Principles of Management - Concepts & Cases (PDFDrive)

Principles of Management:
Concepts & Cases

u
Rajeesh Viswanathan MBA, Ph.D.
First Edition : 2009
MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE
Principles of Management:
Concepts & Cases
© Author
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Preface
What makes this book unique?

One of the fundamental objective of mine is to create a text book for students and
instructors that is both relevant and rigorous. Despite the number of good textbooks
on the market, many of them tend to lean in one of two directions: Some textbooks
do a good job on presenting material and integrating research but students struggle to
make the connection between theory and practice. Other textbooks do a good job of
relating material to the real world but they are not always based on the current
research. My experience in teaching students, talking with other faculties and practicing
managers led me be believe that there is a need for a text book that was a mix of
all which would enable students to apply theory without any difficulty.
The text of this book has been primarily designed to provide clear understanding of
the subject in today’s context to the students of management. Attempts have been
made to familiarize them with latest developments taking place in the theory as well
and practice of management.
Author
Brief Contents
1. Introduction to Management 1 - 20
Introduction — Definitions of Management — To Recall a Few — Importance of
Management Theory — Management Science or Arts — Science and Art in
Management Practice — Functions of Management — Need for Levels of Management
Managerial Skills — Summary — Critical Thinking Exercise — Summary — Case
Study.
2. Evolution of Management Thought 21 - 42

Introduction — Classical Approach — Scientific Management — Bureaucratic
Management — Behavioural Approach — Quantitative Approach — Operations
Management — Modern Approaches to Management — Systems Theory
Contingency Theory — Emerging Approaches in Management Thought — Summary
Case Study.
3. Social and Ethical Responsibilities of Management 43 - 63

Introduction — Social Responsibilities of Management — Arguments for and Against
Social Responsibilities of Business — Social Stakeholders — Measuring Social
Responsiveness — Managerial Ethics — Summary — Case Study.
4. Fundamentals of Planning 64 - 85
Introduction — Definitions of Planning — Nature of Planning — Significance of
Planning — Types of Plans — Steps in the Planning Process — Prerequisites for
Effective Planning — Environmental Constraints — Summary — Case Study.
5. Objectives and Process of Planning 86 - 105

Introduction — Nature of Objectives — Evolving Concepts in MBO — The Process
of MBO — Benefits of MBO — Limitations of MBO — Making MBO Effective
Summary — Case Study.
6. Strategies, Policies and Planning 106 - 134

Introduction — Nature and Purpose of Strategies and Policies — The three Levels
of Strategy — Strategic Planning — Competitive Analysis in Strategy Formulation
Major Kinds of Strategies and Policies — Porter’s Competitive Strategies — Strategy
Implementation — Effective Implementation of Strategy — Planning Premises
7. Managerial Decision-making 135 - 160

Introduction — Significance and Limitations of Rational Decision-making — Managers
as Decision-makers — Decision-making Process — Types of Managerial Decisions
Decision-making under Certainty, Uncertainty and Risk — Management Information
System vs Decision Support System — The Systems Approach to Decision-making
Group Decision-making — Decision-making Techniques — Summary — Case Study.
8. Fundamentals of Organizing 161 - 187
Introduction — Definitions of Organizing — Benefits of Organizing — Traditional
Perspectives on Organizing — Closed System vs Open System — Formal vs
Informal Organization — Span of Management — Organizational Environment for
Entrepreneuring and Intraprenuring — The Process of Organizing — Prerequisites for
Effective Organizing — Summary — Case Study.
9. Strategic Organization Structure 188 - 216

Introduction — Designing Organizational Structures: An Overview — Major Structural
Alternatives — Other Bases for Departmentation — Strategic Business Units
Choosing the Pattern of Departmentation — Summary — Case Study.
10. Line and Staff Authority and Decentralization 217 - 240

Introduction — Authority Defined — Power : Bases of Power — Line and Staff
Relationships — Centralization Versus Decentralization — Delegation of Authority
Balance — The Key to Decentralization — Summary — Case Study.
11. Effective Organizing and Organizational Culture 241 - 255

Introduction — Avoiding Mistakes in Organizing by Planning — Avoiding Organizational
Inflexibility — Avoiding Conflict by Clarification — Ensuring Understanding of
Organization Structure — Organizational Culture — Summary — Case Study.
12. Human Resource Management and Staffing 256 - 276

Introduction — Human Resource Management: An Overview — Staffing
Recruitment — Selection — Socialization Process of New Employees — Summary
Case Study.
13. Performance Appraisal and Career Strategy 277 - 295

Introduction — Significance of Appraisal — Formal vs Informal Appraisals
Performance Rating Methods — Criteria for Appraising Managers — Formulating
Career Strategy — Summary — Case Study.
14. Organizational Change and Organization Development 296 - 316

Introduction — Organizational Change — Planned Change Through Organization
Development — Organizational Development Process — Approaches to Manager
Development — Organizational Conflict — Summary — Case Study.
15. Managing and the Human Factor 317 - 332

Introduction — The Nature of People — Behavioural Models — Managerial Creativity
Innovation and Entrepreneurship — Harmonizing Objectives: The Key to Leading
16. Motivating Employees for Job Performance 333 - 350

Introduction — Definitions and Meaning of Motivation — Classification of Motivation
Theories — Motivational Techniques — A Systems and Contingency Approach to
Motivation — Summary — Case Study.
17. Leadership 351 - 371
Introduction — Definition and Meaning of Leadership — Key Elements of Leadership
Leadership Theories — Vroom-Yetton Model — Summary — Case Study.
18. Managing Communication 372 - 386

Introduction — Definitions of Communication — Significance of Communication in
Organizations — Communication Process — Communication Flows in An Organization
Barriers to Communication — Gateways to Effective Communication — Summary
Case Study.
19. The Control Function 387 - 403

Introduction — Planning and Controlling — Importance of Controlling — Levels of
Control — Basic Control Process — Types of Control — Requirements for Effective
Controls — Summary — Case Study.
20. Control Techniques 404 - 421

Introduction — Major Control Systems — Financial Control — Budgetary Control
Quality Control — Inventory Control — Summary — Case Study.
21. Productivity and Operations Management 422 - 440

Introduction — Production and Productivity — Productivity Problems and Measurement
Operations Management and its Importance — Operations Research for Planning,
Controlling and Improving Productivity — Operations Research Methodology — Some
Operations Research Techniques — Other Tools and Techniques for Improving
Productivity — Summary — Case Study.
22. Direct Control Versus Preventive Control 441 - 452

Introduction — Direct Control Versus Preventive Control — Direct Control — Preventive
Control — Management Audit and Enterprise Self-audit — Summary — Case Study.
23. Management Information Systems 453 - 467

Introduction — Management Information — Components of An Information System
Types of Information Systems — Management Information Systems — Summary
Case Study.
24. International Management 468 - 480

Introduction — Reasons for Going International — International Management Functions
Japanese Management and Theory Z — Japanese vs. US Management Practices
and Theory Z — Multinational Corporations — Summary — Case Study.
References 481 - 486

Index 487 - 490
Syllabus
Chapter 1 - Introduction of Management — Define the Term Management, Approaches to Management,

Need for Management Principles, Need for levels of Management, Managerial Skills, Functions
of Management, Roles of Manager and Challenges of Today’s Manager.
Chapter 2 - Evolution of Management Thought — Early Approaches to Management, Classical Approach,

Behavioural Approach, Quantitative Approach, Modern Approaches to Management and Emerging
Approaches in Management Thought.
Chapter 3 - Social and Ethical Responsibilities of Management — Social Responsibilities of Management,
Arguments for and Against Social Responsibilities of Business, Social Stakeholders, Measuring
Social Responsiveness and Managerial Ethics.
Chapter 4 - Fundamentals of Planning — Nature of Planning, Significance of Planning, Types of Plans, Steps
in the Planning Process, Prerequisites for Effective Planning and Limitations of Planning.
Chapter 5 - Objectives and Process of Planning — discuss — Nature of Objectives, Evolving Concepts in
MBO, The Process of MBO, Benefits of MBO, Limitations of MBO and Making MBO Effective.
Chapter 6 - Strategies, Policies and Planning — Nature and Purpose of Strategies and Policies, The Three
Levels of Strategy, Strategic Planning, Competitive Analysis in Strategy Formulation, Major
Kinds of Strategies and Policies, Porter’s Competitive Strategies, Strategy Implementation, Effective
Implementation of Strategy and Planning Premises.
Chapter 7 - Managerial Decision-making — Significance and Limitations of Rational Decision-making,

Managers as Decision-makers, Decision-making Process, Types of Managerial Decisions, Decision-
making under Certainty, Uncertainty and Risk, Management Information System vs Decision
Support System, The Systems Approach to Decision-making, Group Decision-making and
Decision-making Techniques.
Chapter 8 - Fundamentals of Organizing — Definitions of Organizing, Benefits of Organizing, Traditional
Perspectives on Organizing, Closed System vs Open System, Formal vs Informal Organization,
Span of Management, Organizational Environment for Entrepreneuring and Intrapreneuring, The
Process of Organizing and Prerequisites for Effective Organizing.
Chapter 9 - Strategic Organization Structure — Designing Organizational Structures: An Overview, Major

Structural Alternatives, Other Bases for Departmentation, Strategic Business Units and Choosing
the Pattern of Departmentation.
Chapter 10 - Line and Staff Authority and Decentralization — Authority Defined, Power: Bases of Power,
Line and Staff Relationships, Centralization versus Decentralization, Delegation of Authority and
Balance The Key to Decentralization.
Chapter 11 - Effective Organizing and Organizational Culture, Avoiding Mistakes in Organizing by Planning,
Avoiding Organizational Inflexibility, Avoiding Conflict by Clarification, Ensuring Understanding
of Organizational Structure and Organizational Culture.
Chapter 12 - Human Resource Management and Staffing — An overview of Human Resource Management
Staffing, Recruitment, Selection and Socialization Process of New Employees.
Chapter 13 - Performance Appraisal and Career Strategy — Significance of Appraisal System, Formal vs
Informal Appraisals, Performance Rating Methods, Criteria for Appraising Managers and
Formulating Career Strategy.
Chapter 14 - Organizational Change and Organization Development — Organizational Change, Planned Change
through Organization Development, Organizational Development Process, Approaches to Manager
Development and Organizational Conflict.
Chapter 15 - Managing and the Human Factor — The Nature of People, Behavioural Models, Managerial
Creativity, Innovation and Entrepreneurship and Harmonizing Objectives: The Key to Leading.
Chapter 16 - Motivating Employees for Job Performance — Definitions and Meaning of Motivation, Classification
of Motivation Theories, Motivational Techniques and A Systems and Contingency Approach to
Motivation.
Chapter 17 - Leadership — Definition and Meaning of Leadership, Key Elements of Leadership and Leadership
Theories.
Chapter 18 - Managing Communications — Significance of Communication in Organizations, Communication

Process, Communication Flows in an Organization, Barriers to Communication and Gateways to
Effective Communication.
Chapter 19 - The Control Function — Planning and Controlling, Importance of Controlling, Levels of Control,
Basic Control Process, Types of Control and Requirements for Effective Controls.
Chapter 20 - Control Techniques — Major Control Systems — Financial Control, Budgetary Control, Quality
Control and Inventory Control.
Chapter 21 - Productivity and Operations Management — Production and Productivity, Productivity Problems
and Measurement, Operations Management and its Importance, Operations Research for Planning,
Controlling and Improving Productivity, Operations Research Methodology, Some Operations
Research Techniques, Others Tools and Techniques for Improving Productivity.
Chapter 22 - Direct Control Versus Preventive Control — Direct Control versus Preventive Control, Direct
Control and Preventive Control Management Audit and Enterprise Self-Audit.
Chapter 23 - Management Information Systems — Components of an Information System, Types of Information
Systems and MIS.
Chapter 24 - International Management — Reasons for Going International, International Management Functions,
Japanese Management and Theory Z and Multinational Corporations.
Introduction to
1
Management
L EARNING O BJECTIVES
After studying this chapter, you should be able to:
H Define the Term Management
H Approaches to Management
H Need for Management Principles
H Need for Levels of Management:
H Managerial Skills
H Functions of Management
H Roles of Manager
H Challenges of Today’s Manager
2 Principles of Management: Concepts & Cases
INTRODUCTION
Creativity is the most versatile part of Productivity in any field. The hi-tech world today is the world
man conceived in his mind ages back and projected them into reality through creativity. Without creativity/
creative skills, the world would have been a stupefied monument with no techi-days of the century seeing
the light of day! The intense parade of such glorious times became possible with the advent of the
commercial world taking an earnest plunge into what can be called tech-transition. The tempo of this
transition needed to be organized and manipulated to the advantage of each commercial venture. And this
in turn needed to be well-organized, planned, controlled and streamlined from well within the organization
pertaining to its set goals and objectives. This could be ascertained only by the ideologies of Management
techniques. Management, thereby is yet another creativity— creative problem solving precisely. This creative
problem solving is accomplished through four functions of management: planning, organizing, leading and
controlling. The intended result is the use of an organization’s resources in a way that accomplishes its
mission and objectives. Management Excel is about changing people not about changing businesses. The
word ‘change’ here is in lieu of a ‘transformation’ where we change people by helping them improve their
management skills. Our expectation is that with these tools, they are then likely to change their businesses
or give their business a complete tuned-to-the-times face-lift.
Therefore, basically, Management system itself is all set to strike a harmony in the working trends and
styles i.e., to create a balance and equilibrium between thought and action, goal and achievement,
procedure and performance, product and market. One of the most vital activities in business is to manage
4Ms; Men, Machine, Materials and Money. In a wider perspective, management can be considered as the
optimum utilization of men and resources in an organization to accomplish the desired results. In the
current scenario of business competitions going global, the speed and pace of technological changes,
business practices and increasing social responsibilities of organizations, the role of managers have all
become all too important and crucial for a successful performance.
In the current chapter, we would look into the definitions stated by some of the eminent management
thinkers to understand the essence of management. Subsequently, we would briefly touch upon on the five
basic functions of management i.e., planning, organizing, staffing, leading and controlling. The chapter will
also focus on the managerial skills required at various levels of the organizational hierarchy and the
challenges that are likely to be faced by the managers while managing an organization.
While Management, on one hand is an important activity essential to carry out the operations
effectively and efficiently towards achievement of the organizational goals. Leadership, on the other hand
is the evolutionary mechanism which would help in transforming (changing) organizations to compete with
the changing face of a more challenging tomorrow (world). Whenever a species or individual animal runs
into obstacles, variations occur and new forms are selected from those variations. Leadership is a risk
taking type of action that explores new frontiers and promotes new approaches of behaviour.
DEFINITIONS OF MANAGEMENT
The basic tenets of Management reveal how diverse and varied work force and skills operate and co-
operate to bring about success and progress to any company or commercial effort. The measures are goal-
riveted and the outcome is wholly performance oriented such that there’s no room for any slip-shod error
which could only reflect on weak managerial skills. Therefore, Management thinking itself is quite stoic,
Chapter 1 Introduction to Management 3
specially, in its training to deal with challenges, which alone could help hold up norms and simultaneously
remain flexible to changing trends and above all assist in solving crises of any sort.
TO RECALL A FEW
“Management is the art of getting things done through and with people in formally organized groups.
It is the art of creating the environment in which people can perform and individuals could cooperate
towards attaining of groups goals. It is the art of removing blocks to such performance, a way of
optimizing efficiency in reaching goals”. — Harold Koontz
“Management is principally the task of planning, coordinating, motivating and controlling the efforts
of others towards a specific objective”. — James L Lundy
“Management is a distinct process consisting of planning, organizing, actuating and controlling, performed
to determine and accomplish stated objectives by the use of human being and other resources.” — George
R Terry
Managers carry out the functions of planning, organizing, staffing, leading and controlling: Henry
Fayol was the first management thinker to outline the five basic functions carried out by managers. Every
manager performs these basic functions. These functions are discussed in detail in the later part of this
chapter.
The term ‘management’ applies to any organization irrespective of the size or nature of operations.
However, the key word to success is ‘Skilled Management’ which is highly essential to any kind of
organization: Wherever there are groups of people working together to achieve some common objective,
it becomes essential to guide, organize and control them. Be it a CEO of a multinational company or the
General Manager of a hotel or the first-level supervisor or the manager of a cricket team or the student
president in a college — the prime concern is to manage their people and resources effectively. The
attention of any member of the above category is pivoted towards certain targets. These targets are
attained only through skilled management of an entire team.
IMPORTANCE OF MANAGEMENT THEORY

Skilled application of management theory in an ideal and appropriate manner enhances worker
attitude and work environment (people) setting the organization to being more productive. An entrepreneur
invests money with the notion of returns. And in order to attain this he needs to select the right man for
the right job. He is then obliged to create a conducive working environment in order to attain optimum
productivity. To maximize employee productivity and learning how to manage or rather tackle co-operative
skills is the key purpose of management theory.
Need For Management Principles

Multifarious methods are available to handle commercial, employment or company situations. But it
takes an efficient manager to analyze and employ the best strategy while handling them and also while
extracting work so that only least number of problems are encountered during such operations. By tuning
to the finest of business strategies and new work trends closely retaining and adhering to Management
principles or guidelines, a manager can solve these problems smoothly and efficiently. They can also
predict the results of their actions or efforts with confidence. As said by G.R. Terry, “Principles of
management are to a manager as a ‘table of strength’ of materials is to a civil engineer.” According to
Koontz and O’Donnell, the principles of management are important and useful on account of the following
reasons:
1. To enhance managerial efficiency: Management principles provide guidelines to managers as to
how they should operate in different situations. This leads to smooth functioning of the organization
which in turn enhances managerial efficiency.
2. To comprehend the nature of management: A sound knowledge of management principles helps
to identify the efficiency level of a manager’s job, cull out the scope of his duties, highlight the
point to which his service could be utilized.
3. To train managers: In the words of Henri Fayol, “Management principles are necessary to train and
educate future managers.” Without this organized body of knowledge, it would not be possible to
train people for managerial positions.
4. To facilitate research: Management Principles help to amplify knowledge and carry out further
research in the field of management. It provides new strategies and imaginations to the organization.
5. To coordinate material and human resources: Management principles widen the scope for (help to
make) optimum utilization of natural resources. They also help to coordinate the material and
human resources for the accomplishment of common objectives.
MANAGEMENT SCIENCE OR ARTS

Management is the bone of contention between Arts and Science. While it has been claimed that
management is an art struggling to become a science by a few, there are a few others who contend that
the formal study of management began as a science but has been contaminated by too many factors from
various disciplines, thus making it best — a soft science. Actually management is an eclectic discipline
with elements of both arts and science, as any practising managers will confirm.
Management Science
There is a body of objective, yet incomplete knowledge, that is believed to be the best thinking on the
subject of management. Management science is a body of systematized knowledge accumulated and
accepted with reference to the understanding of general truths concerning management.
Management science is expansive, more flexible and vulnerable to changes or alterations that may
vary from time to time, pertaining to marketing/commercial trends while the case is not so in physical
science. Physical science such as math or chemistry is comprehensive or accurate. Physical science deals
with non-human entity, and it is this inclusion of the human element that raises questions in some minds
about management qualifying as a pure science. For instance, in strictly identical circumstances or situations,
two different individuals need not necessarily think, act or react in an identical way. The response stimuli
in each individual could differ drastically and sometimes even differ to an incomprehensible extent based
on each individual’s psychological, social response or individuality too. Therefore management will never
become pure a science as the physical sciences, but great strides have been taken (made) in systematizing
knowledge and generalizing certain truths which will be evident in the coming chapters. Management is
indeed a social science, a term that accurately describes its true nature.
Management Art
The art of management is a manifestation of personal creative power plus a projection of individual/
team skills in performance. As far as each company’s success rate is concerned the entire scheme of
activities is a continuous process. This process involves constant analysis, research, problem-identification
and error-rectification wherein the contemplation of the problems, events and possibilities develops personal
creative powers on one hand, while, experience, observation, and study of results contribute to better
efficiency and skilled performance on the other. In other words, management art involves envisioning an
orderly whole from chaotic parts, communicating the vision, (and) thereby making provisions for achieving
the goals. It is the “art of arts” because it organizes and uses the human talents.
SCIENCE AND ART IN MANAGEMENT PRACTICE

If science teaches one to know, art teaches one to do. Whereas Managers ought to be a combination
of both being able to know and being able to do things efficiently and effectively to be successful. Such
that, they are indeed a unique scientific and artistic combination in practice. However, quite often, the
old say — “knowledge is power” is true only in its application. Those whom we meet happen to be people
who are very intelligent but lazy and unwilling to apply their knowledge to solving problems and accomplishing
objectives.
In a certain sense, it can be said that the art of management begins where the science of management
stops. Facts are first used, “the known” is given preference, and data owned tangibles are considered.
These scientific aids are pursued to their limits, but in any given case they may seem in adequate. It is
then that the manager should be able to rise up to the need and turn to artistic managerial abilities to
perform what is called a skilled performance. Deciding to move ahead at one time rather than at another
or to act even though all desirable data are lacking or inadequate show the involvement of the art of
management.
FUNCTIONS OF MANAGEMENT
However new or old, small or big, any organization needs to run smoothly and its work atmosphere
has to be conducive in order to achieve its set goals and objectives. Management concepts were developed
and implemented for this singular purpose. There are four basic management concepts that allow any
organization to handle the tactical, planned and set decisions. The four basic functions of the management
are in fact set to have a controlled plan over the preventive measures.
The task of a manager comprises of planning, organizing, directing, and controlling the resources of
an organization and lies in utilizing them in the optimum possible way. These resources include people
and positions, employees and technology, materials and supplies, facilities and equipments, information,
and money. These functions are goal-directed, interrelated and interdependent. While Planning involves
devising strategies in accordance with the goals of the organization, Organizing involves arranging the
necessary resources to execute the plan. Directing involves guiding, leading, and overseeing employees to
achieve organizational goals. Controlling involves verifying whether the final performance or outcome
matches the initial plan. In short, it is the process of creating structure, establishing relationships, and
allocating resources to accomplish the goals of the organization. If initiatives and performances do not
render the anticipated results or do not provide a concurrence to the plan, then the manager holds the
responsibility of taking corrective measures to make sure that this does not recur thereafter. What makes
the Manager’s position demanding is its automatic exposure to work in a dynamic environment where
he must anticipate, adapt and be adept at taking challenges in his stride.
Planning Organizing
Diagnostic
Defining goals,
Target Determining what needs to be done,
Establishing Strategies & how it will be done & who is to do it
Developing sub plans
to coordinate activities
Yes
Staffing
Analyzing the potentials
Controlling Leading needed
to
Directing and perform for each job
Monitoring the activities to ensure
motivating
all involved parties and resolving conflicts
Fig. 1.1 Functions of Management
Planning
What makes planning vital is the impact of today’s decisions on the future. It is the fundamental
function of management from which the other four stems. The need for planning is often apparent after
the fact. However, it is easy to postpone planning in a short-term effort. But it is essential to understand
that postponement of planning, especially, plagues labour oriented hands on managers.
The organizing, staffing, leading and controlling functions stem from the planning function. The
manager is ready to organize and staff only after goals and plans are set to reach the goals placed ahead.
Likewise, the leading function, influencing the behaviour of the employees in the organization, depend on
the goals to be achieved. However, the final accomplishment of goals and standards are urged by the
norms of the controlling function, that are in turn based on the planning function. Undoubtedly, the
planning function provides the goals and standards that drive the controlling function.
Planning is important and crucial to all levels of management. However, the potentials and skills
required differ at each level of management. Note in this figure that the functional qualities (of characteristics)
of the managers at top level are bound to possess more complex skills. On the other hand inefficient
managers at the higher level executing matters as though they are handling matters at the lower level, in
fact, plague planning. Strategic planning is the process by which the organization’s strategies are determined
and in the process, three basic questions are answered:
1. Where are we now?
2. Where do we want to be?
3. How do we get there?
Organizing
Organizing is establishing the internal organizational structure of the business. The focus is on division,
coordination, and control of tasks and the flow of information within the organization. Managers distribute
responsibility and authority to job holders in this function of management.
Each organization has an organizational structure. By action and/or inaction, managers structure
businesses. Ideally, in developing an organizational structure and distributing authority, managers’ decisions
reflect the mission, objectives, goals and tactics that grow out of the planning function. Specifically, they
decide:
1. Division of labour
2. Delegation of authority
3. Departmentation
4. Span of control
5. Coordination
Any Management, for that matter, should be able to make these decisions in any organization that
has more than two people. However small the task may not be simple.
Staffing
Staffing is considered like a corner stone of an organization. The organization’s vision comes true
on having a right set of personnel. It facilitates the achievement of organizational goals by attracting
applications and enables to select individuals whose goals are congruent to the organizational goals. One
of the most cruicial thing in staffing is, we need to analyse the climate of organization and select the
candidate. If we fail in it, it leads to high level of attrition rate and inefficiency and low productivity.
Staffing requirements in an organization change according to the external environment as well. For
example, with changes in technology, there is a need to hire workers who can work in an environment
of high technology demands.
Staffing, which is a managerial function, influences other managerial functions such as leading and
controlling. For example, in the present day culture of teamwork, it is important to select and train
managers to be good team leaders who will be able to make people to work together and achieve
organizational goals. Similarly, the selection of quality managers enhances the controlling function in
organizations.
An organization’s success to a great extend depends on the staff existing with them. Staffing includes
three activities:
(a) Recruitment – attracting the potential candidates
(b) Selection – shortlisting the candidates
(c) Induction and orientation – making the candidate familiar with the new working system and the
methodology to be adopted.
A sound staffing process can be done provided the job analysis has been done in a scientific manner.
It makes clear about the desired skills and abilities needed for the position. This in turn makes the selection
process a fruitful one. Hence, job analysis is like a blueprint to a HR manager.
Every organization has an organization structure irrespective of its size. It makes the roles and
responsibilities clear and avoid any ambiguous situation. This helps in different ways like free flow of
communication, proper delegation, authority and responsibility reporting structure and soon. An organization
structure helps to analyse the roles and responsibilities clearly and make an employee to steer in the right
direction in order to attain optimum productivity.
Generally, work is directed to accomplishing both the organization goals and the personal goals of
employees. Organizing must result in tasks being done as a means to an end rather than an end. Structuring
the business to create a positive environment for people and ultimately a high quality of work life is equally
important to getting the tasks done. Staffing is best done with attention to recruiting, selecting and training
employees to help them satisfy their goals and the goals of the business.
The following assumptions provide the context for our discussion of staffing:
1. The mission for the organization has to be given careful attention by top management and distributed
to the management team and all employees, i.e., the reasons for the venture and scope for
organization business is made explicit.
2. A management team is in place and is able to divide responsibilities. Top management is willing
and able as per requirement or efficient enough to delegate responsibilities and authority.
3. The person hired will be trained to carry out the responsibilities of the position, i.e., it is not
necessary to hire a person who already knows how to do the job.
4. No selection process can guarantee selection success. Even if the “right” person was hired based
on all the information available about the employer at the time the decision was made, six months
or a year or even three years later, it may appear that the “wrong” person was hired.
Staffing success is having the “right person” in a position, rather than simply filling a position. Too
often there is an misconception that luck is a key element in staffing. If this is taken for granted then
consequently, a labour manager may place too little emphasis on what can be accomplished through
improved recruitment, interviewing, selection and training.
Directing
One of the basic function of the manager is to motivate and lead the employees. In order to influence
an employee one of the basic quality need is excellent communication skills. The main motive of directing
an employee is to the attain organizational goals. For this depending on level we need to possess different
skills by which we are able to move ahead i.e., conceptual, human, technical and design skills.
Possessing the blend of these skills helps to realize the organizational and individual needs and
develop a blend of it. The leading activity of a manager plays an active role among the employees than
a passive one. The ulterior motive is to mould the behaviour of the employees to attain the organization’s
vision and at the same time fulfilling employee’s career aspects and desires. A ideal manager is a one
who unfolds the hidden talents existing in the employees. He should posses a zeitigist personality whereby
he is able to feel the pulse of the environment and employees and lead the team.
Nandan Nilikani, CEO of Infosys, Bangalore, India,

Directing and Motivating the employees
Source: Infosys website
Controlling
The term ‘control’ has different connotation in different contexts. With regards to management context,
it refers to the evaluation of performance and the execution of corrective actions to accomplish organizational
goals. Many a times control is often linked to ‘supervision.’ Supervision on the other hand is a part of
control; it is intended to identify deviations from the established standards of performance.
The modern concept of control envisages a system which not only provides a historical record of what
has happened to the business as a whole but also helps in tracking out the issues that led to such a
scenario and further provides strategies which would enable the management to take corrective steps,
if there is any deviation from the plan. It also enables managers to identify trends in costs, markets, and
other aspects of the business, and acts as a guide for future action.
Controlling is like monitoring whereby the planned activities are not getting deviated. Thus, control
ensures that what is done is what is intended. It should be exercised by everyone in the organization.
According to Robert J. Mockler, “Management control is a systematic effort to set performance
standards with planning objectives, to design information feedback systems, to compare actual performance
with these predetermined standards, to determine whether there are any deviations and to measure their
significance, and to take any action required to assure that all corporate resources are being used in the
most effective and efficient way possible in achieving corporate objectives.
NEED FOR LEVELS OF MANAGEMENT

If an organization needs to function effectively, a proper organization structure is required. This
structure comprises of people/staff with varied experience and exposure. The nature of management
continues to remain the same, whether the organization is to be managed as a family, a club or an
enterprise. For effective and efficient function of an organization, the task is divided into three levels i.e.,
Top, Middle and Lower levels of management. Each level has its own roles and responsibilities and
ultimately helps in making the organization’s vision come true. Top level authorities such as vice president,
heads of department, etc., help in formulating policies and decision-making. Those at the Middle level act
as a link between the top and the lower. While the lower level management focuses more on operational
activities.
There are three different levels of management:
1. Top level management, consists of Board of Directors, Managing Directors or President.
2. Middle level management, consists of Vice President – Marketing/Finance/Production.
3. Lower or operating level management, consists of Floor Managers/Supervisors.
Top Level President
Middle Level Vice President Vice President Vice President

Marketing Finance Production
First Level Supervisor Production Supervisor Supervisor

A B C
Employees Employees Employees
Levels of M anagem ent
Top Level Management

Top level management focuses on overall policy formulation of the organization by doing a SWOT
analysis of the organization. After consultation and discussion with the management at the mid-level, the
Top Management frames policies on different functional areas. Framing up a policy such as, for instance,
production policy indicates schedule of productions to be completed. Product policy lays down size, color,
material, design etc. Marketing policy focuses on various channels through which sales could be carried
forth. An HR policy deals with recruitment and placement. It includes organizing which deals with allocation
of duties to the personnel.
Middle Level Management

Middle level management on the other hand works on implementing the policies and plans formulated
by the top level. It comprises of Vice President of the concerned functional area or departmental heads
who will lead the group of workers to the planned targets and provide them with necessary resources in
order to get the jobs done. This group is responsible for the execution and interpretation of policies
throughout the organization and to assist in the successful operations assigned to the concerned division
or departments. At this level the managers have to plan the operations, pass on the instructions laid by
the top management to the appropriate divisions or staff, collect the resources required and control/regulate
the work. Managers at this level are responsible for leading all functions within each department; they are
the ones who provide guidance and structure and support for a purposeful enterprise.
Lower Level Management

This level comprises of supervisors, foreman, and executives assisted by a number of workers who
carry out the activities as per schedule or demand. Though authority and responsibility in the organization
as compared to the middle and top level of management is less, the management at this level too does play
a vital role in implementing the policies designed by the top. They have to comply with the rules and
guidelines made by the higher authorities of the organization. The plans developed and scheduled for
application by the top level management will fail if the workers at the lower level do not fully appreciate
the work allotted to them nor enjoy the nature of their work. The quality and quantity of the work done
will depend upon the performances of the workers at this level. The result or goal, they as a team, help
in achieving would only reflect the hard and effective effort they have put in the form of work to attain
their goals. The supervisors at this level have to maintain high quality standards of the manufactured
product, assign duties to the workers as per planned schedules given by the top and middle level management.
They also are responsible for maintaining the discipline among themselves and increase the spirit of work
among the workers.
Exhibit 1.1 Types of Managers
Jack Welch in his book “Straight from the Gut” speaks about four types of managers, depending on their
ability to achieve set targets, while maintaining the company’s values.
The Type 1 managers live up to the expectations of the company. They are able to deliver commitments and
share the company’s values. It is easy to decide the future of such employees.
The Type 2 managers neither share the company’s values nor do they achieve their targets. Though not very
pleasant, it is also easy to decide the future of such employees.
The Type 3 managers share the values of the company but their performance is dismal. They generally are
not able to deliver the expected numbers. Welch says that GE believes in giving them another chance to
prove themselves. They may be asked to work in a different work environment so as to allow them to start
afresh. Welch states that there have been some wonderful transformations and some of the managers who
are given a second chance do prove their worth.
The Type 4 managers are the most troublesome. These are the managers, who fulfil all commitments and
give results but do not share the company’s values. These managers coerce people to perform and subordinates
are generally afraid of them. Yet, because of their ability to deliver the numbers, top management tends to
overlook their tyrannical behaviour.
Adapted from Jack Welch and John A. Byrne, Straight from the Gut (New York: Warnet Books, 2001) 188.
60
50
40 Planning
30 Organizing
20 Leading
10 Controlling
0
Top Level Middle Level Lower Level
Fig. 1.2 Distribution of Time per Activity by Organizational Level
Source: Adapted from TA Mahoney, TH Jerdee & SJ Carroll, “The jobs of Management,” Industrial Relations 4,
no. 2 (1965), p 103
MANAGERIAL SKILLS
To perform the desired function discussed earlier part, a manager needs to possess skills. Which can
be divided into three categories as follows:
Management Skills
A manager can excel in his profession only if he possess a blend of three skills — conceptual, human
and technical skills. The composition may vary according to the level of the employee. Conceptual skills
are needed for managers at top level. They view the organization as a whole and formulate the policies
and practices according to the vision of the organization. Management is the art of getting the work done
and it is done through human beings. To get optimum productivity a manager needs to motivate his
employees. Human skills helps in enhancing the interpersonal relations and thereby getting the work done
in the optimum possible way. Human skills are needed at all levels. Technical skill is needed mainly at the
supervisory level. Possessing of technical skills helps in guiding the employees and overcoming the lacunas
they possess in their work. In other words it is the ability of to use tools and possessing specialized
knowledge to carry out an activity.
When a manager possesses these skills it (helps) enables him to come out with ideal strategies to meet
the desired goals. Generally a manager needs to possess the following skills but the percentage of it varies
from level to level. However, the kind of job skills befitting a manager of today – are a capacity for
intuitiveness, ability to work under pressure, effective people management, conflict management, crises
management and above all persuasiveness to motivate people under supervision. These being the required
skills needed to carry out the different operations of business, the experienced manager also use them to
counter problems.
In early 1970s, Robert K. Kalz identified three kinds of skills for administrators. These are technical,
human and conceptual skills. A fourth skill – the ability to design solutions – was later added to the above
mentioned skills.
Technical Skills
Technical skill is an imperative skill for managers at the lower levels of management; for it is actually
they, who, under their subordination guide and supervise the work of operators. Unless, managers at lower
level are adept in technical matters, they would not be in a position to direct the operations of their
subordinates in the best manner possible and thereby lead them towards optimal performance – both
quantitatively and qualitatively. The managers could be compared to a mentor who before imparting
knowledge to student in a particular discipline, must himself, be an expert in that specific discipline.
However, technical skills are also needed at the top and middle level. In fact, technical expertise is not
desired in these managers; what is desired is a general acquaintance with technical matters. Managers at
these levels merely do the fundamental planning for operational work leaving the detailed day-to-day operational
nuances to be conducted by those at the supervisory level. For example, employees at the operational level
work with tools, and their supervisors must be able to teach them how to perform the assigned tasks using
these tools. First-level managers spend much of their time in training subordinates and clarifying doubts in
work-related problems.
Human Skills
Human skills or interpersonal skills refer to the ability of a person to work well with other people in
a group. It is the ability to tactfully deal with subordinates/co-workers and mould their behaviour at work
in the desired manner, to help attain the common objectives of the enterprise most effectively and efficiently.
It is the ability to lead, motivate, and communicate with people and to accomplish the set objectives.
Human skills are of paramount importance in contributing to the creation of a fine work environment, in
which workers are made to feel comfortable and are free to voice their opinions. These skills are supposed
to aid employees during interaction with their supervisors, peers and people outside the work unit such
as suppliers, customers and also the general public. These skills are important at all levels in the organization.
Conceptual Skills
This is imperative for the top management, necessary for the middle and desirable at the lower level.
Conceptual skill refers to the ability of a person to think and conceptualize abstract situations. It is the
ability to understand and coordinate the full range of corporate objectives and activities. These skills are
most important for the top management level; as top-level managers have the greatest need to view the
“big picture,” to understand how the various parts of the organization should relate to one another and
associate the organization with the external environment. However, even a ray of conceptual skill in the
lower level managers would turn them to be excellent managers – contributing to the success of the
organization to become a better management.
Top management meeting and framing polices

Design Skills
Design skills refer to the ability of a person to find solutions to problems in ways that would benefit
the organization. Top managers should not only recognize a problem but also suggest ways to overcome
them. If they too merely view only the problem, then they become obviously mere “problem watchers,” and
will prove to be ineffective. Managers at upper organizational levels should be able to design a rational and
feasible solution to the problem by considering the various internal and external factors.
Relative Need for the Main Categories of Skills
Top Conceptual Human

Management and Design
Levels
Middle
Management
Supervision Technical
Skill Distribution at Various Management Levels
Fig. 1.3 Relative Need for the Main Categories of Skills
Adapted from “The Role of the Supervisor,” Open Learning Agency
Managerial Roles
The concept of “managerial role” was first introduced into the analysis of managerial work by Henry
Mintzberg 1973. By the role he understood “a set of certain behavioural rules associated with a concrete
organization or post” (18, p.36). Just like the characters of some play, managers, too, often perform
different roles bound by their position. One can’t help but remember the famous lines, ‘All world is a stage,
and men and women are mere players.’
Thus, in addition to functions of management as parameters of managerial activities there appeared
one more unit — managerial role. We will dwell upon the differences in the two later on, and (now we)
presently concern ourselves with the classification of roles grouped into the three blocks : interpersonal
informational and decisional roles.
So, according to H Mintzberg’s classification managers discharging their duties — communicate with
people, handle information and make decisions as the above-mentioned roles tell us. It should be borne
in mind that roles do not exist per se, with every manager they are interdependent and interrelated in such
a way that they allow to describe the nature of managerial activities taking into account levels of managers
and the specificity of production processes. Therefore, it becomes possible to define different types of
managers with the help of the prevailing roles. For instance, managers ranking high on initiating structure
and low on consideration and are more likely to engage in decisional roles, and less in — informational
roles, and still less in — interpersonal roles.
Table 1: Managerial Roles According To Henry Mintzberg

Interpersonal roles
1. Figurehead Symbolic leader of the organization Attending ribbon-cutting ceremonies, hosting

performing duties of social and receptions, presentations and other activities
legal character associated with the figurehead role
2. Leader Motivating subordinates, interaction Virtually all managerial operations involving
with them, selection and training of subordinates
employees
3. Liaison Establishing contacts with managers Business correspondence, participation in meetings
and specialists of other divisions and with representatives of other divisions
organizations, informing subordinates (organizations)
of these contacts
Informational roles
1. Monitor (receiver) Collecting various data relevant to Handling incoming correspondence, periodical
adequate work surveys, attending seminars and exhibitions,
research tours
2. Disseminator of Transmitting information obtained Dissemination of information letters and digests,
information from both external sources and interviewing, informing subordinates of the
employees to interested people reached agreements
inside the organization
3. Spokesperson Transmitting information on the Compiling and disseminating information letters
organization’s plans, current and circulars, participation in meetings with
situation and achievements of progress reports
the divisions to outsiders
Decisional roles
1. Entrepreneur Seeking opportunities to develop Participation in meetings involving debating

(initiator of change) processes both inside the organization and decision making on perspective issues,
and in the systems of interaction with and also in meetings dedicated to
other divisions and structures, initiates implementation of innovations
implementation of innovations to
improve the organization’s situation
and employee’s well-being
2. Disturbance handler Taking care of the organizations, Debating and decision making on strategic
correcting ongoing activities, assuming current issues concerning ways of overcoming
responsibility when factors threatening crisis situations
normal work of the organization emerge
3. Resource allocator Deciding on expenditure of the Drawing up and approving schedules, plans,
organization’s physical, financial and estimates and budgets; controlling their
human resources execution
4. Negotiator Representing the organization in all Conducting negotiations, establishing official
(mediator) important negotiations links between the organization and other
companies
(http://telecollege.dcccd.edu/mgmt1374/book_contents/1overview/managerial_roles/mgrl_roles.htm Changing Roles of

Management and the Challenges of Today’s Manager:)
We live in an extraordinary era. Never before was the competition so intense, opportunities so huge
and challenges so daunting. It is because of one significant phenomenon – globalization.
As Lord Krishna tells Arjuna in The Bhagavad-Gita, “If you fail to do what is to be done, others will
follow your behaviour, because people look up to you as you are their leader, whether you like it or not”.
In modern times, the best example of leadership-by-example was Mahatma Gandhi, the father of our
nation. In every act of his, he walked the talk and practised the precept. No wonder, he had the trust,
confidence and support of every Indian in his objective to achieve India’s independence through non-
violence.
Managers today do not merely perform the duty of giving instructions and getting work done, rather,
the concept of participative management has taken over precisely. The role of Managers has been
transformed to a facilitator mainly because of the advancement and globalisation. Therefore, decision
making has become more difficult. Earlier there used to be sufficient time for a manager to select the best
alternative. But today that’s not the scenario. He operates as a bounded rationality model, (however)
though he has to make decisions on the basis of economic rationality model.
Retention has become the biggest challenge of a manager. A manager fails in his efficiency level
when he is not able to retain his employee. This shows that he has failed to prove his mettle in being an
efficient manager. Efficient managers are the ones who complete the tasks in the most efficient manner
and in the most desired way. A successful manager does complete, but compromises on time and quality
and output too.
Be a great leader
A successful manager must be a great leader. Let me briefly define management and leadership.
Management is about how best to accomplish an agreed objective. Leadership is about deciding a
laudable, exciting and aspirational objective.
A leader is a ‘change agent’ and his primary goal is to raise the aspirations, hopes, enthusiasm,
energy and confidence of his people so that they believe and act according to the adage – A plausible
impossibility is better than a convincing possibility. For a corporation, an institution or even a nation to
succeed, leaders must create a powerful vision, lead their people from the forefront, help them move
towards that vision, empathize with them, understand their psyche, fuel their hopes and keep their aspirations
high. If you want to be a great leader, remember and act according to the words of Robert Kennedy who
said: Most people see things as they are and wonder why. I dream of things that never were and say why
not?
Build a strong value system

A strong value system based on leadership-by-example, integrity, fairness, honesty, transparency and
good work ethics is essential to energize people. It is best to follow this golden rule in every action– Would
I accept this behaviour towards me is an earnest question one can put to oneself in this context? Good
corporate governance rests on the value fabric of a corporation. Corporate governance is about maximizing
shareholder value legally, ethically and on a sustainable basis, while ensuring fairness to every stakeholder
– the company’s customers, employees, investors, vendor partners, the government, and the community-
at-large.
Good corporate governance boosts the morale of the employees of the corporation, enriches respect
for the corporation from customers and investors, and enhances the performance of the corporation. Good
corporate governance also creates an environment that motivates employees to work hard and smart, thus
maximizing returns on investment, enhancing operational efficiency and ensuring long–term productivity
growth. Consequently, such corporations attract the best talent, the best customers and the best investors
globally. The order of the field however is to ‘Be open to new ideas and show high inclination to
learnability’.
We live in an age when the only thing that is constant is ‘change’ and learnability is the only
instrument one can have to handle fast-paced change. Learnability is the ability of an individual to
constantly and quickly learn new ideas and unlearn outdated ideas, be they technical or managerial. It is
also about a mindset that is open to new ideas, new people, new cultures and new paradigm — all factors
necessary to be a successful global manager.
Age is not a factor to learn and experiment new things. For example, Dr. Govindappa Venkatasamy
founded Aravind Eye Hospital in Madurai, Tamilnadu, India, on his retirement. His model of Aravind Eye
Hospital has succeeded in many developing countries and has helped millions to emerge out of darkness,
literally. From a humble beginning in the city of Madurai, the hospital has emerged into a world-class
institution for eye care and has obtained global recognition. What we need to adopt is that when we learn
we ought to learn objectively and seek the truth.
Besides, it is also important to learn to question illogical and superstitious beliefs and assumptions.
It is essential to believe in the hierarchy of ideas rather than that of men and women and vital to remember
such words as those of Thiruvalluvar that goes as follows: “To identify and grasp the truth, from whatever
you hear and from wherever, is the virtue of wisdom”.
Practice team work and meritocracy

We live in a complex world that requires multiple competencies and hard work to succeed. However,
no individual possesses either the skills or the stamina to handle all aspects of a task. Hence, team work
is crucial. A manager must enhance the confidence, enthusiasm, energy and hopes of his team members.
A manager must practice meritocracy and must be transparent in all his transactions. He must use data
in every transaction to arrive at decisions and start every transaction on a zero base. Doing so would help
a manager to keep the energy and enthusiasm of the team at higher levels.
Be generous
Confident people attract good talent. Generosity is a sign of confidence. A successful manager is
always generous and shares the credit for his achievements with every one of his team members. He
follows the adage: Praise in public and criticize in private is a tact every person in the managerial cadre
should be able to practice. Such a manager makes his people feel an inch taller in his presence.
Demonstrate speed in imagination and decision making, take risks and excel at execution. It is
generally evident that people with quick and confident decision-making capabilities rarely fail. Opportunities
come to people who are quick to make up their minds and embrace challenges. Even a slight show of
vacillation from a manager creates confusion in the minds of his team members and most often derails
progress.
Globalization demands quick decision-making based on confidence. It’s a popular belief that the
world makes way for the determined individual. When Alexander the Great was asked how he conquered
the world, he replied, “By not wavering”. However, every decision must be supported by hard data. It pays
to take risks. Remember that ships are safest in the harbour but they are not meant to be there. They must
go into the high seas and navigate stormy waters to reach their desired destinations. Great corporations
create proud owners in their products and services through sheer excellence. Remember that performance
leads to recognition, recognition leads to respect, and respect leads to power. If we want India to be a
powerful nation, the only instrument we have is performance, achieved through hard work, smartness,
excellence and integrity. It adds to be a good communicator too. No matter how good an idea is, it has
no value unless it reaches across — to the world, and people understand it, embrace it as their own and
help to implement it. Hence, communication is crucial to the success of a manager. Given that we have
to work in multicultural teams, we have to use universally-understood simple but powerful words and
metaphors to communicate interestingly with the people across the globe. Though English will continue to
play a major role as a common business language globally, it is essential to understand and appreciate
the local languages too.
Respect and leverage other cultures

Diverse and inclusive organizations succeed in vitality, innovation and problem solving by leveraging
their multicultural strengths. Managers should learn to appreciate nuances, strengths, aspirations,
opportunities, motivations and challenges of other cultures. Unless a corporation understands the local
context, it is unlikely to be successful globally.
Enjoy life
Excellence in work leads to excellence in life and vice versa. Unless one is a happy person at home,
he or she fails to be a happy person in the office. Success in life is when others’ eyes light up when you
walk in to a room, and your eyes light up when you are with other people. Like the view management
is an art by itself, it’s an art too to take life in our stride and enjoy it, to keep oneself happy and smile
a lot, to create a light-hearted atmosphere at the work place, to share a joke or two with colleagues and
thereby make colleagues and family happy. Above all, to remember to ‘take your work seriously but not
yourself’!3
SUMMARY
Thus, Management is the process of designing and maintaining the environment for efficiently
accomplishing the selected aims. Managers carry out the functions of planning, organizing, staffing, leading
and controlling. Managing is an essential activity at all organizational levels; however, the managerial skills
required vary at each organizational levels. The goal of all managers is to create a surplus. Excellent
companies exploit the innovative trends of information technology in vogue in the 21st Century’s to their
advantage and adapt a great deal from globalization. In this changing world a manager needs should be
dynamic and be able to apply in apt time. He should possess the qualities of a great leader and be able
to build strong value system. Manager should be able to practice team work and meritocracy. He should
be a person with epithetical in nature whereby he is able to feel the pulse of his team members. Last but
not the least, a man who enjoys his life.
Exhibit 1.2 A Guide to Middle Manager Survival
In today’s world, restructuring and downsizing have led to the emergence of flatter organizations. Middle
managers have been the most affected by these changes. Many management writers consider middle
managers as “excess organizational baggage.” Ironically, middle managers are the most potential assets of
the organization. Many organizations have the false notion that by removing these managers, they can
restructure themselves better. To ensure continued survival of middle managers, a number of individual and
organizational actions can be undertaken. These are listed below:
1. Focus on important strategic issues: Middle managers should move away from the day-to-day operations
(which can be delegated to the first-line managers) and devote their attention to the more important
strategic issues.
2. Think like senior managers: They should use their extensive knowledge to deal with more substantive
issues that would lead to organizational benefit.
3. Analyze why change is needed: They must understand the underlying causes for introducing change and
how the organization should adapt itself in the light of opportunities and threats.
4. Ensure greater participation: Middle managers have a great deal of technical expertise and a good
knowledge of organizational processes. This knowledge should be disseminated throughout the organization.
5. Manage change and people together: Middle managers should take the initiative for implementing change
in the organization. They should act as mentors for those with lesser work experience.
6. Utilize their role as intermediaries: Middle managers can comprehend the internal and external pressures
faced by the organization. They can resolve conflicting issues by negotiating with the parties concerned.
7. Implement the vision: Middle managers must attempt to convert top-level strategies into workable actions.
They should take up the responsibility to implement the vision of the organization.
8. Incorporate change into the organization: Middle managers must understand how to implement change
in the organization. They should introduce work practices that bring in innovation and “shifts in thinking.”
In the words of Rory Chase, Managing Director of IFS International in Bedford, “The new role of the middle
manager embraces three key areas: team leadership, change maker and facilitator.” There is no doubt that
in order to survive in this rapidly changing era, middle managers have to make themselves indispensable.
Adapted from Steve Towers, “Re-engineering - Middle Managers are the Key Asset,“ Online Newsletter, October
1996 (Page updated on 27 October 2002), The Institute of Management Excellence.
CRITICAL THINKING EXERCISE

1. Traditional organization is usually depicted as a pyramid-shaped hierarchy with authority and
decision making flowing from the top down. As this chapter has pointed out, the changing environment
demands that new forms of organization be designed. Your assignment is to graphically depict
some new organizational designs. Draw whatever shapes you think represent the boundaryless,
team focused, and process-oriented organizations that are evolving. Then write a brief narrative
describing what you have drawn and what you think the implications behind your designs are.
Agricultural Fertilizer Division of the Northern Chemical Corporation

At the end of a busy day, a group of middle-level managers of the Agriculture Fertilizer
Division of the Northern Chemical Corporation gathered to reflect on their problems. The
headquarters of Northern Chemical had recently set up a central data processing department
in New Delhi, where all the corporation’s data processing would be done for its various
divisions located throughout India. At that time, the data processing equipment of every
division had been taken away; each division headquarters office was given a terminal connected
to New Delhi, and each division was required to get any report processing it needed from the
New Delhi facility.
The headquarters of the Agricultural Fertilizer Division was located in Chennai. This division
CASE STUDY
had long concentrated on developing and selling fertilizers to the large agricultural growers in
the South and on distributing its garden and house plant fertilizers to stores throughout the
country. It had been very successful, with sales growing rapidly and profits even faster. But
the line managers of the division were quite unhappy about not being able to have their own
computer facilities to give them the analyses and reports they needed.
Kumaran, production planning control supervisor, was particularly disturbed about the
change to centralized data processing. “There is no way,” said Kumaran, that I can plan our
products, especially with our many products and customers and demands of our large growers
for good service, if New Delhi runs our programs. The people there do not always have the
data needed in their data bank, and, by the time I get it worked out with them, I have lost
much valuable time.
Murali, district sales manager for Northern Mumbai, was even unhappier. He pointed out
that he needed to run productivity and profitability studies for large growers and he could not
be so unless the division had a computer operation in its own offices in Chennai. The growers
will never understand and why I cannot make these analyses for them quickly, nor will they
understand why they made in Houston; they will soon tell me that there are other companies
that can serve their moaned Murali.
You do have a problem,” said R K Naidu, head of statistical analyses and reports in the
division controller’s office. “But yours is a small one compared with mine” . I have to get
many special and reports to headquarters, to the division managers, and to all you people
in sales, market research, product development, and production. You always want them right
away and in the form you can use most easily. How can I do that for you now?” The
frustration reached its peak when V. Prasad, cost control supervisor, startled the group by
saying “Did you know that all the departments in our division are being charged fees each
month for New Delhi services and that these are higher than the costs when we each had
our own little computer system.
1. Do you agree that these people have a serious problem?

2. If you were one of them, what would you do about it?
3. If you were to look at this purely as an organization problem, what conclusions would you draw?
][][
Chapter 2 Evolution of Management Thought 21
Management
Evolution of
Thought
In this chapter we will discuss:
H Early Approaches to Management
H Classical Approach
H Behavioural Approach
H Quantitative Approach
H Modern Approaches to Management
H Emerging Approaches in Management Thought
INTRODUCTION
According to one school of thought, history has no relevance to the problems faced by managers
today. Some are also of the opinion that management theory is too abstract to be of any practical use.
However, both theory and history are indispensable tools for managing contemporary organizations.
Like most modern disciplines, contemporary management thought has its foundations in the history
of management and the many significant contributions of theorists and practitioners. A theory is a conceptual
framework for organizing knowledge that provides a blueprint for various courses of action. Hence, an
awareness and understanding of important historical developments and theories propounded by early
thinkers is important for today’s managers.
In this chapter, we first take a look at the early approaches to management. We then focus on four
well-established schools of management thought (see Table 2.1): (i) the classical approach; (ii) the
behavioural approach; (iii) the quantitative approach and (iv) the modern approaches to management.
Finally, some emerging approaches in management thought are discussed.
Early Approaches to Management

The Industrial Revolution, which began in Europe in the mid-1700s, was the starting point for the
development of management concepts and theories. The rapid growth in the number of factories during
this period and the need to coordinate the efforts of large number of people in the production process
necessitated the development of management theories and principles. Many theorists and practitioners in
the mid- and late 1800s (pre-classical period) contributed valuable ideas that laid the foundation for
subsequent, broader inquiries into the nature of management. Five principal contributors can be identified
in this early period of development of management thought: Robert Owen, Charles Babbage, Andrew Ure,
Charles Dupin, and Henry Robinson Towne (see Table 2.2).
Robert Owen: Human Resouce Management Pioneer

Robert Owen (1771-1858) was a successful British entrepreneur in the early 19th century. He was
one of the earliest management thinkers to realize the significance of human resources. He believed that
workers’ performance was influenced by the environment in which they worked. He proposed legislative
reform that would limit the number of working hours and restrict the use of child labour. At his own
factories, he introduced a standard working day of 10½ hours and refused to employ children under the
age of ten. Owen’s proposals were opposed by his business partners and were considered radical (child
labour and long working hours were common practices during this era). He tried to improve the living
conditions of his employees by ensuring basic amenities like better streets, houses, sanitation and setting
up an educational establishment in New Lanark.
Owen recommended the use of a “silent monitor” to openly rate an employee’s work on a daily basis.
Blocks of wood were painted in four different colours, with each colour signifying a certain level of
accomplishment. Depending on the productivity of the employee, blocks of appropriate colour were then
attached to each machine in the factory. Owen believed that these open ratings instilled pride and
encouraged healthy competition. Publicizing of sales and production figures by many modern organizations
is based on the same psychological principle.
Table 2.1: Major Classification of Management Approaches and their Contributors
Major Classification of Management Approaches Major Contributors
Classical approach Scientific management Frederick W. Taylor, Frank and Lillian

Gilbreth and Henry Gantt
Bureaucratic management Max Weber
Administrative management Henri Fayol
Behavioural approach Group influences Mary Parker Follet
Hawthorne studies Elton Mayo
Maslow’s needs theory Abraham Maslow
Theory X and Theory Y Douglas McGregor
Model I versus Model II values Chris Argyris
Quantitative approach Management science -
Operations management -
Management information system -
Modern approaches The Systems Theory -
Contingency Theory -
Emerging approaches Theory Z and Quality management William Ouchi
Owen wanted other manufacturers to share his concern for improving workers’ working and living
conditions. He argued that a manager’s best investment was in his workers. Though Owen’s ideas were
not accepted by his contemporaries, they laid the groundwork for the human relations movement. Owen
is also considered a forerunner of the behavioural school because of his concern for human welfare.
Table 2.2: Pre-classical Contributors to Management Thought
Name Period Contribution
Robert Owen 1771-1858 Proposed legislative reforms to improve working conditions of labour
Charles Babbage 1792-1871 Advocated the concept of ‘division of labour’; devised a profit-sharing plan which
led to the modern-day Scanlon Plan
Andrew Ure 1778-1857 Advocated the study of management
Charles Dupin 1784-1873
Henry R. Towne 1844-1924 Emphasized the need to consider management as a separate field of study and
the importance of business skills for running a business.
Charles Babbage
British Professor of Mathematics, Charles Babbage (1792-1871), is widely known as the “father of
modern computing.” He was a pioneer not only in the field of computing but also in the field of management.
His major contributions to the field of computing were the world’s first mechanical calculator and an
“analytical engine” (which was a forerunner of the modern computer). The problems he encountered while
carrying out his projects led him to search for new ways of doing things. His desire to improve processes
led to many contributions to management theory.
Babbage was an advocate of the concept of division of labour. He was impressed by the idea of work
specialization, or the degree to which work is divided into various tasks. He believed that each factory
operation should be thoroughly understood so that the necessary skill involved in each operation could be
isolated. Each worker could then be trained in one specific skill and made responsible only for that part
of the operation. He observed that work specialization could apply not only to physical work but also
mental work. Babbage felt that work specialization would reduce training time and improve (through
constant repetition of each operation) the skills and efficiency of workers. The concept of the assembly line,
in which each worker is responsible for a different repetitive task, is based on Babbage’s ideas.
Babbage believed that the interests of employees and management were closely linked. He, therefore,
devised a profit-sharing plan under which bonuses were given for useful suggestions contributed by
employees and wages were based on the profits generated by the factory. His employee incentive techniques
are used even today. The modern-day Scanlon Plan, under which workers offer suggestions to improve
productivity and then share the resulting profits, is based on Babbage’s ideas.
Andrew Ure and Charles Dupin: Management Education Pioneers

Andrew Ure (1778-1857) and Charles Dupin (1784-1873) were the early proponents of the study of
management. Ure was a British academician and Dupin, a French engineer. Ure, who taught at Glasgow
University, published The Philosophy of Manufacturing, in which he explained the various principles and
concepts of manufacturing. In 1819, Dupin was appointed as a management professor in Paris, which
marked the beginning of an illustrious career. His writings, well-known throughout France, may have
influenced Henri Fayol’s contributions to the theory of management.
Henry Robinson Towne (1844-1924)

Henry R. Towne, President of the Yale and Towne manufacturing company and a mechanical
engineer, realized that good business skills were essential for running a business. He emphasized the need
to consider management as a separate field of systematic study on the same level as engineering. In a
paper, “The Engineer as an Economist,” presented in 1886, Towne suggested that management be studied
as a science and that principles be developed that could be used across various management situations.
Frederick W. Taylor, who attended the presentation, was influenced by Towne’s ideas. Subsequently,
Taylor developed the principles of scientific management.
Assessing Preclassical Contributions

Preclassical theorists generally tried to find solutions to contemporary managerial problems. The early
pioneers, with their technical backgrounds, did not regard management as a separate field of study.
However, their ideas did lay the foundation for the management theorists of the 1900s.
CLASSICAL APPROACH
Classical management thought can be divided into three separate schools: scientific management,
administrative theory and bureaucratic management. Classical theorists formulated principles for setting up
and managing organizations. These views are labelled “classical” because they form the foundation for the
field of management thought. The major contributors to the three schools of management thought –
scientific management, administrative theory and bureaucratic management – are Frederick W. Taylor,
Henry Fayol and Max Weber respectively. Table 2.3 gives a brief overview of the classical theories in
management thought.
Table 2.3: A Brief Overview of Classical Theories
Approach Rationale Focus
Scientific management One best way to do each job Job level

Administrative principles One best way to put an organization together Organizational level
Bureaucratic organization Rational and impersonal organizational arrangements Organizational level
Adapted from “Evolution of Management Thought” <http://www.biz.colostate.edu/faculty/dennism/Management-

Evolution.html
SCIENTIFIC MANAGEMENT
Scientific management became increasingly popular in the early 1900s. In the early 19th century,
scientific management was defined as “that kind of management which conducts a business or affairs by
standards established, by facts or truths gained through systematic observation, experiment, or reasoning.”
In other words, it is a classical management approach that emphasizes the scientific study of work
methods to improve the efficiency of the workers. Some of the earliest advocates of scientific management
were Frederick W. Taylor (1856-1915), Frank Gilbreth (1868-1924), Lillian Gilbreth (1878-1972), and
Henry Gantt (1861-1919).
Frederick Winslow Taylor

Frederick Winslow Taylor took up Henry Towne’s challenge to develop principles of scientific
management. Taylor, considered “father of scientific management”, wrote The Principles of Scientific
Management in 1911. An engineer and inventor, Taylor first began to experiment with new managerial
concepts in 1878 while employed at the Midvale Steel Co. At Midvale, his rise from labourer to chief
engineer within 6 years gave him the opportunity to tackle a grave issue faced by the organization – the
soldiering problem. ‘Soldiering’ refers to the practice of employees deliberately working at a pace slower
than their capabilities. According to Taylor, workers indulge in soldiering for three main reasons as
mentioned in table: 2.4.
Table 2.4: Reasons For Soldiering

1 Workers feared that if they increased their productivity, other workers would lose their jobs.
2 Faulty wage systems employed by the organization encouraged them to work at a slow pace.
3 Outdated methods of working handed down from generation to generation led to a great deal of wasted efforts
Taylor felt that the soldiering problem could be eliminated by developing a science of management.
Table 2.5 presents the steps in scientific management. The scientific management approach involved using
scientific methods to determine how a task should be done instead of depending on the previous experiences
of the concerned worker.
Table 2.5: Four Steps in Scientific Management
Step Description
Step 1 Develop a science for each element of the job to replace old rule of thumb methods.
Step 2 Scientifically select employees and then train them to do the job as described in Step 1.
Step 3 Supervise employees to make sure they follow the prescribed methods for performing their jobs.
Step 4 Continue to plan the work but use workers to actually get the work done.
Adapted from “Management Theory” Management Principles and Practice II, <http://jeeves.commerce.adelaide.edu.au/
courses/mpp2/slides/Management_theory.pdf
In essence, scientific management as propounded by Taylor emphasizes:

(i) Need for developing a scientific way of performing each job.
(ii) Training and preparing workers to perform that particular job.
(iii) Establishing harmonious relations between management and workers so that the job is performed
in the desired way.
Exhibit 2.1 Scientific Management – A Critique
Scientific management focuses primarily on the work to be done. At the heart of scientific management is
the organized study of work, the analysis of work into its simplest elements and systematic improvement
of worker’s performance of each of these elements. Scientific management can be described as a systematic
philosophy of worker and work.
Scientific management, in spite of the hype that it created has not completely succeeded in solving the
problem of managing worker and work. In the words of Peter F. Drucker, “Scientific management has two
blind spots – one engineering and one philosophical.” The first blind spot is the belief that since work has
to be divided into the simplest constituent motions, it should also be arranged as a series of individual
motions – each motion being carried out by an individual worker. It is quite correct to state that work should
be analyzed by the motions that constitute it. But it is an erroneous view that by confining the work to an
individual operation, one can do the work in a much better fashion. For the human resource to be used
productively, the individual operations must be analyzed, studied and improved and jobs be formed out of
these operations which utilize a worker’s specific talents.
The second blind spot of scientific management is “the divorce of planning from doing.” Work becomes more
effective and productive if it involves a good amount of planning. It would be absurd to say that the planner
and the doer should be two different persons just because planning and doing have been separated in work
analysis. Planning and doing are the separate parts of the same job. No work can be performed effectively
unless it includes both these elements. As Drucker very aptly says, “Advocating the divorce of the two is
like demanding that swallowing food and digesting it be carried out in two separate bodies.”
The two blind spots of scientific management help us understand why its application is met with resistance
from the workers. As a worker is taught individual motions, he acquires habit and experience rather than
knowledge and understanding. As the emphasis is placed on the doing aspect, bringing in change would
cause the workers to feel insecure. Scientific management does not take into consideration the fact that
change is inevitable and one of the major functions of an organization is to bring about change.
Adapted from Peter F. Drucker, The Practice of Management (New York: Harper Business, 1986) 280-286.
The two major managerial practices that emerged from Taylor’s approach to management are the
piece-rate incentive system and the time-and-motion study.
Piece-rate Incentive System

Taylor felt that the wage system was one of the major reasons for soldiering. To resolve this problem,
he advocated the use of a piece-rate incentive system. The aim of this system was to reward the worker
who produced the maximum output. Under this system, a worker who met the established standards of
performance would earn the basic wage rate set by management. If the worker’s output exceeded the set
target, his wages would increase proportionately. The piece-rate system, according to Taylor, would
motivate workers to produce more and thus help the organization perform better.
Time-and-Motion Study
Taylor tried to determine the best way to perform each and every job. To do so, he introduced a
method called “time-and-motion” study. In a “time-and-motion” study, jobs are broken down into various
small tasks or motions and unnecessary motions are removed to find out the best way of doing a job. Then
each part of the job is studied to find out the expected amount of goods that can be produced each day.
The objective of a time-and-motion analysis is to ascertain a simpler, easier and better way of performing
a work or job.
Exhibit 2.2 Frederick W. Taylor – The Prophet of Efficiency
Frederick W. Taylor rose from the rank of an apprentice to that of a Chief Engineer at Midvale Steel in a short
span of six years. Taylor’s approach to efficiency was similar to that of a scientist – he observed, measured
and recorded the most trivial tasks. He believed that no matter how easy a task seems, one needs to study
it systematically to find the “one best way” to do that task.
Taylor observed at Bethlehem Steel that each worker performed a variable amount of work depending on his
ability. He also noted that workers brought their own shovels to work and they used the same shovel for
materials of different relative weights, like iron ore and ash. By analyzing carefully, Taylor determined that
the optimum weight for shoveling was 21 pounds. He then suggested the use of shovels of different sizes
for different classes of materials, thereby ensuring that the weight of the material being shoveled was around
21 pounds. By implementing Taylor’s plans of use of shovels of different sizes, the average amount shoveled
was increased from 16 to 59 tons.
As a result of these changes, productivity improved and the company’s costs decreased despite an increase
in the wages of workers. Thus, scientific management with its emphasis on measurement and analysis
embodied the principle of efficiency. Behind the concept of Scientific management is a simple maxim: “Never
assume that the best way of to do something is the way it has always been done.”
Adapted from Joan Magretta and Nan Stone, What management is? (New York: Free Press, 2002) 24-27 and
Kathryn M.Bartol and David C. Martin, Management (USA: Irwin McGraw-Hill, Third edition, 1998) 41-42.
Frank and Lillian Gilbreth

After Taylor, Frank and Lillian Gilbreth made numerous contributions to the concept of scientific
management. Frank Gilbreth (1868-1924) is considered the “father of motion study.” Lillian Gilbreth
(1878-1972) was associated with the research pertaining to motion studies. Motion study involves finding
out the best sequence and minimum number of motions needed to complete a task. Frank and Lillian
Gilbreth were mainly involved in exploring new ways for eliminating unnecessary motions and reducing
work fatigue.
The Gilbreths devised a classification scheme to label seventeen basic hand motions – such as
“search,” “select,” “position,” and “hold” – which they used to study tasks in a number of industries.
These 17 motions, which they called therbligs (Gilbreth spelled backward with the ‘t’ and ‘h’ transposed),
allowed them to analyze the exact elements of a worker’s hand movements. Frank Gilbreth also developed
the micromotion study. A motion picture camera and a clock marked off in hundredths of seconds was
used to study motions made by workers as they performed their tasks. He is best known for his experiments
in reducing the number of motions in bricklaying. By carefully analyzing the bricklayer’s job, he was able
to reduce the motions involved in bricklaying from 18½ to 4. Using his approach, workers increased the
number of bricks laid per day from 1000 to 2700 (per hour it went up from 120 to 350 bricks) without
exerting themselves.
Lillian’s doctoral thesis (published in the early 1900s as The Psychology of Management) was one of
the earliest works which applied the findings of psychology to the management of organizations. She had
great interest in the human implications of scientific management and focused her attention on designing
methods for improving the efficiency of workers. She continued her innovative work even after Frank’s
death in 1924, and became a professor of management at Purdue University. Lillian was the first woman
to gain eminence as a major contributor to the development of management as a science. In recognition
of her contributions to scientific management, she received twenty-two honorary degrees.
Henry Laurence Gantt

Henry L. Gantt (1861-1919) was a close associate of Taylor at Midvale and Bethlehem Steel. Gantt
later became an independent consultant and made several contributions to the field of management. He
is probably best remembered for his work on the task-and-bonus system and the Gantt chart. Under
Gantt’s incentive plan, if the worker completed the work fast, i.e. in less than the standard time, he
received a bonus. He also introduced an incentive plan for foremen, who would be paid a bonus for every
worker who reached the daily standard. If all the workers under a foreman reached the daily standard,
he would receive an extra bonus. Gantt felt that this system would motivate foremen to train workers to
perform their tasks efficiently.
The Gantt Chart (see Figure 2.1) is still used today by many organizations. It is a simple chart that
compares actual and planned performances. The Gantt chart was the first simple visual device to maintain
production control. The chart indicates the progress of production in terms of time rather than quantity.
Along the horizontal axis of the chart, time, work scheduled and work completed are shown. The vertical
axis identifies the individuals and machines assigned to these work schedules. The Gantt chart in Figure
2.1 compares a firm’s scheduled output and expected completion dates to what was actually produced
during the year. Gantt’s charting procedures were precursors of today’s program evaluation and review
techniques.
Limitations of scientific management

Scientific management has provided many valuable insights in the development of management
thought. In spite of the numerous contributions it made, there are a few limitations of scientific management.
They are:
The principles of scientific management revolve round problems at the operational level and do not
focus on the management of an organization from a manager’s point of view. These principles
focus on the solutions of problems from an engineering point of view.
The proponents of scientific management were of the opinion that people were “rational” and were
motivated primarily by the desire for material gain. Taylor and his followers overlooked the social
needs of workers and overemphasized their economic and physical needs.
Scientific management theorists also ignored the human desire for job satisfaction. Since workers
are more likely to go on strike over factors like working conditions and job content (the job itself)
rather than salary, principles of scientific management, which were based on the “rational worker”
model, became increasingly ineffective.
Administrative Theory
While the proponents of scientific management developed principles that could help workers perform
their tasks more efficiently, another classical theory – the administrative management theory – focused on
principles that could be used by managers to coordinate the internal activities of organizations. The most
prominent of the administrative theorists was Henri Fayol.
Henry Fayol
French industrialist Henri Fayol (1841-1925), a prominent European management theorist, developed
a general theory of management. Fayol believed that “with scientific forecasting and proper methods of
management, satisfactory results were inevitable.” Fayol was unknown to American managers and scholars
until his most important work, General and Industrial Management, was translated into English in 1949.
Many of the managerial concepts that we take for granted today were first articulated by Fayol.
According to Fayol, the business operations of an organization could be divided into six activities (see
Figure 2.1)
B usiness O perations
Technical C om m ercial Finan cial Security Accounting M anag erial

A ctivities A ctivities A ctivities Activities Activities A ctivities
Producing Buying, Search for Protecting Maintaining Planning,
and Selling, and optimal employees balance Organizing,
manufacturing Exchange of use of capital and property sheets, Commanding,
products goods and Compiling Coordinating,
services statistics Controlling
Fig. 2.1 Business Operations of an Organization

Fayol focused on the last activity, managerial activity. Within this, he identified five major functions:
planning, organizing, commanding, coordinating and controlling. Fayol’s five management functions are
clearly similar to the modern management functions – planning, organizing, staffing, leading and controlling
– described in Chapter 1. Fayol’s concept of management forms the cornerstone of contemporary
management theory.
Fayol outlined fourteen principles of management:
1. Division of work: Work specialization results in improving efficiency of operations. The concept of
division of work can be applied to both managerial and technical functions.
2. Authority and responsibility: Authority is defined as “the right to give orders and the power to exact
obedience.” Authority can be formal or personal. Formal authority is derived from one’s official
position and personal authority is derived from factors like intelligence and experience. Authority
and responsibility go hand-in-hand. When a manager exercises authority, he should be held
responsible for getting the work done in the desired manner.
3. Discipline: Discipline is vital for running an organization smoothly. It involves obedience to authority,
adherence to rules, respect for superiors and dedication to one’s job.
4. Unity of command: Each employee should receive orders or instructions from one superior only.
5. Unity of direction: Activities should be organized in such a way that they all come under one plan
and are supervised by only one person.
6. Subordination of the individual interest to the general interest: Individual interests should not take
precedence over the goals of the organization.
7. Remuneration: The compensation paid to employees should be fair and based on factors like
business conditions, cost of living, productivity of employees and the ability of the firm to pay.
8. Centralization: Depending on the situation, an organization should adopt a centralized or
decentralized approach to make optimum use of its personnel.
9. Scalar chain: This refers to the chain of authority that extends from the top to the bottom of an
organization. The scalar chain defines the communication path in an organization.
10. Order: This refers to both material and social order in organizations. Material order indicates that
everything is kept in the right place to facilitate the smooth coordination of work activities. Similarly,
social order implies that the right person is placed in the right job (this is achieved by having a
proper selection procedure in the organization).
11. Equity: All employees should be treated fairly. A manager should treat all employees in the same
manner without prejudice.
12. Stability of tenure of personnel: A high labour turnover should be prevented and managers should
motivate their employees to do a better job.
13. Initiative: Employees should be encouraged to give suggestions and develop new and better work
practices.
14. Espirit de corps: This means “a sense of union.” Management must inculcate a team spirit in its
employees.
BUREAUCRATIC MANAGEMENT
Bureaucratic management, one of the schools of classical management, emphasizes the need for
organizations to function on a rational basis. Weber (1864-1920), a contemporary of Fayol, was one of
the major contributors to this school of thought. He observed that nepotism (hiring of relatives regardless
of their competence) was prevalent in most organizations. Weber felt that nepotism was grossly unjust and
hindered the progress of individuals. He, therefore, identified the characteristics of an ideal bureaucracy
to show how large organizations should be run. The term “bureaucracy” (derived from the German buro,
meaning office) referred to organizations that operated on a rational basis. According to Weber, “a
bureaucracy is a highly structured, formalized, and impersonal organization.” In other words, it is a formal
organization structure with a set of rules and regulations. The characteristics of Weber’s ideal bureaucratic
structure are outlined in Table 2.6. These characteristics would exist to a greater degree in “ideal”
organizations and to a lesser degree in other, less perfect organizations.
Table 2.6: Major Characteristics of Weber’s Ideal Bureaucracy
Characteristic Description
Work specialization The duties and responsibilities of all the employees are clearly defined. Jobs are
and division of labour divided into tasks and subtasks. Each employee is given a particular task to
perform repeatedly so that he acquires expertise in that task.
Abstract rules and regulations The rules and regulations that are to be followed by employees are well defined
to instill discipline in them and to ensure that they work in a co-coordinated
manner to achieve the goals of the organization.
Impersonality of managers Managers make rational decisions and judgments based purely on facts. They try
to be immune to feelings like affection, enthusiasm, hatred and passion so as to
remain unattached and unbiased towards their subordinates.
Hierarchy of organization structure The activities of employees at each level are monitored by employees at higher
levels. Subordinates do not take any decision on their own and always look up
to their superiors for approval of their ideas and opinions.
The term “bureaucracy” is sometimes used to denote red tapism and too many rules. However, the
bureaucratic characteristics of organizations outlined by Weber have certain advantages. They help remove
ambiguities and inefficiencies that characterize many organizations. In addition, they undermine the
culture of patronage that he saw in many organizations.
Limitations of Bureaucratic Management and Administrative Theory

Scholars who emphasized the human approach to management criticized classical theorists on several
grounds. They felt that the management principles propounded by the classical theorists were not universally
applicable to today’s complex organizations. Moreover, some of Fayol’s principles, like that of specialization,
were frequently in conflict with the principle of unity of command.
Weber’s concept of bureaucracy is not as popular today as it was when it was first proposed. The
principal characteristics of bureaucracy – strict division of labour, adherence to formal rules and regulations,
and impersonal application of rules and controls – destroy individual creativity and the flexibility to
respond to complex changes in the global environment.
Classical theorists ignored important aspects of organizational behaviour. They did not deal with the
problems of leadership, motivation, power or informal relations. They stressed productivity above other
aspects of management. They also failed to consider the impact of the external and internal environment
upon employee behaviour in organizations.
BEHAVIOURAL APPROACH
The behavioural school of management emphasized what the classical theorists ignored – the human
element. While classical theorists viewed the organization from a production point of view, the behavioural
theorists viewed it from the individual’s point of view. The behavioural approach to management emphasized
individual attitudes and behaviours and group processes, and recognized the significance of behavioural
processes in the workplace. Table 2.7 gives an overview of the key contributions to management theory
by the behavioural management school of thought.
Table 2.7: Contributions of Behavioural Thinkers to Management Thought
Name Period Contribution
Mary Parker Follet 1868-1933 Emphasized group influence and advocated the concept of ‘power sharing’ and integration
Elton Mayo 1880-1949 Laid the foundation for the Human Relations Movement; recognized the influence of
group and workplace culture on job performance
Abraham Maslow 1908-1970 Advocated that humans are essentially motivated by a hierarchy of needs
Douglas McGregor 1906-1964 Differentiated employees and managers into Theory X and Theory Y personalities
Chris Argyris - Classified organizations based on the employees’ set of values
Mary Parker Follet: Focusing on Group Influences

Mary Parker Follet (1868-1933) made important contributions to the field of human resource
management. Though Follet worked during the scientific management era, she understood the significance
of the human element in organizations. She gave much more importance to the functioning of groups in
the workplace than did classical theorists. Follet argued that organizational participants were influenced
by the groups within which they worked.
Follet recognized the critical role managers play in bringing about the kind of constructive change that
enables organizations to function. She suggested that organizations function on the principle of “power
with” rather than “power over.” Power, according to Follet, was the ability to influence and bring about
a change. She argued that power should not be based on hierarchy; instead, it should be based on
cooperation and should involve both superiors and subordinates. In other words, she advocated ‘power
sharing.’
Follet also advocated the concept of integration, which involves finding a solution acceptable to all
group members. She believed that managers should be responsible for keeping a group together and
ensuring that organizational objectives are achieved through group interaction. Her humanistic ideas have
influenced the way we look at motivation, leadership, teamwork, power and authority.
Elton Mayo: Focusing on Human Relations

Elton Mayo (1880-1949), the “Father of the Human Relations Approach,” led the team which conducted
a study at Western Electric’s Hawthorne Plant between 1927 and 1933 to evaluate the attitudes and
psychological reactions of workers in on-the-job situations. The researchers and scholars associated with
the Hawthorne experiments were Elton Mayo, Fritz Roethlisberger, T.N. Whitehead and William Dickson.
The National Research Council sponsored this research in cooperation with the Western Electric Company.
The study was started in 1924 by Western Electric’s industrial engineers to examine the impact of illumination
levels on worker productivity. Eventually the study was extended through the early 1930s. The experiments
were conducted in four phases.
a. Illumination experiments
b. Relay assembly test room experiments
c. Interview phase
d. Bank wiring observation room experiments
Illumination experiments
These experiments, initiated by Western Electric’s industrial engineers, took place between 1924 and
1927. These experiments involved manipulating the illumination for one group of workers (called the
experimental or test group) and comparing their subsequent productivity with the productivity of another
group (the control group) for whom the illumination was not changed. The results of the experiments were
ambiguous. For the test group, performance improved as the intensity of the light increased. The result was
expected. However, the performance of the test group rose steadily even when the illumination for the
group was made so dim that the workers could hardly see. To compound the mystery, the control group’s
productivity also tended to rise as the test group’s lighting conditions were altered, even though the control
group experienced no changes in illumination (see Figure 2.3). Since there was a rise in performance in
both groups, the researchers concluded that group productivity was not directly related to illumination
intensity. Something besides lighting was influencing their performance.
At this point of the Hawthorne Experiments, researchers from Harvard University, under the guidance
of Elton Mayo, were invited to participate in conducting the next phase of experiments.
Relay Assembly Test Room Experiments

A second set of experiments took place between 1927 and 1933. In this phase, researchers were
concerned about working conditions such as number of work hours, frequency and duration of rest
periods. The researchers selected six women for the experiments. These women worked in the relay
assembly test room, assembling a small device called an electrical relay. The participants were informed
beforehand about the experiments. In the course of the experiments, a number of variables were altered
in the room: wages were increased; rest periods of varying lengths were introduced; the duration of work
was shortened. The workers were also granted certain privileges such as leaving their workstation without
obtaining permission. These workers received special attention from the researchers and company officials.
Generally, productivity increased over the period of the study, regardless of how the factors under
consideration were manipulated. The Harvard University group ultimately concluded that better treatment
of employees made them more productive. These experiments recognized the importance of social relations
among participants. Since there was no formal supervisor (only the observer was present), the participants
experienced more freedom and a feeling of importance because they were consulted on proposed changes.
The researchers concluded that employees would work better if management were concerned about their
welfare and supervisors paid special attention to them. One of the findings of the study was the identification
of the concept which came to be described as the ‘Hawthorne effect.’ The Hawthorne effect is defined as
the possibility that individuals picked up to participate in a study may show higher productivity only
because of the added attention they receive from the researchers rather than any other factor being tested
in the study.
Interview phase
During the course of the experiments, about 21,000 people were interviewed over a three-year period
– between 1928 and 1930 – to explore the reasons for human behaviour at work. All the employees in
the Hawthorne plant were interviewed. The generalizations drawn from these interviews are given below:
1. A complaint is not necessarily an objective recital of facts; it can also be a symptom of personal
disturbance, the cause of which may be deep-seated.
2. Objects, persons and events carry social meaning. Their relation to employee satisfaction or
dissatisfaction is purely based on the employee’s personal situation and how he perceives them.
3. The personal situation of the worker is a configuration of relationships. This configuration consists
of a personal reference and a social reference. While personal reference pertains to a person’s
sentiments, desires, and interests, social reference pertains to the person’s past and present
interpersonal relations.
4. The position or status of the worker in the company is a reference from which the worker assigns
meaning and value to the events, objects, and features of his environment, such as hours of work,
wages etc.
5. The social organization of the company represents a system of values from which the worker
derives satisfaction or dissatisfaction according to his perception of his social status and the
expected social rewards.
6. The social demands of the worker are influenced by social experiences in groups both inside and
outside the workplace.
Bank wiring observation room experiments:

These experiments were undertaken by researchers to test some of the ideas they had gathered during
the interviews. The experiments were conducted during 1931-1932.
The fourteen participants in the experiment were asked to assemble telephone wiring to produce
terminal banks. This time no changes were made in the physical working conditions. In the Bank Wiring
Observation Room experiments, workers were paid on the basis of an incentive pay plan, under which
their pay increased as their output increased. Researchers observed that output stayed at a fairly constant
level, which was contrary to their expectations. Their analysis showed that the group encouraged neither
too much nor too little work. It seemed they had their own idea of what “a fair day’s work” was and
enforced it themselves. The test room participants did not behave the way the ‘economic man model’ (this
model states that employees are predominantly motivated by money) predicted. Group acceptance appeared
to be more important to the worker than money. Thus, these experiments provided some insights into
informal social relations within groups.
Exhibit 2.3 Limitations of Human Relations Approach
Human relations theory recognizes the significance of human resources. This theory believes that each
individual is unique and the attitude and behaviour of an employee determines the way he or she works. This
theory is against the view that people respond automatically to monetary stimulus. Human relations theory
was one of the greatest advances in management, yet, it did not succeed in establishing new concepts.
The limitations of the Human Relations theory are:
The Human Relations theorists are of the opinion that by removing fear, people would perform effectively.
This view attacked the assumption that workers can be motivated to work only through fear. The Human
Relations approach made a significant contribution at a time when it was generally being assumed that
workers have to be coerced to work. Yet, this approach has very little to say about positive motivation.
The positive motivation aspect has been generalized by the Human Relations theorists.
Human Relations theory does not provide enough focus on work. It emphasizes more on interpersonal
relations and on “the informal group.” Consequently, this approach assumes that a worker’s attitudes,
behaviour and effectiveness is predominantly determined by his relation with his fellow-workers and not
by the kind of work he does.
Human Relations does not understand the economic implications of organizational problems. Therefore,
most of the principles advocated cannot be applied in the organizational context. Human Relations theory
also tends to be very vague. It stresses on “giving the workers a sense of responsibility” but hardly tells
what their responsibilities are.
Human Relations theory has made noteworthy contributions to the field of management. It provides valuable
guidance in understanding the employees and managing them. This theory also states the importance of
attitudes and behaviours in managing the workforce effectively. Human Relations is one of the foundations
on which the building of management is to be built. Although this theory has given great insights, it has its
limitations also. This theory focuses more on the informal group and is very vague about the positive
motivation aspects.
Contributions of Hawthorne Experiments

The Hawthorne experiments, which laid the foundation for the Human Relations Movement, made
significant contributions to the evolution of management theory. Some of the contributions are illustrated
in Table 2.8.
Criticism of Hawthorne studies

The Hawthorne studies have received considerable criticism. They have been criticized on the following
grounds
Table 2.8: Elton Mayo and the Hawthorne Studies
Pre-judgments Findings
Job performance depends on the individual worker. The group is the key factor in job performance.
Fatigue is the main factor affecting output. Perceived meaning and importance of the work determine output.
Management sets production standards. Workplace culture sets its own production standards.
1. The procedures, analysis of findings, and the conclusions reached were found to be questionable.
Critics felt that the conclusions were supported by little evidence.
2. The relationship made between the satisfaction or happiness of workers and their productivity was
too simplistic.
3. These studies failed to focus attention on the attitudes of employees at the workplace.
Abraham Maslow: Focusing on Human Needs

In 1943, Abraham H. Maslow (1908-1970), a Brandeis University psychologist, theorized that people
were motivated by a hierarchy of needs. His theory rested on three assumptions. First, all of us have needs
which are never completely fulfilled. Second, through our actions we try to fulfil our unsatisfied needs.
Third, human needs occur in the following hierarchical manner: (i) physiological needs; (ii) safety or
security needs; (iii) belongingness or social needs; (iv) esteem or status needs; (v) self-actualization, or self-
fulfilment needs. According to Maslow, once needs at a specific level have been satisfied, they no longer
act as motivators of behaviour. Then the individual strives to fulfil needs at the next level. Managers who
accepted Maslow’s hierarchy of needs attempted to change their management practices so that employees’
needs could be satisfied
Douglas McGregor: Challenging Traditional Assumptions about Employees

Douglas McGregor (1906-1964) developed two assumptions about human behaviour, which he labelled
“Theory X” and “Theory Y.” According to McGregor, these two theories reflect the two extreme sets of
belief that different managers have about their workers. Theory X presents an essentially negative view of
people. Theory X managers assume that workers are lazy, have little ambition, dislike work, want to avoid
responsibility and need to be closely directed to make them work effectively. Theory Y is more positive and
presumes that workers can be creative and innovative, are willing to take responsibility, can exercise self-
control and can enjoy their work. They generally have higher-level needs which have not been satisfied
by the job.
Like Maslow’s theory, McGregor’s Theory X and Theory Y influenced many practicing managers.
These theories helped managers develop new ways of managing the workers. McGregor’s theories are also
discussed in detail in Chapter 16. Table 2.9 gives a comparison of Theory X and Theory Y characteristics.
Table 2.9: A Comparison of Theory X and Theory Y Characteristics
Theory X Theory Y
Most people dislike work and they avoid it Work is a natural activity like play or rest.
when they can.
Most people must be coerced and threatened with People are capable of self-direction and self-control
punishment are before they work. They require if they committed to objectives.
close direction.
Most people prefer to be directed. They avoid People become committed to organizational
responsibility and have little ambition. They are objectives if they are rewarded in doing so.
interested only in security.
Chris Argyris: Matching Human and Organizational Development

Chris Argyris, a Yale University professor, made significant contributions to the behavioural school
of management thought. The major contributions of this behavioural scientist are the maturity-immaturity
theory, the integration of individual and organizational goals, and Model I and Model II organization
analysis.
Argyris points out the inherent conflict between the healthy individual and the rigid structure of the
formal organization. He believes that people progress from a stage of immaturity and dependence to a
state of maturity and independence. Many organizations tend to keep their employees in a dependent state,
thereby blocking further progress. This tendency may keep an individual from realizing his or her true
potential. Further, Argyris argues that several of the basic concepts and principles of modern management
– such as specialization – hinder the development of a “healthy” personality. He feels that such incongruence
between the organization and individual development results in the failure and frustration of employees.
Such incongruence, Argyris argues, can be corrected by techniques such as job enlargement and job
loading, which increase the work-related responsibilities of the individual and allow him to participate in
the decision-making process.
Model I and Model II organizations

Argyris classifies organizations as Model I and Model II organizations on the basis of the employees’
set of values. The employees in Model I organization are manipulative and pitted against each other. They
are not willing to take risks. Workers in Model II organization are open to learning and less manipulative.
Their access to information gives them freedom to make informed choices, which in turn increases their
willingness to take risks. Hence, according to Argyris, managers should strive to create a Model II
environment.
QUANTITATIVE APPROACH
The quantitative management perspective emerged during World War II. During the war, the army
(in the U.S and U.K) brought together managers, government officials and scientists to help it deploy its
resources more efficiently and effectively. These experts used some of the mathematical approaches to
management devised earlier by Taylor and Gantt to solve the logistical problems encountered by the army
during the war. After the war, many organizations started applying the same techniques to solve business
problems. The quantitative approach to management includes the application of statistics, optimization
models, information models and computer simulations. More specifically, this approach focuses on achieving
organizational effectiveness through the application of mathematical and statistical concepts. The three
main branches of the quantitative approach are: (i) management science (ii) operations management and
(iii) management information systems.
Management Science
The management science approach stresses the use of mathematical models and statistical methods
for decision-making. It visualizes management as a logical entity, the action of which can be expressed
in terms of mathematical symbols, relationships and measurement data. Another name commonly used for
management science is operations research. Recent advances in computers have made it possible to use
complex mathematical and statistical models in the management of organizations. Management science
techniques are widely used in the following areas
Capital budgeting and cash flow management
Production scheduling
Development of product strategies
Planning for human resource development programmes
Maintenance of optimal inventory levels
Aircraft scheduling
Various mathematical tools like the waiting line theory or queuing theory, linear programming, the
programme evaluation review technique (PERT), the critical path method (CPM), the decision theory, the
simulation theory, the probability theory, sampling, time series analysis etc. have increased the effectiveness
of managerial decision-making. To apply a quantitative approach to decision-making, individuals with
mathematical, statistical, engineering, economics and business background skills are required. Since one
person cannot have all these skills the quantitative method requires a team approach to decision-making.
This approach has been criticized for its overemphasis of mathematical tools. Many managerial activities
cannot be quantified because they involve human beings who are governed by many irrational elements.
OPERATIONS MANAGEMENT
Operations management is an applied form of management science. It deals with the effective
management of the production process and the timely delivery of an organization’s products and services.
Operations management is concerned with: (i) inventory management, (ii) work scheduling, (iii) production
planning, (iv) facilities location and design, and (v) quality assurance. The tools used by operations
managers are forecasting, inventory analysis, materials requirement planning systems, networking models,
statistical quality control methods, and project planning and control techniques
MODERN APPROACHES TO MANAGEMENT

Besides the classical, behavioural and quantitative approaches to management, there are certain
modern approaches to management. Two of these approaches are the systems theory and the contingency
theory, which have significantly shaped modern management thought. These two approaches to management
are discussed in this section.
SYSTEMS THEORY
Those who advocate a systems view contend that an organization cannot exist in isolation and that
management cannot function effectively without considering external environmental factors. The systems
approach gives managers a new way of looking at an organization as a whole and as a part of the larger,
external environment.
According to this theory, an organizational system has four major components: inputs, transformation
processes, output and feedback (see Figure 2.4). Inputs – money, materials, men, machines and informational
sources – are required to produce goods and services. Transformation processes or throughputs – managerial
and technical abilities – are used to convert inputs into outputs. Outputs are the products, services, profits
and other results produced by the organization. Feedback refers to information about the outcomes and
the position of the organization relative to the environment it operates inThe two basic types of systems
are closed and open systems. A system that interacts with its environment is regarded as an open system
and a system that does not interact with its environment is considered a closed system. Frederick Taylor,
for instance, regarded people and organizations as closed systems. In reality, all organizations are open
systems as they are dependent on interactions with their environment. Whether it is a new product
decision or a decision related to the employees of the organization, the organization must consider the role
and influence of environmental factors. Figure 2.2 depicts an open organizational system.
CONTINGENCY THEORY
This is also known as the situational theory. This approach has been widely used in recent years to
integrate management theory with the increasing complexity of organizations. According to this theory,
there is no one best way to manage all situations. In other words, there is no one best way to manage.
The response “It depends” holds good for several management situations.
The contingency approach was developed by managers, consultants, and researchers who tried to
apply the concepts of the major schools of management thought to real-life situations. Managers, who
follow this approach, make business decisions or adopt a particular management style only after carefully
considering all situational factors. According to the contingency approach, “The task of managers is to
identify which technique will, in a particular situation, under particular circumstances, and at a particular
time, best contribute to the attainment of management goals” (see Figure 2.3).
IN PUTS TRANSFO RM ATION O UTPUTS

PRO CESS
Res ource s M ana gerial an d Goods

Te chnological abilities
Labour Services
Planning
Materials Profits and
Organizing losses
Capital
Staffing Employee
Machinery satisfaction
Leading
Information
Controlling
Technology
FEEDBACK
Fig. 2.2 A Systems View of Organizations

Table 2.10: Important Features of the Major Approaches
Approach Important Features

Classical This approach is divided into three schools – scientific management, administrative theory and
bureaucratic management. Scientific management emphasizes the scientific study of work methods
to improve the efficiency of the workers. The administrative theory focused on principles that
could be used by managers to coordinate the internal activities of organizations. Bureaucratic
management emphasizes the need for organizations to function on a rational basis.
Behavioural The behavioral approach to management emphasized individual attitudes and behaviours and
group processes, and recognized the significance of behavioural processes in the workplace. While
Mary Parker Follett focused on the functioning of groups in the workplace, Elton Mayo’s Hawthorne
studies were aimed at evaluating the attitudes and psychological reactions of workers in on-the-
job situations and laid the foundation for the Human Relations Movement. Abraham Maslow
theorized that people were motivated by a hierarchy of needs. Douglas McGregor’s assumptions
about human behaviour led to the development of Theory X and Theory Y which reflect the two
extreme sets of belief that different managers have about their workers. Chris Argyris is known for
his maturity-immaturity theory, integration of individual and organizational goals, and Model I
and Model II organization analysis.
Quantitative This approach focuses on achieving organizational effectiveness through the application of
mathematical and statistical concepts. The three main branches of this approach are: management
science, operations management, and management information systems.
Contemporary The systems approach views organizations as a part of the larger, external environment. The
(systems and Contingency Theory states that there is no one best way to manage all situations.
contingency)
Contingency View:
Appropriate managerial action
depends on the situation
U niv ersal View :

Same managerial
principles apply to Situation 3
every situation Situation 1
Situation 2
Fig. 2.3 The Contingency Managerial Viewpoint
EMERGING APPROACHES IN MANAGEMENT THOUGHT

William Ouchi, a management expert, conducted research on both American and Japanese management
approaches and outlined a new theory called Theory Z. This theory combines the positive aspects of both
American and Japanese management styles. The Theory Z approach involves providing job security to
employees to ensure their loyalty and long-term association with the company. It also involves job rotation
of employees to develop their cross-functional skills. This approach advocates the participation of employees
in the decision-making process and emphasizes the use of informal control in the organization along with
explicit performance measures. The organization shows concern for its employees’ well-being and lays
emphasis on their training and development. (Theory Z and American and Japanese styles of management
are discussed in detail in Chapter 24).
Another approach in the field of management thought that is gaining increasing importance is that
of quality management. Quality management is a management approach that directs the efforts of
management towards bringing about continuous improvement in product and service quality to achieve
higher levels of customer satisfaction and build customer loyalty. To be successful and effective, this
approach needs to be integrated with an organization’s strategy.
SUMMARY
The Industrial Revolution provided the impetus for developing various management theories and
principles. Pre-classical theorists like Robert Owen, Charles Babbage, Andrew Ure, Charles Dupin, and
Henry R. Towne made some initial contributions that eventually led to the identification of management
as an important field of inquiry. This led to the emergence of approaches to management: classical,
behavioural, quantitative and modern.
The classical management approach had three major branches: scientific management, administrative
theory and bureaucratic management. Scientific management emphasized the scientific study of work
methods to improve worker efficiency. Bureaucratic management dealt with the characteristics of an ideal
organization, which operates on a rational basis. Administrative theory explored principles that could be
used by managers to coordinate the internal activities of organizations.
The behavioural approach emerged primarily as an outcome of the Hawthorne studies. Mary Parker
Follet, Elton Mayo and his associates, Abraham Maslow, Douglas McGregor and Chris Argyris were the
major contributors to this school. They emphasized the importance of the human element which was
ignored by classical theorists in the management of organizations. They formulated theories that centered
on the behaviour of employees in organizations. These theories could easily be applied to the management
of organizations.
The quantitative approach to management focuses on the use of mathematical tools to support
managerial decision-making. The systems theory looks at organizations as a set of interrelated parts.
According to the contingency theory, managerial action depends on the particular parameters of a given
situation. One important emerging approach to management thought is Theory Z. This approach combines
the positive aspects of American and Japanese management styles. All these views on management have
contributed significantly to the development of management thought.
People Express
The behavioural approach in management, is generally drawn on conclusions drawn from
the Hawthorne Experiments, proposes that productivity increases when the workers are recognized
as important members of the organizational family. This is what People Express did. Every
employee was given a share in the ownership of the company and lifetime employment
security was offered to all. People Express became a classic example of organizational
CASE STUDY
success and managerial effectiveness.

Donald Burr was the founder and chairperson of People Express. He has been credited
with building a humane kind of organization where employees were given a great deal of
freedom of operation. Every employee was a part owner of the company. There was no
class distinction between managers and workers. Managers helped workers in carrying out
their duties, pilots helped out in handling the baggage and passenger comfort was given top
priority. Every employee was given the opportunity and encouragement to know the company
well. Even top executives rotated from job to job to learn the major aspects of the business.
People Express was expanding its operations very fast. Within five years of its formation,
it acquired Frontier Airlines and because the fifth largest airline in the country. Since the
infrastructure and operational resources did not match the fast expansion, People Express
experienced its first losses and with it, its managerial style changed. It changed from a
participative style of management and a family type organization to a more traditional style.
Donald Burr took charge of the airline and began dictating policies and it became risky for
the employees to speak out. One of the ordinal architects of lifetime employment at People
Express, Lori Dubose was fired when she started asking questions. Similarly, another director
of the company, Harold Parety, who was told to report to work at 06.00 am and stay till
0900 pm., irrespective of whether there was enough work for him to do or not felt it to be
an insult to his integrity and quit his job and formed his own airline.
Eventually People Express declared bankruptcy because it could not generate enough
revenue to meet operating expenses and other debts.
1. Do you think that the change from participating management style to classic one contributed towards the final
collapse of People Express? Explain your reasons.
2. Do you think that a particular style of management which is effective when the company is growing is equally
effective when the company has grown large?
3. Why do you think Donale Burr changed his managerial styles? Was he justified in firing Lori Dubose because
she disagreed with his managerial policies.
Chapter 3 Social and Ethical Responsibilities of Management 43
Social and Ethical

Responsibilities of
3
Management
H Social Responsibilities of Management
H Arguments for and Against Social
Responsibilities of Business
H Social Stakeholders
H Measuring Social Responsiveness
H Managerial Ethics
INTRODUCTION
As discussed earlier in Chapter 2, organizations function more effectively if they operate as open
systems, interacting with and responding to changes in the external environment. Since such organizations
are affected by changes in the external environment, managers must understand the nature of this
environment.
The external environment of an organization consists of the mega environment (or general environment)
and the task environment as shown in Figure 3.1. The mega environment reflects the major trends in the
societies within which the organization operates. These societies have the following components:
technological, economic, socio-cultural, and international. The task environment consists of specific external
elements with which an organization interacts while conducting its business. These include customers and
clients, competitors, suppliers, labour supply and government agencies. The task environment, which
depends largely on the products and services offered by the firm and its business location, may vary from
firm to firm. While a firm may not be able to directly influence its mega environment, it can certainly
influence its task environment.
Working within a large and complex external environment affects a business in terms of its social
responsibility, its social responsiveness and its ethical behaviour. This chapter describes all these aspects
in detail.
SOCIAL RESPONSIBILITIES OF MANAGEMENT

In the early 20th century, business firms were predominantly concerned with maximizing their profits.
In the 1970s, social activists began to question business enterprises’ singular objective of profit maximization.
They argued that since businesses derive their existence from society, they have some obligations towards
it. The concept of social responsibility became popular after the publication of Howard R. Bowen’s Social
Responsibilities of Business. Bowen argued that business enterprises should consider the impact of their
decisions on society.
Before discussing how an organization can be socially responsible, let us look at some of the widely
accepted definitions of social responsibility. A survey on the social responsibilities of management defined
corporate social responsibility as follows:
“Corporate social responsibility is seriously considering the impact of the company’s actions on
society.” Of the 439 executives surveyed, only 68 per cent of the respondents agreed with the definition.
According to Keith Davis, “Social responsibilities refer to the businessman’s decisions and actions
taken for reasons at least partially beyond the firm’s direct economic or technical interest.”
According to Kenneth R. Andrews, “By social responsibility, we mean the intelligent and objective
concern for the welfare of society that restrains individual and corporate behaviour from ultimately destructive
activities, no matter how immediately profitable, and leads in the direction of positive contribution to
human betterment, variously as the latter may be defined.”
The definitions given by Davis and Andrews suggest that managers must take some steps for the
betterment of society. However, these do not elaborate the specific areas in which the managers have to
take action.
The operational definition of social responsibility is:

“Social responsibility contends that management is responsible to the organization itself and to all the
interest groups with which it interacts. Other interest groups such as workers, customers, creditors, suppliers,
government and society in general are placed essentially equal with shareholders.”
According to the above definitions, managers should pay attention to the welfare of workers, consumers’
needs and their safety, the interests and rights of creditors, government regulations and the obligations of
the organization towards society as a whole.
Technological component
Customers/Clients
International component
Compititors
Government
agencies OR GANIZA TION
Legal political
component
Suppliers
Labour supply
TA SK ENVIRO NM EN T
M EGA EN VIR ONM EN T
Social cultural component
Fig. 3.1 External Environment of an Organization
Exhibit 3.1 Corporate Social Responsibility in the Indian IT Sector
Corporate social responsibility (CSR) has become the buzzword among companies in the information technology
sector. Corporate social responsibility denotes the commitment of organizations to uphold the interests of
direct stakeholders and also behave in an environmentally and economically responsible manner. Many Indian
IT firms have realized the important role of corporate social responsibility in improving a company’s image.
They have donated a sizable chunk of their profits for the betterment of the society. Notable among them
are Polaris Software Labs, NIIT, and Satyam Infoway (Sify).
Polaris: Polaris Software Labs, one of the leading IT companies, spent approximately Rs 21 lakhs on CSR
during the year 2001-02. Polaris decided to provide education to poor children. In 1997, it created the Ullas
Trust. This trust has, since then, provided scholarship to more than 2000 students from 200 different schools.
The trust aims at developing self-confidence in economically backward children. It tries to spot the academically
talented ones among the economically underprivileged students studying in classes 9 through 12. The criteria
for selecting such students includes both merit (a student should score minimum 70 per cent) and family
income (should be below Rs 36,000 per annum). The trust is supported by financial contributions from Polaris,
which contributes 60 per cent, and its associates, who contribute 40 per cent. Polaris is also contemplating
building a network of Ullas Chapters to extend the present scholarship scheme and to motivate the younger
generation to excel in their chosen fields.
NIIT: NIIT, a leader in the IT training field, is making attempts to provide IT education to the children from the
economically weaker sections of society. Over the past 12 years, NIIT has made around one lakh students
IT-literate through its Bhavishya Jyothi Scholarship scheme. NIIT’s ‘Hole-in-the-Wall’ experiment has also
made the Internet experience simple for slum children. Unmanned computers kiosks were placed at various
locations to enable slum children to surf the net and learn more about the Web. Till date, 30 such kiosks
have been set up at various places in the country. NIIT has also created special packages like I-write for
physically challenged people. It has also created a Computer Assisted Teaching and Rehabilitation Programme
(CATERED), specially designed for spastics and visually challenged children. Thus, NIIT has brought the light
of learning in the lives of both poor and physically challenged children.
SIFY: Sify attempts to empower the weaker sections of society through its social service organization
Alambana. Sify’s Alambana Vidya Scheme helps young boys and girls who are unable to pursue their
education due to financial constraints. It provides them free IT education and also helps them find suitable
jobs. Students selected under this scheme undergo a three-month, full-time computer course, which helps
them obtain work as data entry operators, helpers in cybercafes and in retail stores such as Food World.
In January 2001, when Gujarat was hit by an earthquake, Sify reacted promptly by re-establishing its Internet
connectivity within hours. Sify earmarked two areas where it could contribute effectively to society. The first
was to act as an interface between the people of Gujarat and their relatives staying elsewhere and facilitate
their communication through e-mail. The second area was to make a plea for financial contributions from
users in India and abroad through its portal Sify.com. People who were worried or anxious to find out about
their friends or relatives were asked to contact Sify.com via e-mail. Sify then physically delivered e-mail
messages to homeless victims in various relief camps, noted their responses e-mailed them to their friends
and relatives. The company helped many people trace their near and dear ones. Through its appeal for
donations, Sify successfully raised Rs 22.79 lakhs, which was later handed over to the Indian Red Cross
Society.
These examples show that IT firms are recognizing the importance of being good corporate citizens as it not
only enhances their public image but also helps them to create a cordial relationship with society.
Adapted from Raja Simhan T.E, “Making the Ride Happen,” The Hindu Business Line Online Edition, The Hindu
group of publications, 22 January 2003, <http://www.blonnet.com/ew/2003/01/22/stories/2003012200020100.htm>
ARGUMENTS FOR AND AGAINST SOCIAL RESPONSIBILITIES OF BUSINESS

Today, many organizations are involved in social activities. Since the expectations of the society have
changed, organizations have become more aware of their social responsibilities. A careful analysis of
arguments for and against the involvement of organizations in social welfare is necessary to determine
whether an organization should implement social initiatives.
Arguments for Social Responsibilities of Business
Change in public expectations

The needs of today’s consumers have changed, resulting in a change in their expectations of businesses.
Since businesses owe their profits to society, they have to therefore respond to the needs of society.
Business is a part of society

Society and business are benefited when there is a symbiotic relationship between the two. Society
gains through economic development and the provision of employment opportunities; and business benefits
through the workforce and consumers provided by society.
Avoiding intervention by government

By being socially responsible, organizations attract less attention from regulatory agencies. This gives
them greater freedom and flexibility in their operations.
Balance of responsibility and power

Businesses have considerable power and authority. The exercise of this power should be accompanied
by a corresponding amount of responsibility.
Impact of internal activities of the organization on the external environment

Most firms are open systems, i.e., they interact with the external environment. The internal activities
of such firms have an impact on the external environment. To avoid a negative impact on the external
environment, firms should be socially responsible.
Protecting shareholder interests

By being socially involved, a company can improve its image and thus protect its shareholders’
interests.
New avenues to create profits

Social responsibility involves the conservation of natural resources. Conservation can be beneficial for
firms. Items that had been considered waste earlier (for example, empty soft drink cans) can be recycled
and profitably used again.
Favourable public image

Through social involvement, a firm can create a favourable public image for itself and endear itself
to society. By so doing, a firm can attract customers, employees, and investors.
Endeavour to find new solutions

Businesses have a history of coming up with innovative ideas. Therefore, they are likely to come up
with solutions for social problems, which other institutions were unable to tackle.
Best use of resources of a business

Businesses should make optimum use of the skills and talent of its managerial personnel as well as
its capital resources to produce good quality products and services. By so doing, the business will be able
to fulfil their obligations toward society.
Prevention is better than cure

It is in the interests of business organizations to prevent social problems. Instead of allowing large-
scale unemployment to lead to social unrest (which will harm business interests), businesses can be
sources of employment for eligible youth
Arguments Against Social Responsibility of Business
Opposes the principle of profit maximization

The main motive of a business is profit maximization. Social involvement may not be economically
viable for a business.
Excessive costs
When a business incurs excessive costs for social involvement, it passes the cost on to its customers
in the form of higher prices. Society, therefore, has to bear the burden of the social involvement of business
by paying higher prices for its products and services.
Weakened international balance of payments

A weakened international balance of payments situation may be created by the social involvement
of organizations. Since the cost of social initiatives would be added to the price of the products, the
multinational companies selling in international markets would be at a disadvantage when competing with
domestic companies which may not be involved in social activities.
Increase in the firm’s power and influence

Businesses are inherently equipped with a certain amount of power. Their involvement in social
activities can lead to an increase in their power and influence. Such influence and power may corrupt
them.
Lack of necessary skills among businesspeople

Businesspeople do not possess the necessary skills to handle the problems of society. Their expertise
and knowledge may not be relevant to deal with social problems.
Lack of accountability to society

Until a proper mechanism to establish the accountability of businesses is developed, they should not
get involved in social activities.
Lack of consensus on social involvement

There is no agreement regarding the type of socially responsible actions that a business should
undertake.
Exhibit 3.2 Boots Group PLC’s Contributions to its Stakeholders
Boots is United Kingdom’s leading retailer of health and beauty products. The Boots Group operates the
leading drugstore chain in United Kingdom and Ireland. It has around 1400 Boots The Chemist stores and
300 Boots Optician stores in UK and Ireland. Boots Healthcare International is the leading manufacturer of
drugs like Strepsils and Nurofen. Caring for employees and being involved in community development has
been a tradition at Boots. Since its inception, Boots has tried to provide its customers value for their money
by providing them economically priced products. Boots has also made contributions towards community
development and environment protection. It has also realized the value of its employees and tries to keep
their morale high through various innovative activities. Boots has realized that happy employees are the ones
who are the most productive. As early as 1888, the company organized staff outings, which included meals,
sports and dancing. The company’s CEO, Jesse Boots, also made his summer house available for activities
like staff sports and entertainment. In 1911, Boots appointed a full-time professional welfare officer to ensure
the well-being of its employees. In 1918, Boots set up a Welfare Department to coordinate the company’s
medical facilities, and education, sports and social clubs. Boots was one of the earliest companies to set
up a public lending library. In 1899, the Boots Booklovers Library was established. It allowed people to loan
books for a small subscription. These libraries soon became very popular, and by the 1940s, more than a
million people were benefitting from them. Boots made a significant contribution towards the war effort during
the First World War. The company produced Vermin powder and anti-fly cream for troops and also manufactured
Aspirin and Saccharine. Besides these contributions, Boots issued a staff magazine which allowed employees
who were in military service to keep in touch with their families. The company also raised funds to benefit
those affected by the war. Government Information Bureaus were opened in more than a dozen Boots stores
to provide advice and support to the public. In 1920, the Boots Day Continuation School was opened. This
was one of the first schools set up as a joint collaboration between a private company and a local authority.
New facilities to the school were added in 1939. This gave all employees below the age of 18 an opportunity
to study arts, sciences, crafts or vocational courses. In 1930, a new factory complex was built at Beeston,
which included the D10 ‘Wets’ building for the production, storage and distribution of ‘wet’ goods like liquids,
creams and pastes. The construction of the new factory complex saw a tremendous improvement in the
working conditions of the employees. The new factory made use of automatic conveyor belts to carry
materials. The efficiency of the system allowed the company to reduce the work week to five days, without
any reduction in pay. During the Second World War (1939-45), Boots manufactured Pencillin and Saccharine
for the Ministry of Supply. Boots also sent its employees to the cities that were bombed to carry out relief
work as part of the Mobile Infant Welfare Unit. In 1970, the Boots Charitable Trust (funded by the Boots Group
PLC) was established as an independent registered charity. On its inception, it distributed £11,000 to 84
charities. Since then, it has donated £8 million to various charitable appeals. The Boots Recycling Project
commenced in 1984, and has since then grown into a massive programme. The project reuses the stock
received from Boots businesses like store returns, gifts with purchases, and consumables which would soon
reach their expiry date. In 2002, more than 2300 merchandise donations had been made to voluntary and
charity groups. The value of these in-kind donations was estimated to be more than £2 million. The Community
Investment Center, formally inaugurated in 2001, highlights the contributions Boots makes to its communities.
It also serves as an interactive resource for employees and visitors so that they can understand and gain first-
hand experience of the community development projects being undertaken by Boots.
Adapted from “Milestones,” Boots Group PLC, <http://boots-plc.com/communityinvestment/information/
info.asp?Level1ID=5>
SOCIAL STAKEHOLDERS
Managers who are concerned about corporate social responsibility need to identify various interest
groups which may influence the functioning of a firm and which, in turn, may be affected by the firm’s
decisions. Business enterprises are primarily accountable to six major interest groups: (i) shareholders, (ii)
employees, (iii) customers, (iv) creditors and suppliers, (v) society and (vi) government. These groups are
also known as social stakeholders.
Shareholders
The primary responsibility of a business is to protect the interests of its shareholders. The shareholders
provide the core resource – the capital – that enables an organization to operate and grow. They expect
the management to use the capital judiciously and operate the business in a way that ensures a good
return on their investment, both through dividends and through increase in stock value. Shareholders
should be provided with adequate and timely information about the functioning of the organization.
Employees
Employees are an organization’s biggest asset. Traditionally, managers regarded employees only as
factors of production and denied them their rightful share in the distribution of income. However, in the
present times, it is mandatory for business firms to protect the interests of their employees. Laws and
government regulations now define the responsibilities of the employer: ensuring equal employment for
men and women, offering pensions and other retirement benefits, and providing a safe and healthy work
environment. To protect the interests of employees, management must —
(i) Treat workers as the main pillars of the organization.

(ii) Develop administrative processes that promote cooperation between employers and employees.
(iii) Foster a harmonious work atmosphere by adopting a progressive labour policy. This includes
allowing the participation of workers in management, creating a sense of involvement, and improving
the working conditions and living standards of workers.
(iv) Provide fair wages and other financial benefits to workers to keep them motivated.
Customers
In recent years, customers have received great attention. Firms have begun to realize the importance
of keeping customers happy. Moreover, the growth of consumerism has made firms more aware of their
duties towards consumers. Business firms can fulfil their obligations to their customers by:
(i) Charging reasonable prices for their products.
(ii) Ensuring the provision of standardized and quality goods and services.
(iii) Ensuring the easy availability of goods and services, so that customers do not have to spend too
much time and energy in procuring them.
(iv) Abstaining from unethical practices like hoarding, profiteering or creating artificial scarcity.
(v) Refraining from deceiving customers by making false or misleading claims.
Creditors and Suppliers

Creditors and suppliers are responsible for providing inputs for production process in the form of raw
materials and capital. Management is responsible for fulfilling its obligations to its creditors and suppliers.
This can be done by:
(i) Creating a long-term and healthy business relationship with them.
(ii) Making prompt payments to creditors and suppliers.
(iii) Providing them with accurate, relevant and needed information.
Society
Organizations function within a social system and draw their resources from this system. Therefore,
they have certain obligations towards society. The management of business organizations can fulfil their
obligations toward society by preserving and enhancing the well-being of the members of society.
Management can do so in the following ways:
(i) Using its technical expertise to solve local problems.
(ii) Setting socially desirable standards of living and avoiding unnecessary and wasteful expenditure.
(iii) Playing an important role in civic affairs. Volunteers from some companies help the traffic police
regulate traffic at busy intersections. Pizza Corner in Hyderabad is one such company. Many
companies also put up road signs along highways to encourage safe driving habits. For example,
liquor companies such as Shaw Wallace and United Breweries have put up road signs on mountain
roads in India. These road signs caution drivers against driving under the influence of alcohol.
(iv) Providing basic amenities, healthcare and education facilities, thus creating better living conditions.
(For example, the Tata group has set up the Tata Memorial Hospital and Cancer Research Institute
and the Tata Institute for Social Sciences to meet its obligation toward society.)
(v) Establishing development programmers for the benefit of economically weaker sections of society
Government
The government of a country provides the basic facilities required for the survival and growth of
businesses. The government monitors and, to a certain extent, controls the business systems of the country.
Most of the controls imposed by the government are in the best interests of businesses. To fulfil its
obligations to the government, the management of business organizations should:
(i) Be law-abiding.
(ii) Pay taxes and other dues fully, timely and honestly.
(iii) Not bribe government servants to obtain favours for the company.
(iv) Not try to use political influence in its favour
MEASURING SOCIAL RESPONSIVENESS

According to Keith Davis and William C. Frederick, social responsiveness (SR) is “the ability of a
corporation to relate its operations and policies to the social environment in ways that are mutually
beneficial to the company and to society.” In other words, it refers to the development of organizational
decision processes that enable managers to anticipate, respond to and manage the areas of social
responsibility. Though the term ‘social responsiveness’ is generally applied to business organizations, it is
also applicable to not-for-profit organizations.
What should be Measured?

Many attempts have been made to measure social responsiveness. Some companies establish special
committees to evaluate their social responsiveness. What should be measured when measuring social
responsiveness? The various categories for measuring the social responsiveness of organizations are discussed
below (these can vary depending on the industry or company).
Contributions
Companies make direct financial contributions to charitable and civic projects. The Hyundai Motor
Company donated $5,00,000 for public education in Montgomery, Alabama where it plans to build its new
$1billion plant. Many companies made financial contributions towards relief and rehabilitation work after
the Gujarat earthquake (January, 2001). Infosys Foundation, set up by Infosys, provides financial assistance
to war widows
Exhibit 3.3 Philanthropic Activities of Some Major Indian Business Houses
TATAS Temples-Venkateshwara, Lakshmi Narayan, Kali,

Major Institutions Established: Hanuman, Natraj, Govind Deoji
Indian Institute of Science Sanskrit Kala Mandir, Varanasi
Tata Institute of Social Sciences Sangeet Sagar, Calcutta
Tata Memorial Rural Cancer Project J D Birla Institute of Home Science
Tata Agriculture and Rural Training Centre for the Schools and Colleges, e.g. Modern High School,
Blind, Gujarat Rani Birla Girls College
Tata Memorial Centre for Cancer Research Company’s Community Programme:
Tata Institute of Fundamental Research Slum clearance scheme, tenements for slum
dwellers in Hyderabad
National Centre for Performing Arts
Trusts/ Foundations:
Tata Energy Research Institute
Hindustan Charity Trust
National Institute of Advanced Studies
B M Birla Foundation
Management Centre for Human Values
K K Birla Foundation
Company’s Community Programme:
M P Birla Foundation
Through each individual company, coordinated by
the Tata Council for Community Initiatives Fields Supported:
Trusts/ Foundations: Technical education, agricultural research, medicine,
art and culture, scientific research education,
Lady Tata Memorial Trust temple building and renovation, archaeology
Lady Meherabi D Tata Trust GODREJ
J R D Tata Trust Major Institutions Established:
Jamshedji Tata Trust Dr B P Godrej Students Centre
Sir Dorabji Tata Trust S P Hakimji School Foundation for Medical
Sir Ratan Tata Trust Research
J N Tata Endowment Fund for Higher Education Godrej Sailing Club
Fields Supported Naoraj Pirosha Godrej Boating Station
Scientific research, education, health and Godrej Technical Institute
community services, education in social work, art Pirosha Godrej Research Lab
and culture, medicine, energy research, rural
development Soonabi Godrej Dance Academy
BIRLAS (ALL GROUPS) Pirosha Godrej National Conservation Centre
Major Institutions Established: Company’s Community Programme:
Birla Institute of Technology, Pilani and Ranchi Family planning centres, well baby clinics, Godrej
Ganga Ecology Panel
Birla Institute of Scientific Research
Trusts/ Foundations:
Birla Economic Research Foundation
Pirosha Godrej Foundation
Calcutta Medical Research Institute
Soonabai Pirosha Godrej Foundation
B M Birla Heart Research Centre
Fields Supported:
Birla Archaeological and Cultural Research Institute
Education, health and medicine, sports,
Birla Academy of Art and Culture environment and wildlife, conservation of nature,
Planetariums in various cities family planning, arts
BAJAJ Vellayan Chettiar Higher Secondary School

Major Institutions Established: Sri Ramaswamy Mudaliar Higher Secondary School
Institute of Gandhian Studies TI Matriculation School
Gandhi Centre for Science and Human Values Arunachalam Higher Secondary School
Jamnalal Bajaj Institute of Management Studies Murugappa Polytechnic, Avadi
Shiksha Mandal AMM Medical Society
Gita Pratishthan AMM Hospital
Trusts/ Foundations: Valliammai Achi Hospital
Jamnalal Bajaj Foundation Sir Ivan Steadforth Hospital, Ambattur
Jamnalal Bajaj Seva Trust AMM Murugappa Chettiar Research Centre
Kamal Nayan Bajaj Charitable Trust Temples
Fields Supported: Trusts/ Foundations:
Community development, higher education, uplift AMM Foundation
of widows/orphans, scholarships, spiritual and AMM Charities Trust
cultural development, literacy
Fields Supported:
MURUGAPPA CHETTIAR GROUP
Education, medicine and health, scientific research,
Major Institutions Established: self-employment schemes, community welfare
AMM Education Society measures
Source: Pushpa Sundar, Beyond Business: From Merchant Charity to Corporate Citizenship Indian Business
Philanthropy Through the Ages (New Delhi: Tata McGraw-Hill, 2000).
Fund-raising
This involves fund-raising for a social cause, either by the organization itself or by assisting voluntary
social organizations in fund-raising. McDonald’s raised an approximate $15-20 million in a day during its
first ever World’s Children Day fund-raising effort on 20th November, 2002. The proceeds of the fund
would be used by Ronald McDonald House Charities for children’s causes worldwide. In India, newspaper
companies such as The Times of India and the Indian Express participate in fund-raising campaigns to
help people affected by natural disasters. Companies such as Reliance India Ltd. (RIL) and Satyam
Infoway (Sify) collected money from all their employees to contribute to the Gujarat Relief Fund.
Volunteerism
Volunteerism refers to the involvement of employees in civic activities. The Boots Company has a
volunteering programme called ‘Skills for Life,’ which gives employees a host of opportunities to get
involved in community activities in company time. These include giving career talks; conducting mock
interviews; supervising students during their work experience period; sharing business skills with local small
businesses; and planting gardens and decorating community centres. Many Indian companies such as
Voltas are involved in voluntary activities. The Voltas company, belonging to the Tata group, has adopted
ANZA, a school for mentally handicapped children in Mumbai. Volunteers from Voltas provide their
support to workshops organized in the school and also help sell the handicrafts produced by the children
of this school.
Recycling
To conserve the environment, materials like plastic, paper, etc., can and should be recycled into useful
products. Nike and The National Recycling Coalition have decided to expand their ‘Reuse-a-shoe’
programme to 25 community centres across the United States. This will allow athletic footwear to be
recycled into new products like sports surfaces. In India, companies such as Garware and Indian Organic
Chemicals, etc. have worked out an arrangement under which they recycle used Pepsi bottles and generate
polyester fibre. This fibre is then used by Garware company in pillows. The recycling efforts of these
companies reduce the accumulation of plastic waste in landfills.
Valuing diversity
Companies that value diversity voluntarily take measures to promote equal employment opportunities
irrespective of gender, race, religion. In the US, it also involves taking affirmative action. Affirmative action
refers to the set of policies and initiatives designed to eliminate past and present discriminations based on
race, colour, religion, sex or national origin. Such measures are an attempt on the part of companies to
ensure equality in all aspects of employment. In India, some of the companies that have well-developed
diversity policies are Hewlett-Packard, Philips Software, MindTree Consulting, IBM, Motorola, Oracle and
Microsoft.
Exhibit 3.4 IBM’s Commitment to Giving
For many people in the United States, September 11, 2001 was the day when their world was shattered by
the terrorist attack on the World Trade Centre. This was the biggest disaster in the recent history of the
United States. The resultant panic and confusion made it difficult for people who were trying to reach their
near and dear ones. After this catastrophe, many organizations contributed in whatever way they could to
bring the situation back to normal. One of the noteworthy contributions was made by IBM. On September
10, IBM dismantled the website it had created and hosted for the US Open which had just concluded. But
within hours of the terrorist attack on the Twin Towers, IBM had put into action a set of plans to reactivate
the site, provide a new web design, and set up the infrastructure for a fund-raising campaign. Since its
inception, the September 11 Fund website has received more than US $500 million in contributions from
approximately a million individuals around the world.
In addition to hosting the website www.september11.org, IBM has created a variety of technology solutions
to help the victims of the attacks and their loved ones. It played a crucial role in coordinating the charities
which wanted to help the victims. IBM created a common platform for these charities, which later formed the
United Service group. In addition, IBM created an integrated database of client benefits, which is now regarded
as a model for supporting social services.
IBM employees helped the various charities assist the victims of the attack effectively and quickly. The
employees of the company also contributed generously to the charities – they raised $5 million in cash from
their own pockets. Besides the contribution from the employees, IBM contributed another $5 million in the
form of cash, technology and technical assistance in relief and recovery efforts. IBM, not only reacted quickly
to the terrorist attacks, it continued to help victims even a year after the attack. The company created a
database of the bereaved families and invited them for a memorial service marking the first anniversary of the
attacks.
IBM has thus shown its commitment to the community by its noble actions. It not only donated money, but
also its two best resources – IBM technology and the skill and generosity of its employees – to aid the
victims of the attack.
Adapted from “One Year Later... A Commitment To Giving,” IBM, <http://www.ibm.com/ibmgives/news/pledge.shtml>
Direct Corporate Investment

Often, companies make direct investments to provide facilities for a locality or a community. Hewlett-
Packard has launched three digital villages across the United States, which will provide local schools,
businesses and community technology centres with equipment and training in the latest digital technology.
The purpose of these schools, businesses and community technology centres is to offer technological
literacy to residents of under-served communities, regardless of their income or educational background.
In India, many companies make direct investments in programmes and projects to meet their social
obligations. For example, Oil India Limited (OIL) sets aside a significant sum of money towards community
development, development of educational institutions, sports and cultural organizations, building mobile
dispensaries and setting up medical camps that offer child and family healthcare services. OIL has also
invested in gobar gas plants for rural areas, and tubewells and sanitation services for the economically
weaker sections of society. In addition, the company helps universities, colleges and schools develop their
facilities. It also supplies them with equipment and books, and awards scholarships to needy and meritorious
students.
Quality of Work Life

Apart from ensuring fair pay, the fair treatment of employees and safe working conditions, many
companies respond to specific employee needs. Tate & Lyle, a global leader in carbohydrate processing,
carried out an extensive opinion survey of its employees in UK and Portugal. The survey revealed, among
other things, that employees desired to have access to personal training facilities. So, Tate & Lyle set up
a new Learning Resource Centre at the Thames Refinery in London. This would allow all Thames-based
employees to update their existing skills or acquire new ones. The Centre also provided employees the
facilities for enhancing their professional qualifications or just expanding their knowledge base. In India,
some of the companies that emphasize the quality of work life are Hewlett-Packard, SmithKline Beecham,
American Express, Colgate Palmolive, Gillette, Dr. Reddy’s Laboratories, Reliance and Maruti Udyog
Limited. HP allows flexible working arrangements for its employees and follows certain innovative practices
such as allowing employees to avail leave for special occasions (marriage, exam preparation, adoption of
a child, bereavement in the family, and paternity). SmithKline Beecham encourages its employees to
balance their work life with their personal life through arrangements such as compressed work week,
flextime, and work-from-home. Dr. Reddy’s Laboratories tries to bring about the overall development of
its employees by encouraging their participation in cultural and outdoor activities. The company organizes
outdoor expeditions for its employees on a regular basis. It has also set up interest clubs such as a music
forum, a performing arts club, etc.
Attention to Consumers
Consumers prefer to buy products that are of good quality and are safe to use. Bajaj Auto aims at
designing vehicles which give excellent performance and cause the least harm to the environment. It has
a well-equipped laboratory to assess vehicle performance and emission standards. Apart from testing the
vehicles in the laboratory, Bajaj Auto also employs test riders who test the vehicles on all types of terrain
and weather conditions to ensure the suitability of the design before its commercialization.
Pollution Control
Pollution is a major problem caused by rapid industrialization. Increasing public awareness and
government pressure have made corporations more environment conscious. GVK Industries’ first power
plant near the Krishna-Godavari gas fields observes stringent pollution control standards. The plant uses
natural gas or naptha (instead of coal) to produce electricity, thereby, causing significantly less pollution.
Moreover, of the 72 hectares of land acquired for the project, only one-third of it is used by the power
plant. The remainder has been used to construct a greenbelt to curb pollution.
How to Measure SR?
Social audits arose from the need to measure the social responsiveness of organizations. Let us
examine the meaning and significance of social audits.
Social Audits
The concept of social audit was first proposed in the 1950s by Howard R. Bowen. He defined it as
“a commitment to systematic assessment of and reporting on some meaningful, definable domain of the
company’s activities that have a social impact.” Louis E. Boone and David L. Kurtz defined social audit
as “the efforts made within the firm to evaluate its own social responsiveness.” Social audits enable
management to identify the direct financial benefits as well as the intangible benefits to the organization
from socially responsible behaviour. Firms such as General Motors and American Express have published
social audits in the past. A survey of Fortune 500 firms showed that 456 companies (91.2 per cent) have
made social responsibility disclosures in their annual reports.
Social audits can be broadly distinguished into two types: (i) those required by the government, and
(ii) voluntary social programs. The audits imposed by the government involves the audit of pollution control
measures, audit of product performance, and audit of equal employment standards. The second type
includes voluntary audits made by companies to identify the extent of their social responsiveness.
Social audits are difficult to carry out. The categories for measuring social responsiveness discussed
earlier in the chapter determine the areas which should be included in the social audit. As disagreements
can arise over areas of social responsiveness to be measured, results can be somewhat intangible and/or
difficult to measure. Also, assessments of the quality of social programmes are likely to vary. Despite the
problems of carrying out a social audit, the concept is gaining popularity. Many companies are now
assessing their social performance through social audits.
MANAGERIAL ETHICS
In the past few years, many newspapers and magazines have reported on ethical problems in business.
The term ‘ethics’ is generally used to refer to the rules or principles that define right and wrong conduct.
In Webster’s Ninth New Collegiate Dictionary, ethics is defined as “the discipline dealing with what is good
and bad and with moral duty and obligation.” According to Clarence D. Walton and La Rue Tone
Hosmer, “business ethics is concerned with truth and justice and has a variety of aspects such as the
expectations of society, fair competition, advertising, public relations, social responsibilities, consumer
autonomy, and corporate behaviour in the home country as well as abroad.”
Managers, especially top-level managers, are responsible for creating an organizational environment
that fosters ethical decision-making. Theodore Purcell and James Weber suggested three ways for applying
and integrating ethical concepts with daily actions: (i) establishing a company policy regarding ethical
behaviour or developing a code of ethics, (ii) appointing an ethics committee to resolve ethical issues, and
(iii) teaching ethics in management development programmes.
Types of Managerial Ethics

Archie B. Carroll, an eminent researcher in the area of social responsibility, identified three types of
management, depending on the extent to which their decisions were ethical or moral: (i) moral management,
(ii) amoral management, and (iii) immoral management (see Figure 3.2).
M ANA GEM ENT
M oral M anagem ent Am oral M anagem ent Im m oral M anagem ent

Manager follows Manager internationally/ Manager ignores and
ethical considerations unintentionally ignores also opposes ethical
and doctrines ethical considerations behaviour
Fig. 3.2 Types of Managerial Ethics
Moral Management
Moral management strives to follow ethical principles and doctrines. Moral managers strive to succeed
without violating ethical standards. They seek to succeed while remaining within the bounds of fairness
and justice. Such managers undertake activities which ensure that even though they engage in legal and
ethical behaviour, they continue to make a profit. Realizing that moral management calls for more than
what is mandatory, moral managers follow the law not only in letter but also in spirit. Moral managers
always seek to determine whether their actions, decisions, or behaviour are fair to themselves as well as
to all the other parties involved. In the long run, the moral management approach is likely to be in the best
interests of the organization.
Amoral Management
This approach is neither immoral nor moral. It simply ignores ethical considerations. Amoral
management is broadly categorized into two types – intentional and unintentional. Intentional amoral
managers do not take ethical issues into consideration while taking decisions or while taking action,
because in their opinion, general ethical standards are only applicable to the non-business areas of life.
Unintentional amoral managers, however, do not even consider the moral implications of their business
decisions and actions. In a nutshell, amoral managers pursue profitability as the only goal and pay little
attention to the impact of their behaviour on any of their social stakeholders. They do not interfere in their
employees’ activities, unless their behaviour leads to government interference. The central guiding principle
of amoral management is – “Within the letter of the law, will this action, decision, or behaviour help us
make money?”
Immoral Management
Immoral management not only ignores ethical concerns, it also actively opposes ethical behaviour.
Organizations with immoral management are characterized by:
(i) Total concern for company profits only.
(ii) Stress on profits and company success at any cost. Lack of empathy – managers are hardly bothered
about others’ desire to be treated fairly.
(iii) Laws are regarded as hurdles to be removed or eliminated.
(iv) Strong inclination to minimize expenditure.
The basic principle governing immoral management is: “Can we make money with this action,
decision, or behaviour?” Thus, in immoral management, ethical considerations are immaterial.
Factors that Influence Ethical Behaviour

Complex interactions between the manager’s stage of moral development and the various moderating
variables determine whether he will act in an ethical or unethical manner. Moderating variables include
individual characteristics, structural design of the organization, the organization’s culture, and the intensity
of the ethical issue. Figure 3.3 presents a diagrammatic view of the interaction between these various
factors. Individuals are less likely to indulge in unethical behaviour if they are bound by rules, policies, job
descriptions and cultural norms even if they have a feeble moral sense. But, if the organization structure
and culture allows unethical practices, even highly moral individuals may become corrupt. The various
factors that influence the ethical behaviour of managers are discussed below.
Individual O rganization’s Issue intensity

Characteristics S tructural culture Greatness of harm
Stage of V ariables Consensus of wrong
M oral Personal values Content
Organization Probability of harm
Development Ego strength Strength
structure Immediacy of
Locus of Control
consequences
Proximity to victims
Concentrations of
effect
Ethical or U nethica l B ehaviou r
Fig. 3.3 Factors affecting Ethical and Unethical Behaviour
Stages of Moral Development

Managers making ethical decisions may belong to any of the three levels of moral development shown
in Table 3.1. Each level is further subdivided into two stages. The extent to which the manager’s moral
judgment depends on outside influences decreases with each successive stage. At the pre-conventional
level, managers decide whether an act is right or wrong depending on personal consequences like punishment,
favours or rewards. At the second level, the conventional level, managers perceive moral values as important
for achieving certain benchmarks and living up to the expectations of others. Finally, at the third level, the
principled level, managers frame ethical principles without regard to social pressures.
Implications of six stages: The following conclusions can be drawn from the study of the six stages
of moral development of managers:
Individuals move up these stages in a sequential manner.
The moral development of an individual may stop at any stage.
Most managers are at Stage 4 of moral development
Table 3.1: Stages of Moral Development
Level Description of Stage
Principled 6. Following self-chosen ethical principles even if they violate the law
5. Valuing rights of others and upholding absolute values and rights regardless
of the majority’s opinion
Conventional 4. Maintaining conventional order by fulfilling obligations to which you
have agreed
3. Living up to what is expected by people close to you
Preconventional 2. Following rules only when doing so is in your immediate interest
1. Sticking to rules to avoid physical punishment
Source: Stephen P.Robbins and Mary Coulter, Management (Delhi: Pearson Education Inc., First Indian Reprint,
2002) 126
Managers at stage 3 tend to make decisions that will be approved by peers, while managers at stage
4 try to be a good corporate citizen who abide by the organization’s rules and procedures. Managers at
stages 5 and 6, however, are more likely to question organizational practices which they believe to be
wrong.
Individual Characteristics
No two individuals behave in the same manner. They have different values and personality variables.
Values refer to the basic convictions held by an individual regarding right and wrong. Each one of us
follows certain values which we learnt in our early years of development from our parents, teachers, and
friends (and others who influenced us). Thus, the personal values of the different managers in an organization
are often quite different. Values, to a large extent, determine a person’s ethical or unethical behaviour.
Personality variables are also known to influence a person’s ethical behaviour. Two such personality
variables are ego strength and locus of control. Ego strength refers to the strength of a person’s convictions.
People with a higher ego strength tend to do what they think is right. Managers with a high ego strength
are more consistent in their moral judgment and moral action than those with low ego strength.
The other personality variable, locus of control, indicates the degree to which people believe that they
are the masters of their own fate. Based on a person’s locus of control, he can be categorized either as
an external or an internal. Externals believe that whatever happens to them in life is due to luck or chance.
Internals believe that they control their own destiny. Managers with an internal locus of control are more
likely to take responsibility for the consequences of their behaviour than managers with an external locus
of control.
Structural Variables
An organization’s structural design also influences the ethical behaviour of managers. Organization
structures that create ambiguity and fail to provide clear guidance to managers are more likely to encourage
unethical behaviour. Such behaviour can be checked by adopting formal guidelines like written job
descriptions and codes of ethics. Some organizations focus only on results, and not on the means for
achieving them. When people are evaluated only on the basis of their output, they may be compelled to
do whatever is necessary to achieve good results.
The structural designs of different organizations differ in the amount of time, competition, cost and
pressures faced by employees. The greater the pressure on managers, the more likely they are to compromise
their ethical standards. This has an affect on the other employees of the organization. Research shows that
the behaviour of superiors has a very strong influence on the behaviour of subordinates.
Organization’s Culture
The strength of an organization’s culture also has a great impact on the ethical standards of its
employees. An organization culture that is characterized by high risk tolerance, control and conflict tolerance
is most likely to foster high ethical standards. Such a work culture encourages managers to be aggressive
and innovative and to openly challenge expectations which they consider to be unrealistic or personally
undesirable. Thus, a strong and ethical organizational culture would exert a positive influence on managers’
ethical behaviour.
Issue Intensity
The most important factor that affects a manager’s ethical behaviour is the intensity of the ethical
issue itself. A manager may consider a certain issue ethical or unethical, depending upon certain factors.
These factors are greatness of harm, consensus of wrong, probability of harm, immediacy of consequences,
proximity to victims and concentration of effect. The intensity of the ethical issue is greater when:
The number of people harmed is large.
Everyone agrees that the action is wrong.
There are greater chances of the act causing harm.
The consequences of the action may be felt immediately.
The person feels close to the victims.
The action has a serious impact on the victims.
Ethical Guidelines for Managers

To ensure that their decisions and actions are ethical, managers should strive to follow the guidelines
listed below:
Obeying the Law

Managers must ensure that laws are not broken to achieve organizational objectives.
Tell the truth

In order to build and maintain long-term relationships with relevant stakeholders, it is essential to state
the facts clearly and honestly.
Uphold human dignity

People should be treated with respect irrespective of their race, ethnic group, religion, sex or creed.
Adhere to the golden rule

The Golden Rule, “Do unto others as you would have others do unto you,” is often applied when
monitoring the ethical dimensions of business decisions. It involves treating individuals fairly and with
empathy.
Primum non-nocere (above all, do no harm)

Some writers regard this principle as the most important ethical consideration. When pursuing profits,
organizations should ensure that they do not harm society.
Allow room for participation

This principle advocates the participation of stakeholders in the functioning of an organization. It
emphasizes the significance of knowing the needs of stakeholders, rather than deciding what is best for
them.
Always act when you have responsibility

Managers should utilize their capacity and resources to take appropriate action when there is need
for it.
Mechanisms for Ethical Management

There is no specific method for making employees behave in an ethical manner. However, there are
a number of mechanisms that help managers create an ethical climate. These include top management
commitment, codes of ethics, ethics committees, ethics audits, ethics training and ethics hot lines.
Top management commitment

Through commitment and dedication to work, top-level managers can act as role models for their
organization. Their behaviour can influence the ethical behaviour of subordinates.
Code of ethics
A code is a statement of policies, principles or rules that guide behaviour. A code of ethics is a formal
document that states an organization’s primary values and the ethical rules it expects its employees to
follow. Most of the companies that have a code of ethics agree that it encourages employees to behave
in an ethical manner.
Ethics committee
An ethics committee establishes policies regarding ethical conduct and resolves major ethical dilemmas
faced by the employees of an organization in the course of their work. Establishing a code of ethics is not
enough; the ethics committee also has to make ethical behaviour a part of the organizational culture.
Ethics committees perform the following functions:
i. Organizing regular meetings to discuss ethical issues
ii. Communicating the code to all members of the organization
iii. Identifying possible violations of the code
iv. Enforcing the code
v. Rewarding ethical behaviour and punishing those who violate the organization’s code of ethics
vi. Reviewing and updating the code of ethics
vii. Reporting the activities of the committee to the board of directors.
Ethics audits
Ethics audits involve the systematic assessment of the adherence of employees to the ethical policies
of the organization. They aid in better understanding of the policies and also identify the deviations in
conduct that require corrective action.
Ethics training
The purpose of ethics training is to encourage ethical behaviour. It enables managers to align ethical
employee behaviour with major organizational goals.
Ethics hot line

This is a special telephone line that enables employees to bypass the proper channel for reporting their
ethical dilemmas and problems. The line is usually handled by an executive who investigates the matter
and helps resolve the problems of the concerned employee. Such a facility allows the problem to be
handled internally and reduces the chances of employees becoming whistle-blowers. An employee who
reports real or perceived misconduct to an external agency (which may be able to take remedial action)
is called a whistle-blower. A manager should take the necessary steps to prevent a whistle-blower from
going to an outside person or organization since such action can lead to unfavourable publicity or legal
investigation.
SUMMARY
To be truly effective, organizations should interact with their external environment. The external
environment can be divided into the general or mega environment and the specific task environment.
Social responsibility refers to the obligation of a business firm to enhance the condition of society along
with its own interests. Business firms are accountable to six major stakeholder groups: shareholders,
employees, customers, creditors and suppliers, society and the government.
Social responsiveness refers to the ability of a firm to implement policies and take part in activities
that would benefit both society and the firm. The following categories are generally considered when
measuring social responsiveness: contributions, fund-raising, volunteerism, recycling, diversity policies,

direct corporate investment, quality of work life, attention to consumers and pollution control. The need
to measure social responsiveness led to the development of social audits. Social audits are of two types
– audits required by the government and voluntary audits.
Social audits are not legally mandatory, many organizations make social involvement disclosures in
their annual reports. This shows the growing concern among major firms about their social responsibility.
The ethical conduct of an organization depends on the ethical standards of its managers. Three types
of management have been identified, depending on the ethical or moral nature of their decisions. These
are moral, amoral and immoral management. Moral management is in the best interests of the organization
in the long run. However, most companies follow the principles of amoral management. To conduct
business in an ethical manner, managers should be aware of the factors that affect ethical behaviour.
Through mechanisms such as top management commitment, code of ethics, ethics committees, ethics
audits, ethics training and ethics hotlines, managers can inculcate ethical behaviour in the employees.
‘International component’ refers to the developments in countries external to the organization’s home
country which have the potential to influence the organization.
Digital village refers to adoption of a particular area and providing cutting edge technology and
equipment to the residents.
Multi-Crore Stamp Paper Scam

In 2003, a multi-crore stamp paper scam was unearthed in India. The scam involved
printing counterfeit stamp papers and distributing them in major metropolitan cities through
a network of operators thereby swindling crores of rupees meant for the government as fees
CASE STUDY
in financial transactions. The prime suspect, Abdul Karim Telgi, was believed to have been
carrying out this business for the past four years.
Among the major reasons pointed out in promoting this underworld business unhindered
were lack of proper security features in the stamp paper which included: (a) serial numbers;
(b) the attestation stamps given by the main depot of the state and the sub-depot; and (c)
the stamp and address of the licensed stamp vendor, and lack of proper vigilance from the
government authorities in detecting counterfeit stamps.
The Government Press in Nasik is the agency responsible for printing stamp papers in India
and as per rule, to detect the fakes also. An officer in the rank of an assistant manager is
responsible for detecting the fake papers and it has been pointed out that his office was
lacking facilities both in manpower and resources.
Even the employees in the press were found behaving hand-in-glove with the ‘scamsters’.
The racketeers printed the ‘fake’ papers using ‘original’ printing blocks and machines illegally
procured from the Government Press after getting them declared as scrap. As per the rule
machines declared as scrap should be cut into minute pieces to avoid any misuse later. In
this case it has been found that most of the machines declared scrap were in perfect working
condition and were taken out in its original shape.
The racketeers also developed techniques to print the water mark, the main security
feature in the official stamp paper.
1. Point out the reasons that encouraged the scam to continue for four years.
2. What precautionary measures could have been taken to prevent such an incident?
3. The case reflects that ethics were not appropriately institutionalized. Give your opinions to correct the same.
Fundamentals of
4
H Definitions of Planning
Planning
H Nature of Planning
H Significance of Planning
H Types of Plans
H Steps in the Planning Process
H Prerequisites for Effective Planning
H Limitations of Planning
Chapter 4 Fundamentals of Planning 65
INTRODUCTION
All organizations operate in an environment of uncertainty. To be successful, an organization must
anticipate changes and make plans to adapt itself to the environment. Without planning, an organization
is like a boat without a rudder. By setting goals and deciding how to achieve them, planning provides a
steering mechanism for an organization.
Planning is the process of bridging the gap between where we are and where we want to be in the
future. In other words, planning is “looking ahead, relating today’s events with tomorrow’s possibilities.”
It is the process of deciding in advance what to do, how to do, when to do it, and who does what. Proper
planning minimizes risk and ensures that resources are efficiently and effectively utilized.
Planning and controlling are inseparable. Planning involves determining organizational objectives and
developing strategies to achieve the objectives, while controlling involves establishing standards of performance
and comparing actual results with the planned results. Controlling without planning is meaningless. Unless
one knows where to go, one cannot tell whether one is going in the right direction or not. Planning gives
an organization the required focus and direction. Thus planning is a prerequisite of the control function.
In this chapter, we will discuss the definition, nature and significance of planning, types of plans, steps
in the planning process, prerequisites for effective planning and the limitations of planning.
DEFINITIONS OF PLANNING
In simple words, planning is deciding in advance what action to take, how and when to take a
particular action, and who are the people to be involved in it. It involves anticipating the future and
consciously choosing the future course of action.
According to Peter Drucker, “Planning is a continuous process of making present entrepreneurial
decisions (risk taking) systematically and with best possible knowledge of their futurity, organizing
systematically the efforts needed to carry out these decisions and measuring the result of those decisions
against the expectations through an organized systematic feedback.”
In the words of George R. Terry, “Planning is the selecting and relating of facts and the making and
using of assumptions regarding the future in the visualization and formulation of proposed activities
believed necessary to achieve desired results.” Thus, while planning, a manager makes use of facts and
reasonable premises and also considers the relevant constraints. The manager then decides what activities
are needed, how they are to be carried out and how they would contribute to the achievement of the
desired results.
Dalton E. McFarland’s definition of planning takes into account the dynamic nature of the environment.
He defines planning as follows:
“Planning is a concept of executive function that embodies the skills of anticipating, influencing and
controlling the nature and direction of change.”
According to Heinz Weihrich and Harold Koontz, “Planning involves selecting mission and objectives
and the actions to achieve them; it requires decision-making that is, choosing from alternative future
courses of action.” Thus, planning involves determining organizational objectives and deciding how best
to achieve them. It involves looking ahead and relating today’s events with tomorrow’s possibilities.
NATURE OF PLANNING
Planning refers to the process of designing the future course of action for an organization to achieve
specific goals. The nature of planning is discussed below:
Planning is Goal Oriented

Planning is a means for achieving set goals or objectives. It is of no value unless it contributes in some
positive way to the achievement of desired goals. Well-defined goals are essential for effective planning.
Planning is an Intellectual or Rational Process

Planning requires managers to apply their imagination, creativity and their analytical skills to tackle
problematic situations. Planning also requires foresight and sound judgement on the part of a manager.
Thus, planning can be regarded as the outcome of an intellectual or rational process.
Planning is a Primary Function

Planning is the initial activity in the management process. All other functions of management, i.e.
organizing, staffing, directing and controlling, can be carried out efficiently only if they have been properly
planned. Planning thus precedes the execution of all other managerial functions.
Planning is All Pervasive

The planning function extends throughout the organization. It is an essential aspect of management
at all executive levels. Managers at the top level prepare long-term plans for the organization, which would
enable it to achieve its overall objectives. Middle-level managers formulate departmental and functional
plans for the medium term, while managers at the lowest level prepare operating and short-term plans.
Thus, the scope, extent and nature of planning tend to vary at different levels of management.
Planning is Looking Forward

Planning is primarily concerned with anticipating the future. Predicting future trends and preparing
for them is an integral part of planning. Thus, accurate forecasting is essential for planning.
Planning is a Perpetual Process

Planning is a continuous activity; it goes on as long as an organization exists. Plans may be updated,
modified, or replaced by new ones. When a situation calls for a totally new set of goals, new plans take
the place of existing ones. Plans are changed or modified, but are never abandoned.
Planning is an Integrated Process

Plans made at different levels are interdependent and interrelated. The top level of an organization
develops strategic plans, on the basis of which the middle level of management develops tactical plans. In
turn, the lower levels of management develop operational plans on the basis of tactical plans. Thus, plans
constitute a hierarchy in the organization. Even though plans are made at different levels, they should be
in tandem with corporate objectives. These plans can be either long-term plans or short-term plans.
Whatever be the term of the plans, they should be well coordinated so as to achieve the goals of the
organization within a definite time-horizon.
SIGNIFICANCE OF PLANNING
In a complex business situation, planning helps managers meet the challenges posed by the
environment, while at the same time minimizing the risks associated with them. Planning is a prerequisite
not only for achieving success but also for surviving in a complex and competitive world.
Planning is very important in all types of organizations. It forces organizations to look ahead and
decide their future course of action so as to improve their profitability. Organizations that plan in advance
are more likely to succeed than those which fail to plan for the future.
Planning is the first step in the management process. It ensures that the employees of an organization
carry out their work in a systematic and methodical manner. It also helps coordinate and control various
tasks and makes sure that resources are used optimally. The role and significance of planning is discussed
below.
Focuses Attention on Objectives

Every organization seeks to achieve certain objectives. The planning process helps the organization
devise means to achieve these objectives. Sometimes, it is only through planning that these objectives can
be made concrete and tangible. Since plans focus on the achievement of objectives, they prevent the
manager from being distracted by less significant activities.
Offsets Uncertainty and Risks

An important element of planning is to accumulate information for use in forecasting. This information
is then used to develop action plans or detailed guidelines for achieving organizational objectives. The
action plans can either be primary or contingent in nature. Primary plans are formulated by managers on
the basis of their future expectations of political, legal, economic, technological and social environments.
A contingency plan is a plan that is implemented when certain unforeseen events occur. By forecasting
the future, managers can try to reduce the risk of uncertainties and be prepared for unexpected events.
Provides Sense of Direction

The first step in planning is setting goals and objectives for the organization. Setting goals and
objectives facilitates the smooth progress of organizational activities. The absence of planning makes it
difficult for managers to have a sense of focus or direction regarding the future of the organization.
Provides Guidelines for Decision Making

Plans elaborate the actions necessary for achieving organizational objectives and thus help in deciding
the activities to be taken up in the future. Planning involves identifying alternatives and choosing among
those courses of action that are necessary for carrying out a given task. Thus it helps people take future-
oriented decisions.
Increases Organizational Effectiveness

Planning ensures the effective functioning of an organization. To be truly effective, an organization
must be able to achieve its objectives with the available resources. Planning facilitates the optimum
utilization of available resources since, while planning, objectives are set by taking into account the
resources of the organization. Planning ensures that each resource is used in a specific manner at a
particular time. Thus, planning and control ensure that the resources are used in accordance with
organizational specifications.
Provides Efficiency in Operations

Planning results in the use of the most efficient methods for achieving organizational objectives. The
planning process can be a valuable method for improving performance at any organization level. It
improves performance by focusing management’s attention on objectives and by helping management
establish priorities and cope with the ever-changing external environment.
Ensures Better Coordination

Planning is essential for coordinating the activities of an organization. Well-developed organizational
plans unify interdepartmental activities so that the various departments work together to achieve
organizational goals.
Facilitates Control
Planning provides the basis for control. The function of control is to ensure that the activities being
carried out conform to the plans that have been developed. Thus, control cannot be exercised without
plans. Planning makes two important contributions to the control process. First, it leads to the development
of an early warning system which allows managers to detect possible deviations from the plan. Second,
it provides managers with quantitative and concrete data that helps them compare actual performance
with planned performance.
Encourages Innovation and Creativity

By involving employees, the process of planning encourages a healthy work atmosphere. Planning
also encourages managers to devise new ways of doing things. It facilitates innovative and creative
thinking among managers, which is a prerequisite for the long-term survival and growth of a business.
Facilitates Delegation
The planning process facilitates the delegation of authority. Well-established plans act as a guide to
subordinates, thus eliminating the need for constant guidance by managers.
TYPES OF PLANS
Plans can be classified in a number of ways, on the basis of the organization level, the frequency of
use and their time-frame.
Plans Based on Organizational Level

Just as organizations define goals at different levels, they also establish plans at different levels. On
the basis of the organization level, plans can be strategic, tactical or operational. Figure 4.1 illustrates the
types of plans developed for different organizational levels.
M anagem ent Levels
Top-level Middle-level Lower-level

Management Management Management
Long-range Intermediate- Short-range

Time Plans range Plans Plans
Scope Strategic Tactical Operational

Plans Plans Plans
Fig. 4.1 Planning and Management Levels
Source: Gene Burton and Manab Thakur, Management Today: Principles and Practice (New Delhi: Tata McGraw-
Hill Publishing Company Limited, 1995) 151.
Strategic Plans
These plans are designed to achieve strategic goals. More precisely, strategic plans are general plans
that indicate the resource allocation, and priorities and actions necessary for achieving strategic goals.
These plans which establish overall objectives for organizations, analyze the various environmental factors
that affect organizations. Table 4.1 describes eight major areas for strategic goals.
Table 4.1: Eight Major Areas for Strategic Goals
Major Areas Description

Market Standing Desired share of present and new markets, including areas in which new products are
needed, and service goals aimed at building customer loyalty.
Innovation Innovations in products or services as well as innovations in skills and activities
required to supply them.
Human Resources Supply, development and performance of managers and other organization members;
employee attitudes and development of skills; relations with labour unions, if any.
Financial Resources Sources of capital supply and how capital will be utilized.
Physical Resources Physical facilities and how they will be used in the production of goods and services.
Productivity Efficient use of resources relative to outcomes.
Social Responsibility Responsibilities in such areas as concern for the community and maintenance of
ethical behaviour.
Profit Requirements Level of profitability and other indicators of financial well-being.
Source: Peter F. Drucker, Management: Tasks, Responsibilities and Practices (New York: Harper and Row, 1974)
100-117.
Strategic plans are applicable to the entire organization and are generally developed by top management
in consultation with the board of directors and the middle management. They tend to cover an extended
period of time – usually three years or more. Managers who are involved in developing strategic plans work
in an environment of uncertainty and are required to make assumptions about future threats and
opportunities. To develop such plans, they require large amount of information, especially with regard to
the future of the external environment.
Tactical Plans
They aim at achieving tactical or short-term goals. These plans help support the implementation of
strategic plans. Tactical plans essentially indicate the actions that major departments and sub-units should
take to execute a strategic plan. Such plans are more concerned more with actually getting things done
than with deciding what to do. They are thus essential for the success of strategic plans.
Exhibit 4.1 Strategic Workforce Planning
One of the most important activities of an organization is planning for workforce requirements, particularly
requirements for senior management and key technical personnel. Nowadays, every organization has some
form of management succession and development plans. These plans allow the organization to identify the
future need for employees, identify prospective candidates for various positions, and develop the selected
candidates for higher positions in the organization. Only a few organizations take the help of quantitative
analysis to develop their succession and development plans. Though some managers consider this analysis
too detailed and complex, it can actually help an organization make its succession and development planning
process very effective.
Strategic workforce planning is a discipline within the planning function that helps an organization identify and
address the staffing aspects for their business strategies and plans. Strategic workforce planning results in
two major outputs:
Staffing strategies – These refer to an organization’s long-term plans for meeting its staffing needs. The
strategies provide the long-term context within which short-term decisions of an organization can be
taken.
Staffing plans – These describe the specific staffing actions like recruitment, promotions, etc. that an
organization will take in the short-term. These actions should be compatible with the organization’s
staffing strategies.
Without clear staffing strategies, an organization will not be able to take effective short-term staffing actions.
Short-term staffing plans can be effective only if they support the organization’s long-term staffing strategies.
Consider the case of a company that needs ten engineers at the end of the current year. It could opt for
recruitment, internal movement or outsourcing of the concerned tasks. It may also be able to meet its need
by reorganizing or rescheduling the work that these individuals have to perform. However, the company may
not be able to decide which is the best option if it does not know the duration for which it requires the
engineering talent. The most effective option becomes obvious when an organization understands the long-
term implications of its staffing actions. If the company requires engineering talent for more than a year and
their capabilities are critical for achieving its goals, it is better for the company to recruit engineers. On the
other hand, if the need is only for a short period, the company can look for a temporary solution such as
outsourcing.
For strategic workforce planning to be effective, the organization must define its future staffing requirements
properly. It must determine the levels where staffing is needed and should also identify the skill-sets required.
In addition, the organization must be able to identify its current staff availability and project its future staff
availability. It must also calculate the difference between staffing “supply” and “demand.” This analysis is
quantitative and precise and requires managers to make assumptions about expected turnover, retirements,
promotions and other staffing actions. After identifying the staffing gaps and surpluses, the managers can
take requisite staffing actions to eliminate them.
Adapted from Thomas P. Bechet, “Using Strategic Workforce Planning to Support Management Succession and
Development Planning,” Nardoni Strategic Solutions, <http://www.rennardoni.com/page24.html
Tactical plans are developed by middle-level managers, who may consult lower-level managers before
finalizing the plan and communicating it to top-level management. Compared to strategic plans, tactical
plans cover a shorter time frame (usually 1 to 3 years). A middle-level manager acting as a tactical planner
deals with much less uncertainty and risk than the strategic planner. The information that he requires is
also less and most of it can be derived from internal sources.
Operational Plans
Operational plans are developed to determine the steps necessary for achieving tactical goals. They
are stated in specific, quantitative terms and serve as the department manager’s guide to day-to-day
operations. Operational plans are developed by lower-level managers. These plans generally consider time
frames of less than a year, such as a few months, weeks, or even a few days. They spell out specifically
what must be accomplished over short time periods in order to achieve operational goals. Lower-level
managers who develop operational plans work in an environment of relative certainty. Hence, the amount
of risk involved in making operational plans is lesser than that involved in making tactical plans. The
information needed for operational planning can be obtained almost completely from within the organization.
Unless operational goals are achieved, tactical and strategic goals will not be achieved. Therefore, operational
plans are necessary for the success of tactical and strategic plans.
Plans Based on Frequency of Use

Plans can also be categorized on the basis of their frequency of use. Based on the extent of use, plans
can be of two types: single-use plans and standing plans.
Single-use plans
A single-use plan is aimed at achieving a specific goal and is designed to deal with a unique, non-
recurring situation. Once the goal has been achieved, the plan ceases to exist. In other words, a single-
use plan is a one-time plan and is created in response to non-programmed decisions of managers (non-
programmed decisions are specific solutions to atypical or non-routine problems and are arrived at
through an unstructured, undefined process).
The major types of single-use plans are programmes, budgets and projects.
Programmes
Programmes are large scale single-use plans that coordinate a complex set of activities to achieve
important non-recurring goals. They are concrete or well-defined schemes designed to accomplish specific
objectives. Programmes spell out clearly the steps to be taken, the resources to be used and the time period
within which the task is to be achieved. They also indicate who should do what and how. Programmes
serve as useful guides for day-to-day operations. They are action-based and result-oriented management
approaches that facilitate the smooth and efficient functioning of organizations.
Budgets
A budget outlines the expected results of a given future period in numerical terms. It is a plan of action
or blueprint designed to achieve a specific goal. A budget may be expressed either in financial terms or
in terms of units of products, labour-hours, machine-hours, or any other numerically measurable term. A
budget generally quantifies the plan and establishes the target for actual operations. It indicates the
financial resources necessary for supporting the various activities included in a programme. Many
organizations use the budget as a basis for planning and coordinating other activities.
Projects
A project is similar to a programme, but is smaller in scale and less complex. A project may be a
component of a programme, or it may be a self-contained, single-use plan. A project helps in the precise
allocation of duties and effective control and easy implementation of the plan.
Standing plans
Standing plans refer to specific actions which have been developed for dealing with recurring situations.
While single-use plans are used for situations that are unique, standing plans are used for situations which
may be encountered by managers on a regular basis.
Exhibit 4.2 Procurement Policies and Procedures at IBM
Integrity and ethical standards – As a matter of policy, IBM is fair and ethical in its business dealings
with suppliers and other business partners. If this policy is being compromised, the matter can be brought
to the notice of the IBM Global Procurement Ombudsman (800-233-3073). The issues will be resolved
promptly with care, respect and confidentiality.
Reciprocity – IBM is against reciprocal buying arrangements as such arrangements may interfere with IBM’s
goal of buying goods and services which have the best price, quality, technology and prompt delivery
schedules.
Confidentiality – IBM considers its business relationships with its suppliers and potential suppliers as
private and confidential. IBM treats information received from its suppliers in a responsible manner and
expects its suppliers to reciprocate similarly. Moreover, IBM does not wish to receive any information of a
confidential nature from a supplier unless and until IBM and the supplier have entered into a confidential
disclosure agreement.
Patents – IBM does not knowingly violate the patent rights of other firms. On the contrary, IBM requires
patent indemnification on all procured materials. IBM will discuss ideas and inventions with individuals outside
the system and if the need arises, it will contract external agencies for development of special products. In
such cases, appropriate contractual agreements have to be made beforehand.
Supplier Diversity Programme – IBM is firmly committed to providing opportunities to people of different
ethnic origins, women, physically challenged persons, etc. to participate in all areas of its procurement,
marketing and contracting activities. By so doing, IBM tries to ensure a diverse supplier base.
Gifts and Gratuities – IBM employees and their family members are not allowed to accept gifts from
suppliers or prospective suppliers. The employees are allowed to accept only those gifts with a value of $25
or less.
Business meals and Entertainment – IBM employees who have to deal with suppliers are allowed to accept
customary business amenities such as meals and entertainment. However, the expenses involved should be
reasonable and must not violate the law or known supplier business practices. Further, IBM employees are
also expected to reciprocate suppliers in a similar manner and to share the costs equally over time.
Appropriate conduct on IBM Premises – All individuals on IBM premises are expected to conduct themselves
in a professional, business-like manner. Examples of inappropriate conduct are: being under the influence of
alcohol; using illegal drugs; using a controlled substance, except for approved medical purposes; possessing
of a weapon of any sort; and/or harassing and threatening others or behaving violently towards them.
Adapted from Thomas P. Bechet, “Using Strategic Workforce Planning to Support Management Succession and
Development Planning,” Nardoni Strategic Solutions, <http://www.rennardoni.com/page24.html>
Standing plans are developed in response to programmed decisions of managers (programmed decisions
refer to solutions to routine problems and are arrived at by following rules, procedures or habits). They
speed up the decision-making process and allow managers to handle similar situations in a consistent
manner. Since standing plans are predetermined courses of action, they make it possible for managers to
delegate authority. Since every course of action has been clearly defined by these plans, they do away with
the need for continuous supervision by managers. They also provide a ready reference for executive action
as they spell out what is to be done in a particular situation.
The three main types of standing plans are policies, procedures and rules:
Policies
A policy is the most general form of a standing plan. It specifies the broad parameters within which
organization members are expected to operate in pursuit of organizational goals. Policies do not specify
what actions should be taken, but provide general boundaries for action. They indicate the direction in
which top management wants to channelize the energies of people in the organization. Policies are
generally flexible and broad in their scope.
Procedures
A procedure is a chronological sequence of steps to be undertaken to achieve an objective. It is more
specific than a policy as it outlines the steps to be followed under certain circumstances. Procedures are
guides to action that specify in detail the manner in which activities are to be performed. Well-established
and formally laid down procedures are often called standard operating procedures (SOPs). They ensure
uniformity in action. Unlike policies, which tend to be fairly general, procedures provide detailed step-by-
step instructions regarding the action to be taken. Thus, procedures help in simplifying and streamlining
the administrative activities of an organization.
Rules
These are the simplest type of standing plans. A rule is a statement that spells out what should or
should not be done in a particular situation. Unlike procedures, rules do not specify a series of steps but
dictate exactly what must or must not be done. Thus, rules are rigid and definite plans that do not allow
for deviation. They provide very little flexibility. However, rules help ensure that employees behave in the
desired manner and make their actions predictable. They regulate the day-to-day conduct of affairs by
providing detailed instructions.
The different types of single-use and standing plans can be arranged in a hierarchy. This is depicted
in Figure 4.2, where organizational objectives serve as a platform for the development of strategic plans.
The strategic plans lead to the development of tactical and operational plans. These plans are then
converted into narrower, more detailed standing plans and single-use plans.
Plans Based on Time Frame

Organizational plans should not extend beyond specific time frames. Plans based on the time horizon
can be classified into three types – long-term plans, intermediate-term plans and short-term plans.
Plans
Single-use plans Standing Plans
Programmes Budgets Projects Policies Procedures Rules
Fig. 4.2 Hierarchy of Plans
Long-term Plans
These are the strategic plans of an organization, and have a time frame exceeding five years. A long-
term plan is derived from the vision developed for the organization by its founders or the top management.
It involves setting up broad objectives and establishing procedures for achieving these objectives.
Intermediate-term Plans
While long-term plans provide a direction for the organization, intermediate-term plans specify the
activities to be carried out. These plans generally cover time periods ranging from one to five years.
Intermediate plans define the organization’s activities and provide direction for middle management. When
a firm’s long-term plans are not very clear due to high levels of uncertainty, the focus of planning activity
shifts to intermediate-term plans because they are made for a shorter duration of time and therefore their
outcomes are certain and predictable.
Short-term Plans
These plans generally cover time periods up to one year. They provide lower-level managers with
guidelines for carrying out the day-to-day activities of an organization. They take care of the individual
activities needed to achieve the overall objectives outlined by long-term planning. They guide a manager
by stating what he has to do; how, where and when he has to do it; and the resources available for
performing the specified task. Short-term plans thus help managers make better use of manpower and
other resources in the immediate future.
Apart from the different types of plans mentioned in this section, an organization can also have
specific plans and directional plans. Specific plans are those which have clearly defined objectives. They
are very specific and unambiguous. For instance, a manager who seeks to increase his firm’s sales by 10
per cent over a period of one year might establish specific procedures, budget allocations, and schedules
of activities for reaching that goal. These represent specific plans. To be effective, specific plans require
an environment of certainty and predictability, which often does not exist. When there is high uncertainty
and management is required to be flexible in order to respond to unexpected changes, it is preferable to

use directional plans. These plans establish general guidelines. They provide managers with a focus, but
do not confine them to specific courses of action. Instead of following a specific plan to cut costs by 5
per cent and increase revenues by 10 per cent in six months, a directional plan may chalk out a course
for improving corporate profits within a broad range, say 10 to 15 per cent, over the next six months. Thus,
directional plans provide flexibility but do not provide clearly defined objectives, as specific plans do.
STEPS IN THE PLANNING PROCESS

Planning is an endless process. The process is constantly modified to suit changes in environmental
conditions and changes in objectives and opportunities for the firm. As organizations differ in terms of their
size and complexity, no single planning procedure is applicable to all organizations. However, all planning
processes contain some basic steps, which are represented in Figure 4.3. An extended model of the same
process is shown in Figure 4.4.
Analyzing Opportunities
Managers should be aware of the opportunities in the external environment, as well as those within
the organization. They should understand the firm’s strengths and weaknesses and the ways in which they
can utilize the firm’s strengths to make the most of an opportunity. A thorough understanding of the
opportunities available outside the business enterprise enables managers to set realistic objectives. Once
managers perceive the presence of an opportunity which can be exploited, the other steps of the planning
process can be undertaken.
Analyzing Determining
Establishing Identifying
Opportunities Objectives Planning
Alternatives
Premises
Review Implementation Selection Evaluation
Fig. 4.3 Basic Steps in the Planning Process
Establishing Opportunities
The second step is to establish objectives for the entire organization and for every work unit within
the organization. Objectives specify the results expected from a particular course of action and define the
areas that should receive special attention. In addition, objectives specify what should be achieved by the
network of strategies, policies, procedures, rules, budgets and programmes. Organizational objectives
provide direction to the major plans. These plans help the various departments of an organization prepare
their objectives in line with the organizational objectives. Thus, there exists a hierarchy of objectives in
an organization.
Objectives must be stated clearly and must be established for all key areas where performance affects
the well-being of the organization. They should be specified in measurable terms like costs, targets or
quality specifications.
Determining Planning Premises

After establishing organizational objectives, the next step is determining planning premises. Planning
premises are assumptions about the environment in which the plan is to be carried out. They lay down
the boundary or limitations within which plans are to be implemented.
Planning premises include both external and internal premises. External premises include social,
economic, political and technological factors; competitor’s plans and actions; government policies, etc.
Internal premises include an organization’s policies, resources, ability to withstand environmental pressure,
etc. Plans are formulated taking into account both external and internal premises.
Since the future is highly unpredictable, it is not possible to make assumptions about every aspect of
the environment in which a plan has to be carried out. Premises should therefore be confined to those
assumptions that are strategic or critical to a plan. According to the principle of planning premises, “The
more thoroughly individuals charged with planning understand and agree to utilize consistent planning
premises, the more coordinated enterprise planning will be.” In other words, the planners must understand
and agree upon the planning premises to develop well coordinated plans for the enterprise.
Identifying Alternatives
Various alternative courses of action can be identified after establishing organizational objectives and
planning premises. A particular objective can be achieved through various actions. For instance, if expansion
is an organization’s objective, it can be achieved by expansion in the same field, or diversification, or
amalgamation, or by introducing a new product variant in the market and so on. Thus, there are many
ways of achieving the same goal. A common problem at this stage is selecting the most promising
alternatives for further analysis. The planner must examine these alternatives and decide on the best ones
through careful analysis. These alternatives lay the foundation for the next step in planning.
Evaluating Available Alternatives

After identifying alternative courses of action and examining their advantages and disadvantages, the
next step is to evaluate the alternatives keeping in mind the goals of the organization and the available
resources. Each alternative may have some positive and negative aspects. For instance, one alternative
may be highly profitable but may require heavy investment and may have a long gestation period; another
one may be less profitable but may also involve less risk. Since the future is uncertain, the planner can
never be sure of the outcome of any alternative. Thus, many variables and limitations have to be considered
when evaluating alternative courses of action. The use of planning and decision-making techniques, such
as operations research, helps in the evaluation of alternatives.
BEIN G AW ARE O F
OP PO R TUNITY
In light of: COMPARING
The market ALTERNATIVES IN
Competition LIGHT OF GOALS
What customers want SOUGHT
Our strengths Which alternative will
Our weaknesses give us the best chance of
meeting our goals at the
lowest cost and highest
profit
S ETTING O BJE CTIV ES

O R G O ALS
Where we want to be end
what we want to
accomplish and when CHO O S IN G A N
ALTE RNATIV E
Selecting the course of
action we will pursue
CO NSIDE RING
P LANN ING PRE M IS ES
FO RM ULATING
In what environment – S UPP ORTING P LA NS
internal or external –
our plans operate? Such as plans to:
Buy equipment
Buy materials
Hire and train workers
Develop a new product
IDEN TIFYIN G
ALTE RNATIV ES
What are the most
promising alternatives to NUM BE RIZING PLANS
accomplish our BY M AKING BUDG ETS
objectives Develop such budgets as:
Volume and price of sales
Operating expenses
necessary for plans
Expenditures for capital
equipment.
Fig. 4.4 An Extended Model of the Planning Process
Source: Heinz Weihrich and Harold Koontz, Management: A Global Perspective (Singapore: McGraw-Hill, Tenth
edition, 1994) 131
Selecting the Most Appropriate Alternative

After carefully evaluating the alternative courses of action, the most appropriate one is selected. At
this point, a decision is made about the course of action to be taken. Sometimes, after evaluating a few
alternative courses of action, a planner may choose more than a single alternative, as two or more
alternatives may seem advisable. Another reason for choosing more than one alternative plan is that the
planning premises may change (since the future is unpredictable). In such a case, the planner must be
ready with an alternative plan (normally called a contingency plan) that can suit the changed situation.
Implementing the Plans

This involves putting the plan into action. In order to implement the actions stated in the plan,
managers have to make a series of decisions. A manager can implement the plans of a firm through the
use of authority, persuasion or policy. Authority is a legitimate form of power that comes with the position
and is not associated with a person. It is often sufficient to implement relatively simple plans that do not
cause a significant change in the status quo. But a complex and comprehensive plan cannot be implemented
through authority alone. Persuasion is another tool used by managers for implementing their plans.
Persuasion is “the process of selling a plan to those who must implement it, by communicating
relevant information so that the individuals understand all the implications.” Thus, persuasion requires
convincing others, so that the plan is accepted on the basis of its merits rather than on the authority of
the manager. When long-term plans are developed, managers generally formulate policies for implementing
them. Policies are usually written statements that provide guidelines for selecting particular courses of
action for achieving a firm’s objectives. Effective polices are those that are flexible, comprehensive,
coordinated, ethical and clear.
Reviewing the Plan

Once a plan has been implemented, it has to be reviewed. A review helps managers to evaluate the
plan and also identify deviations from the established course of action. It thus helps managers take the
necessary corrective measures. At every stage of the review, the outcomes must be compared with the
expected results. This will help the organization develop future plans. A periodic review of plans enables
an organization to update them in the light of changes in the business environment.
PREREQUISITES FOR EFFECTIVE PLANNING

Planning is an essential managerial function and should be given due emphasis in order to make it
more effective. It forms the basis for other functions in the management process. The following measures
help to make the planning exercise more effective.
Establishing the Right Climate for Planning

Managers should create a climate that is conducive to planning. This can be done by setting objectives,
developing realistic planning premises, ensuring information flow and providing appropriate staff assistance
at all levels, reviewing subordinates’ plans and their performance, reviewing various goals and redrafting
them as required, for the effective implementation of organizational plans. By so doing, managers can
remove obstacles to planning and facilitate effective planning.
Clear and Specific Objectives

Since the overall objectives of the organization serve as guidelines for preparing plans at different
levels, these objectives should be clearly stated for all key result areas. Key result areas are those aspects
which have a direct bearing on an organization’s well-being. For instance, an organization’s key result
areas could include profitability, sales, research and development, manufacturing, etc. For effective planning
and allocation of resources, objectives should be laid down in clear and specific terms.
Planning Premise
As mentioned earlier, planning premises are assumptions about the external and internal environment
in which the plan is to be carried out. A careful identification of the premises is very important for effective
planning, and forecasting is very important for accurate premising. Thus, in order to develop effective
plans, managers have to make various forecasts regarding markets, prices, sales, technical developments,
etc. When formulating planning premises, an organization should consider various internal factors (like its
policies and resources) as well as the external factors (such as changes in political, social, economic or
technological environments; competitor’s plans and actions; and government policies).
Initiative at Top Level

The success or failure of any organizational process depends primarily on the initiative of top-level
management. Planning is no exception to this rule. The initiative and support of top level management is
essential for success of the planning process. In any organization, the top-level management has an
important role to play in the planning process. For planning to be effective, objectives must be set by top-
level managers and should be supported by lower level managers.
Participation in Planning Process

Planning is likely to be most effective when managers at all levels are given the opportunity to
contribute to plans affecting areas over which they have authority. Allowing managers at all levels to
participate in the planning process by consulting them and taking their suggestions boosts their morale and
makes them feel involved.
The method and extent of participation in the planning process varies from one organization to
another. There are various methods of involving employees in the planning process. One commonly used
method is the ‘Management by Objectives’ approach. In this approach, the manager and the subordinate
set objectives jointly for the short term. The manager then periodically reviews the performance of the
subordinate and evaluates the progress made by him towards the achievement of the specified objectives.
For the MBO process to work, active participation of subordinates and superior is a must. Another way
of ensuring employee participation in the planning process is through the constitution of planning committees.
These committees would be responsible for transmitting information relevant to planning to those involved
in the planning process, obtaining their suggestions, and, finally, developing effective plans. A third method
of participative planning is “grass-root budgeting.” The grass-root budgets undergo integration and
adjustments on their way up to the top management. Any of the above methods of participation can be
adopted, depending on the situation prevailing in the organization.
Communication of Planning Elements

When middle and lower level managers fail to understand their organization’s goals and planning
premises, their planning efforts are likely to fail. Therefore, top level managers should communicate goals
and planning premises throughout the organization. The information provided should be clear and specific.
Planning can be effective only when employees understand their role and the plan as a whole. They should
understand what a plan is trying to achieve and how it is going to achieve it.
Integration of Long-term and Short-term Plans

For planning to be effective, long-term and short-term plans must be fully integrated. Short-term
operational plans should contribute to the long-term plans and act as a means for implementing them. The
integration of long-term and short-term plans can be achieved by formulating the short-term plans in
accordance with long-term plans. Moreover, if an organization prepares its long-term plans on the basis
of what it hopes to achieve through its short-term plans, it can achieve coordination between its long-term
and short-term plans.
Exhibit 4.3 Guidelines for Successful Planning and Implementation
1. Involve the right people in the planning process – While planning, it is essential to obtain inputs from
those who will implement the plans and from representatives belonging to groups which will be affected
by the plan. People who are involved in these plans should also be involved in reviewing and authorizing
the plan.
2. Communicate the plan throughout the organization – As plans keep changing, it becomes difficult
to remember who is supposed to do what and according to which version of the plan. Moreover, the key
stakeholders may also request copies of the various plans of the organization. Therefore, it would be in
the best interests of the organization to put its plans in writing and make them known throughout the
organization.
3. Goals should be SMARTER – A SMARTER goal or objective is:
Specific – A goal should be specific, not vague and hard to understand.
Measurable – The outcomes of a goal should be measurable.
Acceptable – The goal should be acceptable to those who are to pursue it.
Realistic – The goals to be achieved should be realistic.
Time frame – The goal should specify a time frame for achieving it.
Extending – The goal should stretch the capabilities of the performer and motivate him to extend his
capabilities beyond the usual limit.
Rewarding – The goal should be such that those involved in its accomplishment are rewarded.
4. Making people accountable – Plans should specify who is responsible for what results. The persons
responsible should periodically review the status of the plan.
5. Redesigning the plan – Sometimes, it is necessary to deviate from the plan. The persons responsible
for implementing the plan should note such deviations when they occur and make necessary adjustments
to the plan.
6. Evaluating the plan – Feedback should be obtained regularly from the people implementing the plan.
The feedback should address aspects such as how the planning process could have been made better,
whether the goals are realistic, and whether sufficient resources are available for implementing the plan.
This will help planners ensure that the plans meet the needs of the organization.
7. Acknowledging and celebrating accomplishments – This step is frequently overlooked. It is often
observed that new targets are set once desired results have been achieved. As a result, employees have
to continually solve one problem after the other. In order to avoid cynicism and fatigue from creeping into
the planning process, one must acknowledge the good work done and have a little celebration. This would
boost the morale of the planners and would ensure their fullest efforts in subsequent plans.
Adapted from “Basic Guidelines for Successful Planning Process,” The Management Assistance Program for Nonprofits,
http://www.mapnp.org/library/plan_dec/gen_plan/gen_plan.htm#anchor1384873
An Open Systems Approach

Managers should adopt an open systems approach to make the planning process effective. In this
approach, managers consider the impact of changes in the external environment on the firm and on every
aspect of planning. As an organization is affected by changes in the external environment, the planning
process is also affected by many interactions and influences of the external environment. The open systems
approach to planning introduces an element of flexibility in planning, thus making it effective.
Management Information System

In order to execute managerial functions effectively, managers at every level require vital information
that is communicated with speed, brevity, precision and economy. An efficient management information
system should be developed so that relevant facts and figures are made available to managers at the right
time. An efficient management information system will in turn lead to effective planning.
Limitations of Planning
The planning process has to deal with many obstacles and constraints. The limitations of the process
are discussed below
Lack of Accurate Planning

Planning is based on the information supplied to the planners. The quality of planning depends on
the relevance and accuracy of the information. Plans developed on the basis of inaccurate data can be
incorrect and misleading.
Time Consuming Process

The practical utility of planning is sometimes negatively affected by the time factor. Planning is a time
consuming process. The collection of data and revision of plans take up a considerable amount of time.
The more detailed the planning, the greater is the time consumed. In order to increase the accuracy of
planning, managers may spend an excessive amount of time securing information. This may result in a
delay in the implementation of plans and consequently the loss of opportunities.
Expensive
The planning process is very expensive. The gathering of information and testing of various courses
of action involve large amounts of money. As a result, many organizations, particularly small ones, are
unable to afford a formal planning programme. A formal planning programme may necessitate the recruitment
of additional staff, thereby causing additional strain on the monetary resources of an organization. Thus,
it may not be feasible to undertake planning beyond a certain extent. Planning should be undertaken only
to the extent that its benefits justify the costs involved.
Inflexibility
Planning may result in internal inflexibility. Employee initiative and individual freedom may be curbed
because of detailed policies and procedures. Such inflexibility may also delay the performance of tasks.
In addition, it may stifle innovation and creativity.
Resistance to Change
Generally, people are more concerned about the present than the future. The future is highly
unpredictable and the organizations have to keep changing to progress. However, the human psychology
is such that people often resist change. They resist change due to fear of failure and fear of uncertainty.
Planning requires a willingness to change and take risks.
Exhibit 4.4 Contingency Planning
Many companies follow a “crossed fingers” approach when managing disasters – the company crosses its
fingers and hopes that it will not be affected. Statistics reveal that more than 60 per cent of the companies
affected by a major disaster are wiped out of business within two years if immediate steps are not taken.
Therefore, companies must develop a contingency plan to manage things when a disaster strikes. The factors
that should be considered when developing a feasible contingency plan are:
Lessening interruptions to operations of the business
Limiting the seriousness of the disruption to business
Resuming critical operations within a specified time after a disaster
Speeding up restoration of services
Providing the customers the assurance that their interests are protected
Maintaining a positive image of the organization
Minimizing financial loss
Making the employees and management aware of the contingency plan
The first step in the development of a contingency plan is to obtain executive support, which will in turn help
the planners obtain the resources necessary to create the plan. The objectives of the contingency plan and
the consequential cost of not having a plan should be communicated to the management.
Next, a planning committee has to be established to oversee the development and implementation of the plan.
The committee members should be sourced from all departments. Each committee member should perform
a risk analysis. The risk analysis should cover a range of possible disasters, including natural, technical, or
manmade (terrorism). Subjects that should be considered include:
Financial impact
Operational impact (customer service, reduced quality, loss of competitive advantage)
Intangible impact (public opinion, employee morale, employee confidence about the company sustaining
in business)
Critical business functions
Requirements for continuing to run the business (relocation, modifying the current facility)
Another important step in contingency plan development is to conduct research and gather the material
necessary for the response and recovery of the company after a disaster. Instances of these could be a
telephone list of key personnel, vendors, and others who will play a role in the recovery process and an
accurate inventory of the company’s equipment. A checklist should also be developed that will allow the
management to notify appropriate parties in case of disaster.
After the contingency plan has been prepared, it should be shared with all the employees. They should also
be educated and trained to implement the plan. The company must sometimes carry out practice runs of the
contingency plan to see that it really works. The contingency plan must be reviewed biannually and revised
annually. By having a well-designed contingency plan in place, a company can even survive a disaster of high
magnitude and can quickly resume normal operations.
Adapted from Courtney Staub,”Contingency Planning – Expecting the Unexpected,”15 March 2001, http://
www.commercialfloorcare.com/CDA/ArticleInformation/features/BNP Features Item/0,3440,22826,00.html>
Exhibit 4.5 Reasons for Avoidance of Planning
Planning is a very important managerial function. However, in many cases, people avoid planning due to
various reasons. These reasons are listed below:
Organizational Problems
1. Faulty reward schemes – Success achieved due to proper planning sometimes goes unnoticed. As a
result, the employees may feel dejected. And since employees may be punished when a failure occurs,
they often consider it better not to undertake something, rather than take a risk, fail, and be punished.
This type of attitude toward employees discourages them from planning and undertaking a task.
2. Excessive involvement with crisis management – The organization may sometimes be so involved in
managing present crises that they may not take into account anything else. Too much involvement with
crisis management can leave the management of the organization overworked, with no time to spare for
planning.
3. The ‘get stuck in’ culture – Some managers consider planning a waste of time, either because they
are carrying out relatively simple jobs, or they do not understand the significance of planning. In addition,
managers who are very experienced may fail to take the planning activity seriously. Such an attitude
creates problems for inexperienced employees, who need clear guidelines. This approach also increases
the work load of experienced managers.
4. Unwillingness to spare organizational resources on planning – Planning requires time and money as
additional staff may have to be employed for this function. Some organizations are quite reluctant to spend
the organizational resources on planning activities. This is a short-sighted approach to management, as
the failure to plan well may ultimately lead to failure in the achievement of organizational goals.
Individual Reasons
Individuals may oppose planning for the following reasons:
1. Laziness – They may be too lazy to devote time and energy for planning. This is a very common reason
for the failure to plan activities.
2. Resistance to change – Sometimes, individuals do not wish to change the status quo. They may
consider change to be harmful to their interests. Therefore, they may oppose planning.
3. Fear of failure – Sometimes plans may not work out well or may even fail. People may oppose planning
as they may be unwilling to take the risk of failure.
4. Experience – Over a period of time, as the individual gains experience, he or she may cease to be
dependent on formal planning. The individual may become overconfident of his capabilities and underestimate
the importance of planning.
Bad experiences with the planning process
In some cases, people may have had bad experiences with plans which were cumbersome, impractical or
inflexible. Such individuals may resist the use of plans. However, if planning is carried out in a proper manner,
it may prove very helpful for the organization.
Adapted from “Why Do People Avoid Planning?” Mind Tools Ltd., <http://www.psywww.com/mtsite/plfailpl.html>
ENVIRONMENTAL CONSTRAINTS
The process of planning is also influenced by changes in the external environment. Unforeseen
changes may cause a plan to be altered drastically. Moreover, managers have hardly any control over
changes in social, economic, political and technological environments. The plans of an organization may
be greatly affected by the political climate of a country and changes in the ruling party’s policies and
regulations. Trade unions also may affect organizational plans by bargaining for higher wages and other
benefits. Frequent technological changes may decrease a company’s competitive advantage and increase
manufacturing costs, thus upsetting even the best laid plans.
Lack of Ability and Commitment

Sometimes organizations fail to formulate good plans because of lack of commitment of managers to
the planning process and their inability to develop good strategies; lack of clear and specific objectives;
failure to examine all planning premises; and failure to understand the scope of the plan. Even if a plan
is good, inadequate top management support, inadequate delegation of authority by top management, and
inadequate control mechanisms will cause the plan to fail.
False Sense of Security

Planning may create a false sense of security. A manager may feel that once a plan has been
formulated, organizational processes will automatically be efficient. This may not necessarily be true. If a
plan is not reviewed and revised periodically, the plan may hinder processes instead of facilitating them.
SUMMARY
Planning is the most basic of all management functions. It involves looking ahead and relating today’s
events with tomorrow’s possibilities. Planning is goal-oriented, and forward-looking process. It offsets
uncertainty and risk, provides a sense of direction, provides guidelines for decision-making, and increases
operational efficiency and organizational effectiveness. It also helps in the coordination of organizational
activities and facilitates control and delegation.
Plans can be of various types, depending on the organization level, the frequency of use and the time
frame. Depending on the organization level, plans can be strategic, tactical or operational. When frequency
of use is taken into consideration, plans can be classified into single-use plans and standing plans. Single-
use plans include budgets, programmes and projects. Standing plans include policies, procedures and
rules. On the basis of the time frame, plans can be short-term, intermediate-term or long-term. Apart from
these, an organization can also have specific or directional plans.
Planning is an ongoing process. All planning processes consist of eight steps: analyzing opportunities,
establishing objectives, determining planning premises, identifying alternatives, evaluating available
alternatives, selecting the most appropriate alternative, implementing the plan and reviewing the plan.
Though planning provides several benefits, it has certain limitations too: it requires accurate information,
it is a time consuming process, it is expensive and it lacks flexibility. Moreover, people tend to resist change
and are unwilling to take risks. They also may be reluctant to establish goals which are essential for good
planning. Even if good plans have been developed, changes in the environment may have a negative affect
on them. In order to overcome these limitations, managers should establish a proper climate for planning;
develop clear and specific objectives; evaluate all planning premises, ensure the support of top-level
management, encourage employee participation in the planning process, communicate goals and planning
premises throughout the organization, integrate short-term and long-term plans, have an open systems
approach to planning, and implement an effective management information system.
The Class Issues of Toys

A major strategic issues facing toy makers today is planning to meet the increasingly diverse
STUDY
demands of consumers, kids included.
CASE
In Brookline, Masschusetts, No Kidding has made its choice: It has built an educated,
professional clientele from the affluent suburbs by stocking hard to find items with a educational
focus and offering ready advise from a staff of moonlighting teachers. In an industry where
more than 100 independent toy stores closed in 1995, No Kidding is thriving. Even with
100% mark ups and non of the licensed products found in large commercial toy stores.
Co-owners Judy Crockerton and Carol Nelson have the vision of No Kidding as an educational
toy business with close tie to the educational community, when asked whether she is a
entrepreneur, Crockerton says “I’m taken a back…. No,… I’m a teacher”.
1. What management and planning barriers might No Kidding face given its owners philosophy.
2. What suggestions would you make to No Kidding about its plans for future. Why?
3. How can planning help small focused stores like No Kidding compete against larger, more commercial stores.
][][
Process of Planning
Objectives and
5
H Nature of Objectives
H Evolving Concepts in MBO
H The Process of MBO
H Benefits of MBO
H Limitations of MBO
H Making MBO Effective
Chapter 5 Objectives and Process of Planning 87
INTRODUCTION
Managing an organization effectively requires the formulation of clear objectives. Objectives serve as
guidelines or roadmaps for managerial effort and action. Well thought out objectives steer an organization
to success.
An objective is a goal or an end that an organization or an individual aims at or strives to attain.
A supervisor or a team sets the objectives and decides the processes by which these objectives can be
achieved. Objectives provide a direction for the organization and specify the quantity and quality of work
to be accomplished within a given period of time. Objectives determine what individuals, groups and
organizations are expected to accomplish. They provide a fundamental basis for decision-making and a
criterion against which outcomes are measured. Thus, objectives are the foundation of good planning.
In this chapter, we will first discuss the nature and characteristics of objectives and later the various
aspects of ‘Management By Objectives’ (MBO).
NATURE OF OBJECTIVES
Objectives state the end results to be achieved by the organization. They form the basis of all good
planning processes. The overall objectives of an organization need to be supported by its sub-objectives.
Objectives form a network as well as a hierarchy.
Hierarchy of Objectives
As Table 5.1 shows, objectives form a hierarchy, ranging from the overall aim of the organization to
specific individual objectives. At the top of the hierarchy is the socio-economic purpose, which requires
an organization to contribute to the welfare of society by providing goods and services at a reasonable
cost. At the second level is the underlying purpose of the business or mission. Mission or purpose states
what the firm plans to achieve. As there is only a fine distinction between the two terms, many management
writers use these terms interchangeably. The third level of hierarchy contains more specific objectives for
those areas in which the success of the enterprise depends on its performance. These areas are called key
result areas. There is no consensus among management scholars about what should be the key result areas
of a business. Peter F. Drucker suggests the following the key result areas in business: productivity, physical
and financial resources, profitability, market standing, innovation, managerial performance and development,
worker performance and attitude, profitability and social responsibility. Of late, two other key areas are
gaining strategic importance. These are service and quality issues.
The Process of Formulating Objectives and The Organizational Hierarchy

As shown by Table 5.1, managers at different levels in the organization are concerned with formulating
different kinds of objectives. The purpose, the mission, the overall objectives of the firm, and the objectives
in the key result areas are evolved by the board of directors and top managers. Middle-level managers are
involved in formulating divisional and departmental objectives. The lower-level managers are concerned
with deciding objectives for their departments and units as well as for their subordinates. Individual
objectives such as performance and development goals, are placed at the bottom of the hierarchy. This
does not mean that these objectives are meant only for managers at the lower-levels or that they are less
important. Managers at the top levels also should set objectives for improving their own performance and
development. In fact, their objectives should be much more challenging than those of their subordinates.
Table 5.1: Relationship of Objectives and Organizational Hierarchy
Level of Organizational Hierarchy Types of Objectives
Socio-economic purpose
Mission
Overall objectives of the firm
Objectives in the key result areas
productivity,
Bottom-up approach
Top-down approach
Board of Directors and Top-level physical and financial resources,

managers innovation,
managerial performance and
development, worker performance and
attitude,
social responsibility,
quality and service issues
Middle-level managers Divisional objectives
Departmental objectives
Lower-level managers Objectives for subordinates
Performance goals
Development goals
As indicated by the arrows in Table 5.1, the organization can use either the top-down approach or
the bottom-up approach for setting objectives. There is often a conflict among management theorists as
to which is the better method. In the top-down approach, top-level managers determine the objectives for
subordinates to follow, while in the bottom-up approach, subordinates themselves attempt to formulate
objectives and present them to their superior for approval. The supporters of the top-down approach argue
that the organization needs clarity in direction by way of corporate objectives set by the CEO and the
board of directors. On the other hand, proponents of the bottom-up approach argue that top management
should ascertain information from lower levels in the form of objectives. It has been observed that either
approach alone is insufficient. There is no hard and fast rule as to where and when one should use a
particular approach. Both approaches are equally important and can be used according to the situation
and can be modified depending on factors such as the size of the organization, the organization culture
and the urgency of the plan.
A Network of Objectives
Objectives and planning programmes are co-existential and correlational. They support one another
to form a network of expected outcomes and results. If the objectives are not linked with each other and
if they do not support one another, it is possible that individuals may carry out their plans, keeping in mind
only their individual or departmental goals. This may be harmful for the organization.
Goals and plans are very rarely linear, instead they form an interlocking network. Each programme
within such a network can be again subdivided into another interlocking network. For instance, a new
product design programme may comprise of a network of programmes such as development of preliminary
schematic design, development of a functional model, packaging design, and other elements. Each of these
can in turn, be subdivided into a series of interlocked programmes.
Exhibit 5.1 Guidelines for Writing Objectives
It is important to learn to write meaningful objectives, regardless of the types of objectives. The guidelines
mentioned below would help in formulating realistic objectives:
1. Commitment to action: The objective must begin with the word “To” followed by an action verb. Any
particular objective is achieved as a result of some action. Therefore, commitment to action is a prerequisite
for the formulation of an objective.
2. Specify a single key result: An objective should specify a single key result area. To measure a particular
objective effectively, each subordinate and manager must know specifically what is to be achieved.
Therefore, the focus should be on a single key result area in each performance objective.
3. Specify a target date: Objectives should specify a deadline for results to be accomplished. If the objective
intends to improve the state of affairs in the organization, it should have a specific target date identified.
4. Should be measurable and verifiable: Objectives should be specific and quantitative. Only if they are
measurable and verifiable, it is possible to assess how much progress has been made. This is extremely
difficult for managers to accomplish as they are often confused as to how to identify specific criteria in
areas which are subjective. If the objectives are qualitative, then it should be explained as to why the
objective has been chosen, what will be its end results and how one will know whether the objective has
been achieved or not.
5. Individual objectives should be related to higher objectives of the organization: Objectives of a
subordinate should be in keeping with the objectives of the superior and the organizational goals. This
will help in achieving both individual and organizational goals.
6. Understandable: An objective that is easy to understand can be easily implemented. It should be
understood by those who are responsible for accomplishing it. As far as possible, an objective should
be free from ambiguity.
7. Realistic and attainable: An objective should be challenging and should stretch the abilities of an
individual. But it should also be within range of the abilities of a person. A good performance objective
should serve as a motivational force for an individual. Thus, it should be neither too simple nor too difficult
to accomplish but should be attainable.
8. Should be consistent with organizational resources: A performance objective should match with the
resources of an organization. Moreover, an organization should be willing to commit its resources towards
the attainment of those objectives.
9. Should be mutually acceptable by both superior and subordinate: Objectives should be discussed
by the superior and subordinate and should result in mutually understood and accepted objectives. By
discussing the objectives and thereby reaching an agreement, the subordinate would feel involved and be
more committed.
Multiplicity of Objectives
Organizations usually have numerous aims and objectives. Similarly, there are likely to be numerous
goals at every level in the hierarchy of objectives. It is usually assumed that a manager can effectively
pursue only a few objectives. Pursuing too many objectives may result in dilution of the drive needed to
accomplish them. It may also result in unnecessarily highlighting minor objectives.
There is no definite number of objectives for an organization. If there are too many objectives, none
of them may receive adequate attention, thereby making planning ineffective. Nevertheless, the number of
objectives also depends on how much the managers will do themselves and how much they will delegate
to their subordinates.
Exhibit 5.2 Essentials for a Manager’s Objectives
Each manager, from a top-level manager to a production foreman needs clear objectives. Objectives specify
the contribution expected from every manager and subordinate. They also spell out the contribution a
manager’s unit is expected to make to help other units achieve their objectives. Lastly, objectives also help
a manager understand what contribution other units can make towards accomplishment of his unit goals. In
a nutshell, the focus is on team work and networking and accomplishing a job through these.
Objectives should give a clear picture of the individual responsibilities of both the manager and the subordinates.
The superior should understand what he can expect from the subordinate. The subordinate should also
understand he is accountable for specific results. The superior and the subordinate need to make an extra
effort to make their ideas compatible to each other.
An individual’s objectives should be in line with the organizational goals. All employees should be asked to
give a statement of their objectives, which should be in accordance with the departmental and organizational
goals. This helps the employees to focus on the goals of the company and allows them to define their
contribution.
The objectives of every manager must define his contribution to the attainment of organizational goals in all
areas of business. Every manager may not make a direct contribution in every area. For instance, the
contribution which marketing makes to the productivity of a company is indirect and hard to define. Also, if
a manager and his unit are not expected to contribute towards any one of the areas that affect the growth
of the firm, it should be clearly stated. This holds true especially for service staff and for specialized work
force like computer professionals. These individuals may not always be able to relate their work to business
objectives. But unless they make an attempt, they may direct their work away from business objectives.
The objectives of managers at all levels and in all areas should be in tune with both long-term and short-term
plans so as to obtain balanced efforts. Moreover, all objectives should include both tangible objectives and
intangible ones such as manager organization and development, worker performance, attitude and public
responsibility.
Adapted from Peter F.Drucker, Management: Tasks, Responsibilities, Practices (Delhi: Allied Publishers, 1998) 436-
37.
EVOLVING CONCEPTS IN MBO

Heinz Weihrich and Harold Koontz define management by objectives as “a comprehensive managerial
system that integrates many key managerial activities in a systematic manner and that is consciously
directed toward the effective and efficient achievement of organizational and individual objectives.”
Management by Objectives (MBO) is a management concept that has gained immense popularity in
many organizations. The process of MBO begins with the setting of subordinates’ objectives jointly by the
immediate superior and subordinates and ends with the performance appraisal of the subordinates.
Managers and their subordinates plan together to set common goals. Each employee’s major areas of
responsibility are clearly defined in terms of measurable objectives and result areas. Periodic reviews, both
individual and departmental, are done to assess the accomplishment of objectives.
Though MBO is a widely used term, there is no clear consensus on what it actually is. While some
think of it as an appraisal tool, others see it as a motivational technique; still others consider MBO as a
planning and control device. Definitions and applications of MBO differ widely and therefore, it is important
to know how the concept evolved.
Exhibit 5.3 Strategic Management and MBO
MBO has been used as a vehicle for motivating, controlling as well as evaluating, many small and large
businesses. MBO highlights a systematic approach to change by directing efforts of the individual towards
attainable objectives. The MBO approach has undergone many changes in the recent times. The previous
approaches to MBO tend to concentrate on the individual and the short term perspective whereas the new
approach focuses on strategic management.
According to Henry J. Tosi and Stephen J. Caroll, the strengths of an MBO programme are:
1. MBO aids planning by emphasizing collaborative efforts between managers and subordinates.
2. MBO clarifies management’s expectations from subordinates, as both managers and subordinates have
to establish feasible objectives within a specific period of time.
3. MBO improves the flow of information and communication between managers and subordinates, thereby
making individuals aware of organizational objectives.
4. MBO improves the performance review and evaluation process by providing feedback.
Strategic management spells out broad objectives and goals of the firm. They provide direction and support
for the firm by considering customers, products and services, technology and other factors. Strategic
management takes a detailed view of the business by matching external environment with the resources of
the firm. While MBO process relies on the participation of subordinate and superior, the strategic management
process relies upon a team approach that starts from the corporate level and ends at the functional level.
The strategic planning process depends on input from all levels of management. MBO should be integrated
into a total strategic management approach of planning, implementing, receiving feedback and adapting to
change.
Many businesses in fact have not yet realized that MBO and strategic planning should be merged rather than
considering them as two different systems. By combining MBO and strategic management, various conflicts
and weaknesses of MBO can be resolved. At the same time, the company can profit from the benefits of
a group process for strategic planning that facilitates participation, loyalty, an open culture and a flexible
management style. The new approach to MBO does not compensate for strategic management. Thereby,
MBO can add some meaning to strategic management but it is not the essence of strategic management.
The top-level management must give its special attention to strategic planning as this decides an organization’s
future.
Adapted from Dale Krueger, “Strategic Management and Management by Objectives.” <www.shaer.uca.edu/Research/
1992/SBIDA/92sbi024.htm>
Early Impetus to MBO

No single person can claim to be the originator of the MBO approach. One of the earliest management
thinkers to use this term was Peter F. Drucker. MBO first gained recognition way back in 1954 with the
publication of his book The Practice of Management. Drucker considered MBO as a means of managerial
self-direction and self-control. He emphasized the importance of setting objectives in all areas where
performance is critical for the survival and success of the enterprise. He suggested that managers at every
level participate in formulating objectives as this would help them have a better understanding of the
broader aims of the company. It would also help them to know how their own specific objectives relate
to the overall company goals. According to Drucker, the relationship of each individual’s objectives to the
common goal is of primary importance.
Exhibit 5.4 Systems Approach to MBO
MBO was introduced in the 1950s by Peter F. Drucker, who considered objectives a necessity in every area
where performance and results directly affect the survival and growth of a business. He emphasized the
importance of participative goal setting, self-control and self-evaluation. Unfortunately, MBO was not taken as
a way of managing, but selective aspects were applied to performance appraisal.
The systems approach to MBO adds on two new areas, besides the other existing concepts of the MBO
approach: (1) MBO is viewed as a comprehensive system in which many key managerial activities are
integrated and (2) systems concepts are used to emphasize the interdependence of MBO with its environment.
The systems approach recognizes the fact that the organization does not exist in a vacuum but receives
inputs (human, capital, managerial, technological, etc.) from the external environment.
The MBO Transformation Process
1. Strategic planning and hierarchy of objectives: These are closely linked to each other. Strategic planning
is concerned with determining major objectives of the company. Opportunities and external constraints
are analyzed and matched with the strengths and internal weaknesses of the organization. This analysis
is the foundation for determining the hierarchy of objectives.
2. Setting objectives: Objectives are jointly set by the superior and the subordinate. The objectives should
be verifiable, and should be stated, in terms of (a) quantity, (b) quality, (c) time and (d) cost. Objectives
should be measurable and should contribute to the objectives of the next or higher organizational unit.
They should be challenging but reasonable and should focus on results.
3. Planning for action: Action plans are concerned with identifying and grouping activities; coordinating efforts
of groups and individuals; defining the role, authority and responsibility of each person; determining the
sequence of activities and establishing the resources needed to achieve the objectives.
4. Implementing MBO: MBO must get the full-fledged support of the top management. Moreover, the internal
environment of the organization must be conducive to MBO. MBO should be adopted as a part of the
organizational culture itself.
5. Control and appraisal: MBO helps in control and appraisal. Control refers to the measurement of
organizational performance, whereas appraisal emphasizes the evaluation of individual performance.
6. Subsystems: The two subsystems that are frequently an integral part of MBO are manpower planning and
compensation. Manpower needs are identified during action planning and goal setting. MBO can thus
be used as a basis for manpower planning. MBO can help in developing a compensation system that is
fair and which is congruent with performance levels in the organization.
7. Organizational development: Organizational development involves making systematic, long-range efforts to
make the organization more productive. Some specific approaches in organizational development include
problem-solving, team development, cooperation and organizational rejuvenation. Though organizational
development places an impetus on the macro aspects of an organization, individual developmental aspirations
are also taken care of. Various managerial needs are converted into personal development objectives and
action plans.
In a nutshell, the systems approach to MBO recognizes the fact that an organization is an open system.
The inputs from the external environment are transformed through the MBO process to produce outputs.
Adapted from Heinz Weihrich, “A New Approach to MBO - Updating a Time-Honored Technique, “ <www.usfca.edu/
fac-staff/weihrichh/docs/newmbo.pdf>
Emphasis on Performance Appraisal

Douglas McGregor, the propounder of Theory X and Theory Y, advocated the use of MBO as a
performance planning and appraisal system. In his classic article published in the Harvard Business
Review in 1957, McGregor criticized traditional appraisal programmes that focused on personality traits
for evaluating subordinates. He suggested a new approach to appraisal, based on Peter Drucker’s concept
of MBO. He suggested that subordinates should set short-term objectives for themselves and then review
those objectives with their superior. Evaluation of performance should be done against the set objectives,
primarily by the subordinates themselves. This new approach thus encouraged self-appraisal and self-
development in keeping with the overall company objectives.
Emphasis on Short-term Objectives and Motivation

The importance of individual goal-setting has long been recognized by several researchers, consultants
and practitioners. Studies have shown that performance levels were higher when people worked towards
specific objectives than when they were simply asked to do their best. Therefore, goal-setting is an
important factor in motivating employees. Its importance as a motivational technique is not restricted to
business alone; it can be applied to public organizations and one’s personal life as well.
Inclusion of Long-range Planning in the MBO Process

In many MBO programmes that stress on motivation and performance appraisal, only short-term
objectives tend to be focused upon. For instance, a production manager, in an effort to reduce maintenance
costs, may neglect the necessary expenses for keeping the machines in good working condition. The
breakdown of machinery may not be evident earlier, but it can result in costly repairs later. A manager
may not invest in new products that would take several years to realize profits. Similarly, to show a good
profit margin in a given year, maintaining good relationships with customers may be neglected. Having
recognized these shortcomings, many organizations now consciously include long-range and strategic
planning in MBO programmes.
The Systems Approach to MBO

MBO has come a long way since it was first suggested by Peter Drucker as a way of promoting
managerial self-control. It has been used in appraising performance – both individual and collective, in
motivating individuals, and more recently in strategic planning. Many other managerial subsystems can
also be integrated into the MBO process. These include design of organizational structures, portfolio
management, management development, budgeting, career development, and compensation programmes.
These diverse managerial subsystems need to be integrated so as to form a unified system. A recent
research study which investigated MBO as a comprehensive managing system indicated that it is possible
to integrate most key managerial activities with the MBO process and ideally, this ought to be done.
However, the degree of integration varies for individual managerial functions. For instance, it was found
that the highest degree of integration of MBO is possible with functions such as planning, controlling, and
directing. But other managerial functions like organizing and staffing could be also integrated into the MBO
process. These findings suggest that in order to be effective, MBO has to be viewed as a comprehensive
system.
MBO has come a long way since it was first suggested by Peter Drucker as a way of promoting
managerial self-control. It has been used in appraising performance – both individual and collective, in
motivating individuals, and more recently in strategic planning. Many other managerial subsystems can
also be integrated into the MBO process. These include design of organizational structures, portfolio
management, management development, budgeting, career development, and compensation programmes.
These diverse managerial subsystems need to be integrated so as to form a unified system. A recent
research study which investigated MBO as a comprehensive managing system indicated that it is possible
to integrate most key managerial activities with the MBO process and ideally, this ought to be done.
However, the degree of integration varies for individual managerial functions. For instance, it was found
that the highest degree of integration of MBO is possible with functions such as planning, controlling, and
directing. But other managerial functions like organizing and staffing could be also integrated into the MBO
process. These findings suggest that in order to be effective, MBO has to be viewed as a comprehensive
system.
THE PROCESS OF MBO

MBO is a system which aims at achieving objectives of the organization, facilitating employee
participation and making them more committed to the organization. The MBO process emphasizes clarity
and balancing of organizational objectives, and the participation of managers and subordinates, with
accountability for results.
Steps in the MBO Process

The MBO process has many steps, as shown in Figure 5.1. An extended model of the process is
shown in Figure 5.2.
Develop overall organizational goals
Establish specific goals for various departments, sub-units & individuals

Feedback
Formulate action plans identifying the problem areas
Implement and maintain self-control
Conduct periodic review of the plans
Appraise performance of the subordinate
Fig. 5.1 Steps in the MBO Process

Developing Overall Organizational Goals

In the first step of the MBO process, managers must determine the mission and the strategic goals
of the enterprise. The goals set by top-level managers are based on an analysis of what can and should
be accomplished by the organization within a specific period of time. Organizational goal-setting requires
managers to take into account the company’s strengths and weaknesses in the light of available opportunities
and potential threats. Goals must be set for all the key result areas and should be flexible. While setting
goals, the managers should also establish the methods by which the goals are to be achieved.
The MBO process also involves the clarification of organizational roles. When an organization’s
structure is analyzed, it is often found that there is no clarity as to who is responsible for achieving which
particular goal. Ideally, each goal and sub-goal should be the responsibility of one particular individual
rather than of many individuals. However, it is not always possible to make individuals personally responsible
for achieving objectives. For instance, while setting goals for a new product launch, the managers of
marketing, research, and production must cooperate with one another and carefully plan out the activities
of their individual departments.
The functions of these managers can be centralized by appointing a product manager who can
monitor and control the activities of the various departments. If this cannot be done or is not desirable,
each manager’s contribution to the organizational goal should be clearly spelt out.
Exhibit 5.5 Importance of Goal-Setting
Goals are statements of what organizations intend to accomplish. Goals are important for an organization
for the following reasons:
1. Goals direct the activities of the organization: Goals provide a direction for the activities of an organization,
define its purpose and set priorities for group action. Clear goals allow the team members to understand
what is expected of them. This also allows them to focus on results.
2. Goals act as a motivational force: People feel involved if they take part in the goal-setting process.
Moreover, they will be motivated to work for results and feel more committed to the organization. Members
of a group are more likely to be active and satisfied when the group goals help them in accomplishing
their individual goals.
3. Goals organize the work of an organization: In the absence of goals, the work of an organization
proceeds in a haphazard manner. Goals help in organizing various tasks in an activity. They also assist
in achieving the requisite results from a specific activity.
4. Goals emphasize teamwork: Goals improve the cohesiveness or unity of a group as goals make the
group members interdependent on each other. The group members must cooperate with each other for
achieving results. Also, the process of working with others makes the team members feel responsible.
5. Goals encourage focused work: Goals help an organization be focused. The presence of goals helps
the organization to ensure that its employee’s energy is focused on work activities and achievement of
results rather than allowing them to get involved in personal conflicts and discussions as to how the firm
should function.
6. Goals help measure an organization’s progress: When goals are in place, the group members can
ascertain how much progress has been made. Since goals are measurable, the group members can also
measure to what extent goals have been achieved.
Adapted from “Goal Setting,” 20 September 2001, Student Association Inc., <http://sai.cup.edu/sai/handbook/
goals.htm>
Establish Specific Goals for Various Departments, Sub-units and Individuals

At this stage, goals are set for various organizational levels so that each goal contributes to the
achievement of the overall goals set for the organization. Upper-level managers develop specific objectives
for their departments in collaboration with their subordinates, i.e. the managers at the next lower level.
Every manager in an organization is both a superior as well as a subordinate except for the top level and
the lowest level managers. This process is repeated for all the hierarchical levels in the organization.
After determining the pertinent general objectives, strategies, and planning premises, the superiors
work with subordinates in setting their objectives. The superior must determine (i) which objectives are
reasonably attainable, (ii) which goals would stretch the ability of the subordinates, (iii) which objective
would be in accordance with upper-level objectives, (iv) which goals are consistent with the goals of other
managers in other functional areas, and (v) which objectives are consistent with the long-term objectives
and interests of the department and the organization. The superior must approve the subordinate’s objectives
only after considering these factors.
Formulating Action Plans

Once the goals of various departments, sub-units and individuals have been set, action plans must
be developed. Action plans state what is to be done and how, when, where, and by whom in order to
achieve a goal. These plans should focus on the methods or activities necessary for achieving particular
goals.
Action plans identify problem areas and increase the feasibility of achieving goals. They point out
areas in which resources and assistance will be required, thus making the achievement of objectives more
efficient. Action plans are usually developed by subordinates in conjunction with their superiors. The
superiors must ensure that the different action plans complement one another and do not work at cross-
purposes.
Implementing and Maintaining Self-control

Once the objectives have been set and action plans determined, the subordinates should be given
considerable freedom to carry out their activities and implement their plans. MBO is expected to help
subordinates gain a clear idea of what they should achieve. The MBO process not only gives subordinates
a sense of direction, it also allows them to evaluate their own progress. As a result, supervisors need not
get involved in the day-to-day activities of subordinates. However, they need to be kept informed about
the progress and about any unforeseen difficulties. If the subordinates encounter any problems while
implementing plans, their supervisors should provide them adequate training and organizational support.
Periodic Review
As plans are implemented, the monitoring of performance becomes important. Periodic reviews have
to be done to ensure that plans are being implemented properly and that objectives are being achieved.
Such reviews allow managers to measure results, identify and remove obstacles, solve problems, and make
changes to the action plans that are not achieving the expected results. They also help the managers
determine whether the plans and goals are appropriate for the organization or need to be changed.
Changes can be made to the existing goals or new ones can be added. Reviews are usually done on a
quarterly basis, but they can be done more frequently if the business environment is undergoing rapid
change. Periodic reviews give the managers an excellent opportunity to provide timely feedback to their
subordinates.
Enterprise Planning
Objectives Premises
Give rise to
Key result areas
Affect
Appropriate
May affect organization
Superior’s
objectives
May affect
Recycling
Superior’s Subordinate’s
Available preliminary
needed preliminary
recommendation statement of
resources of objectives for objectives
subordinate
Agreement
Subordinate’s
objectives
Periodic review Subordinate’s

of progress by ongoing Final review
superior performance and
appraisal of
New performance
inputs
Corrective Final
measures and performance by
superior’s subordinate
assistance
Fig. 5.2 The Process of Managing and Appraising by Objectives
edition, 1994) 152.
Performance Appraisal
At the end of an MBO cycle, typically one year after the original goals were set, the final performance
is matched with the previously agreed-upon objectives. The managers evaluate each subordinate’s
performance over the preceding year. The performance appraisal focuses on the extent to which goals
have been achieved, extent of shortfall in the achievement of goals, reasons for the shortfall and preventive
action that is necessary to avoid such difficulties in the future. The appraisal session also recognizes the
areas in which subordinates have performed effectively. It also includes an identification of areas in which
individuals could improve by acquiring some specialized skills. The goals and plans for the next MBO cycle
can also be discussed at this stage.
Though performance appraisal is the last step of the MBO process, the feedback provided during this
stage is used as input for developing new objectives.
BENEFITS OF MBO
MBO can be practiced in various organizational activities like performance appraisal, organization
development, long-range planning, integration of individual and organizational objectives, and so on.
When used as an approach to management, MBO yields a wide range of benefits. These benefits are
discussed below.
Better Managing
MBO helps managers allocate organizational resources and plan activities effectively. As a part of the
MBO process, managers have to chart out a method for accomplishing results and decide what resources
and assistance they will require for achieving objectives. Thus managers are forced to focus on the results
when planning activities. Moreover, MBO not only aids planning it also facilitates evaluation and control.
Thus, MBO facilitates better management.
Clarity in Organizational Action

MBO identifies the key result areas where organizational efforts are needed. A clear definition of the
objectives in the key result areas helps relate the organization with its environment. Organizational objectives
are always influenced by the external environment in which the organization functions. Thus, if there is
any change in the external environment, it must be taken into account at the objective-setting stage itself
to help the organization develop effective short-term as well as long-term plans.
Encouragement of Personal Commitment

The biggest advantage of MBO is that it encourages personal commitment to goals by employees. The
MBO programme gives employees the responsibility of setting their own objectives, gives them the opportunity
of having their ideas included in the planning programme, provides them a clear picture of their area of
discretion or authority, and facilitates assistance from superiors for accomplishing their goals. Thus an
MBO programme makes a subordinate feel more involved and strengthens his commitment to the
organizational goals. It increases the enthusiasm of subordinates by putting them in charge of achieving
goals.
Personnel Satisfaction
MBO brings about personnel satisfaction by allowing employees to participate in setting their objectives
and by appraising their performance in a rational manner. Individuals derive a great deal of professional
satisfaction from setting and achieving goals. And as MBO ensures rational performance appraisal,
employees are assured that they will be judged impartially and that their appraisal will not be affected by
managerial prejudices, biases and other personal factors. This, in turn, leads to better performance among
employees.
Basis for Organizational Change

Every organization has to be flexible and adaptable to change in order to keep up with changes in
the external and internal environments. However, bringing about organizational change is not an easy task
and requires a great deal of effort on the part of managers. The MBO process stimulates organizational
change, provides the framework and guidelines for planned change, and helps managers overcome resistance
to change (by employees). Thus, the MBO process helps top management initiate, plan, direct and control
the direction and speed of change.
Development of Effective Controls

Since MBO forces management to clearly state objectives, it leads to the development of effective
controls. Management control involves the measurement of results and taking corrective action to check
deviations from plans. A clear set of verifiable goals helps managers determine what should be measured
and what action should be taken to correct deviations
Some of the other advantages of MBO are listed below:
(i) It helps managers coordinate goals and plans
(ii) It helps managers clarify priorities and expectations
(iii) It coordinates the efforts of various departments of an organization
(iv) It allows greater consistency in decision-making
(v) It helps an enterprise focus on areas where effective management is crucial for the organization
(vi) It improves communication between superiors and their subordinates and increases understanding
between them.
LIMITATIONS OF MBO
MBO is not without its problems and weaknesses. Some of the problems are inherent in the MBO
process itself while others are due to shortcomings in the implementation of MBO concepts.
Some of the limitations of MBO are discussed below:
Failure to Teach MBO Philosophy

MBO is an innovative philosophy for managing organizations. Not only should managers understand
and appreciate this approach, they should also make their subordinates understand how the process will
benefit them and what part it will play in appraising their performance. The MBO philosophy is built on
the concepts of self-direction and self-control. These concepts are aimed at making managers become
more professional in their approach. Failure to understand and make others understand the philosophy of
MBO leads to the failure of the MBO process itself.
Failure to Give Guidelines to Goal Setters

Like any other kind of planning, MBO requires that adequate guidelines be provided to those who
are expected to set goals. In other words, managers must understand what the corporate goals are and
how their own activities will contribute toward achieving these goals. If the corporate goals are vague,
unreal or inconsistent, it may not be possible for managers to tune their activities to match the goals.
Managers should also be aware of the planning premises and the major policies of the company. They
should have a good understanding of how organizational policies affect their areas of operation. This will
help them to effectively plan their activities to ensure that their departmental goals match that of the
organization.
Difficulty in Goal-setting
MBO requires verifiable goals against which performance can be measured. However, it may be quite
difficult to set such goals. Also, excessive emphasis on economic results puts undue pressure on individuals
and may even lead to unethical behaviour. In order to reduce the chance of the use of unethical means
for achieving goals, top management must set reasonable objectives and clearly state behavioural expectations.
It should also give a high priority to ethical behaviour and ensure that unethical behaviour is punished.
Emphasis on Short-term Goals

In order to achieve quick results, managers generally emphasize short-term goals. As a result, there
is always the danger of emphasizing short-terms goals at the expense of long-term goals. Therefore, top-
level managers should ensure that short-term goals contribute to the achievement of the long-term goals
of the organization.
Inflexibility
When there are revisions in organizational objectives, premises and policies, managers must make
corresponding changes in their own objectives. If they do not, their goals become obsolete. However,
managers are often unwilling to change their goals. Striving for goals that have become obsolete nullifies
the efficacy of revising organizational objectives, and modifying its policies.
Other Dangers
The implementation of MBO gives rise to some problems. For instance, in their desire to make goals
verifiable, managers may make excessive use of quantitative goals, or may set quantitative goals in areas
where they are not applicable. In the process, they may downgrade important goals that are difficult to
state in terms of end results. Often, in spite of having the participation and assistance from superiors,
managers may fail to use objectives to bring about constructive change in the organization. There is also
the fear of managers getting excessively involved in the MBO process and forgetting that managing involves
more than goal-setting. Difficulties may also arise in applying goal-oriented planning in a dynamic and
complex environment.
Some other weaknesses of MBO are listed below:
1. It takes too much time and effort and involves too much paperwork.
2. It necessitates training of managers.
3. It tends to falter without strong, continual commitment from top management.

4. Its emphasis on measurable objectives can be used as a threat by overzealous managers.
5. It can lead to considerable frustration if one manager’s efforts to achieve goals are dependent on
the achievement of goals of others within the organization. Group goal-setting and flexibility are
required to solve this type of problem.
MAKING MBO EFFECTIVE

MBO is certainly not a simple process that can be quickly and easily implemented. Its implementation
requires a change in the very culture and environment of organizations. Many organizations failed to apply
this process successfully as they were hesitant to accept change. Others could not create the proper
environment required for the adoption of MBO. Some of the prerequisites for implementing the MBO
program and making it effective are discussed below.
Top Management Support

The degree to which an MBO programme in an organization is likely to succeed depends on the
extent of top management support it receives. In order to keep the MBO programme alive and fully
functional, the top management must provide continual support to the subordinates. Top-level commitment
for the MBO programme is also essential for its acceptance by employees. Middle-level managers and
managers at the supervisor level may revert back to the traditional and authoritarian methods of managing
if they find it difficult to set and review objectives. Top managers must be aware of these tendencies. They
should therefore provide continuous support to make the MBO programme an important part of the
organization’s operating procedures.
Exhibit 5.6 Evaluation of MBO
Despite the immense popularity of MBO, it just seems to be industrial engineering with a new name. The
typical MBO effort seems to intensify hostility and resentment between a manager and subordinates –
something seems to go wrong between the concept of MBO and its implementation. MBO as a practice is
supposed to:
- Provide a clear idea about the job to be done and what is the result expected.
- Connect individual performance with goals of the organization.
- Measure and judge performance.
- Enhance communication between the subordinate and the superior.
- Serve as a device for organizational control and integration.
- Serve as a platform for judging salary raise and promotion.
Major problems faced in the MBO process:
1. It is very difficult to pinpoint the specific objectives which determine a subordinate’s effectiveness.
2. As goals and objectives are pre-determined, an individual has little scope for creativity, spontaneity and
innovation.
3. Most job descriptions do not take into account the increasing interdependence of managerial work in
organization.
4. The setting of objectives is done over a very short span of time, which may not allow adequate interaction
among different levels of an organization.
5. Superiors also feel that they are behaving in an unkind manner by making judgements about another
person’s worth. They dislike this aspect to a great extent and this causes MBO to fail at times.
6. Subordinates are appraised on the basis of the compatibility of their goals with those of their superiors
and how well they work with their superiors to accomplish the latter’s goals. This is a subjective area
and bias tends to creep into the MBO process.
Three steps have been suggested to overcome these problems:
Motivational assessment– The MBO programmes should motivate the subordinates and it is necessary for
an organization to evaluate its MBO programme. Every MBO programme and its performance appraisal
system should be analyzed to understand the extent to which it fosters a genuine partnership between the
employee and the firm.
Group action– Every MBO programme should include group goal setting, group definition of individual and
group tasks, the appraisal of group accomplishment by the group itself, group appraisal of each member’s
contribution to group effort and shared compensation based on the relative success with which group goals
are achieved. Objectives should include both long-term and short-term objectives.
Appraisal of appraisers– Every MBO programme should also have a regular appraisal of the manager by
his subordinates which should be reviewed by the manager’s superior. Every manager’s compensation should
depend upon how well he develops people as shown by such appraisals.
The purpose of MBO is defeated due to the problems mentioned earlier. To improve the quality of the MBO
programmes and to make it successful, the fundamental managerial consideration must be this question:
“How can we meet both individual and organizational purposes?”
Adapted from Harry Levinson, “Management by Whose Objectives?” Harvard Business Review, Vol.81, Issue 1
(January, 2003): p107, 10p.
Training for MBO

Systematic training is required to help employees understand the concepts and philosophy underlying
MBO. Managers should receive adequate training regarding the implementation of MBO process and the
benefits that MBO brings to them and the organization. If the managers are not properly trained, they may
resist the MBO programme, thus making it unsuccessful.
Formulating Clear Objectives

The success of an MBO programme depends on the nature of the objectives set. Managers and
subordinates should decide on objectives that give a real indication of performance. The objectives must
be realistic and easy to understand. At times, managers may have to be trained in setting useful and
measurable goals and communicating the same to their subordinates effectively.
Effective Feedback
In addition to setting realistic goals, managers must carry out regular performance reviews and
provide feedback to subordinates. The success of an MBO programme essentially depends on the participants
knowing where they stand in relation to their objectives.
Managers should provide feedback through written reports and counselling sessions. Individuals should
receive periodic reports on their overall performance and they should be called for periodic counselling and
appraisal interviews, during which the superior helps subordinates evaluate their progress and identify
problems. During these counselling and interview sessions, the superior can also offer planning suggestions
to subordinates to improve their performance.
Encouraging Participation
To be successful, MBO programmes should ensure commitment and participation in the MBO process
at all levels of the organization. Participation by subordinates in goal-setting may require some reallocation
of power. Managers must encourage subordinates to take a more active role in defining and achieving their
own objectives. This may make some managers feel uncomfortable as they may perceive it as a loss of
power, but an MBO programme can be effective only if the managers relinquish some control.
Though the above prerequisites can help make an MBO programme effective, the key to the success
of MBO programmes lies in the beliefs, assumptions and attitudes of subordinates and managers. MBO
techniques work well when managers hold Theory Y assumptions and the actions and attitudes of
subordinates are consistent with these assumptions. In other words, Theory Y managers and subordinates
are an ideal combination for MBO. This combination is depicted in Box 1 of Figure 5.3.
Other combinations of managers and subordinates are also shown in Figure 5.3. If managers follow
the assumptions made by Theory X, and subordinates fit these assumptions, successful implementation of
MBO is highly unlikely. This combination is depicted in Box 3 of Figure 5.3. Although managers may use
these techniques, inwardly they may believe that this approach will not work. In addition, unlike the earlier
two combinations, the outcome of the MBO process may also depend on who changes – the manager or
the subordinate. These situations are depicted in the other two boxes (Box 2 and Box 4) of Figure 5.3.
In Box 2 of the figure, the manager’s positive view of his subordinates and MBO procedures may change
subordinates who believe in Theory X and develop them to the point where they fit Theory Y assumptions.
In such a case, an MBO programme would have a good chance of succeeding. If the situation turns out
to be as described in Box 4, success can result if the manager applies MBO techniques carefully and
earnestly, even though he or she doubts its efficacy. Managers may reevaluate some basic assumptions
based on the positive reactions of subordinates.
MANAGER’S ASSUMPTIONS ABOUT SUBORDINATES
THEORY X THEORY Y
SUBORDINATES’ ATTITUDES
High likelihood of
THEORY Y
Success/failure
depends on who success!
AND BEHAVIOURS
changes
(?) 4 1
3 2
THEORY X
High likelihood of Success/failure

failure! depends on who
changes
(?)
Fig. 5.3 Likelihood of Success of MBO Programmes
Source: James A. F. Stoner and Charles Wankel, Management (New Delhi: Prentice-Hall of India Private Limited,
Sixth Indian Reprint, 1987) 104.
SUMMARY
Objectives are the important ends towards which organizational and individual activities are directed.
Clear and verifiable objectives facilitate the effective and efficient management of organizations. Management
by Objectives (MBO) is an effective planning tool that helps supervisors set objectives. MBO has come
a long way since it was first suggested by Peter Drucker as a way of promoting managerial self-control.
It has been used to appraise performance, to motivate individuals, and recently, for strategic planning.
MBO aims at achieving organizational objectives and enhancing employee commitment and
participation. MBO is a cyclical process. It involves developing overall organizational goals, clarifying
organizational roles, establishing specific goals for various departments and individuals, formulating action
plans for various departments and individuals, implementing and maintaining self-control, carrying out
periodic reviews, and conducting performance appraisal of employees.
MBO offers several benefits. It leads to better management of resources, clarity in organizational
action and more satisfied personnel. It encourages personal commitment, provides a basis for organizational
change and leads to the development of effective controls. However, MBO has its drawbacks. It takes up
too much time and money and can be inflexible. Moreover, failure to teach the MBO philosophy and lack
of proper guidance to goal-setters may lead to its unsuccessful implementation. In order to overcome these
limitations and make MBO effective, the support of the top-level managers is essential. They must formulate
clear objectives, encourage participation at all levels, and provide training to people who would be
implementing the MBO programme.
Competitive Challenges for Carmakers

The interdependencies of countries can best be illustrated by the global automobile war.
There are large number of companies producing innumerable varieties of cars, buses and
trucks sold all over the world. The competition is so fierce that no country has a clear
competitive advantage in all areas. In executive leadership, the American Lee lococca of
Chrysler is often mentioned. In prestige, the European Mercedes-Benz is frequently cited. The
CASE STUDY
Japanese are considered tough competitors known for high productivity and adaptability.
More recently inexpensive Korean cars have entered market including US and India. The
beneficiaries of this competition are the car buyers who can choose from a great variety of
features such as Japanese reliability, European handling, and the comfort of the traditional
American family car.
The car companies, however, face many problems besides competition – overcapacity in
the United States and Europe; traffic congestion in metropolitan areas, which may limit the
demand for cars; increasing concern about protectionism in Europe as well as in Japan; and
other difficulties. Estates. Although it has not yet materialized, there is an enormous expected
demand for automobiles in less developed countries.
How, then do the world’s carmakers respond to or prepare for such challenges? Each
company tries to use its own strength to compete in the world market. Fiat, an Italian car
company, seem to have worked out its labour problems and can now focus on beating
Volkswagen, the European leader. The strength of VW, on the other hand, is its automated
assembly line. Moreover, VW has cooperative ventures with over ten automakers, including
the German Daimler-Benz and Porsche, Japanese Nissan, Swedish Volvo, and Spanish
SEAT.
Germany has become the second-largest market for Japanese cars (the largest is the United
States). The strategy of Japanese automakers in Germany is similar to that in the United
States: Get into the market, learn from mistakes and correct them quickly, listen to the
customers, and have a flexible production line to adapt to customers’ tastes. Carl Hahn, the
chairman of VW, admitted that the Japanese cannot be beaten on productivity. The motto
underlying a joint project with the Japanese seems to be “If you can’t beat them, join them.”
Thus, Volkswagen and Toyota will produce pickup trucks designed by the Japanese.
Listening to the customers was one of the keys to success of Japanese car companies in
Germany. They changed their styling to accommodate European preferences, and they equipped
their cars with better suspension and steering to make them suitable for the German freeways,
which have no speed limit. Similarly, they identified the need for minivans and four-wheel-
drive vehicles and offered models to fill those needs.
One reason many Japanese carmakers can respond quickly to changes in the market is the
fact that they deal with many suppliers. It has been estimated that Toyota, for example, buys
about 80 per cent of its parts from suppliers. The company also strengthened its market
position in the United States by a joint venture with General Motors, producing cars in
Fremont, California. In-deed, many Japanese carmakers have cooperative arrangements with
foreign companies. The exception is Honda, which is quite independent. With its Japanese
facilities used to its limits, Honda was one of the first foreign manufacturers (besides VW,
which has closed its US plant) to establish itself in the United States. The company’s success
led to the introduction of a new luxury car marketed under the Acura label.
In the past, General Motor’s full model line and its enormous size were considered strengths.
But it is now realized that these characteristics can also be weaknesses, hindering quick
adaptation to changes in the environment. GM’s vertical integration, in which the company
produces some 70 per cent of its own parts, may also contribute to its inflexibility. Although
GM operates worldwide, there has been little cooperation between the US Company and its
foreign subsidiaries in the past. In contrast, Ford Motor Company has become truly international,
with close coordination among its design centres in the United States, England, and Germany.
Chrysler has enlarged its capacity through the purchase of American Motors. The company
tries to stay competitive by adapting to changes in consumer demands through the use of
flexible manufacturing techniques. It is quite clear now that executives of major car companies
have to take a global view of their business. While opportunities have been increased by
internationalization, threats are always present. Ashiftin, the director of the interdependent
economies or a dramatic change in oil prices can make or break the automobile market. The
challenges for the car makers’ executives are great indeed.
1. Why have Japanese car companies been so successful in the United States, Germany and India?
2. What of organization structure is best for competing in the international car war? Why?
][][
Strategies, Policies
and Planning
6
H Nature and Purpose of Strategies and Policies
H The Three Levels of Strategy
H Strategic Planning
H Competitive Analysis in Strategy Formulation
H Major Kinds of Strategies and Policies
H Porter’s Competitive Strategies
H Strategy Implementation
H Effective Implementation of Strategy
H Planning Premises
Chapter 6 Strategies, Policies and Planning 107
INTRODUCTION
Changes in the business environment are taking place at a rapid pace. The top management of an
organization therefore needs to respond accurately and efficiently to these changes and effect a concurrent
change in the direction or course of action adopted by the organization. To face these contemporary
challenges, business firms are increasingly relying on the use of strategic planning. Organizations differ
from one another in their degree of formality, complexity and sophistication. So, the kind of strategic
planning each organization undertakes also differs. Strategic planning is the formalized, long-range planning
process used to define and achieve organizational goals. Strategic planning involves understanding present
and future trends, determining the direction in which the firm is headed, and developing the means to
achieve the organization’s goals. Strategic planning is a very complex process. The impact of various
external factors on the functioning of the firm and the utilization of these factors to the firm’s advantage
are also part of the process of strategic planning.
Planning is usually done in an environment of uncertainty. Since it is difficult to predict the future,
people make assumptions or forecasts about what the environment might be. Some of the forecasts
become the basis for other plans. For instance, the estimated market demand in a particular industry
becomes the basis for making estimates for sales planning, which, in turn, become the basis for production
planning, and so on.
In this chapter, we will discuss the nature and purpose of strategies and policies, the three levels of
strategy, the strategic planning process, competitive analysis in strategy formulation, major kinds of strategies
and policies, Porter’s competitive strategies, strategy implementation, effective implementation of strategy,
and the premises for planning.
NATURE AND PURPOSE OF STRATEGIES AND POLICIES

Strategies and policies are closely related terms. They provide a direction or a sense of purpose to
an organization. They form the basis for operational plans and influence the other areas of management.
Strategy refers to the determination of the mission (or purpose), and the basic long-term objectives
of an enterprise and the adoption of courses of action and allocation of resources necessary to achieve
these aims.
Policies are general concepts or statements that guide managers’ thought processes and behaviours
when they make decisions. Policies are framed to make sure that managerial decisions are made within
defined parameters. Although it is not essential that policies be necessarily followed by action, they serve
as guides to ensure that managers remain committed to the decisions they have made.
Though the above statements give different definitions for the terms strategy and policy, it is possible
that they mean the same thing in certain instances. For example, a company may plan to develop new
products that fit into its marketing plan, as an essential element of the company’s strategy. In the same
way, a company’s plans to distribute only through retail outlets, may be an essential element of its strategy.
While growth through acquisitions may be the policy of one company, expanding the present market or
product line may be the policy of another firm. Although the above examples can be considered as policies,
they are also crucial components of major strategies. Thus, one logical way to distinguish between policies
and strategies is that while policies are guidelines which help a manager in decision-making, strategy
requires the organization to commit its resources in a specific direction.
The nature and purpose of strategies and policies are discussed below:
The Key Function: Giving a Direction to Planning

The key function of strategies and policies is to give a specific direction to plans. They serve as a
guide to the achievement of organizational goals. Strategies and policies influence an organization’s
progress and growth. They try to provide answers to some vital and crucial questions such as: (a) What
business are we in? (b) What business should we be in? (c) Who are our customers?, etc.
The Guide: Furnishing a Framework for Plans

Strategies and policies help managers to prepare plans. They are equally helpful in guiding operational
decisions. The basic principle of the strategy and policy framework states that ‘the more clearly strategies
and policies are understood and implemented in practice, the more effective and consistent will be the
framework for enterprise planning.’ For instance, if the introduction of new products into the market is the
major policy of a company, it will allocate more resources to research and development activities, and this
is in turn reflected in its budget preparation.
The Need for Operational Planning: Tactics

In order to be effective, an organization must put its strategies and policies into practice by means
of plans. Tactics are the action plans with the help of which organizations execute their strategies. Further,
if strategies are to be effective, they must be supported by effective tactics.
The Effect on all Areas of Management

Strategies and policies affect planning. As planning is the initial step in the management process,
other areas of management are also greatly influenced by the predetermined strategies and policies. For
instance, major policies and strategies influence the organizational structure, and these in turn influence
the other functions of a manager.
THE THREE LEVELS OF STRATEGY

Arthur A. Thompson and A.J. Strickland describe three types or levels of strategies: (i) corporate-level
strategy, (ii) business-level strategy and (iii) functional-level strategy. Figure 6.1 shows these three levels of
strategy.
Corporate-level Strategy
The purpose of a corporate-level strategy is to identify the business areas in which an organization
will carry out its operations. It also states how these businesses can be coordinated in order to make the
organization more competitive in the marketplace and how resources can be allocated among the various
businesses in an organization. Thus, an organization operating in more than one area of business needs
a corporate-level strategy. The development of corporate-level strategy is generally the responsibility of the
top management in association with the strategic planning personnel of the organization. Corporate
strategy states a comprehensive action plan for the entire corporate organization and tries to determine
the scope, range and role of each constituent business. Stephen C. Wheelwright has identified two major
approaches that managers can adopt to develop better corporate strategy. These are: (i) the values-based
approach, and (ii) the corporate portfolio approach.
The Values-based Approach

The values-based approach is based on the values, that is, the beliefs and convictions of the managers
and employees of the organization. The long-term direction for the organization as to how it should
conduct its business, is determined on the basis of these values. The strategies developed by adopting the
values-based approach are undertaken gradually and in an incremental manner by obtaining the consensus
of all the members of the organization. These strategies provide broad guidelines rather than narrowly-
focused plans.
The Corporate Portfolio Approach

The corporate portfolio approach is a rational and analytical approach and involves the evaluation
of the various business units of an organization by its top management. The business units are evaluated
on the basis of their performance relative to their competitors and their internal makeup (organizational
structure, systems and processes). Having evaluated each business unit, the top management develops a
strategic role for each unit that would lead to an improvement in the overall performance of the organization.
Corporate strategy
Mission
Business unit strate gy Business goals
Competencies
Func tional Human Research and Marketing Finance Manufacturing

strate gy resources development
Fig. 6.1 Three Levels of Strategy in an Organization
Adapted from “Strategic Planning,” http://www.civ.utoronto.ca/sect/coneng/tamer/Courses1299/lectures/the%20business/

Strategy-web.pdf
The BCG matrix

The BCG matrix was devised by the Boston Consulting Group, a leading management consulting
firm, in the 1970s. It is a widely used method of portfolio management and helps businesses evaluate their
business portfolios to estimate their profitability. The matrix provides diversified organizations with an
effective framework for evaluating the relative performance of their various businesses.
Exhibit 6.1 Corporate Strategy of Goodlass Nerolac Paints Ltd.
Goodlass Nerolac Paints, a leading Indian paint manufacturer for more than 80 years, is well-known for
pioneering a range of quality paints. It is the second largest paint company in India and is the market leader
in the industrial paints segment. The company has a turnover of Rs 760 crores and has five strategically
located manufacturing units nationwide. It also has a strong dealer network of around 11,000 dealers. It
manufactures a range of diverse products, from architectural coatings for homes, offices, hospitals and hotels
to sophisticated industrial coatings.
Goodlass Nerolac’s corporate strategy for the latter half of 2002, (to be precise, the festival season beginning
September 2002), focused on its brand ‘Nerolac Paints.’ The strategy reinforced Nerolac’s image as providers
of complete paint solutions to its customers. It also aimed at keeping its leadership position intact. A couple
of years ago, Goodlass Nerolac Paints had stopped corporate advertising and had embarked on a strategy
of building individual brands. It had launched “Nerolac Excel,” a premium exterior paint brand, “Nerolac
Allscapes – 24 Karat,” an interior emulsion, and “Nerolac Suraksha,” an economy exterior paint. All these
brands were runaway successes. In 2002 the company changed its strategy and again tried to reinforce its
corporate image. As a part of this strategy, the company designed a new television commercial and developed
various promotional plans for the festive season. The television commercial featured two well-known television
actresses, Smriti Malhotra Irani and Sakshi Tanwar, but retained the very popular Nerolac jingle, “Jab ghar
ki raunak badhani ho” (with a fresh touch of Gujarati folk tunes). The television commercial also showed
innovative bright colours, keeping in mind market trends. For the past two years, Goodlass Nerolac had been
offering a variety of colour schemes quite different from the outdated neutral and pastel shades.
Nerolac was the only paint company to launch a grand promotional campaign for the festive season. This
campaign included contests on a daily basis for 60 days, and concluded on Diwali day, that is November
4, 2002. The company also had a grand scale “Har Din Diwali” contest. Customers could participate in this
contest by purchasing any of Nerolac’s products. This contest offered exciting prizes, amounting to Rs 50,000
on a daily basis. The prizes included electronic goods like television sets, washing machines, VCRs,
refrigerators and microwave ovens from Samsung. The bumper prize for the contest was a grand Honda City
car. Goodlass Nerolac thus revamped its corporate image through a new campaign and a fresh look for the
festive season.
Adapted from “Goodlass Nerolac Plans Aggressive Campaign,” 7 September 2002, The Information Company Pvt.
Ltd.,<http://www.domain- b.com/companies/companies g/goodlass_nerolac/20020907_campaign.html>
Firms that adopt the BCG approach of portfolio management focus on three aspects of a particular
business unit. These are: the volume of sales achieved by the particular unit, the growth of its market size,
and whether the unit functions as a cost centre or as a profit centre in its operations. The BCG approach
tries to bring about a balance among the business units that generate revenue and those that consume it.
In a BCG matrix, business units can be plotted according to the growth rate of the industry they are
operating in and according to their relative market share. The businesses of a diversified organization are
classified, according to their characteristics, as “question marks”, “stars”, “cash cows” and “dogs.” Figure
6.2 shows a BCG matrix.
A business unit in the “question mark” category has a relatively low market share in a rapidly
growing market. Businesses plotted in this quadrant are also called “problem children.” The future
performance of such business units/businesses is uncertain. Even though a question mark has a low
market share and yields minimal or even negative profits and cash flow, the rapid growth taking place in
the market may compel the business unit to invest heavily in its operations merely in order to maintain
its market share. Further, if the parent organization wishes to increase the market share of a question
mark, it will require still larger investments. Nevertheless, a rapidly growing market offers exciting opportunities
to an organization provided it adopts the right business strategy and is able to obtain funds to implement
the strategy.
Stars Q uestion m arks
High
M AR KET G RO W TH RA TE
(breakeven low profits) (unprofitable, investment
Cash use for future)
C ash cows Dogs

(profitable) (breakeven, marginal
Low
profit)
High Cash generation Low

R ELA TIVE M AR KET SH AR E
Fig. 6.2 The BCG Matrix
Source: John L. Thomsan, “Strategic Management - Awareness and Change,” 2nd edition (UK: Chapman & Hall,
1996) p310
A question mark that is able to capture increasing amounts of this growing market will be very
profitable for a firm in the long run. On the other hand, a question mark that is unable to match the market
growth is likely to have low profits. The BCG matrix suggests that organizations should invest carefully in
question marks. Businesses in the question mark quadrant require cash inflows to become stars. If they
cannot be converted into stars then the cash inflow into such businesses should be discontinued.
A business unit in the “star” category enjoys a relatively high market share in a rapidly growing
market. Such a business unit is usually quite profitable. As these businesses are currently very competitive
and have rapid growth potential, they require huge investments and working capital in order to keep
growing. Therefore, the profits generated by stars are used up to finance their growth.
“Cash cows” are businesses that have a relatively high market share in a market which is growing
slowly. They are both profitable and a source of surplus cash. As the growth rate of the market is very
low, the business need not invest huge sums of money to maintain its position in the market. Thus, the
high profits that a cash cow generates can be used to support question marks and stars (cash cows are
“milked” for cash to support businesses in markets that have greater and faster growth potential).
Finally, “dogs” are businesses that have a relatively low market share in a market that is either
growing very slowly or is declining. A dog is a moderate user and/or supplier of cash. As such businesses
do not hold out much economic promise, the BCG matrix suggests that organizations should either not
invest in them or should consider selling them as soon as possible. In other words, they should get out of
these businesses as soon as possible. The position of business units in the BCG matrix does not remain
constant over time. Instead, with growth in the market and corresponding changes in their relative market
share, business units change their position in the matrix. They begin as question marks, then become stars,
and later into cash cows, and are finally transformed into dogs.
To be successful, firms should evaluate the performance of their business units from time to time.
Keeping in consideration the sequence followed by business units in the BCG matrix, firms should visualize
the position their business units are likely to occupy in the matrix in the near future. This helps firms invest
the profits generated by cash cows and the more successful dogs, in question marks to increase their
relative market share and transform them into stars. With the passage of time and a subsequent slow down
in the market growth rate, the stars will ultimately become cash cows and generate excess cash which can,
in turn, be invested in new question marks.
Business-level Strategy
These days, many organizations have a number of distinct strategic business units. A strategic business
unit (SBU) is a relatively independent business that can function to a certain extent, on its own. Each SBU
has its own unique set of goals, competitors and strategies. The business unit has its own strategies to
accomplish its goals.
The focus of business-level strategy is on determining the best ways of operating a particular business
in accordance with the corporate-level strategy. Business-level strategies attempt to identify ways and
means to achieve a competitive advantage. They also try to respond appropriately to changing environmental
and competitive conditions, and help in allocating the resources of the business unit. Usually, business
strategies are developed by the heads of the respective business units, subject to the approval of top
management. At this level, managers are not required to decide what business to be in (as at the level of
corporate strategy), but to develop a business strategy, i.e. formulate plans to take best advantage of the
firm’s areas of distinctive competence in a particular market. If the organization is involved in only one
business, the corporate-level and business-level strategies are the same. The corporate-level and business-
level strategies differ only in organizations which conduct more than one business in different industries.
Functional-level Strategy
This strategy focuses on developing action plans for managing a particular functional area within a
business. The functional areas include research and development, manufacturing or operations, marketing,
human resources and finance. Functional-level strategies help the organization to develop strong functional
competencies that enable it to gain a competitive advantage over its competitors.
STRATEGIC PLANNING
Strategic planning is defined by Stoner and Wankel as “the process of selecting an organization’s
goals, determining the policies and programmes necessary to achieve specific objectives en route to the
goals, and establishing the methods necessary to assure that the policies and strategic programmes are
implemented.” In other words, strategic planning is the process of developing long-term plans that help in
defining and accomplishing an organization’s goals. It involves setting out the organization’s objectives and
laying down specifications as to how they ought to be accomplished.
Characteristics of Strategic Planning

The following are some of the characteristics of strategic planning:
(i) Strategic planning deals with and provides answers to certain basic questions pertaining to the
organization such as, “What business are we in and what business should we be in?”, “Who are
our customers and who should our customers be?” and “What goods or services are we going to
offer?”
(ii) Strategic plans are formulated for a long-term period.

(iii) Strategic planning is based on long-term forecasts and appraisal of the external environment.
(iv) It helps an organization to prioritize its activities and to focus its resources on the most important
activities.
(v) The top-level management is responsible for formulating strategic plans for the organization, since
top-level managers have the vision as well as the conceptual and design skills necessary to consider
various aspects for the overall benefit of the organization. Moreover, only if the top-level management
is committed, can the support and commitment of subordinates for implementation be obtained.
(vi) Strategic plans enable a manager to plan daily activities in a detailed manner.
Strategic Planning vs Operational Planning

Strategic planning is the planning activity of an organization in which the top management plays the
most crucial role. Operational planning, on the other hand, is the planning activity that takes place at the
lower levels. Strategic planning provides guidance and defines the boundaries for operational planning.
Thus, there is considerable overlap between the two types of planning activities. However, it should be
noted that the emphasis of strategic planning is on doing the right things, whereas the emphasis in
operational planning is on doing those things right. Thus, strategic planning focuses on improving
organizational effectiveness to counter the challenges posed by competitors, while operational planning
focuses on enhancing the efficiency of employees within the organization. Strategic planning also lays
down the major goals and policies of the organization, in contrast to operational planning, which decides
the use of organizational resources in day-to-day operations. Both strategic and operational planning are
necessary for the growth of an organization. In order to be effective, the management of an organization
must have a strategy and it must also ensure that the day-to-day activities of the organization at the
operational level help it achieve the goals laid down in the strategy.
Significance of Strategic Planning

In recent years, the importance of strategic planning for managers and for the effective management
of organizations has grown substantially. Most organizations now recognize the significance of strategic
planning for the long-term growth of the organization. Strategic planning provides management with a
framework for the activities of the organization. Such a framework, in turn, helps the management to
improve the functioning of the organization and its responsiveness to the environment. It provides direction
for an organization’s mission, objectives, and strategies, and facilitates the development of plans for each
functional area of the organization.
In addition to providing managers with a clear picture of the activities of the organization, strategic
planning also makes it possible for them to formulate plans and activities that can help the organization
achieve its goals. Another benefit of strategic planning is that it enables managers to prepare for and deal
with the rapidly changing environment in which their organizations conduct business. When the pace of
change was slower, managers operated on the assumption that the future would be similar to the past.
They established goals and plans based on past experiences. Today, events take place too rapidly for
experience to always be a reliable guide, and managers must develop new strategies to counter the unique
problems and opportunities of the present and the evolving future.
Some of the other benefits of strategic planning are listed below:

It provides managers with consistent guidelines on how to carry out organizational activities.
Further, strategic planning helps managers frame clearly defined objectives for the organization,
and methods to achieve them.
It helps managers make appropriate decisions. A careful analysis of available opportunities when
strategic plans are being drawn up, provides managers with additional information and assists
them in making good decisions.
During strategic planning, the goals, objectives, and strategies of the organization are carefully
scrutinized. Thus, strategic planning minimizes the chance of making mistakes and lessens the
scope for unpleasant surprises.
It helps managers to anticipate problems before they actually occur and deal with problems before
they become critical.
Limitations of Strategic Planning

Strategic planning is not free from inherent limitations. The following are some of the disadvantages
of strategic planning:
It is very expensive. In order to develop effective strategic planning systems, some companies invest
heavily in consultants, planning staff, and expensive, sophisticated models and planning programmes.
The financial resources of the company deployed for this purpose may not be available for other
purposes.
The planning staff drawing up strategic plans may take decisions based on abstract concepts
instead of taking decisions based on the real needs of the business.
Strategic planning does not yield obvious and immediate results. It requires considerable investment
in time, money, and people and may take years to produce results.
Strategic planning can be a lengthy and time-consuming process. A strategic plan can and often
does take up to two years to be drawn up. It cannot be completed in a short span of time.
Strategic planning sometimes encourages the firm to adopt the most rational and risk-free option.
Managers may develop only risk-free objectives and strategies that can survive the detailed analysis
that takes place during the planning process. They may thus avoid considering options that may
involve high degrees of risk and uncertainty and which may be difficult to analyze and communicate.
It may take time for the process of strategic planning process to begin to function smoothly. Till
this happens, the organization may be rather slow and uncertain in making decisions pertaining
to important issues that affect the organization. So, strategic planning may result in the loss of
several opportunities for the firm.
Strategic Planning Process

Managers involved in strategic planning aim at translating the broad intentions of the firm into more
concrete and measurable strategic plans, policies and budget allocations. Many managers refer to strategic
plans as “action plans,” because developing strategic plans forces managers to analyze broad organizational
issues thoroughly instead of focusing exclusively on short-term organizational matters. The six steps involved
in the process of strategic planning are depicted in Figure 6.3. Each step is discussed in detail in the
following section:
Identify Formulate
Analyze the opportunities strategies
environment and threats
Identify Reassess Implement

mission, mission and strategies
objectives objectives
and strategies
Analyze Identify
the firm’s strengths and Evaluate
resources weaknesses results
Fig. 6.3 Strategic Planning Process
Source: “Management Planning,” <http://www.uvawise.edu/frey/planning.pdf>
Step one: Defining the mission of the organization

The first step in the process of strategic planning is to define the mission of the organization. The
mission of a business is a general and lasting statement and describes the fundamental purpose for which
it exists. The mission of an organization differentiates the organization from other organizations of the
same kind. It should basically address three important issues: (i) What is the business we are in? (ii) Who
are our customers? and (iii) What goods or services will we offer?
In addition to identifying the salient reasons for which an organization exists, mission statements
provide guidelines for future decisions. The mission statement of an organization provides the basis for
determining the priorities, strategies, plans and work assignments of the organization. Companies may
change their missions over a period of time to reflect changes in the external environment or management
philosophy. However, at any given point of time, the mission serves as a guide for managerial thought and
action. Understanding its mission helps a company determine its specific objectives and goals.
Step two: Drawing up organizational objectives

After defining an organization’s mission, the next step is to determine the means of accomplishing that
mission. This is done by formulating a set of objectives that the organization must achieve within a
specified period of time. Objectives help organizations improve their effectiveness in three ways: they
provide the organization with a direction, they set standards to evaluate the organization’s performance,
and they motivate the employees of the organization to perform better. The goals of the organization in
terms of profitability, customer service, and social responsibility help to define its objectives. Formulating
appropriate objectives is very important for the success of an organization since objectives provide the
foundation for planning, policy-making, and setting performance standards.
Step three: Assessing organizational resources, risks and opportunities

The third step in the process of strategic planning is an analysis of the organization’s strengths and
weaknesses. These are then compared with those of other organizations. At this stage, the risks and
opportunities present in the environment in which the firm operates, are also evaluated. Organizational
factors have a significant role to play in determining the effectiveness of different strategies in achieving
organizational objectives. A SWOT analysis of the firm helps in assessing its strengths, weaknesses,
opportunities and threats. SWOT analysis is discussed in the next section.
Step four: Formulating strategy

After an organization analyzes its resources, and the environment within which it operates, the next
step is to formulate a strategy. This involves identification, evaluation and selection of strategic alternatives.
Identification of strategic alternatives: An analysis of the environment and the firm’s capabilities
helps a firm determine the various strategic alternatives available to it. Some of these alternatives could
be: to explore new markets; to redesign important products to improve their quality or reduce costs; or,
to invest in promising sectors. A limited number of alternatives may be generated if only a minor change
in the existing strategy is required. But if a totally different strategic approach is required, then more
alternatives must be identified.
Evaluation of strategic alternatives: After identifying the various strategic alternatives, they have
to be carefully evaluated before a final selection is made. According to Richard R. Rumelt, the various
strategic alternatives can be evaluated on the following criteria:
The strategies and their component parts should have consistent goals, objectives and policies.
The strategies should focus organizational resources and efforts on resolving the crucial issues
identified during strategy formulation.
Strategic alternatives should attempt to resolve problems with the help of organizational resources
and skills.
Finally, the strategies should be able to produce the intended results.
While evaluating strategic alternatives, the management should focus on a particular product or
service, and on the competitors of the firm, and should reject those alternatives that fail to create a
competitive advantage for the firm.
Selection of strategic alternatives: After evaluating different alternatives, the best among them
should be selected. For selection of the best alternative, the manager should consider those alternatives
which make the best use of an organization’s capabilities and resources. The choice of strategy depends
upon various factors such as the perception of management, the external environment, the attitude of
management towards risk and the strategies previously implemented in the organization.
Step five: Implementing strategy

After a strategy is formulated, the organization must implement it. Tactical and operational plans
should be designed to help in the successful implementation of the firm’s strategic plans. Tactical plans
focus on allocation of organizational resources for the various short-term activities of the organization.
These are developed by managers at the functional level. It is, therefore, the responsibility of the managers
of various functional areas such as production, finance, human resources management, and marketing,
to formulate short-term departmental plans that help the organization to implement its strategic plans
successfully.
Step six: Monitoring and adapting strategic plans

Monitoring and adapting strategic plans ensures that the actual performance of the organization
matches its expectations. Appropriate control mechanisms help in acquiring feedback and in monitoring
strategic plans. Feedback enables the manager to determine the effectiveness of a particular strategy. It also
helps to determine whether the actual performance is in accordance with the formulated strategy and
whether the strategy helps to accomplish the organization’s objectives.
COMPETITIVE ANALYSIS IN STRATEGY FORMULATION

In order to formulate an effective strategy for gaining a competitive edge, managers need to analyze
thoroughly their organization’s competitive situation. This can be done by assessing both environmental
and internal factors that influence the effectiveness of the organization. SWOT analysis is a technique for
analyzing a firm’s competitiveness by assessing the organization’s strengths and weaknesses and the
environmental opportunities and threats.
SWOT is an acronym for strengths, weaknesses, opportunities and threats. SWOT analysis evaluates
the firm’s internal strengths and weaknesses and the impact of environmental opportunities and threats.
An organization should evaluate its internal characteristics to determine its strengths and weaknesses, and
the relevant external environmental factors to determine the opportunities and threats.
In order to carry out a SWOT analysis, one should first know what these terms mean. A strength is an
internal characteristic that has the capacity to improve the organization’s competitive situation while a
weakness is an internal feature that may cause the organization to be susceptible to competitors’ strategic
moves. An opportunity is an environmental condition that an organization can exploit to improve its
competitiveness and get ahead of its competitors. On the other hand, a threat is an environmental condition
that can adversely affect the organization’s competitive ability. Some issues that might be considered in
SWOT analysis are shown in Table 6.1
Table 6.1: Major Issues to Consider in SWOT Analysis
Ability to take advantage of economies of scale and /or Missing some key skills or competencies/lack of
learning and experience curve effects management depth/a deficiency of intellectual capital relative
to leading rivals
Proprietary technology/superior technological Subpar profitability because...
skills/important patents
Superior intellectual capital relative to key rivals Plagued with internal operating problems
Cost advantages Falling behind rivals in putting e-commerce capabilities and
strategies in place
Strong advertising and promotion Too narrow a product line relative to rivals
Product innovation skills Weak brand image or reputation
Proven skills in improving production processes Weaker dealer network than key rivals and/or lack of
adequate global distribution capability
Sophisticated use of e-commerce technologies and Subpar e-commerce systems and capabilities relative to
processes rivals
Superior skills in supply chain management Short on financial resources to fund promising
strategic initiatives
A reputation for good customer service Lots of underutilized plant capacity
Better product quality relative to rivals Behind on product quality and/or R&D and/or
technological know-how
Wide geographic coverage and/or strong global Not attracting new customers as rapidly as rivals due to
distribution capability ho-hum product attributes
Alliances/joint ventures with other firms that provide
access to valuable technology, competencies, and/or
attractive geographic markets
Potential Company Opportunities Potential External Threats to Company’s Well-being
Serving additional customer groups or expanding into Likely entry of potent new competitors
new geographic markets or product segments
Expanding the company’s product line to meet a Loss of sales to substitute products
broader range of customer needs
Potential Resource Strengths and Competitive Potential Resource Weaknesses and Competitive
Capabilities Deficiencies
A powerful strategy supported by competitively No clear strategic direction
valuable skills and expertise in key areas
A strong financial condition, ample financial Obsolete facilities
resources to grow the business
Strong brand name image/company reputation A weak balance sheet, burdened with too much debt
A widely recognized market leader and an attractive Higher overall unit costs relative to key competitors
customer base
Utilizing existing company skills or technological Mounting competition from new Internet start-up
know-how to enter new product lines or companies pursuing e-commerce strategies
new businesses
Using the Internet and e-commerce technologies to Increasing intensity of competition among industry
dramatically cut costs and/or to pursue new sales rivals may cause squeeze on profit margins
growth opportunities
Integrating forward or backward Technological changes or product innovations that
undermine demand for the firm’s product
Falling trade barriers in attractive foreign markets Slow down in market growth
Openings to take market share away from rivals Adverse shifts in foreign exchange rates and trade
policies of foreign governments
Ability to grow rapidly because of sharply rising Costly new regulatory requirements
demand in one or more markets
Acquisition of rival firms or companies with Growing bargaining power of customers or suppliers
attractive technological expertise
Alliances or joint ventures that expand the A shift in buyer needs and tastes away from the
firm’s market coverage or boost its competitive
capability
Openings to exploit emerging new technologies Adverse demographic changes that threaten to curtail
demand for the firm’s product
Market openings to extend the company’s brand Vulnerability to industry driving forces
name or reputation to new geographic areas
Source: Arthur J. Thompson Jr. and A.J. Strickland III, Strategic Management: Concepts and Cases (Delhi: Tata
McGraw-Hill, Twelfth edition, 2001) 121
Environmental Assessment
Certain elements in the general or mega-environment have a significant impact on the ability of an
organization to achieve its strategic goals. While analyzing environmental opportunities and threats, managers
should take into account these elements that may have a positive or negative affect on the organization’s
ability to achieve its strategic goals. These elements include economic, technological, legal-political, socio-
cultural, and international influences. Managers should also evaluate major elements in the organization’s
task environment to understand their impact on strategic goals. These task elements are the specific
external elements with which the organization interacts in the course of its business, like customers,
competitors, and suppliers.
Porter’s Five Competitive Forces Model

To analyze the nature and intensity of competition in a given industry, a renowned management
expert, Michael E. Porter, developed the ‘five competitive forces’ model. These five competitive forces are:
rivalry, bargaining power of customers, bargaining power of suppliers, threat of new entrants, and threat
of substitute products and services. The long-term profitability or return on investment of a firm in a
particular industry is directly affected by the collective strength of these forces. Table 6.2 lists the major
ways in which the competitive forces may adversely affect the profit potential of a firm.
Table 6.2: Porter’s Five Competitive Forces Model
Competitive Forces Reasons for lower profit potential

Rivalry Various competitive tactics among rivals lower prices that can be
charged or raise costs of doing business.
Bargaining power of customers Customer’s force price reductions or negotiate increases in product
quality and service at the same price.
Bargaining power of suppliers Suppliers threaten price increases and/or reductions in the quality
of goods or services.
Threat of new entrants New entrants bid prices down or cause incumbents to increase
costs in order to maintain market position.
Threat of substitute products or services Availability of substitutes limits the prices that can be charged.
Source: Michael E. Porter, Competitive Strategy (New York: Free Press, 1998) 3-33.
Rivalry is the extent to which competitors continually compete in order to secure for themselves the
top position in the industry. Firms may exhibit rivalry by employing tactics like price competition, or by
launching attractive advertising campaigns, introduction of new products, and improved customer service
or warranties. The use of such tactics tends to bring down the profit margins of the various competitors
in the industry either by forcing them to lower the prices of their products or by increasing their costs of
doing business.
The bargaining power of customers is the ability of the customers of the company to force it
to lower the price it charges for its products or services, or the customers’ ability to demand better quality
or more service from the firm at the same price. Customers tend to be a powerful entity when: (i) their
purchases form a large chunk of the seller’s total sales, (ii) they make bulk purchases of products and
services, and (iii) there is no difference in the products (in terms of features) being manufactured by the
various suppliers in the industry. An increase in the bargaining power of customers tends to lower the profit
potential for businesses in that industry.
The bargaining power of suppliers is the extent to which suppliers can threaten either to increase
the prices or reduce the quality of their goods and services. Suppliers tend to be powerful when there are
only a few players in the industry, when there are no substitutes for their products or services, or when
their products or services are critical to the buyer’s business. The profit potential for businesses operating
in an industry is reduced if the bargaining power of suppliers is high.
The threat of new entrants refers to the ease with which new competitors can enter the market.
New entrants may have substantial resources and bring in additional production capacity. This can trigger
price wars and/or increase the cost of doing business for existing businesses due to the higher expenditures
they will have to incur (for a larger sales force, advertising, better service, etc.) to retain their market
position. The threat of new entrants depends on how difficult it is to enter the relevant market. The barriers
to entry are high when: (i) a firm needs needs large capital investment to start a business (e.g. steel
industry) (ii) economies of scale do not allow a new player in the industry to start small and build up
volume over a period of time (e.g. television industry) and (iii) established competitors have loyal customers
who consider the products or services offered by these companies to be unique and are reluctant to buy
products or services offered by other companies.
The threat of new entrants is low when barriers to entry are high and new entrants expect a strong
reaction from the present competitors. On the other hand, the threat of new entrants entering the market
is high when barriers to entry are low and when the new entrants expect only a mild reaction from the
existing competitors.
The threat of substitute products or services is the extent to which firms in other industries
offer substitute products for a reputed product line. The availability of substitutes affects the price that firms
in an industry can charge for their products because any increase in price of the product by the firms may
motivate customers to switch to a substitute product. The availability of substitute products and services
lowers the profit potential of all firms in the industry
Organizational Assessment
In the process of conducting a competitive analysis, managers must pay considerable attention to
factors within the organization that affect its competitiveness. They need to assess the major internal
strengths and weaknesses that influence the organization’s ability to compete.
Strengths are an important source of competitive advantage. When a strength is unique and does not
allow competitors to easily match or imitate it, it is known as distinctive competence. Distinctive competence
enables an organization to gain competitive advantage over its competitors. On the other hand, organizational
weaknesses can leave the organization vulnerable to competitors’ actions. Organizations that fail either to
recognize or to overcome their weaknesses are likely to suffer from competitive disadvantages. This, in
turn, would lead to the unsatisfactory performance of these organizations.
One common aid in assessing organizational strengths and weaknesses is a functional audit. This is
an exhaustive appraisal of the important positive and negative attributes of each major functional area.
For instance, a functional audit might assess the appropriateness of the targeting and segmentation of
markets by the marketing department, the availability of working capital from the finance department, etc.
A functional audit also covers many other aspects of each department.
An analysis of the environmental opportunities and threats, as well as organizational strengths and
weaknesses, sets the basis for strategy formulation
MAJOR KINDS OF STRATEGIES AND POLICIES

According to Koontz and Weihrich, for the smooth functioning of any major business enterprise, the
most important strategies and policies are likely to be in the following areas.
Growth
Growth strategies provide guidelines for the organization’s growth. They provide answers to such
issues as a forecast of the quantity of growth necessary for the firm, the necessary speed of that growth,
the area where growth should take place, and the manner in which it should occur.
Finance
A clear strategy for financing operations is very essential for every business and non-business enterprise.
There are various ways in which a firm can finance its operations. The firm should choose its financing
strategy after considering the advantages and limitations of alternative financing strategies.
Organization
Organizational strategy determines the type of organizational pattern in a firm. This type of strategy
provides answers to questions like how centralized or decentralized the decision-making authority should
be, how the staff positions should be designed, and so on. It also defines the organizational structures,
which establish the system of roles and role relationships in the organization.
Personnel
Personnel strategies are the strategies developed for managing human resources. They generally deal
with issues in different areas of human resources management like industrial relations, recruitment, training,
appraisal, compensation and job enrichment.
Public Relations
Public relations strategies should support strategies developed in other areas. Strategies in the area
of public relations should be designed in accordance with the type of business of the firm, the image of
the firm in the eyes of the public, and how much the firm is affected by government regulations.
Products or Services
The reason for the existence of a business is to provide products or services to its customers. A firm’s
success is determined by its new products or services more than by any other factor. Although it is not
possible to formulate a set of strategies that can be applied across all organizations and situations, certain
key questions can help an organization understand the strategies necessary for effective performance. To
help frame product or service strategies, the key questions a firm should ask itself include:
What is our business?
Who are our customers?
What do our customers want?
How much will our customers buy and what price would they be willing to pay?
How should we respond to existing and potential competition?
What are the advantages we possess in serving our customers better?
What are the profits we can make?
How can we cater to the needs of the customers?
Marketing
Marketing strategies are designed to make the customers aware of the company’s products and
services. These also help in persuading customers to buy the company’s products or services. Marketing
and product strategies should be closely related and must support each other. The important questions that
provide guidelines for establishing a marketing strategy are:
Exhibit 6.2 Competitive Advantage
A firm is believed to have a competitive advantage when it uses its resources and capabilities to develop
organizational competencies, which, in turn, create substantial value for customers.
Features of competitive advantage:
i. Competitive advantage is the strongest when it is extremely difficult or expensive for competitors to copy.
ii. It is not possible for a firm to have a competitive advantage over all other competitors. The factor giving
rise to the competitive advantage of a particular firm may be present in other firms as well. Rather than
having no competitive advantage at all, it is always better for a firm to have a competitive advantage that
is shared by the top 10 per cent of the companies in the industry.
iii. Competitive advantage should ultimately create increased value for customers.
iv. Competitive advantage is generated on the basis of organizational competencies.
Steps in creating competitive advantage:
A firm can create a sustainable competitive advantage by following the steps given below:
i. Identify the specific target markets the firm wants to serve.
ii. Identify the potential opportunities that have not been tapped, so the firm can provide better products to
customers, thereby enhancing value for the customers.
iii. Analyze its resources and capabilities to find out whether it can exploit the opportunities that have been
identified. If it does not have the necessary resources, it should develop plans to obtain them.
iv. Examine its capabilities and check whether it has the relevant capabilities for making the best use of
opportunities. It should develop plans to obtain relevant capabilities if it lacks them.
v. Integrate resources and capabilities to build distinctive competencies so that it can generate additional
value for the customer.
Wal-Mart, founded in 1962 by Sam Walton, is the largest retailer in the United States and the world’s largest
private employer. An analysis of Wal-Mart’s history shows that it applied the five-steps listed above. The
founder, Sam Walton, identified his target consumers as residents of small towns in Arkansas, Missouri and
Oklahoma. Walton saw an opportunity in providing value to customers by offering products at everyday low
prices along with a high degree of customer service. Besides hiring employees, with relevant experience from
various functional areas like retailing, distribution, finance and human resources, Wal-Mart designed its
operations in a very cost effective manner. For instance, it linked all operating units with its corporate office
by means of the largest private satellite communication system. This allowed data, voice and video
communication among all divisions of Wal-Mart and speeded up the process of inventory replenishment. Wal-
Mart enhanced its organizational capabilities by increasing its expertise in functional areas like retailing,
marketing, distribution etc. The company also made the best use of its resources and internal capabilities
to build its core competencies. Its core competencies (in various areas including retailing, inventory control,
customer service, finance and cost control, product selection, marketing, location identification and selection,
distribution, acquisitions, international expansion and management information systems) helped it to provide
its customers’ products at low prices with excellent customer service.
A competitive advantage is difficult to develop and sustain. But if a firm can develop a specific and sustainable
competitive advantage, it can reap many benefits.
Adapted from Brad Sago, “Building Organizational Competencies for Competitive Advantage,” Business Credit, Vol.
105, Issue 2 (Feb. 2003): p 16, 2 p.
Where are our customers from and what are their reasons for buying?
What are the ways in which we can induce a customer to buy?
What is the best way for us to sell?
Do we have something unique to offer that other competitors cannot?
How can we serve our customers in the best possible manner?
Do we need to and can we provide support services?
What is the best pricing strategy and policy for our operations?
PORTER’S COMPETITIVE STRATEGIES

Strategy guru, Michael E. Porter, has described three business-level strategies which can help a firm
gain competitive advantage over its competitors in the same industry. A business-level strategy generally
deals with the manner in which the operations of a particular business are carried out. Since Porter’s
strategies can be applied across many different situations, these are also called “generic” strategies.
Porter’s competitive strategies are: overall cost leadership, differentiation, and focus. Table 6.3 lists
the common organizational requirements that are necessary to execute these strategies successfully.
Table 6.3: Common Requirements for Successfully Pursuing Porter’s Competitive Strategies
Generic strategy Commonly Required Skills and Resources Common Organizational Requirements
Overall Cost Leadership Sustained capital investment and access Tight cost control
to capital Frequent, detailed control reports
Process engineering skills Structured organization and responsibilities
Intense supervision of labour Incentives based on meeting strict
Products designed for ease in quantitative targets
manufacture
Low-cost distribution system
Differentiation Strong marketing abilities Strong coordination among functions in

Product engineering R&D, product development, and
marketing
Creative flair Subjective measurement and incentives
Strong capability in basic research instead of quantitative measures
Corporate reputation for quality or Amenities to attract highly skilled
technological leadership labour, scientists, or creative people.
Long tradition in the industry or unique
combination of skills drawn from other
businesses
Strong cooperation from channels
Focus Combination of the above policies directed Combination of the above policies
at the particular strategic target directed at the particular strategic target
Source: Michael E. Porter, Competitive Strategy (New York: Free Press, 1998) 41
Exhibit 6.3 Aravind Eye Hospital – Its Strategy at a Glance
Aravind Eye Hospital was founded in 1976 by a retired eye surgeon, Dr. Govindappa Venkataswamy. He
started a small non-profit, twenty-bed hospital. Within a span of twenty five years, surgeons at Aravind have
performed the largest number of eye surgeries in the world. Since its inception, Aravind has given sight to
more than one million people in India. The procedures at Aravind hospital are so efficient that the hospital
has a gross margin of 40 per cent, despite the fact that 70 per cent of the patients pay nothing or close
to nothing. Moreover, the hospital does not depend on donations. Dr. Venkataswamy has made this possible
by constantly cutting costs and by increasing efficiency in Aravind’s operations.
Dr. Venkataswamy says millions of Indians suffer from blindness due to cataract. Most of these cataracts
need only a simple operation. Dr. Venkataswamy’s dream was to make cataract surgery affordable for the
masses. He focused on developing a simple operation for removing cataracts and designed an extraordinary
strategy. Dr. Venkataswamy drew inspiration from the assembly-line process pioneered by Henry Ford. He
standardized each and every step in the process of the surgery, right from patient screening and registration
to the operation itself. He also designed the operation theatre in a way that maximized the productivity of
the surgeons. In Aravind, while a surgeon operates on one patient, the next patient is prepared for surgery
on the next operating table. So when the first operation is completed, the surgeon can immediately start the
next operation. This process is repeated to enhance the productivity of surgeons. Since Aravind Eye Hospital
has a standardized operating procedure, surgeons have to give up some independence while operating on a
patient. The standardization of procedures helps make Aravind very cost-effective. The hospital is thus able
to provide world class eye care to its patients at a very low cost. According to a report, a hospital in the
United States has to incur an expenditure of $1650 to perform a surgery for removal of cataract, whereas the
same surgery costs only $10 at Aravind.
A significant cost involved with cataract surgery is the use of an intraocular lens for replacing a patient’s
clouded lens. By the 1990s, Aravind Eye Hospital was using a large number of such lenses. It decided to
cut costs by setting up Aurolab, its own lens production unit. Today, Aurolab produces more than enough
lenses to meet its own needs; and it sells the surplus to other eye-care providers.
Dr. Venkataswamy has divided the operations of the Aravind Eye Hospital into two facilities, which are located
near each other – one for patients who can pay for the amenities and the other for patients who cannot and
have to be treated free of cost. Although the amenities are different in these two places, both share the same
staff of doctors and nurses, ensuring high-quality medical care for all. The hospital is thus providing eye-care
suited for different budgets. Aravind Eye Hospital is self-sustained due to its paying class of patients, who
come there for its world-class eye care facilities.
Aravind has forged research and training collaborations with premier teaching hospitals in the United States.
Though it is a cost leader in cataract surgery, it has never compromised on quality, which appeals to patients
who can pay. Also, the doctors feel proud to be involved with Aravind and work for longer hours for less pay.
Thus, Aravind’s strategy has made it a cost leader and has set it apart from others.
Adapted from Joan Magretta and Nan Stone, What Management Is?(New York: Free Press, 2002) 112-114.
Overall Cost Leadership

A cost leadership strategy aims at improving the efficiency of a firm’s operations in order to bring
down the firm’s overall costs of producing goods and services as compared to its competitors. This strategy
involves attempting to minimize costs in every aspect of the business. Costs can be controlled by developing
efficient methods for production, curbing overhead and administrative costs, procuring materials at low
prices and by monitoring costs of promotion, distribution and service. By bringing down its operational
costs, an organization can offer its products and services at lower prices.
It can also earn higher profits because the profit margins are greater or because the sales volume is
increased. Thus an organization which follows an overall cost leadership strategy can gain an edge over
its competitors.
A low-cost strategy is a risky proposition. An organization should never consider lowering costs at the
expense of quality. Moreover, to pursue a cost leadership strategy effectively, a firm should be the cost
leader in the industry and not just one among a number of firms trying to be cost-effective. Another
disadvantage of the cost leadership strategy is that rivalry between two businesses trying to be cost leaders
may bring down the profits of both the firms. Therefore, it is important for the organization to have a cost
advantage which is quite unique and cannot be easily imitated. The organization must also be able to
incorporate improved technologies that can help improve its operational efficiency. Apart from these
aspects, managers must try to bring out new product or service innovations which may be very important
to customers. Innovation in products or services is essential to prevent competitors from using a differentiation
strategy and stealing customers by bringing about significant product innovations or service improvements.
Exhibit 6.4 Doing Better by Being Different
Sam Walton had set up the first Wal-Mart store in Arkansas in 1962. It was there that he learnt the first
lesson of retailing – discount product prices to expand volume and increase overall profits. By following this
principle, Wal-Mart grew rapidly. By 1969, there were 18 Wal-Mart stores, most of them in small towns, with
sales of $44 million. Subsequently, Wal-Mart built discount stores in all the fifty states in the US to become
the only national discount chain, which offered general merchandise to consumers across the country. In
1991, Wal-Mart started operations in overseas countries. Wal-Mart continued to grow mainly due to two
factors — its highly automated distribution centres, which cut shipping costs and time, and its computerized
inventory system which speeded up checkout and reordering. Wal-Mart also explored the possibility of
introducing other innovations such as self-service.
Wal-Mart discount stores constituted the core discounting business. The stores offered a wide range of items
to consumers in a pleasant and convenient shopping ambience. Each store had wide, clean brightly lit aisles
and shelves stocked with thousands of items. Goods on sale included family apparel, health and beauty aids,
household needs, electronic items, toys, fabrics and crafts, jewelry, and shoes. In addition, there were other
services such as a pharmacy department, snack bar or restaurant, vision centre and one hour photo processing
services.
Each store sold popular and trusted brand names from companies like P&G and Unilever. At the same time,
Wal-Mart offered its customers special labels on a variety of merchandise made available through licensed
agreements. Three marketing principles guided Wal-Mart – low prices, consistently well-stocked shelves and
friendly associates. Wal-Mart attempted to maintain low prices by strict cost control. Wal-Mart staffers were
expected to be friendly and provide exceptional customer service in a friendly shopping environment. There
were nearly 2,000 stores in operation in 1998. A market survey conducted in 1998 revealed that prices of
goods sold in discount stores were 15% lower than that in conventional stores.
A growing demand for convenience prompted Wal-Mart to pioneer a concept in retailing known as Supercenters.
They operated on a new retail format that competed worldwide with discount and grocery stores alike. The
Supercenters were, essentially, a logical extension of the discount store. Recognizing that shoppers’ time
was limited, Wal-Mart combined full grocery lines and general merchandise under one roof, giving them one-
stop family shopping experience.
Adapted from Wal-Mart, Volume I, Global Strategic Management Case Studies on Fortune 500 Companies, Transworld
University.
Differentiation
A differentiation strategy attempts to offer products and services that are considered unique or innovative
in the industry. If a firm is successful in differentiating its products or services from those of its competitors,
it can generate sizeable profits. This is because successful differentiation allows a firm to charge premium
prices. A firm may differentiate its products and services in various ways. It may differentiate itself from
others in terms of design or brand image (e.g. Coca-Cola), features (e.g. Cadillac), technology (e.g. Intel
microprocessors), customer service (e.g. Hilton hotels), or quality (e.g. Sony). By using the differentiation
strategy, a firm is able to influence the perception of customers that a product or service is unique, rather
than having to reduce its costs to attract customers.
Exhibit 6.5 HDFC Bank – A Trendsetter
HDFC Bank is regarded as India’s premier banking institution. The price/earnings ratio for HDFC Bank is Rs
35, whereas for most other banks (which are growing at an impressive rate), it ranges between Rs 6 and
Rs 23. The difference between the stocks of HDFC Bank and those of other banks is due to the perception
that it is a trendsetter. HDFC Bank has changed the manner banking is done in the country.
The crux of HDFC Bank’s strategy has been its focus on retail liabilities. The bank focuses on low-cost retail
deposits. According to HDFC Bank, it is reluctant to rely on corporate deposits as these tend to be very
unstable and costly. Moreover, corporate deposits are short term deposits that are withdrawn once there is
a change in interest rates.
HDFC’s strategy of high growth with low risk has made its stocks very valuable. In the banking industry,
growth is achieved with an increasing risk of non-performing loans (NPL). However, HDFC Bank has proved
that it can show good growth in business without causing an increase in non-performing loans. It has achieved
40% year-to-year growth in assets, while bringing down the number of NPLs. HDFC Bank is quite conservative
and has predefined provisions for covering 70% of its NPLs. Its general provisions for covering NPLs are quite
stringent.
HDFC Bank maintains its low-risk growth model through innovative methods. First, it focuses on providing
banking services to top-rated corporations. Approximately 70% of HDFC’s corporate clients are top-rated
companies. Although the bank provides funds at a very low rate, the risks are almost negligible. Second,
HDFC Bank uses technology throughout its banking operations. With the use of modern technology, HDFC
Bank has been able to service customers through multiple channels like ATMs, mobile banking, phone
banking and internet banking. Third, HDFC Bank focuses on stable streams of income. Most banks rely on
treasury operations to increase the return on equity. This approach tends to increase the volatility of earnings.
HDFC Bank, however, focuses on earning higher fee income by offering value-based services like cash
management, custody service and distribution of financial products. Over time, HDFC Bank has grown to
become one of the largest clearing banks for leading national stock exchanges. It is also one of the biggest
custodians of money, having nearly half a million retail accounts.
HDFC Bank has decided to aggressively pursue retail initiatives like offering loans against shares, car loans,
personal loans, consumer-durable loans and credit cards.
HDFC Bank plans to grow at an impressive rate of 30% for the years 2002-2004. It plans to grow through
cash management and custody services and retail initiatives. Thus, HDFC Bank plans to use its low-risk
growth model to carve a niche for itself in the banking industry.
Adapted from Aaron Chaze, “HDFC Bank: An Unorthodox Trendsetter,” Global Finance, Vol.15, Issue 3 (March
2001): p 49, 1p.
However, a differentiation strategy too has a few drawbacks. If the customers perceive the prices of
products as too high, they may choose alternatives which are less expensive, even if it means sacrificing
some desirable features. Moreover, customer tastes, preferences and requirements are unpredictable, and
keep changing rapidly. Therefore, businesses which pursue a differentiation strategy must analyze the
shifting tastes and needs of customers carefully.
A differentiation strategy is very effective when the differentiating factor is both essential for customers
and hard for competitors to imitate. A differentiation strategy differs from a focus strategy in that a
differentiation strategy is usually aimed at a large market while a focus strategy concentrates on a specific
niche market.
Focus
A focus strategy helps a firm specialize within a very narrow segment of the market by establishing
a position of overall cost leadership, differentiation, or both. In other words, a firm pursuing a focus
strategy tends to serve a specific segment of the market instead of catering to the entire market. This
segment may be a special group of customers, a specific geographic area, or a particular product or
service line.
The logic behind a focus strategy is that a firm can serve a market segment more effectively than its
competitors if it specializes in serving that segment, as compared to its competitors who cover the entire
market. To establish itself within a specific market segment, an organization may adopt a low-cost or a
differentiation approach, or a combination of these approaches. It is possible to achieve differentiation
with a focus strategy by customizing the product to the specialized needs of the market segment. This
produces a cost advantage, since a firm that is specialized may offer better prices on custom orders than
a firm that has a leadership position in serving the needs of the entire market.
STRATEGY IMPLEMENTATION
Strategy implementation is the process through which a chosen strategy is put into action. It includes
those management activities that are necessary to convert a strategy into action, to institute strategic
controls for monitoring progress, and ultimately to achieve the organization’s goals. Strategy implementation
involves two steps: (i) carrying out of strategic plans and (ii) maintaining strategic control as shown in
Figure 6.4.
Carrying Out Strategic Plans

According to strategy implementation experts, Jay R. Galbraith and Robert K. Kazanjian, certain
major internal elements of the organization may need to be synchronized to convert a chosen strategy into
action. These elements which include technology, human resources, reward systems, decision processes
and structure, are interdependent and affect each other. A change in one variable forces change in one
or more of the other variables. We shall now discuss these internal elements in detail.
Technology
Technology consists of the knowledge, work techniques, tools and equipment used by an organization
to deliver its products or service to the customers. The technological functions of the business must be
taken into consideration while implementing strategy at all levels. For instance, if an organization follows
a low-cost strategy, it may have to improve or modify its technology in order to bring down the cost of
production. Technological changes may also be necessary when a firm follows a differentiation strategy,
as it has to develop and/or produce better products or services.
STRATEG Y IM PLEM ENTATIO N
Carrying out S trategic M aintaining Strategic

Plans: Control
Technology
Human resources
Reward systems
Decision processes
Structure
Fig. 6.4 Strategy Implementation Phase of a Strategy Management Process
Human Resources
All the individuals working in an organization comprise its human resources. One of the prerequisites
for effectively implementing a human resources strategy is to have a skilled workforce. Strategic human
resource planning that links the human resource needs with strategies can help develop a workforce which
has the relevant skills. The skills and experience of a firm’s employees are also a source of its competitive
advantage. A skilled and experienced workforce is much more efficient than one with less work experience.
Such workers can help find ways of reducing costs and improving products and services.
Reward Systems
Reward systems consist of tangible rewards such as bonuses, awards and promotions as well as
intangible rewards like personal feelings of accomplishment and challenge. Good reward systems help in
motivating employees to perform better and provide support to a given strategy. There are no specific rules
as to what rewards are to be used for a particular strategy or a particular organization. However,
according to the type of strategy pursued, specific rewards may be given to the employees. Thus, when
a manager in an organization following a growth strategy achieves his goals, he may be given stock
options as a reward; whereas a manager working in an organization that follows a stability strategy might
receive a bonus for performing well on the job.
Decision Processes
Decision processes consist of the means and methods of resolving organizational problems. An
important issue in the area of decision processes is that of resource allocation. Resource allocation helps
in effective implementation of strategies since strategic plans are more likely to succeed if the resources
needed for implementing them are readily available. Decision processes also help in avoiding conflicts and
sorting out issues that may crop up during implementation of the strategy. The decision processes may
vary from firm to firm.
Structure
Organization structure refers to the formal pattern of interaction and relationships among various
individuals in the organization. It is designed by the management to link individual tasks with group tasks
so as to facilitate the accomplishment of the goals of the organization. Research has shown that strategies
tend to be more successful when the organizational structure supports the strategic direction.
Maintaining Strategic Control

Managers need to monitor the progress of planned activities. This is done through strategic control.
A formal strategic control system helps keep strategic plans on track. It involves (i) looking out for critical
environmental factors that could affect the feasibility of strategic plans, (ii) analyzing how the strategic
actions affect the organization, and (iii) ensuring the proper implementation of strategic plans.
Strategic control systems need to be carefully designed ahead of time and not just as an afterthought.
Establishing strategic control measures involves designing relevant information systems that provide feedback
on how strategic plans are being carried out and how they affect the organization’s functioning. Such
information systems enable managers to take corrective action as and when necessary while implementing
strategic plans.
The process of strategy implementation involves introducing change and innovation in the organization.
EFFECTIVE IMPLEMENTATION OF STRATEGY

Although formulating clear and meaningful strategies is very important, the strategies serve no purpose
unless they are properly implemented. Managers should keep in mind the following recommendations in
order to implement strategies effectively.
Communicating Strategies to all Key Decision-making Managers

Formulating meaningful strategies is of no use unless these are communicated to the managers who
are in a position to implement them. Strategies should be communicated in writing, and it should be
ensured that all those involved in implementing these strategies understand them well. It sometimes happens
that strategies that are understood by the chief executive and other executive committee members who
have developed them, are not understood properly by the managers who are responsible for implementing
them. In such situations, it is clear that the strategies have not been effectively communicated to the lower
levels by the top management.
Developing and Communicating Planning Premises

Planning premises are assumptions about the environment in which plans will operate. Managers are
responsible for laying out the premises which are the basis for formulating plans and taking decisions. They
should explain and clarify the planning premises to all those involved in the process of decision-making.
Managers should also develop programmes and make decisions in tune with the planning premises. If key
assumptions about the environment are not included in the planning premises, the decisions made by the
managers are often just personal opinions, which may be inaccurate and may also lead to confusion.
Developing an Appropriate Fit between Organizational Structure and Planning

Needs
The organizational structure should be conducive for managers to implement plans that lead to the
accomplishment of the organization’s goals. Ideally, a single person should be responsible for implementing
all the strategies leading to attainment of a particular goal. Hence, as far as possible, end-result areas and
key tasks should be identified and assigned to a single individual. The organization should opt for a
different organizational structure when such assignment of tasks is no longer feasible.
Ensuring that Action Plans Contribute to and Reflect Major Objectives and
Strategies
Action plans are major or minor tactical programmes and decisions, and should reflect the desired
objectives and strategies. There are several ways in which the contribution of action plans to major goals
can be ensured. Managers at all levels can review the recommendations of staff advisers and line subordinates
to make certain that the action plans are consistent and contribute to the development of the organization.
Major decisions can also be reviewed by appropriate committees to assess their contribution to organizational
goals. Important plans like budgets should be reviewed either by a committee or by top-level managers,
with due consideration to objectives and strategies.
Developing Contingency Strategies and Programmes

A manager should always be prepared with a contingency plan to counter unforeseen changes in
competitive factors or other external environmental elements. Since the environment is unpredictable, there
is every possibility that a given set of objectives, strategies, or programmes may quickly become obsolete.
In such a case, the manager has to proceed on the most reliable set of premises he or she can come up
with at the given time. Contingency plans help managers to deal with unforeseen situations.
Reviewing Strategies Regularly

When conditions change, even the best strategies may not remain viable. Therefore, strategies should
be periodically reviewed. Major strategies should be reviewed at least once a year, and more often if
possible. Also, the external environment of the firm should be continuously monitored to assess and predict
potential opportunities and threats which may affect the performance of the firm.
Continuing to Emphasize Planning and Implementing Strategy

Even if an organization has developed a feasible system of objectives and strategies and has implemented
it, the system may fail unless managers realize its significance. The managers need to ensure that everyone
in their team understands the underlying strategies. This does not mean that the organization has to keep
conducting seminars and learning sessions. Managers can orient their subordinates in their day-to-day
interactions with them. Although this process may seem to be very tiring, it is the best way to make the
employees realize the importance of strategies.
Creating a Proper Organizational Climate

Creating an organizational climate that is suitable for strategy implementation is important for making
a strategy work. The term ‘organizational climate’ refers to the characteristics of the internal environment
of an organization such as the extent of commitment and dedication of the employees towards organizational
goals, the existing cooperation among the employees, and the efficiency with which plans are translated
into results.
The employees should make it a point to understand the organization’s strategies and implement them
effectively.
PLANNING PREMISES
The development of premises, an area which is often overlooked, is one of the most important steps
in effective planning. Planning premises are defined as the anticipated environment in which plans are
expected to operate. They include assumptions or forecasts of the future and known conditions that will
affect the operation of plans.
Planning Premises versus Future Expectations

Planning premises include forecasts which indicate what can be expected in the future. They provide
a framework on which plans can be developed. However, not all premises are forecasts. One should
differentiate between forecasts that are planning premises, and forecasts that are translated into future
expectancies (generally in financial terms) from the original plans. For instance, a forecast which determines
future business conditions, sales volume, or the political environment provides the premises on which plans
can be developed. However, a forecast of revenues or costs from a new project translates a planning
programme into future expectations. In the first case, the forecast is a necessary input for planning, while
in the second case, the forecast is an end-result of planning.
Effective Premising
As many plans fail due to poor premising, special care should be given to development of effective
planning premises. Identifying the environmental factors which may affect a manager’s plans in the future
is a difficult task. Even after these factors are identified, using consistent and meaningful planning premises
in plans can be difficult. Effective premising is a process which involves four parts or stages:
Selection of Premises that are Essential for Specific Programmes

Planning premises differ in importance across organizations. Some premises may be strategically
important for one enterprise, but not so important for another enterprise. Managers at all levels should
select their own planning premises. Managers should attempt to determine those external and internal
environmental factors which may affect the plans for which they are responsible.
Development of Alternative Premises for Contingency Planning

Managers should develop plans based on different assumptions as the future is unpredictable.
Verification of the Consistency of Premises
The planning premises used in an organization must be consistent with each other; this should be
verified before they are adopted. This can be done by asking the planning staff at headquarters and
divisional levels to recommend their essential planning premises to the executives at the top. The planning
premises recommended by them may either be applicable to the entire organization or to the relevant
division. The top-level management should approve the planning premises after consulting various other
employees, in order to ensure that the planning premises are valid, consistent and useful
Communication of the Premises

It is important to analyze the information needs of managers and to ensure that the premises needed
for planning can be developed by them. In some organizations, a manual of planning premises for the use
of managers is drawn up and circulated. These manuals incorporate the various assumptions about the
environment which are broadly applicable in planning. The manuals have to be updated once the premises
change. Moreover, when a major programme assignment is made or when a budget proposal is requested,
superiors should develop and distribute additional planning premises for their subordinates to use.
Strategies and policies help a firm decide its course of action and form the basis for developing
effective tactical and operational plans. Formulating meaningful planning premises are also necessary for
developing consistent and well-coordinated plans.
SUMMARY
Strategies and policies are closely related. They provide direction for the organization and form the
basis of operational plans. Strategy refers to the determination of the long-term objectives of an enterprise
and the adoption of courses of action to achieve these aims, while policies are concepts that guide the
thought processes and behaviour of managers when they make decisions. There are three different levels
of strategy – the corporate-level, business-level and functional-level strategies. Corporate-level strategies
address what businesses the organization operates in, how the strategies of those businesses can be
coordinated to strengthen the organization’s competitive position, and how resources are to be allocated
among the businesses. The two major approaches that can be adopted by managers in developing
corporate-level strategy is the corporate portfolio approach and the values-based approach. A widely used
portfolio management method is the BCG matrix, devised by the Boston Consulting Group. This matrix
plots businesses against relative market share and industry growth and helps organizations evaluate their
business portfolios in order to determine their profitability.
Strategic planning is the formal process of developing long-term plans which help in defining and
achieving organizational goals. Strategic planning provides consistent guidelines for organizational activities.
It helps managers to make appropriate decisions and anticipate problems before they arise. The strategic
planning process involves six steps. These include (i) defining the mission of the organization, (ii) determining
organizational objectives, (iii) assessing organizational resources and evaluating environmental risks and
opportunities, (iv) formulating strategy, (v) implementing strategy through operating plans, and (vi) monitoring
and adapting strategic plans. Before devising an effective strategy to gain a competitive edge, managers
need to analyze the organization’s competitive situation carefully. For this purpose, a SWOT analysis,
which involves analyzing the organization’s internal strengths and weaknesses and environmental
opportunities and threats, is carried out. Different kinds of strategies and policies cover the areas of
growth, finance, organization, personnel, public relations, products or services and marketing.
Michael Porter has outlined the business-level strategies of overall cost leadership, differentiation, and
focus, that may be adopted by firms. Cost leadership strategies aim at reduction in cost. Firms which adopt
a differentiation strategy attempt to offer products and services that are considered unique in the industry.
A focus strategy facilitates specialization by establishing a position of overall cost leadership, differentiation,
or both. A firm adopting a focus strategy attempts to serve a specific segment of the market, instead of
catering to the entire market. Thus, all the major aspects of strategies, policies and planning premises have
been discussed in the chapter. These concepts are of great significance in contemporary management theory.
McDonald’s: Serving Fast Food around the World

Ray Kroc opened the first McDonald’s restaurant in 1955. He offered a limited menu of
high quality, moderately priced food served fast in spotless surroundings. McDonald’s “QSC&V
(quality, service, cleanliness and value) was a hit. The chain expanded into every state in the
nation. By 1983 it had over 6000 restaurants in the United States.
In 1967 McDonald’s opened its first restaurant outside the United States, in Canada. By
CASE STUDY
1985 international sales represented about one fifth of McDonald’s total revenues. Yet fast
food has barely touched many cultures. While 90 per cent of the Japanese in Tokyo have
eaten a McDonald’s hamburger, few outside the cities know what a hamburger is. In Europe,
McDonald’s maintains a very small percentage of restaurant sales but commands a large
market share of the fast food market.
The taste for fast food, American style, is growing more rapidly abroad than at home.
McDonald’s international sales have been increasing by a large percentage every year. Every
day more than 18 million people in over 40 countries eat at McDonald’s.
Its traditional menu has been surprisingly successful. People with diverse dining habits have
adopted burgers and fries wholeheartedly. Before McDonald’s introduced the Japanese to
French fries, potatoes were used in Japan only to make starch. The Germans thought
hamburgers were people from the city of Hamburg.
It’s fast, family-oriented service, cleanliness and its value for money menu accounted for
much of McDonald’s success. McDonald’s was one of the first restaurants in Europe to
welcome families with children. Not only are children welcomed, but in many restaurants they
are entertained with crayons and paper, a play area or even Ronald McDonald, their mascot,
who can speak twenty languages.
McDonald’s golden arches promise the same basic menu and QSC&V in every restaurant.
Its products, handling and cooking procedures and kitchen layouts are standardized and
strictly controlled. McDonald’s revoked the first French franchises because they failed to meet
its standards for fast service and cleanliness even though they were highly profitable. This may
have delayed its expansion in France.
Local managers and crew run the restaurants. Owners and managers must attend the
Hamburger University near Chicago to learn how to operate a McDonald’s restaurant and
maintain QSC&V. The main campus library and modern electronic classrooms (which includes
simultaneous translation systems) are the envy of many universities.
McDonald’s ensures consistent products by controlling every stage of the distribution.
Regional distribution centres purchase products and distribute them to individual restaurants.
The centres will buy from local suppliers if the suppliers can meet the detailed specifications.
McDonald’s has had to make some concessions in products sourcing. For example it is
difficult to grow the Idaho potato in Europe.
McDonald’s uses essentially the same competitive strategy in every country. Be first in a
market and establish your brand as rapidly as possible by advertising very heavily. Each outlet
is opened with much fanfare. So many people attend the opening of one Tokyo restaurant
that the Police closed the street to vehicles. The strategy has helped McDonald’s developed
a strong market share in the fast food market, even though its US competitors and new local
competitors quickly enter the market.
Their advertising champions are based on local themes and reflect on different environments.
In Japan where burgers are a snack, McDonald’s competes against confectionaries and the
new “Fast Sushi” restaurants. Many of the charitable causes McDonald’s supports abroad
have been recommended by the local restaurants.
McDonald’s have been willing to relinquish the most control to its far Eastern operations,
where many restaurants are joint ventures with local entrepreneurs who own 50% or more
of each restaurant.
European and South American restaurants are generally company operated or franchised
(although there are many affiliates-Joint ventures-in France) like the US franchises restaurants
abroad are allowed to experiment with their menus. In Japan hamburgers are smaller because
they are considered as snack. The “Quarter Pounder” didn’t make much sense to people on
metric system. So it is called a “Double burger”. Some of the German restaurants serves beer,
some French restaurants serve wine. Some far Eastern McDonald’s offer oriental noodles but
these new items must not disrupt existing operations.
1. What opportunities and threats did McDonald’s face? How did it overcome them? What alternatives could
it have chosen?
2. Before McDonald’s entered the European market, few people believed that fast food could be successful in
Europe. Why do you think McDonald’s succeeded? What strategies did it follow? How did these differ from
its strategies in Asia?
3. What is McDonald’s basic philosophy? How does it enforce this philosophy and adapt to different environments?
Chapter 7 Managerial Decision-making 135
Decision-making
7
Managerial
H Significance and Limitations of Rational
Decision-making
H Managers as Decision-makers
H Decision-making Process
H Types of Managerial Decisions
H Decision-making under Certainty,
Uncertainty and Risk
H Management Information System vs
Decision Support System
H The Systems Approach to Decision-making
H Group Decision-making
H Decision-making Techniques
INTRODUCTION
Decision-making describes the process by which a course of action is selected as the way to deal with
a specific problem. People at all levels in an organization are constantly making decisions and solving
problems. For managers, the decision-making and problem-solving tasks are particularly important aspects
of their jobs. Which employee should be assigned a particular task? How should profits be invested?
Whether the problem is large or small, it is usually the manager who has to confront it and decide what
action to take. Managers make decisions dealing with both problems and opportunities. For instance,
making decisions about how to cut costs by five per cent reflects a problem. The manager also has to make
decisions when there is an opportunity that can be exploited. If the firm has surplus funds, the manager
has to decide whether the extra funds should be used to increase shareholder dividends, reinvested in
current operations, or to expand into new markets.
The quality of managers’ decisions is the yardstick of their effectiveness and value to the organization.
Managers are usually evaluated and rewarded on the basis of the importance and results of their decisions.
This indicates that managers must necessarily develop decision-making skills.
In this chapter, we will discuss the significance and limitations of rational decision-making, and look
at managers as decision-makers, the decision-making process, types of managerial decisions and decision-
making under certainty, uncertainty and risk. This will be followed by a discussion on the distinction
between the management information system and the decision support system, and the systems approach
to decision-making, group decision-making and decision-making techniques.
SIGNIFICANCE AND LIMITATIONS OF RATIONAL DECISION-MAKING

The process of rational decision-making is very similar to the process of formal strategic planning
discussed in Chapter 6. The various steps in the decision-making process are discussed in the latter part
of this chapter.
Significance of Rational Decision-making

Managers who use a rational, intelligent, and systematic approach are more likely to come up with
high quality solutions to the problems they face than the ones who do not use this approach.
Rational decision-makers have a clear understanding of alternative courses of action to accomplish
a goal under a particular set of circumstances.
Rational decision-making is based on the information available with the decision-makers and their
ability to evaluate alternatives.
Rational decision-making aims at deciding the best solution by selecting the alternative that most
effectively facilitates goal achievement.
Limitations of Rational Decision-making

It is very difficult for managers to be completely rational in their decision-making since decisions
are taken keeping the future in mind, and the future is very uncertain.
It is very difficult to determine all the alternative courses of action that might be followed to
accomplish a goal.
Rational decision-making becomes almost an impossible task when one has to explore areas
which have never been ventured into before.
In most cases, all possible alternatives generated cannot be thoroughly analyzed, even with
sophisticated analytical techniques and computers.
Even though the decision-maker strives to be completely rational, sometimes limitations of
information, time and certainty, curb rationality.
Sometimes, managers allow their risk-avoiding tendency to disrupt their rational decision-making
process.
MANAGERS AS DECISION-MAKERS
The success of an organization depends greatly on the decisions that managers make. For this
reason, managerial approaches to decision-making have been the subject of voluminous research. In this
section, two major types of models regarding how managers make decisions are discussed in brief.
The Rational Model

The rational model of managerial decision-making has its roots in the economic theory of the firm.
When theories about the economic behaviour of business firms were being developed, there was a general
tendency among economists to assume that whatever decisions managers made would always be in the
best economic interests of their firms. This assumption was initially accepted by many management
theorists. According to the rational model, managers engage in a decision-making process which is totally
rational. They have all the relevant information needed to take decisions. They are also aware of different
possible alternatives, outcomes and ramifications, and hence make rational decisions. This view which
was in vogue during the first half of the twentieth century, has serious flaws, as it is quite difficult to obtain
complete information and make “optimal” decisions in complex situations. In spite of its drawbacks, the
rational view provides a benchmark against which actual managerial decision-making patterns can be
compared.
Non-rational Models
Unlike the rational view, several non-rational models of managerial decision-making suggest that it
is difficult for managers to make optimal decisions due to the limitations of information-gathering and
processing. Within the non-rational framework, three major models of decision-making have been identified
by researchers. These are: (a) ‘satisficing’ model, (b) incremental model, and (c) garbage-can model.
‘Satisficing’ Model
In the 1950s, an economist, Herbert Simon studied the actual behaviours of managerial decision-
makers. On the basis of his studies, Simon propounded the concept of bounded rationality. This concept
suggests that the managers may not always be perfectly rational in making decisions. Their decision-
making ability may be limited by certain factors like cognitive capacity and time constraints. The concept
of bounded rationality was offered as a framework to facilitate better understanding of the actual process
of managerial decision-making. According to the concept of bounded rationality, the following factors
commonly limit the degree to which managers are perfectly rational in making decisions:
(i) Decision-makers may have inadequate information about the nature of the issue to be decided.
They may also not possess enough information about possible alternatives and their strengths and
weaknesses.
(ii) The amount of information that can be gathered in regard to a particular decision is limited by
time and cost factors.
(iii) Decision-makers may overlook or ignore critical information because of their perceptions about the
relative importance of various pieces of data.
(iv) The degree to which decision-makers can determine optimal decisions is limited by the individual’s
capacity and intelligence.
(v) The inability to remember large amounts of information is another factor that limits the ability of
managers to make rational decisions.
Simon argues that instead of searching for the perfect or ideal decision, managers frequently settle for
one that will adequately serve their purpose. He contends that managers accept the first satisfactory
decision they uncover, rather than searching till they find the best possible decision. Simon calls this
‘satisficing’. The satisficing model holds that managers seek alternatives only until they identify one that
looks satisfactory.
The ‘satisficing’ approach can be considered to be an appropriate decision-making approach when
the cost of searching for a better alternative or delaying a decision exceeds the potential gain that is likely
by following the ‘satisficing’ approach.
Incremental Model
Another approach to decision-making is the incremental model. The incremental model states that
managers put in the least possible effort – only enough to reduce the problem to a tolerable level. The
manager here is concerned more with finding a short-term solution to the problem than making a decision
that will facilitate the attainment of goals in the long-term. The incremental model does not require
managers to process a great deal of information in order to take a decision.
Garbage-can Model
The garbage-can approach to decision-making holds that managers behave randomly while making
non-programmed decisions. That is, decision outcomes are chance occurrences and depend on such
factors as the participants involved in the decision-making process, the problems about which they happen
to be concerned at the moment, the opportunities they happen to identify and their favourite solutions or
the solutions they use the most to solve most problems. The garbage-can strategy is effective in the
following situations: (i) when the managers have no specific goal preferences, (ii) when the means of
achieving goals are unclear, and (iii) when there are frequent changes in the participants involved in
decision-making. This approach can have serious consequences. The garbage-can approach is often used
in the absence of strategic management.
DECISION-MAKING PROCESS
Decision-making is a systematic process and involves a series of steps. Any decision-making process
consists basically of the following seven steps. These have been shown in Figure 7.1.
Identify the problem

Scanning stage
Categorization stage
Diagnosis stage
Identify resources (people, money, materials,

time, equipment, expertise, information)
Identify constraints (lack of adequate
resources, etc.)
General alternative solutions

Brainstorm
Feedback
Select an alternative (by experience,

experimentation and research & analysis)
Implement the decision
Monitor the dicision
Fig. 7.1 The Process of Decision-making
Identifying the Problem

The first step in the decision-making process is identifying the problem. Prior to identifying the
problem, it is essential to first recognize that a problem exists. Identification of the problem involves three
stages: scanning, categorization, and diagnosis. The scanning stage involves monitoring the work
environment for changes that may indicate the emergence of a problem. At this stage, a manager may
have a very faint idea that an environmental change could lead to a problem or that an existing situation
is posing a problem. When an organization fails to achieve its goals, there is a performance gap between
the predicted or expected level of performance and the actual performance level. The categorization stage
attempts to understand this performance gap. At this point, the manager attempts to categorize the
situation as problematic or not. The diagnosis stage involves gathering relevant facts and other additional
information pertaining to the problem. It also specifies both the nature and the causes of the problem. At
this stage, the problem should be stated in terms of the discrepancy that exists between the current
conditions and the desired conditions, and the causes for the discrepancy should also be specified. Proper
diagnosis is very essential for the success of the decision-making process.
Exhibit 7.1 Constraints on Decision-making
An organization has to make decisions to achieve its objectives. Decision-making is a very important
managerial domain. Decisions can be classified into various categories, as listed below:
(i) Programmed decisions – Routine decisions taken by a manager.
(ii) Non-programmed decisions – These are decisions that are unstructured and are made in unforeseen
conditions.
(iii) Strategic decisions – Long-term decisions of the organization, regarding its direction and policy.
(iv) Tactical decisions – These are used to implement strategic decisions and are medium-term decisions.
(v) Operational decisions – These are the decisions which are made on a day-to-day basis and are less
contentious.
As a business operates in an environment that is constantly changing, a manager has to be cognizant of
both the external and internal factors that affect it. A manager faces several constraints while making
decisions. These constraints could be internal (for instance, management style, organizational structure,
current policy, employee behaviour, etc.) or external in nature. The external constraints affecting decision-
making are:
Political constraints: An organization is affected by changes in the political environment. For instance, a
change in the government of a state or country may affect policies in effect. Further, the policies of a particular
party may or may not be conducive to the organization.
Economic constraints: Economic factors also impose certain constraints on an organization. The economic
factors that affect decision-making are economic policies, condition of the economy, domestic demand, etc.
Social constraints: Decision-making is also affected by various social constraints. Social variables such
as changes in lifestyle of people, the increasing number of women in the workplace, the increasing number
of divorces, etc. affect an organization’s decisions regarding products and marketing strategy.
Technical constraints: Technology also has a great impact on decision-making. Organizations find it essential
to adopt automation and information technology in order to compete effectively with competitors and to
achieve their goals.
Legal constraints: An organization’s decisions are also affected by changes in legislation. New laws and
regulations have a direct bearing on the way an organization functions.
Environmental constraints: With growing concern for the environment, an organization has to take into
consideration the norms set by the government and other agencies. An organization has to keep its pollution
under control, recycle the waste it produces, and produce environment-friendly products. These constraints
affect the organization’s decisions on how to utilize its resources.
Ethical constraints: Organizations are often governed by norms which guide ethical behaviour. These norms
are set either by the government, an association of organizations, or by the organization itself.
Adapted from “Advanced Business: Business Decision Making,” Weekly Newsletter, Biz/ed, 11 November 2002,
<http://www.bized.ac.uk/current/news/2002_3/111102_bus_a.htm>
Identifying Resources and Constraints

Once the problem is identified and diagnosed, the manager should identify the resources and constraints
relevant to the problem. Anything that can be used to solve the problem is a resource. These include
people, money, materials, time, equipment, expertise, and information. On the other hand, constraints are
the factors that limit managers’ efforts to solve the problem. They are hindrances to problem solving.
Examples of constraints include lack of adequate resources, etc. Organizations generally face more than
one problem at a time. These problems compete for the manager’s attention and for the scarce resources
of the organization. Making an explicit list of the organization’s resources allows the manager to allocate
the resources in such a way that they are utilized to the maximum extent possible. The listing of constraints
alerts managers to the presence of various bottlenecks that could create problems. Organizations sometimes
face situations in which the absence of a specific resource or the presence of a particular constraint poses
a problem for conducting its business.
Generating Alternative Solutions

Once the problem, resources and constraints of the organization are identified, the next step would
be to generate feasible alternatives to the problem. Managers should not take any major decision without
exploring all the possible alternatives. The temptation to accept the first feasible alternative often prevents
managers from finding the best solution to the problem. Generating a number of alternatives allows them
to resist the temptation of finding a speedy solution to the problem and increases the chances of reaching
an effective decision. The development of alternatives can often be facilitated through brainstorming, a
group decision-making technique that encourages members of a group to generate as many feasible ideas
as possible on a given topic, without carefully evaluating each one of them. In a brainstorming session,
none of the ideas offered is criticized. Each idea is recorded for later evaluation.
Since there are always alternatives waiting to be discovered, the process of generating alternatives
could go on forever. Two factors must be taken into consideration when determining the appropriate
amount of time to be spent on generating alternatives. The first is the importance of the problem. The
greater the importance of the problem, greater will be the value of any improvements that can be made
to the solution of the problem. The second factor relates to how accurately the manager is able to
differentiate between alternatives. This depends on the availability of data and the cost of evaluating the
data. When sufficient data is available, it is relatively easy to distinguish between alternatives and to
determine their relative effectiveness. Managers should not devote too much time to generating alternatives
when the data available is very limited. Similarly, a manager prefers fewer alternatives when the cost of
evaluating the data is high.
Evaluating Alternatives
The generation of alternatives should be followed by a thorough analysis of the pros and cons of each
alternative. In other words, alternatives should be evaluated in order to see how effective each would be.
Generally, there are five criteria on the basis of which alternatives are evaluated: feasibility, quality,
acceptability, cost, and ethics. Feasibility refers to the degree to which an organization can accomplish
a particular goal within the related organizational constraints (such as time, budget, technology and
policies). Alternatives that do not seem feasible should not be considered any further. Quality refers to the
extent to which an alternative finds an effective solution to the problem under consideration. Alternatives
that only partially solve the problem are eliminated at this stage. Acceptability refers to the degree of
support extended to the chosen alternative by the decision-makers and those who would be affected by
its implementation. This criterion is considered to be very important in evaluating alternatives. The costs
criterion refers to the resources required and also the degree to which the alternative may produce
undesirable side effects. Thus, the term ‘costs’ not only includes monetary expenditures that the company
incurs but also some intangible issues such as retaliation from competitors. Ethics refers to the degree of
compatibility of an alternative with the ethical standards and social responsibilities of the organization.
Selecting an Alternative
After evaluating the alternatives, the next step in the decision-making process would be to select the
best alternative. Managers can make use of three basic approaches for selecting among alternatives. These
are: (1) experience, (2) experimentation, and (3) research and analysis. When taking decisions, managers
tend to rely on past experience to a great extent. Many managers believe that their previous accomplishments
and mistakes are infallible guides to the future. Though experience is the best teacher, excessive reliance
on it can be dangerous, especially since many managers fail to recognize the underlying reasons for their
mistakes or failure. Moreover, the solutions to new problems may be very different and the lessons from
one’s experience may not be valid in every situation. For one to take good decisions, these have to be
evaluated in terms of the future. Experience can be useful only when the decision-maker learns the
fundamental reasons for success or failure from experience. A successful programme, a profitable product
promotion, or any other decision that turns out well, may provide avenues for such learning.
Another way to decide among alternatives is to try one of them and see the consequences.
Experimentation is often used in scientific inquiry. Most people recommend that it should be employed
more often in managing and that it should be the only way by which a manager can make sure that the
plans are right. The experimentation approach can be quite expensive, especially if a programme requires
heavy capital expenditure, and if several alternatives have to be tried out. Moreover, after experimenting,
doubts may still linger as to what the experiment proved. Thus, this technique must be used only after
considering other techniques. Experimentation can, however, be used in other ways. For instance, a firm
may test a new product in a certain market before launching it nationwide. Organizational techniques are
often tried out in a branch office before being implemented throughout the company.
When important decisions are involved, one of the most effective techniques to select an alternative
is through research and analysis. This approach attempts to solve a problem by first understanding it. It
tries to find relationships among the critical variables, constraints, and premises which have a direct effect
on the goal to be accomplished. In this approach, the decision-maker develops a model simulating the
problem. He may also represent the variables in a problem situation through mathematical terms and
relationships. One of the most comprehensive research and analysis approaches to decision-making is
operations research. This is discussed later in the chapter as one of the decision-making techniques.
Whatever approach the decision-maker may adopt in selecting an alternative, he must bear in mind
that the selected alternative should be acceptable to those who must implement it and those who will be
affected by the decision. Failure to meet this condition is one of the most likely reasons for failure of the
decision-making process.
Implementing the Decision

Once the best among the available alternatives has been selected, it must be implemented properly
to achieve the objective for which it was selected. It is possible for a good decision to become ineffective
due to poor implementation. Successful implementation of a decision usually depends on two factors –
careful planning, and sensitivity to those who will implement the decision and/or those who will be affected
by it. Minor changes require only a little planning, whereas major changes require extensive planning
efforts, such as written plans, special funding arrangements, and careful coordination with units inside and
outside the organization. Decisions can be implemented smoothly by being sensitive to the reactions of
those whom the decision will affect. The decision-makers should anticipate potential resistance at various
stages of the implementation process. They should also realize that unanticipated consequences may arise
despite the fact that precise evaluation of all alternatives and carefully consideration of the consequences
of each alternative have been undertaken.
After the process of implementing the decision has begun, any number of situations, such as unexpected
effects on cash flow or operating expenses, can arise. Managers must, therefore, have contingency plans
ready to deal with such situations. In order to overcome resistance to change, the people who will be
implementing the decision should be given careful orientation and training. A participative approach may
be an effective way for the successful implementation of certain decisions. Most managerial problems
require the combined efforts of many members of the organization; each should understand what role he
or she is to play during each phase of the implementation process.
Monitoring the Decision

Managers are required to monitor the process of implementation of the decision so as to make sure
that everything is progressing according to plan. It should also be ensured that the problem that initiated
the decision-making process has been resolved. Monitoring decisions involves gathering information to
evaluate how the decision is working. Thus, feedback is an essential component of the decision process.
It allows the decision-maker to determine the effectiveness of the chosen alternative in solving the problem
or in moving the organization closer to the attainment of its goals.
In order to evaluate the effectiveness of a decision, there should be a set of standards against which
actual performance can be compared. A second requirement is the availability of performance data for
comparison with the set of standards. Finally, a data analysis strategy, which includes a formal plan
outlining how the data will be used, should be developed. By reviewing the decisions, the decision-maker
will recognize the mistakes he has made and learn where and how to avoid them in the future. This will
also help him sharpen his decision-making skills.
TYPES OF MANAGERIAL DECISIONS

Decisions made by managers usually fall into either of the following two categories (1) programmed
decisions, and (2) non-programmed decisions.
Programmed Decisions
Programmed decisions are those that deal with simple, common, frequently occurring problems that
have well-established and understood solutions. These decisions are made in routine, repetitive, well-
structured situations, using predetermined decision rules that may be based on habit, established policies
and procedures, or computational techniques. For instance, if a manager of a distribution centre knows
from experience that he needs to keep a thirty-day supply of a particular item on hand, he can establish
a system whereby the appropriate quantity is automatically reordered whenever the inventory drops below
the thirty-day requirement.
As Figure 7.2 indicates, most programmed decisions are made by lower-level managers. This is
because problems at the lower level of the organization are often routine and well-structured, and require
less decision-making and discretion on the part of the manager.
Programmed decisions can be made in less time, and are consistent and inexpensive in nature. For
example, the presence of policies, procedures, and rules in organizations eliminates the need to identify
and evaluate alternatives, and select a new alternative, each time a decision is to be made. It would be
rather time-consuming and expensive if a manager had to decide how to handle customer complaints on
an individual basis. But, if the organization has a policy that states – “Exchanges will be permitted on all
purchases within 15 days” – it simplifies matters considerably.
Unstructured problems Non-programmed decisions

Top
level
managers
Middle level
managers
Structured Programmed
problems Lower level managers decisions
Fig. 7.2 Nature of problems and Decision-making in organizations
However, programmed decisions limit the flexibility of managers to a certain extent. But, at the same
time, they save time and allow the decision-maker to devote his or her efforts to unique non-programmed
decisions.
Although effective managers depend on company policy in order to save time, they should, nevertheless,
remain alert to the possibility of exceptional cases. For instance, company policy may impose a ceiling on
the advertising budget for each product. However, a particular product may require an extensive advertising
campaign to counter a new aggressive marketing strategy of a competitor. In such a case, a programmed
decision, that is, a decision to advertise the product in accordance with budget guidelines, might be a
mistake. Thus, managers must use their own judgment to decide whether a situation calls for a programmed
or a non-programmed decision.
Non-programmed Decisions
Non-programmed decisions are those that deal with unusual or exceptional problems. Since non-
programmed decisions involve situations that are novel and/or ill-structured, predetermined decision rules
are impractical for such decisions. Most of the important decisions that managers make fall into the non-
programmed category. Decisions that involve strategies to deal with mergers, acquisitions, takeovers and
organization design, are non-programmed by nature. So also are decisions pertaining to new facilities,
new products, labour contracts, and legal issues.
If a problem has not occurred often enough to be covered by company policy, i.e., if it is not recurring
in nature, or is not so important that it deserves special treatment, it should be resolved by means of a
non-programmed decision. For instance, problems such as how to allocate an organization’s resources,
what to do about a failing product line, etc. usually require non-programmed decisions.
As Figure 7.2 indicates, most non-programmed decisions are made by upper-level managers, because
these are the managers who have to deal with unstructured problems. Because of their nature, non-
programmed decisions usually involve a lot of uncertainty, a condition where the decision-maker has to
choose a course of action without having complete knowledge of the consequences that will follow its
implementation.
Managers taking non-programmed decisions must treat each situation as unique and distinct from
others. They need to invest enormous amounts of time, energy and resources to explore the situation from
all perspectives. Intuition and experience are major factors in non-programmed decisions. Managers
should strive to convert as many decisions as possible into programmed ones. Many organizations treat
routine decisions such as decisions involving inventory control, supplier selection and individual salary
decisions, as special decision areas requiring unique solutions. Some of these can be converted into
programmed decisions for the greater part, so that the manager can devote more time and effort towards
taking decisions that are not programmable.
DECISION-MAKING UNDER CERTAINTY, UNCERTAINTY AND RISK

Managers make decisions for events that are likely to occur in the future. Sometimes they have an
almost perfect understanding of the conditions surrounding a decision, but at other times, they have very
little understanding of the conditions. Every decision-making situation has some aspects that are unknown
and are very difficult to predict. These include considerations such as the reaction of a competitor to a
price change, the reliability of a new supplier, the use of a promising but untried technology, the actual
productivity of newly installed machines, etc. Based on the degree of certainty involved, every decision-
making situation falls into one of three categories: (1) certainty, (2) risk, and (3) uncertainty.
Decision-making under Certainty

A condition of certainty exists when the decision-maker knows with reasonable certainty what the
alternatives are, what conditions are associated with each alternative, and the outcome of each alternative.
Under conditions of certainty, accurate, measurable, and reliable information on which to base decisions,
is available. The cause and effect relationships are known and the future is highly predictable under
conditions of certainty. Such conditions exist in case of routine and repetitive decisions concerning the
day-to-day operations of the business.
Decision-making under Risk

When a manager lacks perfect information or whenever an information asymmetry exists, risk arises.
Under a state of risk, the decision-maker has incomplete information about available alternatives but has
a good idea of the probability of outcomes for each alternative. While making decisions under a state of
risk, managers must determine the probability associated with each alternative on the basis of the available
information and his experience.
Decision-making under Uncertainty

Most significant decisions made in today’s complex environment are formulated under a state of
uncertainty. Conditions of uncertainty exist when the future environment is unpredictable and everything
is in a state of flux. The decision-maker is not aware of all available alternatives, the risks associated with
each, the consequences of each alternative or their probabilities. The manager does not possess complete
information about the alternatives and whatever information is available, may not be completely reliable.
In the face of such uncertainty, managers need to make certain assumptions about the situation in order
to provide a reasonable framework for decision-making. They have to depend upon their judgment and
experience for making decisions.
Modern Approaches to Decision-making under Uncertainty

There are several modern techniques to improve the quality of decision-making under conditions of
uncertainty. The most important among these are (1) risk analysis, (2) decision trees and (3) preference
theory.
Risk Analysis
Managers who follow this approach analyze the size and nature of the risk involved in choosing a
particular course of action. For instance, while launching a new product, a manager has to carefully
analyze each of the following variables – the cost of launching the product, its production cost, the capital
investment required, the price that can be set for the product, the potential market size and what per cent
of the total market it will represent.
Risk analysis involves quantitative and qualitative risk assessment, risk management and risk
communication and provides managers with a better understanding of the risk and the benefits associated
with a proposed course of action. The decision represents a trade-off between the risks and the benefits
associated with a particular course of action under conditions of uncertainty.
Decision Trees
These are considered to be one of the best ways to analyze a decision. A decision-tree approach
involves a graphic representation of alternative courses of action and the possible outcomes and risks
associated with each action. By means of a “tree” diagram depicting the decision points, chance events
and probabilities involved in various courses of action, this technique of decision-making allows the
decision-maker to trace the optimum path or course of action. “Decision trees” are discussed in detail in
the later part of the chapter under the head “Decision-making techniques.”
Preference or Utility Theory

This is another approach to decision-making under conditions of uncertainty. This approach is based
on the notion that individual attitudes towards risk vary. Some individuals are willing to take only smaller
risks (“risk averters”), while others are willing to take greater risks (“gamblers”). Statistical probabilities
associated with the various courses of action are based on the assumption that decision-makers will follow
them. For instance, if there were a 60 per cent chance of a decision being right, it might seem reasonable
that a person would take the risk. This may not be necessarily true as the individual might not wish to
take the risk, since the chances of the decision being wrong are 40 per cent. The attitudes towards risk
vary with events, with people and positions. Top-level managers usually take the largest amount of risk.
However, the same managers who make a decision that risks millions of rupees of the company in a given
programme with a 75 per cent chance of success, are not likely to do the same with their own money.
Moreover, a manager willing to take a 75 per cent risk in one situation may not be willing to do so in
another. Similarly, a top executive might launch an advertising campaign having a 70 per cent chance of
success but might decide against investing in plant and machinery unless it involves a higher probability
of success.
Though personal attitudes towards risk vary, two things are certain. Firstly, attitudes towards risk vary
with situations, i.e. some people are risk averters in some situations and gamblers in others. Secondly,
some people have a high aversion to risk, while others have a low aversion. Most managers prefer to be
risk averters to a certain extent, and may thus also forego opportunities. When the stakes are high, most
managers tend to be risk averters; when the stakes are small, they tend to be gamblers.
MANAGEMENT INFORMATION SYSTEM VS DECISION SUPPORT SYSTEM

Managers at all levels require information to be provided to them with speed, brevity, precision and
economy to enable them to carry out their functions effectively. This need is satisfied by means of a
management information system. A Management Information System (MIS) is a system that gathers
comprehensive data, organizes and summarizes it in a form that is of value to functional managers, and
provides them with information they need to carry out their work. MIS is used to transform data into useful
information in order to support managerial decision-making with structured decisions or programmed
decisions. In simple words, a MIS is a computer-based information system which assists managers in
decision-making and control and in planning more effectively.
The typical MIS is made up of four major components – data gathering, data entry, data transformation
and information utilization. The modern MIS is based on a centralized database of raw data. Data is
stored in the database in such a way that parts of it may be selected, altered, used in calculations, and
transformed into useful information that can be used in a wide variety of applications.
MIS offers a wide spectrum of services at all levels and for all functional areas of the organization.
It provides the top management with information pertaining to the external environment. To the middle
management, it provides information useful for operational plans and to the first-level managers, it provides
internal information useful for operations control. MIS will be discussed in detail in Chapter 12.
A decision support system (DSS) is an interactive computer system that can be easily accessed and
operated by people who are not computer specialists. It helps them to plan and make decisions. In other
words, DSS is a computer-based information system that supports the process of managerial decision-
making in situations that are not well structured. Such systems do not actually provide “answers” or point
to optimal decisions for managers. Rather, they attempt to improve the decision-making process by
providing tools that help managers analyze the situations more clearly. Thus DSS does not replace managerial
decision-making but supports it and makes the process more effective. DSS has become increasingly
popular because of advances in computer software and hardware.
A typical DSS consists of the following elements:
An MIS that supports several methodologies for accessing and summarizing data
A sophisticated database that allows information to be accessed in various ways
A user-friendly interface that allows the user to use simple commands rather than technical computer
terms when communicating with the DSS
A database built from both external and internal sources so that the manager can relate internal
events to external forces
Rapid response time, which makes DSS an easy and rewarding system to use.
A DSS must provide information to managers whenever it is needed in a form they can easily
understand. A typical DSS places the information under the manager’s direct control. According to Hogue
and Watson, the unique executive user configuration of the DSS is based on the following characteristics:
1. Executive decisions are the focal points: The data for the DSS and associated models are organized
around the executive’s decisions rather than around existing databases.
2. Specialize in easy-to-use software: The DSS specializes in easy-to-use software that uses simple
English commands rather than technical computer terms.
3. Employs interactive processing: The rapid response time of a DSS permits interactive processing.
4. Use and control rests with the user: The use and control of the DSS rests with the user and not
the central information management department.
5. Flexible and adaptable: The DSS is flexible and adaptable to change in the executive’s style or in
the external environment.
An MIS is a DSS if, and only if, it is designed with the primary objective of managerial decision
support. Thus, a DSS is a specialized MIS designed to support a manager’s skills at all stages of decision-
making, namely identifying the problem, choosing the relevant data, selecting the approach to be used in
making the decision, and evaluating the alternative courses of action.
Although there are similarities between a MIS and a DSS, there are also certain differences. In
comparison to a MIS, a typical DSS provides more advanced analysis and greater access to various
models that can be used by managers to examine a situation more thoroughly. Moreover, a DSS tends
to be more interactive than a MIS. It enables managers to communicate directly (often back and forth) with
computer programmes that control the system and to obtain the results of various analyses almost
immediately. Finally, a DSS often relies on information from external sources as well as from the internal
sources that are largely the domain of the MIS.
THE SYSTEMS APPROACH TO DECISION-MAKING

Many elements of the planning environment extend beyond the boundaries of an enterprise. Hence,
it is not possible to make decisions in a closed-system environment. Moreover, since each department or
unit of an enterprise is a sub-system of the entire enterprise, managers of the organizational units must
be responsive to the policies and programmes of other organizational units and of the whole enterprise.
When a manager makes a decision, he has to take into account the thinking and attitudes of others within
the enterprise, as they are also a part of the system.
Even in a closed-system model, a manager has to make several assumptions regarding the
environmental forces that influence the organization. However, while taking into account the various
elements, the manager does not give up his role as decision-maker. It is not advisable to make the decision
process unnecessarily democratic. Subordinates or others may have an immediate or remote interest in
any decision to be taken. The manager must decide which, if any, of his subordinates he needs to consult
in respect of any issue. The manager is the decision-maker who must select a course of action from among
the alternatives, taking into account the events and forces in the environment.
GROUP DECISION-MAKING
In many major organizations, decisions are often made by groups rather than by individuals. Group
decision-making is practised in many large and complex organizations. Many studies have shown that
groups make better decisions than individuals. As the old adage goes, “Two heads are better than one.”
A major reason why group decision-making is more effective than decision-making by individuals is that
more information is available in a group setting. In group decision-making, several individual members
contribute their ideas before a decision is made.
Table 7.1: Advantages and Disadvantages of Group-Aided Decision-making and Problem Solving
Advantages Disadvantages
1. Greater pool of knowledge: A group can bring much 1. Social pressure: Unwillingness to “rock the boat”
more information and experience to bear on a decision and pressure to conform may combine to stifle the
or problem than can an individual acting alone. creativity of individual contributors.
2. Different perspectives: Individuals with varied 2. Domination by a vocal few: Sometimes the quality
experience and interests help the group see decision of group action is reduced when the group gives
situations and problems from different angles. in to those who talk the loudest and longest.
3. Greater comprehension: Those who personally 3. Logrolling: Political wheeling and dealing can
experience the give-and-take of group discussion about displace sound thinking when an individual’s pet
alternative courses of action tend to understand the project or vested interest is at stake.
rationale behind the final decision.
4. Increased acceptance Those who play an active role 4. Goal displacement: Sometimes secondary
in group decision-making and problem solving tend considerations such as winning an argument,
to view the outcome as “ours” rather than “theirs”. making a point, or getting back at a rival displace
the primary task of making a sound decision or
solving a problem.
5. Training ground: Less experienced participants in 5. Group think: Sometimes cohesive “in groups” let
group action learn how to cope with group dynamics the desire for unanimity override sound judgement
by actually being involved. when generating and evaluating alternative courses
of action.
Source: Robert Kreitner, Management (New Delhi: AITBS Publishers & Distributors, First Indian edition, 1999) 234.
The group has more information and a greater number of alternatives available to it. Another major
strength of group decision-making is the relative ease of implementing decisions. The people involved in
a group decision understand the rationale behind it, are more likely to accept it and are capable of
communicating the decision to their work groups or departments. Despite its advantages, group decision-
making also has several potential disadvantages compared with individual decision-making. One of the
major disadvantages of group decision-making is that it is a time-consuming process. Moreover, group
decisions are often a compromise between the differing opinions of individual members rather than an
appropriate solution to the problem. There is often pressure to accept the decision favoured by a majority
of the group members. It is also possible that differences in status or rank, or personality, result in one or
more individuals dominating the group. A final disadvantage is that the group may succumb to a
phenomenon known as group think. This is the tendency exhibited in cohesive groups to seek approval
on an issue at the expense of a realistic appraisal of the situation. The group members are so focused on
preserving the cohesiveness of the group that they may not raise topics which bring to the fore differences
of opinion. In order to avoid conflict between group members, the group may arrive at decisions that are
not in the best interests of either the group or the organization.
The group has more information and a greater number of alternatives available to it. Another major
strength of group decision-making is the relative ease of implementing decisions. The people involved in
a group decision understand the rationale behind it, are more likely to accept it and are capable of
communicating the decision to their work groups or departments. Despite its advantages, group decision-
making also has several potential disadvantages compared with individual decision-making. One of the
major disadvantages of group decision-making is that it is a time-consuming process. Moreover, group
decisions are often a compromise between the differing opinions of individual members rather than an
appropriate solution to the problem. There is often pressure to accept the decision favoured by a majority
of the group members. It is also possible that differences in status or rank, or personality, result in one or
more individuals dominating the group. A final disadvantage is that the group may succumb to a
phenomenon known as group think. This is the tendency exhibited in cohesive groups to seek approval
on an issue at the expense of a realistic appraisal of the situation. The group members are so focused on
preserving the cohesiveness of the group that they may not raise topics which bring to the fore differences
of opinion. In order to avoid conflict between group members, the group may arrive at decisions that are
not in the best interests of either the group or the organization. The advantages and disadvantages of
group decision-making are summarized in Table 7.1.
Forms of Group Decision-making

The most common forms of group decision-making are: interacting groups, Delphi groups, and
nominal groups.
Interacting Groups
One of the most common forms of group decision-making is an interacting group. It is a decision-
making group in which the members openly discuss, argue about and agree on the best alternative. In this
form of group decision-making, an existing group (like a functional department, regular work group, or
standing committee) or a newly designated group (such as an ad hoc committee, task force, or work team)
is entrusted with the task of taking a decision. The discussion is open and interactive, with group members
“free-wheeling” ideas that lead to an accumulation of pooled information and value judgments. The group
arrives at a decision after discussing the pros and cons of various alternatives. An advantage of this
method is that the interaction between people brings forth many new ideas and improves understanding
between members of the group. However, a major disadvantage of this form of group decision-making is
that political factors can influence it to a great extent. It fosters group dynamics that tend to limit the
creative process.
Step 1: Selection of a group of experts
Step 2: Ideas and forecasts are obtained from all participants, usually through a
questionnaire
Step 3: Results are summarized and redistributed among participants
Step 4: Members whose responses deviate from the opinion of the majority are requested
to reconsider or provide justification for the deviation
Step 5: Responses are again summarized and new questions are developed on the basis of
the responses
Step 6: Repeat the cycle till results obtained are in a range that is narrow enough to be used
as a forecast
Fig. 7.3 Steps in the Delphi Method
Delphi Groups
This form of group decision-making involves obtaining the opinions of experts and developing a
consensus. This technique was originally developed by the Rand Corporation. It uses the individual views
and opinions of a panel of experts. Their opinions are combined and averaged. Since the Delphi technique
does not bring the participants together, most of the inhibiting factors of group dynamics are eliminated
and anonymous participation is facilitated. The Delphi method is outlined in Figure 7.3.
Exhibit 7.2 The Basic Steps and Concerns of Delphi Method
According to Adler and Ziglio, the Delphi method is a method of group communication among a panel of
geographically dispersed experts. This method allows experts to deal with a complicated task in a systematic
manner. The Delphi method tries to overcome the limitations of a conventional face-to-face interaction. In the
Delphi method, the most important elements are (1) presenting the information in a structured manner (2)
providing feedback to the participants and (3) ensuring anonymity of participants.
As described by Fowles, the Delphi method comprises of the following ten steps:
1. Creation of a team to undertake and monitor a Delphi study.
2. Selection of panelists (who are experts in their domain) to participate in this exercise.
3. Developing the first round of Delphi questionnaire.
4. Testing the questionnaire to see that there are no ambiguities or vagueness in the terms used.
5. Transmission of the first questionnaire to the panelists.
6. Analysis of the responses of the first round.
7. Preparing and testing the questionnaire for the second round.
8. Transmission of the second questionnaire to the panelists.
9. Analyzing the second round of responses (steps 7 to 9 are repeated as desired to get correct results).
10. A report is prepared by the analysis team to present the conclusions of the exercise.
The Delphi method has been criticized by several management writers. The major concerns about the Delphi
method are:
i. Discounting the future – Present events are often considered more important than the future and the past
happenings. Therefore, there is a tendency to discount or undermine future events.
ii. The simplification urge – Sometimes, the experts project the future in terms of their own specializations.
They may not find it easy to develop a holistic view of the future. Hence, the pervasive influence of change
may be underestimated.
iii. Illusory expertise – Some experts may not be able to forecast future trends. Such an expert’s view must
not be mistaken as the most appropriate.
iv. Sloppy execution – The Delphi process may occasionally lose its focus and this can result in a poor job.
v. Format bias – In some cases, the format of the questionnaire may not be appropriate for some participants.
vi. Manipulation – The responses can be manipulated by those monitoring the process in order to move the
next round of responses in a desired direction.
In general, many management writers are of the opinion that Delphi method is useful for those questions
which are specific and single-dimensional. However, this method fails when the forecast is complex and deals
with multiple factors. Thus, a Delphi study helps find suitable answers to specific questions.
Adapted from “The Delphi Method: Definition and Historical Background,” <http://www.iiit.edu/~it/delphi.html>
The first step in the Delphi technique is to bring together a panel of experts. Next, a problem is
presented to them and they are asked to give their (anonymous) solutions to the problem.
Exhibit 7.3 Strengths and Weaknesses of Delphi Method
The main strength of Delphi method is that it allows a manager to explore issues on which decisions have
to be made in an objective manner. The Delphi method is a powerful technique which can give useful answers
to specific and appropriate questions.
Nevertheless, the Delphi method has a number of weaknesses too. Firstly, it is difficult to conduct Delphi
studies well. A lot of thought and consideration must go into the choice of the people who are to participate.
The questionnaire too has to be prepared with great care so as to avoid confusion. A second drawback of
the Delphi method is that it takes a considerable amount of time.
A single round can easily take three weeks; therefore, the Delphi method cannot be used in cases where
time is a constraint. Finally, some management theorists are of the opinion that Delphi method does not
really produce accurate answers. They feel that the participants with extreme opinions are more likely to
change their stand, rather than elaborate the reasons behind their choice. Also, since expert consensus is
usually regarded as more likely to be correct than a forecast made by an individual, too much emphasis is
placed on obtaining consensus. Thus, the Delphi method discriminates against extreme opinions.
In spite of its pitfalls, the Delphi method is a systematic way of organizing the views of experts. It brings
together the expertise of all the participants in a particular domain. The Delphi method is still considered as
one of the best ways to collect and synthesize opinions.
Adapted from Theodore Jay Gordon, “The Delphi Method,” 1994, <http://www.futurovenezuela.org/_curso/5-
delphi.pdf>
The responses are collected and averaged by the people coordinating the Delphi group. They then ask
the experts for some more alternatives or solutions to the problem. At this juncture, the experts who
contribute unusual solutions may be asked to explain or clarify them further. These explanations are
sometimes conveyed to other experts. The process of collecting the responses from experts and asking them
to give more alternatives is repeated a number of times in order to achieve in-depth consensus. When there
is a relative stability in the responses given by the participants, the average response or solution is taken
to represent the decision of the “group” of experts. The Delphi technique is not used for routine, everyday
decisions because it is time-consuming and expensive.
Nominal Groups
This is another useful group decision-making technique, which is used occasionally. In a nominal
group technique, the group members are actually brought together, whereas in the Delphi method, the
participants do not meet. However, nominal group members do not interact as freely as the members of
interacting groups. This technique is generally used when creative or innovative ideas are required. The
nominal group procedure is shown in Figure 7.4.
The nominal group technique begins with the managers assembling a group of knowledgeable people
and outlining the problem to them. The group members are asked to list out the possible solutions to the
problem. The members then present their ideas. These are then recorded (on a flip chart or blackboard)
in full view of the group. Discussion in the initial stages pertains to clarification of doubts. When all the
responses are recorded on the master list, the group members discuss and evaluate the ideas openly.
Group members then rank the various alternatives and decide on the best alternative. The alternative that
secures the highest rank represents the decision of the group. However, it is upto the manager to accept
or reject the group decision.
DECISION-MAKING TECHNIQUES
A number of sophisticated techniques or tools which are useful in the decision-making process are
available. In this section, each of these techniques is discussed in brief.
Marginal Analysis
This technique is used in decision-making to figure out how much extra output will result if one more
variable (e.g. raw material, machine, worker) is added. In his book, ‘Economics’, Paul Samuelson defines
marginal analysis as the extra output that will result by adding one extra unit of any input variable, other
factors being held constant. Marginal analysis is particularly useful for evaluating alternatives in the
decision-making process.
Financial Analysis
This decision-making tool is used to estimate the profitability of an investment, to calculate the
payback period (the period taken for the cash benefits to account for the original cost of an investment),
and to analyze cash inflows and cash outflows. Investment alternatives can be evaluated by discounting
the cash inflows and cash outflows (discounting is the process of determining the present value of a future
amount, assuming that the decision-maker has an opportunity to earn a certain return on his money).
Group information
and idea generation
process
WORKING Perform round

Develop action plan
TOGETHER robin silent
for selected ideas
TO SOLVE reporting
and implementation
PROBLEMS
plan
Clarification of
Ranking of ideas ideas and group
discussion
Fig. 7.4 Steps for Conducting Nominal Group Technique
Source: Dr.Johnson A.Edosomwan, Organizational Transformation and Process Reengineering (USA: St.Lucie
Press, 1996), p.111.
Break-even Analysis
This tool enables a decision-maker to evaluate the available alternatives based on price, fixed cost
and variable cost per unit. Break-even analysis is a measure by which the level of sales necessary to cover
all fixed costs can be determined.
Exhibit 7.4 Advantages and Disadvantages of Nominal Group Process
A nominal group process is a structured problem-solving technique in which individuals and the ideas
generated by them are brought together in a face-to-face group situation. Nominal group processes are used
in the field of health services, social services and education. This technique is also used in industry and
government agencies to enhance creative participation in group problem-solving.
Advantages:
1. If the nominal group process is well-organized, a definite conclusion can be arrived at from a heterogeneous
group.
2. This process can be used to elaborate upon the data obtained from surveys or existing documents. It can
also be used to produce a more specific survey.
3. The process motivates all the participants to get involved in the process and contribute their ideas.
4. A nominal group process produces many ideas in a short span of time. It takes into account individual
thoughts and concerns.
5. Allows people of different backgrounds and experience to give their inputs.
6. Provides equal opportunity for all participants to express opinions and ideas without any confrontations.
7. Promotes creative thinking and effective communication.
8. Allows participants to express their ideas in a clear manner.
Disadvantages:
1. Since this process involves face-to-face interactions, it requires a skilled group facilitator.
2. It is very hard to carry the process out with a large group. For a large group, the facilitator has to prepare
in advance and the participants have to be divided into smaller groups of 6-10 members.
3. The facilitator or group leader must be flexible and should respect the views expressed by others.
Otherwise, the process may become very rigid.
4. Inadequate discussion may cause ambiguity and overlapping of ideas.
5. Individuals who are selected to participate in the process may not represent all the subgroups of the
community. Some subgroups may not be represented at all. Therefore, the ideas generated in a nominal
group process may not portray the concerns of the entire community.
6. People who are aggressive may not allow others to participate or to express their views fully. In order
to avoid such a situation, the group facilitator must be tactful and give all participants a fair chance.
7. A nominal group process may not be a sufficient source of data in itself. This process may require a
follow-up survey, observations or documentary analysis.
This process is not suitable for routine meetings, negotiations and collective bargaining.
Adapted from “Nominal Group Process,” 10 January 1994, Michigan State University Extension, <http://
www.msue.msu.edu/msue/imp/modii/iii00005.html>
Using this technique, the decision-maker can determine the break-even point for the company as a
whole, or for any of its products. At the break-even point, total revenue equals total cost and the profit
is nil.
Ratio Analysis
It is an accounting tool for interpreting accounting information. Ratios define the relationship between
two variables. The basic financial ratios compare costs and revenue for a particular period. The purpose
of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses
of a firm, as well as its historical performance and current financial condition.
Operations Research Techniques

One of the most significant sets of tools available for decision-makers is operations research. Operations
research (OR) involves the practical application of quantitative methods in the process of decision-making.
When using these techniques, the decision-maker makes use of scientific, logical or mathematical means
to achieve realistic solutions to problems. Several OR techniques have been developed over the years.
Some of the most widely used techniques are discussed briefly in this section.
Linear Programming
Linear programming is a quantitative technique used in decision-making. It involves making an
optimum allocation of scarce or limited resources of an organization to achieve a particular objective. The
word ‘linear’ implies that the relationship among different variables is proportionate. The term ‘programming’
implies developing a specific mathematical model to optimize outputs when the resources are scarce. In
order to apply this technique, the situation must involve two or more activities competing for limited
resources and all relationships in the situation must be linear.
Some of the areas of managerial decision-making where linear programming technique can be
applied are:
Product mix decisions
Determining the optimal scale of operations
Inventory management problems
Allocation of scarce resources under conditions of uncertain demand
Scheduling production facilities and maintenance
Queuing or Waiting-line Method

This is an operations research method that uses a mathematical technique for balancing services
provided and waiting lines. Waiting lines (or queuing) occur whenever the demand for the service exceeds
the service facilities. Since a perfect balance between demand and supply cannot be achieved, either
customers will have to wait for the service (excess demand) or there may be no customers for the
organization to serve (excess supply). When the queue is long and the customers have to wait for a long
duration, they may get frustrated. This may cost the firm its customers. On the other hand, it may not be
feasible for the firm to maintain facilities to provide quick service all the time since the cost of idle service
facilities have to be borne by the company. The firm, therefore, has to strike a balance between the two.
The queuing technique helps to optimize customer service on the basis of quantitative criteria. However,
it only provides vital information for decision-making and does not by itself solve the problem. Developing
queuing models often requires advanced mathematical and statistical knowledge.
Game Theory
This is a systematic and sophisticated technique that enables competitors to select rational strategies
for attainment of goals. Game theory provides many useful insights into situations involving competition.
This decision-making technique involves selecting the best strategy, taking into consideration one’s own
actions and those of one’s competitors. The primary aim of game theory is to develop rational criteria for
selecting a strategy. It is based on the assumption that every player (a competitor) in the game (decision
situation) is perfectly rational and seeks to win the game.
Exhibit 7.5 Decision Trees and their Application

Good managers can be compared with navigators. They should always have their sight fixed on the horizon
and at the same time on the current position as well. They are not only responsible for achieving results at
the present moment, but are also accountable for the firm’s accomplishment of its objectives in the long term.
Managers make progress through effective decisions. Decision-making requires the manager to scan the
future, and predicting the future is not an easy task. Moreover, one is faced with too many choices and
uncertainties in predicting the future. Most of the time, the uncertainties are interconnected, and managers
should keep this in mind while taking decisions. As an organization grows and new information emerges, a
manager is required to make many decisions over a period of time.
A decision tree is a tool which helps to map out sequential decisions in a graphical form. While constructing
a decision tree, one must anticipate future uncertainties and subsequent decisions one has to take. A
decision tree is a useful technique which forces one to think systematically about the likely possibilities, and
make decisions accordingly.
Developing new drugs is a time-consuming and risky venture. Before a drug can be introduced into the
market, it has to cross many barriers. A drug has to satisfy many scientific and regulatory criteria. A
compound that seems promising in the lab may fail in animal trials. Even if, in animal trials, it is found to
be both safe and efficacious, it may falter in human trials. After human trials, it may still be rejected by
regulatory authorities. After passing all these tests, drugs still face another major hurdle – competition in the
market place. A rival company may have a better product, greater reach through a bigger sales force, or some
other specific advantage.
For pharmaceutical companies, the time when a drug makes its entry into the market is very crucial. For
any category of drugs, the first entrant is likely to gain a major share of the market. Decision analysis can
show how useful it would be for a company to get into a market a month or a year ahead of its competitors.
In 1994, Merck, a pharmaceutical company, was trying to develop and market a new generation of painkillers
called Cox-2 inhibitors. At this time, Monsanto, a competitor of Merck, was already developing Celebrex,
which was the first Cox-2 inhibitor to be developed by a pharmaceutical company.
Monsanto, therefore, had a headstart over Merck. The chief of drug research at Merck, Dr. Edward Scolnick
had to bring out another compound soon, if they were to be in the race. By this time, animal trials had
revealed that the two Cox-2 inhibitors being developed by Merck were efficacious and safe. These drugs now
had to be tested on humans and this was a very expensive affair. Dr. Scolnick was faced with two options,
i.e. he could either test both the compounds simultaneously, or first test one of the compounds and if it
happened to fail, he could test the second compound. The first option was more expensive but fast; whereas
the second option would be economical but slow. Using the decision tree method, Dr. Scolnick analyzed the
risk involved and the likely payoff from both the options and opted to get both the products tested simultaneously.
As expected, only one of the compounds passed the tests of efficacy and safety in human beings. Although
Merck could not launch its product before Monsanto, it was able to gain a significant market share in the
Cox-2 inhibitors market. Monsanto launched Celebrex in January 1999 and Merck launched its brand of Cox-
2 inhibitor, Vioxx in May 1999. By the year 2000, Vioxx had gained a 49 per cent market share whereas
Celebrex had a small lead with a 51 per cent market share. Thus, Merck was able to tilt the odds in its favour
by deciding to take risks and by making innovative decisions.
Adapted from Joan Magretta and Nan Stone, What Management Is? (New York: Free Press, 2002) 169-172.
In other words, the theory assumes that the opponent will carefully consider what the decision-maker
may do before he selects his own strategy. Minimizing the maximum loss (minimax) and maximizing the
minimum gain (maximin) are the two concepts used in game theory.
Simulation
This technique involves building a model that represents a real or an existing system. Simulation is
useful for solving complex problems that cannot be readily solved by other techniques. In recent years,
computers have been used extensively for simulation. The different variables and their inter-relationships
are put into the model. When the model is programmed through the computer, a set of outputs is obtained.
Simulation techniques are useful in evaluating various alternatives and selecting the best one. Simulation
can be used to develop price strategies, distribution strategies, determining resource allocation, logistics,
etc.
Decision Tree
This is an interesting technique used for analysis of a decision. A decision tree is a sophisticated
mathematical tool that enables a decision-maker to consider various alternative courses of action and
select the best alternative. A decision tree is a graphical representation of alternative courses of action and
the possible outcomes and risks associated with each action. In this technique, the decision-maker traces
the optimum path through the tree diagram. In the tree diagram the base, known as the ‘decision point,’
is represented by a square. Two or more chance events follow from the decision point. A chance event
is represented by a circle and constitutes a branch of the decision tree. Every chance event produces two
or more possible outcomes leading to subsequent decision points.
The decision tree can be illustrated with an example. If a firm expects an increase in the demand for
its products, it can consider two alternative courses of action to meet the increased demand: (1) installing
new machines, (2) introducing a double shift. There are two possibilities for each alternative, i.e. output
may increase (positive state) or fall (negative state). The probabilities associated with each state are taken
as 0.6 and 0.4 respectively. This information can be presented in a tabular form, known as a pay-off
matrix (see Table 7.2).
Table 7.2: Pay-off Matrix
Alternatives Nature of events

Output rise Output fall
Additional machines Rs 3,00,000 Rs 2,00,000
Double shift Rs 2,80,000 Rs 2,40,000
A decision tree based on the above table is shown in Figure 7.5. Pay-off for two alternatives may be
calculated as follows:
Additional machines
= (Rs 3,00,000 x 0.6) + (Rs 2,00,000 x 0.4)
= Rs 2,60,000
Double shift
= (Rs 2,80,000 x 0.6) + (Rs 2,40,000 x 0.4)
= Rs 2,64,000
Since the pay-off from introducing a double shift is higher, it may be selected. Though, the decision
tree does not provide a solution to the decision-maker, it helps in decision-making by showing the
alternatives available and their probabilities. The decision tree allows the decision-maker to see the
application of most of the steps in the decision-making process in one single diagram. The effectiveness
of this decision-making technique depends on the assumptions and the probability estimates made by the
decision-maker.
Output falls
(0.6)
Additional
Output falls
machines
(0.4)
DECISION
POINT
Output falls
(0.6)
Double
shift
Output falls
(0.4)
Fig. 7.5 Decision Tree
SUMMARY
Decision-making describes the process by which a course of action is selected to deal with a specific
problem. The success of an organization depends greatly on the decisions of managers. There are two
major types of models used by managers to make decisions – (1) rational model and (2) non-rational
models. In the rational model, managers engage in rational decision-making processes. At the time of
decision-making, they possess as well as understand all the information that is relevant to their decision.
In contrast, non-rational models of managerial decision-making suggest that limitations of information-
gathering and information-processing make it difficult for managers to make optimal decisions. The three
non-rational models of decision-making discussed in the chapter are: ‘satisficing’, incremental, and garbage-
can models.
Any decision-making process contains seven basic steps: (1) identifying the problem; (2) identifying
resources and constraints, (3) generating alternative solutions, (4) evaluating alternatives, (5) selecting an
alternative, (6) implementing the decision, and (7) monitoring the decision. Managerial decisions are of
two types – programmed decisions, and non-programmed decisions. Programmed decisions involve simple,
common, frequently occurring problems. They have well-established and understood solutions. Non-
programmed decisions deal with unusual or exceptional problems. Based on the degree of certainty
involved, every decision-making situation falls into one of three categories: (i) certainty, (ii) risk, and (iii)
uncertainty.
In conditions of certainty, the decision-maker knows with reasonable certainty what the alternatives
are, what conditions are associated with each alternative and the outcome of each alternative. Under a
state of risk, the decision-maker has incomplete information about available alternatives but has a good
idea of the probability of particular outcomes of each alternative. Conditions of uncertainty exist when the
future environment is unpredictable and everything is in a state of flux.
The decision-maker is not aware of all available alternatives, the risks associated with each alternative,
or the consequences of each alternative or their probabilities.
In order to carry out managerial functions effectively, managers at all levels require vital information
with speed, brevity, precision and economy. A management information system is a computer-based
information system that gathers comprehensive data, analyzes and summarizes it, and provides it in a form
that is of value to functional managers. A decision support system is an interactive computer system that
can be easily accessed and operated by people who are not computer specialists, and who use this system
to help them in planning and decision-making.
Major decisions in organizations are often made by groups rather than a single individual. The most
common forms of group decision-making are: interacting groups, Delphi groups, and nominal groups.
Finally, the different decision-making techniques such as marginal analysis, financial analysis, break-even
analysis, ratio analysis and operations research techniques have been discussed. The different operations
research techniques discussed in the chapter include: queuing or waiting-line method, linear programming,
game theory, simulation, and decision trees.
Olympic Toy Company, Chennai

“I expect all the managers in my department to act completely rationally in every decision
STUDY
they make,” declared Shanti Rengarajan, vice-president of marketing for the Olympic Toy
CASE
Company. “Every one of us, no matter what his or her position, is hired to be a professional
rationalist, and I expect all of us not only to know what they are doing and why but to be
right in their decisions. I know that someone has said that a good manager needs only to
be right in more than half of his or her decisions. But that is not good enough for me. I would
agree that you may be excused for occasionally making a mistake, especially if it is a matter
beyond your control, but I can never excuse you for not acting rationally.”
“I agree with your idea, Madam,” said Manjeeth Singh, her advertising manager, “and I
always try to be rational and logical in my decisions. But would you mind helping me and
be sure of this by explaining just what ‘acting rationally’ is?”
1. Explain how the vice-president of marketing might describe what is involved in making rational decisions.
2. If Manjeeth Singh then declares that there is no way show one can be completely rational, what would you
suggest a reply?
Chapter 8 Fundamentals of Organizing 161
Fundamentals of
8
H
Definitions of Organizing
Organizing
H Benefits of Organizing
H Traditional Perspectives on Organizing
H Closed System vs Open System
H Formal vs Informal Organization
H Span of Management
H Organizational Environment for
Entrepreneuring and Intrapreneuring
H The Process of Organizing
H Prerequisites for Effective Organizing
INTRODUCTION
Organizing is a very important managerial function. If planning focuses on deciding what to do,
organizing focuses on how to do it. Thus, after a manager has set goals and worked out a plan to
accomplish those goals, the next managerial function is to organize people and allocate resources to carry
out the plan.
People who know how to make effective use of their resources can make any organizational design
or pattern work efficiently. A manager has to create the right conditions to enable the employees to
effectively utilize the resources of the organization to achieve organizational goals. He has to make the
employees understand the necessity of cooperation for accomplishing tasks. Employees should understand
their roles and responsibilities and should work together to achieve the organizational objectives. This
applies to any organization – business, government, or a football team. For a subordinate to understand
his role, a manager must provide verifiable objectives and a clear picture of the major duties to be
performed. The manager must also specify subordinates’ authority and responsibility. This gives the
subordinate an idea of what he must do to achieve the goals and objectives of the organization. In
addition, a manager should provide the subordinates with necessary information and tools for effectively
performing their roles. Organizing is therefore designing and maintaining a formal structure of roles and
positions.
DEFINITIONS OF ORGANIZING
According to Stephen P. Robbins and Mary Coulter, ‘organizing’ is “determining what tasks are to
be done, who is to do them, how the tasks are to be grouped, who reports to whom, and where decisions
are to be made.”
Thus, organizing refers to important dynamic aspects such as what tasks are to be performed, who
has to perform them, on what basis the tasks are to be grouped, who has to report to whom and who
should have the authority to take decisions.
L.A. Allen defined organizing as “the process of identifying and grouping the work to be performed,
defining and delegating responsibility and authority, and establishing relationships for the purpose of
enabling people to work most effectively together in accomplishing objectives.”
According to this definition, organizing is a management function involving assigning duties, grouping
tasks, delegating authority and responsibility and allocating resources to carry out a specific plan in an
efficient manner.
In a nutshell, organizing refers to the grouping of activities and resources in a logical fashion.
BENEFITS OF ORGANIZING
Effective organizing provides numerous organizational benefits:

The process of organizing helps an individual develop a clear picture of the tasks he or she is
expected to accomplish.
The process of organizing supports planning and control activities by establishing accountability
and an appropriate line of authority.
Exhibit 8.1 Reorganization at HP
Stanford engineers Bill Hewlett and David Packard founded HP in California in 1938 as an electronic instruments
company. Till the 1950s, HP had a well-defined line of related products, designed and manufactured at one
location and sold through an established network of sales representative firms. The company had a highly
centralized organizational structure with vice-presidents for marketing, manufacturing, R&D and finance.
But by the early 1970s, HP had grown from a highly centralized, rather narrowly focused company into one
with many widely dispersed divisions and activities. HP began to use a concept called ‘local decentralization,’
wherein a division was given the full responsibility for a product line (when it had grown large enough) at a
separate, but close, location.
Notwithstanding the efforts made by the top management to generate synergies across divisions, the
decentralized structure that HP had, till the 1980s, created major problems for the company. Users perceived
it as three or four companies, with little coordination between them. For example, when users of HP 3000
computers went to buy HP printers, they found that the software loaded on their computers (which were made
by another HP division) wouldn’t allow them to use it for graphics.
In the 1990s, HP found that its elaborate network of committees was slowing down its ability to take quick
decisions, especially those pertaining to new product development. To address this problem, the then CEO
John Young, dismantled the committee network, and as a part of reorganization, also cut a layer of management
from the hierarchy. These changes enabled HP to gain market share in workstations and minicomputers, and
till the mid 1990s, HP performed well.
However, with the growth in size of operations, came problems as well. It was at this stage that Fiorina took
over the company’s reins. In a bid to make HP an effective selling organization, Fiorina reorganized the
company’s 83 product units into six centralized divisions.
Fiorina immediately introduced several changes, in an attempt to set things right at HP. She began by
demanding regular updates on key units. She also injected the much-needed discipline into HP’s computer
sales force, which had reportedly developed a habit of lowering sales targets at the end of each quarter. Sales
compensation was tied to performance and the bonus period was changed from once a year to every six
months. To boost innovation and new product Fiorina increased focused on ‘breakthrough’ projects. She
started an incentive programme that paid researchers for each patent filing. Fiorina developed a multiyear plan
to transform HP from a ‘strictly hardware company’ to a Web services powerhouse. To achieve this plan,
Fiorina dismantled the decentralized organization structure.
However, the reorganization soon ran into problems. With HP’s 88,000 employees adjusting to the biggest
reorganization in the company’s history, expenses had risen out of control. The new structure did not clearly
assign responsibility for profits and losses. With employees in 120 countries, redrawing the lines of
communication and getting personnel from different divisions to work together was proving very troublesome.
Source: ICFAI Center for Management Research
Organizing creates channels of communication and thus supports decision-making and control.
The process of organizing helps maintain the logical flow of work activities. By so doing, it helps
individuals and workgroups to easily accomplish their tasks.
Organizing helps an organization make efficient use of its resources and avoid conflict and
duplication of effort.
Organizing coordinates activities that are diverse in nature and helps build harmonious relationships
among members involved in those activities.
The process of organizing helps managers to focus task efforts such that they are logically and
efficiently related to a common goal.
Exhibit 8.2 Reorganization and Leadership at ABB
On January 1, 1997, Goran Lindahl (Lindahl) succeeded Barnevik as the CEO of ABB. In this year, ABB’s
financial performance deteriorated significantly. In 1998, Lindahl decided to restructure ABB so as to enable
it to focus its resources on the potentially lucrative business areas. Lindahl split the power transmission and
distribution segment into a power transmission segment and a power distribution segment, and the industrial
and building materials segment into three new segments – the automation segment, the oil, gas and
petrochemicals segment, and the products and contracting segment. In his efforts to simplify the decision-
making process, Lindahl eliminated a layer of regional management, which was present in the matrix
structure. The dual reporting system of the matrix structure was also removed. Under the new system, the
local country heads of the businesses reported directly to the Business Area managers. The restructuring
and cost cutting initiatives including closing of factories and job cuts, by Lindahl, resulted in improved financial
performance for ABB in 1999. For the financial year ending 1999, the net income rose to $1.61 billion, an
increase of 24% over 1998. However, the financial performance of ABB deteriorated significantly in 2000. For
the financial year ending 2000, the net profit fell by 10.5% to $1.44 billion. Lindahl had to step down as ABB’s
CEO in December 2000. On January 1, 2001, Jorgen Centerman became the CEO of ABB. He focused on
serving customers better by using IT. He announced major changes in Lindahl’s group organization structure.
As per to the new structure, the existing business segments of ABB were replaced by four end-user divisions,
two channel partner divisions and a financial services division. The end-user divisions included utilities, manufacturing
and consumer industries, process industries and oil and gas and petrochemicals divisions. The end-user
divisions directly provided customers with ABB products and services. The two channel partner divisions
included power technology products and automation technology products. These divisions served directly external
channel partners like wholesalers, retailers, system integrators and original equipment manufacturers.
Source: ICFAI Center for Management Research
TRADITIONAL PERSPECTIVES ON ORGANIZING

Many management theorists, for instance, Taylor (scientific management), Fayol (classical
administrative), and Weber (bureaucracy), sought to establish universal principles for organizing work,
allocating resources and coordinating activities. Given the diverse nature of organizations, it seems unlikely
that a unanimous agreement upon a universal way of organizing could have been possible. Nevertheless,
it was later evident that the views of these early management theorists on organizing were quite compatible
with one another. Further, their theories of organizing depended to a large extent on organization structure.
The organization theories proposed by Taylor, Fayol and others emphasized the setting up of a network
of functional assignments and establishing clearly defined authority relationships. They also felt that tasks
should be specifically designated to individuals.
Fayol and Taylor considered ‘organizing’ to be a part of management. Organizing was one of Fayol’s
five universal functions of management. Taylor had a highly structured approach to organizational design.
This is evident from the narrow task definitions and stringent work rules proposed by him. Fayol, and other
pioneering management theorists who were influenced by Taylor, advocated a closely controlled,
authoritarian organization, characterized by an unrestricted downward flow of authority in the form of
orders and rules. Their theories of organizing gave rise to the following four principles
(I) Unity of command: To ensure the smooth flow of authority in the organization, each individual
has to report to a single superior. This approach helps managers to avoid the possibility of
conflicting orders.
(II) Well-defined hierarchy of authority: The aim of this principle is to ensure the pursuit of
organizational goals by the employees in a coordinated manner.
(III) Authority at par with responsibility: Authority is defined as the right to get work done
through subordinates, whereas responsibility is the obligation of an individual to accomplish the
assigned work. When a manager delegates authority, commensurate responsibility must also be
expected in return. Conversely, when an individual is held responsible for accomplishing a particular
task, adequate authority to complete the task should also be given to him or her.
(IV) Downward delegation of authority and not responsibility: This principle intends to
eliminate the practice of “passing the buck.” A superior has the right to get tasks accomplished
by his subordinates, but the responsibility for getting the task done still lies with the superior.
Max Weber, a classical management theorist and a German sociologist, believed that effective
organizations (for which he coined the term “bureaucracy”) had a formal structure and followed a predefined
set of rules and regulations. These organizations had the following characteristics:
a. Every individual in the organization specialized in doing a specific task (resulting in a division of
labour).
b. A set of rules and procedures that consistently apply throughout the organization.
c. A hierarchy of authority is established to define a chain of command from upper level of the
organization to the lower levels.
d. Impersonality – Hiring and promoting of people in the organization is based on their competence
and not on their contacts with influential people.
e. Management’s relation with superiors and subordinates are of an impersonal nature and an
appropriate social distance is maintained in all interactions.
The circumstances that prevailed in Germany in the early 1900s influenced Weber’s ideas about
organizations. During those days, public administration relied heavily on the personal judgment of officials
than on sound management practices. Nepotism (recruiting and promoting one’s own relatives) was also
rampant. Weber drew inspiration from the highly respected and efficient Prussian army, which was his
model for the bureaucratic form of organization.
Weber’s theory projected bureaucracy as the epitome of efficiency. But in practice, it was found that
organizations that adopted this approach were slow, insensitive to individual needs and highly inefficient.
Today, the term “bureaucracy” has come to be associated with inefficiency, inflexibility, and red-tapism.
Bureaucratic organizations are considered unresponsive to the needs of customers and employees.
However, it is not possible to eliminate bureaucracy altogether. Every well-managed organization,
irrespective of its size or purpose, adopts a bureaucratic approach to some degree. To a certain extent,
bureaucracy increases the organizational efficiency, but certain aspects of bureaucracy may hinder the
efficiency of the organization.
Challenges to The Traditional View of Organizations

The recommendations made by traditionalists on organizing and managing were quite rigid and could
not be applied in all work situations. Rules and procedures that proved effective in military organizations
and in routine shop operations failed to work in complex organizations. The universal principles and
functions of management proposed by Fayol also did not guarantee success. It was also found that
organizing was much more than mere obedience to authority as propounded by Taylor.
Likewise, Weber’s ideally bureaucratic organizations, in practice, proved to be inefficient and slow.
In addition to this, two other challenges to the traditional view of organizations were thrown up by the
concepts of “bottom-up authority” and “environmental complexity and uncertainty.”
Bottom-up Authority
According to the traditionalists, authority is inextricably linked with the ownership of property and
hence flows from the top level to the bottom level of an organization. Individuals who do not own any stock
in the organization are thus given the least amount of authority. Chester I. Barnard questioned the
traditionalists’ assumption about the downward flow of authority and came up with a more democratic
acceptance theory of authority. According to Barnard’s acceptance theory, organizations are cooperative
systems where the authority that a leader has over his subordinates is determined by the subordinates’
willingness to comply with it. A subordinate may identify a communication from the superior as being
authoritative and comply with it, only if he or she—
a. understands the message
b. believes that it is in agreement with the organization’s purpose
c. feels that it serves his or her interests, and
d. is in a position to comply with it.
This theory paved the way for a host of ideas such as upward communication and the informal
organization (which is based on friendship, unlike the formal organization which is based on a set of rules
and procedures). These concepts were earlier discussed only by human relations theorists. Thus, Barnard
made organizations appear more humane by defining a new role for subordinates as active controllers of
authority rather than as passive recipients of authority.
Environmental Complexity and Uncertainty

According to the traditionalists, organizations must have a rigid structure and must practice rational
management if they are to achieve organizational effectiveness and efficiency. However, they also realized
that environmental complexity and uncertainty are capable of upsetting even the best laid plans. According
to Charles Perrow, “The increasing complexity of markets, variability of products, increasing number of
branch plants and changes in technology all required more adaptive organizations.” As plans are generally
made on the basis of incomplete or imperfect information, allowances must be made for some deviation
at the time of implementation of a plan.
The traditional theory is based on a closed-system approach, which assumes that the surrounding
environment of an organization is fairly predictable, and that any uncertainty within the organization can
be eliminated through proper planning and stringent control. But due to the shortcomings of this type of
system (as mentioned above), modern management theorists proposed an open-system approach. The
open-system approach to organizing is considered more rational than the closed-system approach because
it provided a more realistic view of the interaction between an organization and its environment,
and
it emphasized the need for flexibility and adaptability in organization structure.
Let us now discuss both closed and open systems in detail.
CLOSED SYSTEM VS OPEN SYSTEM

The various views on division and coordination of work activities and resource allocation can be
divided into two theories – the classical closed system concept and the open system concept. The classical
closed system concept was supported by classical management theorists, while the open system approach,
which was developed recently, was supported by modern management theorists. Both these theories have
contributed to understanding of the managerial function of organizing.
Closed System View of Organizations

The classical management theorists assumed that the primary goal of organizations was economic
efficiency, and that organizations were essentially closed systems. Consequently, they regarded organizations
as rational and economic entities.
According to Louis E. Boone and David L Kurtz, “Closed systems are sets of interacting elements
operating without any exchange with the environment in which they exist.” This definition implies that
closed systems require no inputs – human, technical, etc. – from the external environment in which they
exist. But no organization can be a totally closed system. For instance, even a relatively closed system, like
a wind-up alarm clock, requires outside intervention when it slows down or goes out of order. Thus, a
totally closed system is only a theoretical concept. Different systems differ in the degree to which they
depend on the external environment for information, material and energy inputs.
The two basic characteristics of a closed system are:
It is perfectly deterministic and predictable.
There is no exchange between the system and the external environment.
If the initial conditions and the stimuli in a closed system are known, the final condition, i.e., the result
can be predicted with certainty. Let us consider the example of a pool table. Prior knowledge of the
following conditions and stimuli make it possible to accurately predict where each ball will come to rest:
the position of every ball on the table
the elasticity of the bumpers
the coefficient of friction between the balls and the table
the force with which the cue ball is hit
the direction of the cue ball
the type of spin on the cue ball
Classical management theorists borrowed certain ideas from the closed-system concept that was
popular during that period of time. As a result, these theorists emphasized structure and attempted to
eliminate environmental disruptions that could affect their studies of planned systems activities. As discussed
earlier in the chapter, planning and decision-making that does not consider the impact of the external
environment is ineffective. Consequently, the new concept of open systems was supported by many
management theorists.
Open-system View of Organizations

Traditional closed-system views (like scientific management, the universal process approach, and
bureaucracy) ignored the influence of the external environment. This sometimes led to the failure of plans
and inefficient handling of resources. Unlike the closed-system approach, the open-system concept stressed
the need for flexibility and adaptability in organizational structure, and the mutual interdependence between
the organization and its external environment. According to this concept, organizations should be adaptive
and should take into consideration the influence of the external environment. According to Andy Groove,
former CEO of Intel Corp, “A corporation is a living organism, and it has to continue to shed its skin.”
The modern open-system model of organizing allows an organization to interact with its environment
and evolve its organizational structure gradually over time. Thus, open systems are based on a biological
model rather than a physical one.
Boone and Kurtz define an open system as “a set of elements that interact with each other and the
environment, and whose structure evolves over time as a result of interaction.”
The open-system concept is based on the assumption that no system is totally deterministic or
predictable because of the uncertainties in the external environment. Here again, let us consider the
example of the pool table. As a player strikes the cue ball, his or her opponent may pick up a ball from
the table. This disturbs the game and it now becomes impossible to predict where the balls will ultimately
come to rest. This is analogous to the influence of the environment on the system.
An organization is a system consisting of several subsystems which interact with one another. The
organization, in turn, is a subsystem of a larger system – social, political, economic or legal system.
System-to-system interactions, like the movement of capital (example: corporate borrowings), the movement
of goods and services (example: international trade), and the movement of people in and out of the labour
force, are as important as the systems themselves.
Open-system Characteristics
According to Daniel Katz and Robert Kahn, open-system organizations have several common
characteristics. These characteristics, which are tabulated in Table 8.1, are:
Cycle of Events
Every organization receives inputs from its environment, processes them and produces the output
required by a system (an individual or an organization). This is a repetitive process.
Table 8.1: Characteristics of Open-systems
Characteristics Brief Description Example
Cycle of events Process by which an open-system R.K. Productions uses human resources
receives inputs from its environment, (actors, directors) and physical resources
transforms them and generates output. (scripts, film, cameras, sets) to convert a
story idea into a motion picture
Negative entropy The ability of a system to repair itself, Anheuser-Busch chooses to expand its theme
survive, and grow by importing resources park division by acquiring Cypress Gardens
from its environment and transforming them and Sea World from Harcourt Brace
into outputs. Jovanovich.
Feedback An open-systems component used by Hilton Hotel managers use guest responses on
mechanisms organizations to identify deviations postage-paid response cards left in hotel
from objectives. rooms and at the front desk to measure
customer satisfaction.
Dynamic Process by which open systems maintain General Motors seeks to offset declining US
homeostasis equilibrium over a period of time. market share by increasing its market share
from 4 per cent to 10 per cent in the Asia-
Pacific market by the end of the 1990s.
Differentiation Structural force in organizations whereby Procter & Gamble’s organization chart reveals
the system develops specialized functions six different divisions, each headed by a vice-
among its various components. president: coffee, food products, industrial
foods, packaged soaps and detergents,
paper products, and toilet goods.
Equifinality Principle that open-systems can achieve Mercedes-Benz personnel are responsible for
their objectives through several different manufacturing the chassis for their two-seater
courses of action. 500SL luxury sports roadster. Cadillac sub-
contracted design and production of the
Allante car body to Italy’s Pininfarina.
Adapted from Louis E. Boone and David L. Kurtz, Management (USA: McGraw-Hill Inc., International Student
edition, 1992) 223.
Negative Entropy
The tendency of systems to break down, become disorganized, or to disintegrate is known as entropy.
Systems can fight entropy by taking resources – energy, money, machinery and human talent – from the
environment and transforming them into outputs on a continuous basis. By so doing, the systems can
mend themselves, survive and grow. Systems that can remain healthy for long periods of time are said to
exhibit negative entropy. Thus, for businesses, long-term profitability is a widely used criterion of negative
entropy. For example, SBI launched credit cards in order to offset the possibility of entropy (i.e. losing its
customer base). This move also helped it compete with private and multinational banks.
Feedback Mechanisms
The information used by a system to monitor its performance is called feedback. Feedback helps the
organization compare its results with its objectives and make the necessary adjustments. For example,
consider a room air-conditioning system. The system continuously interacts with the environment by
measuring the actual temperature in the room.
This is then compared with the desired temperature. If the actual temperature is higher than the
desired temperature, the air-conditioning system is activated until the desired temperature is reached.
Likewise, low temperature may result in deactivation of the air-conditioning system. Thus, the air-conditioning
system can be described as an open-system that has a feedback mechanism.
Dynamic Homeostasis
The process by which a living being adjusts and maintains itself in an optimal state is called homeostasis.
Instead of homeostasis, Robert Kreitner uses the term ‘dynamic equilibrium.’ According to Kreitner, “In an
open-system, dynamic equilibrium is the process of maintaining the internal balance necessary for survival
by importing needed resources from the environment.” To understand this concept, consider the following
illustration. The body temperature of a human being is 98.6° Fahrenheit, but deviations within a small
range are possible. The tolerance limit of these deviations is very small for human beings, and any
deviations greater than the tolerance limit may cause permanent brain damage or even death. The human
body has certain physiological mechanisms that help it maintain its normal body temperature, despite
temperature variations in the immediate environment. If the temperature is too high, people sweat, and
if the temperature is too low, they shiver. People also try to regulate their body temperature by wearing
appropriate clothing or by adjusting their immediate environment through the use of air-conditioners, room
heaters, etc.
Organizations must also show a tendency towards homeostasis, if they wish to survive and continue
performing their tasks. In order to maintain a steady state during the cycle of events (input – processing
– output), an organization has to adjust itself according to the situation. Thus, the organization must be
dynamic in nature. For example, the management of an organization can take a loan when operations
have drained the organization’s cash reserves.
Differentiation
Differentiation refers to the tendency of a system to move towards the specialization of various tasks.
Differentiation in an organization takes place in response to environmental factors and increases in
complexity as the size of the organization increases. For instance, the number of specialists in the medical
profession increased due to the exponential growth that took place in the field of medical knowledge. The
American Medical Association has more specialists than general practitioners as its members.
Equifinality
The term equifinality refers to the achievement of a particular result by different means. Equifinality
is based on a general principle that open-systems can accomplish their tasks and meet their objectives by
following different courses of action. This principle emphasizes that open-systems do not need a single
‘best’ method to achieve their objectives and accomplish their goals. According to Katz and Kahn, “A
system can make the same trial state from differing initial conditions and by a variety of paths.” Thus, the
principle of equifinality implies that a manager may opt for a variety of satisfactory alternatives rather than
search endlessly for a single best alternative.
In other words, a manager can make use of various sets of inputs, process them, transform them in
different ways, and achieve a satisfactory output. AMUL (Anand Milk Union Limited), a profit-making
dairy in Gujarat, adopted the principle of equifinality to become one of the best managed cooperative
organizations in India. Unlike traditional steel companies, Nucor avoids taking loans, builds its own
mills and produces steel from scrap, rather than ore.
The company uses the latest energy-saving technology and links the weekly bonuses of non-union
employees to productivity. Although many American steel giants had to go for downsizing due to cut-throat
foreign competition, Nucor survived because of equifinality i.e. the company could find different and better
ways of getting tasks accomplished.
Developing an Open-system Model

An open-system model is based on organization-environment interaction. A business takes the inputs,
transforms them, and produces the output. Generally, the inputs are in the form of capital, raw materials,
labour, machinery and market information; and the outputs are goods and services, (that are marketed),
CEO
Vice President, Vice President, Vice President, Vice President,

Marketing Production Finance Operations
Regional Heads
Area Heads
Sales personnel
Informal group of Quiz-
Informal group of Cricket team members team members
Fig. 8.1 Formal and Informal Organisation
waste materials (recycled or sold as scrap), and profits or losses (that are realized). This model, which is
a generalized model for a business organization, also suits all types of organizations (shown in Figure 8.1).
A system can be considered as comprising a set of interactive subsystems. Three important subsystems
can be identified. These are:
Technical
Boundary-spanning
Managerial
The technical subsystem is also known as the production function. This system processes and converts
raw materials into finished goods and services. Though the technical subsystem is vital to an organization,
the presence of this subsystem does not ensure the survival of an organization. The organization requires
other supporting subsystems.
The boundary-spanning subsystem consists of jobs that require the interaction of personnel with the
general environment. These jobs are also known as interface functions and can be easily recognized by
their titles. For example, purchasing agents are responsible for the continuous, timely and reliable flow of
raw materials; public relations staff are responsible for developing and maintaining a favourable public
image of the organization; and strategic planners are responsible for analyzing future trends and detecting
environmental opportunities and threats. Thus, the members of a boundary-spanning subsystem facilitate
the organization’s interaction with the environment.
Technical and boundary-spanning subsystems require a managerial subsystem to coordinate their
activities. The managerial subsystem controls and directs the other subsystems in such a way that the total
system works effectively and efficiently.
FORMAL VS INFORMAL ORGANIZATION

In the early 1930s, the famous Western Electric studies revealed that groups of people who shared
an informal relationship formed an important part of the total work situation. The studies concluded that
the network of personal and social relationships, not established by the formal organization, gave rise to
informal organizations within an enterprise. Such relationships arise spontaneously from the interaction of
people with one another and cannot be controlled by formal authority.
A formal organization is a group of people working together cooperatively, under authority,
towards goals that mutually benefit the participants and the organization. It is a system of well-defined
jobs, each bearing a definite measure of authority, responsibility, and accountability.
An informal organization is “a network of personal and social relations not established or required
by the formal organization but arising spontaneously as people associate with one another.”
An informal organization lays emphasis on people and their relationships, whereas a formal organization
lays emphasis on official positions in terms of authority, responsibility, and accountability. Therefore, in
an informal organization, ‘power’ is associated with a person. But in a formal organization, ‘power’ is
associated with a position, since, a person has it only when he or she occupies that position. In other
words, in informal organizations, power is purely personal in origin, while in formal organizations, power
is institutional in origin. Table 8.2 lists the differences between formal and informal organizations.
Table 8.2: Formal Organization Vs Informal Organization
Formal Organization Basis of Comparison Informal Organization
Official General nature Unofficial

Authority and responsibility Major concepts Power and politics
Position Primary focus Person
Delegated by management Source of leader power Given by group
Rules Guidelines for behaviour Norms
Rewards and penalties Sources of control Sanctions
Although many management theorists differentiate between formal and informal organizations, often
both are found in organizations, as shown in Figure 8.2.
The informal organization may or may not support the goals and objectives established by the formal
organization. Hence, it is the manager’s responsibility to identify the informal relationships in the organization
and integrate them with the formal organization to achieve the desired goals.
Formal Organization Informal Organization
Risk Informal
Job Unit Group
Authority Accountability Status Politics
S
I Responsibility Power
Total
behaviour
A - Activity
I - Interaction
S - Sentiments
Fig. 8.2 Formal Vs Informal Organization Model
To study the total organization (which includes both formal and informal organizations), George
Homans developed a model (see Figure 8.3) based on three concepts: activities, interactions, and sentiments.
Activities include all that an individual actually does; interactions refers to an individual’s personal and
social relationships with others; and sentiments refer to an individual’s emotional reaction to various
organizational issues. In a formal organization, the manager establishes the relationships between his
subordinates, asks them to follow orders, and directs them to perform the tasks in a specified manner and
work as a team. The subordinates are expected to possess certain sentiments about the organization, the
manager, and the work. But, informal relationships develop spontaneously, supplementing or modifying the
formal relationships established by the management. For example, an informal relationship may be established
among people who may have lunch together. Informal relationships can help a company attain organizational
goals as people may find it easier to seek help from someone they know even if they are from a different
department, than from a person whom they know only at a formal level. There is no official chain of
command in the informal organization, since power is not determined by the management but is determined
by one’s relations with other members of the group.
Since informal power depends on interpersonal relationships, it does not remain consistent like formal
power. Further, since people’s sentiments cannot be controlled by management, informal organizations
cannot be controlled by management as precisely as formal organizations.
Even as the formal organization grows to an immense size, informal groups tend to remain small and
stay restricted to personal relationships. Though small in size, a large number of groups operate within an
organization. Informal groups need not be restricted to people within the organization – they may have
external members as well. However, due to their small size and instability, informal organizations cannot
be a substitute for the formal set-up. They only supplement it.
CEO
VP VP VP
Marketing Finance HR
Divisional
Heads
Department
Heads
Fig. 8.3 Organization Structure with Narrow Span/Tall Structure
The emergence of informal organizations within a formal framework is a natural process. Three
behavioural variables have been found to influence such a process. First, the employees may behave in
a manner different from the one specified by the organization. For example, employees may perform a task
differently from what is expected of them. They may work slower than they were supposed to or they may
modify a work procedure gradually as they gain more experience. Second, employees often interact with
different people who possess different maturity levels and attitudes, and they tend to associate with people
who share similar views. Such an affiliation need not be affected by their formal organizational positions.
Third, the set of attitudes, beliefs and values that some workers hold can be very different from what the
organization expects of them. Such workers may form an informal group to share their common attitudes,
beliefs, etc. Therefore, managers must keenly follow the informal developments that take place within their
span of control to ensure that the organizational goals are achieved efficiently and effectively.
SPAN OF MANAGEMENT
Organizations are growing in terms of size and geographical coverage, thereby increasing the workload
of executives. To cope up with this workload, managers should delegate routine activities to their
subordinates. Delegation of such activities would leave managers free to handle key strategic issues. The
number of subordinates a manager has to supervise has a direct bearing on the degree to which managers
can interact with and supervise subordinates. The span of control refers to the number of subordinates a
superior can supervise efficiently and effectively.
According to Kathryn M. Bartol and David C. Martin, “The span of management or span of control
is the number of subordinates who report directly to a specific manager.”
The principle of span of management states that there is a limit to the number of subordinates a
manager can effectively supervise, but the exact number will depend on the impact of underlying factors.
One important thing is to be noted in the definition cited above. It is not how many people who report
to a manager that matters. What matters is how many people who have to work with each other report
to a manager. What counts are the number of relationships rather than the number of men.
The span of control is a very important principle that emphasizes the need for coordination among
the subordinates working under a particular manager. The question therefore arises: how many people can
a manager supervise effectively? Students of management have come to the conclusion that a manager
can effectively manage usually four to eight subordinates at the upper levels, and eight to fifteen subordinates
at the lower levels. According to the British consultant, Lyndall Urwick, the ideal number of subordinates
for a higher level executive should be four while the number of subordinates for an executive at the lower
level may be eight or twelve. Others are of the view that a manager can manage twenty to thirty subordinates.
A survey of 100 large companies carried out by the American Management Association showed the
following results.
The number of executives reporting to the presidents varied from one to twenty-four
Only twenty-six presidents had six or fewer subordinates
The average number of executives under a manager was nine
Another study of forty-one smaller organizations revealed that
Twenty-five of the presidents had seven or more subordinates
The most common number of subordinates was eight
None of these studies indicated the actual span of control. One reason is that the studies were carried
out to know the span of control at or near the highest level of an organization. The results, therefore, may
not be applicable for different levels of the organization. Many organizations may have a narrower span
at the middle and a comparatively wider span at the top level. Another reason is that successful organizations
have a varying span of management. They arrived at the best span of control through trial and error. So,
it is best to decide the span of management, according to the prevailing situation within the organization.
Tall Versus Flat Structure

The span of management has a direct effect on the number of hierarchical levels in an organization.
A tall structure comprises many hierarchical levels with narrow spans of control as shown in Figure 8.4.
Having many levels within an organization has some disadvantages. Firstly, as the number of levels
increase, the effort and expenditure involved in managing them also increases. Extra costs are incurred
on hiring additional managers and staff for their assistance, and for coordinating departmental activities.
These costs are referred to as overheads and are a burden to the organization. Thus, having a large
number of levels is an expensive affair.
The second disadvantage of a tall structure is that communication gets unduly complicated. It is
much more difficult to communicate the objectives, policies, plans and procedures in organizations with
a tall structure as compared to the organizations with a flat structure. This is because of omission and
misinterpretation of messages while they are being transmitted from one level to the other levels of the
organization. The presence of a number of levels dilutes the information as it passes from the source to
the receiver. Thus different levels sometimes act as ‘communication filters.’
Finally, in an organization with a tall structure, numerous departments and levels make the planning
and controlling tasks complicated. A plan made at the top level may appear to be definite and complete,
but as the plan is subdivided at lower levels, it may lose its clarity. The controlling task also becomes
difficult due to additional levels and managers.
Due to these disadvantages, many organizations opt for downsizing. According to Bartol and Martin,
“Downsizing is the process of significantly reducing the layers of middle management, increasing the span
of control, and shrinking the size of the workforce for purposes of improving its efficiency and effectiveness.”
Another term, which is synonymously used with downsizing is “restructuring”. “Restructuring is the process
of making a major change in the organizational structure that often involves reducing management levels
and possibly changing some major components of the organization through divestiture and/or acquisition.”
Restructuring involves decreasing an organization’s workforce.
For instance, Ford Motor Company cut down its management levels after it realized that it was
managing 12 levels of hierarchy as compared to 7 layers at Toyota. Ford realized that they were not only
bearing administrative overheads but also that the absence of many levels proved to be a competitive
advantage for Toyota. In addition, more levels of hierarchy made it difficult for the company to move
quickly in the competitive environment. Once Ford opted for reduction in organizational levels, Toyota also
followed suit and reduced its management levels further.
CEO
VP Administration
VP Operations
VP Advertising
VP Marketing
VP Logistics
VP Finance
VP Sales
VP HR
Divisional
Heads
Fig. 8.4 Organization Structure with Spans/Flat Structures
A flat structure has a wide span of control and fewer hierarchical levels as shown in Figure 8.4. The
classical school of management emphasized the need to specify the number of subordinates for an
organization to have an effective span of management. The operational-management theorists, on the
other hand, are of the opinion that it is not possible to determine a specific number of subordinates that
a manager can effectively supervise as there are too many underlying variables in any management
situation. While interacting with his subordinates, a manager should therefore, identify those aspects that
consume a majority of his time. This would help him to work out solutions to reduce these time pressures
and determine the best span of management. Also, it will enable him to extend his span of management
without destroying effective supervision.
In a flat structure, tasks are highly inter-related. As a result, control and coordination are negatively
affected. Nowadays, the span of management is primarily decided by the environment in which the
subordinates are being supervised. Some of the factors that determine an organization’s span of control
are the amount of time spent by the supervisor with his or her subordinates, the flow of communication
in the organization, the capability of the supervisor, etc. A poor span poses problems such as (i) over-
supervision, (ii) delay in decisions, (iii) problems in communication, (iv) decreased levels of initiative and
morale, (v) less opportunity for responsibility and development, and (vi) higher costs.
One of the early management writers, V.A. Graicunas tried to analyze the increase in the number of
interactions and relationships by increasing the number of subordinates under a particular manager. He
stated that a manager should not only consider direct one-to-one relationships with his or her subordinates
but should also recognize the importance of cross-relationships among the subordinates and interactions
between groups of two or more subordinates. For instance, a manager who supervises three people under
him interacts with them at three levels: firstly with each person as an individual, secondly with all three
subordinates as a group and with three different groups of two employees each. The number of possible
interactions and relationships can be determined by the formula:
R = n (2n-1 + n-1)
where,
R = relationships
n = number of subordinates
R = 2(22-1 + 2-1)
= 2 (2+1)
=2x3
=6
If there are two subordinates working under a manager, the number of possible interactions and
relationships will be six. Likewise, if the number of subordinates is 10, the manager may have approximately
5,210 interactions. Although Graicunas’ formula does not help in determining the optimum span of
management, it demonstrates how complex a work group becomes as the number of members increases.
Factors Determining an Effective Span

The principle of the span of management states that there is a limit to the number of subordinates
a manager can effectively supervise, but the exact number will depend on the impact of underlying factors.
Personal capabilities like quick comprehension, ability to command loyalty and respect from subordinates
and good interpersonal skills are important to determine the span of management. However, the most
important factor for determining an effective span of management is the manager’s ability to reduce the
time he or she spends with subordinates. This depends on the competence of the manager and nature of
the task to be completed. The frequency of superior-subordinate contacts, and therefore, the span of
management is also affected by other factors which are described below.
Trained Subordinates
Well-trained subordinates perform their tasks efficiently without requiring much guidance from their
superior. Thus, well-trained subordinates reduce the number of contacts needed and save the manager’s
time. For such employees, the manager only needs to provide broad guidelines for a particular task and
he can therefore manage a large number of subordinates.
New and complex industries face problems while designing training programmes because rapid
technological changes necessitate frequent modification in the training programmes in order to update the
workers. For example, managers in the textile industry tend to be more completely trained than their
counterparts in the aerospace industry. This is because technological changes are faster in the aerospace
industry in comparison to the textile industry.
Clarity of Delegation of Authority

The main reason why a manager is overburdened with time-consuming contacts with subordinates
is because tasks have not been organized properly and delegation of authority is not clear. A well-trained
subordinate can perform a task without taking much of the manager’s time, provided the manager delegates
authority clearly. On the other hand, if the task is not clearly defined or if the subordinate does not have
sufficient authority to perform the task, the manager may have to spend a considerable time supervising
the subordinate’s efforts.
Clarity of Plans
Much of what a subordinate is expected to do depends on the plans that are to be implemented.
Therefore, plans should be well-defined, workable, and the authority required to implement them should
be appropriately delegated. This will enable the subordinate to clearly understand what is expected of him
or her. This will save the superior’s time and allow him to implement the plan efficiently. This is generally
the case with managers responsible for supervising repetitive operations. A production supervisor in a large
cloth manufacturer’s unit may thus, be able to oversee the working of as many as thirty subordinates.
However, if the plans are not properly understood, and the subordinates have to draw up their own
plans, they may need more supervision and guidance. The superior, therefore, has to frame clear-cut
policies to guide decision-making by subordinates and should ensure that these are consistent with the
department’s goals and operations. The supervisor should also ensure that these policies are understood
by the subordinates. This helps to reduce the time taken up by superior-subordinate contacts.
Use of Objective Standards

Managers should get adequate feedback from their subordinates to find out if the subordinates have
understood the plans and are following them. This feedback may be obtained either by personal observation
or through objective standards. Well-designed objective standards show if there has been any deviation
from the plans. They help a manager avoid time-consuming contacts and pay attention to those aspects
that are very important for the successful implementation of plans.
Rate of Change
Changes occur more rapidly in certain organizations than in others. The rate at which change takes
place in an organization determines the degree to which policies can be formulated as well as the stability
that can be achieved in the policies of the concerned organization. This factor (rate of change) explains
the organization structure present in companies having a wide span of management (e.g., railroad, banking
and public utility companies) in contrast to those that have a narrow span of management.
The Roman Catholic Church can be considered to illustrate the affect of slow change on policy
formulation and on subordinate training. The Roman Catholic Church, as an organization, symbolizes
durability and stability in the history of Western civilization. This organization has very few levels of
hierarchy. Generally, bishops report directly to the Pope (except in rare cases where they report to
archbishops); and parish pastors report to the bishops. Thus, the Roman Catholic Church has a wide span
of management spread across the world. Though this span is very broad, it is manageable because of the
high degree of training given to the bishops and the slow rate of change in procedures and policies. Even
after 2000 years, the major objectives of the organization have remained the same, despite procedural and
policy changes.
Communication Techniques
The span of management is also influenced by the effectiveness of the communication techniques
used. If managers had to convey every plan, instruction and order personally to subordinates, they would
have no time to do their own work. Therefore, some managers use administrative staff or assistants to
communicate with key subordinates. To speed up the decision-making process, a superior may also ask
for written recommendations from subordinates. Some top managers manage a wide span of control by
asking for a summarized presentation of all recommendations.
The number of subordinates under a manager can be increased if the manager is able to communicate
plans and instructions in a clear and concise manner. A superior who can express himself well would make
a subordinate’s job easier by eliminating the need for the subordinate to seek further clarifications. But
if he is not able to do so, the subordinate may seek more meetings with the superior to clear his or her
doubts. As a result, the manager may spend a disproportionate amount of time with the subordinate.
Recent technological advances have made it possible to get tasks done with fewer subordinates. Most
modern offices are equipped with fax, teleconferencing, Internet and networking facilities. These modes of
communication help save the manager’s time and enhance his span of control.
Amount of Personal Contact Needed

In many situations, face-to-face meetings are essential. This is because such situations cannot be
handled only through written reports, planning documents, memoranda, policy statements and the like.
Delicate situations can be properly handled only through face-to-face meetings. This type of contact helps
clarify the doubts of subordinates, encourages them to share their ideas with their superiors, and boosts
their morale. Personal interaction between the manager and subordinates is essential when a subordinate’s
performance has to be appraised, when a problem has to be communicated, or when the opinion of
subordinates about a particular issue is sought.
Personnel matters such as grievance procedures, performance appraisals and such require the superior
to spend time on one-to-one interactions with subordinates. Thus, they reduce the traditional span of the
manager by not leaving him with enough time to supervise more number of subordinates. Many organizations
fail to consider the effect that such tasks will have on a manager’s time. As a result, many-a-time,
managers are overburdened and have to manage spans beyond their capacity. Hence, it is essential that
organizations consider these factors when deciding on the span of management.
Organizational Levels
Research has revealed that the size of an effective span varies with the organization level. In a major
study, researchers developed and tested a model taking organization level as one of the variables. They
concluded that the degree of specialization of individuals (i.e., a person’s level of specialization) was the
most prominent factor affecting the span of control. This study showed that
routineness of operations seemed to have hardly any affect on the span of management at any
level.
the number of subordinates had little affect on the span of management at the lower levels, but
it had a positive affect at the middle levels.
supervision of a greater number of specialties narrowed the spans at the middle and lower levels
but increased them at the top level. The reason for the widened span of managers at the top level
was the additional responsibilities these managers had to shoulder, like serving as the organization’s
interface with the external environment, dealing with important policy matters, and carrying out
strategic planning for the organization.
Use of Staff Assistance

Managers can manage a larger number of subordinates by delegating a certain amount of work to
staff assistants, who gather information and communicate orders and instructions to the subordinates. This
process enables managers to save time and allows them to widen their span of control.
Supervision by Others
Subordinates are often supervised by people other than their immediate superior. This trend is
increasingly gaining importance as it reduces the burden on the immediate superior and helps increase
the superior’s span of control.
A study carried out by researchers revealed that 50 per cent or more supervision of a subordinate was
done by someone other than his or her direct superior. The research also concluded that the average span
was 17.6 in the case of organizations in which subordinates were supervised by many superiors, as
compared to 9.7 in those organizations in which they were not being supervised by others.
Other Factors
There are many other factors that influence the span of management. Some of them are given below:
The more competent a manager, the larger the number of subordinates that he can manage.
Complex tasks comprise a variety of activities and require close supervision while simple tasks
need lesser supervision, and hence, allow a wider span of management.
The willingness of subordinates to shoulder responsibility and take reasonable risks facilitates a
wide span of control.
If the manager has mature subordinates, he may delegate more authority and thus widen the span
of management.
An analysis of the various factors that influence the span of management highlights the fact that there
are several variables that determine the number of subordinates that can be managed by a superior. The
span should be decided by taking into consideration the various factors in the organization. The span may
vary at different levels and in different functions of the same organization. Sometimes, as the organization
grows, the number of levels increases (because more personnel have to be supervised).
Despite the benefits of flat organizational structures, the span of management in such organizational
structures is subject to certain limitations. In some cases, managers may have more subordinates than they
can manage effectively, despite proper delegation of authority to subordinates, organization of training
programmes for subordinates, the clear formulation of plans and policies, and the adoption of efficient
control and communication techniques. Thus, when organizations that have a flat organizational structure
grow in size, the organization is forced to increase the number of levels to eliminate the problems caused
by a large span of management.
A balance has to be reached by considering all the relevant factors. Widening the span and reducing
the levels may be a solution in some cases. However, this decision should be made after analyzing all the
costs involved – financial costs, as well as costs in terms of morale, personal development of employees
and attainment of organizational objectives. A comparison between the various alternatives available is
essential before taking the final decision.
ORGANIZATIONAL ENVIRONMENT FOR ENTREPRENEURING AND INTRAPRENURING

‘Entrepreneurship’ generally refers to managing small, independent businesses. Recently, some
management theorists have applied this term to large organizations and also to managers performing
entrepreneurial functions through which they bring about innovative changes in the organization. Peter F.
Drucker suggested that instead of seeking entrepreneurial persons, organizations should show commitment
to continuous innovation, which is a specific activity of entrepreneurs. Managers who function as
entrepreneurs try to bring about change to make the most of an enterprise’s potential. As entrepreneurs,
managers must try to capitalize on the available opportunities and improve the organization’s position in
the industry.
Exhibit 8.3 Characteristics of an Entrepreneurial Organization
1. One of the main features of an entrepreneurial organization is the effective implementation of creative
ideas. By so doing, the organization provides various avenues for its employees to explore in order to
accomplish the organizational goals.
2. For an organization to remain profitable in these days of fierce competition, innovation and continuous
improvement is a must. Entrepreneurial organizations keep improving continuously and look for better and
efficient ways of doing the same things.
3. Entrepreneurial organizations anticipate change and effectively bring about change in an organization’s
processes.
4. Entrepreneurial organizations are able to create new jobs, as they have the capacity to develop new
products and services. They are able to create new jobs as fast as old jobs are destroyed (by either
obsolescence or automation).
5. An entrepreneurial organization consists of networked teams functioning as small businesses. These
teams coordinate with each other and with external agencies. Networking among the various teams leads
to knowledge sharing, which speeds up the process of innovation.
6. In large organizations, such teams generally do not cater to the needs of customers by directly creating
new products. Instead, they provide services to others within the organization, who, in turn, use them to
provide what the customer wants.
7. Entrepreneurial organizations offer greater levels of service to customers at an affordable price.
Adapted from Gifford and Elizabeth Pinchot, “Free Intraprise,” Pinchot & Company, <http://www.pinchot.com/
MainPages/BooksArticles/InnovationIntraprenuring/FreeIntraprise.html>
Gifford Pinchot, who coined the term ‘intrapreneur,’ differentiates between the ‘intrapreneur’ and the
‘entrepreneur.’ According to Pinchot, “An intrapreneur is a person who focuses on innovation and creativity
and who transforms a dream or an idea into a profitable venture by operating within the organizational
environment. In contrast, the entrepreneur is a person who does the same, but outside the organizational
setting.” However, many authors do not differentiate between these two terms. In this chapter, the term
‘entrepreneur’ is used to refer to a driven, motivated, creative person either working for an organization
or outside an organization.
Exhibit 8.4 eBay – An Entrepreneurial Venture
eBay, the brainchild of Pierre Omidyar, is the first and the most happening person-to-person trading
company on the Internet. Omidyar, a software developer, designed an online trading post, Auction Web in
1995 to enable his girlfriend to collect Pez dispensers from other traders over the Internet (Pez dispensers
are containers in which Pez Candy Inc. markets its sugar-coated candies. The dispensers are a major
collector’s item.) In those days, the concept of the Internet had not attracted much attention. However,
Omidyar’s site gradually gained popularity and a number of collectors started listing a variety of goods on
it. In the beginning, collectors could list their goods for free, but after a while, Omidyar started charging a
nominal fee for listing goods on the site. In 1996, this site became a full-fledged business venture. In 1998,
Omidyar recruited Meg Whitman as the CEO of eBay. Together, they launched a public issue for the
company in the latter half of 1998. eBay had a market value of almost $2 billion at the end of its first day
of trading. The company, which accounted for 90 per cent of the online auction business, had almost 15
million registered users in 2000. By mid-2001, the number of registered users had almost doubled.
The company essentially runs a continuous yard sale. However, the virtual marketplace of the company is
huge and very efficient. Size is crucial for creating a marketplace which allows buyers to buy whatever they
want, and provides sellers an access to customers who will buy at a good price. In the non-virtual world,
reaching out to a large audience is an expensive affair. If one were to put up a board indicating a yard sale,
the sale would be limited only to the local people who happened to see the board. The number of potential
customers would be higher if an ad announcing the yard sale were placed in the newspaper, but it would
also be expensive for the person who placed that ad. In other words, the costs go up as one tries to cater
to a larger audience. Moreover, in the non-virtual world, distance can sometimes become a constraint. People
may not wish to travel very far just for the sake of a yard sale.
eBay brings together millions of people in cyberspace who are interested in buying or selling goods. It earns
revenues by charging a small fee for every listing, which ranges from twenty-five cents to two dollars. It
charges higher fees for extra marketing services, like highlighting listings, which could be in the range of $2
to $49.95. eBay also charges a fee when a transaction takes place, which could be anywhere between 1.25
and 5 per cent of the sale price. As the basic listing fee is nominal, it would not be a constraint for a person
who wants to trade on the Net. eBay’s auction format not only provides entertainment, it also sometimes aids
in raising the selling prices of goods (bidders may quote higher prices to acquire the goods). When an auction
ends, eBay notifies both the seller and the buyer if there is a winning bid.
The modalities of payment and shipping have to be worked out by the buyer and the seller themselves. eBay
does not bear the risk of credit or cost of inventory and transportation. After every sale, eBay encourages
buyers to provide feedback regarding the sale. This information is then added to the seller’s profile and posted
on the site. Sellers receive colour-coded stars, based on the feedback received from buyers. Those sellers
who receive too many negative comments are dropped from the site. Thus, eBay tries to project itself as an
ethical and honest company by avoiding having business dealings with sellers of disrepute.
Sellers perceive eBay as an inexpensive marketing conduit which provides easy and cost-effective access
to a large number of buyers. Although eBay started as a national yard sale, it has now become the marketing
and distribution wing of many small-scale businesses. These small companies provide the merchandise, and
eBay supplies it to the customers for a small transaction fee. Thus, eBay enables small businesses to lower
the costs of reaching target customers. Thousands of small businesses have become feasible as eBay acts
as a cost-effective intermediary for them. eBay thus, has supported many budding entrepreneurs and has
made their dreams of owning a business a reality.
Adapted from Joan Magretta and Nan Stone, What Management Is? (New York: The Free Press, 2002) 52-56.
Exhibit 8.5 Intrapreneurship – Its Benefits
The growing intensity of competition has led to a renewed focus on intrapreneurs, or “in-house entrepreneurs.”
Through intrapreneurship, organizations can enhance their competitive advantage. It is essential for organizations
to nurture intrapreneurial behaviour and practice so that it becomes a part of their organizational culture.
Intrapreneurship involves infusing entrepreneurial behaviour into an organization and concentrating on extending
the capabilities of a firm. By means of internally generated ideas, the firm can make the most of the
opportunities available in the environment. Intrapreneurship can take place at any organization level.
Benefits of intrapreneurship:
1. Intrapreneurship adds to shareholder value, and, as a result, helps improve an organization’s financial and
market performance.
2. Intrapreneurship brings about change within an organization and enables the organization to enhance its
competitive advantage by entering into new lucrative businesses or developing new and innovative products.
3. The most visible outcome of the intrapreneurial process is the discovery of new, exciting products, which
have a direct impact on organizational performance measures, like sales and marketshare. A famous
example of this is 3Ms “Post-it pads.” In 1999 alone, the sale of this product generated more than US$
1.3 billion for 3M.
4. Intrapreneurship creates new knowledge within an organization, develops new competencies, and/or
modifies the existing competencies of the organization. The acquisition of new knowledge by the organization
helps it improve upon or sustain its competitive advantage.
5. Intrapreneurship affects organizational learning, especially in areas of opportunity assessment and the
creation and commercialization of knowledge-intensive products, processes and services.
6. By developing new products and services and designing better processes, intrapreneurs make an
organization proactive and more willing to take risks, thus improving its performance. Intrapreneurship also
helps an organization improve its competitive advantage through the development of innovative products
and services.
Adapted from Mark Robinson, “The Ten Commandments of Intrapreneurs, “New Zealand Management, Vol. 48,
Issue 11 (Dec 2001): p95, 3p.
Since it is the manager’s responsibility to build an environment that facilitates the achievement of
group goals, he or she must encourage entrepreneurs to make the most of any particular opportunity.
Entrepreneurs sometimes take personal risks to bring about change and hence expect recognition and
reward. At times, a reasonable risk taken by an entrepreneur may result in failure, and the losses incurred
will have to be borne by the organization. Moreover, a certain amount of freedom and sufficient authority
should also be necessarily delegated to entrepreneurs to enable them to implement their ideas.
THE PROCESS OF ORGANIZING

Several fundamental aspects pertaining to the organization need to be considered in order to describe
the process of organizing. First, the structure must be compatible with the objectives and plans of the
organization. Second, the structure must indicate the extent of authority available to the management of
the organization. Third, the organization must take into account the external environment also. The
organization structure should be designed in such a way that it allows members of a group to contribute
towards achievement of organizational goals, and to help individuals accomplish their objectives efficiently
in a changing environment. Thus, the organization structure should be dynamic in nature. However, there
is no universal structure that is applicable in all situations. Depending on the situation, an effective
organization structure must be designed.
Finally, as the organization consists of individuals, the grouping of activities and the authority
relationships in the organization must consider the constraints and customs that bind the individuals. This
does not imply that people have to be given precedence over organizational goals; it simply means that
when designing a structure, the type of individuals who are going to constitute the organization must be
considered.
The Logic of Organizing

The process of organizing follows a logical sequence, as shown in Figure 8.5. The process of organizing
consists of the following six steps:
The objectives of the organization should be established
The supporting objectives, policies and plans should be formulated
The activities required to achieve the objectives should be identified and classified
The best way of grouping the activities and utilizing the available human and material resources
should be chosen
Authority should be delegated to the head of each group so that they can perform their activities
The various groups should be connected to each other, both horizontally as well as vertically, by
means of authority relationships and information flows.
Some Misconceptions
The term ‘organizing’ does not mean extreme occupational specialization because, in many cases,
extreme occupational specialization may result in making the task seem uninteresting, unduly restrictive,
and tedious. Keeping in view the results desired, the manager responsible for organizing must decide
whether the task should be broken down into smaller, more specific parts (as in an assembly line) or
whether it should be broadly defined to include all aspects of manufacturing from the design stage to
production and sale of the final product. In any organization, jobs can be designed in such a way that
they allow no freedom to the employees or, in contrast, in a way that allows employees a high degree of
discretion. The application of structural organization theory depends on the situation prevailing in the
organization.
PREREQUISITES FOR EFFECTIVE ORGANIZING

Broadly speaking, there is no ‘best way’ to organize because the process of organizing depends to a
great extent on the organizational situation. The managerial function of organizing can be made more
effective if the following prerequisites are satisfied.
Feasibility Studies and Feedback
1.Enterprise
objectives
2. 3. Identification 4. Grouping of 6. Horizontal and 7. Staffing

activities in 5. Delegation
and vertical
light of of athority
classification coordination of
of required resources authority and
activities and information
situations relationships
8. Leading
(Planning) (Organizing) (Other Functions)
Fig. 8.5 Organizing Process
The span of management and the levels of organization are clearly defined
The factors determining the basic framework of departmentation, along with their strengths and
weaknesses, are taken into consideration
The different kinds of authority and responsibility relationships that exist in an organization are
understood
The way authority is delegated throughout the organization structure, along with the degree of
delegation, is taken into consideration
The way the manager implements organization theory is considered.
SUMMARY
Organizing is an important managerial function. If managerial planning focuses on deciding what to
do, organizing focuses on how to do it. Thus, after a manager has set goals and developed a workable
plan, the next managerial task is to organize people and groups to carry out the plan.
Organizing is the process of identifying and grouping the work to be performed, defining and delegating
authority, and establishing relationships to enable people to work together to achieve the organization’s
objectives. In essence, organizing involves the grouping of activities and resources in a logical fashion.
The various approaches to the division and coordination of work activities and resource allocation
fall under two broad categories: the classical closed systems and the open systems. Closed systems involve
sets of interacting elements operating without any exchange with the environment in which they exist.
Open systems consists of sets of elements that interact with each other and with the environment, and
whose structure evolves over time as a result of these interactions.
The span of management refers to the number of subordinates who report directly to a specific
manager. According to Graicunas, what counts is the number of relationships among those who report
to a manager, not the number of people who report to him. Spans of management have a direct affect
on the number of hierarchical levels in an organization. A tall structure consists of many hierarchical levels
with narrow spans of control, whereas a flat structure contains fewer hierarchical levels.
The process of organizing consists of six steps – defining the firm’s objectives, framing supporting
objectives and policies, identifying and classifying the required activities, grouping the activities according
to the available human and material resources, delegating authority, and horizontal and vertical coordination
of the various groups in the organization.
Effective organizing has many benefits. It helps individuals clearly visualize the tasks they are expected
to accomplish. It supports planning and control activities. Organizing also creates channels of communication
and helps in maintaining the logical flow of work activities. The process of organizing ensures efficient use
of resources and helps avoid conflicts and duplication of effort. It coordinates diverse activities and builds
harmonious relationships among members of the organization. The process of organizing helps managers
to focus on tasks that are logically related to a common goal.
THE DESIGN AND DESIRES OF ST. LUKE’S

STUDY
CASE
Every one of the 55 employees of St. Luke’s, a creative London Ad agency, is an owner
from the switch board operator to the creative director.
A five-person council governs the company. Two of the council members are elected from
among the employees. A new creative director who joins the firm receives shares in the
company, but fewer than a receptionist who’s been with the agency since the beginning.
Just one year old, St. Luke’s generates annual billing of $72 million and is fastest growing
agency in London.
1. How St. Luke’s structure differ from that of a traditional organizational structure?
2. What management problems might be encountered in such a flat structures organization?
3. What structural problems might St. Luke’s find in the future? What concepts present in the chapter might help
the firm solve those problems?
][][
Organization
9
Structure
Strategic
H Designing Organizational Structures: An
Overview
H Major Structural Alternatives
H Other Bases for Departmentation
H Strategic Business Units
H Choosing the Pattern of Departmentation
Chapter 9 Strategic Organization Structure 189
INTRODUCTION
Every organization has certain goals and objectives, and one of the important factors affecting their
achievement is the structure of the organization. The efficiency with which an organization accomplishes
its goals and objectives is, to a great extent, dependent on its structure.
Organization structure refers to the defined relationships between the elements of the organization –
people, tasks, information, and control processes. In the previous chapter, we discussed various theories
of organizing, formal versus informal organizations, the span of supervision and its determinants, and
finally the process of organizing. In this chapter, we discuss various structural alternatives, how the
organization structure is designed and how the pattern of departmentation is chosen.
DESIGNING ORGANIZATIONAL STRUCTURES: AN OVERVIEW

Organizational design is defined as the process of developing an organizational structure. Managers take
into consideration a number of factors when designing organizational structure. One of the important factors
is strategy.
Which Comes First – Strategy or Structure?

A noted business historian, Alfred D. Chandler, in his book Strategy and Structure, traced the genesis
of some of the largest American companies. He tried to determine if strategies were developed before or
after designing the structure of organizations. He concluded that in major companies like Sears, General
Motors, DuPont and Standard Oil, strategy development came first and structural change followed Chandler
was of the opinion that organizations frequently change their strategy in order to utilize their resources in
an efficient manner and develop over a period of time. These changes may cause difficulties because the
organization structure and the new strategies may not be compatible. Unless the organizations make
modifications in their existing structures, the new strategies cannot be implemented effectively and efficiently.
However, many other researchers considered Chandler’s thesis too simplistic. According to them,
particular structures are likely to influence the strategies that organizations are liable to adopt For example,
at Eastman Kodak, changes in structure preceded changes in strategy. Between 1981 and 1985, Kodak
lost about $3.5 billion in sales to its competitor Fuji Photo Film. This was because Kodak’s functional
structure did not permit the development of the kind of strategies needed to manage its different businesses.
Realizing this problem, the former CEO of Kodak, Colby Chandler, reorganized the company and made
34 divisions, each of which dealt with different products. Each division operated as a strategic business
unit. Within 2 years, almost every unit had gained a sizeable market share and Kodak’s exports had
increased by 23 per cent. Although opinions may differ about what comes first – strategy or structure,
Alfred Chandler’s work highlights the fact that a mismatch between strategy and structure can affect overall
organizational performance.
Exhibit 9.1 Changes in Nestle’s Organizational Structure
In the 1950s, most single business and multibusiness companies were organized around country profit
centres. Nowadays, it is hard to find multibusiness companies which are organized purely on geographical
lines. Most multibusiness companies today are organized around both business and geographic structures.
In the 1980s, Nestle, the food and beverage giant, was organized around country profit centres. The company
operated in many African, Middle Eastern and Asian countries. Since cross-border product development for
serving different markets was not done on a large scale, Nestle was forced to use local ingredients for its
products. Nestle also empowered the respective country managers to take decisions regarding its operations
in those countries. The geographical structure was favoured by Nestle due to several factors: use of moderate-
scale plants, supply of inputs for products by local suppliers, absence of the need to allocate a large budget
for R&D (only around 1 per cent of sales was being spent on R&D), and the difference in food products and
variation in consumers tastes across different countries.
This two-dimensional structure of country profit centres and central functions worked remarkably well for
Nestle. However, due to certain factors, Nestle reorganized its structure. In the early 1990s, Nestle began
to acquire other food and beverage companies, thereby making its products lines more diverse. This created
many problems for management at Nestle. For instance, although mineral water and instant coffee are both
classified as beverages, both these product categories had to be managed very differently. Similarly, pet foods
and groceries are both classified as food items but are sold through different channels. In addition, Nestle
also found that it needed to bring out new products. With increase in the number of private-label products
in the grocery market, manufacturers of packaged goods found that they had to add value to their brands
by developing new products. The development of new products required operation of cross-functional processes.
Furthermore, the costs associated with Nestle’s attempts to increase its brand value necessitated an increase
in sales through worldwide availability of its products. The products, thus, had to be restructured and there
also arose a need for cross-border management to manage and monitor the company’s assets across
borders. Another factor that forced Nestle to reorganize its businesses was the expansion of the retail grocery
trade and mass merchants across national borders. These merchants wanted a single contract across
borders. To keep customers happy, Nestle had to consider changing its organizational structure. The most
important factor which influenced Nestle’s decision to reorganize was that many of its global competitors had
started shifting from country profit centres to business units. Many of its competitors (like Danone and
Unilever in Europe and Mars in America) allowed business units more autonomy, thus facilitating faster
decision-making.
These factors compelled Nestle to give more power to central business units and regions. The central
functions of finance, R&D and purchasing were retained while the manufacturing and marketing functions were
assigned to different business units. Although the new structure was characterized by a decrease in the
number of zones, nevertheless, there was an increase in the strength of each zone in the new structure. The
increase in strength of each zone took place due to the increase in opportunities for cross border purchasing
and distribution. Opportunities for trade also arose due to the emergence of the European Economic Community
and Mercosur (in South America). An increase in the number of mass merchandisers led to the need for a
single cross-border purchase agreement in various countries. While Nestle continues to retain its geographical
and country profit centres, it has given more decision-making power to the country business units.
Adapted from Jay R. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bas Inc., 2000) 92-98.
Formulation of vision,
mission and goals
Contingency factors Strategy

Technology
Environment
Organization structure
Functional
Divisional Structural methods for
Hybird promoting innovation
Matrix
Attainment of
organizational goals
Fig. 9.1 Factors Influencing Design of Organizational Structure
Factors Influencing Organization Design

Though there exists an important relationship between structure and strategy, there are other contingency
factors, such as the size of an organization and the technology used that determine the effectiveness of a
particular structure. Further, structural methods that promote innovation, help in implementing strategies
and achieving organizational goals. The relationship of these components with the organizational structure
is shown in Figure 9.1.
MAJOR STRUCTURAL ALTERNATIVES

The first real task in designing an organization structure is to identify all the activities of the organization
and group them properly. This process of grouping the activities is commonly known as departmentation.
Thus, departmentation divides a large and complex organization into smaller and more flexible administrative
units.
It is the process of grouping activities, and delegating authority to managers to supervise the resulting
divisions and to guide the staff, giving the managers responsibility for the performance of the divisions
Departmentation is required for the following reasons:
It helps an organization take advantage of functional specialization.
It defines the role of each individual and helps him know the part he is to play in the total activities
of the company (i.e. the individual’s contribution towards achieving organizational objectives).
It facilitates control, coordination and communication.

It provides the necessary platform to build loyalty among members of the organization.
It helps a manager identify and locate sources of skills, information and competence to take certain
vital managerial decisions.
Departmentation can be done through four major structural alternatives. They are
Functional structure
Divisional structure
Hybrid structure
Matrix structure
Functional Structure
A functional structure is a type of departmentalization in which positions are grouped according to
their main functional (or specialized) area. In other words, positions are combined into units on the basis
of similarity of expertise, skills and work activities. Grouping activities on the basis of the functions of an
organization is called ‘functional departmentation.’ Organizing by functions is the most widely used method
of grouping activities, and this structure can be seen in almost every organization. This kind of
departmentation follows the pattern of what the organization does (its functions) and groups all the work
to be performed into departments on the basis of the functions. Generally, the basic functions of an
organization are production (creating a product or service and adding value to it), selling (identifying
customers who wish to accept or buy the good or service at a price), and financing (raising and collecting,
safeguarding and spending the funds available, i.e. managing financial resources). Thus, it is quite logical
to group the activities of an organization on the basis of functions such as engineering, production, sales,
marketing and finance. A typical functional grouping for a manufacturing company is shown in Figure 9.2.
An organization which adopts a functional structure must consider the relevant specialized areas that
are crucial for its performance. Thus, the functional designations that appear in one organization’s functional
structure may be different from those in the functional structure of another organization. This happens for
the following reasons:
There is no widely accepted terminology for these functions. For example, a manufacturing enterprise
may use designations like “production”, “engineering”, “marketing”, “sales”, and “finance”; a
wholesaler may define his functional structure in terms of “buying”, “selling”, and “finance”, while
an airline uses the terms “operations”, “air traffic and control”, and “finance.”
The basic activities may differ from one organization to the other and the importance of such
activities may also vary. For example, religious organizations (churches, temples, etc.) have no
production departments; and the armed forces have no sales departments. This does not mean that
organizations do not undertake these activities but these are of less importance, and are often
associated or combined with other functions.
Advantages of a Functional Structure

A functional structure is logical and has withstood the test of time. It helps the organization employ
a great variety of skills and utilize them efficiently. The major advantages of a functional structure are as
follows:
Clarity about career paths

One of the advantages of a functional structure is that it provides clarity about how an employee can
progress in the organization. Every employee has clear career paths within his or her specialized function
and is encouraged to develop his or her expertise. Thus, the employees of an organization can understand
how they can shape their careers.
Economies of scale within function

A functional structure provides economies of scale within functions. This is because employees who
specialize in particular areas can handle large amounts of work efficiently. Also, the organization can
invest in equipment if the volume of work is very large. This helps to reduce duplication and waste.
Specialization
A functional structure encourages employees to become specialized in a particular area and develops
their expertise. A functional structure also helps in developing specialists within a particular function. For
example, the Vice President of human resources in a functional structure, can develop specialists in areas
like recruiting, training, and compensation. In this way, specialized technical competencies can be developed,
giving a competitive advantage to the organization. Even a small organization can compete with large
organizations with respect to quality, price, and delivery by putting its limited resources into a single
specialized activity and utilizing them effectively.
Coordination
A functional structure allows easy coordination within departments in a particular specialized area,
as the activities are inter-related. This facilitates the smooth functioning of an organization.
In-depth skill development

A functional structure helps employees develop in-depth expertise. Employees get exposure to a range
of skills in their functional departments. This allows them to develop specialized skills in a particular
functional area of the company.
Power and prestige

A functional structure ensures that the top-level managers have the power to control the various
activities of the organization. In the functional structure, each person in the organization is specialized in
the work activity being performed. Specialization of the employees thus rules out encroachment into their
domains by others. This gives them a feeling of security and makes them feel their work is prestigious and
valued.
Other benefits
A functional structure makes training programmes simple. Also, the top-level managers maintain a
strict control over the activities of the organization as they are responsible for the final outcome.
Disadvantages of a Functional Structure

Although a functional structure has many advantages, it also has several disadvantages. They are:
Chairman & Managing Director
General Management
Management Information
Director Finance System/SAP
Director Director Director

Director Director
Director Human Project/ General
Marketing Sourcing Engineering
Operations Resource Administration
/EHS
Head of HRD Head of Head of Head of Head of

Production- Planning Marketing Sourcing Engineering Corporate Tax
Disperse (Team)
Marketing- Technical Projects-Civil Sales Tax/
Head of Head of Domestic Sourcing Legal
Production- Factory & Projects-
Acid Labour Marketing- Quality Control Fabrication Estate
Management Export Raw Material Management
Head of Environment
Production- Staff Admn Product Pollution
Reactive Management Health & Control
& Technical Safety
Head of Support Excise
Production-
Vat Acid/Leather Accounts
dyes Disperse
Head of R&D /Solvent dyes
Reactive/Vat
Quality dyes
Control Speciality
chemicals
Acid/Leather
dyes Disperse/
Solvent/Vat
dyes Reactive
dyes Dye-
intermediates
& Speciality
Chemicals
Fig. 9.2 Organization Structure of Colourtex Industries
Source: http://www.colourtex.com/organization.htm
Boredom and monotony

Functional specialization may result in extremely narrow, dull, boring, and monotonous tasks. Moreover,
every functional manager perceives his function to be the most important one. In other words, he or she
overestimates the importance of his own function to the extent that he or she forgets the overall goals and
objectives of the organization. Specialists sometimes become so narrow in their orientation that they do
not realize the importance of other functions. The lust for aggrandizement (enhancing power, rank, or
welfare) on the part of each function is the price paid for the laudable desire of each manager to do a
good job.
Poor decision-making
In a functional structure, only the top-level manager can see the entire picture. So, the decisions tend
to be misunderstood, thereby, leading to poor implementation. Issues such as ‘who is right?’, ‘who has
performed better?’ induce an unhealthy competition among the members of the organization, thus adversely
affecting harmony in the organization. As major issues and conflicts are passed on to the top levels for
resolution, responses to complex problems may be seriously delayed. The top managers are overloaded
with work and may not be able to make good decisions.
Sub-unit conflicts
As the organization grows in size, boundaries are erected between departments and coordination
between departments becomes difficult to achieve. It becomes difficult for the management of an organization
to measure the performance of a particular unit because various functions contribute to the end result. As
a result, people tend to pass the buck or sidetrack issues. Overlapping authority, divided responsibility, and
ambiguity of accountability add to the confusion. Thus, if the functional structure is adopted, important
projects may suffer due to lack of coordination across functions.
Managerial vacuum
A functional structure provides a fairly narrow training base for managers because they tend to move
up within one function. This limits their knowledge to their area of specialization. These managers have
very limited knowledge of other functions. The functional structure falls short in providing training for a
functional manager to learn how to handle problems which are complex and require interdepartmental
coordination and knowledge of other functions. Therefore, it is sometimes difficult for a manager from such
a structure to reach at the top of the organization hierarchy, where a broad perspective of the organization’s
activities is required. This may ultimately lead to a shortage of managers with general management skills
in the organization.
Uses of Functional Structure

A functional structure can be adopted by organizations that are small or medium-sized, but require
a formal structure to coordinate their activities. This structure cannot be used by organizations that are
too large and where coordination across functions is difficult to achieve. Small or medium-size organizations
have a limited number of products or services or cater to a set of customers or clients whose needs are
relatively similar.
For example, Domino’s Pizza Inc. has a functional structure, in which operations, distribution, finance,
and administration are the major functional departments. The company could adopt a functional structure
because it deals only with pizzas and other related items.
Divisional Structure
A divisional structure is a type of departmentalization in which positions are grouped according to
similarity of products, services or markets.
The process of dividing large functional pyramids into smaller, more flexible, administrative units is
called divisionalization. A divisional structure creates a set of essentially autonomous small companies in
terms of products, services or markets. It is designed to promote independent and self-contained units.
Thus, each division has the functional resources it needs to pursue its goals with little or no reliance on
other divisions. As the divisional structure allows the major functions of an organization to be contained
within one division, it is considered a ‘self-contained structure.’
There are three major forms of divisional structure: product division, geographic division, and customer
division. The form of divisional structure chosen depends on the rationale for divisionalization.
Product Divisions
Product divisions are divisions created to concentrate on a single product or service or at least a
relatively homogeneous set of products or services. Product or commodity divisions are particularly suitable
for extremely large, complex and multi-product organizations, where large differences in the product or
services lines make coordination within a functional design extremely slow and inefficient. A product
division requires the organization’s work to be divided on the basis of its products. In this form of
organizational structure, the large functional units of an organization are divided into small units, and each
such unit is grouped in terms of the product produced and sold. Each division is responsible for its own
performance and profitability. It is also responsible for product modification and new product development.
Adequate attention is given to products that need to be carefully nursed and skillfully developed. Products
that are in the decline stage of product life cycle may be discontinued. Depending on the changing
conditions, products and divisions can be developed, added or dropped. With the divisional structure,
each product department has its own functional specialities. For instance, every product department may
have a functional structure within it, with functional departments like a personnel department, a manufacturing
department, and a marketing department. Function specialities perform the tasks associated with the
products of only their specific division.
Product divisions lay emphasis on results and performance, rather than on the means. This form of
organizational structure is based on the output of the organization. The divisional head is responsible for
the division’s performance and holds complete strategic and operating decision-making authority.
Organization by product divisions is illustrated in Figure 9.3.
Advantages of product divisions

Organizing by product or product lines is an important basis of departmentation. These are the
advantages of an organization having product divisions:
Product divisions facilitate the use of specialized equipment (e.g. a press for molding car bodies),
promote coordination, and allow optimum utilization of personal skills and specialized knowledge. For
example, a salesperson would be very effective when he is thoroughly acquainted with the product,
whether the product is power plants, lubricants, or conveyors. The benefits of product divisions can be
significant for companies whose potential volume of business is high enough to justify employing such
sales people (i.e. sales people who possess thorough knowledge of the product being marketed). If a
company produces an item or closely related items on a sufficiently large scale to justify the use of
specialized facilities, it can benefit in economic terms by using product divisions in assembling, handling
and manufacturing them.
This form of organizational structure facilitates the growth and diversity of products and services
offered by the organization.
The performance of each product line can be compared and analyzed. This would facilitate the
dropping of unprofitable product lines and the expansion of profitable product lines.
Product divisions allow the organization to come up with additional product lines without dislocating
the existing product lines.
Product divisions provide an excellent training ground for managerial personnel. Since product
divisions have a great degree of autonomy, a manager can acquire a broad range of experiences.
The manager also has to face many challenges as he is responsible for the profitability of the
division. He knows what he is doing and works towards the accomplishment of organizational
goals instead of concentrating on personal goals.
Product division managers supervise the engineering, product, sales and services, and cost functions
of their department and they are responsible for achieving certain product goals and producing a
profit. This enables top managers to measure and analyze the contribution of each product line
to total profit.
As the basic functions (manufacturing, and sales) are performed by the department itself, the
problem of coordination at higher levels is reduced. This may sometimes facilitate better timing and
customer service. The coordination of various activities related to a particular product line is taken
care by the head of the department.
Disadvantages of product divisions

Product divisions allow greater degree of autonomy and help managers learn about various aspects
of managing an organization. However, they have certain disadvantages, such as:
Product divisions require people with general managerial abilities.
Managerial costs are higher because of the decentralization of various activities such as personnel,
production, sales and accounts. These activities are performed separately by each department. In
other words, the costs increase due to duplication of central service and staff activities.
Product divisions may increase the problem of control at the top management level. This is so
because the management of an organization may find it difficult to monitor the activities of
different product departments. The problem of control is very critical to the organization as a
product division manager is, to a great extent, in the same position as the chief executive of a
single-product-line company.
This method of grouping poses certain problems in coordination, decision-making and control.
Thus, organizations operating with product divisions must hold enough decision-making and control
powers at the headquarters level to ensure that the goals of the organization as a whole are
achieved smoothly.
Uses of product divisions

Organizations that require specialized knowledge for selling and marketing different products adopt
this structure. As the cost of decentralization on account of product divisions is high, organizations nullify
this cost by improving efficiency. Some organizations combine the two types of organizational structures
i.e. functional and product, to facilitate better control. These organizations centralize the personnel and
finance functions, while all other functions are performed separately by individual departments.
P resident
Refrigerators Air-conditioners Vacuum cleaners
Operations Operations Operations Operations Operations
Marketing Marketing Marketing Marketing Marketing
Accounting Accounting Accounting Accounting Accounting
Fig. 9.3 A Simplified View of a Product Based Structure
Geographic Divisions
Geographic divisions are divisions designed to serve different geographic areas. Under this method,
territory or location is taken as the basis for organizing. This is common in organizations that operate over
wide geographic areas, such as banking, insurance and transportation firms. Such organizations set up
separate regional units, each self-sufficient in manufacturing, marketing and sales, to cater to the needs
of local markets as shown in Figure 9.4. This type of organization structure is often adopted when it is
important to provide products and services that are customized to the needs of different regions
As the organizations grow, their activities are grouped area-wise into zones, divisions, sections and
branches on the basis of the distinct needs, tastes and facilities in a country. For example, the Life
Insurance Corporation of India, which has its head office in Mumbai, is divided into 5 regions – eastern
region (Calcutta), central region (Kanpur), northern region (New Delhi), southern region (Chennai), and
the western region (Mumbai). The concept is also applicable in a situation in which four guards are placed
at the east, west, north and south gates of a plant. However, this structure is more beneficial to large
organizations, because it allows them to meet the specific needs of customers in different areas. Generally,
business firms resort to this structural form when similar operations are undertaken in different geographic
areas, as in chain retailing, wholesaling, automobile assembling, etc.
Co rpo rate Office
Northern Eastern Canadian Division International

Southwest Division
Division Division
Division
United
Northwest Northeast Los Angeles Eastern Kingdom
Region Region Region Region Region
Bay Area Southeast Western

San Diego Japan
Region Region Region
Region Region
Midwest
Region Arizona Korea
Region Region
Texas Taiwan
Region Region
Mexico
Region
Fig. 9.4 Organization Structure of Castco Wholesale Corporation
Compiled from Annual Report 2002, Castco Wholesale Corporation
Advantages of geographic divisions

These are the advantages which accrue to an organization having geographic divisions:
Geographic divisions allow a manager to pay special attention to the needs and problems of the
local markets. Local factors such as the customs, tastes and preferences, culture and lifestyle of the
population affect the organization’s functioning. It has been observed that the same kind of work
is performed in a different manner in different locations. Thus, knowledge of the local environment
is important for effective management.
Geographic divisions provide opportunities for local talent to be utilized. Local people, who possess
a good knowledge of customer likes and dislikes of that area, can be recruited as salespersons.
Since such salespeople know the area well and are given a limited territory to cover, they are more
successful in selling.
Organizations can follow a geographic or territorial basis for setting up manufacturing facilities at
specific locations in a country. The primary motive of organizations in doing so may be to reduce
the cost of transporting the finished product to the market or to minimize the delivery time. The
organization may also follow such a strategy to take advantage of the lower labour rates in certain
regions. By setting up manufacturing facilities in such regions, the company creates employment
opportunities in these regions. This helps the company to improve its image and develop goodwill.
Geographic divisions improve an organization’s relationship with customers and the organization
can avoid delays in sorting out customer problems.
Geographic divisions help managers gain extensive knowledge of diverse activities. Thus, this
organizational structure provides a good training ground for developing general managers as they
take an integrated view of the organization and look after all the operations of the unit.
Disadvantages of geographic divisions

The following are the disadvantages of geographic divisions:
Geographic divisions require more people with managerial capabilities. Often, the growth of an
organization is hampered if there is a shortage of managers.
Communication poses a problem in geographic divisions. This is so mainly due to the geographical
distance between the departments. But with the advent of modern modes of communication like
video conferencing, Internet, intranet etc., this is no longer a major problem.
In this form of organizational structure, costs of operations are high because of duplication of
activities in different geographic regions. Managers of a territory may want to have their own
personnel, accounting, purchasing and other services, which are already being carried out at the
head office. This duplication, thereby, increases the cost.
In geographic divisions, the top managers at the headquarters may find it difficult to control and
supervise the activities at the department level, as the departments may be located in different
locations.
In geographic divisions, the actual activities are carried out at branches spread throughout the
country, and reports are sent to the zonal office, and then to the headquarters. In the same way,
major policy decisions are taken at the headquarters and communicated to the branches through
the zonal offices. Thus, a gap always exists between the branches and the headquarters. This gap
may hinder the growth and operations of an organization in a rapidly changing environment.
Hence, this form of organization structure poses the problem of coordination and communication
in rapidly changing environments.
When geographic divisions can be used

Geographic divisions are most often used in sales and production, while the finance function is
usually carried out at the headquarters. To develop an appropriate sales campaign and to utilize the latent
advantages available in a region for a good customer service programme, organizations opt for this form
of organizational structure. In some situations, the nature of the product also demands geographic divisions.
For example, dairy products, soft drinks, etc. require such divisions because they rely on customer tastes
and preferences. In such a situation, geographic divisions are used to cater to the needs of the markets.
Nowadays, this structure is adopted to avoid congestion in large urban centres and the problem of hiring
and utilizing labour. Thus, geographic division becomes necessary at some stage in large organizations
that operate in a wide geographic area.
Customer divisions
Customer divisions are divisions set up to service particular types of clients or customers. Under this
method, activities are grouped according to the customers the organization serves (as shown in Figure
9.5). These divisions cater to different needs of various segments of customers. Here, activities are grouped
around the customers, and these activities are overseen by a department head. For example, an educational
institution offers regular and extension courses to cater to the needs of different student groups. Another
example is a marketing or sales department of an organization grouping its activities on the basis of (i)
large and small customers (ii) rich and poor customers, (iii) industrial and non-industrial customers, (iv)
male and female customers (most common in cosmetic and garment industry), (v) old and young customers,
(vi) wholesale, retail, or hire-purchase customers, etc. With customer divisions, each department contains
individuals who perform the necessary functions for a specific type of customers. For example, Citicorp
Investment Management Inc. reorganized its institutional asset management unit, which was earlier organized
by product divisions to customer divisions. The new structure comprised four major divisions – the
national corporate and public funds group, the regional companies group, the domestic institutions group
and international institutions group.
MD & CEO
Deputy MD
SGM. SGM, Major SGM, Growth

Treasury Client Group Client Group
GM, Oil & gas
Investments GM, MCG
Economic
research
Fig. 9.5 Organization Structure Showing Customer Departmentation
Adapted from “Organizational Structure of ICICI (2001) <www.icici.com>
Advantages of customer divisions

The following are the various advantages of customer divisions:
Customer divisions can address the differing needs of customers for clearly defined services. In this
way, an organization can encourage different types of customers to carry out business transactions
with it. For example, a manufacturer who sells to both wholesalers and industrial buyers can satisfy
the special needs of both these categories of customers by setting up separate departments.
Customer divisions are more specialized as they have specialists who can understand the situation
and needs of a particular segment of customers.
This form of organizational structure is useful for organizations that serve different types of customers.
For example, educational institutions offer regular and extension services – evening school or
college divisions, distance education division, etc. with respect to time, subject matter and sometimes
instructors – to cater to the needs of an entirely different group of students other than those who
attend the school or college on a full time basis.
Disadvantages of customer divisions

Customer divisions have the following disadvantages:
Coordination between sales and other functions becomes difficult, as the customer division is a
part of the marketing function.
Various customer departments may put pressure on the management for special treatment, or for
certain facilities and services for their customers from time to time, which may cause rivalry among
the departments.
Special facilities and manpower for certain customer groups may be underemployed. In periods
of recession, some customer groups may just vanish due to worsening economic conditions.
Uses of customer divisions

Customer divisions are useful when the organization’s primary interest is to meet the needs of different
customer groups. These divisions can be used to group the sales function and cater to the different needs
of different segments of customers.
Advantages of a Divisional Structure

A divisional structure has the following advantages:
Each unit or division can respond or react quickly, when required, because it can make independent
decisions and generally does not need to coordinate with other divisions before taking an action.
Coordination is simplified as each division is similar to an organization, containing the various
functions within it. These functions can help achieve the goals of the division.
Organizing by divisions help organizations focus on serving their customer well. This is because
the organization’s focus is on a limited number of customer groups or on a limited number of
products or services.
A divisional structure helps top-level management fix responsibility and accountability for
performance. As a particular division deals with a particular product or service, territory, or
customer type, depending on the form of the divisional structure, the division manager can be held
responsible for the performance of the division.
Unlike the managers in a functional division, who specialize in a particular area, managers in a
divisional structure are exposed to various other functional activities in their divisions. Thus, this
structure provides a good training ground for managers to enhance their general management
skills.
Disadvantages of a Divisional Structure

A divisional structure also has several disadvantages. These are:
Duplication of resources and activities is one of the important disadvantages of a divisional
structure. For example, each division may need a separate computer, even though it is underutilized
to a certain extent. In a functional structure, however, the organization can go for a computer
system which can be shared by various departments and therefore, is used efficiently. Activities
such as personnel, accounts, production and sales are carried out separately by each divisional
unit, even though they are common to all the units. This increases the costs for the organization.
Individuals in a divisional structure are unable to develop in-depth expertise in areas of specialization
to the same extent as in a functional structure. For instance, when an organization with a functional
structure reorganizes itself to the product division design, the human resource department is divided
and the management may allocate various human resource specialists to different product
departments. In such a case, an individual who has the expertise in recruiting also has to handle
other issues like compensation, etc. in a product division. This is because the organization cannot
afford to duplicate the entire human resource department that existed in the previous (functional)
structure.
The individuals in a divisional structure tend to concentrate on divisional goals and not on the
organization goals.
In a divisional structure, divisions may become preoccupied with their own issues and concerns.
There may be unnecessary rivalry over sharing the organization’s resources.
Uses of Divisional Structure

A divisional structure can be adopted by organizations that are fairly large and have substantially
different products or services, operate in different geographic areas or cater to different customer segments.
A divisional structure with self-contained units is not advisable if the nature of organization makes it
necessary to share common resources, such as expensive machinery. According to Stephen P. Robbins,
“The divisional structure is made up of self-contained and autonomous units and is applicable to organizations
with product or market diversity, divisible technologies, large size, and operating neither in very complex
nor very dynamic environments.
Hybrid Structure
Hybrid structure is a form of departmentalization that adopts both functional and divisional structures
at the same level of management.
Many large organizations adopt this structure so as to incorporate the advantages of both functional
and divisional structures. The functional structure is adopted to derive the benefits of economies of scale,
greater competence of managers and efficiency in resource utilization while the divisional structures is
created to focus on products, services, or markets.
The hybrid structure of IBM is shown in Figure 9.6. IBM has functional departments to take care of
those areas where greater expertise is required. These areas are communications, finance, human resources,
research, etc. The company also has four major product divisions which focus on product development
in those areas where technology changes rapidly and need a varied technical expertise. IBM did not
provide each product division with its own sales and service group, but centralized these functions and
organized them on the basis of geography.
The functional departments of a hybrid structure have greater staff authority when compared to the
divisional departments. Since this authority originates from the top level of the organization, functional
departments are also referred to as ‘corporate departments.’
Advantages of a Hybrid Structure

By using a hybrid structure, the organization can achieve a specific competency and economies
of scale in prime functional areas along with focus on products, services and markets.
CHIEF EXECUTIV E
Senior Senior
Vice President, Vice President & Vice President,
Communications Chief Financial Research
Officer
Senior Senior Senior

Vice President, Vice President,
Vice President & Vice President,
Marketing Strategy
General Counsel Human Resources
Senior VP & Senior VP & Senior VP & Senior VP &

Senior VP &
Group Executive, Group Executive, Group Executive, Group
Group Executive,
Worldwide Sales Personal Systems Technology Executive,
Server Group
& Services Group Group Software Group
Europe/Middle AS/400 Personal

East/Africa Division Software
Asia Pacific Products Products
Latin America 6000 Division
North America Division Development
Global System Networking
Services Technology Software
Worldwide & Division
Client Server Architecture Software
Computing Division Solutions
System/390 Division
Division Lotus
Development
Corporation
Fig. 9.6 IBM’s Hybrid Structure

Source: Kathryn M. Bartol and David C.Martin, Management (USA: Irwin McGraw-Hill, Third edition, 1998) 293.
This design also facilitates adaptability and flexibility in handling diverse product or service lines,
territories, or differing needs of customers, through a partially divisional structure.
This structure helps to strike balance between divisional and corporate goals.
Disadvantages of a Hybrid Structure

Organizations with hybrid structure are inclined to develop large staffs in the corporate-level
functional departments over a period of time. As these departments grow larger, they may try to
exercise greater control over the divisions, which may lead to a discord.
In exceptional situations that require coordination between a division and a corporate functional
department, a hybrid structure may be slow to respond, as compared to a functional or divisional structure.
For example, a personnel issue that needs deviation from the policy may take more time to resolve in a
hybrid structure, when compared to a functional or divisional structure.
Uses of Hybrid Structure

A hybrid structure is well suited for organizations operating in considerable environmental uncertainty.
The uncertainty can be best handled by a divisional structure, whereas the functional structure allows
development of expertise. A hybrid structure also suits medium or large organizations that have enough
resources to justify divisions as well as some functional departmentalization.
Matrix Structure
A matrix structure is a type of departmentalization that superimposes a horizontal set of divisional
reporting relationships onto a hierarchical functional structure. Matrix organization is also referred to as
a grid organization or project or product management organization. The main feature of a matrix organization
is that functional and project or product patterns of departmentation are combined in the same organization
structure. Thus, a matrix structure can be termed to be both functional and divisional at the same time.
A matrix structure has two chains of command – vertical and horizontal. A basic matrix structure is shown
in Figure 9.7.
As shown in the Figure 9.7, marketing, human resources, customer care, research and development,
finance, production and engineering represent the functional departments that comprise the horizontal
hierarchy; the managers of products A, B and C represent the divisional units that operate vertically across
the structure. The heads of these divisional departments and functional departments that comprise the
matrix structure are at times referred to as ‘matrix bosses.’
In a matrix structure, an employee has to report to two matrix bosses. For example, an employee of
the marketing department may report to the vice president, marketing, horizontally across the chain or to
a manager of Product C vertically up the chain. This characteristic of matrix structure violates the principle
of unity of command (an employee should report to only one superior at any given point of time) and
makes the structure complicated.
Product A Product B Product C
Marketing
Human Resources
Customer Care
R&D
Finance
Production
Engineering
Fig. 9.7 Matrix Structure
A matrix structure is often seen in construction (e.g., building a dam or a bridge), marketing (e.g.,
an advertising campaign for a new product), the installation of electronic data processing systems, aerospace
(e.g., designing or launching a weather satellite), and a consultancy firm where professional experts work
together on a project.
Matrix Stages
Organizations that adopt a matrix structure generally pass through the following structural stages:
Stage 1 is a traditional structure, generally a functional one. This structure follows the unity-of-
command principle.
Stage 2 is a temporary overlay. In this stage, managerial integrator positions are established. These
are developed so that individuals can take responsibility for particular projects (e.g. project managers),
oversee product launches (e.g. product managers), or deal with some other issues for a limited duration
where coordination across functional departments is necessary. Such managers frequently lead or work
with temporary interdepartmental teams formed to address the issue.
Stage 3 is a permanent overlay. At this stage, the managerial integrators operate on a permanent
basis (e.g. a brand manager takes care of issues pertinent to a brand regularly). They frequently interact
with permanent interdepartmental teams to get the work done.
Stage 4 is a mature matrix. In this stage, matrix bosses have equal power.
Stages 2 and 3, that involve managerial integrators, are frequently referred to as matrix structures,
even though an actual matrix provides equal power for functional and divisional managers.
Each stage of the matrix structure provides increasing amounts of horizontal integration, but at the
same time, it makes administration more complex. There is dual authority to some degree, even with
managerial integrators, because the integrators often coordinate directly with various members of functional
departments (e.g. marketing, purchasing, engineering, etc.) assigned to assist them with their projects.
Though the managerial integrators do not have direct line authority over the employees assigned to
their projects, they supervise the work of these employees as coordinators. Thus teamwork is emphasized.
As all the major decisions must get the nod from both the functional manager and the divisional
manager, there is dual authority in the mature matrix. A mature matrix is adopted when the functional
and divisional dimensions are equally important.
The temporary and permanent forms of the matrix structure function successfully in a variety of
organizations. The management of an organization should weigh the advantages and disadvantages of a
matrix structure carefully before adopting it.
Advantages of a Matrix Structure

A matrix structure facilitates decentralization of decisions, so that the decisions are taken by the
functional manager or division project manager level. This enables top-level management to focus
on the strategic issues.
A matrix design brings about horizontal coordination to projects (brands or products), which may
not be possible with a functional organization structure. Thereby, the chances of success of the
projects are higher.
This structural form allows the organization to keep a check on the environmental conditions with
respect to both the projects and the functional areas. As many decisions are taken at the lower
levels, this structure can react quickly to changes in the environment.
Another advantage of the matrix structure is that it allows effective use of human resources.
According to the situation or depending upon the need, functional specialists can be added to or
reassigned from different projects.
Cost can be brought down by allocating support systems such as computers, software and special
equipment among the different projects, according to their requirements.
Disadvantages of a Matrix Structure

Administration costs are higher because of the additional hierarchy of project managers and their
immediate support staff.
As the individuals working within the matrix structure report to two bosses, they are unclear about
who has the authority and responsibility for decision-making.
Due to the dual authority system and the need for greater communication, the possibility of
conflicts is greater, particularly between functional managers and project managers.
In this form of structure, individuals are too engrossed with maintaining good relations with their
peers, and tend to neglect the project goals and clients.
Matrix organizations encourage group decision-making. However, group effort may sometimes be
carried out to such an extent that even minor decisions are made in groups which bring down
productivity levels.
Though a matrix organization is adaptable to change, it is sometimes extremely slow in responding
to changes. This may be due to poor interpersonal skills of employees, or because the top-
management wishes to retain complete control.
When to Consider a Matrix Structure

It is not desirable for every organization to adopt a matrix structure. Texas Instruments decided to
discard its matrix structure as it found that it could not keep up with the competition due to the complexities
associated with this structure. The additional administrative complexity that arises at the lower levels
should be balanced by sufficient horizontal coordination. Matrix structures can be adopted if the following
three conditions exist:
a. There is a very high pressure from the environment that makes it essential to have a strong focus
on both the functional and divisional aspects of the organization. In other words, the environment
in which the organization operates is such that it encourages use of both functional and divisional
structure. For example, if an organization’s product portfolio is very wide, it may opt for a product
division, but rapid developments in engineering technology may necessitate it to adopt functional
structure also.
b. The external environment of the organizations is changing and uncertain, and they have to process
large amounts of information and coordinate activities to develop newer and better products. For
instance, in the electronic and semiconductor industry, companies worldwide make technological
improvements and reduce prices in order to gain competitive advantage over their competitors.
c. There is a need for the company to share its resources. Organizations may need to be flexible in
using the functional resources across various products or projects. On the other hand, the
organization may opt for a divisional structure and assign a technical expert to each division.
A matrix structure requires a change in the organization’s culture to support and facilitate collaborative
decision-making. To function effectively and efficiently, managers and other employees may need special
training, especially for improving their interpersonal skills. While a mature matrix structure is not very
necessary for many organizations, temporary and permanent overlay stages are being used to a greater
extent. This is being done by creating temporary and permanent cross-functional teams. For example,
General Mills Cereal plant in Lodi, California, has cross-functional teams that schedule, operate and
maintain equipment and machinery on their own without any managers. The teams are so effective that
the night shifts operate without a single manager.
To develop an appropriate organizational design, a manager has not only to weigh the advantages
and difficulties of various structural alternatives, but he or she should also consider other contingency
factors that affect the structural requirements.
OTHER BASES FOR DEPARTMENTATION

In addition to the above mentioned structural alternatives, there are three other bases that may be
considered for departmentation. They are
a. Departmentation by simple numbers
b. Departmentation by time
c. Departmentation by process or equipment
Departmentation by Simple Numbers

Departmentation by simple numbers was an important method of classifying tribes, clans, and armies
in the past. Though the use of this method is decreasing nowadays, it may still have some implications
in today’s world. In this method, a certain number of persons who are to perform the same duties are kept
in one department under the supervision of one person, irrespective of what they do, where they do, and
what they work with. This form of departmentation is based only on the number of people involved in it.
The usefulness of this form of departmentation has diminished with each passing century for three
reasons. First, technology has become more sophisticated and demands for more specialized and diverse
skills have increased. For example, in the US, agriculture was considered to be the domain of labourers.
But, of late, due to more specialized farming operations, use of manual labour is decreasing and now
restricted only to harvesting.
Second, the groups comprising of specialized personnel are generally much more efficient than those
groups which have been formed on the basis of numbers. The defense forces of the US were reorganized
on the basis of specialization of personnel. Individuals possessing skills in using different types of weapons
were grouped together. For example, the traditional infantry unit, when supported by artillery and tactical
air support, is a more efficient fighting unit than it would be, if each were organized separately.
Finally, the most prominent cause for decline of departmentation by simple numbers is that it is useful
only at the lowest level of the organization structure.
This method was earlier used in the armed forces and may also be suitable for industrial establishments
that have fewer individuals at the lower levels. But this type of departmentation becomes ineffective when
any factor other than just the number of people performing similar duties gains importance.
Departmentation by Time
Departmentation by time is also one of the older forms of departmentation and generally used at lower
levels of the organization. In some organizations that work round-the-clock (for example, public utilities like
railways, post and telegraph offices, hospitals, etc.) departmentation is based on time. The use of shifts
is common in such organizations as they may be affected by economic, technological or other factors. For
such organizations, a normal eight-hour workday may not be sufficient. For example,
Vice President
(Production)
Evening Night
Day shift
shift shift
Fig. 9.8 Departmentation by Time
In hospitals, round-the-clock patient care is essential and such departmentation facilitates this. Similarly,
the fire department has to be ready to act in case of any fire accident or emergency. Technological factors
may also necessitate the use of departmentation based on time (see Figure 9.8). For example, producing
steel is a continuous process and requires an organization to work round-the-clock by means of shift
system. The basic idea behind this form of departmentation is to get enough specialized workers to work
in all shifts through the day.
Advantages of Departmentation by Time

The basic advantage of time-based departmentation is that it helps in efficient utilization of manpower
and other resources.
An organization can render its services to its customers for a period greater than the normal 8-
hour working day. Thus, an organization can make its services available to those who need it at
any hour.
This form of departmentation facilitates the use of processes requiring a continuous cycle without
interruption.
Expensive capital can be efficiently utilized as employees working in shifts make use of the same
machinery for a greater period of time.
This form of departmentation is convenient for some people as they can work at night. For
example, students may find it convenient to work at night, as they have classes to attend during
the day.
Disadvantages of Departmentation by Time

There may be a lack of supervision in the night shifts.
Most of the employees find it difficult to adjust to switches from one shift to another. For example,
an individual may find it difficult to shift from a night shift to a day shift and vice versa.
When an organization operates with several shift systems, coordination and communication may
become a problem. For example, employees working in the night shifts may not clean up and
grease the machinery to be used by the day-shift people. This can be resolved through the
establishment of regular practices.
Employees may postpone their work in order to get paid for overtime work. This will push up the
costs of production and affects the final price of the product or service.
Workers may concentrate on narrow and specified technical aspects of the organization rather
than on the ‘total system.’
Departmentation by Process or Equipment

In manufacturing organizations, the activities are often grouped on the basis of processes or equipment.
This form of departmentation brings together people and material to carry out a particular operation. It
permits intensive and economical usage of costly equipment. Such departmentation can be found in paint
or electroplating process grouping. It can also be seen in the oil and textile industry or in the arrangement
of one plant area of automatic screw machines or punch presses. Another common example of equipment
departmentation is the electronic data processing department. Figure 9.9 illustrates such an organizational
arrangement.
Advantages of Departmentation by Process or Equipment

Process departmentation enables an organization to get the benefits of specialization and make
optimum use of the resources and the equipment.
This departmentation is beneficial when the equipment or machinery requires special operating
skills.
President
Vice President
Production Sales Controller Tooling

Manager Manager Manager
Fabrication Assembly Inspection
Procurement Tool Tool

Coordinator Fabrication Maintenance
Fig. 9.9 Process or Equipment Departmentation
Adapted from Charles W. L. Hill and Gareth P. Jones, Strategic Management Text and Cases – An Integrated
Approach, 4th edition (Chennai: All India Publishers and Distributors (Regd., 2000)
The basic purpose of the departmentation is to get economic benefits. Machinery or equipment
related to a particular activity may be installed in one department and arranged in such a way that
makes the series of operations feasible and economic.
Disadvantages of Departmentation by Process or Equipment

Process departmentation hinders the coordination of various functions due to the limitations that
arise from specialization.
This form of departmentation results in conflicts between different managers at different levels on
matters such as allocation of funds, providing facilities to different processes, etc.
STRATEGIC BUSINESS UNITS

The strategic business unit (SBU) is a more recent form of organization structure adopted by several
companies. SBUs are separate businesses set up as units within a larger company. They handle and
promote specific products and product lines as if they were an independent business and ensure that they
receive adequate attention. In other words, an SBU is a distinct business entity, which can be managed
independently with respect to other businesses within an organization. An SBU has a distinct mission and
a defined set of competitors.
The General Electric Company was one of the earliest users of this form of organizational structure.
The company offered a wide variety of products and product lines. It decided to introduce a special
organizational unit in order to ensure that each of its products received the same care and concern as if
the product were developed, produced, and marketed by an independent company.
Some organizations have made use of SBUs for its major product lines. For example, the Occidental
Chemical Company used the SBU concept for products such as resins, phosphates and alkalis.
Exhibit 9.2 Business Units of Motorola

Motorola is a global leader in providing integrated communications and embedded electronic solutions. Its
different business units provide a range of services to its customers. These units are listed below.
Broadband Communications Sector: Motorola’s Broadband Communications Sector (BCS) is the world’s
leading supplier of digital cable set-tops and cable modems. This business unit provides end-to-end systems
for delivering interactive digital video and voice and high-speed data solutions for broadband operators.
Commercial, Government and Industrial Solutions Sector: The Commercial, Government and Industrial Solutions
Sector (CGISS) provides integrated communications and information solutions to government and business
enterprises. This sector helps to improve public safety operations provided by governments and private
enterprises across the world.
Global Telecom Solutions Sector: The Global Telecom Solutions Sector (GTSS) is responsible for providing
infrastructure, network services and software which would take care of the needs of network operators
worldwide. At the same time, this sector provides next-generation network operators the opportunity to create
new, revenue-generating applications and services for customers.
Integrated Electronic System Sector: The Integrated Electronic System Sector (IESS) provides a broad range
of embedded systems and products to cater to the needs of various markets. These include the automotive,
industrial, Telematics (a combination of telecommunication systems and computing systems),
telecommunications and portable energy system markets.
Personal Communications Sector: The Personal Communications Sector (PCS) is concerned with the design,
manufacture, sales and service of wireless subscriber and server equipment. The equipment includes wireless
handheld devices for cellular and iDEN integrated digital enhanced networks, advanced messaging devices,
personal two-way radios, and a broad range of mobile-data services, servers and software solutions with
related software and accessory products.
Semiconductors Products Sector: Motorola’s Semiconductors Products Sector (SPS) is the world’s largest
producer of embedded processors. This sector is responsible for the creation of DigitalDNA system-on-chip
solutions for a wired world. The sector’s focus on wireless communications and networking provides new
business opportunities for its customers in the consumer, computing and networking, transportation and
wireless communications market.
Adapted from “Business Units,” Motorola, <http://www.motorola.com/content/0,1037,5-106,00.html>
A business can be called an SBU, if it satisfies certain specific criteria. An SBU should
a. have a mission for itself that is unique and different from the missions of other SBUs
b. have well defined competitor groups
c. formulate its own interdependent plans, which are different from those of other SBUs
d. manage its resources efficiently in key areas
e. neither be too small nor too large, but have an appropriate size.
Exhibit 9.3 Strategic Business Units of Goodyear

Goodyear is the world’s largest manufacturer of tyres. It operates in various countries spread over six
continents and its annual sales exceed $14 billion. Apart from the Goodyear brand of tyres, it manufactures
and sells various other brands of tyres, which have made a niche for themselves. Some of its famous brands
include Dunlop, Kelly, Fulda, Lee, Sava and Debica. Its non-tyre business units provide rubber products and
polymers for automotive and industrial markets. Goodyear markets its products in 185 countries. It has
manufacturing operations in 96 plants in 28 countries and has about 100,000 employees. Goodyear is truly
a global giant and a universally recognized brand name. As Goodyear has a worldwide production capacity
and sophisticated technological resources, it offers its customers products of the best quality. The Goodyear
brand name symbolizes quality and diversity in the tyre and rubber products business.
Goodyear has organized itself into various strategic business units, which serve different geographical markets
and produce different products. These strategic business units and the markets they serve are shown in the
table below.
Strategic Business Unit Products & Markets Geographic Markets Served

North American Tyre Original equipment and replacement tyres United States, Canada
for autos, trucks, farm purposes, aircraft
Goodyear European Union Original equipment and replacement tyres Europe
for autos, trucks, tractors
Goodyear Eastern Europe, Original equipment and replacement tyres Poland, Slovenia, Turkey,
Africa, and Middle East for autos, trucks, tractors Morocco, South Africa
Goodyear Latin America Original equipment and replacement tyres Central America, South
for autos, trucks, tractors America
Goodyear Asia Original equipment and replacement tyres Asia, Australia, New Zealand
for autos, trucks, farm purposes, aircraft
Engineered Products Auto belts, hose, industrial products Worldwide
Chemical Products Synthetic and natural rubber, chemicals Worldwide

Off the Road Tyres Original equipment and replacement tyres for Worldwide
construction and other off-the-road vehicles
Aircraft Tyres Original equipment and replacement tyres Worldwide
for private and commercial aircraft
Adapted from “Strategic Business Unit Profiles,” Goodyear Tyre and Rubber Company, <http://www.goodyear.com/
corporate/sbuprof.html>
In actual practice, it may be very hard to find such SBUs which meet all the criteria mentioned above.
Generally, a ‘business manager’ is appointed for each SBU and held responsible for guiding and
promoting the product. The business manager also holds the responsibility for making the business profitable
while guiding the product from the research and development stage to the marketing stage. Thus, an SBU
has its own goals and objectives and a manager, who with the help of full-time or part-time employees
(individuals from various other departments assigned to the SBU on a part-time basis) will formulate
strategic and operating plans for the product or product line and oversee its implementation. Figure 9.10
illustrates the SBU for phosphates of Occidental Chemical Company.
As a large company has various products or product lines, there is very high chance that a product
may be lost among other products that are more profitable. The basic purpose of adopting an SUBs
organization is to ensure that a product is not ignored among the others that generate larger profits and
greater sales volume. An SBU aids a manager and his staff to concentrate their energies in guiding and
G EN ER AL M AN A GE R
Industrial Chem icals
BU SIN ESS M A N AG ER
Phosphates
Division Division Division Product Accounting

Production Sales Market
personnel purchasing research development manager
manager manager manager
manager manager manager manager
Works Works Works Regional Regional Regional

manager, manager, manager, manager, manager, manager, Los
Atlanta Chicago Dallas New York Chicago Angeles
Product Product Product

manager manager manager
A B C
Fig. 9.10 Typical Strategic Business Unit Organization in a Large Industrial Chemical Company
edition, 1994) 283.
promoting a product or product line. Thus, SBU organization is a technique to conserve entrepreneurial
attention and initiative, which is a hallmark of small businesses. It is likely that large companies lack the
entrepreneurial spirit and this can be promoted by developing SBUs.
CHOOSING THE PATTERN OF DEPARTMENTATION

There is no universal basis for departmentation that can be applied to all organizations and all
situations. Also, as every organization is different from the other, it has to select the pattern of
departmentation, depending on the situations it faces – the tasks to be performed and the manner in which
they should be performed, the technology being used in the department, the individuals and their personalities,
the customers or consumers being catered to, and other internal and external environmental factors. The
managers should take into consideration the relative advantages and disadvantages of each pattern of the
organization structure and choose the one that best suits the organization.
A basic consideration to be kept in mind while selecting a basis for departmentation is that the
organizational structure should help a manager achieve organizational goals efficiently and effectively.
Departmentation is not an end in itself; rather, it is a means of grouping activities that facilitates the
achievement of organizational goals and objectives.
Another important aspect relating to departmentation pertains to combining types of departmentation
within a functional area. For instance, a company manufacturing plastic goods may have organized the
production and selling functions of its products on a geographical basis, while the dinnerware category,
which is a product category is kept as a separate department. Thus, a functional department manager may
group the activities using two or more bases of departmentation at the same organization level.
Management specialists stress the need to maintain a uniform pattern of organization structure below
a specific hierarchy level in organizations. They insist that by doing so the organization chart can be
understood easily and control within the organization becomes simpler. But the objective of departmentation
is not to build a rigid structure, characterized by consistency with other units of the organization and by
use of the same bases (of departmentation). Instead, the activities are to be grouped in such a manner
that they contribute to the accomplishment of organizational goals.
Organizations with multiple plants at different locations usually organize all of them in the same way.
Thus, the departments in all such plants are virtually the same. Designing an identical organization
structure in similar kinds of organizations just for the sake of beautifying an organizational chart is not a
good practice and is not advisable. The purpose of developing an organization structure is not to control,
but to achieve its goals efficiently and effectively. Therefore, there may be important reasons for comparing
the operation of similarly organized plants, but the basic purpose of organizing should not be sacrificed
for these reasons. If the basic purpose of organizing is sacrificed for the sake of control, then the cost of
control is too great.
SUMMARY
Every organization has some goals and objectives and one of the important factors that affect these
goals is the organizational structure. The efficiency with which an organization accomplishes its goals and
objectives depends on the structure it adopts. Departmentation is the process of grouping activities to
achieve organizational goals and objectives, and delegating authority to a manager to supervise the
division and guide the staff, making him responsible for its results. The process of developing a structure
is also referred to as organization design. There are four major structural alternatives – functional structure,
divisional structure, hybrid structure, and matrix structure. The functional structure is a type of organization
structure which groups positions on the basis of main functional or specialized areas. The divisional
structure is a type of departmentation based on similarity of products, services or markets. It has three
major forms – product division, geographic division, and customer division. The form of divisional structure
chosen depends on the rationale for divisionalization. A divisional structure can be adopted by organizations
that are fairly large and have different products or services, operate in different geographic areas or cater
to different customer segments. Many organizations, especially large organizations, adopt hybrid structures
in order to incorporate the advantages of both functional and divisional structures. Organizations requiring
functional expertise and/or efficiency, and which operate in uncertain environments can adopt a hybrid
structure.
A matrix structure is a type of departmentalization that superimposes a horizontal set of divisional
reporting relationships onto a hierarchical functional structure. The essence of a matrix organization is the
combination of functional and product or project patterns of departmentation in the same organization
structure.
In addition to the major structural alternatives, other bases for departmentation include –
departmentation by simple numbers, departmentation by time, and departmentation by process or equipment.
SBUs are distinct businesses set up as units in a larger company to ensure that a certain product or
product line is promoted and handled as though it were an independent business. The basic purpose of
SBU is to give all the products equal attention and care. There is no universal basis for departmentation
that is applicable to all organizations and all situations. Every pattern of departmentation has its own
advantages and disadvantages. So, an organization has to select the basis of departmentation that is best
suited to its needs.
The New Medical Market Place

Hal has just returned from a trip to his health care unit for his annual check-up. He made
an early appointment so that he would not miss a client luncheon at noon, but unfortunately,
he had to call prospective client and cancel because examination process was taking so long.
STUDY
Hal had already waited four months for this appointment and he was experiencing some
CASE
symptoms that might indicate an ulcer. So he decided to hang in there all day if necessary.
And it was necessary. He was kept waiting for hours as the staff used triage to prioritise their
cases. Hal’s case was “just routine”, so he was held up at the many stations he had to visit,
from the chest X- ray to blood and urine samples. Hal even had to walk from building to
building within the facility to get the correct services. Only once did he see a doctor; the rest
of his contacts were technicians or clerks who needed insurance information.
By the time he reached home at 0600 pm that night Hal was exhausted and frustrated.
As a productions and operations specialist, he was appalled at how disorganized the clinic
was. He was well aware that there are many pressures on health care professionals, from
demand for health care reform to pricing health care cost. He felt that the disorganization
masquerading as it organized business needed help from THE BUSINESS TEAM INC.
1. How might the team go about approaching the clinic with its reorganizing needs?
2. What type of problems do you think the Team would find if it try to change the organization of the clinic
and consequently the authority relation among the staff.
3. Do you think a matrix structure would work in a medical clinic?
4. Who do you approach the re-design problem if you were the member of The Business Team Inc.?
Chapter 10 Line and Staff Authority and Decentralization 217
Decentralization
Line and Staff
Authority and
10
H Authority Defined
H Power: Bases of Power
H Line and Staff Relationships
H Centralization Versus Decentralization
H Delegation of Authority
H Balance – The Key to Decentralization
INTRODUCTION
After understanding the different patterns of departmentation, it becomes necessary to understand the
authority relationships that exist in an organizational structure. Authority relationship refers to the binding
force which links the different parts of an organization. Managers at different levels need varying types and
amounts of authority for making decisions. Therefore, various authority relationships exist in an organization,
many of which revolve around line and staff functions. This chapter deals with the nature of line and staff
functions, the reasons for conflicts between the two and the ways to avoid them.
While discussing authority relationships, it is important to understand the amount of authority that
can be delegated by the superior to the subordinates. This depends on the degree of centralization or
decentralization present in an organization. The latter part of the chapter deals with delegation of authority,
decentralization, and factors affecting decentralization. Authority relationships are, therefore, responsible
for facilitating departmental activities and ensuring the proper functioning of an organization.
AUTHORITY DEFINED
The term ‘authority’ has several meanings. For instance, a person with superior knowledge and skills
in a particular area is considered an authority or an expert in that area. The term ‘concerned authority’
is often used to refer to officials in a specific department in a government agency. However, in the context
of an organization and its management, authority is defined as the power to make decisions, which guide
the actions of others. It is a relationship between two individuals, the superior and the subordinate. The
superior frames and transmits decisions with the expectation that these will be accepted by the subordinate.
The subordinate executes such decisions and his conduct is determined by them.
On the basis of this definition, the following features of authority can be identified:
Authority is the power to make decisions and see that they are carried out in the right way at the
right time, providing necessary guidance, as and when required.
Authority is the relationship between two individuals – the superior and the subordinate.
A person with authority can regulate the behaviour of his or her subordinates so that they behave
in a desired manner.
Authority is exercised to achieve organizational goals.
Authority is vital for a manager. A manager cannot get tasks accomplished by subordinates if he does
not have the requisite authority. The managerial function of organizing is said to be incomplete until
appropriate authority relationships support the people present in different departments. The various positions
and departments must be coordinated with each other for the accomplishment of organizational goals, and
this is possible only by defining authority relationships clearly. Authority relationships ensure cooperative
action and facilitate the achievement of organizational goals by stating who is responsible for which
activities. In the absence of formal authority relationships, it may not be possible for individuals working
in an organization to combine their efforts and achieve organizational goals. Authority, by assigning well-
defined roles to organizational participants, prevents behaviour that is entirely spontaneous and unrehearsed,
and ensures identical behaviour patterns necessary for the working of an organization.
The two terms ‘authority’ and ‘power’ are sometimes used interchangeably since both tend to influence
the behaviour of the individuals on whom they are exercised. However, there is a difference between the
two and in order to avoid confusion, it is necessary to distinguish between them.
Authority in an organization is the right in a position (and, through it, the right of the person
occupying the position) to exercise discretion in making decisions affecting others. It is, of course, one type
of power in an organizational setting. The concept of power and different bases of power are discussed
in the next section.
POWER : BASES OF POWER

Power, a much broader concept than authority, is the ability of individuals or groups to induce or
influence the beliefs or actions of other persons and groups.
Formal authority is a type of power. It refers to the right to exert influence. Formal authority is derived
from the formal position defined by the organization, and individuals who have this authority can use it
only within prescribed limits. By conferring formal authority upon an individual, the organization makes
it lawful or legitimate for the individual to exercise this authority.
Power is the ability to influence other people and their behaviour. A manager is said to have power
if he can change the behaviour or attitudes of his employees. Thus, while authority is conferred by the
organization, the personality and actions of an individual give him the power to influence others. Unlike
authority, power requires no formal position. Power can be derived from not only the job position, but also
from expertise, technical competence, and seniority in the organization. The type of power which is very
important in the organizational context is legitimate power. Legitimate power is similar to authority, and
exists when a subordinate acknowledges the right of a superior to exert influence within certain limits. The
rights, obligations and duties associated with a certain position in an organization provides legitimate
power to the individual holding that position. For example, a Ticket Collector in the Railways has the
power to levy a fine on individuals who travel without a ticket. This power is legitimate power since it is
conferred on him by the institution – in this case, the Railways.
Power works both ways – downward and upward. For example, a plant manager has the right to
establish reasonable work schedules. In this case, he is exercising ‘downward legitimate power.’ A guard
asking the company’s president to present an identification card before being allowed onto the premises
is exercising ‘upward legitimate power.’
Power may also be derived from the expertise of a person or a group. This is known as expert power.
Expert power is based on the belief that the influencer has some relevant expertise, special knowledge or
skill which the influencee lacks. For example, doctors, lawyers, engineers and university professors are able
to influence others because they are very knowledgeable in their specialized field.
Another form of power is referent power. Referent power refers to the desire of the influencee to
identify with or imitate the influencer. It may be held by a person or a group. In other words, it is the
influence which certain persons or groups are able to exert on others, and arises due to the latter’s belief
in them and their ideas. For example, Martin Luther King hardly had any legitimate power, but he was
able to influence many people by the sheer force of his ideas, his magnetic personality, and his ability to
preach. Similarly, a sportsperson or a movie star or a politician may possess referent power. Referent
power functions at superior and peer levels. For instance, charismatic superiors and peers may influence
their subordinates and colleagues to agree to their viewpoints. The strength of referent power depends
upon the respect and admiration the superior or peer commands from the subordinates and colleagues
respectively.
The basis for reward power is the ability of the influencer to reward the influence for performing a
job well or meeting other organizational requirements. For example, a university professor holds a considerable
amount of reward power, for he or she has the power to award grades to the students.
Coercive power is the negative dimension of reward power. It is based on the influencer’s ability to
punish the influence for failing to perform a job well. Punishment may involve pulling up a subordinate
or withholding a hike in pay, the loss of a minor privilege, or even the loss of the job. Generally, coercive
power is used in organizations to ensure a minimum standard of performance.
Like authority, power also can be institutional or impersonal. However, in most organizations, it is
not the managers (superiors) alone who have power conferred on them. Informal groups and competent
subordinates also possess some power. Only a part of the total power can be institutionalized, and termed
authority. Table 10.1 shows the difference between authority and power.
Table 10.1: Differences between Authority and Power
Authority Power
Authority is the right to do something. Power is the ability to do something.

Authority is the legitimate power given by an
organization to a member holding a position. Power requires no formal position.
Authority is derived only through position. Power is derived from many sources.
Authority is a narrow term and is a major Power is a broader concept that creates action when authority
source of power. fails to achieve results.
Organizational authority is the power to exercise discretion in decision-making and is derived by

virtue of the position.
Organizations should strike a proper balance between power and authority. A failure to balance
power and authority at all levels of the organization may have disastrous consequences. In certain situations,
the superiors may have the authority (right) to do something, but may lack the power (ability) to do it,
while in some other cases, the superior may have the power (ability) but may not have the requisite
authority (right) to carry out the activity. So, for organizational success, individuals should have the means
(power) equal to their rights (authority).
LINE AND STAFF RELATIONSHIPS

The various departments of an organization are bound together by authority relationships. In an
organization, there are many types of authority relationships essential for its efficient functioning. Managerial
positions at various levels require different types and amounts of authority for decision-making. These
different authority relationships revolve around the concept of line and staff functions in the organization.
There is much confusion, both in management literature and among managers, about the exact
nature of line and staff relationships. A widely accepted perspective of line and staff functions is that line
functions are those which directly influence the accomplishment of organizational objectives.
Staff functions are those which facilitate the work of the line personnel towards the achievement of
organizational objectives.
Concept of Line and Staff

Though the distinction is relatively easy to make on paper, in practice, it is hard to distinguish
between direct and supportive activities. For instance, in an academic institution, the position of teachers
(faculty) is considered as line in nature, but the position of the research staff is not. In a manufacturing
firm, production and sales (and sometimes finance) are considered as line functions, while purchasing,
accounting, personnel, plant maintenance and quality control are considered staff functions. Production
departments like the painting department or the parts assembly department are seen as being directly
responsible for the achievement of organizational goals and are therefore classified as line functions. As
the purchasing department is not directly involved in accomplishing organizational goals, it is considered
to be a supporting function and is therefore classified as a staff function. But in practice, purchasing is
an essential function as important as the production department for the achievement of organizational
objectives. A similar dilemma arises with quality control, which is considered a staff function. In today’s
quality-conscious world, it is difficult to achieve organization goals without maintaining quality. Failure to
meet quality standards will hinder an organization’s goal of producing high-quality goods, and result in
their produced goods getting rejected. This, in turn, may adversely affect their production and sale. Thus,
there is not always a clear demarcation between line and staff functions. However, much of the confusion
can be overcome by defining these functions clearly.
Line and staff functions are defined on the basis of two viewpoints – the functional viewpoint and
authority relationships viewpoint. According to the functional viewpoint, line functions are those which
have a direct bearing on the achievement of organizational objectives; and staff functions are those which
assist line functions to attain these objectives. Louis A. Allen, who supports the functional viewpoint,
defines line and staff functions as:
“Line functions are those functions which have direct responsibility for accomplishing the objectives
of the enterprise, and staff refers to those elements of the organization that help the line to work more
effectively in accomplishing the primary objectives of the enterprise.”
Organizational objectives determine the line and staff functions, and so any change in these objectives
may result in changes in the line and staff functions. Therefore, what is considered as a staff function in
one organization may be a line function in another. For example, the personnel function in an employment
agency is a line function, but it is a staff function in a manufacturing organization. This is because the
objective of an employment agency is to recruit suitable candidates and to place them in vacant positions
in client organizations. According to the objectives of the employment agency, the personnel function can
be regarded as a line function.
According to the authority relationships viewpoint, line and staff are two types of authority that are
based on functions. Line authority is the direct authority exercised by a superior over his subordinates,
so that his orders and instructions are carried out in a proper manner. Thus, line authority is the basis
of the relationship between superior and subordinates and is the ultimate form of authority in the organization.
This gives the superior the right to command, act, decide, approve and disapprove organizational activities.
The exercise of this authority is always downward and is characterized by two important features – the
right to decide, and the right to direct.
Table 10.2: Principle Distinctions between Line and Staff Authority
Line Manager Staff Manager
A line manager is a generalist. A staff manager is a specialist whose knowledge is limited

only to his specialized field.
A line manager directs others. A staff manager assists others.
A line manager delegates authority. A staff manager serves authority.
A line manager trains his or her subordinates. A staff manager investigates the problems related to his or
her field of specialization.
A line manager exerts control over his or her A staff manager makes plans.
subordinates.
A line manager uses sanctions. A staff manager solves special problems.
A line manager has veto power. A staff manager supports line effort.
A line manager makes operating decisions. A staff manager provides ideas to line managers.
A line manager bears final responsibility. A staff manager has expertise in a specialized field.
Adapted from D. McFarland, Management (New York: Macmillan, 1979) 364.
Staff function is advisory in nature. The main staff functions are investigation, research and giving
advice to line managers on how to accomplish tasks. Thus, the work of staff personnel comprises of
activities such as planning, suggesting the possible courses of action and persuading line managers to
accept their suggestions. According to T. Benedict, “it is a means to an end, and not an end in itself. In
the decision-making process, it is a means for putting information in perspective, for those who must make
and effect management decisions. The staff role is thus a role of service to managers.”
The staff person is thus, an advisor possessing or holding no authority. Staff authority is characterized
by two important features – it provides service to the line, and is devoid of the right to command.
According to Koontz and others, “Line authority becomes apparent from the scalar principle as being
that relationship in which a superior exercises direct supervision over a subordinate – an authority
relationship in direct line or steps. The nature of staff relationship is advisory. The function of people in
a pure staff capacity is to investigate, research and give advice to line managers to whom they report.”
Functional Authority
In addition to line and staff, there is a third form of authority – functional authority. Staff function
may lack independent formal authority in some organizations. But, in other organizations, staff personnel
may have formal authority over line members within the limits of their specialized areas. This authority
to control the functions of other departments, related to specific tasks, is known as functional authority.
Functional authority allows a staff person to issue certain instructions to the line managers directly, rather
than making recommendations to his superior or other line managers. F.W. Taylor proposed the concept
of functional authority to permit a number of specialists to exercise authority within their specific areas
of competence. This authority is limited as a staff person can exercise it in only those areas where he has
technical expertise, and where his recommendations would be accepted. According to Heinz Weihrich and
Harold Koontz, “Functional authority is the right that is delegated to an individual or a department, to
control specified processes, practices, policies, or other matters relating to activities undertaken by persons
in other departments.”
Functional authority violates the principle of unity of command. If this principle were to be applied
without any deviation or exception, functional authority would be exercised only by line managers. But,
in some conditions, line managers are not allowed to exercise functional authority for the following
reasons:
lack of specialized (functional) knowledge,
lack of competence and expertise to supervise processes, and
the risk of policies being interpreted incorrectly.
In such a case, the common superior of the line and staff personnel delegates some of the line
manager’s functional authority to a staff specialist or to a manager in another department. For example,
the company controller holds the functional authority to prescribe a specific accounting system throughout
the company and this authority is delegated to him by the company’s top management.
Staff personnel exercising functional authority are effective under three circumstances:
a. When the staff personnel not only advise or transmit information, but also show the line managers
how this information can be used effectively or how recommendations should be implemented.
b. When a superior delegates authority to the staff personnel to transmit information, advise and
make recommendations directly to the superior’s subordinates. The basic motive of such delegation
is to save time and transmit the information faster throughout the organization.
c. When the staff personnel possess functional expertise in certain specified tasks and are given
authority to prescribe processes, methods, procedures, or even policies to be adopted in various
line and staff departments.
Managing functional authority relationships is similar to managing dual-boss relationships in
organizations that have a matrix structure. Functional authority is similar to line authority, except that staff
personnel with functional authority do not have the right to punish violations or deviations from the
intended course of action, in order to ensure compliance.
To have a better understanding of functional authority, let us consider the following illustration. The
president of an organization holds complete authority to manage it, the only exception being the restrictions
placed by a superior authority like the board of directors.
The president’s authority is also limited by the corporate charter, bye laws and government regulations.
Generally, the role of the staff personnel in an organization is to offer counsel to the line managers. Staff
personnel hold no authority. But, when the president delegates certain amount of authority to these staff
personnel to issue instructions directly to the line managers, this authority is called “functional authority.”
Figure 10.1 illustrates the functional authority in an organization. As shown in the figure, the president of
a firm has delegated functional authority to some of the staff and service executives – to instruct the line
managers regarding the procedures they should follow in the fields of public relations, purchasing, personnel,
and accounting. Subordinate managers can also delegate their functional authority. For instance, the
superintendent of a factory can delegate functional authority to supervisors of quality control, cost, and
production control departments, to specify methods and procedures to the shop floor personnel.
As functional authority violates the principle of unity of command, its use should be restricted.
Generally, functional authority should be restricted to the procedural aspects of a function – the ‘how’ and
‘when’ of that function or specified task – and should not be extended to the ‘where’, ‘what’ and ‘why’
of it. For example, a purchasing manager’s functional authority should be restricted to working out the
procedures for divisional or departmental purchasing.
It should not include the right to instruct departments about what they can purchase, where they can
purchase it and why they should purchase it. Likewise, the functional authority of a personnel manager
in a line organization is restricted to laying down procedures for handling employee leaves, grievances, and
the administration of wage and salary programmes. Further, functional authority should not be delegated
too much down the line, as such delegation may create problems. For example, it would be better if a
personnel manager, rather than a junior personnel officer, gives instructions on personnel matters.
LIN E AUTH ORITY O F TH E PRESIDENT
A UT H O RIT Y A FT ER D ELE G A T IO N
Public relations
procedures
procedures
Accounting
procedures
Purchasing
Controller Personnel Purchasing Public

manager manager relations
manager
Manager, Manager, Manager,

Western Central Eastern
Division Division Division
Normal line relationships

Delegation of functional authority from line authority of the president
Fig. 10.1 Functional Authority Deligation
edition, 1994) 297
Line and Staff Conflicts

Line and staff personnel are expected to support each other and work harmoniously to achieve
organizational goals and objectives. But, conflicts between the two often crop up. This is one of the major
sources of friction in many organizations. This friction leads to loss of time and reduces organizational
effectiveness. Hence, the sources of such conflicts should be identified and necessary action should be
taken to overcome them. Line and staff functions cannot be differentiated clearly on a theoretical basis.
In the absence of a clear delineation of responsibilities, jurisdictional conflicts cannot be avoided. For
example, in a manufacturing organization, financial analysts, auditors, marketing managers and statisticians
argue that their functions are also directly related to the overall profitability of the organization, as are the
functions of production supervisors. Similarly, the problem of clear distinctions between the areas of
influence of line departments and staff departments also leads to conflicts.
Line and staff conflicts may arise due to various factors. These factors can be grouped into three
categories: the viewpoint of line managers, the viewpoint of staff managers, and the nature of line and staff
relationships.
Viewpoint of Line Managers

Line managers are held responsible for the achievement of organizational objectives. They tend to
view staff personnel as people who create more problems than they solve. They feel that the staff personnel
work against them in the following ways:
Lack of accountability: The general perception of line managers is that the staff personnel are not
accountable for their actions. Line managers feel that this prompts staff personnel to ignore the overall
objectives of the organization. Whenever the established targets and actual performance of the organization
fail to match, criticism will be directed at line managers; but when things go well, the staff personnel get
the reward. This incongruity between authority and accountability is a source of conflict between line and
staff.
Encroachment of line authority: Line managers perceive staff personnel as invading their territory
by giving recommendations and advice on matters that come within the purview of line managers. Thus,
the encroachment of his authority by a staff functionary affects the proper functioning of the line manager’s
department. This makes line managers reluctant to accept staff advice and recommendations. It may also
lead to opposition and animosity towards the staff personnel.
Dilution of authority: The creation of the staff function dilutes the line manager’s authority and
influence. There is a feeling of insecurity among line managers that their responsibilities may be reduced
and their jobs may become less challenging due to the induction of staff personnel. The line manager
resents the loss of functions delegated to the staff. This makes line managers insecure and gives rise to
conflicts.
Theoretical bias: Staff personnel tend to be specialists in areas like industrial and labour relations,
engineering, etc. They generally limit their thinking to their own speciality and depend upon the guidelines
prescribed in their own discipline. They fail to relate their recommendations to the overall needs and goals
Moreover, as staff personnel do not have a first-hand experience of operations, they are unable to
appreciate the actual dimensions of the problem. In other words, staff managers may be cut off from the
day-to-day operational realities that the line managers face, and therefore, the suggestions made by them
may lack applicability. Sometimes, the ideas recommended by them may be feasible in other organizations,
and in other situations, but not in their own organization in the present context.
Viewpoint of Staff Managers

Staff personnel also have their own grievances against line managers. Some of these are:
Lack of proper use of staff: Quite often, decisions are made by line managers without seeking
any input from the staff personnel. Staff personnel are informed or notified only after the decision has been
taken, making them feel that line managers do not make proper and efficient use of their services. As a
line manager has considerable authority and control over the activities in his department, he may amend,
accept, or reject ideas given by the staff, irrespective of their quality and feasibility. Moreover, when the
management finds fault with the line manager’s decisions, or if something goes wrong, it is the staff
personnel responsible for these decisions who get the blame.
Many staff specialists are of the opinion that they would feel more involved if the line managers were
to consult them before making decisions. Such participation enables staff personnel to anticipate problems
and recommend precautionary measures. Instead, staff personnel complain that line managers consult
them only as a last resort and do not consider their suggestions seriously, no matter how valuable and
important they might be. Under-utilization of staff personnel may also prevail in some organizations,
because line managers prefer to “run their own show.”
Resistance to new ideas: New ideas are often rejected by line managers as they feel that these
ideas have resulted because of there being something wrong with the existing way of functioning. Line
managers resist these ideas and try to find faults with them. Hence, the contribution of new and innovative
ideas by the staff personnel are often opposed and discarded by the line managers.
Lack of proper authority: Staff members often feel that though they have the best solutions to
the problems in their area of speciality, they do not have enough authority to implement them. They
contribute to the realization of organizational objectives without enjoying any ‘real authority.’ Since the
line manager holds the authority and is the chief power centre in the organization, he may not consider
it necessary to consult the staff personnel before arriving at a decision. Even if the staff person is consulted,
the line manager may not implement his suggestion. Many staff specialists feel that adequate authority
should be delegated to the staff personnel, if their specialized skill and expertise are to be taken advantage
of. In the absence of such authority, line managers often withhold information and resources from the staff
personnel, in order to retain their control over their departmental activities.
Nature of Line and Staff Relationship

The very nature of line and staff relationships leads to conflicts between line managers and staff
personnel. The sources of conflicts are discussed below:
Different backgrounds
Line and staff personnel usually have different technical backgrounds. Further, in comparison to line
personnel, staff personnel are generally younger, academically better qualified, dynamic, individualistic and
display greater poise in social interactions. They often look down on line managers, who may not be highly
educated but may have reached their present position by gradually working their way up the corporate
ladder. The reverse of this situation may also exist, when line managers with good academic qualifications
are designated as general managers.
Such line managers may consider themselves superior to the staff personnel who are functional
experts with a lot of experience, but without professional qualification in that field. These differences could
create an atmosphere of mistrust and resentment between the line and staff personnel.
Lack of demarcation between line and staff authority

Although theoretically, there is a distinction between line and staff functions, in reality, there is no
clear demarcation between them. Many of the tasks of line and staff are not clearly defined and it is also
not clear how the tasks are related to each other. This often leads to duplication of effort and gaps in
authority and responsibility. Both line and staff managers may claim credit for the successful completion
of a task. On the other hand, when work is not completed on time, each may try to shift the blame on
to the other.
Lack of proper understanding of authority

The employees of an organization may not clearly understand the nature of line, staff and functional
authority. Failure to understand the exact nature of line, staff and functional authority causes
misunderstanding between line and staff personnel. This may lead to encroachment upon each other’s
area of authority, which in turn, leads to further conflicts. Staff personnel may have to approach a
common superior for getting their ideas and recommendations approved by line managers, and this might
make the line managers feel that they are being influenced and pressurized by the superior to accept the
recommendations and ideas of staff personnel.
Avoidance of Line and Staff Conflict

Line and staff functions are needed for the smooth functioning of any organization. Therefore, they
should work in coordination with each other to achieve organizational goals and objectives in an efficient
way. Any conflicts due to misunderstandings between line and staff functions or due to organizational
situations should be resolved as soon as possible. Some of the steps that can be undertaken to avoid
conflicts between the two are:
Clarity in relationship
The relationships between line and staff personnel should be clearly defined in order to avoid conflicts
from arising between these two functions. Line managers are generally held accountable for the achievement
of the goals of the organization and they should have sufficient authority to make operational decisions.
Staff personnel, on the other hand, contribute to the organization’s progress by making recommendations
and offering expert advice on matters pertaining to their specialized fields. Line managers have the ultimate
authority to accept, modify or reject the suggestions and recommendations given by the staff personnel.
Staff personnel should provide advice to line managers when they feel it necessary, rather than
waiting for line managers to ask for it. Staff personnel may be given a certain amount of functional
authority in some situations which ensures that their recommendations are implemented. But, staff personnel
should exercise their authority on the basis of knowledge and competence. Line managers should give
serious thought to the advice offered by the staff personnel and also consult them in all cases, barring the
exceptional situations where time is a limiting factor in decision-making.
Proper use of staff

Line managers must be taught how to make optimum use of the expertise and capabilities of staff
personnel. This will help him achieve organizational goals efficiently. Staff personnel should let line personnel
know exactly how they can help the latter perform their activities in a better manner.
Line managers should assign critical work to staff personnel in their areas of specialization. They
should ensure the participation of staff personnel during the basic stages of planning an activity, rather
than seeking their participation when a problem arises. The staff’s expertise might help to nip many
problems in the bud.
For the effective functioning of an organization, it is essential to have competent staff personnel, who
can combine academic excellence with practical experience in the field. Line managers should treat their
staff counterparts as partners and inform them about all actions which may have an impact on staff
activities. This minimizes the chances of misunderstandings arising later. Staff managers, in turn, should
keep line managers informed about the latest developments in their field and point out potential problem
areas.
Completed staff work

A good arrangement of staff activities generally culminates in completed staff work. Completed staff
work refers to the careful analysis of a problem by a staff specialist and presentation of the solution in a
detailed and systematic manner to the line manager. This helps the line manager concentrate on just
accepting or rejecting the completed action. In a completed staff work, a problem is carefully studied, the
possible solutions are identified and listed, and clear recommendations are made based on the facts
compiled. Staff managers should also make it clear how their recommendations could be put into practice.
They should seek the approval of all those likely to be affected by the recommended action. According to
J.L. Powell, “completed staff work theory may result in more work for the staff officer, but it results in more
freedom for the chief. The chief is protected from half-baked ideas, voluminous memoranda, and immature
oral presentations.”
Hold staff accountable for the result

Holding the staff personnel accountable for the outcome of their suggestions encourages them to make
their suggestions more carefully. Moreover, line managers might be more ready to accept staff suggestions,
when they know that the failure of an idea could be blamed on the staff personnel.
CENTRALIZATION VERSUS DECENTRALIZATION

Another important aspect in the managerial function of organizing is the degree to which centralization
or decentralization exists in a formal organizational structure. Centralization refers to the retention of
control by the top management in the area of decision-making. In highly centralized organizations, only
the top management has the right to make decisions. On the other hand, decentralization refers to the
participation of employees in the decision-making process. The terms centralization and decentralization
can also be used in a different context to refer to the organizational aspects such as administrative
processes, location of the firm, different functions that are being carried out, and the extent to which
authority is delegated. For instance, physical or geographical decentralization refers to the degree to which
the company’s operations are spread throughout the country. Centralization is at one end of the continuum
while decentralization is at the other end of it.
According to Louis A. Allen, “Centralization is the systematic and consistent reservation of authority
at central points within an organization. Decentralization applies to the systematic delegation of authority
in an organization-wide context.”
According to Robert Kreitner, “Centralization is the relative retention of decision-making authority by
top management. Decentralization is the granting of decision-making authority by management to lower
level employees.
Exhibit 10.1 Centralizing Procurement
It has been observed that many medium and large companies have uncoordinated and decentralized
procurement operations. Many experts are of the opinion that by centralizing the procurement operations, a
company can save around 15 to 20 per cent on the purchased materials and services, which amounts to
billions of dollars for a large company. Thus, a company can leverage its buying power and save a lot of its
funds.
Two important considerations have to be kept in mind for effective and successful centralization of procurement.
(i) It is necessary for the top management to understand that centralized procurement is one of the best
means to generate effectiveness in buying procedures. As centralized procurement decisions may give
rise to many objections and requests for exception, top-level managers need to be very firm, in order to
overcome them.
(ii) A highly competent and good team player should be appointed as the Chief Procurement Officer (CPO)
to oversee the procurement operations. This person should be an experienced procurement professional,
either from within the company or with external professional experience.
Many companies have chosen a decentralized structure to manage diverse and geographically spread operations.
A decentralized approach works very well with functions like sales, manufacturing and product engineering.
However, procurement is an exception to the rule, as it is very important to maintain and leverage a consistent
relationship with major suppliers.
In most cases, purchased materials and services account for 50 per cent or more of a division’s total revenue.
Furthermore, purchased materials and services have a great impact on the quality of finished goods and the
continuity of operations. This provides enough reason for managers to demand a greater degree of authority
in procurement matters, especially in source selection and supplier performance. Companies with centralized
procurement can cut down a division’s purchase costs to a great extent and yet be responsive to the
division’s need for world-class sources. Due to their good relationships with the top management at the
supplier’s end, companies having centralized procurement divisions are able to obtain superior quality material
from the supplier and ensure timely delivery of the same.
Instead of centralizing the procurement division in entirety, it is a suitable alternative to have the heads of
various divisions or national procurement operations report directly to the centralized procurement leader, i.e.,
the Chief Procurement Officer (CPO). Under such a system, the CPO can monitor and control procurement
policy, procurement strategy, supplier selection and supplier relationships. IBM has successfully organized
its procurement division on these lines.
Role of the Board of Directors – When a company decides to centralize its procurement function, the
decision should be approved and endorsed by its Board of Directors (BoD). The BoD should:
(i) Delegate the authority to acquire materials, facilities and services from external parties as required by the
company, to the CPO. The CPO can delegate authority to other personnel for short periods of time, if
he does not have the expertise pertaining to certain items. This is possible in the areas of advertising,
legal services, employee benefits, real estate, investment banking services, etc.
(ii) Pass a resolution that the company will not engage in reciprocity, i.e., buying from someone who is not
competitive in price, quality, delivery or technology. The purpose of selecting and managing suppliers
should be to get the best price, quality, delivery and technology for the products. The CPO must try to
avoid corporate practices that favour some suppliers unduly. Favoring some suppliers may discourage
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The result is, almost invariably, a messy mixture of decentralized units sharing cost-effective centralized
resources. An organization’s position on the decentralization-centralization continuum is dependent on the
following situational variables.
History of an Organization
Decentralization of authority depends on the manner in which the organization has been built-up over
time. An organization that has been primarily built by an individual’s efforts tends to have a highly
centralized structure. Therefore, in many industrial houses, the power to make important decisions is
vested with a few top-level managers. In contrast, organizations that have grown through a number of
mergers, amalgamations and consolidations tend to stay decentralized. This is especially true if the acquired
units are making good profits. The management processes and the design of the previously independent
organization may not be changed even after the merger because it may adversely affect its profit margins.
Therefore, the acquired unit tends to retain a certain amount of autonomy for a considerable period of
time before becoming completely centralized in its operations.
Availability of Competent Managers

The degree of decentralization in an organization is influenced by the availability of competent
managers. Decentralization of authority may not be possible if the managers of the organization are not
talented enough, and if they cannot handle the problems of decentralized units. Moreover, competent
managers have a higher need for autonomy and this can be fulfilled only in decentralized organizations.
Decentralization provides a training base for managers and improves their ability to manage under various
situations.
Size of the Organization

The size of the organization is another factor that affects decentralization. As an organization grows
in size, there is an increasing tendency to decentralize its operations. In a large organization, numerous
decisions have to be taken at different places. Therefore, it becomes difficult to coordinate the functions
of different departments. A particular decision may require the interaction of managers at various levels.
This process may be time-consuming and may prove very costly for an organization. Hence, to avoid slow
decision-making and to bring down the costs associated with managing a large organization, authority
should be decentralized. Decentralization enables the organization to operate as a group of small independent
units thus reducing the workload of managers, reducing the amount of paperwork and improving the
quality of decisions.
Geographical Dispersion
Decentralization is effective for organizations which have operations in different locations. Top-level
executives often find it impossible to keep track of the details of operations in scattered locations. In such
cases, the control exercised by the top management from the headquarters may be ineffective, because
they are unlikely to be aware of local conditions and problems. Therefore, such geographically diverse units
can be decentralized and managers from these units made responsible for their operations and profits.
Exhibit 10.2 Decentralization Vs. Centralization
Conventional wisdom states that small companies are fast, adaptive, entrepreneurial and effective, whereas
large companies are slow, bureaucratic, inflexible and ineffective. The former IBM CEO, Louis V. Gerstner,
strongly disagrees with this perspective. In his opinion, size allows an organization to make greater investments
and to take on a higher degree of risk.The concept of decentralization was popularized by McKinsey during
the 1960s and 1970s. Decentralization was considered to be good for an organization because it helped in
faster decision-making and thereby providing better service to its customers. The advocates of decentralization
argued that since big companies were inefficient, slow and cumbersome, they needed to be organized into
small independent units to remain competitive. However, the concept of decentralization has been taken too
far by some organizations. Many managers wanted to control every aspect of their business. As a result,
every decentralized unit had its own planning team, human resources group, data processing centre, financial
team, etc. A highly decentralized organization lacks coordination between its various units, and hence,
frequently experiences conflicts for resources and is unable to respond quickly to customer needs. High levels
of decentralization lead to duplication of staff and process development at various levels of the company. This
is an expensive affair, and at a time when companies are attempting to be cost-effective, decentralization can
hardly be regarded as a wise move. In today’s highly competitive and dynamic world, it is not practical to
follow a strategy of total decentralization. This strategy is too expensive and too slow when important changes
are to be made in the way an organization functions. Therefore, the CEO of the company should decide the
functions that would be local or decentralized, and those that would be common for the whole company. The
best companies balance its common and shared activities with its highly localized, unique ones. Shared
activities can be grouped into three categories. The first category includes those activities which can be
managed effectively by leveraging the size of the enterprise. This category includes functions like data
processing, data and voice networks, purchasing, HR systems and real estate management. Most of these
are back-office functions and the enterprise can reduce its costs through economies of scale. Moreover, it
is not economically viable for every unit to have its own data processing centre, purchase department and
real estate department. It is in the best interests of the organization to share these functions across different
decentralized units.The second category of shared activities includes business processes that are closely
related to the marketplace and the customer. These business processes include common customer databases
and common customer relationship management systems, which provide integrated information about
customers.The third category of shared activities involves having a close coordination between various departments
in order to conquer a market, usually a new or redefined one. These activities are the most difficult to carry
out, because the managers of a profit-centre must subordinate their goals for the benefit of the company. As
this becomes very difficult to put into practice, it may lead to struggles and conflicts within the organization.
An organization with many decentralized units faces a lot of conflicts. Often, people are asked to do
contradictory things. Divisions are asked to be competitive in the external market, and at the same time, give
up the resources necessary for achieving the division’s objectives, in the larger interests of the company. An
organization has to therefore strike a balance between its unique decentralized activities and its common
shared activities.
Adapted from Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? (New York: Harper Business, 2002) 242-
249.
Technical Complexity of Tasks

Technology has changed rapidly over the years and there is a growing need for specialists who can
understand it. Since it is impossible for the top-level management to keep track of all technological
advances and handle technology-related issues, it becomes necessary to delegate authority for carrying out
technical projects to experts in the concerned fields. In such cases, organizations need to follow a decentralized
approach.
Time Frame of Decisions

In order to survive in a highly competitive environment, every organization has to capitalize on the
available opportunities. In a decentralized organization, the authority to make decisions lies with the head
of that particular unit. Therefore, decisions can be made faster. The decisions are made closer to the scene
of action, and are therefore, timely and accurate.
The Importance of a Decision

The importance of a decision to an organization is also a crucial factor that influences the
decentralization of authority. Generally, decisions which involve high risks and costs are made by the top
management, while the decisions involving routine and low-risk activities are delegated to the subordinates.
Planning and Control Procedures

If an organization has clear objectives and a specific plan to achieve them, a superior would be
willing to allow subordinates to make decisions independently. The assigning of functions such as organizing,
staffing, directing and controlling to managers at different levels depends on the manner in which they have
been allocated at the time of designing the organizational plans and also on the extent to which these plans
have been implemented. Allocation of planning activities may be subject-wise or plan-wise. Subject-wise
allocation depends on the subjects assigned to a particular level of management, whereas plan-wise
allocation depends upon the type of plans formulated for a particular level of management. In organizations
that have precise, clearly written policy statements defining its objectives, managers can make their own
decisions keeping these in mind, without having to consult their superiors. Moreover, if managers have
participated in the planning process, they can handle the functions that are derived from these plans. Thus,
when lower level managers are allowed to participate in the planning process, decentralization is facilitated.
To be effective, decentralization should be supported by a well-defined system of control procedures
in order to ensure that the performance at different levels in the organization is in accordance with its
plans. The greater the degree of development and use of control techniques, the better are the chances for
effective decentralization.
In the absence of a good system of control procedures, it is difficult for the top management to
compare and evaluate the effectiveness of decisions made by subordinates. In spite of these difficulties,
the current trend towards decentralization has obtained momentum with advances in statistical devices,
accounting controls and other techniques.
Views of Subordinates
The willingness of subordinates to take on additional responsibilities is another factor that affects the
degree of decentralization. If the subordinates are dynamic and well-trained, they will accept any authority
delegated to them and take on the responsibility of achieving stated goals. Such subordinates strive to
make best use of their abilities in order to achieve the goals. But, if the subordinates are not willing to
take up additional responsibilities and prefer to evade responsibility, they may perceive delegation of
authority and decentralization as a threat.
Environmental Influences
Besides the factors mentioned above, all of which are internal to the organization, there are
environmental factors also that affect the degree of decentralization. Government regulation of private
business is the most important factor which affects the extent of decentralization. For instance, organizations
whose pricing mechanisms are decided by the government, e.g. fertilizers, cement, etc. do not require
managers to spend much time in determining the price structure. In such a case, this function cannot be
decentralized as even the top management does not have authority over it.
Decentralization is suitable for firms that operate in uncertain conditions, as decentralized firms tend
to be flexible and adaptive. Thus, organizations characterized by fast growth in a dynamic environment
need greater decentralization. For example, electronics and software firms need to decentralize their
businesses because they operate in a rapidly changing industry which requires them to take speedy and
timely decisions. The degree of decentralization is also affected by the rate of change in the organization.
If the organization operates in a rapidly developing and expanding industry, it is better to follow a
decentralized approach because managers are overburdened with decision-making responsibilities. By
allowing lower-level managers to make some decisions, this problem can be solved.
DELEGATION OF AUTHORITY
The job of a manager is to get work done by others. This is possible when he delegates some tasks
and duties to his subordinates. The term delegate, in common parlance, means to grant or to confer. Thus,
a manager grants or confers on his subordinates, certain tasks and duties, along with the sufficient
authority to accomplish these.
“The delegation of authority is the delivery by one individual to another of the right to act, to make
decisions, to requisition resources and to perform other tasks in order to fulfil job responsibilities.”
In other words, individuals need to be given a degree of authority to enable them to carry out their
tasks.
Thus, delegation is the process by which managers allocate a chunk of their workload to their
subordinates. Delegation helps in establishing a pattern of authority between the superior and his subordinates.
The delegation of authority by superiors to subordinates is necessary for the efficient functioning of any
organization, as the superior cannot personally accomplish all tasks or completely supervise all tasks
carried out by subordinates. Effective managers normally delegate as many routine tasks as possible to
subordinates and concentrate their efforts on the more important ones. Delegation becomes even more
important as an organization grows. A manager has to delegate authority once his span of control crosses
a certain limit. In other words, when there are many subordinates under a particular manager, he can
delegate some authority to them. This allows the subordinates to make decisions within the area of their
assigned duties.
Delegation is a two-sided relationship that requires sacrifices from both the delegator and the delegant.
The delegator must be prepared to sacrifice a portion of his authority, and the delegant must be willing
to shoulder additional responsibilities. Delegation requires a fair amount of trust between the delegator and
the delegant.
Exhibit 10.3 Making Delegation Work
Effective management relies on proper delegation. It is wrong to say to your subordinate. “Here is the task,
now do it,” while you sit back and wait for results. Remember the slogan: delegate, don’t abdicate.Having
decided what the task is and having selected a person to carry it out, there are three broad stages of
delegating: briefing, monitoring progress and evaluating results.
Briefing
Specify the essential parameters: details of the task, deadlines, resources.
Explain the desired outcome.
Allow the assigned person the freedom to decide how to perform the task – but get the person to explain
his or her plan of approach.
Check that the person understands what is required – encourage discussion.
Sell, but do not oversell, your own approach. Be enthusiastic. If you get commitment and agreement, you
have a better chance of success.
Be realistic about your expectations; do not underestimate the difficulties, but set challenging targets.
Indicate the need for progress reports and intermediate deadlines.
Discuss the areas of the task that are sensitive to error or risk.
Monitoring Progress
Allow the person to proceed with the task without interference.
Encourage the person to follow his or her own way of working.
Be alert for signs that things are going wrong, but make room for trivial mistakes.
Intervene only if the person does not spot errors or where sensitive areas are threatened.
Be ready with help, advice and encouragement, but avoid doing the task yourself. Transfer the delegation
only in extreme circumstances.
Encourage frequent informal discussions rather than a formal feedback.
Stand back from the process and retain a view of the bigger picture.
Evaluation and Feedback
Did the person produce the results you expected? If the task was successful, say so. Give praise, recognition
and credit to the people involved. If the result was unexpected, ask:
Was it due to a misunderstanding between you and your people?
Was his or her performance not up to the standard?
Was the wrong person selected?
Were there unforeseen problems?
Were these mistakes preventable?
Make sure everyone concerned learns from the experience. Finally, do not blame your people in public,
or in front of your boss or colleagues, but accept the responsibility yourself.
Adapted from Arthur Young, The Manager’s Handbook, UK, 174-175.
Factors Affecting Delegation of Authority

The factors that affect the delegation of authority can be studied from three aspects. These are:
The delegator’s (superior’s) aspect
The delegant’s (subordinate’s) aspect
The organizational aspect.
The Delegator’s Aspect

A manager may not delegate authority effectively when he has a love for authority, fear of subordinates’
advancement, fear of his shortcomings being exposed and a negative attitude towards employees. In
addition, the personality traits of a manager and his experiences may also affect the delegation of authority.
Love for authority

An autocratic manager is not very likely to delegate authority to his subordinates. Such a manager
likes to make his importance felt by forcing subordinates to approach him often to get their decisions
approved. A manager may also not delegate authority to his subordinates if he likes to maintain a tight
control over his own activities. Such managers like to convey the impression of being very busy and
therefore allow work to be piled high on their desk. Since such managers do not wish to share their
workload with their subordinates, they generally do not delegate their authority.
Fear of subordinates’ advancement

The fear of a subordinate’s advancement also affects the manager’s ability to delegate authority
effectively. A manager may not delegate authority effectively due to two reasons. Firstly, the superior may
fear that the competence and the good performance of the subordinate might earn him a promotion as
a result of which, he would lose a good subordinate. Secondly, the superior may also fear that the
subordinate may excel in his job to such an extent that he may become a contender for the manager’s
position, status and title.
Fear of exposure
A superior may not delegate adequate authority fearing that his managerial shortcomings would be
exposed if he does. This generally is the case when the procedures and practices followed by the superior
are not very good. Thus, the fear of exposure of their shortcomings may make managers ineffective in
delegating authority.
Attitude towards subordinates

As mentioned earlier, delegation of authority requires a certain amount of trust between the superior
and his subordinates. Therefore, the superior’s attitude toward his subordinates, and the subordinate’s
attitudes towards the superior are important for delegation. Lack of confidence in subordinates is a major
factor that affects delegation of authority. The lack of confidence may be justified if the subordinates are
also lacking in knowledge and skills. However, in the long run, managers should train and educate their
subordinates so that they can take up additional responsibilities. When a manager does not have enough
confidence in his subordinates, he not only avoids delegation of authority, but also does the subordinates’
work himself. A bank manager, who personally balances the ledger at the end of the day for all tellers, even
though they may not be under his direct supervision, is doing the job for the subordinate. This not only
affects his work performance, but also robs subordinates of growth opportunities and demotivates them.
It is also a waste of time, because the subordinate is idle while the superior is busy doing routine work,
instead of concentrating on tasks of strategic importance. Also, a superior who does not have good
interpersonal relationships with his subordinates, is unlikely to delegate authority to subordinates.
Personality traits and experiences of the superior

The personality traits and experiences of a superior affect the way in which he delegates authority
to his subordinates. For instance, a superior who has been delegated adequate authority in his or her own
career or who has worked his way up from the ranks, is likely to delegate authority. On the other hand,
autocratic managers are less likely to delegate authority.
Some managers may not be able to plan and decide which tasks to delegate and to whom they should
be delegated, as they are not very organized. They may also fail to set up a control system for monitoring
subordinates’ actions. Moreover, many managers usually do not enjoy guiding, reviewing and cross-
examining their subordinates, and this is unavoidable when authority is delegated. For this reason, such
managers avoid delegating authority to their subordinates.
The Delegant’s Aspect

Delegation of authority is not only affected by various factors pertaining to the delegator, but also by
factors pertaining to the delegants. These factors are discussed below:
Fear of criticism
The subordinate may not accept delegated tasks if he suspects that the credit for success will be taken
by the boss, and criticism for failure will be directed toward him. The fear of criticism also makes a
subordinate reluctant to accept authority. When the subordinate feels that taking responsibility is asking
for trouble, he or she is hesitant to accept the delegated work. Subordinates with such an attitude prefer
to follow the directions of their superior, rather than taking independent charge of a task.
Lack of information and resources

Subordinates are reluctant to accept delegation when they do not have adequate information and
resources. When tasks are not clearly defined, when adequate authority is not delegated, when instructions
are vague, and resources are scarce, subordinates are unlikely to do a good job and their enthusiasm for
delegated work dwindles.
Lack of self-confidence
Sometimes, subordinates may refuse to take up delegated tasks as they may lack confidence in
themselves. Fear of criticism and/or dismissal from service for committing mistakes prevents them from
accepting additional responsibilities.
Absence of rewards and incentives

Many subordinates may be unwilling to take up additional responsibilities and pressure unless they
receive some rewards and incentives for satisfactory performance. Therefore, all companies should develop
a system of rewards and incentives.
The Organizational Aspect

Apart from the personal factors of the delegator and delegants, delegation of authority also depends
on certain organizational aspects. For instance, much as he would like to retain all authority with himself,
organizational factors may necessitate even an autocratic superior to delegate his authority. The various
organizational factors that affect the delegation of authority include the organization’s policy towards
centralization or decentralization, availability of managerial personnel, the type of control mechanisms
adopted by the organization, the management philosophy, etc. Unfavourable organizational factors may
adversely affect the delegation of authority.
BALANCE — THE KEY TO DECENTRALIZATION

There is no simple answer to the question whether centralization or decentralization is the preferable
option for an organization. Decentralization is not a panacea for all problems, and centralization is not
necessarily bad. Although decentralization is strongly favoured these days, extensive decentralization should
not be undertaken without understanding its implications fully. The major problem caused by decentralizing
an organization is loss of control. It is not advisable for an organization to decentralize to such an extent
that organizational goals are forgotten and the existence of the organization as a unified entity is threatened.
Therefore, an organization should strike a balance between centralization and decentralization. It should
opt for centralization in certain major policy areas at the top level such as financing, overall profit goals
and budgeting, new product programmes, basic personnel policies, development and compensation of
managerial personnel, major marketing strategies, etc. The organization can also decide to decentralize
routine and monotonous tasks that subordinates at the lower level can carry out without much guidance
from superiors. This would enable managers to focus their attention on strategic and important issues.
Decentralization results in high costs for the organization and therefore, an organization should ensure that
the benefits of decentralization outweigh the costs. Table 10.3 lists out the advantages and limitations of
decentralization.
Table 10.3: Advantages and Limitations of Decentralization
Advantages of Decentralization Disadvantages of Decentralization

1. Decisions can be taken by lower level managers. 1. Coordination of decentralized units poses a serious
challenge to top management.
2. Facilitates fast decision making. 2. Policies may not be applied uniformly across all the
units and this may lead to employee demotivation.
3. Decisions and strategies can be quickly adapted 3. Differences in opinions of top management and unit
to the competitive environment. heads can often lead to conflicts.
4. Provides autonomy to employees, increases their 4. Competition between various units may be very
self-confidence and thus enhances their motivation severe, they may develop hostility toward each other
levels. making it difficult to reap benefits such as resource
and knowledge sharing.
5. Highly effective in large and complex organizations 5. Economies of scale may not be realized as each unit
where it is difficult for top management situated in tries to be independent.
the headquarters to study the local conditions and
take appropriate decisions.
6. Frees the top management from decisions related 6. The success of a unit will depend on the efficiency
to day-to-day operations and allows them to and capability of its head.
concentrate on strategic issues.
SUMMARY
Although the term authority has various connotations, in the organizational context, authority is
defined as the power to make decisions which guide the actions of others. Power, on the other hand, is
the ability of individuals to influence the beliefs and actions of others. Power can be legitimate, expert,
referent, reward, or coercive. Various authority relationships exist in an organization, many of which are
related to line and staff functions. Line functions are those which are directly responsible for accomplishing
the objectives of the enterprise, while staff functions are advisory in nature. The main staff functions are
investigation, research and giving advice to line managers on how to accomplish tasks. Functional authority
involves conferring rights upon individuals or departments to control the processes and practices pertaining
to personnel in other departments. Instead of making recommendations to the line managers or superiors,
functional authority allows staff personnel to issue instructions to line managers directly.
Although line managers and staff personnel are expected to work together for accomplishment of
organizational goals, there are many factors which contribute to the conflicts between line and staff
personnel. The line managers have clashes with the staff personnel as they feel that staff personnel are not
accountable for their actions. Moreover, line managers feel that staff personnel invade their territory and
dilute their powers. Since staff personnel may not have experience of the operational activities, their
recommendations and ideas may lack applicability. Staff managers feel that line managers do not make
the right use of talents of the staff personnel and are not open to new ideas. Further, since staff personnel
lack authority, they may not be able to implement their solutions for problems. The difference in the nature
of line and staff functions is also a prime reason for conflicts between line and staff managers. The line
and staff conflicts can be avoided by having clearly defined authority relationships between line and staff
functions and by ensuring proper use of staff talent. The staff personnel should also be made accountable
for the outcome of their actions and present line managers the solutions for problems in as complete a form
as possible, leaving only its acceptance or rejection to the line manager.
Organizations differ from each other in the amount of authority given to the lower-level employees
regarding decision-making. Centralization is the retention of decision-making authority with the top
management, whereas decentralization is granting of decision-making powers to the lower-level employees.
It is not possible for an organization to be either completely centralized or completely decentralized. An
organization can either follow a centralized or decentralized approach depending upon the manner in
which it has grown over time, its size, the technical complexity of its tasks and the geographical dispersion
of its business operations. Apart from these, other factors like time frame of decisions, importance of a
decision to the organization, the planning and control procedures used and influence of various environmental
factors determine the level of decentralization in an organization. Moreover, decentralization is facilitated
if competent and experienced managers are present in the organization and subordinates are willing to
take on additional responsibilities.
Depending on whether the organization follows a centralized or decentralized approach, authority is
either retained with the top management or is delegated to the lower-level managers. Delegation of
authority refers to a manager granting the right to a subordinate to make decisions or use his discretion
in judging certain issues. The amount of authority delegated depends on the delegator and the delegant,
as well as organizational factors. The delegation of authority may not be effective if a superior does not
like to delegate, if he is afraid of his subordinates’ advancement, if he fears that his shortcomings may be
exposed or if he has a negative attitude towards his subordinates. Also, if the delegant is afraid of criticism,
lacks information and resources, lacks self-confidence and if the rewards and incentives are not attractive
enough, the delegant may not be willing to take on additional responsibility.
Ford’s Global Strategy: Centres of Excellence

In 1986 Ford passed its bigger competitor, General Motors, with earnings of $ 3.3 billion.
Ford’s market share is about 20 per cent. But success, in many instances, may be only
temporary, and Ford’s Chairman, Donald E. Petersen, is concerned about complacency.
Indeed, the company has to work hard to maintain its reputation for stylish, aerodynamic
CASE STUDY
cars and high quality.

Under the former leadership of HenryFord ll, the company was very centralized. But
Petersen’s plan is to make Ford an integrated global enterprise. Thus, a great deal of authority
for the development of specific models or components is now centralized in the company’s
various technical centres around the world rather than in Detroit. Under this plan, the car or
its components are developed in the technical centre with the best expertise in a particular
field, anywhere in the world, This could save company a lot of money by avoiding duplication
in development and reducing tooling costs. For example, Ford of Europe, located in England,
is the centre for developing the platform for the new model that will replace the European
Sierra and the American Tempo and topaz. Ford will sell the new cars in Europe and in the
United States. Similarly, in Japan, Mazda (Ford owns 25 per cent of the company), which
has much experience in building small cars, will be the little centre for developing the platform
for the replacement car for the Escort. The North American centre of excellence will focus
on midsize cars. Similar centres are planned for major components, such as transmissions
and engines. While these centres of excellence develop platforms and key components,
exterior and interior styling will be the responsibility of companies in the various regions.
The concept of the centres of excellence may seem promising, yet a previous attempt in
the early 1980s to build a “world car” Europe failed. It is said that the American car, the
Escort, shared only one part with its European counterpart, namely, a seal in the water
pump.
1. What do you think of Ford’s overall decentralization with centralized authority for development of specific cars
and components at the technical centres?
2. Why does Ford think that the concept of having centres of excellence located in various parts of the world
will be the correct organization structure for the twenty-first century?
][][
Effective Organizing
and Organizational
11
Culture
H Avoiding Mistakes in Organizing by
Planning
H Avoiding Organizational Inflexibility
H Avoiding Conflict by Clarification
H Ensuring Understanding of
Organizational Structure
H Organizational Culture
INTRODUCTION
The main aim of organizing is to create a structure of roles to help a company perform efficiently.
Organizing requires linking various communication and decision centres for coordinating and controlling
efforts towards group and organizational goals. For an organizational structure to be effective, it must be
comprehensible, and it must reflect sound management principles. There is no one best way of organizing;
the success of any method depends on the situation in which it is used.
Managers may commit some mistakes when organizing tasks and duties. These mistakes include the
failure to plan properly; the failure to clarify relationships between various employees; the failure to
delegate authority; failure to maintain a balance in delegation; misuse of functional authority; instructions
being given by more than one superior; misuse of staff function; excessive emphasis on organizing and
poor organization of various functions.
AVOIDING MISTAKES IN ORGANIZING BY PLANNING

Like all other managerial functions, effective organizing depends on setting realistic objectives and
systematic planning for achieving those objectives. According to Lyndall Urwick, “lack of design (in
organizations) is illogical, cruel, wasteful, and inefficient.” It is illogical because good design, or planning,
must always precede execution; it is cruel because lack of design in an organization adversely affects the
individuals who work there; it is wasteful, because until and unless jobs are grouped on the basis of their
functional specialization, it is not possible to train new employees efficiently; and it is inefficient because
if the management of a company is not based on sound principles, it will tend to be influenced by various
personalities in the organization. This will result in an increase in company politics and subsequently lead
to conflicts.
Planning for the Ideal

The aim of planning is to design an organizational structure which would help the organization
achieve its goals. In order to create such an ideal organization, designing of the organization structure has
to be done keeping in mind the organizational philosophy, and defining the various authority relationships
in the organization. The managers of an organization may opt for a highly centralized structure or for a
structure consisting of semi-independent (product or territorial) divisions. The organizational structure must
reflect the management philosophy. As environmental factors like competition in the marketplace and
technology keep changing, the organization structure should be flexible enough to adapt to these changes.
Thus, a continuous remolding of the ideal organizational plan is necessary. This does not imply that an
ideal plan should not be developed. An ideal organization plan is necessary because it provides a standard,
against which managers can evaluate their new plans and make suitable changes wherever possible.
What works in one organization may not always work in another. So, managers should not always
follow popular notions of organizing. Though the principles of organizing have general application, the
organization structure should be tailor-made, in accordance with the company’s size, operations and
needs.
Chapter 11 Effective Organizing and Organizational Culture 243
Modification for Human Factor

In certain instances, managers must make modifications in the structure to suit individual abilities and
limitations. For example, sometimes managers have to accommodate employees who do not fit into the
ideal structure simply because the services of those employees cannot be terminated. But even though the
structure is being modified to suit the human factor, the achievement of the goals and objectives of the
organization remain the primary considerations of organizing. To minimize the need for such changes it
is necessary to have proper human resource planning so that the structure is not changed in accordance
with the abilities and limitations of the personnel.
Advantages of Organization Planning

Planning the organization structure helps managers foresee future personnel needs and determine the
kind of training employees require. For recruitment to be effective, the managers in an organization must
have a clear idea of the kind of employees they want and the kind of experience these employees must
have. Only then will they be able to recruit people who fit into the organization structure. Organization
planning also identifies weaknesses in an organization, like obsolete practices, excessive and lengthy lines
of communication, unclear authority relationships, and excessive bureaucracy, by comparing the desirable
organizational structure and the actual organizational structures.
AVOIDING ORGANIZATIONAL INFLEXIBILITY

Over a period of time, organizations become too rigid and lack the ability to adapt to the changing
environment. Consequently, they are unable to handle contingencies when they arise. Such a resistance
to change can make organizations inefficient and lead to loss and wastage. To avoid such inflexibility, an
organization should have a well-planned organization structure that will enable the organization to adapt
quickly to the changes in the business environment as well as enhance its ability to meet new contingencies.
Signs of Inflexibility
Many organizations, especially those which have been in operation for many years, show evidence
of inflexibility. Some of the symptoms of inflexibility are:
An organizational design that is unsuitable for the prevailing conditions
An organization operating with old machinery, instead of sophisticated equipment
A district or regional unit that is no longer necessary for the organization due to the availability
of improved methods of communication that allow the head office to directly communicate with
its customers
Situations where there is a need to increase the size of a district or regional unit of an organization
that is highly centralized when it needs to be decentralized
An organization using an old marketing and product strategy that does not meet the changing
needs of the customers
Avoiding Inflexibility Through Reorganization

Though reorganization is primarily undertaken to respond to changes in an organization’s environment,
there may be other factors that force a firm to reorganize. Some of these factors are:
Merger, acquisition or sale of major organizational assets

Influence of competitors in the market
Development of new production techniques
Changes in the firm’s product line or marketing methods
Government policies (fiscal policy and other regulations)
Labour union demands or new personnel policies
The domino effect – where a single change triggers off a sequence of related changes
The development of new management principles and techniques. The development of new methods
of managing organizations, for example, gaining adequate financial control with a high degree of
decentralization
Sometimes new CEOs, Vice-Presidents, or department heads bring in new ideas which are based on
their past experience. These new ideas or approaches to management may require changes in the
organizational structure. Even if they do not bring in new ideas, their methods of managing and their
personalities may be different from those of the predecessors and may require changes in the organization
structure.
The deficiencies in an existing organization structure may necessitate reorganization. Deficiencies
may arise from organizational weaknesses like (i) a slow decision-making process; (ii) failure to accomplish
organizational objectives; (iii) lack of financial control; (iv) excessive costs; (v) very large spans of
management; (vi) inability to meet deadlines; (vii) lack of a uniform policy; (viii) and the ineffectiveness
of a manager, who for some reason or other may not be replaced even though he or she lacks the required
skill and knowledge. These deficiencies can be overcome by reorganization of the firm’s structure.
The Need for Readjustment and Changes

As change is a continuous process, organizations need to be reorganized and readjusted on a
continuous basis to avoid stagnation. Given the need for an organization to reorganize and adjust to
change on a continuous basis, “empire building” by managers is discouraged. Empire building involves
the process of managers building an empire for themselves in the organization. This makes the manager
appear more important. By discouraging empire building, organizations can make employees realize that
their positions in the organization are not permanent but are subject to change. Some managers, realizing
that an organization structure is dynamic, go in for structural changes merely to accustom their subordinates
to change, so that people get used to the idea of reorganization and accept the reorganization process
when it takes place. However, if a company makes structural changes too frequently, the employees of the
organization may get demoralized and spend most of their time wondering about their future in the
organization.
AVOIDING CONFLICT BY CLARIFICATION

Apart from being well-planned and flexible, the organization structure must also be clearly described,
so that people who are a part of it understand it well. Conflicts arise in organizations largely because
people do not understand their roles and those of their colleagues. To ensure that the workers understand
their roles, organizations can use organization charts that provide accurate job descriptions, establish lines
of authority and informational flow, and identify specific goals for specific positions.
Organization Charts
An organization chart is a vital tool for providing information about organizational relationships.
According to Kathryn M. Bartol and David C. Martin, “the organization chart is a line diagram that depicts
the broad outlines of an organization’s structure.
In a more elaborate sense, an organization chart is a diagrammatic representation of the major
functions and their respective relationships, the channels of formal authority, and the relative authority of
each manager who is in charge of a specific function. The chart indicates the major positions or departments
in the organization and groups these positions into specific units, and identifies the reporting relationships
from lower to higher levels and the formal channels of communication that facilitate the flow of information.
An organization chart shows only formal relationships; the informal relationships are not depicted on the
chart since such relationships are transitory and constantly in a flux.
It is possible to represent every organization structure in the form of a chart, as the organization chart
only shows how the various departments are linked to each other and the various authority relationships.
Advantages
Many entrepreneurs and top-level managers do not like to develop organization charts for their firms.
They are of the opinion that the absence of a chart makes it easier to introduce changes in the structure
of the firm. They also feel that the absence of a chart encourages healthy competition among middle-level
managers. Moreover, they are of the opinion that an organization chart tends to make people overly
conscious of being superiors or inferiors, and thus destroys their team spirit.
However, such fears are largely unfounded. Relationships between subordinates and their superiors
are determined essentially by means of reporting relationships and not merely by organization charts.
Moreover, managers cannot develop team spirit in an organization without clearly defining relationships
among employees. Ambiguous authority relationships may in fact cause problems for the organization. It
may lead to frustration, manipulation, buck-passing, duplication of effort, lack of coordination, lack of
control, poor decision-making, vagueness in organization policies, and organizational inefficiency.
Organization charts are particularly helpful in providing a visual map of the chain of command. The
chain of command is the unbroken line of authority in an organization that links each employee with the
topmost position in the organization through a series of managerial positions. This enables each individual
to identify his or her boss and identify the line of authority to the top, through the various layers or levels
in an organization.
Charting an organization structure can help managers identify inconsistencies in the lines of authority
that need to be corrected. A chart also helps managers and new personnel find out how and where they
fit into the organization structure.
Limitations
Organization charts also have their limitations. Such charts indicate only the formal authority
relationships that exist in an organization and fail to indicate the informal or informational relationships
that may be of significance to the organization. Figure 11.1 shows the formal and informal relationships
found in a typical organization, but it does not reveal all the informal relationships that are normally
present in organizations. The organizational chart also does not show the amount of authority present at
different points in the structure. Though it would be interesting to indicate the degree of formal authority
through lines of different widths while charting an organization, it may not be logical to measure authority
in such a manner. And drawing multiple lines of informal relationships and of communication may
complicate the chart to such an extent that it may become difficult to understand. Many charts show ideal
structures, rather than what they really are because managers neglect or hesitate to redraft the charts,
forgetting the fact that organization structures are dynamic and need to be changed according to the
situation.
Formal relationship
Informal or
informational
relationship
Fig. 11.1 Formal and Informal or Informational Relationships in an Organization
Individuals sometimes confuse authority relationships with status. For example, in a particular
organization, the staff manager (reporting to the CEO of the company) may be shown at the top of the
organization chart, while a regional line manager may be shown one or two levels lower to the staff
manager. Thus, the levels on an organization chart do not necessarily conform to the levels of organizational
importance. This problem can be overcome if the organization chart clearly defines the authority relationships
in the organization as well as the salary and bonuses offered at each level in the organization structure.
Position Descriptions
It is essential that an organization clearly defines every managerial position in the organization. A
clear description of the position makes the new employee’s responsibilities clear to everyone. An effective
position description clarifies the basic function of the position, the reporting relationships at that level, the
authority vested in a position, and the major end-result areas for which the incumbent is responsible. It
also states the verifiable objectives for the end-result areas. Some of the benefits of position descriptions
are:
They identify duties and responsibilities that are overlapping or neglected
They provide guidance regarding candidate requirements, salary levels, and training needs of new
employees; they also help managers determine the tasks to be done and the employees who should
do them
They act as a means of control over the organization by furnishing a standard against which
management can decide whether a position is necessary and what its location in the structure
should be.
ENSURING UNDERSTANDING OF ORGANIZATION STRUCTURE

An organization structure can be implemented effectively only if the members of the organization
understand it thoroughly. To help employees understand the structure, they must be given training regarding
their roles and responsibilities. As an organization consists of formal and informal relationships, all the
members must have an adequate understanding of the working of both these relationships.
Teaching the Nature of the Organization’s Structure

Many organizational structures that are carefully worked out fail because members do not understand
them. A well-written organization manual must contain a statement of the organization’s philosophy,
charts, programmes as well as an outline of job descriptions. Such manuals facilitate easy understanding
of the organizing function. They describe an organization’s structure and illustrate it with a chart. But such
forms of communication may convey different meanings to different people. So, managers should explain
to their subordinates the organization’s structure, their position in it, and the different relationships involved.
Managers may do this by coaching the subordinates individually, by holding staff or special meetings, or
by observing whether the organization structure clearly defines the lines of authority. If the subordinates
are not willing to make decisions and tend to pass important issues up the hierarchy, the superiors can
tell the subordinates what is expected of them and can clarify authority relationships. Managers should also
observe the communication among organization members during meetings. If the communication seems
to be inadequate, it might indicate a poorly designed organization structure or a poor understanding of
the organization structure. Managers should then try to find out why it is so. Frequent group meetings or
excessive committee work may require some investigation on the part of managers. Thus, it is the duty
of managers to teach their subordinates the fundamentals of organizing on a continuous basis; negligence
in this area may lead to poor functioning of the department or organization.
Recognizing the Importance of the Informal Organization and the Grapevine

To ensure that a formal organization structure works effectively, managers must identify the informal
relationships operating within it and take full advantage of them. Informal relationships refer to those
interrelationships that are not shown on the organization chart (such as unwritten rules of organizational
conduct); the employees in the enterprise who hold power not by virtue of their position in the organization,
but because of their personal influence; and gossip. One of the best examples of an informal organization,
which exists in almost every department and organization, is the grapevine.
The Grapevine
An informal organization comes into existence when the members of the formal organization strike
up friendships and pass on information that is related in some way or the other to the organization. The
grapevine refers to the informal communication network present throughout the organization. An informal
organization is not bound by the authority relationships defined by the organization. In an informal
organization, employees across different levels come to know each other and pass on information related
to the organization. At times, the information shared may only be gossip.
In many typical organizations, many employees derive security, status and social satisfaction from the
grapevine. Such employees may feel a strong impulse to exchange information on a variety of topics with
people whom they know and trust. Since all forms of informal organization serve the fundamental human
need to communicate, the grapevine is inevitable and valuable.
The grapevine survives on information that is not available to the entire group, either because it is
confidential or because the communication channels for that type of information are inadequate. Sometimes,
managers rely on the grapevine to spread messages. As the grapevine facilitates quick and effective
communication, a top manager can use it for quick communication by providing it with accurate information.
In fact, a manager can even become a member of the organizational grapevine, either personally, or
through a secretary or trusted staff member.
Benefits
One of the important benefits of an informal organization is that it enhances the cohesiveness of a
formal organization. It gives the members a sense of satisfaction, self-respect and status, and makes them
feel that they belong to a group. Managers, therefore, often make use of informal organizations as channels
of communication and as a means of boosting employee morale.
ORGANIZATIONAL CULTURE
In recent years, research has proved that culture has a tremendous impact on management practices.
Some researchers examined the impact of the internal culture (corporate culture) of organizations, while
others examined the impact of external culture (social culture) on managerial practices. In this section, let
us examine the meaning of culture, the significance of culture, the characteristics of organizational culture,
and the organizational socialization process.
Meaning of Culture
Anthropologists, psychologists, sociologists, and historians define culture in various ways. According
to Linda Smircich, organizational culture is a system of shared values, assumptions, beliefs, and norms
that unite the members of an organization. According to Ralph Linton, culture refers to the set of values
that help members understand what the organization stands for, how it does things, and what it considers
important. Ricky W. Griffin states that organizational culture is the collection of shared (stated or implied)
beliefs, values, rituals, stories, myths and specialized language that foster a feeling of community among
organization members. The above definitions reveal that culture is a set of values, beliefs, norms, attitudes,
and habits, which governs the behaviour of a group of people.
Exhibit 11.1 Culture at Southwest Airlines
Southwest Airlines began operations in June 1971 with flights between Dallas, Houston and San Antonio.
Today, Southwest Airlines operates nearly 2500 daily flights from 55 U.S cities and has a fleet of more than
300 Boeing 737s. It is the only short-haul, point-to-point, inexpensive, and high frequency carrier in the United
States. Southwest Airlines has an incredible record of growth and profitability (even in times of recession).
Its success is due to its unique strategy, which is unlike that of any other airline. Most airlines get their
passengers to their destinations using major airports, and provide assigned seats, meals and other services.
But, Southwest Airlines, by focusing on only a few routes which connect less congested airports, offers no-
frills, point-to-point, short-haul travel and is therefore economical to passengers. Since Southwest Airlines
does not provide all amenities to passengers, it incurs low costs. During 1990-1994, when the airline industry
as a whole lost $12 million, Southwest was the only airline to be profitable.Southwest’s cost advantage stems
not only from its focused product offering, but also from its highly motivated and highly productive employees.
It does not have binding rules and regulations which can hamper productivity. Therefore, labour costs are low
and planes are in service for a longer time, thereby contributing to the productivity of the organization.
Southwest Airlines has a very low gate turnaround time (the elapsed time between a plane’s arrival at the
gate and its next departure). A ground crew of Southwest Airlines consisting of six people takes fifteen
minutes to carry out the necessary procedures, while other airlines normally take thirty-five minutes to do
the same task with a crew of twelve people.The CEO and founder of Southwest Airlines, Herb Kelleher,
believes that if employees are happy, dedicated and energetic, they will take good care of customers.
Southwest Airlines believes that work should be fun, and that every individual is important and should be
treated with dignity. The informal corporate culture is evident from the employee uniforms, consisting of
shorts, polo shirts and sports shoes. When a plane prepares to take off, there is a funny presentation on
safety procedures. Flight attendants are encouraged to use their imagination to entertain passengers. For
instance, one attendant cautioned all passengers to be seated until the plane stopped “because the cockpit
crew are better pilots than drivers.” (Now many airlines are trying to bring in an element of fun in their
service.)Southwest employs a range of activities and systems to reinforce its values. These include training
at its ‘University for People,’ compensation schemes, company-sponsored contests, parties and celebrations.
Southwest Airlines also spends a large amount of time selecting people who would be compatible with its
culture. It employs more than 28,000 employees, and “hires for attitude and trains for skills.” Employees
understand the necessity of performing a job well, and put in their best efforts to get a job done. As a result,
of its 30 years of service, 28 of them have been profitable, which is an impressive track record. Southwest
has a vibrant, energetic, enthusiastic and warm team, which makes flying a different and memorable experience.
Adapted from Nan Stone and Joan Magretta, What Management Is? (New York: Free Press, 2002) 198-200, “Fun
Works,” Clark & Company, Mhttp://www.corpstory.com/articles/southwest.htm> “Hight-Flying Hijinks: Southwest
Boards Sears, “One by One: How Southwest Airlines keeps its spirits high, “ Trendscope.net, Vol.2, Issue 2
(February 2001) <http://www.trendscope.net/article.cfm?ID=174>
The Significance of Corporate Culture

Modern organizations have been trying to create a corporate culture with a distinct identity by
molding the behaviour of their members. Many think that only giant multinational organizations can afford
to have a corporate culture, but this is not the case. IBM, P&G and Philips have distinct corporate cultures,
but so do organizations like the State Bank of India, Eenadu and Varun Motors. Research indicates that
organizations that have a strong culture are more likely to be successful than those that do not have such
a culture.
Exhibit 11.2 Reengineering Corporate Culture
Culture has been defined as the moral, social and behavioural norms of an organization. The culture of an
organization is based on the beliefs, attitudes, and priorities of its members. Most organizations do not
attempt to create a certain culture consciously; culture develops unconsciously, based on the values of the
founders of an organization or its top-level managers. Every organization has its unique set of values or unique
style of functioning. For instance, Hewlett-Packard’s corporate culture values respect for others, hard work,
and a feeling of belongingness. This culture has been developed and sustained through extensive training of
its managers and employees.The top management of many successful companies attempt to maintain the
corporate culture by defining and communicating the rules for acceptable behaviour to the employees.
However, due to the increasing worldwide mobility of people and the global expansion of the businesses,
many organizations today operate with a number of diverse cultures. Nowadays, the ‘reengineering’ of an
organization’s style of functioning is gaining popularity. This reengineering involves changing the culture of an
organization to a team culture. When adopting a team culture, a company should consider the following
organizational issues:
The various units of an organization should have clear and consistent goals.
The team members should be clear about their roles and responsibilities.
Leadership should be shared by the members of the team.
The team members should be responsible for achieving results.
The team members should possess enough knowledge and skills.
The required behavioural competencies should be reinforced in the team members.
The team members must be given adequate authority and power.
The team should share the rewards for achieving the desired results.
The corporate culture should be reflected in the organization’s mission, vision and goal statements. The
culture and values of the organization must be emphasized in the company’s training programmes and the
company’s communication. Since the corporate culture is the distinct identity of an organization, the company
should strive to maintain it.
Adapted from “Corporate Culture,” Auxillium West Human Resources Software, <http://www.auxillium.com/
culture.shtml>
A company’s culture provides guidelines for its policies and practices. The dynamics of an organization
can be understood better by studying the culture that prevails in the organization. Table 11.1 describes the
work cultures of two different organizations. Given a choice, most individuals would like to work in an
organization which has an environment that is similar to “Environment B.”
Corporate culture acts as a basis on which companies establish rules that specify how people should
behave in the organization. Many corporate slogans give a general idea of what a particular company
stands for. For example, Infosys’ corporate slogan, “Powered by intellect, Driven by values,” describes the
focus of the company on its values and its talented workforce. General Electric’s slogans always had
progress as its main theme. Earlier, its corporate slogan was “Progress is our most important product,”
and now the slogan is “Imagination at work.” The mission of these companies, often expressed in
corporate slogans, contributed to the successful conduct of their businesses.
Table 11.1: Illustrations of Organization Culture and Management Practice
Environment A Environment B
Planning
Goals are set in an autocratic manner. Goals are set with a great deal of participation.
Decision-making is centralized. Decision-making is decentralized.
Organizing
Authority is centralized. Authority is narrowly defined. Authority is decentralized. Authority is broadly defined.
Staffing
People are selected on the basis of friendship. People are selected on the basis of performance criteria.
Training is in a narrowly defined speciality. Training is in many functional areas.
Leading
Managers exercise directive leadership. Managers practice participative leadership.
Communication flow is primarily top-down. Communication flow is top-down, bottom-up, horizontal,
and diagonal.
Controlling
Superiors exercise strict control. Individuals exercise a great deal of self-control. Focus is
Focus is on financial criteria. on multiple criteria.
edition, 1994) 334.
According to Moskowitz, the work environment in well managed companies has the following
characteristics:
It makes people feel they are part of a team
It encourages open communication
It stresses quality
It lays emphasis on profit sharing
It blurs distinctions in ranks
Organizations with such characteristics perform well and keep their employees happy
Characteristics of Organizational Culture

The six common characteristics of corporate culture are discussed below:
1. It is distinctive: Organizations, like fingerprints, are unique. Each has its own management
philosophy, style of communication, mission and objectives, policies and procedures. All these
variables, in their totality, constitute its distinctive culture.
Exhibit 11.3 IBM’s ‘Basic Beliefs’
The year 1990 was one of IBM’s most profitable years. But by 1993, the company was incurring heavy losses
due to rapid changes in the computer industry. One reason why IBM was losing its competitive advantage
was the fact that its culture was not in tune with the changing times. In Who says Elephants Can’t Dance?
ex-IBM Chief Louis V. Gerstner says, “Culture isn’t just one aspect of the game, it is the game.” According
to Gerstner, organizations that have been successful have had strong cultures which reinforced the elements
responsible for their success. These elements reflected the environment from which they emerged. Since the
environment changes continuously, such organizations must learn to change their culture. IBM, unfortunately,
did not adapt quickly to changes in the environment.An organization’s culture is generally influenced by its
founder’s values, beliefs, principles and also idiosyncrasies. The culture of a company may be very difficult
to change if the organization has been created by a visionary leader. IBM’s culture reflected the values and
beliefs of Thomas J. Watson, Sr. Since Watson Sr. was a self-made man, IBM had a culture in which people
worked hard, respected each other and behaved in an ethical manner. Even well before governments started
speaking about diversity and equal opportunity in employment, and advancement and compensation for all,
IBM had people from diverse backgrounds in its workforce. Thomas Watson systematically institutionalized
the values which led IBM to success. He summarized the most important values as the ‘Basic Beliefs’:
Excellence in everything we do.
Superior customer service.
Respect for the individual.
These ‘Basic Beliefs’ were very successful and helped IBM achieve phenomenal growth. The ‘Basic Beliefs’
were based on sound management principles and should have been the standard norms for any organization.
But the way in which the ‘Basic Beliefs’ were being used had very different implications in 1993 from what
they had in 1962, when Watson had introduced them. The first Belief was ‘excellence in everything we do.’
Over time, excellence became almost synonymous with perfection. This resulted in a system of checks,
validations and approvals which slowed down the decision-making process greatly.The second Belief of
‘superior customer service’ had come to mean “servicing our machines on customer’s premises.” The supplier-
customer relationship at IBM had become totally one-sided and did not focus on the changing needs of the
customer. IBM staff did not take into account the needs of the customer and did not encourage customers
to expand their thinking. Instead, they just shipped the latest version of the system, whenever it came out.
In other words, IBM failed to create value for customers.The most powerful of all the Beliefs, “respect for the
individual,” had also become distorted over time. By mere virtue of being hired by IBM, employees expected
rich benefits and lifetime benefits. They did not consider it necessary to earn respect. Moreover, IBM
employees had become immune to recessions, price wars and technology changes. This belief also came
to mean that IBM employees could do whatever they wanted to, within the broad scope of legal and HR rules,
and need not be accountable for their actions.There is a tendency among organizations to codify the practices
which make it great. This helps in the effective transfer of knowledge, and makes it clear to the employees
“how we do things.” But as the environment changes, rules, guidelines and customs lose connection with
the mission of the enterprise. Although IBM had established good beliefs, they led to serious problems over
time. It would have been sheer madness to tamper with the good things of the organization. As Gerstner
rightly says, “We couldn’t throw the baby out with the bath water.” It was therefore necessary to bring
changes in the culture while retaining its strengths to make IBM a profitable organization once again.
Adapted from Louis V. Gerstner, Who Says Elephants Can’t Dance? (New York: Harper Business, 2002) 183-187.
2. It is based on certain norms: Norms are the general standards of behaviour. They provide
guidelines on how much work should be done, the code of behaviour to be followed, etc.
3. It promotes dominant and stable values: Organizations expect all participants to share
some major values, such as production of high quality products, low absenteeism, and high
efficiency. The values of an organization are stable in nature and usually change very slowly over
time.
4. It leads to common behavioural aspects: When members of an organization interact with

one another, they use a common language, and use the same jargon and rituals.
5. It shapes philosophy and rules: An organization’s culture shapes the philosophy that expresses
its beliefs regarding the treatment of employees and/or customers. Culture also provides strict
guidelines regarding how to get along with others in the organization.
6. Its strength varies: Organizational cultures may vary in their strength. Culture can be characterized
as relatively “strong” or “weak” depending on the degree of impact of organization culture on
employee behaviour and depending on how widely this impact is visible in the organization.
The Organizational Socialization Process

Organizational socialization refers to the process that helps new employees adapt to the organization’s
culture. Organizations use several resources to bring a newcomer into their cultural fold. These may
include company newsletters, manuals, handbooks, orientation and training, and citation of role models.
Stories also play a vital role in introducing new employees to the organization’s culture. Stories are
remembered longer than abstract facts, rules and regulations. They are powerful tools for conveying values,
because they provide substance to abstract values. Another useful method for conveying values is the
participation of senior officers in training programmes designed to help new employees understand the
corporate culture. The personal management philosophy statement also helps newcomers adjust to the
company’s culture. These statements are given to trainees on the last day of the training programme.
Steps in the Socialization Process

The organization should select entry-level candidates with care. By using standardized procedures
and looking for specific traits necessary for performance, the selectors can identify candidates
whose values are compatible with the organization’s culture.
The newcomer is subjected to many experiences to determine whether he accepts the culture or
questions it. These experiences make the new employees feel vulnerable, moves them emotionally
closer and makes them cohesive as a group.
The newcomer is given practical training, leading to mastery of one of the core disciplines of the
business. This training is reinforced through field experience.
The next step in this process is measuring operational results and rewarding individual performance.
Employees are expected to understand the most important values of the organization and adhere
to them. By adopting the company’s values, the employees show that they trust the organization.
The next step involves reinforcing the stories and organizational folklore which validate corporate
culture and the way things are done in the organization.
The last step involves acknowledging the good work of employees by promoting them to higher
positions. These people can act as role models for the new employees.
SUMMARY
Organizing aims at developing a definite structure of roles to achieve efficient organizational
performance. Planning helps managers avoid mistakes in organizing by identifying future personnel needs
and by developing the required lines of communication. It also helps managers identify outdated ways of
doing things and thus helps organizations stay innovative. An effective organization remains flexible and
adapts to changes in the environment. By reorganizing, an organization can stay flexible and be responsive
to the environment.
A firm can use organization charts and position descriptions to avoid conflict. The efficiency of
organizations increases when all members are taught the importance of informal organization and how it
works. One form of informal communication is the grapevine. Managers must sometimes make use of the
“grapevine” for effective communication and for improving the morale of employees.
Effective enterprises develop and nurture an organizational culture. The term organizational culture
refers to a set of values, beliefs, and norms which influence the behaviour of its members. The organizational
socialization process is the process by which new employees assimilate to the culture of the organization.
The organizational socialization process involves many steps from careful selection of entry-level personnel
to providing them with on-the-job training, measuring and rewarding their performance and promoting
employees who have performed well and using them as role models for the new employees.
Organization Culture at IBM

Everyone at IBM is expected to follow three fundamental principles. Respect individuals,
strive for excellence and provide the best service. Thomas Watson founded a patriarchy to
instill these principles. His successors have maintained them in the face of rapid growth and
changing technology by moving toward a more entrepreneurial system.
One way top management shows its respect for individuals is by treating all employees as
equals. IBM hires employees for life. No one will lose his or her job unless he or she
consistently fails to meet clear standards or violates the ethics code. There is no distinction
between white-, blue-, and pink-collar workers. Many employees will move through line and
CASE STUDY
staff positions over the course of their career. All employees are encouraged to continue their
education and prepare themselves for promotions. Almost all middle- and upper-level positions
are filled by existing IBM employees.
New employees undergo upto 9 months of training to prepare them for their job and to
indoctrinate them in the IBM philosophy. Those who stay rapidly adapt to the corporate
culture by dressing conservatively, engaging in competition and team sports, attending various
company events and embracing other aspects of corporate life. Another mark of respect for
the individual is the attention top management pays to employee suggestions. The firm has
a tradition of open doors at the highest levels. At least once a year, employees discuss matters
important to them with their managers. In turn, managers publicly respond to all comments
received in suggestion boxes. A suggestion programme rewards ideas that reduce costs or
improve products or quality control. Between 1975 and 1984, IBM paid workers almost $60
million for suggestions which saved the Company $300 million.
Top management monitors employee morale through questionnaires and round-table
discussions at all levels. It holds branch and division managers accountable for any problems
and actively helps them improve morale. Most employees are happy being a part of the IBM
family and stay with the company for their entire professional life. IBM is well known for
dependable service. Top management emphasizes its commitment to service by focusing on
the people who provide that service: the marketing representatives. Most of the top executives,
including Thomas Watson, began their career as salesmen.
Representatives are given full responsibility for pleasing customers. If representatives lose
an account, the original sales commission for that account is deducted from their salary. Not
surprisingly, the representatives spend much of their time helping customers to maintain their
system.
Distinction at IBM is based on merit. The system is designed to foster achievers. Managers
establish realistic goals and exuberantly reward employees when they reach them. Almost 25
per cent of the employees get bonuses, many receive gifts or a dinner for two and they receive
frequent praise.
The merit system is most obvious in the sales force. Annual sales quotas are set so that
approximately 80 per cent of the sales representatives will meet them. The representatives’
monthly sales are posted on bulletin boards. Managers are expected to help subordinates to
meet their goals. Those who achieve their quota join the “100% Club.” They attend a lavish
three-day annual celebration. The 10 per cent of the sales representatives who have the
highest sales join the “Golden Circle” and celebrate their success at a posh resort. Those who
consistently fail to meet quotas are dismissed.
The competition is tempered by a rigorously enforced code of ethics and team spirit. No
matter what their levels, managers’ successes depend on their teams’ efforts. Because the
teams are small, managers can give extensive personal attention to their subordinates. In
addition, the sales branches hold monthly rallies to review progress and reward top performers.
As IBM grew, the organization became a vast bureaucracy. Growth has spawned many
rules and controls. The hierarchy in such a large organization may slow down communication
between departments. Thus, despite their immediate superior’s attention to their professional
needs, some employees feel insignificant and do not know the direction of the company.
IBM’s customer orientation helped the firm to respond rapidly to changes in the market
despite the bureaucracy. When personal computers became popular, top management realized
it had ignored a product its customers wanted. To get a personal computer on the market
fast, top management bypassed its bureaucracy by forming an independent business unit
(IBU). The vice-president and his team were freed from other duties so that they could devote
their full attention to developing, manufacturing and marketing the IBM personal computer
(PC) without interference from the rest of the organization.
The PC team made several revolutionary decisions, including buying components from
other companies, using “open architecture” so other companies could provide software and
compatible equipment, and distributing the PC through computer stores. Previously, IBM had
insisted on providing all computer services and equipment itself, and its technical specifications
had been jealously guarded secrets.
IBM is now exploiting opportunities in telecommunications, robotics, electronics, scientific
instrumentation and computer software by buying into existing companies or forming IBUs.
The company has also moved toward decentralization, giving individuals more autonomy
without relinquishing its founder’s basic philosophy.
1. What is IBM’s culture? How does it affect employees? What symbols, traditions and norms typify IBM?
2. How has the culture changed? How did it help or hinder IBM’s adaptation to the external environment?
3. What problems could acquisitions and IBUs create? How should IBM integrate them?
][][
Human Resource
Management and
12
staffing
H Human Resource Management: An Overview
H Staffing
H Recruitment
H Selection
H Socialization Process of New Employees
Chapter 12 Human Resource Management and Staffing 257
INTRODUCTION
The most important resource of an organization is its human resources – the people who work in the
organization. People are vital for the effective operation of a company. To meet the challenges and
competitive atmosphere of today’s business environment, managers must recognize the potential of human
resources, and then acquire, develop and retain these resources. This forms the basis of human resource
management (HRM). HRM is the management of various activities that are designed to enhance the
effectiveness of the manpower in an organization in the achievement of organizational goals. Acquiring
skilled, talented, and motivated employees is an important part of HRM.
Human resource management forms a crucial function in organizations of all sizes. Larger firms
usually have a separate HRM department. Small organizations, however, cannot always afford to have a
separate HRM department that can continually follow the performance of individuals in the organization
and review their accomplishment of goals. Instead, in such organizations, each manager is responsible for
utilizing the skills and talents of the employees under him, effectively. Traditionally, HRM departments had
a relatively small role to play in the organization’s overall mission and plans. They developed staffing plans,
handled complaints, determined benefits and compensation, and conducted performance appraisal
programmes. These activities were, and still are, very important in managing an organization. However,
today HRM departments are playing a more strategic role in charting the course of their firms. Changes
in the environment, such as increasing costs, changing demographics and limited skilled labour supply,
rapid technological changes and the need for new skills, have created a strategic need for HRM expertise.
These changes have led to the acknowledgment that human resources need careful attention and are vital
to the success of any business.
In this chapter, we will first discuss HR planning. The other steps in the HRM process – staffing,
training and development, performance appraisal, and compensation will also be discussed. The later part
of the chapter will discuss the two important elements of staffing – recruitment and selection. The chapter
concludes with a description of the socialization process of new employees.
HUMAN RESOURCE MANAGEMENT: AN OVERVIEW

Human Resource Management (HRM) may be defined as the organized function of planning for
human resource needs, and recruitment, selection, development, compensation and evaluation of performance
to fill those needs. The HRM process is an ongoing function that aims to keep the organization supplied
with the right people in the right positions, when they are needed. The HRM process, shown in Figure
12.1, includes five basic activities: (1) human resource planning, (2) staffing, (3) training and development,
(4) performance appraisal, and (5) compensation. Human resource planning is discussed in detail in this
section. Staffing is discussed in detail in the next section of the chapter.
Human Resource Planning

Human resource planning is the process of determining future human resource needs relative to an
organization’s strategic plan and devising the steps necessary to meet those needs. It involves estimating
the size and composition of the future work force, and helping the organization acquire the right number
and the right kind of people when they are needed. As outlined in Figure 12.2, HR planning can be
logically divided into three parts: (1) Forecasting manpower demand, (2) Forecasting manpower supply,
and (3) Human resource actions.
Forecasting Manpower Demand

This involves assessing how many people will be required in the organization in the foreseeable future
and what abilities they are required to possess in order to enable the organization to remain in operation.
Several factors need to be considered while forecasting the demand for human resources. As illustrated
in Figure 12.2, these factors can be both long-range as well as short-range. The expected growth of the
organization, budgetary constraints, and the introduction of new technology are some of the important
factors that need to be considered while forecasting manpower demand.
Human Resource
Planning
Recruitment
Staffing
Selection
Training and
Development
Performance
Appraisal
Compensation
Fig. 12.1 Human Resource Management Process
Forecasting Manpower Supply

Like any other resource, human resources are subject to subtle erosion. Employees leave the
organization for a wide variety of reasons, and they need to be replaced. The management has to explore
both internal and external sources of supply for such replacement needs.
Internal labour supply

A prime source of manpower supply in an organization is its pool of current employees who can either
be transferred within the organization or promoted, to help the organization meet its demand for human
resources. There are three means of assessing the internal labour supply. These are (i) skills inventories,
(ii) replacement planning, and (iii) succession planning.
A skills inventory is a computerized database, which contains basic information pertaining to each
employee. This information can be used to assess the likely availability of individuals for meeting current
and future human resource needs. A skills inventory typically contains information regarding the knowledge
of each employee, his skills, experience, interests, performance and other relevant personal characteristics.
The process through which an organization identifies potential candidates to fill specific managerial
positions is called replacement planning. To make the process of identifying the potential candidates
easy, an organization has a manager inventory chart (or a replacement chart) that shows the major
managerial positions, current incumbents, potential replacements for each position, and the age of each
person on the chart. Figure 12.3 depicts a typical manager inventory chart. Using a manager inventory
chart, the GM can identify where he stands with respect to the staffing position. The chart in Figure 12.3
shows the finance manager as the GM‘s potential successor because the finance manager has the immediate
scope to be promoted and also has a subordinate as a potential successor. Further, there is one other
potential candidate within this department who can be promoted within a year. A look at other departments
shows that the production manager is acceptable but cannot be promoted.
Resource Dem and Forecasting Resources Supply Forecasting

Long Range 1. Current Inventory
1. Strategic plans
2. Productivity Levels
2. Demographics
3. The economy 3. Turnover Rate
4. Technological trends 4. Absenteeism Rate
5. Social trends 5. Movement among Jobs Rate
Short Range
1. Production Schedules/Budgets
a. Time series
b. Ratios
c. Work standards
2. Affirmative Action/Equal
Employment Opportunity
(EEO) Goals
3. Relocations/Plant Closings
Hum an Resource Actions

1. Hiring
2. Training
3. Career Management
4. Productivity Programme
5. Reduction in Force
Fig. 12.2 Human Resource Planning
Source: Edwin B.Flippo, Personal Management, Sixth edition

Exhibit 12.1 Hiring at Wipro
In Wipro Technologies, Bangalore, employee referrals and the “e-recruitment” model contribute significantly
towards achieving the hiring objectives of the company. Employee referrals, which comprised only 20% of the
entire recruitment process in the year 2001, increased to about 40% of the overall hires in the year 2002.
On an average, the company receives about 750 referrals per week. The company has chosen employee
referrals as a source of recruitment and has been encouraging it because employees have a better understanding
of the job requirements and the organizational culture as compared to other sources. This increases the
company’s chances of getting qualified referrals who would prefer to work in such an environment. Further,
it helps the new recruits to integrate themselves faster with the organizational culture and work towards
achieving its goals. The process of employee referrals is actively promoted by the top management of the
company and all employees of the organization are encouraged to participate in it. Further, the process is
completely automated in nature, right from the capture of candidates’ resumes to providing online information
of status. Vacancies arising in the company are announced and communicated through the company’s
intranet. Apart from employee referrals, Wipro is also among the first companies in India to adopt web
recruitment. Its culture of assimilating new technologies and trends has resulted in the creation of an online
career site. Wipro’s career site not only serves as a hub for all interactions with prospective candidates, but
also provides information about job openings in the company through its online job section. Furthermore, the
career site also has tie ups with several leading job portals in India and abroad and helps candidates to
update their resumes.
Adapted from “Recruitment:Wipro prefers the ‘best brings in the best’ policy,”The Hindu, 30 May 2002, Wipro
HealthCare and Life Science, <http://www.wipro.com/newsroom/newsitem2001/newstory156.htm>
There is one individual in this department one level lower in the hierarchy who is suitable for
promotion, while other employees in this department fall between the extremes of non-promotability and
good. Thus, the staffing pattern in this department can be considered unsatisfactory. The personnel
manager has the potential for promotion, but needs to improve his performance further before he is finally
promoted. The subordinates in this department have potential for promotion within a year. Therefore,
personnel department will not face the problem of succession even if the personnel manager is promoted
to higher position.
In the marketing department, though the marketing manager is suitable for promotion, his subordinates
do not have the potential to be promoted in the near future.
Advantages and Limitations of The Manager Inventory Chart

The advantages of a manager inventory chart are:
1. The chart provides a clear idea about the present and future staffing situation of an organization.
2. The chart gives a clear indication of the future internal supply of managers by indicating who is
promotable within a year.
3. When managers who have the potential for future promotion are identified, they can be easily
given a suitable position in the organization. This will stop the managers from moving out of the
organization and reduce their propensity to seek employment outside the company.
4. The manager inventory chart helps to identify the employees who are not performing upto
expectations and can help in training or replacing them, whichever is necessary.
5. With the help of the chart, managers can be transferred from one department to another. This not
only helps in enhancing the managers’ experience, but also helps to strengthen weak departments.
The disadvantages of the manager inventory chart are:

1. The chart does not show the position to which the manager may be promoted. If a vacancy occurs
in another unit of the organization, the person with the potential to be promoted may not necessarily
fit the position, since it may require him to have knowledge or skills in specialized areas. A
manager from the sales department who is promotable, can hardly fill the post of a Vice-President
(Purchases).
2. A fair assessment of the capabilities of an individual can be made based on his skills, performance
and other information. However, the data shown on the chart is not sufficient to make a fair
assessment of an individual.
3. Updating the chart is time-consuming and requires a lot of effort.
4. Top-level managers may be reluctant to make their charts available to other top level managers due
to the fear of losing competent subordinates to other organizational units.
Ge neral M anag er (GM )
Production Finance Manager Marketing Personnel

Manager Manager Manager
Akhil Sehgal L. K. Krishna D. Srinivasa

I. Sarita
(42, 5, D) (39, 4, A) Rao (41, 2, D)
(40, 4, B)
J. Nagarjuna
(45, 7, B)
Rajesh Sehgal C. Anjali Anita Roy
(41, 3, D) (44, 7, D) (45, 7, B)
A.M. Kumar
(50, 8, D)
Mohith Kalyani K. Aditya J. K. Mittal
(39, 4, B) (45, 9, D) (43, 4, B)
N. Shivani
(44, 6, A)
Naresh Jain Meena Iyyar
G. Akhilesh (40, 2, A) (50, 6, C)
(30, 2, E)
H. Lavanya
(27, 1, C)
45 = Age A Immediately Promotable

5 = Years in Position B Promotable in one year
C Potential for further promotion
D Satisfactory, but not promotable
E Terminate
Fig. 12.3 Manager Inventory Chart

Succession planning, the third method of internal labour supply, is a means of identifying individuals
with high potential. In contrast to replacement planning, which focuses on identifying specific candidates
who could fill designated managerial positions, succession planning ensures that individuals receive
appropriate training and job assignments, and thus assists in their long-term growth and development.
Succession planning, thus, provides the organization with a well-qualified pool of individuals from which
top-level and middle-level managers can be selected in the future.
External labour supply

Organizational expansion and/or employee attrition makes it necessary for the organization to sometimes
turn to the external labor supply.
Human Resource Actions

After estimating the demand and supply of human resources, managers must take steps to balance
the two. The matching of projected human resource needs with projected availability of human resources
provides the basis for undertaking various actions to ensure that supply will equal demand at the time
specified. Table 12.1 shows the HR actions based on demand and supply forecasting. The data that has
been collected for the availability and requirement of the personnel can be categorized into four situations.
Each of these situations requires a different action to be taken for estimating the demand and supply of
human resources.
Human resource activities like selection, promotion and placement come into focus when there is high
demand for and supply of manpower in the organization. Consequently, efforts are made to match the
available manpower with organization’s needs. When the supply of human resources is low and the
demand is high, a different emphasis is required. The company can go in for internal promotions, and
should place special emphasis on training and development to enlarge and improve the internal pool of
manpower. However, this takes time and planning. Recruitment is another option. When there is a high
demand for manpower within the enterprise, it is likely that there is high demand for such manpower in
the external environment as well. Therefore, it is essential that the compensation offered be competitive.
This is very important for retaining individuals already employed by the enterprise, and also for recruiting
new manpower.
Table 12.1: HR Actions Based on Demand and Supply Forecasting
Situation Demand for Supply of HR Actions

Manpower Manpower
1 Low Low Need to pay attention to organizational planning

Training and development of manpower if industry growth
and change in demand is expected in the future
2 Low High Prepare plans for growth and expansion
Outplacement of employees
Layoff excess manpower
Demote certain personnel
Early retirement of employees
3 High Low Internal promotions
Training and development of manpower
4 High High Offer competitive pay package
For a firm with a high supply of human resources and a low demand, there are several alternatives
available to strike a balance between demand and supply. The firm can prepare plans for growth and
expansion, as this would increase the demand for human resources, thereby using the manpower available.
Other alternatives are to resort to replacement or outplacement services, layoffs, demotions or early
retirements.
An organization, which has a low supply of manpower and a low demand, should pay special
attention to organizational planning, as this situation indicates a degree of saturation in the organization.
It should undertake training and development of its manpower if there are prospects of growth and of likely
changes in demand for manpower in the future.
Staffing
Though the term “human resource management” is frequently used for the managerial function of
“staffing,” staffing is just a part of the HRM process and plays an important role. Staffing involves a set
of activities aimed at attracting and selecting individuals for positions in a way that will facilitate the
achievement of organizational goals. The two basic steps of staffing are recruitment and selection.
The staffing process is a systematic attempt to implement the human resource plan by recruiting,
evaluating and selecting qualified candidates for job positions in the organization. Recruitment involves
finding and attempting to attract job candidates who are suitable for filling job vacancies. Job analysis,
job description, and job specification are important tools in the recruitment process. Once suitable candidates
are attracted to the job position, the management needs to find qualified people to fill the positions through
the selection process. Several methods are used in selecting prospective candidates. These include preliminary
screening, application blank, selection test, comprehensive interviews, etc. The recruitment and selection
process of staffing is discussed in detail, in later sections of this chapter.
Training and Development

Although organizations often recruit fully qualified individuals who require little or no training, training
is usually undertaken for new recruits as well as for existing manpower, who require improved skills in
order to advance in the organization. Employees at all levels – managerial, technical and operative – will
require some training at some point of time in their careers. Although the objectives, methods, and course
or programme contents often differ, the basic principles of teaching/learning are the same. Training is
formally defined as a planned effort to improve the performance of the employee in his area of work. In
other words, training denotes efforts to increase employee skills in their jobs. For instance, employees might
be instructed in new decision-making techniques or the capabilities of data processing systems.
Development programmes are designed to educate employees beyond the requirements of their present
positions in order to prepare them for promotions. They also help them get accustomed to the organizational
climate. Development is long-term in nature. It helps the employee fit into the organization.
Thus, the processes of training and development aim at increasing the ability of individuals and
groups to contribute to organizational effectiveness. Training and development is discussed in detail in
Chapter 14.
Performance Appraisal
Performance appraisal compares an individual’s job performance against standards or objectives
developed for the individual’s position. The process of performance appraisal involves defining the
expectations for employee performance, measuring, evaluating and recording employee performance against
these expectations, and providing the employee with feedback regarding his performance. The major
purpose of performance appraisal is to influence employee performance and development in a positive
way. When the performance is high, the individual is likely to be rewarded (by a hike in pay or a
promotion). If performance is low, some corrective action (such as additional training and development)
might be arranged to make the performance meet the desired standards.
Thus, effective performance appraisal as a control technique, requires standards, information and
corrective action. Standards in performance evaluation are prior specifications of acceptable levels of job
performance. Information must be available in order to measure the actual job performance against the
standard job performance. Corrective action must be taken by managers to restore any imbalance between
actual and standard job performance. Performance appraisal is discussed in detail in Chapter 13.
Compensation
Compensation consists of the wages paid directly to the employees for the amount of time worked
or the number of units produced. It also includes the monetary and non-monetary benefits that an employee
receives as part of his employment relationship with the organization. Wages paid for time worked (or
number of units produced) are typically payments made in the form of cash and reflect direct work-related
remuneration such as basic pay, merit increases, or bonuses. Benefits, on the other hand, are forms of
supplementary non-monetary payments over and above the wages paid. They include various protection
plans (such as employee insurance), services (such as company cafeteria), pay for time not worked (such
as during vacations or sick leave), and income supplements (such as stock ownership plans).
A sound compensation programme enhances the organization’s ability to attract and retain employees.
The compensation programme affects every member of the organization, and it is one of the most important
and time-consuming tasks of the human resources department.
Exhibit 12.2 Cisco’s Recruiting Edge
The more important it is to a company to have talented employees, the more efficient should be its recruitment
system. Cisco Systems, one of the successful companies of Silicon Valley, attributes its success to hiring
the right kind of people required for the job. The recruiting team of Cisco has been very successful in exactly
identifying the kind of people the company needs to hire. The company has achieved growth through
acquisitions and it has a knack for integrating the employees of the company it acquires. According to
Cisco’s CEO, John Chambers, “Our philosophy is very simple – if you get the best people in the industry
to fit into your culture and you motivate them properly, then you’re going to be an industry leader.”
Since the company targets people having an efficient record, it is aware that it will not be easy to obtain
access to these people. Therefore, it initially conducts focus group sessions (it obtains access to these
candidates by identifying their hobbies or meeting them at clubs or other recreational places) with the
participation of the ideal recruitment targets for the company. It initially tries to find out information about the
activities in which these employees are involved during their free time, the websites they visit, and their
opinions pertaining to job hunts. The company has learnt to reach potential candidates through a variety of
routes, not commonly used in recruiting. Cisco recruiters obtain business cards of prospects and speak to
them informally about their careers. The newspaper ads that Cisco publishes are also unlike the routine ads
published to advertise specific job openings. The ads that Cisco runs feature the company’s internet address
and ask the interested candidates to visit the company website in order to apply for any position at Cisco.
These ads benefit the company by allowing it to provide information in an inexpensive manner about each
job position. These ads also help the company monitor the number of visits to its site. Another advantage
of this approach is that the company is able to identify the company to which the visitor to the site belongs
and directly send messages pertaining to the job to the applicant at his workplace.
To make the applicants more familiar with the type of job and the work environment at Cisco, the company
launched a ‘Friends programme.’ Employees at Cisco who volunteer for this programme are rewarded for each
prospect they befriend and who is ultimately hired by the company. As part of the befriending process, these
employees tell the prospects about the benefits of working at Cisco and their experiences so as to encourage
them to join Cisco.
Cisco has also launched a tool called ‘Profiler’ on its webpage in order to standardize its online recruitment
system. The tool seeks to obtain educational and employment information of the applicants by providing them
a series of pull-down menus and asking them to make the appropriate selection. This is followed by a series
of questions which seek specific information about the applicant’s background by asking him what has been
his average growth during the past three years and his year-to-year career growth. Cisco found that the peak
time of visits made to its website was between 10 AM and 3 PM. Since most of the people logged on to
the site from their workplace, there was always the fear of being caught by the superior. Keeping that danger
in mind, Cisco designed an escape button on each screen.
Another aspect that Cisco identified was that applicants do not like taking time off to fill the form. Hence,
in order to facilitate a faster hiring mechanism, the company hired in-house (within Cisco) headhunters trained
to identify qualified managers for filling forms. The innovative hiring methods used by Cisco have paid the
company rich dividends by enabling it to tap candidates with the right potential.
STAFFING
Staffing is defined as filling and keeping filled, positions in the organization. Staffing facilitates the
achievement of organizational goals by inviting applications from and selecting individuals whose goals are
congruent to the organizational goals. When staffing, it is necessary to take into account internal factors
of the firm such as personnel policies, the climate in the organization and the appraisal system. Staffing
requirements in an organization change according to the external environment as well. For example, with
changes in technology, there is a need to hire workers who can work in an environment of high technology
demands.
Staffing, which is a managerial function, influences other managerial functions such as leading and
controlling. For example, in the present day culture of teamwork, it is important to select and train
managers to be good team leaders who will be able to make people to work together and achieve
organizational goals. Similarly, the selection of quality managers enhances the controlling function in
organizations.
Once the manpower requirement is identified, a number of candidates may have to be recruited. This
involves attracting qualified candidates to fill positions in the organization. The process of recruitment and
selection are discussed in detail below.
RECRUITMENT
Recruitment is the process of identifying and attempting to attract candidates who are capable of
filling job vacancies appropriately. In other words, the primary objective of recruitment, is to attract those
applicants who are best qualified to fill the vacancies. A well-planned and well-operated recruiting system
generates the required number of qualified applicants. Selection made from the available well-qualified
applicants ensures that the people hired have the potential to meet organization’s needs. Thus, effective
selection depends on effective recruitment.
Sources of Recruitment
The sources of recruitment can be both internal and external.
Internal recruitment
Internal recruitment involves identifying the potential candidates within the organization who can fill
the vacant positions. Apart from identifying the candidates, they have to be encouraged to accept the
vacant organizational positions. Most multinational firms, such as IBM, General Motors, and Procter &
Gamble, have a policy of recruiting or promoting from within the organization, except in exceptional
circumstances. This method of filling vacant positions by promotions from within the organization helps
to build employee morale and prevent high-quality employees from leaving the organization. In order to
fill high-level positions, a skills inventory may be used to identify internal candidates, or managers may be
asked to recommend individuals who should be considered for these positions. The main disadvantage of
recruiting from internal sources is its “ripple effect.” That is, when an employee is promoted to a different
job, it becomes essential to find someone else to take his or her place in the organization.
Table 12.2: Advantages and Disadvantages of Internal and External Recruitment
Internal Recruitment External Recruitment
Advantages
Familiarity of candidate with organization’s policies, Influx of new ideas.

procedures and culture.
Available information and observation by superiors Candidates who are recruited from competitor
facilitates easier selection. organizations provide valuable information
about competitor’s moves and strategies.
Selection and socialization of job incumbents Facilitates recruitment of candidates with diverse
involves less time and money. skills, expertise and vast experience.
Enhances employee morale by offering
opportunities for upward mobility.
Prevents high-quality employees from leaving the
organization.
Disadvantages
Lack of new ideas. Lack of reliable information increases the probability

of committing mistakes in selection.
Need for expensive training programmes. Expensive process.
Can breed nepotism and political manoeuvrs. Orientation process may consume a lot of time.
Leads to ‘Ripple effect’. Breeds resentment among aspiring internal candidates.
May leave unsuccessful contenders disgruntled.
External Recruitment
External recruitment involves attracting people from outside the organization to apply for vacant
positions in the organization. The advantages and disadvantages of internal and external recruitment are
listed in Table 12.2. There are a variety of sources from which external job candidates can be obtained.
These include advertising, educational institutions, employment agencies, voluntary applicants, and referrals
by current employees.
Advertising
Advertising in newspapers and journals is the most popular method of recruitment from external
sources. Advertising in local newspapers is a good source of recruiting people for lower level positions.
Though advertisements reach a large audience, they are likely to attract many unsuitable candidates. This
increases the burden of the initial screeners. In order to avoid this problem, it is essential that the
advertisements describe the job qualifications appropriately. The following are some of the elements that
should be included in an advertisement in order to make it effective – name of the company, the product
(the post for which the advertisement is given), and the place where the vacancies are to be filled, hiring
qualifications, compensation plan and benefits, and the way to contact the employer.
Educational Institutions
Educational institutions are an excellent source of potential employees for entry-level positions in
organizations. However, some large firms look to educational institutions for high-level positions as well.
Business colleges, vocational schools and universities are good sources of external recruits. Although most
graduates lack work experience, they have the conceptual and technical knowledge that firms seek. Almost
all colleges have a placement cell; a company representative usually works with the placement cell to set
up an interview schedule and to have company brochures distributed.
Most graduates, however, prefer to work for large, well-known organizations, which provide good
training programmes and provide many benefits to their employees. Hence, small firms may not be very
successful in recruiting from campuses.
Employment Agencies
Employment agencies are a good source for recruitment. But if the employment agency chosen is not
a good one, the entire process of recruitment can be adversely affected. Hence, the recruiting firm should
be careful to select a reliable employment agency, and should develop a good working relationship with
it. Both the job description and job qualifications for the position to be filled must be conveyed clearly to
the agency. The candidates are initially screened by the agency before they are sent to the recruiting firm.
Therefore, the recruiter needs to spend time only with those candidates who are well qualified for the job.
Private employment agencies usually offer positions and applicants of a higher calibre. They charge a fee
for the services rendered, from the employer and/or the employee. Management consultants are specialized
private employment agencies. They conduct executive search to identify potential recruits, especially for
middle and top-level placements.
Voluntary Applicants
“Walk-ins,” whether they reach the employee by letter, telephone or in person, are also a source of
prospective applicants. Some firms view walk-in applicants as aggressive and self-reliant individuals.
Others reject all unsolicited applications because they believe that the proportion of qualified applicants
from this source is low. Unsolicited applications often have a short life, so if the firm wishes to respond
and has a vacancy, it should do so quickly. Alternatively, voluntary applications can be kept in the
database for later use by the organization, whenever vacancies arise.
Referrals by Current Employees

Existing employees can be asked to furnish the names and details of people who they think are
suitable for a particular vacancy in the organization. The employees may suggest the names of friends who
work for another firm, or for relatives. This type of external recruitment can prove to be effective as the
employees can provide information on the applicant’s ability to perform on the job and how well he or
she can get along with others.
One major issue related to external recruitment is the tendency of the recruiters to give candidates
a very positive view of the organization in order to attract new employees. Unfortunately, this strategy
sometimes backfires. An individual who accepts a position with unrealistic expectations may become
dissatisfied and leave soon. An alternative approach is to present the job candidate with a balanced view
of both the positive and negative aspects of the organization. Presenting a realistic job preview may
reduce the number of candidates interested in the job, but will most likely have a positive effect on job
satisfaction and performance.
The Recruitment Process

The recruitment procedure is initiated when a vacancy occurs and is reported to the human resources
department. The recruitment procedure should consist of certain sequential steps to ensure that the new
recruits have the necessary qualities and qualifications to match the requirements of the job. The steps in
the process are depicted in Figure 12.4.
Perform job Design job Develop a job Attract a pool Select the
analysis description specification of applicants best recruits
Fig. 12.4 The Recruitment Process
Perform Job Analysis

In order to recruit and hire persons suited for specific vacancies, it is essential to know what the job
itself requires. Job analysis is the process of determining the tasks that make up a job and the skills and
abilities that the employee must have to fulfil the duties and responsibilities of the job. It may be formally
defined as a systematic, detailed study of jobs, consisting of identifying and examining what is required
of the person assigned to the job, and the elements and characteristics of the job.
A job analysis involves three steps.
1. analyzing the environment (nature of competition, customers, etc.) in which employees work;
2. determining duties and responsibilities to be discharged;
3. observing and recording the various tasks of the job as they are actually performed.
Job analysis is often done through interviews, direct observation, or by using a questionnaire that is
completed by the person currently holding the job and his immediate supervisor. Job analysis forms the
basis for both job description and job specifications. This is shown in Figure 12.5.
Two widely used systematic job analysis approaches are the functional job analysis (FJA) and the
position analysis questionnaire (PAQ). Functional job analysis focuses on four dimensions of an individual’s
job:
1. The data, people and jobs pertaining to the individual’s job.
2. Methods and techniques that the individual uses on the job.
3. Tools and equipment used by the worker.
4. Products and services produced by the worker.
A look at the above dimensions shows that the first three dimensions relate to the inputs and the job
activities, while the fourth dimension relates to the output and job performance. FJA is the most widely
used systematic job analysis method. It provides a description of jobs that can be used as a basis for
classifying jobs according to any of the four dimensions. It focuses on the task and technological factors
at work. It can also be the basis for specifying standards of performance. For instance, managers can
prescribe what methods and machines an individual must use, and how he must use them.
C omponents of Job A nalysis
Job Description Job Specification

(Emphasis is on the job) (Emphasis is on the
individual)
Objectives of the Job
Work to be
Minimum qualification
performed
required
Skills needed
Listing of skills,
Responsibilities
education and work
involved
experience needed to
Relationship of the
perform the job
job to other jobs
Working conditions
Fig. 12.5 Job Analysis Components

The position analysis questionnaire (PAQ) too focuses on the task and technological factors, but in
addition to these, it also takes into account the human factor. PAQ analysis attempts to identify the
following six aspects of a job:
1. The sources of information that are critical to job performance.
2. Information processing and decision-making critical to job performance.
3. The amount of physical activity and skill required for the job.
4. Physical working conditions and reactions of individuals to those conditions.
5. Interpersonal relationships required to perform the job.
6. Other characteristics of the job, such as work schedules and work responsibilities.
There is considerable overlap between FJA and PAQ. Each attempts to identify work activities and
outcomes. But the PAQ, in addition, takes into consideration the individual’s psychological responses to
the job and its environment. It enables managers to set standards and obtain information about the
employee, the performance of work, and the results of work.
Performing an accurate job analysis is quite a complex task. But if effectively done, it leads to effective
job description and job specification.
Designing Job Description

The second step in the recruitment process is designing the job description. The job description is a
written statement describing the objectives of a job, the work to be performed, the skills needed, the
responsibilities involved, the relationship of the job to other jobs, and working conditions on the job.
A job description conveys the essence of the job along with a list of tasks and responsibilities that
the job involves. It can be utilized for a number of important HRM functions – selection of new employees,
their orientation and training, and the appraisal process. A clearly written job description gives a sense
of direction to the new recruit. When responsibilities listed in the job description are well quantified, they
help in evaluating the employee’s performance.
Developing a Job Specification

A job description should be accompanied with a job specification. A job specification is a written
document that describes the minimum acceptable qualifications required of a person who fills a particular
job. It also lists out the skills, education and previous experience needed to perform the job. In job
description, the emphasis is on the job, whereas in job specification, the emphasis is on the person doing
the job. In job specification, the duties and responsibilities stated in the job description are converted into
a set of human qualities that a recruit should have in order to perform the job satisfactorily.
Attracting a Pool of Applicants

It is impossible for an organization to select high calibre candidates unless it has a sizable body of
candidates to choose from. Attracting a pool of applicants is the next major step in the recruitment process.
The number of applicants that a firm can attract determines the future success or failure of the organization.
A firm should neither start with too large a number nor too few applicants. When the number of applicants
is small, persons who are not actually suitable for the job may be hired. However, when a large number
of applications are processed, the management may bypass desirable candidates at the recruiting stage.
The number of applicants that the recruiting firm is able to attract depends upon the sources used for
recruitment. For instance, an advertisement in a local newspaper will attract fewer applicants than an
advertisement in a national newspaper or journal.
The number of recruits who have to be attracted depends on the quality of candidate required for a
particular position. It is advisable to screen a larger number of applicants when high-calibre people are
needed.
SELECTION
Once an adequate number of applicants has been sourced, the process of selection begins. Selection
is the second step in the staffing process. The selection process involves choosing the candidates who best
meet the qualifications and have the greatest aptitude for the job. The objective of effective selection is
to match individual characteristics (ability, experience, and so on) with the requirements of the job. The
aim of selection should be to choose candidates who can meet the organization’s goals.
Exhibit 12.3 Behavioural Interviewing: A predictor of future performance
Although behavioural interviewing is a relatively new concept in India, it is a widely used and proven method
of job interviewing by some of the major players in corporate America. It is believed that behavioural interviewing
can predict the future on-the-job performance, select candidates who are successful in the jobs they are
chosen for, 55% of the time, whereas the success rate in the case of traditional interviewing is only about
10%. The major advantage of this method of interviewing is that it greatly enhances the manager’s ability to
predict whether or not a candidate will be successful in the job. The use of the behavioural method of
interviewing benefits employers by reducing the number of mistakes made during selection, as well as
reducing discrimination and turnover and enhancing the productivity in the organization. In order to determine
a candidate’s potential for succeeding in the job, the interviewer tries to identify the candidate’s job-related
experiences, behaviours, knowledge, skills and abilities which the company considers as desirable for the
particular position. For example, Accenture, one of the leading management consultancies in the world, looks
for the following characteristics in candidates for managerial positions before hiring them: The candidate
should have the ability to think critically, he/she should be a self-starter, should have the willingness to learn
and to travel, should be self-confident, able to work in a team and should have a professional approach.
Behavioural interviewing also benefits candidates by helping to build their confidence, encouraging them to
be committed to their job and allowing them to know that they are qualified for the job. Some of the typical
questions that are put to candidates in a behavioural interview include: “Tell me about a time when you had
to deal with a personality conflict with a co-worker or boss” or “Tell me about an event or a time when you
motivated your team or a member of your workteam.” The interviewer’s purpose of asking the candidate such
questions is to determine his/her crisis management, motivational and conflict management skills. While
solving the problem, the skills demonstrated by the candidate helps the interviewer to evaluate his/her
performance objectively.
Adapted from Katherine Hansen, “Behavioural Interviewing Strategies,” HRM Review, February 2003: 22-23.
The Selection Process

The selection process involves mutual decision-making on the part of both the organization and the
job applicant. The organization decides whether or not to make a job offer and how attractive the offer
should be. The applicant for the job decides whether the organization and the job offer will fit his or her
needs and goals. However, when the job market is extremely tight, the selection process will be more one-
sided. Several candidates will apply for each position, and the organization will, on the basis of a series
of screening devices, select the candidate it finds to be the most suitable. The process is also one-sided
in the opposite way when the candidate is a highly qualified executive or a professional who is being
courted by several organizations.
There is a vast array of selection methods available for an organization. Each method enables the
management to obtain information regarding a job applicant that can help the organization determine
whether the applicant’s skills, knowledge, and abilities are appropriate for the job position in question. The
selection process consists of various steps as shown in Figure 12.6. The size of the company, the number
of candidates needed, and the importance of the position to be filled are the major factors that determine
the steps in the selection process.
A typical selection process follows a standard pattern and consists of the following steps:
Preliminary screening
Application bank
Selection test
Comprehensive interview
Reference check
Physical examination
Making the selection
Preliminary
screening
Application
Intelligence tests
bank
Personality tests
Knowledge tests
Performaces/Work
sample tests
Selection test
Comprehensive
interview Structured
Semi structured
Unstructured
Reference check
Mail
Phone
Person
Physical
examination
Making the
Selection
Fig. 12.6 Steps in the Selection Process

Preliminary Screening
The preliminary screening interview is used to make a quick evaluation of the applicant’s suitability
for the particular job. Elimination of some of the candidates can be done in the preliminary screening
interview on the basis of job description. This screening weeds out unqualified applicants and is often the
first personal contact an applicant has with the company. It enables the management to discuss the job
in adequate detail, and analyze whether the applicant is suitable for the job. The interview centres upon
an analysis of the general background, education and experience of the candidate. The initial screening
is best left to a staff member or subordinate so that valuable executive time is not wasted. The interview
usually lasts for a very short duration, ranging from twenty to thirty minutes, and is conducted by a
member of the human resources department. When the initial screener believes that the applicant meets
the minimum requirements, he asks the applicant to fill out an application form. Preliminary screening is
important for large organizations which receive a large number of applicants whenever their representatives
visit college campuses or put an advertisement in the newspapers. The screening process, as filtering
mechanism, takes some pressure off other selection devices.
Application Blank
Candidates who pass the preliminary screening are usually required to complete a formal application
form specially designed to obtain the required information about the candidate. Applicant banks are an
efficient method of gathering information about the applicant’s previous work history, educational
background. Generally, the data provided in the application bank is used informally to decide whether a
candidate merits further evaluation. Interviewers use application banks to familiarize themselves with
candidates before interviewing them. The application bank can also include reasons for applying, expected
salary, reasons for leaving the previous job, positions last held, and time spent with last employer.
Selection Tests
Tests of ability, skill, aptitude, or knowledge that is relevant to the particular job, are usually the best
predictors of job success, although tests of general intelligence or personality are occasionally useful as
well. A selection test also measures certain psychological factors such as ability to reason, capacity for
learning, temperament, and specific aptitudes and physical abilities.
There are different kinds of tests used in the selection process.
Intelligence tests
An intelligence test explores alertness, comprehension and reasoning abilities of the applicants. Through
these tests, managers can predict the future job performance of the applicant. Questions in intelligence
tests are job-oriented, and abstract.
Personality tests
Personality tests are a means of measuring characteristics (such as pattern of thoughts, feelings and
behaviour) that are distinctively combined in a particular individual and influence the individual’s interactions
in various situations. They also measure an applicant’s self-confidence, and emotional stability. The use
of personality tests for selection purposes is subject to considerable debate because of the difficulty of
accurately measuring personality characteristics and the problems associated with matching them
appropriately to job requirements.
Knowledge tests
Knowledge tests evaluate the applicant’s knowledge about the company, its competitors and customers,
its products, the target market and the like.
Performance or work sample tests

Such tests are a means of measuring practical ability on a specific job. In performance or work
sample tests, the applicant completes some job activity under structured conditions. For instance, a person
who had applied for the post of a service representative may be asked to handle a simulated situation
involving a complaining customer. Although they can be costly if special facilities and equipment are
needed, performance tests, when devised to closely reflect important aspects of the job, tend to be valid
predictors of future performance.
Comprehensive Interview
A comprehensive or an in-depth selection interview is designed to find out more about the applicant
as an individual and, in general, obtain information of interest to the interviewers so that the suitability
of the candidate for the job and the organization can be determined.
In this stage of the selection process, the interviewer matches the information obtained about the
candidate through various sources, such as the application bank, screening and testing. Clarification and
elaboration of brief responses given in the application bank are also sought in the interview process. Unlike
the screening interview, which is usually conducted by a member of the human resources department, the
in-depth interview is usually conducted by the manager to whom the candidate would report if hired.
The three widely used types of interviews include structured interview, semi-structured interview, and
unstructured interview. In a structured interview, the interviewer asks the candidate a predetermined set
of questions in the specified sequence with virtually no deviations. This type of interview is very useful if
the interviewer has to interview a large number of candidates or when the interviewer is relatively untrained.
Unstructured interviews are informal and unorganized. There are no pre-planned questions. The
candidate is allowed to talk freely on general questions and the purpose of the interview is to find out about
the kind of person the candidate is.
In comparison to an unstructured interview, a structured interview yields more valid data. However,
there are certain disadvantages of structured interviews. They are almost mechanical in their approach
and may convey disinterest to the candidate. Also, they do not allow the interviewer to probe interesting
or unusual issues that may arise during the interview.
To overcome these disadvantages and still acquire reasonably valid data for making a selection
decision, interviewers can use a semi-structured interview, which is a combination of structured and
unstructured interviews. Here the interviewer uses a set of pre-planned questions and also allots time for
interaction and discussion.
Reference Checks
Applicants are required to furnish names of persons who can be contacted by the recruiting firm if
it wishes to know about the character and suitability of the applicant. References assure the recruiting firm
that the information given by the applicant is reliable. Reference checks can be obtained by mail, by
telephone, and in person. Such checks are conducted to verify information on application banks and
sometimes, to collect additional data that will facilitate the selection decision. References from individuals
who are familiar with the candidate’s academic achievements and from the applicant’s former employees
are more helpful than other types of references.
Physical Examination
The physical examination is the last step before taking a final decision on whether to select an
applicant or not. Physical examinations are designed to ensure that the candidate can perform effectively
in the position for which he or she is applying, to protect other employees against contagious diseases,
to establish a health record for the applicant, and to protect the organization against unjust compensation
claims.
Making the Selection

The applicants who qualify in the selection test, interview, reference check and physical examination
are now considered to be eligible to receive an offer of employment. Once the selection process generates
the list of selected candidates, it is the applicant’s prerogative to decide whether to accept the offer or not.
Individuals are encouraged to work in an organization when the goals set are realistic and where they
can prove their ability and talent to achieve those goals. Added to this, if the job suits the personality of
the individual, then the individual can show effective results as he/she has a greater suitability for the job.
Rejected candidates should be intimated. Such communication is essential for attracting candidates in the
future.
SOCIALIZATION PROCESS OF NEW EMPLOYEES

Newly selected employees must be integrated into the organization. The process of adaptation by a
new employee is referred to as the socialization process. The new employee has to adapt to a new
environment – different work activities, a new boss, different group of co-workers and different set of job
performance evaluation standards. The socialization process determines the future success of the new
recruit in the job. Recruitment, selection and training efforts have a great impact on employee socialization.
To make the socialization process effective, the employer should present a realistic picture of the job to
the new recruit as well as provide him/her with good quality training.
There are primarily two levels of socialization. The first level – ‘initial socialization’ – occurs during
the recruitment, selection, and during the introductory training efforts made by the firm. This stage ends
when the new employees receive an initial orientation on the firm’s procedures and policies. The second
level called ‘extended socialization’ aims at making the new recruit feel that he or she is an integral part
of the company.
Many large companies rely on long-term training, job-rotation, and corporate social activities for their
extended socialization programmes.
SUMMARY
The HRM process includes five basic activities (1) human resource planning, (2) staffing (3) training
and development, (4) performance appraisal and (5) compensation.
HR planning is designed to ensure that the personnel needs of the organization will be constantly and
appropriately met. HR planning involves three steps: (1) forecasting manpower demand, (2) forecasting
manpower supply, and (3) human resource actions. Staffing is an integral part of the HRM process. It is
a set of activities aimed at attracting and selecting workers for the purpose of achievement of the organization’s
goals. The two basic steps involved in staffing are recruitment and selection. The recruitment process
begins with finding and attempting to attract candidates who are suitable for filling job vacancies. The
recruitment process involves five steps: (1) performing job analysis, (2) designing job description, (3)
identifying job specification, (4) attracting a pool of recruits, and (5) selecting the best recruits. Recruitment
can be conducted internally as well as from external sources. Internal recruitment is the process of finding
potential internal candidates (present employees) and encouraging them to apply for and/or be willing to
accept organizational positions that are vacant. External recruitment involves attracting people from outside
the organization to apply for vacant positions. There are various sources for obtaining external job
candidates. These include advertisements, educational institutions, employment agencies, voluntary
applicants, and referrals by present employees. Once the candidates are attracted to job positions, the
management needs to find qualified people to fill the available jobs through the selection process. The
selection process consists of seven steps: (1) preliminary screening, (2) application bank, (3) selection tests,
(4) comprehensive interviews, (5) reference checks, (6) physical examination, and (7) making the selection.
To integrate the newly hired employees into the organization, managers must adopt a systematic socialization
process.
Anna Electronics Company

CASE STUDY
Anna Electronics Company (AEC) has an excellent national and international reputation,
and its employees are proud to work for the firm. But the company demands total loyalty
from its employees and even tries to influence their behaviour and appearance after work.
Malliga, a bright young woman working for AEC for over 10 years, was highly respected
by the colleagues and did a fine job as a divisional sales manager. It was generally agreed
that she had excellent potential for advancement. For 2 months, Ms Malliga had been in love
with Ramanan, who worked in the electronics division of a competing company. One day
Kumaran, Malliga’s boss, approached her about this matter, stating that there might be a
possible conflict of interest in her association with an employee of the competitor. He made
it clear that AEC has an unwritten policy that demands (and rewards) complete loyalty from
all its employees.
Shortly after this emotional confrontation with her boss, Ms Malliga was transferred to a
non-managerial position without any loss in pay.
She also noted that even her friends at AEC tried to avoid her. But Malliga felt very
strongly that the company had no business suggesting whom she could and could not see
after working hours; as a result, she quit her job.
1. Can a company demand loyalty to the extent indicated in the case? Would your answer be different if Malliga
had access to important company trade secrets?
2. What would you do in Malliga’s position?
3. What would you do in the supervisor’s position?
Chapter 13 Performance Appraisal and Career Strategy 277
Career Strategy
Appraisal and
13
Performance
H Significance of Appraisal
H Formal vs Informal Appraisals
H Performance Rating Methods
H Criteria for Appraising Managers
H Formulating Career Strategy
INTRODUCTION
Assessment of employee contribution to the success and growth of an organization can be defined
as the process of performance appraisal. Continuous assessment of employee performance helps
organizations to determine whether the performance of employees is aligned with the goals of the organization,
gives feedback to the appraisee, determines how his/her performance can be improved and measure actual
job performance to standard job performance. Thus, as an effective control technique, performance
appraisal requires standards, information, and corrective action. To elaborate, the standard that is fixed
in performance evaluation indicates the expected level of job performance from an individual by an
organization. Finally, managers must take corrective action to restore any imbalance between standard
and actual job performance.
Performance appraisal is a continuous process that focuses on organization’s objectives, task
accomplishment, and personal development. Appraisal is, or should be, an integral part of any system of
management. Assessing the manner and methods whereby a manager plans, organizes, staffs, leads and
controls is the only method to ensure that employees in managerial position are doing an effective job of
managing. Effective performance appraisal should also recognize the sincere desire of employees for
progress in their career.
In this chapter we will discuss the significance of appraisal, formal versus informal appraisals,
performance rating methods, criteria for appraising managers and formulating a career strategy.
SIGNIFICANCE OF APPRAISAL
Performance appraisal is the process by which organizational expectations for employee performance
are defined followed by the measurement, evaluation and recording of his/her actual performance relative
to these predetermined expectations and then providing the employee the relevant critical and constructive
feedback. In simple words, performance appraisal can be defined as the formal evaluation of an individual’s
job performance. It involves giving feedback to the individual and includes constructive solutions for further
improvement.
The major purpose of performance appraisal is to influence, in a positive way, both employee
performance and organizational development. In addition, to these the appraisal process is used for a
variety of other organizational purposes, such as making decisions about pay raises, planning future
performance goals, assessing the promotional potential of employees, and determining training and
development needs. Performance appraisal also provides feedback to employees, which helps them improve
their present performance and plan future careers.
Thus, some of the objectives of appraisals are as follows:
Performance feedback
Performance improvement
Identification of potential
Promotion decisions
Compensation administration
Work-force planning
Validation of selection procedures
Exhibit 13.1 Informal rewards at Honeywell, Blanchard and American Express
In order to motivate employees to perform in the best interests of the company, organizations have to devise
reward systems that will inspire them to perform. Although traditional reward systems such as compensation
and promotion still remain popular the value of informal rewards, as a form of employee motivator, is
increasing. Informal rewards also have an increased potential for use with executive management. As informal
rewards are personal and flexible, have a greater impact in motivating people and help reinforce more formal
organizational systems, today most organizations use them. Honeywell, Blanchard Training and Development,
Inc., and American Express have actually devised programmes for implementing informal reward systems.
The management at the Honeywell Technology Centre of Honeywell, Inc., implemented a programme called
“The Winning Edge.” The aim of this programme was to recognize superior employee performance. Any
employee recommended for the award by another employee becomes a participant in the programme. The
programme comprises reviewing of the recommendations by a committee, awarding a cash award of $ 100
to the individual approved by the committee and presenting him/her with a commendation certificate at a
ceremony. In addition to this, the names of all award winners are posted in the company’s newsletter. This
programme helped the company to successfully improve the morale of its employees. Blanchard Training and
Development, Inc., a management training and consulting company, instituted ‘The Eagle Award’ to recognize
employees who offer superior service to customers. As in Honeywell, employees could recommend the name
of any employee who delivered excellent customer service such as helping a customer locate a lost order
or resolving a billing problem, rearranging trainer schedules to accommodate a last-minute training request
of a customer, and the like.The ‘Great Performers Programme’ at American Express Travel Related Services
was initiated to motivate employees to work harder by displaying life-sized posters of famous people at
prominent locations in the organization with information of their greatest achievements. This paved the way
to the practice of displaying pictures of their employees who excel in performance along with a statement
of the major accomplishment of each employee. The nomination of employees displaying outstanding excellence
could be made by fello employees, supervisors as well as customers. The award winners of the ‘Great
Performers Programme’ then become eligible for a Grand Award, which is decided by a worldwide governing
committee.
Adapted from Bob Nelson, “Performance Management, the use of informal rewards in recognizing performance,”
Performance Management, <http://www.p-management.com/articles/9902.htm>
FORMAL VS INFORMAL APPRAISALS

The process of performance appraisal occurs both informally and formally or systematically.
Informal Appraisal
In an informal appraisal, continuous feedback is provided regarding the performance of employees.
As a close interactive relationship exists between behaviour and feedback, informal appraisals encourage
desirable professional behaviour and prevents undesirable behaviour. The feedback is usually spontaneously
expressed or alternatively the subordinate can get immediate feedback from the superior as and when the
job is completed. Hence, informal appraisal can be termed an integral activity of any organization. The
feedback both verbal and written should be taken seriously and should be acted upon. Suggestions should
be implemented. Informal appraisals usually occur on a day-to-day basis. Exhibit 13.1 shows the informal
appraisals at Honeywell, Blanchard and American Express.
Formal Appraisal
Formal appraisals are usually conducted annually or semi-annually or on a systematic basis. The
main purpose of a formal appraisal is:
To help employees understand how their performance is evaluated.

To give employees a performance rating.
To identify those employees who perform well and reward them as per their performance and
identify suitable candidates for promotion.
To identify employees whose performance is not up to the mark and organize remedial measures
such as training in order to improve their performance.
In this process of formally evaluating employees, it is important for managers to evaluate employees
not only on their present performance, but also on their ability to perform different tasks effectively in the
future. That is, if and when these employees are placed in different or more responsible positions, they
should be able to perform effectively.
Four basic approaches are proposed for formal performance appraisals.
Superior’s rating of subordinates
A group of superiors rating subordinates
Peer assessment
Subordinate’s ratings
The first approach, ‘A superior’s rating of subordinates’, is a common approach and is followed in
most organizations. But with the present changes in the business environment, other approaches are
gaining importance.
The second approach that is commonly used these days is ‘A group of superiors rating subordinates.’
In this method, a subordinate is rated by a managerial committee or by a group of managers who fill
separate rating forms. This approach is considered to be more effective than the first approach because
it relies on the feedback of a number of managers. Where the first can become subjective, the second is
objective and balanced. The drawbacks of this approach are that it is time consuming and at times it may
reduce employees’ feelings of accountability to their immediate supervisor.
The third approach is the rating of an individual by his peers. Employees working at the same
organizational level are asked to rate their co-workers. This approach is rarely followed in organizations,
as this too can be subjective.
The fourth approach is subordinates’ rating of superiors. Here subordinates evaluate their superior’s
performance. This approach has a common analog in colleges, where students are often asked to evaluate
their lecturers on a number of performance measures. Though not widely used earlier in business
organizations, now this approach is becoming a common method of evaluating managers and helping
them to improve their performance.
Apart from these four approaches, there is another method of performance which is called the “360-
degree appraisal.” In such an appraisal the individual is evaluated by his or her superior/superiors, peers,
and subordinates. Thus the “360-degree appraisal” is in fact an amalgamation of all the four formal
appraisal methods discussed earlier. If 360-degree appraisals are to be successful, they need to be carefully
designed and skilfully implemented.
Figure 13.1 shows a performance appraisal system which has the characteristics of all feedback
control methods. Through this system, managers can obtain information related to inputs, activities, and
outputs. The inputs here are the employees skills and traits, the activities are the job performance, and the
outputs are the job outcomes.
Corrective action is taken to change employees’ knowledge and skills, as well as job performance,
activities and behaviours.
The effectiveness of a formal performance appraisal system depends on the quality of control techniques
used. They include standards, information and corrective action.
CO RREC TIVE
IN DIVID UAL ACTION
LEAD TO
PERFO RM ANCE
APPRAISAL
SYSTEM S
Fig. 13.1 Performance Appraisal Systems
Standards
The most important and crucial aspect of performance appraisal lies in determining the standard of
an effective performance. In performance systems, standards are usually referred to as criteria or means
of identifying success in an activity. An important and essential step in developing a performance appraisal
system is the development of criteria that indicate a successful performance.
The primary method of evaluating an individual job performance is to compare his performance with
the organization’s overall objectives. The individual performance should not only be congruent with these
objectives but it should also contribute to organizational performance. Though this principle seems self-
evident, it is difficult to implement, particularly, when there is a change in organizational objectives.
Information
Information is essential for managers to appraise the performance of subordinates. Managers must
decide three issues regarding information that is needed for appraisal. The information needed for appraisal
can be ascertained through the source, the schedule and the method of appraisal. Information technology
is helping companies sharpen their appraisal process as can be seen from Exhibit 13.2.
Sources of information: Appraisal information can be ascertained from five possible sources: (1)
the immediate superiors or supervisors of the appraisee (2) peers, (3) the appraisee himself, (4) subordinates
of the appraisee and (5) individuals outside the work environment. In most cases, the appraiser is the
immediate supervisor of the person being rated and is most familiar with the appraisee’s performance.
Exhibit 13.2 IT to sharpen the process of appraisal
In most organizations, the annual appraisal system usually does not work as effectively as expected. As a
result, employees become dissatisfied as their performance remains unrecognized and consequently the
company performance suffers as a whole. The reasons why companies neglect having an annual process of
appraisal can be attributed to involvement of plenty of paperwork and excessive control of the appraisal
process by the HR department. Thus, the delay that it results in makes many line managers lose interest
in the management function of appraisal. Keeping these drawbacks in consideration, companies such as
Nokia and UBS have begun to use information technology (IT) to make the process of performance appraisal
more user-friendly.Nokia uses an online appraisal system which helps it to cover all its 53,000 employees.
Each employee posts a series of objectives on the corporate intranet. These objectives are then discussed
and agreed upon by managers and other superiors who are involved in the appraisal process. These objectives
are then put on the corporate intranet and serve as a draft plan for the employee for the next six months.
This plan serves as a basis for evaluating the performance of the employee at the end of six months and
reaching a conclusion regarding his performance. If the performance requires improvement, the HR department
assists the individual in analyzing the reasons for his poor performance and provides him with the necessary
training to improve his skills. The advantage of Nokia’s style of appraisal is that the individual is empowered
to set his own objectives. His training and development needs are identified as a part of subsequent
discussions with the manager. Although a manager plays an important role in assessing the employee’s
performance, the HR department conducts the annual review of the performance of all the employees to
assess their training and development needs.The appraisal process at Nokia increases the confidence level
of the employees as it begins with the employee posting the result of his self-assessment on the corporate
intranet. The self-assessment report of the employee is then sent to the manager who adds his evaluation
to the report. In order to present an unbiased opinion, evaluations by 5 or 6 managers are obtained and added
to it. Thus a 360 degree performance appraisal can work efficiently if information technology is
harnessed.Although IT cannot prove to be a perfect tool for appraising the performance of employees, if it is
coupled with vital support from the management, it can certainly help an organization to come up with effective
results in the long-term.
Adapted from “Performance Appraisals,” Country Monitor, Vol 10, Issue 13 (8 April 2002): p 5, 1p.
In some organizations, group ratings are used to appraise managerial personnel. Here the members
of the group include superiors, peers, and subordinates. Though some companies use the peer appraisal
system, this method is usually not very successful. Another method of appraisal is self-appraisal. Using self-
appraisals may prove to be of some benefit. The major claims in support of this approach are that it
increases the personal commitment of employees because of their participation in the performance appraisal
process, it improves employees’ understanding of job performance, and reduces hostility between superiors
and subordinates over ratings.
On the other hand, the major advantage of using multiple appraisers (superior, peer, and self-ratings)
is that it provides a great deal of information about the appraisee. In making decisions about promotion,
career planning, and training and development, as much information, as possible is needed to suggest the
best course of action about the employee.
Schedule of appraisal: In general, senior employees who have worked in the organization for many
years are formally appraised once a year. New hands/ junior employees are usually appraised more
frequently than other employees. The time and frequency of appraisal depends on the situation and on the
purpose of the appraisal. If performance appraisals occur too frequently, the appraisee may not be able
to use the feedback to make improvements.
The performance appraisal programme should be considered an ongoing continuous process that
focuses on the organization’s objectives, on task accomplishment and the personal development of the
employees.
Appraisal methods: The most simplistic method of information-gathering for appraisal consists of
the manager’s periodic observations of the subordinate’s performance. But this may sometimes become
subjective. There are other more complex systems where the manager fills in forms which document the
subordinate’s performance during the period covered by the appraisal. This may be more objective. A
number of other performance rating methods have been developed. The important ones are: graphic rating
scales and behaviourally anchored rating scales. These are discussed in detail in the next section.
Corrective Action
Once the performance standards are spelt out and the actual performance information is gathered,
both are compared in order to identify the deviations. If the performance does not match the standards
laid out, corrective action is suggested. The corrective action may be in the form of training and development.
As shown in Figure 13.1 corrective action may be necessary for any or all of the following – inputs
(employees), activities (job performance), and outputs (outcomes). In other words, corrective action is
directed towards changing employees’ knowledge and skills, as well as job performance, activities and
behaviours.
PERFORMANCE RATING METHODS

As performance is multi-dimensional, performance appraisal methods must also consider the various
aspects of a job. The most widely used approaches for appraisal focus on employee behaviour or on
performance results. Thus, performance rating can either be behaviour oriented or result-oriented. Result-
oriented appraisal implies the evaluation of an individual based on actual job performance. In other
words, the output generated (that is the number of units produced), or the services rendered are taken into
consideration in appraising the individual. Behaviour-oriented appraisal focuses on employee behaviour.
With behaviour-oriented appraisals, two important means of assessment are graphic rating scales and
behaviourally anchored rating scales.
Graphic rating scales are performance appraisal forms listing a numbers of factors, including general
behaviour and characteristics (such as regularity, quality of work, presentability, dependability, quantity
of work, and relationships with co-workers), on which an employee is rated by the supervisor. Individuals
are rated by supervisors on each of these factors that usually have about five gradations each. For example
the five gradations can be unsatisfactory, conditional, satisfactory, above satisfactory and outstanding.
Figure 13.2 shows some common graphic rating scale formats.
a. Quality
High Low
High Low
b. Quality
5 4 3 2 1
c. Quality
Exceptionally Work usually Quality is Work contains Work is

high-quality done in a average for frequent flaws seldom
work superior way this job satisfactory
d. Quality
Too many About Occasional Almost never
errors average errors makes mistakes
e. Quality 5 4 3 2 1
Performance grade
f. Performance
factors Consistently Sometimes Consistently Consistently
superior superior average unsatisfactory
QUALITY:
Accuracy
Economy
Neatness
g. Quality
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Poor Below Average Above Excellent

average average
h. Quality 15 13 11 9 7 5 3 1
work
Rejects and errors: Work usually OK: Work passable: needs Frequent errors and
consistently rare errors seldom made to be checked often scrap: careless
Judge the amount of scrap, consider the general care and accuracy of
I. Quality of work work, also consider inspection record Poor 1-6: Average 7-18: Good
19-25: Excellent 26 and above
Fig. 13.2 Graphic Rating Scale Formats
The flexibility and the generality of the rating factors makes it possible to evaluate employees in a
number of different jobs. At the same time the general nature of the graphic rating scales makes it
susceptible to inconsistent or inaccurate rating of employees. Hence when applying these to a particular
job, managers have to make considerable interpretations of the factors in the specific jobs that are to be
appraised. For example quality can mean different things in different jobs. In other words, the meaning
of a performance criterion must be carefully spelled out for the appraiser. For instance, in Figure 13.2,
scales (a), (b), (e), and (g) give the rater little help in defining the criterion. Scales (c) and (h) help the
rater to clearly define each performance criterion.
Behaviourally Anchored Rating Scales (BARS)

In order to reduce subjective interpretation inherent in graphic rating scales, performance appraisal
experts have developed Behaviourally Anchored Rating Scales (BARS). BARS is a sophisticated and useful
rating method. BARS contain sets of specific behaviours that represent gradations of performance used as
common reference.
Engineering Competence
(the technical ability and skill utilization
as applied to any assigned job)
Place a single X on the appropriate point
on the vertical scale.
(Ratee’s name)
Highest performance 2.00 This engineer is recongnized as

an expert and can be expected
Always displays an
to help others and to provide
understanding of difficult
advice and counsel to others
engineering problems
working on the team.
1.75
This engineer can be expected to
1.50 know almost everything about
the job and can provide answers
to some of the difficult
problems
1.25
This engineer can be expected to

1.00 work deligently on normal
Average performance projects and to contribute
Displays an understanding of
positively to completing these
engineering job requirements when
tasks on time.
doing normal
0.75 This engineer can be expected to

work late on projects and to make
every effort to complete projects
Lowest performance This engineer has difficulty in

0.50 working on non-routine projects
Is interested only in routine jobs that
and on many normal projects.
require minimum engineering skills.
0.25
This engineer is confused and

0.00 can be expected to hinder the
completion of projects because of
a lack of engineering knowledge.
Fig. 13.3 Behaviourally Anchored Rating Scale
Source: John M. Ivancevich, James H. Donnelly, Jr. and James L. Gibson, Management – Principles and Functions
(Delhi: All India Traveller Bookseller, Fourth edition, 1996) 539
Points (or anchors) for rating employees on various job dimensions. Supervisors first identify relevant
performance dimensions and then generate anchors – specific, observable behaviours typical of each
performance level. Anchors are also called critical-incident statements. They are used as criteria to
discriminate among differing levels of performance.
The form for a BARS usually covers 6 to 10 specifically defined job behaviours, each uniquely
described. An example of BARS for engineering competence is presented in Figure 13.3. The criterion is
defined for the appraiser; the descriptions defining the particular response categories are easy to interpret.
Moreover, the feedback provided by the BARS is specific and meaningful. For instance, if the appraisee
is given a 1.50 on a particular criterion, the individual is provided information on the specific behaviour
that the rater has evaluated. BARS has a number of advantages. It acts as a tool for providing valuable
insight into developing training programmes. With the help of this training, employees can learn expected
behaviour and they become knowledgeable about how their job is being evaluated. Also the evaluation
programme concentrates on job-relevant and job-specific behaviours. An additional advantage of BARS
is that in the process of appraisal, both superiors and subordinates can equally contribute to the development
of evaluation criteria and the critical incidents that are used to define each level of performance.
BARS are time-consuming and costly to develop as they have to cover each and every dimension of
all the jobs in the department. As a result, BARS tend to be used mainly in situations in which a relatively
large number of individuals perform similar jobs. Despite the time, expense and procedural problems of
developing and implementing BARS, this system has numerous advantages. BARS minimizes subordinate
or superior defensiveness toward evaluation. Through direct involvement in the development of BARS,
subordinates understand the method and manner whereby they are appraised. The development of BARS
could include both, superior and subordinate. Thus, all the parties involved can contribute to the development
of the evaluation criterion.
BARS usually concentrates on job-specific and job-relevant behaviours. Generally, most performance
appraisal programmes are abstract and not meaningful to either party involved in the process. In such
traditional appraisals when providing feedback to subordinates, supervisors must convert the ratings to
examples of actual job behaviour. In many cases, there are variances in supervisors’ abilities to make these
conversions from the rating scale to meaningful job behaviours. With the help of BARS, a supervisor can
identify meaningful job behaviours that can be used in the process of interviewing an employee during
appraisal. Using BARS provides valuable insights that can help develop training programmes. After identifying
the formal and informal appraisals, the next step is identifying the criteria for appraising managers.
CRITERIA FOR APPRAISING MANAGERS

Given consistent and integrated planning designed to reach specific objectives, the best criteria of
judging managerial performance relate to the ability to set goals, to plan programmes that would help in
accomplishing those goals, and to succeed in achieving them. The system of measuring performance
against verifiable goals should also be supplemented by the appraisal of a manager as a manager.
Managers at different levels in the organization undertake non-managerial duties that cannot be overlooked.
All these factors have to be taken into account in manager appraisal. Managers should be appraised on
the basis of how well they understand and undertake managerial functions.
Appraising Managers Against Verifiable Objectives

A widely used approach to managerial appraisal is to evaluate their performance in setting and
accomplishing verifiable objectives. In order to effectively manage and accomplish tasks, it is necessary
that employees be given realistic and attainable targets. This is necessary since individuals taking up
certain targets should know what the outcome of their efforts should be.
The Appraisal Process

The appraisal process can be made easier by setting verifiable objectives. In some organizations,
appraisal through results fails. The main reason may be that management by objectives is mainly seen as
an appraisal technique rather than as a key to planning, organizing, staffing, leading and controlling. In
such cases where results oriented appraisal fails, managers have to verify whether the objectives set by
them are practically verifiable and actually attainable. They must then assess how employees have performed
in relation to these unrealistic objectives.
When assessing the accomplishment of goals, it is important that managers take into account whether
the goals were realistic enough to attain and the factors that led to the accomplishment of the task or else
if the task is not accomplished, the reasons that hindered the accomplishment of the task. The evaluation
should also include whether the individual continued to work with the same obsolete goals in spite of the
changing situations.
A model of performance appraisal is shown in Figure 13.4. It indicates three types of appraisals: (1)
a comprehensive review, (2) progressive or periodic reviews, and (3) continuous monitoring.
Performance of
the employee
To improve
To bring
about change
in Corrective Undesirable Outputs
Inputs Action
Motivates
employee Desirable
Rewards
Fig. 13.4 The Appraisal Process

A formal comprehensive appraisal is usually conducted once a year, while in some enterprises, all the
reviews are conducted within a brief period of time every year, others schedule the appraisals in such a
way that they are spread out over a longer period of time or through the year. It is unlikely that any
suggestion made about a common time frame for the formal comprehensive review will be universally
acceptable to all organizations. The time frame for conducting the formal comprehensive review depends
on the nature of the task, past company practices, and other situational factors. It is important that formal
comprehensive reviews are supplemented by frequent progressive or periodic reviews. Periodic reviews can
be short and relatively informal. They help to identify the problems or barriers that hinder effective
performance, and facilitate a smooth flow of communication between the superior and his/her subordinates.
Moreover, it is possible that changed situations may warrant the rearrangement of priorities and renegotiation
of objectives. Finally, there is continuous monitoring of performance. When performance is monitored
continuously, one does not have to wait for the next periodic review to correct deviations of performance
from plans. The supervisor can immediately discuss the problem with the subordinates and this allows for
corrective action to be taken immediately. Thus a small deviation can be prevented from developing into
a major problem.
Strengths of Appraisal Against Verifiable Objectives

A lot of similarity occurs between the process of appraising an individual on the basis of accomplishment
of objectives and the process of management by objectives. Both these processes are important for
effective management and improving the skills of employees. Appraisal against verifiable objectives has
several strengths. The appraisal is operational in nature. It does not form a separate component different
from the job but is a review of what they actually did as managers. In any appraisal, there is always a
question regarding the performance of an individual in terms of attainment of goals. Is the individual
working in accordance with the goals? What is the performance expected from the individual? Is the
individual able to achieve the goals as per the verifiable objectives? Another advantage to be gained is
that you gain credibility since the appraisal is based on objectivity rather than mere judgment. This type
of appraisal can be carried out with the mutual cooperation of the superiors and the subordinates rather
than the superiors framing judgments about the subordinates.
Weaknesses of Appraisal Against Verifiable Objectives

There are certain inherent weaknesses in the implementation of MBO. The same applies to appraisal
against verifiable objectives. Luck plays an important role in the performance of an individual. It may so
happen that sometimes employees may miss or may not meet goals due to no fault of theirs. For example,
a product may find acceptance in the market because of its high demand, in spite of a poor marketing
campaign by the marketing manager. Going by the sales performance, the marketing manager will be
rewarded. Sometimes it is also possible that sudden cancellations in orders can bring down the profits and
this can show up the poor performance of a particular unit.
Though evaluators insist that uncontrollable factors are taken into consideration, in reality it is rarely
done, as it is extremely difficult. For example, in the above-mentioned case of outstanding sales, the
performance due to luck and due to competence is difficult to measure. In such a system, it is difficult to
measure the performance of non-performers. Since this method lays more emphasis on operating objectives,
it may overlook the need for individual development. This method does not take into consideration the
managerial abilities of an individual and concentrates only on the individual’s operating performance.
Hence, it is important to have an appraisal system that not only appraises the performance of an employee
as a manager but also his performance in relation to setting and meeting organizational goals.
Appraising Managers as Managers

When appraising managers it is important to have certain set standards. The fundamentals of
management can provide appropriate standards for appraising managers. It is also imperative that the
appraisal in order to be effective, should move beyond evaluating the basic functions of the manager. The
fundamentals of management provide benchmarks to evaluate how employees understand, assess and
follow the functions of managing. For instance, in the area of planning, a manager’s rating would be
determined through questions such as the following.
Does the manager
set both short-term and long-term goals (in verifiable terms) for the departmental unit?
check plans periodically to see if they are consistent with current changing expectations?
while selecting an alternative, recognize and give primary attention to those factors that are critical
to the solution of a problem?
In the area of organizing, ratings are determined through the following questions. Does the manager
regularly ensure that subordinates understand the nature of line and staff relationships?
delegate authority to subordinates on the basis of the performance expected of them?
avoid making decisions in that area once authority has been delegated to subordinates?
In the three other areas of managing, that is – staffing, leading, and controlling – similar questions
are asked by evaluators. Managers are rated on how well they perform the activities. The scale used is
from 0 to 5 ranging from inadequate to superior. Each rating is well defined. For instance, “superior”
would mean “a standard of performance which cannot be further improved under any circumstances or
conditions known to the rater.”
In order to reduce subjectivity and to increase discrimination among performance levels, the ratings
must also be reviewed by the superior’s superior. Moreover, the raters must be informed that their own
evaluation will depend on how fairly they evaluate their subordinates’ performance. This can be ascertained
by the objectivity and specificity of the questions.
Advantages of Appraising Managers as Managers

This method has been found useful as it uses the fundamental principles of management theory. By
doing so it gives operational meaning to what management really means. Communication difficulties can
be avoided by using a standard reference text to interpret the concepts and terms of management theory.
Thereby, most of the management terms used such as delegation, variable budgets, etc. can have a
consistent meaning. Also the usage of management techniques can be uniform.
This approach has also been found to be useful in drawing the attention of the manager to certain
basic principles that may have been disregarded. Further, it identifies both areas of weaknesses and the
strengths of the organization. It acts as a tool to assess the manager’s performance in setting and achieving
goals.
Exhibit 13.3 Appraisals through ADCs
A new kind of appraisal is fast gaining prominence in corporate India. Companies are forced to respond to
the career growth demands of its pool of young employees. Today, young executives in companies dream
not just of attaining incremental growth in their career but also of entering into managerial positions in the
organization. To unlock these dreams of their employees, companies are turning to a human resource tool
called the Assessment Development Centres (ADCs). Major companies like the Birla Group, Ballarpur Industries,
Telco, RPG, and HLL are using this tool. This is not just another tool for appraisal. It is a specialized tool
that pinpoints the best capabilities in employees. Even sophisticated appraisal methods like the 360 degree
performance appraisal are unable to do this. This method comprises the appraisal of an employee by a high
powered panel, the members of which are senior persons from within the organization. However, to ensure
objective evaluation the panel members do not even know the employees they are appraising. The employees
are judged purely on the basis of merit and aptitude. ADCs identify and develop skills of employees. In Telco,
which has about 34,500 employees, the ADC panel comprises six people – the chief of corporate human
resources (HR), chief of regional HR and chiefs of the various plants involved. ADCs identify and develop skills
present in the employees of an organization. Through the process of ADC, junior managerial talent (below
30 years) is recognized and nurtured to take up higher managerial responsibilities. In Telco, around 180-200
junior managers apply to the ADCs every year. After a round of elimination tests, 25-30 candidates are
shortlisted and seven or eight of them possessing the requisite merit and talent are selected for higher training
to occupy responsible positions. These ADCs have helped Telco to identify outstanding junior employees who
can widen the range of their responsibilities. This would not have been possible with a normal performance
appraisal system. The RPG group instituted the ADC to identify the potential managerial talent present within
the organization. AV Birla Group used this tool to identify successors to senior managers on the verge of
retirement. In the case of HLL, development of the ADC is part of its Project Millennium, which involves the
division the company into smaller profit centres and the empowerment of promising junior employees to take
on greater responsibilities. Another reason for companies to establish ADCs is to identify internal employees
having the potential to carry the business forward. For example, the selection of candidates for the middle
management levels at Bilt involves putting all the 125 junior managers through a selection test from which
24 would be selected. Of this number, three candidates would be finally selected who would be groomed to
take up middle level managerial positions. In comparison, the A.V. Birla and RPG groups have not adopted
such stringent measures in their ADCs. The ADCs in these companies involve an intensive three-day programme
where panelists or assessors and the assessees jointly participate in a series of events which include fact-
finding, presentations, role plays, analyses, group tests and in-basket tests. The true test of an effective ADC
takes place when it also bears heavy training costs for implementing development programmes for the
successful candidates. For this purpose, Bilt has tied up with the Indian Institute of Management (Ahmedabad)
and the London-based Centre for Creative Learning in order to meet its junior managers’ training needs. It
also plans to send its middle managers to INSEAD in France, the Harvard Business School, Asian Institute
of Management, Manila, and a few premier Indian institutes in order to train them to take up senior posts.
At Telco, each successful assessee has to move through four functions, different from what he/she has
performed earlier for three months each. Since assessors also need to be trained, help from external
organizations is also solicited for this purpose. At Telco, senior HR managers have to first attend training
seminars before they train panel members. Thus, before a company starts its appraisal process, it must first
identify and decide about the skills and competencies it seeks in its employees.
Adapted from Pallavi Bhattacharjee, ‘Catching them young,’ Business World, 31 May 1999.
Weaknesses of Appraising Managers as Managers

One of the shortcomings of this approach is that it is applicable only to the managerial aspects of
a given position and not to such technical qualifications as marketing or engineering abilities that might
also be equally important and need to be assessed. The innumerable checkpoints also add to the complexity
of the process. Rating all of them takes quite a lot of time. Another major shortcoming is the subjectivity
factor involved. However, since the checkpoints are specific and pertain to the fundamental management
theory, this approach is far more objective than the appraisal of managers only on the broader areas of
the managerial functions.
FORMULATING CAREER STRATEGY

During the entire process of performance appraisal, it is important to identify the strengths and
weaknesses of an individual. This identification is the first step in formulating a career plan. A career
strategy should be so designed that it helps an individual to utilize his strengths to the maximum extent
and overcome weaknesses. Exhibit 13.3 explains how companies are adopting new methods of appraising
employees. These appraisals help employees achieve their career growth as well. Figure 13.5 depicts the
steps in formulating a career strategy. They are briefly explained as follows:
Preparation of a Personal Profile

The first step in formulating a career strategy is the preparation of a personal profile. This is a difficult
task which requires an insight into oneself. Managers should take up introspection in order to assess
whether they are introverts or extroverts, their attitude towards performance of tasks, money and the like.
Answering such questions and having an understanding and clarification of their values will help determine
the direction of their professional career.
Development of Long-range Personal and Professional Goals

Developing long-range personal and professional goals is important for career planning. Managers
usually resist such goal-setting because uncertainties in the environment can hinder the achievement of the
set goals and further, non-achievement of these goals can result in estimable harm to one’s ego.
Individual resistance to setting goals can be avoided by the careful planning of career goals based on
performance goals. Secondly, goals should be made flexible according to the changing circumstances in
the environment. Resistance can also be overcome by integrating short-term and long-term goals. The next
problem that arises with regard to setting goals is the time factor. The question is how far in advance
should one plan one’s goals. Depending on the nature of career goals and the circumstances, the time
frame for planning will differ. For instance, the time frame for becoming a pilot is shorter than for becoming
a professor.
Analysis of Environment Threats and Opportunities

It is necessary to analyze the dangers and opportunities that are internal and external to the organization.
These include economic, social, technological and demographic factors. Apart from these, the labour
market, business competition and other factors also have an impact on a particular situation and the
establishment of career goals. For instance, if an individual plans to expand the scope of his career, then
he might want to join a firm that creates new products and processes rather than work for a firm that is
already established in the market and is not expected to grow.
It is also important to be concerned not only about the present but also about the future environment.
This requires forecasting
Analysis of Personal Strengths and Weaknesses

A career plan can be successful, if the opportunities and threats are matched with the strengths and
weaknesses of the individuals. Individual capabilities may be categorized as technical, human, conceptual,
or design oriented.
The relative importance of these skills differs for various positions in the organizational hierarchy. For
instance, technical skills are very important at the supervisory level, conceptual skills are crucial for top
managers, and human skills are important at all levels.
Development of Strategic Career Alternatives

Once personal strengths and weaknesses are analyzed, the next step would be to develop strategic
career alternatives. There are a number of methods to develop successful strategic career alternatives.
Firstly, one has to take advantage of one’s opportunities and build strategies based on them. To illustrate,
if there is a vacancy for a computer programmer and if an individual has the necessary knowledge of
programming then he must take advantage of the opportunity available in order to build opportunities for
a satisfying career. But if the person is not well versed with programming, then he has to overcome this
weakness and develop appropriate skills. Also, one has to recognize the threats in the environment and
frame strategies to counter these threats.
Prepare personal profile
Develop long range personal &

professional goals
Conduct a SWOT analysis
Develop strategic career

alternatives
Test for consistency and make

strategic choices
Develop short-range career

objectives and action plans
Develop contingency plans
Implement the career plan
Fig. 13.5 Steps in Formulating a Career Strategy

Consistency Testing and Strategic Choices

The most obvious rational choice based on strengths and opportunities is not always the most fulfilling
alternative in developing a career strategy. Though a person may have certain skills that are in demand
in the job market, a career in that field may not be congruent with personal values or interests. Taking
the above example though a person has good programming skills, his interest may be more in dealing with
people.
Hence strategic choices require trade-offs. They require rational and systematic analysis of an individual
in analyzing his personal preferences, ambitions and values. All the above factors highlight the importance
of concentrating on those factors that are critical for personal success.
Development of Short-range Career Objectives and Action Plans

Career strategy has to be supported by short-term objectives and action plans too. For instance, if an
individual aspires to become a systems analyst, his short-term objective may be to pursue a relevant
computer course.
Development of Contingency Plans

As the future cannot be predicted with absolute accuracy, career plans are developed in an environment
of uncertainty. Thus, it becomes imperative to develop contingency plans based on alternate assumptions.
For example although a person may be working as a programmer, it is essential that he also has an
alternate career plan on the assumption that the company may not run successfully for long.
Implementation of a Career Plan

Once contingency plans are developed, the next step would be to implement the career plan. Career
planning starts during performance appraisal and it is the right time to discuss an individual’s personal
growth and development. At this stage, personal goals and ambitions can be considered in designing
training and development programmes.
Monitoring Progress
Progress toward career goals must be monitored and necessary corrections in the aims or plans must
be made. Performance appraisal is the right time to assess career programmes. During performance
appraisal not only performance against objectives in the operating areas is reviewed but also the achievement
of milestones in the career plan. Apart from this progress has to be monitored as and when a task or
project is completed.
SUMMARY
Performance appraisal is the process of evaluation of individual job performance in order to make
objective human resource decisions. It involves the formal evaluation of an employee’s job performance,
feedback to the individual and determination of whether and how the performance can be improved. The
process of performance appraisal occurs both formally and informally. An informal appraisal is where the
manager mentions that a particular job was performed well or poorly during the performance of the job
or immediately after the job is performed. It is conducted on a day-to-day basis. Formal appraisal occurs
annually or semi-annually on a systematic basis. It has four major purposes: (1) to let employees know
how their present performance is being formally rated, (2) to identify those employees who deserve merit
raises, (3) to identify those employees who require additional training, and (4) to identify candidates for
promotion. There are four basic approaches to formal appraisal: (1) a superior’s rating of subordinates,
(2) a group of superiors rating subordinates, (3) a group of peers rating a colleague, and (4) subordinates’
rating of bosses.
A performance appraisal system has the characteristics of all feedback control methods. Through this
system, managers can obtain information related to employees, their job performance and the job outcomes.
The effectiveness of a performance appraisal depends on the quality of the control techniques used such
as establishing standards, information, and corrective action. As performance is multidimensional,
performance appraisal methods must consider the various aspects of a job. Performance rating can either
be behaviour-oriented or result-oriented. Within the behaviour-oriented category, two important assessment
means are graphic rating scales and behaviourally anchored rating scales.
The appraisal should measure both, the manager’s performance in accomplishing goals and plans as
well as his performance as a manager. The system of measuring performance against verifiable goals
should be supplemented by the appraisal of a manager as a manager. Performance appraisal requires the
identification of the strengths and the weaknesses of an individual. This identification process proves to
be the starting point of a career plan. The formulation of a career strategy involves several steps. These
include preparation of a personal profile, development of long-range personal and professional goals,
analysis of the environmental threats and opportunities, identification of personal strengths and weaknesses,
development of strategic career alternatives, consistency testing and strategic choice, development of short-
range career objectives and action plans, development of contingency plans, implementation of career
plans and monitoring of progress.
Dream Projects Incorporated

G.R. Bhat was the Managing Director (MD) of Dream Projects, a multidivisional company
in the high-technology field. The large company was well-known for its technical innovations
CASE STUDY
and the high calibre of its scientists and engineers. But competition was on the increase, and
the MD realized that the success of the firm depended on effective management. It was felt
that planning was one of the very weak areas where improvement was needed. Therefore, the
MD invited Kamalan, a management consultant, to “look at his company” and to explore
alternative ways of improving the organization. At the first meeting considerable trust developed
between Bhat and Kamalan and in the course of the discussion it was agreed that any major
organization intervention should be based on facts (that is, on data collected from the
organization itself). Kamalan began by interviewing three major department heads—Ms Madhav,
Mr Aravindan and Mr Suresh—to get an overview of the firm and the quality of its managers.
The MD agreed, tentatively, to a long-range systematic organizational development effort.
However, the immediate problem was making some selections for key managerial positions.
Managers have to be well versed in all managerial functions, but at this point it was felt
that aspects of planning were, particularly important. With the guidance of the consultant,
Bhat assessed the planning activities of three managers considered for the positions of (1)
head of the corporate planning group and (2) division manager. He found useful the appraisal
approach developed by Harold Koontz and described in the text.
The instructions for rating the candidates for the positions were as follows: In rating each
question, give the following marks for each (for each level of rating use only one of two
numbers, such as 4.0 or 4.5 for Excellent; use no other decimals). The possible marks were:
X= Not applicable to position

N = Do not know accurately enough for rating
5.0 = Superior: A standard of performance which could not be improved upon under any
circumstances or conditions known to the rater
4.0 or 4.5 = Excellent: A standard of performance which leaves little or any consequence
to be desired
3.0 or 3.5 = Good: A standard of performance above the average and meeting all normal
requirements of the position
2.0 or 2.5 = Average: A standard of performance regarded as average for the position
involved and the people available
1.0 or 1.5 = Fair: A standard of performance which is below the normal requirements of
the position, but one that may be regarded as marginally or temporarily acceptable
0.0 = Inadequate: A standard of performance regarded as unacceptable for the position
involved
The results of the evaluations are shown in the following table.
To gain greater confidence in his judgment, Bhat asked two of his general managers to
rate the three candidates.
Their evaluations were consistent with the president’s appraisal.
Assume that all three candidates have similar technical and managerial skills besides those
shown in the table and that their performance results are similar.
1. Whom would you select as a head of the corporate planning staff? Why?
2. Whom would you choose as manager of the division?
3. What other factors would you consider in making the selection?
4. What training and development would you recommend for each of the managers?
][][
Organizational
14
Development
Organization
Change and
H Organizational Change
H Planned Change Through Organization
Development
H Organizational Development Process
H Approaches to Manager Development
H Organizational Conflict
Chapter 14 Organizational Change and Organization Development 297
INTRODUCTION
Present day organizations face a dynamic and changing business environment. They must realize that
change is an inherent aspect of management and that to survive they need to adapt to these changes. The
reasons for these changes are varied, ranging from having a multicultural workforce to technological trends
that have an impact on the functioning of the organization. Further, the sophistication of information
technology and the globalization of organizations has brought new challenges and led to the development
of new products. Successful organizations will be those that face these challenges and develop a workforce
that will be able to tackle the competitive business environment. To survive in such an environment,
organizations must, among other things, train and develop managers so that they are able to cope with
new demands, new problems and new challenges.
This chapter focuses on organizational change – its cause and its process. It also considers why
people and organizations often resist change and examines methods for overcoming this resistance. The
chapter also discusses the process of organization development and the different approaches to manager
development. The chapter concludes with a discussion on organizational conflict.
ORGANIZATIONAL CHANGE
The fierce domestic and foreign competition during the past few decades has led to the fast changes
in organizations. Organizations make minor structural adjustments in reaction to changes in the environment.
What distinguishes planned change from routine change is its scope and magnitude. Planned change
reflects a change in goals or operating philosophy and involves implementation of a new policy. It aims
to prepare the entire organization, or a major part of it, to adopt significant changes in the organization’s
goals and direction. It generally has two major goals: (1) improve the ability of the organization to adapt
to changes in its environment, (2) change employee behaviour.
Factors that Lead to Organizational Change

Several factors lead to organizational change. Some of them are discussed below:
Nature of the workforce

Globalization has led to the creation of multicultural work environment with culturally diverse employees.
Organizations therefore have to form policies and programmes that will help them to manage the diverse
workforce effectively. Training and developmental activities should also be designed to deal with and meet
the needs of a diverse workforce.
Technology
Technology has had a tremendous impact on jobs and the organization as a whole. To survive in the
competitive business world, organizations are adopting sophisticated information technology. The
replacement of direct supervision by computer control, for instance, is resulting in wider spans of control
for managers and flatter organization structures. Individuals doing narrow, routine and specialized jobs are
being replaced by work teams whose members can perform multiple tasks and actively participate in team
decisions.
Economic factors
Economic factors like interest rate fluctuations and foreign currency fluctuations cause organizational
change. A downturn in the economy can affect an industry and its workforce. For instance, when interest
rates rise, the market for new-home loans and refinancing declines. And for many mortgage brokerage
firms, revenues decline and layoffs ensue.
Competition
This is another important factor that can cause organizational change. Increasing competition pressures
established organizations to defend themselves against both traditional competitors who develop new
products and services and small entrepreneurial firms with innovative offerings. Only those organizations
that can change in response to the competition will succeed.
Sources of Resistance to Change

The greatest challenge for an organization adapting to these changes is managing employee resistance,
which can be implicit or deferred. Implicit resistance can be in the form of loss of loyalty, loss of motivation
to work and increased errors or mistakes. These are difficult to recognize and tackling such resistance is
a challenging task for the organization. This resistance can hinder the progress of the organization if it does
not deal with it in the early stages. Resistance to organizational change may produce minimal reaction at
the time it is initiated in the case of deferred resistance, but the resistance surfaces weeks or even months
later. The main reasons for resistance to change are both individual and organizational.
Individual resistance
Individual resistance arises due to differing perceptions, personalities and needs. Some of the reasons
for an individual’s resistance to change are discussed below.
Habit
Individuals generally feel comfortable in the environment that they are habituated to. When confronted
with change, the thought of moving away from the environment they are accustomed to becomes a source
of resistance.
Security
Safety and security are high priorities for any individual. When employees feel that the security of
their job is threatened by change, they resist it.
Economic factors
In organizations where pay is tied to productivity, individuals usually resist change as they fear that
they will not be able to perform new tasks effectively, thus causing a decline in productivity and a decrease
in their income. Usually employees resist the deployment of technological tools as they feel that they will
not be able to learn how to use them thus causing a fall in performance and thereby income.
Fear of the unknown

The introduction of new concepts or techniques in the workplace can result in resistance from
employees. The introduction of computers in an organization means that employees will have to learn
certain packages to work efficiently. This may not be liked by some employees, and they may develop a
negative attitude towards computers and resist them.
Selective information processing

Perceptions play an important role in shaping one’s world. The information that individuals process
becomes selective as it is according to their perceptions. So, information that is within their perceptions
is accepted and the rest rejected. For instance, employees who dislike the introduction of computers may
ignore the arguments put forward by their superior regarding the importance of learning how to use
computers and the potential benefits that it will bring them.
Organizational resistance
Organizations are conservative by their very nature. They actively resist change. Six major sources
of organizational resistance are outlined here.
Structural inertia
Organizations usually develop structures and processes that help them in achieving their goals. On
the basis of these processes, recruitment, training and development take place in organizations. Organizations
get accustomed to these processes and consequently are unwilling to make any changes.
Limited focus of change

Systems and processes in organizations are interdependent. So, change in one system will definitely
have an impact on other systems. Hence, change in organizations does not have a limited focus. For
example, changes in technological processes also result in changes in organization structure (if the
technological change has to be successful).
Group inertia
The group plays an important role in influencing an individual to resist change. Even though an
individual is willing to accept the change, the norms of the group act as a constraint. Unions in organizations
follow certain norms, and may resist changes made by the management if these changes oppose the norms
followed by the union.
Threat to expertise
Sometimes the introduction of certain changes can reduce the expertise of certain specialized
departments. In the 1980s, the introduction of decentralized personal computers which helped users gain
access to information directly from mainframe computers were regarded as a threat to the specialized skills
of employees working in the centralized information systems departments.
Threat to established power relationships

Changes in the business environment often result in changes in the structure and functioning of teams.
This can alter the distribution of authority and long term power relationships. The present trend of self-
managed teams and the participative decision-making is often seen as a threat by supervisors and middle
level managers. Consequently they oppose such changes.
Threat to established resource allocation

Groups that control sizable resources in the organization often see change as a threat. They tend to
be content with the way things are.
Measures to Overcome Resistance to Change

There are six ways in which managers can overcome the initial resistance to change. These alternatives,
the situations in which they are commonly used, and the advantages and disadvantages of each, are
discussed in brief in this section.
Education and communication

One strategy for overcoming resistance to change is education and communication. This involves
explaining the need for and the logic of change to individuals. In other words, it involves providing
adequate information and making sure that the change is communicated clearly to those it will affect. This
strategy basically assumes that the source of resistance lies in misinformation or poor communication, and
that if employees are made aware of all the facts and if misunderstandings are cleared up, resistance will
subside. Communication can be achieved through face-to-face discussions, formal group presentations, or
special reports or publications.
This method is commonly used when there is lack of information or inaccurate information and
analysis about a change. Using this method to overcome resistance to change can be advantageous
because, once persuaded, people will often help implement the change. However, this method can be very
time-consuming, if many people are involved.
Participation and involvement

Resistance tends to be less pronounced when the individuals who will be affected by a change are
allowed to participate in planning and implementing it. Personal involvement through participation tends
to defuse both rational and irrational fears about a change. This strategy is used when the initiators do
not have all the information they need to design the change, and others have considerable power to resist.
Exhibit 14.1 explains how adaptability and involvement play a key role in adjusting to change.
Facilitation and support

The use of facilitation and support is another way to overcome resistance. When fear and anxiety are
responsible for resistance to doing things in a new and different way, encouragement and support from
the management in the form of special training, job stress counselling, and compensatory time off can be
helpful. This method is used when people are resisting change because of adjustment problems. No other
approach works as well with adjustment problems as this. The drawback of this method is that, as with
the others, it is time-consuming. Moreover, it is expensive and its implementation offers no assurance of
success.
Negotiation and agreement

Negotiation can be a particularly important strategy when one group perceives that it will be hurt by
the change and is in a position to cause the change effort to fail. In this method, management neutralizes
potential or actual resistance by offering something of value in exchange for cooperation. For instance, a
clerical employee who is paid on an hourly basis may be put on a regular salary in return for learning how
to operate a new computerized workstation. This method is a relatively easy way to avoid major resistance
to change. Yet one cannot ignore the high costs it often entails. Additionally, there is the risk that, once
management negotiates with one group to avoid resistance, it is open to the possibility of being threatened
by other individuals seeking some advantage.
Manipulation and co-optation

Manipulation refers to covert attempts to influence change. It usually involves selectively providing
information about a change so that it appears more attractive or necessary to potential resisters. The
selective use of information misrepresents the potential negative aspects of a change thus raising ethical
issues. In co-optation, a leader or an influential person among the potential resisters is given a seemingly
desirable role in the change process in order to gain the leader’s cooperation. It is a form of both
manipulation and participation as it seeks to “buy off” the leaders of a group resisting change by giving
them a key role in the change decision. The leader’s advice is sought, not to arrive at a better decision,
but to gain his/her endorsement of the change.
These methods are adopted when other methods do not work or are too expensive. Both manipulation
and co-optation are relatively inexpensive and easy ways to gain the support of adversaries. The danger
with manipulation and co-optation is that this strategy can backfire if the individual recognizes what is
being done and feels manipulated.
Exhibit 14.1 Adaptability: The mantra for organizational survival
For present day organizations, adaptability is essential for survival. Organizations should change in response
to external influences, just as an amoeba changes its shape and direction on the basis of external influences.
Companies that have been around for years are those that are sensitive to the external environment and know-
how to adapt and evolve to fit ever-changing conditions. How can companies become more adaptable to cope
with changes in the environment? This question becomes more important as the lifespan of the products
becomes shorter and technological advances become faster.
Adaptable companies act very differently from rigid, command and control organizations. Business in adaptable
organizations is not conducted in the old fashioned way where there is rigid functional division and top-down
decision-making. Instead, in adaptable organizations
Employees are given more freedom in decision-making
Management sets broad goals and objectives. By setting broad goals and objectives, as opposed to
determining specific tasks, executives allow employees to respond to an opportunity in a way that makes
the best sense at that time.
Executives regularly conduct scenario planning. Adaptable companies integrate scenario planning into
their management practices.
Managers create accountability around projects, not positions. Today, employees are more likely to be
working in groups to complete projects than working alone to complete individual tasks. For this reason,
employees should be held accountable for the projects they take on, rather than the tasks they were hired
to complete.
Organizational learning is ongoing. A fundamental characteristic of all adaptive organizations is their ability
to constantly receive feedback from their environment. They use sound intelligence-gathering processes
to anticipate the moves their competitors will make.
Clearly, to become more adaptable to ever-changing market conditions, companies must rethink how they
set goals, organize work and manage employees. In addition, all functional units within a company, including
the finance function, must change the way they operate. In the financial processes,
Opportunities are evaluated from multiple perspectives. Instead of relying on one stable way of evaluating
financial data, companies need flexible financial systems that allow them to aggregate along different
axes.
Adaptable companies understand that costs and revenues must be assignable to all the dimensions so
that the potential for profitability can be identified.
Develop more open accounting systems by giving more people access to financial information.
Track different metrics that will give managers a better sense of what the future holds. The metrics may
include such things as measures of customer satisfaction; the amount of business customers do; the
average length of time a customer stays with the company; and the percentage of revenue from products
that didn’t exist two or three years ago.
Adapted from Shari Caudron, “The Amoeba Corporation,” Business Finance (April 2000): p54,
<http://www.bfmag.com/archives/appfiles/Article.cfm?IssueID=324&ArticleID=13545>
Explicit and Implicit Coercion

Explicit and implicit coercion can also be used to overcome resistance to change. This strategy
involves making direct or indirect use of power to pressurize change resisters to conform. Managers who
cannot or will not invest the time required by other strategies can force employees to go along with a
change by threatening them with termination, transfer, loss of pay raises or promotions, and the like. This
method is speedy and can overcome any kind of resistance. However, coercion can create resentment and
may even escalate resistance.
Each of these strategies for overcoming resistance to change has advantages and drawbacks. Situational
appropriateness is the key to success. Exhibit 14.2 suggests some steps for managing resistance to change.
Exhibit 14.2 Tactics for Managing Resistance
The following are some of the tactics for managing resistance to change.
All the parties contributing to the change process should be involved, and they should be told the need
for change and the goals and objectives of the change process.
A written document should be prepared so that everyone involved in the change process has a clear idea
of the goals of the organization thereby reducing misunderstandings.
The individual needs of those who will be affected by the change should be addressed which will help in
building trust. · The change process should be designed in such a way that it is flexible enough to
accommodate exceptions.
The current change effort should be completed before beginning the next change effort.
Communication sessions should be held to allow employees to express their feelings towards and opinion of
the change process.
Open and honest communication should be encouraged for effective implementation of the change process.
Such communication will help build trust among the employees.
The change process should continually focus on the positive aspects of the change.
When there are oppositions to the change, managers should look for areas that are strongly being
opposed. Then the positive aspects of change in these areas should be clearly communicated to the
employees. The boundaries of the change effort should be clearly set out to avoid unrealistic fears about
future, unplanned changes.
Retraining and readjustment processes should be designed for employees affected by the change.
Adapted from www.smartbiz.com
Change Process
Change may be viewed as a process, since it usually involves several steps. Changes are not
instantaneous though the process may be relatively quick. The process of change may be studied for
individuals, groups and an organization. According to Kurt Lewin, organizations should follow three steps
to achieve acceptance of change: (1) unfreeze the status quo, (2) move, (3) refreeze the new change.
Lewin’s three-step model of the change process is shown in Figure 14.1.
MOVE REFREEZE
UNFREEZE
Shift to a different Revised behaviour
Change the behaviour of or performance
existing situation performance becomes the new
norm
Fig. 14.1 Lewin’s Three-Step Model of Change
Unfreezing
This involves making the need for change so obvious that the individual, group, or organization can
readily see and accept it. Figure 14.2 depicts the process of unfreezing the status quo. The status quo can
be regarded as a state of equilibrium. To move from this equilibrium, i.e. to overcome the pressures of
both individual resistance and group conformity, unfreezing is necessary. This can be achieved in one of
three ways. First, the driving forces, which direct behaviour away from the status quo, can be increased.
Second, the restraining forces, which hinder movement from the existing equilibrium, can be decreased.
The third alternative is to combine the first two approaches.
Moving
This is the second step in the change process and involves discovering and adopting new attitudes,
values and behaviours. A trained change agent leads individuals, groups, or the entire organization
through the process. During the process, the change agent fosters new values, attitudes and behaviour
through the process of identification and internalization. Members of the organization will identify with the
change agent’s values, attitudes and behaviour, and internalize them, once they perceive their positive
impact on performance. The change should be seen as desirable from the perspective of the people
undergoing the change.
Resistance to
Resistance to change
Level of perform ance change
Change
P2
P1
Forces for Forces for

change change
Tim e
Fig. 14.2 Lewin’s Three-Step Model
Source: “Dr. Robin Stanley Snell, “Organizational Change,” <www.ln.edu.hk/mgt/staff/robin/People/ChangeSlides.ppt>
Exhibit 14.3 Cultural Change at BBC
BBC is one of the premier broadcasting channels in the UK. It has won numerous industry awards and has
a secure income stream from the UK license fee till 2006. To keep pace with the latest developments in the
industry, it has launched more television channels and radio stations and Internet and interactive services.
The company planned to reach diverse audience. It planned to exploit the benefits of digital technology by
making the programmes more creative, original and thought provoking. This required a cultural change in the
organization. The preparation for the change included studies of major companies in the US. Through these
studies BBC learnt that companies that embraced change had very good internal communications. This
internal communication helped employees adapt to the change process. The main task for BBC was to create
such system of internal communication in the organization. Later, the company, in consultation with its
executive committee, identified the key principles for change. They included:
Creating a vision that is relevant to everyone.
Involving everyone in the change process. (So BBC encouraged its workforce to provide ideas and
suggestions for improvement. The executive committee planned to use these opinions to help improve the
organization.)
Improving internal communication.
Encouraging employees to actively participate in the change process. (The company created a small
team of 20 people dedicated to the change programme. Instead of using the services of consultants, they
employed their own people.)
Encouraging constructive criticism and allowing people to implement their suggestions so that they would
develop a sense of ownership towards the company.
Measuring the change process. (At BBC, change was measured through a monthly online survey and the
results were reported each quarter.)
The role of internal communications
Internal communications plays an important role in harmonizing change. The team involved in internal
communications works not only as strategic counsellors for the employees, but also as tactical coordinators.
The role of internal communications is multidimensional: helping employees in the change process, management
development and listening and keeping employees informed of the change process. Senior internal
communications practitioners work with divisional leaders and HR and OD professionals to tailor communication
for their divisions. To the average employee, internal communications is not highly visible. They only get to
see line managers embracing and leading change. Hence, efficient leading plays an important role in the
change process. Apart from internal communications, external communications also plays an important role.
BBC maintained good external communications by working closely with the press and public relations
colleagues. This was necessary since BBC was often an object of media attention.
Adapted from Russell Grossman and Pamela Smith, “Humanizing Cultural Change at the BBC,” Strategic
Communication Management, Vol. 7, Issue 1 (Dec. 2002/ Jan.2003): p28,4p.
Refreezing
In the refreezing stage, the new behaviour pattern is locked in by means of supporting or reinforcing
mechanism, so that it becomes the new norm. According to Lewin, the new behaviour pattern or level of
performance must become the accepted behaviour or level of performance. The new pattern has to replace
the former completely for successful change to take place. Unless this last step is taken, there is a very high
chance that the change will be short-lived and that employees will attempt to revert to the previous
equilibrium state. The objective of refreezing, then, is to stabilize the new situation by balancing the new
restraining and driving forces.
PLANNED CHANGE THROUGH ORGANIZATION DEVELOPMENT

Organization Development (OD) is a systematic, integrated, and planned approach to improving
enterprise effectiveness. OD can be defined as top-management’s supported, long-term effort to improve
an organization’s problem-solving and renewal process, through an effective and collaborative diagnosis
and management of organization culture. In other words, OD is a change effort that is planned, focused
on an entire organization or a large subsystem, aimed at enhancing organizational effectiveness, and
based on planned interventions made with the help of a change agent or third party who is well versed
in behavioural sciences. Exhibit 14.3 shows how BBC adopted a method of planned change.
OD relies on the use of interventions, which are change strategies developed and initiated with the
help of a change agent. The change agent, or consultant, is an individual who helps the organization
approach old problems in new or innovative ways.
Many of the approaches to planned change are appropriate for solving immediate and specific
problems. OD, in contrast, is a longer-term, more complex, more encompassing, and more costly approach
to change that aims to move the entire organization to a higher level of functioning while greatly improving
each individual member’s performance and satisfaction. Though OD frequently includes structural and
technological changes, its primary focus is on changing people and the nature and quality of their working
relationships.
The Objectives of OD
As OD programmes are framed keeping in view specific situations, they vary from one situation to
another. In other words, these programmes are tailored to meet the requirements of a particular situation.
But broadly speaking, all OD programmes try to achieve the following objectives:
1. Making individuals in the organization aware of the vision of the organization. OD helps in making
employees align with the vision of the organization.
2. Encouraging employees to solve problems instead of avoiding them.
3. Strengthening inter-personnel trust, cooperation, and communication for the successful achievement
of organizational goals.
4. Encourage every individual to participate in the process of planning, thus making them feel responsible
for the implementation of the plan.
5. Creating a work atmosphere in which employees are encouraged to work and participate
enthusiastically.
6. Replacing formal lines of authority with personal knowledge and skill.
7. Creating an environment of trust so that employees willingly accept change.
According to OD thinking, organization development provides managers with a vehicle for introducing
change systematically by applying a broad selection of management techniques. This, in turn, leads to
greater personal, group, and organizational effectiveness.
ORGANIZATIONAL DEVELOPMENT PROCESS

The Organizational Development (OD) process consists of three major steps: diagnosis, intervention
and evaluation (see Figure 14.3). These steps are similar with the planned change process discussed
earlier, since Organizational Development is actually a specialized type of change effort..
An OD process is most likely to be initiated when top management believes that there are deficiencies
in the way the overall organization is functioning.
Diagnosis Intervention Evaluation
Fig. 14.3 Organizational Development Process
Diagnosis
The Organizational Development process usually begins with a diagnosis of the current situation. The
diagnosis pays particular attention to the widely shared beliefs and values and norms of organization
members that may be interfering with the effectiveness of the organization. The change agents (and others
who are helping with the change process) gather the required data through multiple means: interviews,
questionnaires, internal documents, records and reports. Questionnaires are the most commonly used
diagnostic tools. They may be administered to a group of people, or they may be mailed individually. The
same questionnaire can be used again to monitor changes over a period of time. Companies such as IBM
and Ford Motor Company often conduct surveys to keep abreast of employee thinking on a variety of
issues.
Even interviews can be used to gather data. By using a carefully compiled list of specific questions
(requiring yes or no answers) and general, open-ended questions (requiring detailed explanations), a
skilled interviewer can discover a great deal about both individuals and the organization as a whole.
Since people do not always give correct information (they tend to say one thing and do another)
management can use a ‘direct observation’ strategy, when necessary. In this strategy, a third party (usually
an outside consultant) directly observes organizational members at work.
Each of these methods of gathering data has its appropriate place in OD diagnosis. By balancing the
respective strengths and weaknesses of the various methods, it is possible to develop a diagnostic strategy
based on two or more methods. For instance, a carefully structured interview could supplement the results
of a records review or fill in gaps left by a prepackaged survey questionnaire. The overall objective,
however, is to obtain as much useful information as possible at a reasonable cost.
Intervention
Once the situation has been properly diagnosed, OD interventions, or change strategies, can be
designed and implemented with the help of a change agent. An intervention, in OD terms, is a systematic
attempt to correct an organizational deficiency uncovered through diagnosis. Some of the major intervention
techniques used by OD specialists are described below.
Process consultation
This is concerned with interpersonal relations and the functioning of work groups. In this technique,
the OD change agent, (or consultant) observes the group and provides feedback regarding dysfunctions
in areas such as decision-making, handling of conflicts, and communication patterns. The main aim of
this technique is to help group members gain the skills they need to identify and resolve group dynamics
issues on their own.
Team building
This is aimed at helping work groups become effective at task accomplishment. Like process
consultation, it typically includes OD consultant feedback in such areas such as conflict resolution and
communication. It also involves taking the help of OD consultants in assessing group tasks, member roles
and strategies for accomplishing work tasks. Team building is viewed by many as an effective OD
technique because it emphasizes interactive group behaviour processes. Some of the main purposes of
team building include (i) setting goals and/or priorities, (ii) examining the way a group is working (processes
such as decision-making and communications), (iii) analyzing the way work is performed, (iv) examining
relationships among the people doing the work.
Third-party intervention
This is concerned with helping individuals, groups or departments resolve serious conflicts that may
be caused by suboptimal interpersonal relations or arise out of specific work issues. OD consultants help
the parties concerned resolve their differences through such techniques as problem solving and conciliation.
Survey feedback
In survey feedback, data gathered through survey questionnaires and/or personal interviews are
analyzed, tabulated into understandable form, and shared with those who first supplied the information.
Survey feedback lets people know where they stand in relation to others on important organizational issues
thus helping them resolve conflicts in a constructive manner. Effective feedback should be relevant,
understandable, descriptive, verifiable, and inspiring.
Technostructural activities
These are intended to improve work technology and/or organization structure. This intervention
technique is used to help organization members enhance their own effectiveness by showing them how to
evaluate and make appropriate changes in task design, work methods and organization structure.
Skill development
Skill development techniques help employees identify their shortcomings and overcome their deficiencies.
These techniques can be used to improve employee performance in areas such as delegation, problem
solving, conflict resolution and leading. Skill development is a part of management development and
training when it is carried out alone rather than a comprehensive OD programme. Unlike most OD
interventions, skill development deals with content rather than process. Training is usually conducted to
help employees enhance skills such as writing objectives and formulating plans. Skill development helps
employees to perform to the best of their abilities.
Organizational culture change

This involves the development of a corporate culture that correlates with organizational strategies and
other factors, such as organizational structure. The OD consultant assists in developing methods for
determining the current corporate culture, assessing its appropriateness, and planning necessary changes.
All these intervention techniques aim at solving current problems and helping individuals and groups
acquire the skills necessary for solving future problems. Increasingly, OD specialists are expanding their
interventions to include a wide range of approaches in such areas as cultural change and techno structural
activities. Successful OD efforts are likely to involve multiple intervention techniques.
Evaluation
It is important to monitor the effectiveness of OD programmes continually, because OD is oriented
toward long-term change and may take several years to achieve significant results. The ability to evaluate
the results of OD interventions depends heavily on the accurate diagnosis of the current situation and the
clear identification of the desired results. In order to facilitate the evaluation process, data is collected as
part of the diagnosis process. The collected data can be used as benchmarks to assess the effectiveness
of the interventions after they have been implemented. Such evaluation is necessary because even successful
interventions do not necessarily produce results in all the targeted areas.
From a research perspective, evaluation should be a part of every OD programme, even though it is
difficult, time-consuming, and expensive. Claims of improvement brought about by an OD programme
cannot be verified without an objective evaluation of results.
APPROACHES TO MANAGER DEVELOPMENT

According to Koontz and Weihrich, the term manager development refers to “the progress a person
makes in learning how to manage.” To make organizational programmes more effective, training is
provided to managers to facilitate the process of learning. This is referred to as managerial training. The
main difference between organization development and manager development is that the former focuses
on the total organization or a major segment of it, while the latter concentrates on individual managers.
The main objectives of manager development are:
To increase the knowledge of the manager.
To help the manager learn new skills required by the job.
To help the manager apply these skills efficiently and thereby improve performance.
To achieve the objectives of the organization.
Before choosing a training and development programme an organization must analyze its needs.
Three kinds of needs have to be considered: organizational needs, needs and requirements of the job, and
individual needs for the job. Organizational needs include the objectives of the organization, the requirement
of managers, the turnover rates etc. Job related needs refer to the needs that arise as per the requirements
of the job. These can be identified through job descriptions and performance standards. Individual needs
can be identified through performance appraisals, interviews with job holders, tests, surveys, and career
plans. After analyzing the needs, an organization can choose any of the two approaches to manager
development: on-the-job training and internal and external training.
On-the-job Training
On-the-job training helps managers learn many aspects of a job. In the learning process, trainees
contribute to the objectives of the enterprise. Some of the important on-the-job training techniques are
discussed below.
Planned Progression
This technique guides managers in their path of development. It clearly identifies the aspects of their
performance that need to be improved. It provides them clear guidelines as to where they stand and what
aspects of their performance need to be improved. For example, a lower level manager in the production
department is provided with a clear career path and guidelines to advance from the supervisor level to
works manager and eventually to the production manager. The manager then knows the requirements for
advancement and the means of achieving it. The main advantage of this technique is that it involves a
step-by-step approach which requires tasks to be performed effectively at each level.
Job Rotation
The process of job rotation helps broaden the knowledge of managers. It does so by rotating managers
through various types of jobs: non-supervisory work, observation assignments (observing what managers
do, rather than managing themselves), and managerial training positions and middle-level positions.
Job rotation programmes provide managers with ample experience in managing jobs. However, some
job rotation programmes do not provide managerial authority to participants. The participants only assist
line managers and as a result do not gain the required managerial experience. At times, participants are
not given sufficient time on the job to prove their effectiveness. Problems arise when trainees are not
provided suitable jobs after the job rotation process. In spite of these drawbacks, job rotation can have
a positive impact on an organization if carved out properly.
Creation of “Assistant-to” Positions

This method helps subordinates gain useful insights by working in close coordination with experienced
superiors. To assess the performance of trainees and provide feedback, managers conduct various tests.
This method can yield good result if the managers are highly experienced, can provide the trainees useful
guidelines regarding the work, and mould them into successful managers.
Temporary Promotions
When a manager is on vacation, falls ill, or is away on an extended business trip, or when a position
is vacant, individuals are frequently appointed as “acting” managers. This method of learning can be
effective if the ‘acting manager’ is allowed to shoulder the responsibilities of the managers and take
decisions. But if the acting manager is only a figure head with no responsibilities, this method does not
serve any “learning” purpose.
Committees and Junior Boards

Trainees can gain experience through interaction with senior managers. Committees and “junior
boards” provide the platform for such experience for trainees. By participating in such activities, middle
and lower level managers get acquainted with the various issues of the organization. This training exercise
can be successful if trainees are given an opportunity to submit proposals that allow them to demonstrate
their analytical and conceptual abilities.
Coaching
This on-the-job training technique has to be taken up by every line manager. The success of this
technique depends on the level of trust between the superior and the subordinate. A coach requires
effective communication skills along with patience and wisdom. He has to develop strengths of subordinates
while helping them overcome their weaknesses. Although coaching is time consuming, it brings a number
of advantages to an organization. Over the long-run, it can help an organization avoid costly mistakes.
Internal and External Training

Manager development programmes can be conducted within the organization or offered externally by
management associations and educational institutions. Some of the internal and external training techniques
are discussed below.
Sensitivity training/T-groups/encounter groups

This training was popular in the 1960s and 1970s. The main objectives of this managerial training
technique are as follows:
It helps individuals gain insights into their behaviour and helps them analyze the way they appear
to others.
It helps individuals develop the skills necessary for diagnosing and understanding of group processes.
It helps individuals improve their understanding of group processes.
In T-Group training, members express their opinion freely and openly. This feedback can be both
positive and negative. Sometimes negative feedback can force people to move away from the group and
can also lead to personal anxieties and frustrations. Hence it is necessary to administer it properly to
encourage collaborative and supportive behaviour. T-Group training will not be successful if the participants
are not free to participate in groups. For T-Group training to be successful, it is not only necessary to have
supportive participants but also a qualified trainer who can conduct the session without becoming emotionally
involved. A T-group training programme can be executed successfully if the guidelines given below are
followed:
Employee participation should be voluntary.
A screening test should be conducted to screen out candidates who can pose a hindrance to the
progress of the work.
Having a good trainer is essential. Hence, it is important to evaluate the trainer and his competence.
The goals and process should be clearly explained to the potential participants before they are
asked to participate in the programme.
Sensitivity training should be conducted depending on the needs and objectives of the organization.
If other methods of training are more suitable, they should be considered.
Conference Programmes
These programmes can be used for internal or external training. Speakers, who are experts in their
respective fields, are brought in to provide the required inputs to the trainees. Internal speakers may
provide insights into the company’s history, policies, rules and procedures, which will help future managers.
External speakers can provide information on a broad range of managerial skills techniques. These
programmes can be successful if trainees needs are identified accurately.
University Management Programmes

Managers can also attend training programmes conducted by universities, which include courses,
workshops, and conferences. Some of these programmes (along with seminars and live projects) are
designed for the needs of individual companies. Universities also offer executive development programmes
that provide career guidance to fit the training and development needs of supervisors.
University management programmes expose managers to theories, principles and new developments
in management. Such programmes bring managers together, enabling them to share ideas and experiences
with other people in similar positions, facing similar challenges.
Readings
This is a self-development technique that aims at increasing the knowledge of managers through
exposure to current and relevant management literature. For this method to be successful, the training
department must develop a list of books that will be useful for managers. Knowledge can be further
enhanced by discussing the articles and books with colleagues and senior managers.
Business Simulation, Experimental Exercise and Expert Systems

Business simulation and experimental exercises are approaches to training and development which
became popular after the introduction of microcomputers. Such approaches range from behavioural
exercises dealing, for instance, with attitudes and values, to simulations in the fields of marketing, accounting,
decision support systems and business policy, and strategic management.
Expert systems are used by managers to help them make useful decisions. Such systems are subsystems
of artificial intelligence systems. Expert systems are increasingly being used to check sales orders in
companies. IBM uses it for pricing systems bids, while American Express uses it for credit authorization.
All the training programmes discussed above can be effective if they are designed in accordance with
the requirements of the organization. On the whole, these training programmes concentrate on increasing
the knowledge of employees, developing the attitudes and behaviours necessary for better performance,
and developing employee skills to improve their performance and achieve organizational goals.
ORGANIZATIONAL CONFLICT
Conflict may occur within the individual, between individuals, between individual and the group, and
between groups. A conflict trigger creates interpersonal or inter-group conflict. A conflict trigger can be
allowed to continue until it stimulates constructive conflict. But when it moves in the direction of destructive
conflict, steps should be taken to correct the conflict trigger.
While conflict is generally perceived as dysfunctional, it may prove to be beneficial as it may cause
an issue to be examined and evaluated from different perspectives.
Sources of Conflict
There are many potential sources of conflict. Some of them are discussed below:
Competition for scarce resources

In an organization, anything of value (funds, personnel, valuable information) can be a competitively
sought-after resource. When competition for scarce resources becomes destructive, conflict can be avoided
by increasing the resource base. For example more personnel can be hired when they are to avoid
shortages in the future.
Time pressure
Time pressure, like deadlines, can increase the performance of an individual or reduce the performance
by triggering destructive emotional reactions. Hence, while imposing deadlines, managers must understand
and consider an individual’s capacity and ability to meet the set targets.
Unreasonable standards, policies, rules or procedures

When policies, standards, rules, or procedures are unreasonable and unattainable, they lead to
dysfunctional conflict between managers and subordinates. Therefore, managers must frame sound policies,
rules and procedures and correct those policies and procedures that do not help employees achieve
organizational objectives.
Communication breakdowns
Communication is a complex process. Barriers to communication often provoke conflict. When two-
way communication is hampered, it is easy to misunderstand another person or group. Such
misunderstandings have a negative impact on employee performance.
Personality clashes
People have different values and different perceptions of issues. A production manager, for instance,
may be of the opinion that streamlining the product line and concentrating on a few products can make
the organization more productive, while a sales manager may desire a broad product line that will satisfy
diverse customer demands. An engineer may like to design the best product regardless of market demand
or cost considerations. It is very difficult to change one’s personality on the job. The practical remedy for
serious personality clashes is to separate the antagonistic parties by reassigning one or both to a new job.
Showing genuine concern for the ideas, feelings and values of subordinates helps minimize such conflicts.
Ambiguous or overlapping jurisdictions

When job boundaries are not clear, they often create competition for resources and control. A
clarification of job boundaries and jurisdictions of various managers helps in preventing conflicts from
turning into serious problems.
Unrealized expectations
When expectations are not met, employees feel dissatisfied. Unrealistic expectations can also result
in destructive conflict. Open and frank communication with employees can help make people knowledgeable
about what they can expect from their organization.
Conflict can arise from other sources as well. For example, a superior’s autocratic leadership style
may cause conflicts. Differing educational backgrounds of employees may also lead to conflict.
Managing conflict
Conflict can be managed in different ways. Most conflict resolution techniques either focus on
interpersonal relationships or structural changes. Some of the different conflict resolution techniques are
described below:
Avoidance
Sometimes even the best managers find themselves in the middle of destructive conflict, whether due
to inattention or to circumstances beyond their control. In such situations, they may choose to do nothing
and simply avoid the conflict.
Problem solving
In problem solving the two parties involved in the conflict identify and correct the source of their
conflict. In this approach, differences are openly confronted and issues are analyzed as objectively as
possible. Problem solving encourages managers to focus their attention on causes, factual information, and
promising alternatives. The disadvantage of this method is that it is time consuming. But when the final
result is positive then it is worthwhile to invest time in solving the problem, instead of ignoring it and
allowing it to worsen.
Compromise
A traditional way of coping with conflict is to compromise, i.e., agreeing in part with the other
person’s point of view. Advocates of the compromise approach say that everyone wins because the
approach is based on negotiation. However, most people do not have good negotiating skills.
In addition, they approach compromise situations with a win-lose attitude and tend to be disappointed
or feel cheated by the compromise arrived at.
Forcing
Another approach to managing conflicts is forcing, or thrusting one’s own view on others. This
approach is used when time is of the essence and management orders the conflicting parties to handle the
situation in a specified manner. Forcing does not resolve the conflict and, in fact, may even worsen it. It
may also foster resentment, mistrust and resistance.
Smoothing
This technique involves emphasizing areas of agreement and common goals and de-emphasizing
disagreements. Such an approach may reduce conflict in the short run, but it does not solve the underlying
problem. However, smoothing can be useful when management is attempting to hold things together until
a critical project is completed or when there is no time for compromise or problem solving and forcing
is deemed inappropriate.
Structural change
Conflict can also be addressed by making structural changes. This method involves modification and
integration of the objectives of groups with differing viewpoints. The organization structure may have to
be changed and authority-responsibility relationships clarified. New methods of coordinating activities may
have to be identified. Often, one must not only decide on the necessary changes but also select the
appropriate approach to conflict resolution.
SUMMARY
Change refers to any alteration of the status quo. Forces that cause organizational change include the
nature of the workforce, technology, economic factors and competition. Change has always been a part
of the managerial environment, and the most common characteristic of the change process has been
people’s resistance to it. The sources of individual resistance to change include habit, security, economic
factors, fear of the unknown, and selective information processing. There are at least six ways in which
managers can overcome the initial resistance to change: education and communication, participation and
involvement, facilitation and support, negotiation and agreement, manipulation and co-optation, and
explicit and implicit coercion. Organizational change may be viewed as a process, since it usually involves
several steps. According to Kurt Lewin, organizations should follow three steps to achieve acceptance to
change: (1) unfreeze the status quo, (2) move, and (3) refreeze the new change.
Organization Development (OD) is a systematic, integrated and planned approach to improving
enterprise effectiveness. It is a change effort that is planned, focused on an entire organization or a larger
subsystem, aimed at enhancing organizational effectiveness, and based on planned interventions made
with the help of a change agent, or a third party, who is well versed in behavioural sciences. The OD
process consists of three major steps: (1) diagnosis, (2) intervention (3) and evaluation. The chapter
examined two major approaches to manager development: (1) on-the-job training, (2) and internal and
external training. The different on-the-job training techniques are: planned progression, job rotation,
“assistant-to” positions, temporary promotions, committees and junior boards, and coaching. The different
internal and external training techniques are: sensitivity training or T-groups, conference programmes,
university management programmes, readings, business simulation, experimental exercises, and use of
expert systems.
Finally, the chapter examined the nature of organizational conflict. Conflict may arise within the
individual, between individuals, between the individual and the group, and between groups. The various
sources of conflict include competition for scarce resources, time pressure, unreasonable standards/policies/
rules/procedures, communication breakdowns, personality clashes, ambiguous or overlapping jurisdictions,
and unrealized expectations. Conflict can be managed in different ways. The different conflict resolution
techniques are: avoidance, problem solving, compromise, forcing and smoothing.
Management Education at the Indian School of Business (ISB), Hyderabad

The Hyderabad-based Indian School of Business, established In 2001 is a distinct
management institution in Asia. Its distinctiveness stems from its unique origins, innovative
and model academic programmes, and world-class yet affordable, overall value proposition.
The uniqueness emanates from the fact that it is jointly promoted by corporate-academia
partnerships and it has affiliation with three of the world’s leading business school which
include the University of Pennsylvania and the London Business School. The ISB has been
funded entirely from private corporations, foundations and individuals, and the governing
body includes eminent business leaders, entrepreneurs and academicians from around the
world.
The ISB believes that the leadership skills can be learned and that successful leaders must
take charge of their own development and growth to achieve their true potential. It strongly
CASE STUDY
believes that whatever your mode of leadership, it should be grounded in a strong foundation
of core values.
Essentially a research-driven school, the ISB nourishes a distinct culture, an ideal blend of
academic excellence, cultural diversity, innovation and teamwork. The school offers regular
academic programmes with a global curriculum, which simultaneously focuses on various
Issues faced by the developing economies. Primarily, the school’s curriculum focuses on
managing business in fast-evolving environments, with strong emphasis on entrepreneurship,
the impact of technology on commerce and managing the emerging markets of Asia. The
curriculum shares the best practices on how to combine technology and entrepreneurship and
incorporates the latest in global management practice and thinking. The school also offers
executive education programmes designed for senior executives and managers with a high
potential for leadership.
The school follows a portfolio faculty model that aims to achieve an ideal mix of resident
and visiting faculty. It gives students the benefit of international exposure while providing
content that is contemporary and global in its perspective. The classrooms are equipped with
state-of-the-art audio-visual and video conferencing facilities. And the entire campus is enabled
for broadband internet connectivity and the ISB intranet.
The school has a Learning Resource Centre (LRC) which has a hybrid collection of printed
as well as electronic resources that include books, journals, databases, audiovisuals, CDs/
DVDs, e-book, over 2,500 e-journals (including archives of full-text articles dating back 15 to
20 years), reports, case studies, conference proceedings and other training resources.
Taking into consideration the importance of thought leadership and extensive research in
management education, the ISB has set up Centres of Excellence in five major areas:
technology, entrepreneurship, leadership and change management, strategic marketing and
analytical finance. These centres take up research, teaching and networking activities focused
on issues of relevance to emerging economies.
In a nutshell, the ISB aims to equip a student in

Preparing a financial statement;
Evaluating return on investments;
Managing new technology trends;
Motivating employees;
Obtaining capital for a start-up company;
Entering new markets; and
Formulating cutting edge marketing strategies
The students at ISB are part of a learning culture where individual vision, intellectual
discipline and a sense of work are valued significantly. The ISB also intends to play a major
role in creating synergies between India, Asia and global business environment.
1. ISB believes that leadership skills can be acquired through learning. Comment.
2. Compare the ISB approach with the one used in your school.
][][
Chapter 15 Managing and the Human Factor 317
Managing and the

Human Factor
15
H The Nature of People
H Behavioural Models
H Managerial Creativity
H Innovation and Entrepreneurship
H Harmonizing Objectives: The Key to Leading
INTRODUCTION
The functions of a manager include careful planning, designing an efficient organization structure,
selecting people or staff who are competent enough to achieve the plans, and controlling their activities
in order to measure and rectify deviations. However, a manager cannot be effective simply by the exercise
of these functions while lacking an understanding of human behaviour. A manager can make himself
effective by understanding human nature and using it to lead his or her subordinates towards the
accomplishment of organizational goals and objectives.
The managerial function of leading is defined as the process of influencing people so that they will
contribute to the organization and group goals. It is in this area of management that behavioural sciences
have made a major contribution.
In this chapter, we will discuss the various theories and models that explain human behaviour.
Effective managers draw from these theories, models and experiences in their efforts to harmonize individual
and organizational objectives. The main emphasis in this chapter is on explaining that people are different
in many ways.
THE NATURE OF PEOPLE

Every organization differs from the other in its goals and objectives. Further, every organization
comprises of individuals who have different needs and objectives. Through the function of leading, managers
can help these individuals (organizational members) to utilize their potential to simultaneously fulfil their
needs as well as contribute to the goals of the organization. To do so, managers are required to understand
the role of each organizational member in the organization, their individual characteristics and personality
differences. As part of their efforts to understand the behaviour of people, managers must keep the
following four aspects under consideration: individual differences, considering the person as a whole, the
importance of personal dignity, and the multiple roles of an individual.
Individual Differences
Though human beings have several common traits, each person is individually different from the
other. Most people feel excited when they achieve something and are grieved by the loss of a loved one.
However, within these broad similarities, each person differs from the other in a million ways. Individual
differences originate from differences in their psychology. Psychological differences and experiences in the
past make each person respond differently to different situations. Thus, there is no average person.
However in most enterprises, the assumption that people are alike forms the basis on which rules and
regulations, procedures, job descriptions, safety standards, job schedules and the like are developed.
It is the responsibility of the managers to understand the complexity and individuality of people before
applying the principles of motivation, leadership, and communication. If it were not for individual differences,
some standard, across-the-board way of dealing with the employees could be adopted, and minimum
adjustments would be required thereafter. However, individual differences necessitate the modification of
these principles so as to suit a particular employee or situation. Though it is difficult to satisfy all the needs
of an employee, managers should have considerable latitude to make individual arrangements to ensure
that jobs are so assigned that they suit a particular person in a specific situation.
The Importance of Personal Dignity

The employees of an organization deserve to be treated differently from other factors of production
(capital, land and machinery). Irrespective of the position they hold in the organization, employees desire
that the management should treat them with respect and dignity. Employees demand value for their skills
and abilities, and encouragement and opportunities for developing themselves. Every person in an
organization, whether it is the president, vice-president, manager, first-line supervisor, or the worker,
contributes towards the achievement of the organizational goals. Each person is unique in nature and has
different abilities and aspirations. However, each one of them is a human being and deserves to be treated
as one. Thus, it is essential that employees are respected and treated with dignity in organizations.
Considering the Whole Person

Although some organizations may wish they could employ only a person’s skill or brain, they actually
employ a whole person and not just distinct characteristics of the person such as knowledge, attitudes,
skills, or personality traits. These characteristics tend to interact with each other and, in specific situations,
some of them may predominate over the others.
Every employee is a human being and is influenced by external factors. This may in turn affect the
performance of the employee at work. It is impossible for a person to remain unaffected by the influence
of external factors and to prevent them from having an impact on his or her work. Thus, managers need
to recognize the influence that external factors can have upon the employees and accordingly devise ways
to manage them.
Multiplicity of Roles
Individuals in organizations should not just be considered as factors of production. On the contrary,
they may play many roles. They may be buyers of goods and services and thus lead to a demand for them.
They may be members of families, charitable organizations, trade unions or political parties, and may have
a different role to perform in each of these. While playing these different roles, individuals affect the
economy in some ways and establish certain laws or codes of conduct that need to be followed by both
managers as well as organizations. In the performance of their roles, every individual interacts with other
members of a broad social system. This makes it essential for managers to study various models and
theories to understand human behaviour.
BEHAVIOURAL MODELS
Over the years, management writers have developed several models to understand the complexity of
people. Based on their assumptions about people, managers consciously or subconsciously, have in mind
a model of individual and organizational behaviour. Managerial behaviour is thus influenced by the
manager’s assumptions about people and the related theories.
In this chapter we look at the behavioural models proposed by Edgar H. Schein and Lyman Porter,
McGregor’s classic assumptions about people, and the organization behaviour models suggested by Raymond
E. Miles.
From the Rational-Economic View to the Complex Person

Edgar H. Schein based his study of human behaviour on four concepts. These concepts are based
on rational-economic assumptions, social assumptions, self-actualizing assumptions, and complex
assumptions.
Rational-economic assumptions
The concept of rational-economic assumptions is based on the idea that people are primarily motivated
by economic incentives. Individuals always prefer economic incentives to all other rewards at work.
Economic incentives are controlled by the organization and the employees of the organization are passive
and have no say in this matter. They are motivated, manipulated and controlled by the organization. The
assumptions made here are similar to the Theory X assumptions proposed by McGregor, which will be
discussed later in the chapter.
Social assumptions
This concept is based on Elton Mayo’s idea that, basically, people are motivated by social needs –
the need to belong, to feel part of a group, to display loyalty, and to give and receive friendship, acceptance
and support from others at work. Thus, the social forces of the peer group play a more important role than
controls imposed by managers in determining the behaviour of individuals.
This concept stresses the need for a manager to understand people’s feelings and their need to identify
with a group, and to harness these needs for the benefit of the organization.
Self-actualization assumptions
The concept of self-actualization suggests that people are primarily influenced by their own needs and
motives. According to this concept, motives fall into five categories. They form a hierarchy ranging from
the simple need for survival to the highest need of self-actualization which involves the maximum use of
a person’s potential. This concept highlights the ‘intrinsic’ satisfaction that an individual derives from the
tasks and responsibilities associated with his or her job.
Complex assumptions
This concept presents Schein’s own view of people. According to this concept, people are complex
and highly variable in their behaviour. They develop and change in response to internal processes and
external factors. Further, as time progresses, new motives develop in people and they learn to respond to
different managerial strategies. Thus, even if a manager knows his subordinates well, he should always be
prepared for surprises.
Contrasting Views and Models of People

In order to understand the behaviour of people, one needs to first understand human nature. Several
attempts have been made by various workers to classify the basic views pertaining to the underlying nature
of people. Lyman Porter and his colleagues have identified six models that describe the nature of people.
These models are described below:
Rational or emotional?
The rational view holds that people behave in a rational manner. They systematically collect and
evaluate information and make decisions by carrying out an objective analysis of the various options
available to them. A manager who holds this view adopts a rational approach while interacting with
people and may totally disregard the emotions, feelings and the human side of his or her subordinates.
In contrast, the emotional view holds that individuals are predominantly ruled by their emotions, some of
which are uncontrollable in nature. A manager who believes in the emotional view may play the role of
an amateur psychiatrist and try to identify the psychological causes behind an employee’s behaviour.
Behaviouristic or phenomenological?
According to the behaviouristic view, an individual’s behaviour is influenced by the environment.
Managerial strategies based on this theory try to bring about changes in the environment in order to make
subordinates behave in the desired manner. In contrast, the phenomenological view proposes that people
are unpredictable, subjective, relative (rather than absolute) and unique in nature. Therefore, a manager
who follows this view should first understand the complex functioning of the human brain, as it is the brain
from which all behaviour originates. Understanding the complex functioning of the human brain is,
however, an impossible task and hence scientific observation of behaviour cannot form a basis for
understanding people.
Economic or self-actualizing?
The economic view proposes that economic factors motivate people. The theory assumes that people
behave in a rational manner and get satisfaction from material rewards. Managers who adopt this view
may consider money as the prime means to motivate their subordinates to accomplish organizational
tasks. This view makes managers create a competitive environment in the organization wherein the prime
concern of every individual is self-interest. On the other hand, the self-actualizing view holds that individuals
in an organization try to develop themselves, so as to increase their competence and make the best use
of their potential. A manager who holds this view would strive to establish an environment that would help
all individuals in the organization to work towards self-improvement by exercising self-direction and
utilizing their full potential.
McGregor’s Theory X and Theory Y

Another view about the nature of people was presented by Douglas McGregor in his book, The
Human Side of Enterprise. In order to explain the nature of people, McGregor identified two sets of
assumptions known as Theory X assumptions and Theory Y assumptions. He believed that these
assumptions typified managerial views of employees. McGregor suggested that in order to manage,
managers should begin by asking themselves the basic question of how they (managers) see themselves
in relation to others.
Theory X assumptions
Theory X has a pessimistic and rigid view of human nature and includes some of the “traditional”
assumptions pertaining to it. Some of the assumptions of this theory are:
Individuals inherently dislike work and will avoid work if they can.
Due to the inherent aversion of humans to work, managers have to control, coerce, direct, and
threaten employees with punishment in order to make them work towards the achievement of
organizational goals and objectives.
People prefer to be directed, wish to avoid responsibility, have little ambition, and above all, want
security.
Theory Y assumptions
Theory Y has an optimistic, dynamic, flexible, and positive view of employees. The assumptions on
which this theory is based are as follows:
People do not have a natural dislike for work. They put in physical and mental effort for work as
naturally as they play or rest.
People are internally motivated to achieve the goals and objectives to which they are committed.
Thus, external control and threat of punishment are not the only means for getting employees to
achieve organizational objectives.
The degree of commitment shown to the achievement of goals and objectives is proportionate to
the size of the rewards associated with their achievement.
Under proper conditions, people learn to accept responsibility and also try to seek responsibility.
Most people are capable of being innovative in solving organizational problems. Thus, the capacity
to exercise a relatively high degree of imagination, ingenuity, and creativity to solve organizational
problems is not confined to only a few people in the organization, but is widely distributed among
all the employees of the organization.
The complete utilization of the intellectual potential of the average person does not take place
under the conditions of modern industrial life.
Thus, Theory X emphasizes control and supervision of subordinates by the superior to make them
achieve organizational goals and objectives, whereas Theory Y supports self-direction and self-control by
the subordinates and the integration of individual needs with organizational goals. There is no doubt that
the assumptions managers make as outlined in these two theories influence the manner in which the
managers carry out their functions and activities.
Clarification of the Theories

McGregor named his theories Theory X and Theory Y because he wanted to have a neutral terminology
for his theories and wanted to avoid connoting them as “good” or “bad.” He was concerned that his
theories may be misinterpreted, and so, in order to keep the assumptions in the right perspective, McGregor
made the following clarifications pertaining to some of the areas that could be misunderstood:
(i) Theory X and Theory Y are just assumptions and are not to be treated as prescriptions or
suggestions for managerial strategies. These assumptions are only intuitive deductions and are not
based on research. It is important that these assumptions be tested against reality rather than
being blindly followed.
(ii) Theory X and Theory Y do not indicate ‘hard’ or ‘soft’ management. Resistance and antagonism
may result if the management adopts a “hard” approach. On the other hand, a “soft” approach
may result in laissez faire management, which is not congruent with Theory Y. An effective
manager recognizes the dignity and capability of his subordinates, understands their limitations
and adjusts his behaviour according to what the situation demands.
(iii) Theory X and Theory Y have a totally contrasting view of people. X and Y type personalities do
not constitute the two extremes of a continuum with X on one end and Y at the other. The
difference between these two types of personalities is not in terms of degree. Instead, X and Y
represent opposite types of personalities.
(iv) Theory Y cannot be considered as an argument against the use of managerial authority. Neither
should it be considered as a case for consensus management. According to Theory Y, authority
is only one of the various ways in which managers exert leadership.
(v) Different tasks and situations require different approaches to management. While authority and
structure may prove to be effective for certain tasks, other tasks and situations may require a
different approach.
John J. Morse and Jay W. Lorsch suggested that different approaches are effective in different
situations. Thus, a productive organization is one in which the managerial demands on employees closely
match with the employees and the particular situation.
Three Managerial Models

According to Raymond E. Miles, a manager must create an efficient and effective socio-technical
system by integrating organizational variables (such as goals, technology, and structure) with human
variables (such as attitudes, capabilities, values, needs, and demographic characteristics). This integration
can be achieved through managerial activities (such as selecting, training, directing, appraising,
communicating and controlling), designing the organization and jobs, developing the employees, and
rewarding them for their contributions. Miles was of the view that managers have their own ideas on how
to manage people, and this partially determines the way managerial activities are carried out. He proposed
three models of management – the traditional model, the human relations model, and the human resources
model.
The traditional model emphasizes the controlling and directing functions of the manager to obtain the
desired performance from the employee. This model is thus somewhat similar to McGregor’s Theory X.
The human relations model focuses on social and egoistic needs of the individual. This model recognizes
the fact that fair treatment and remuneration are not enough to motivate people to work. The human
resources model advocates that managers should act as developers and facilitators to help their subordinates
to achieve performance targets. These three models are explained in more detail in Table 15.1.
MANAGERIAL CREATIVITY
Creativity comprises an important factor in managing people. Demands for creativity and innovation
make the practice of management endlessly exciting and sometimes extremely difficult. A distinction can
be made between creativity and innovation. Creativity is the ability to develop new ideas, whereas
innovation involves the use of such ideas. The discussion in this chapter is limited to creativity.
A management consultant specializing in creativity described it as follows:
“Creativity is a function of knowledge, imagination, and evaluation. The greater our knowledge, the
more ideas, patterns, or combinations we can achieve. But merely having the knowledge does not guarantee
the formation of new patterns; the bits and pieces must be shaken up and interrelated in new ways. Then,
the embryonic ideas must be evaluated and developed into usable ideas.”
Nearly all managerial problem-solving requires a healthy measure of creativity. Managers not only
generate new ideas but also translate them into practical applications. Managers mentally take things
apart, rearrange the pieces in new and potentially productive configurations, and look beyond the normal
framework for new solutions.
The Creative Process

The creative process is rarely simple and linear, and usually comprises four overlapping and interacting
phases: unconscious scanning, intuition, insight and logical formulation.
Table 15.1: Alternative Theories of Management
Traditional model Human relations model Human resources model
Assumptions
1. Work is inherently distasteful 1. People want to feel useful and 1. Work is not inherently distasteful.
to most people. important. People want to contribute to
meaningful goals, which they
have helped establish.
2. What workers do is less 2. People desire to belong and to 2. Most people can exercise far more
important than what they earn be recognized as individuals. creative, responsible self-
for doing it. direction and self-control than
their present jobs demand.
3. Few want or can handle work 3. These needs are more important
which requires creativity, self- than money in motivating people
direction, or self-control. to work.
Policies
1. The manager’s basic task is to 1. The manager’s basic task is to 1. The manager’s basic task is to
closely supervise and control make each worker feel useful make use of his “untapped”
his subordinates. and important. human resources.
2. He must break tasks down into 2. He should keep his subordinates 2. He must create an environment
simple, repetitive, easily informed and listen to their in which all members may
learned operations. objections to his plans. contribute to the limits of their
ability.
3. He must establish detailed work 3. The manager should allow his 3. He must encourage full
routines and procedures and subordinates to exercise some participation on important
enforce these firmly but fairly. self-direction and self-control on matters, continually broadening
routine matters. subordinate self-direction and
control.
Expectations
1. People can tolerate work if the 1. Sharing information with 1. Expanding subordinate influence,
pay is decent and the boss is subordinates and involving self-direction, and self-control will
fair. them in routine decisions will lead to direct improvements in
satisfy their basic needs to operating efficiency.
belong and to feel important.
2. If tasks are simple enough and 2. Satisfying these needs will 2. Work satisfaction may improve
people are closely controlled, improve morale and reduce as a “by-product” of subordinates’
they will produce upto resistance to formal authority – making full use of their resources.
standard. subordinates will “willingly
cooperate.”
Unconscious Scanning
Unconscious scanning is the first phase of the creative process. It is difficult to explain or illustrate
this phase as it involves a state beyond the consciousness of the individual. In this phase, even though
the problem is not well-defined, the manager is figuring out aspects of the problem at the back of his mind.
Often managers facing a time constraint tend to take hasty and premature decisions without analyzing all
aspects of an apparently ill-defined and ambiguous problem.
Intuition
Intuition comes into the second phase of the creative process and links the unconscious state of mind
with the conscious state. This stage may involve a combination of factors that may seem contradictory
at first. This phase can be explained by taking the example of Alfred Sloan and Donaldson Brown of
General Motors. They developed the idea of an organization with decentralized division structure and
centralized control. At first, the two concepts seemed to contradict each other. However, the idea begins
to make sense when one recognizes the underlying principles involved in it. These include assigning
responsibility for operations to the divisional head and maintaining control over certain important functions
at the central office (headquarters). Thus, in the case of General Motors, it took the intuition of two great
corporate leaders to see that two apparently contradictory principles – decentralization and centralization
– could interact in the managerial process.
Some time is required for intuition to work. Intuition requires individuals to come up with new
combinations of ideas and to integrate diverse concepts and ideas. Techniques such as brainstorming and
synectics (discussed later in this chapter) help to promote intuitive thinking in individuals.
Insight
The third phase of the creative process – insight – is largely the result of hard work. For example, to
develop a usable product, a new service, or a new process, new ideas are essential. Interestingly, insights
most often occur when the thoughts are not directly focused on the problem at hand. Some of these
insights may last only for a few minutes. Hence, it is essential for a manager to have a paper and pencil
ready to note down creative ideas as and when they come to mind.
Logical Formulation
The final phase of the creative process consists of logical formulation or verification. It involves testing
the insights generated by using logic or experiment. This may be done by continuing to work on an idea
or by inviting critiques from others. For example, in the General Motors example, the decentralization
structure proposed by Sloan and Brown had to be tested against organizational reality.
Techniques to Enhance Creativity

Creativity can be taught. Creative thoughts are a result of hard work and there are various techniques,
especially in the decision-making process, to nurture creative thoughts in individuals. Some techniques
focus on individual actions, while some focus on group interactions. Two popular techniques to nurture
creativity in individuals are brainstorming and synectics.
Brainstorming
Alex F. Osborn developed the technique of brainstorming, one of the best-known techniques for
facilitating creativity. The purpose of this technique is to improve problem solving by finding new and
unusual solutions. Brainstorming aims at a multiplication of ideas through group thinking. The following
rules are observed in brainstorming:
None of the ideas are criticized.

The emphasis is on obtaining as many ideas as possible.
The participants are encouraged to contribute towards improving the ideas of the other participants
in the group.
The more radical the ideas, the more effective they make the brainstorming technique.
Though brainstorming was widely accepted after its introduction, it lost some of its appeal when
research revealed that individuals could develop better ideas working by themselves than they could by
working in groups. Additional research, however, has revealed that in some situations, when the information
has to be distributed among many people, the group approach might be effective. In such situations, a
poorer group decision is found to be more acceptable than a better individual decision. The acceptance
of new ideas is greater if the decision is made by the group which will be implementing it.
Synectics
This technique is a modification of the Gordon technique, developed by William J. Gordon. The
members of a synectics team are carefully chosen, taking into consideration their ability to deal with the
problem. The problem may be of a magnitude that affects the entire organization.
The leader of the group plays a key role in this approach. The specific nature of the problem is known
only to the leader. It is the duty of the leader to guide the discussion without revealing the actual problem.
This is done primarily to prevent the group from reaching a premature solution to the problem. The
members of the group are then involved in a complex set of interactions from which a solution emerges.
The outcome of the synectics approach is often an innovative new product.
Limitations of Traditional Group Discussion

Although it is true that brainstorming and synectics may result in creative ideas, it would be wrong
to assume that creativity thrives only in groups. In fact, a group discussion may hinder creativity in many
ways. For example, the members of a group may pursue only one particular idea, ignoring all other
alternatives. It may also happen that the members may hesitate to express their idea before the group due
to the fear of being ridiculed. Lower-level managers may not be able to express their views openly in the
presence of top-level managers. The need to arrive at a consensus may be stronger than the need to
explore creative but unpopular solutions to a problem. Due to the need to arrive at a decision as early as
possible, groups may not make any efforts to search for data relevant to a decision.
Exhibit 15.1 Effective management of the innovation process
Although many organizations talk about innovation and attempt to innovate, very few are able to innovate
successfully, especially in the long-term. Often, for well-established organizations, new strategies,
reorganizations, launches of new products and services with a lot of fanfare and at much expense, are
failures. The reason for the failure of organizations to innovate lies in their inability to manage the innovation
process effectively. Most innovation efforts of companies are found to lack either proper leadership, or
management of the process, or both. Innovation requires to be managed – The process of innovation needs
to be successfully managed. For innovation efforts to be successful, the head of the company should set
the direction, and the management should ensure the achievement of goals of the company. The management
should have the faith that clear, creative solutions will emerge from ideas that may seem vague at first, and
should continue working with them rather than abandoning them. The innovation process is a blend of
creativity, analytical methodology and timely action on the part of management. Ensure clarity and alignment
with organizational goals at the very outset – For an innovation programme to succeed, it is essential to
ensure that the goals, parameters and success criteria are aligned with the organization’s mission,
competencies, and aspirations. This will ensure that the ideas generated will be received with enthusiasm
and commitment throughout the organization. Further, it is essential to obtain the participation of the top
management at the very outset of the innovation programme to ensure that it is synchronous with the
organizational priorities.Creativity is a part of innovation – Creativity involves exploring and discovery of new
things. Innovation is applied creativity and requires looking at things in a new light. There are three ways of
making this happen. The first is to use a team approach. Another is to involve customers and prospective
customers in the innovation process. The third method is to use the services of an expert to design an
innovation process that is customized to suit the specific needs of the organization.Building synergy through
teamwork – Rather than one or two individuals working in isolation, a team comprised of individuals with
diverse experience and functional expertise working together facilitates the generation of a greater variety and
depth of ideas. A team approach is the best way to innovate since it allows the members to build on one
another’s ideas, critically analyze them, and generate enthusiasm for ownership of ideas which is essential
for the successful implementation of ideas.Understanding the perspective of other stakeholders – In order to
be innovative and to continue to remain innovative, the organization should obtain the inputs and approval of
its customers, internal staff and external stakeholders through focus groups and qualitative research methods.
These methods help the organization to understand the current and emerging preferences of customers,
operational opportunities for the company, and the market realities facing it. They also help to stimulate the
thinking of the focus groups and serve as a source of idea generation, concept development and product
refinement.The best innovation process is versatile in nature – To be most effective, the innovation process
should be flexible, structured and adaptable to the changing needs of the organization. The use of diverse
techniques in the innovation process allows individuals to break habitual thought patterns. The process of
innovation leverages the abilities of individuals to imagine, create, evaluate and select ideas that may help
in the achievement of organizational goals. By exploring possibilities and developing probabilities, innovation
can help in delivering creative solutions that would benefit the organization as well as the industry.
Adapted from “Managing Innovasaurus,” Bridges of Innovation, <http://www.bridgesofinnovation.com/page16.html>
The Creative Manager

It is detrimental to the organization if the managers assume that most employees are non-creative and
possess little ability to develop new ideas. In a favourable environment almost all individuals are capable
of being creative. However, the degree of creativity varies from individual to individual.
Creative individuals are usually very curious and come up with new and unusual ideas. They are
seldom satisfied with the status quo. They are aware of their capabilities, object to conformity and try to
be different from the others. Creative individuals are not only intelligent and rational, but also use the
emotional aspects of their personalities in problem solving.
There can be no doubt that creative people can make an immense contribution to an organization.
However, creative individuals may also cause difficulties in an organization. This is because change is not
always welcome and frequently leads to undesirable and unexpected consequences. Also, creative individuals
may pursue their ideas doggedly and irritate others. Such individuals may also ignore established rules,
regulations, and policies, and thus disrupt the smooth functioning of the organization.
On account of these difficulties, most organizations underutilize their creative individuals and forget
that unusual ideas can be of great benefit to the firm. However, creativity can be nurtured if the organization
makes effective use of individual and group techniques of enhancing creativity. This can be particularly
important in the area of planning. It is important to remember that creativity is not a substitute for
managerial judgement. It is ultimately the manager’s responsibility to weigh the pros and cons of pursuing
an unusual and innovative idea before actually implementing it.
INNOVATION AND ENTREPRENEURSHIP

In recent times, considerable attention has been given to innovation and entrepreneurship. These
terms conjure up pictures of entrepreneurs who proved successful within a short period of time by establishing
new companies. Ramalinga Raju of Satyam Computers and Narayana Murthy of Infosys are two of India’s
prominent first-generation entrepreneurs.
According to Peter F. Drucker, innovation suits not only a high-tech organization but a low-tech,
established business as well. Worthwhile innovations are not just a matter of sheer luck; they require
systematic and rational work which must be well-organized and managed in order to deliver the desired
results.
The term ‘entrepreneurship’ suggests dissatisfaction over the ways things are, and awareness of a
need to do things differently. Innovation may take place in the following situations:
1. An unexpected event, success, or failure.
2. Realization of incongruity between what is assumed and what the real situation is.
3. The need to improve a task or a process.
4. Market changes or changes in the industry structure.
5. Demographic changes.
6. Innovation based on knowledge.
7. Changes in meaning or in the way things are perceived.
Exhibit 15.2 How can managers enhance innovation in large companies?
Very often, innovation is wrongly equated with invention. According to managerial executives working for large
organizations, the essence of innovation lies in the conversion of ideas into commercial revenue-generating
streams. Some have even identified an innovation quotient and differentiated it from the idea quotient. The idea
quotient indicates the percentage of employees in the organization who are equipped with good ideas,
whereas the innovation quotient indicates the percentage of those employees whose ideas make it to
practical implementation. In most organizations, the idea quotient is quite high whereas the innovation
quotient is very low. Some of the major challenges faced by organizations in their efforts to increase their
innovation quotient are to:
1. Encourage sharing of ideas by individual employees with others so that they become a part of the
organization database.
2. Nurture the relevant ideas and develop them into projects and product prototypes.
3. Capture the knowledge resulting from idea sharing and make it a part of the organization’s intellectual
capital.
Managers of large companies can take the following steps to meet these challenges and contribute to the
enhancing of innovation in the company:
Creativity techniques – Brainstorming and synectics are two well-known techniques of problem-solving.
Companies can make effective use of these time-tested techniques to generate creative ideas and thereby
contribute to the innovative capabilities of the employees.
Develop idea banks – Managers can develop an idea bank within the company, which will serve as a
database for creative ideas. Many organizations encourage their employees to contribute their ideas to the
idea bank in the organization so that the ideas can gain wide exposure. Moreover, idea banks serve as a
source of ideas to product managers and allow them to exploit and shape them into product prototypes.
Run knowledge sharing fairs – Companies can conduct knowledge sharing fairs, which will enable them
to expose the ideas of their employees to the right audience. Knowledge sharing fairs are a marketplace for
trading ideas and facilitating innovators or idea generators to get in contact with those with the potential to
exploit these ideas and convert them into business proposals.
Encourage experimentation – Companies should follow the example of the ‘3M’ company and encourage
their employees to be innovative. At 3M, employees are allowed to spend 10 to 15 per cent of their time in
pursuing their own ideas and interests. The company’s philosophy is to back people, and not just projects.
Experience has shown that both organizations as well as individuals in the organization benefited from such
experimentation.
Provide the right climate and support – The most vital factor that influences innovation in an organization
is the support and climate provided to the employees and the attitude of managers towards techniques that
enhance innovation. Even if the idea of a particular employee fails, the organization should continue to
encourage the employee and not stigmatize him for failing. Also, the product development process in the
organization should not involve too many formal stages. An extremely formalized product development process
creates hurdles in moving from one phase to another. The company must also help its employees to find
market opportunities for their innovations and provide them with the necessary help and support in connecting
with the right people and resources that may be required to make their ideas materialize. Most important of
all, the organization must ensure that the fame and recognition for the innovation goes to the innovator.Thus,
in order to make innovation succeed in large companies, managers should not believe that there is a lack
of creativity in the organization. They must create the right environment and provide the support that is
necessary to stimulate idea generation and its conversion into revenue-generating streams. This is the only
way in which an organization can achieve a higher innovation quotient
Adapted from David J. Skyrme, “Creativity Is Not Innovation,” Update, No. 17 (March 1998): 20 April
2000,<www.skyrme.com/updates/u17.htm>
Exhibit 15.3 Tapping innovative ideas at RPG Enterprises
Most companies strive to create a work environment which will help innovation and creativity to flourish in the
organization. Towards this end, RPG Enterprises has set up a special team of professionals known as
‘incubators.’ It is the responsibility of the ‘incubators’ to ensure that innovative business ideas generated by
the employees of the organization are tapped and converted into profit avenues for the organization.‘Incubators’
at RPG Enterprises are specially identified senior executives of the company who will nurture the ideas
sourced from employees and ensure their implementation. The company uses a recognition and reward
programme to encourage and reward the employees who contribute practical ideas to the
organization.Traditionally, in most companies, whenever a problem arises, the employee approaches the
superior who then gives the employee a solution to the problem. In such situations, only the brainpower of
the superior is being utilized. All others in the organization merely serve as means of implementing the ideas
of superiors. By introducing a new ‘innovation culture’, RPG Enterprises makes its employees undergo a
series of training sessions to encourage them to ‘think outside the box.’ Along with training its employees,
the company is also training its managers to encourage subordinates to think of new ways of doing things,
instead of providing them with ready solutions. Thus, the company tries to encourage idea generation at every
level in the organization.The ideas generated are pooled using an intranet, reviewed by a management
committee at the apex level of the organization, and those which seem practical are then sent to the team
of ‘incubators.’ Through this initiative, the company creates a work environment in which employees are
encouraged to take risks and experiment with new ideas without the fear of failure. Likewise, the managers
are trained to adopt a managerial style that encourages subordinates to come up with innovative ideas and
allows creativity to flourish in the organization. RPG has implemented this programme in one of its companies.
The 50 new and innovative ideas that resulted from the programme are now contributing nearly Rs 20 lakh
each to businesses of RPG Enterprises.
Adapted from Tarun Narayan, “Incubating fresh business ideas at RPG Enterprises,” Financial Express, 13 March 2003.
HARMONIZING OBJECTIVES: THE KEY TO LEADING

A manager should have a thorough understanding of the human factor in order to lead satisfactorily.
The leadership style and motivational approach that a manager adopts depends on the way he or she
views human nature. Though a number of theories and models have been presented to explain human
nature, no single theory or model can provide a complete understanding of the whole person. Therefore,
it is appropriate to have an eclectic view of the nature of people.
Individuals in an organization usually work in groups, towards the achievement of personal and
organizational goals and objectives. Sometimes these goals and objectives may clash and lead to discord.
As a leader, the manager must harmonize the needs of individuals with the requirements of the organization.
The managerial function of leading helps to bridge the gap between effective control techniques,
logical and well-defined plans, carefully designed organization structures, and efficient staffing programmes
on the one hand, and the need for people to understand, to be motivated, and to contribute all they are
capable of to achieve organizational objectives on the other. A manager has to design an environment
that takes full advantage of the individual drives of employees. By communicating with their subordinates
and guiding them, managers must make them understand how their own interests are served when they
work creatively for the organization.
Exhibit 15.4 Strategies for companies to remain continuously innovative
In order to survive in the rapidly changing global economic environment, it is essential that businesses learn
to adapt themselves quickly and flexibly to fit into the changing economic and cultural landscape. A company
must be a reservoir of creativity, flexibility and agility 24 hours a day and all seven days of the week, in order
to achieve and sustain the position of a leader in the global marketplace.The environment in which companies
operate their businesses in the present day is highly unpredictable. Hence, innovation is a must to survive
in such an environment. Further, innovation has to take place on a continuous basis to enable companies
to keep pace with the competition. A company loses ground to its competitors as soon as the pace of change
outside the company overtakes the pace of change within the company. Companies can adopt the following
strategies to ensure that their employees become innovative:Make everyone accountable: It is not possible
for a few individuals at the top to plan all the activities of the company. Therefore, companies should assign
responsibilities to its employees and make them accountable for their actions. This strategy has been
successfully used by Koch Industries, an oil and gas company based in Wichita, Kansas, USA. The
company wanted to establish world-class safety standards in its plant. Rather than making its safety
engineers responsible for identifying unsafe conditions and discovering new and safer ways of conducting
business, the company assigned this responsibility to the employees involved in various processes. After this
initiative, the company displayed a 50% decrease in the number and severity of accidents taking place each
year across all its plants, and within one year the company moved up in the rankings to become a company
with one of the best safety records in the industry.Replace rigid processes with clear business objectives:
Often, business processes are designed in great detail and handed over to the persons responsible for
implementing them. The rigidity in the processes stifles innovation in the company and also slows down work.
Instead, companies should hand over the responsibility of designing business processes to the persons
implementing them. Not only will this result in deadlines being met and increasing shareholder value, but it
will also allow innovation to flourish in the company.Challenge employees to compete: Absence of competition
may result in lethargy setting in. Hence, every company should devise steps that challenge its employees
to compete in order to survive in the business. Competition may be generated through internal or external
means.Encourage employees to be innovative and reward them accordingly: Often companies contact external
agencies for accomplishing tasks that can be economically carried out using in-house talent. For example,
a budget of $ 30 million was earmarked by Koch Industries to increase its pipeline capacity with the help
of external consultants. However, a team of company employees were successful in increasing the pipeline
capacity by 15 per cent by spending only a little above $1 million. In recognition of their contribution, the
company immediately rewarded all of them with cash incentives amounting to 15 per cent of their annual
salary.Focus on the core strengths of the company, and outsource: In order to remain innovative and nimble,
it is essential for a company to outsource most of its activities to partners having the necessary expertise,
and to retain only those activities which contribute to its core competency. This has been the case with
Universal Leven, a Netherlands-based subsidiary of Allianz. Although it was established recently, the company
has sold over 15,000 policies to date with almost 200 new policies being issued each week. The company
is only involved in crucial activities such as devising the corporate strategy, network expansion and product
development. All the other activities of the company including design and branding of the product, marketing
and back-office operations, have been outsourced.
Adapted from Stephen M. Shapiro, “Innovation as a Weapon in Global Competition,” The 24/7 Innovation Group,
<http://www.24-7innovation.com/jcaf.pdf>
Exhibit 15.5 Molding entrepreneurial ability at Wipro
In addition to being a leading software company of the country, Wipro has a unique track record of creating
entrepreneurs. The common factor associated with companies such as MindTree Consulting, Kshema
Technologies, TVA Infotech, Fabmart, Aztec Software and some others is that all of them have been set up
by people who have, at some time or the other, worked for Wipro.Wipro believes in offering early general
managerial responsibility to its employees. The company empowers its employees early in their careers. This
helps them to develop the ability to visualize the big picture at the start of their career and helps them to
develop into first generation entrepreneurs in the future.The company’s willingness to tolerate failures allows
its employees to take decisions that they wouldn’t dream of taking in any conventional organization. This
serves as a major factor that allows future entrepreneurs to develop and refine their skills.Wipro has developed
a structured innovation initiative through which it tries to leverage the entrepreneurial abilities of its employees
to accomplish organizational goals. The company provides the more entrepreneurial of its employees with the
option of becoming entrepreneurs. However, the company does not prevent them from leaving the organization
if they wish to try and succeed on their own, without the backing of Wipro.
Adapted from Venkatesha Babu, “The United Colours of Entrepreneurship, “Business Today, 19 January 2003: 184-
185
SUMMARY
Leading is the process of influencing individuals so that they contribute to the organization and group
goals. In this chapter, we have discussed some of the key concepts in the study of human nature. A
manager has to take all these concepts into account so that he can effectively direct human resources
towards the achievement of organizational goals.
Different ideas conceived of by various management writers were discussed in the chapter. Edgar H.
Schein proposed four concepts to understand human behaviour. These are based on rational-economic
assumptions, social assumptions, self-actualization assumptions, and complex assumptions. McGregor’s
two perspectives (Theory X and Theory Y) have also been discussed. However, no single model is
sufficient to explain the complexities of people. Therefore, a manager has to adopt an eclectic approach,
drawing upon different models to understand human behaviour.
Creativity is an important factor in managing people. It is the ability and power to develop new ideas,
while innovation involves the practical implementation of such ideas. The creative process comprises of
four overlapping stages – unconscious scanning, intuition, insight, and logical formulation. Of the various
techniques that help to enhance creativity, two important techniques, brainstorming and synectics, have
been discussed in the chapter. Finally, the chapter discusses the importance of innovation and
entrepreneurship in an organization and a manager’s need to understand human nature and harmonize
individual goals and objectives with those of the organization.
Call Centres: The Death Knell for The Youth?

The concept of ‘call centre” emerged in the recent years, with increasing volumes of
business process outsourcing (BPO) operations from developed countries to low-cost developing
countries like India and China. The services provided by the call centres include handling high
volumes of inbound and outbound customer care services, help desk and telemarketing
services, and many back-end non-core business activities such as payroll accounting,
maintenance of employee records and e-mail management services.
CASE STUDY
The call centre business has been flourishing in six major cities of India—the most important
being Bangalore, Gurgaon, Chennai and Hyderabad. The Indian call centre services market,
expected to grow to $ 735.7 million by 2008, operates through an estimated five lakh call
centre agents.
Though the lure of good pay conditions and the chances of going abroad has augured a
healthy sign for a flourishing call centre business, it has thrown open a big sociological and
psychological challenge for the youth, the major ‘work horses’ in the call centre business (The
average age of a call centre agent is about 23 years). Normally, a call centre agent has to
work on erratic work schedules and pressure cooker like stress situations. [Their performance
is measured by the duration of ‘talk- time’ (time an agent spends in engaging a customer)
and ‘wrap time” (the time an agent spends in finishing an operation efficiently).
Owing to intense work pressure, an agent gets literally separated from his/herfamily and
friends. Many professionals in this industry have started complaining of major physical and
mental problems, which include depression, anxiety disorders and relationship-related problems.
Their emotional hygiene gets disturbed with the altered sleep cycles (resulting from regular
night shifts). In some cases, it results in an imbalance in the functioning of the hypothalamus,
which finally controls the thyroid and adrenaline levels. Physically, cases of hearing loss (due
to constant listening to a device), hair loss and abnormal loss of weight have also been
reported. Moreover, chronic alcoholism and smoking have been found resorted to as an
escape value for the immense tension and mental disturbances associated with this profession.
Above all, the lack of social acceptance for this profession has further aggravated the
condition of a call centre professional.
1. Suppose you are the employer of the call centre firm. What precautions could you have taken to avert these
“occupational hazards”, and safeguard the moral of your employees?
2. If you are a call centre agent, what precautions would you take to keep your moral high?
][][
Chapter 16 Motivating Employees for Job Performance 333
Employees for Job

16
Performance
Motivating
H Definitions and Meaning of Motivation
H Classification of Motivation Theories
H Motivational Techniques
H A Systems and Contingency Approach to
Motivation
INTRODUCTION
In any type of organization, a manager must know what motivates his workers in order to make each
individual employee perform to the best of his ability. It is not an easy task to motivate employees because
they respond in different ways to their jobs and to organizational practices. Motivation is a human
psychological characteristic that affects a person’s degree of commitment. It is the set of forces that move
a person towards a goal. It deals with how behaviour is energized, how it is directed and how it is
sustained. The manager’s challenge, then, is to channel this energy and direct this behaviour toward the
organization’s ends.
Factors that affect work motivation include individual differences and organizational practices.
Individuals differ in their personal needs, values and attitudes, interests and abilities. Organizational
practices that affect motivation include the rules, policies, managerial practices and reward systems. In
order to motivate employees, managers must consider how these factors influence and affect their job
performance.
This chapter is concerned with how managers can motivate subordinates to improve their performance
and satisfaction level. A chapter on motivation is included in the part on leading, because managers
cannot lead unless subordinates are motivated to follow them. The chapter begins with a clarification of
the meaning of motivation. This is followed by an overview of the content and process theories of
motivation and motivational techniques. Finally, the systems and contingency approach to management
is explained.
DEFINITIONS AND MEANING OF MOTIVATION

According to Stephen P. Robbins, motivation is the willingness to exert high levels of effort toward
organizational goals, conditioned by the effort’s ability to satisfy some individual need.
Fred Luthans views motivation as “a process that starts with a physiological or psychological deficiency
or need that activates behaviour or a drive that is aimed at a goal or incentive.”
The three key elements in the above definitions are needs, drives and goals. Needs set up drives
aimed at goals; this is the basic process of motivation. Figure 16.1 depicts the motivation process.
Need is the origin of any motivated behaviour. Need is a felt deprivation of physiological or psychological
well-being. Needs exist in each individual in varying degrees. When an individual recognizes a need, he
is driven by a desire to fulfil the need. Drives are directed at fulfilment of needs. Drives are action-oriented
and provide an energizing thrust toward reaching a goal. Incentives or goals are the instruments used to
induce people to follow a desired course of action. Once the goal is attained, the physiological or psychological
balance is restored and the drive is cut off.
NEEDS DRIVES GOALS

(Desires or Wants (Motives) (Incentives)
Physiological or Deficiency with direction Anything that alleviates a

Psychological Deficiency need and reduces a drive
e.g. Need for food and e.g. Hunger and thirst e.g. Food, water, friends
water, need for friends drives; a drive for
affiliation
Fig. 16.1 The Basic Motivation Process
CLASSIFICATION OF MOTIVATION THEORIES

Numerous theories have been developed by behavioural scientists about how managements can
motivate employees. These theories assist managers in understanding why an individual chooses to work,
why he may continue to work for a firm for a considerable amount of time, and how to boost the morale
of a worker and motivate him to produce at his or her highest possible level. Thus, motivation theories
are important for managers who want to be effective leaders.
Motivation theories can be classified into two categories – content or need theories, and process
theories. Motivation theories based on needs determine the motives that drive individual behaviour. Need
theories contend that the way we behave is entirely dependent on the internal needs which we attempt to
fulfil. Need theories specify precisely what motivates an individual. Thus they specify the content of the
needs of an individual. These theories are therefore also called content theories of motivation. Several
other theories are concerned with the mechanics of motivation. These theories are referred to as process
theories of motivation. While content theories focus on factors within the individual that lead to motivation,
the process theories focus on the dynamics of motivation and how the motivation process takes place.
Table 16.1 tabulates the contributions of content and process theories of motivation.
Table 16.1: Approaches to Motivation
Type Characteristics Theories Managerial Examples
Content Concerned with factors that 1. Needs hierarchy theory Motivation by satisfying individual
arouse, start or initiate 2. Two-factor theory needs for money, status, and achievement.
motivated behaviour 3. ERG theory
Process Concerned not only with 1. Expectancy theory Motivation by clarifying the individual’s
factors that arouse 2. Equity theory perception of work inputs,
behaviour, but also with performance requirements and rewards.
the process, direction, or
choice of behavioural
patterns
Content Theories of Motivation

In this section, we explore the four prominent content theories proposed by Abraham Maslow, Frederick
Herzberg, Clayton Alderfer and David McClelland. These theories have had the greatest influence on the
field of management. Each theory is discussed below:
Maslow’s needs hierarchy theory

One of the most popular explanations for human motivation was developed by the psychologist,
Abraham Maslow and popularized during the early 1960s. Maslow’s hierarchy of needs theory argues that
human needs form a five-level hierarchy (see Figure 16.2). Maslow classified these needs into five groups:
physiological needs, need for security, social needs (love and belongingness), self-esteem needs and self-
actualization needs.
Physiological needs
Physiological needs are the basic needs for food, clothing and shelter. An organization helps in
satisfying the physiological needs of its employees by offering them adequate wages. According to Maslow’s
theory, until these needs are satisfied to the degree necessary to maintain life, other needs will not motivate
an individual. Further, once these basic needs are satisfied, they no longer motivate the individual.
Safety and security needs

Once the physiological needs of an individual are met, the individual aims to satisfy his safety and
security needs. These needs include the need to be free from the fear of physical, psychological or financial
harm. Once the individual feels reasonably safe and secure, he/she turns his/her attention to developing
relationships with others.
Self-
actualization
needs Examples in the workplace:
(Freedom to be Opportunity to handle
creative and challenging projects
innovative)
Esteem needs Examples in the workplace: Pay

(Need for respect and hike, promotion, personal
recognition) assistant, company car
Social needs Examples in the workplace:

(Need for love and affection) Work groups, teamwork,
appropriate office layout
Safety and Security Needs Examples in the workplace:

(Need to be free the fear of physical, Job security, pension, life
psychological and financial harm) insurance
Examples in the workplace:

Physiological needs Rest periods, work breaks,
(Need for food, clothing, shelter) lunch breaks and wages
Fig. 16.2 Maslow’s Needs Hierarchy

Social needs
Social needs are also called belongingness needs or need for love. They involve the desire to affiliate
with and be accepted by others. Managers can satisfy this need of employees by allowing social interaction
between them by means of appropriate office layout, coffee breaks, and by providing them lunch and
recreational facilities.
Esteem needs
This level represents the higher needs of humans. They include the desire to have a positive self-image
and obtain respect and recognition from others. An organization may appreciate an employee’s performance
by rewarding him with a pay hike, a promotion, a well-furnished office, a car, a personal assistant and
other benefits such as stock options, club memberships, etc. Such measures on the part of an organization
help to satisfy the esteem needs of its employees.
Self-actualization needs
These comprise the highest level needs in Maslow’s needs hierarchy theory. Self-actualization needs
are an individual’s need to realize his full potential through continuous growth and self-development. Here,
the individual is concerned with matters such as the freedom to express his creativity and translate
innovative ideas into reality, pursue knowledge and develop his talents in uncharted directions. Most
management experts feel that employees’ need for self-actualization can be satisfied by allowing them to
participate in decision-making and giving them the power to shape their jobs.
Some work-related means of fulfilling the various needs in the hierarchy are shown in Figure 16.2.
This theory suggests that the importance of lower order needs (physiological, safety and security, and
social needs) declines as an individual progresses through the needs hierarchy. An individual joins a job
to satisfy his basic physiological needs for food, clothing and shelter. Once these needs are fulfilled, he
seeks job security to fulfil his safety needs. He may join a social organization or a club to satisfy his social
needs. Once social needs are satisfied, fulfilling higher levels of needs – esteem and self-actualization –
becomes his goal.
Limitations to Maslow’s Theory

A number of research studies have been conducted on the needs hierarchy theory in organizations.
The studies revealed that human needs do not always emerge in a hierarchical manner. The reversal of
Maslow’s hierarchy can be seen from an example of a starving artist who attempts to fulfil his self-
actualization needs despite his physiological and security needs not being fulfiled. Similarly, Maslow’s
theory does not explain how a person prioritizes the needs at a particular level of hierarchy. For example,
a person may experience more than one physiological need such as hunger, thirst and shelter. Maslow’s
theory does not explain which of these needs he will fulfil first.
About a decade after publicizing his original paper, Maslow attempted to clarify his position by saying
that gratifying the self-actualizing need of growth-motivated individuals can actually increase rather than
decrease the striving for self-actualization. In his later conceptualization, Maslow allowed for the occasional
possibility of reversals in the needs hierarchy.
Exhibit 16.1 Employee Motivation in Different Organizations
Motivating employees has always been a critical issue for most organizations. To motivate employees,
organizations need to provide a good working environment, recognize good performance and reward employees
appropriately, encourage teamwork, and train and develop employees. Organizations also need to continuously
evaluate and measure the effectiveness of the steps taken to motivate employees. Some of the methods used
by leading organizations to motivate their employees are discussed below. Eli Lilly gives special attention
to the creation of a work environment that employees would love to work in. At Eli Lilly, new employees are
personally welcomed by their bosses. If the new recruit is not a local resident, the boss goes to the railway
station/airport to receive him, arranges for his accommodation, food, and even laundry, if required. Though
employees in other organizations in the industry work for six days a week, Eli Lilly gives its employees two
Saturdays off a month (second and fourth). It also offers one week of paternity leave to its married, male
employees. The company takes feedback from its employees regarding its policies and work environment
and takes the necessary action to rectify the weaknesses and problems identified by them. Cadbury India
strives to make the workplace informal and pleasant to work. It believes in developing informal culture.
Employees can come to office in casuals. Cadbury provides a gym, cafeteria and piped music to its
employees. Employees from different functions form teams, visit markets, interact with customers and
provide their feedback to the management. They can also give their suggestions and implement them once
they are approved. Cadbury quickly allocates budgets to managers who propose innovative and feasible
proposals. The Philips Software Centre India tries to help employees maintain a balance between work and
personal life. The company frequently organizes get-togethers of employees’ families. It discourages its
employees from taking on more work than they are capable of delivering and putting in so many hours at
work that they disrupt their personal life. The company encourages employees to suggest new ideas. If an
employee’s idea is approved by the head office, he receives a cash award of Rs 5000. If the idea is filed for
patent, the employee receives $ 750. FedEx helps its employees identify their strengths and weaknesses
and offers personal development programmes to overcome their weaknesses. It encourages employees to
pursue courses offered by the company or external training institutes. About 600 courses are offered through
the company’s online training library. FedEx reimburses expenses (up to $ 3000 each year) incurred on
education and training by employees. Nokia motivates employees through both monetary and non-monetary
benefits. The company shares its profits with employees. About 1-5% of the company’s earnings per share
(EPS) is distributed among its employees. Nokia appraises and rewards employees purely on the basis of
their talent and potential. It promotes meritorious employees quickly, irrespective of their age, qualification
and experience. Even front office employees stand a chance of being promoted to managerial positions.
Adapted from “Great Places to Work,” Business World, 1 September, 2003, “Motivation – the Reason for Crisis,”
http://www.globalchange.com/motivation.htm and Gregory, P. Smith, “Transforming workers to winners,”< http://
www.refresher.co/!winners>
Herzberg’s Two-factor Theory

In the late 1950s, Herzberg and his associates conducted a study involving two hundred engineers
and accountants to find out the extent of their satisfaction or dissatisfaction with their jobs. The respondents
in the study were asked to recall instances when they were particularly satisfied with their work and
instances when they were particularly dissatisfied with their work. The factors which made them express
satisfaction were related to the content of their job. According to the respondents, the aspects of their job
which gave them satisfaction included having opportunities to achieve something through their work,
receiving recognition from others for their work, having opportunities for promotion and advancement, and
having a chance to take on new responsibilities. Herzberg and his associates call these job content factors
which contribute to the individual’s satisfaction, motivators. On the other hand, feelings of discontent or
dissatisfaction were found to be associated with factors related to the job context, or factors that affect
the immediate work environment but were not directly related to the job itself. The respondents complained
about poor supervision, the inability to mingle with other people on the job, uncomfortable working
conditions, low pay and benefits and job insecurity. These job context factors that lead to dissatisfaction
of individuals have been termed as hygiene factors by Herzberg.
Based on these results, Herzberg concluded that the presence of good job content factors leads to
satisfaction, and the absence of good job context factors leads to dissatisfaction. The findings of Herzberg
and his associates suggest that the best way to motivate workers is to satisfy their need for job content
factors. Herzberg contended that hygiene factors were important to prevent workers from feeling dissatisfied
but did not lead to their satisfaction.
Motivators in the Herzberg’s two-factor theory correspond to the higher-level needs of esteem and self-
actualization in Maslow’s needs hierarchy, while the hygiene factors correspond to Maslow’s physiological,
safety and social needs. Table 16.2 compares Maslow’s and Herzberg’s theories of motivation.
Table 16.2: Comparison of Maslow’s and Herzberg’s Theories of Motivation
Maslow’s Hierarchy of Needs Herzberg’s Two-Factory Theory
Self-actualization needs Motivators:

Responsibilities
Esteem needs Challenging Work
Recognition
Achievement
Social needs Maintenance Factors:

Job security
Safety and security needs Good pay
Working conditions
Physiological needs Type of Supervision
Interpersonal relations
Several researchers have challenged Herzberg’s findings. According to some researchers, it is easy to
understand why people would associate feelings of satisfaction with factors such as challenge, growth, and
recognition. It is very natural for people to attribute good results to their own efforts and blame external
factors for their failures. Thus, these researchers contended that satisfaction and dissatisfaction in individuals
are not the outcome of different factors but it is individuals who assign different sources to their successes
or failures. Edwin Locke, who reviewed research pertaining to Herzberg’s theory spelt out the various
problems associated with Herzberg’s findings. They are
1. the theory minimizes differences across people;
2. there is confusion in the original classification and statements; and
3. the arguments put forth by Herzberg are characterized by logical inconsistencies.
It was, therefore, concluded that Herzberg’s arguments did not withstand logical or empirical scrutiny.
McClelland’s Needs Theory

David C. McClelland has contributed to the theories of motivation by highlighting the importance of
three basic needs to understand motivation. They are achievement needs, affiliation needs, and power
needs. McClelland’s initial work centreed on the need for achievement.
Need for achievement

Achievement-motivated people thrive on pursuing and attaining goals. People with a high need for
achievement have an intense desire for success. They typically seek competitive situations in which they
can achieve results through their own efforts and which allow them to obtain immediate feedback on how
they are doing. They take a realistic approach to risk. People with high need for achievement are
characterized by restlessness and willingness to work long hours. Individuals with high need for achievement
can be a valuable source of creativity and innovative ideas in organizations. Supervisors who want to
motivate achievement-oriented employees need to set challenging, but reachable goals and provide immediate
feedback about their performance.
Need for affiliation

Need for affiliation refers to the desire to maintain warm, friendly relationships with others. Affiliation-
motivated people are usually friendly and like to socialize with others. They suffer pain when they are
rejected. They usually exhibit the following characteristics:
(i) They strive to maintain pleasant social relationships.
(ii) They enjoy a sense of intimacy and understanding.
(iii) They are ready to console and help others in trouble.
(iv) They love to engage in friendly interaction with others.
To motivate individuals with a high need for affiliation, managers should provide them with a
congenial and supportive work environment in which they can meet both corporate goals and their high
affiliation needs by working with others. In situations that require a high level of cooperation with and
support of others, including clients and customers, individuals with a high need for affiliation prove to be
assets for an organization.
Need for power

The need for power refers to the desire to be influential and to have an impact on a group. Power-
motivated individuals see almost every situation as an opportunity to seize control or dominate others.
They are willing to assert themselves when a decision needs to be made. The power motive has significant
implications for organizational leadership and for the informal political aspects of organizations.
The need for power is manifested in two forms: personal and institutional. People with high need for
personal power try to dominate others by demonstrating their ability to wield power. They often run into
difficulties as managers because they attempt to use the efforts of others for their own benefits. In contrast,
individuals with a high need for institutional power focus on working along with others to solve problems
and achieve organizational goals. McClelland’s work suggests that individuals with a high need for institutional
power become the best managers, because they are able to coordinate the efforts of others to achieve long-
term organizational goals.
Thus, it is suggested that the need profile of successful managers, at least in a competitive environment,
consists of (1) a moderate to high need for institutional power, (2) a moderate need for achievement (this
motivates individuals to contribute towards attainment of organizational goals early in their career and
drive the organization to develop a competitive edge as they progress towards higher levels) and (3) at least
a minimum need for affiliation (this contributes to maintenance of pleasant social relationships in
organizations). According to McClelland, individuals without the appropriate need profile can increase
their needs through training. While this may be true for the need of achievement and the need for
institutional power, it may be difficult to develop the need for affiliation through training.
Alderfer’s ERG Theory

An extension of Herzberg’s and Maslow’s content theories of motivation comes from the work of
Clayton Alderfer. As opposed to Maslow’s five needs, Alderfer suggested that needs can be classified into
three groups of core needs – existence, relatedness, and growth (hence the theory is referred to as ERG
theory). Existence needs are concerned with physiological well being of an individual. The relatedness
needs pertain to the desire to establish and maintain interpersonal relationships. The growth needs pertain
to the desire to be creative, make useful and productive contributions and have opportunities for personal
development. Figure 16.3 shows how these groups of needs are related to Maslow’s and Herzberg’s
categories of needs. Alderfer viewed these needs as a continuum rather than as discrete categories arranged
in a hierarchical manner. According to the ERG theory, different needs can emerge simultaneously, and
people can move backward and forward through the needs continuum as circumstances change. There
is every possibility that a higher-level need may assume greater significance over a lower-level need. The
ERG theory too, is not supported by adequate empirical evidence. However, the ERG theory is considered
a better and more correct explanation of people’s motivation than Maslow’s theory.
Assessing Need Theories

A comparison of the needs identified by the four theories (McClelland’s needs theory, Alderfer’s ERG
theory, Maslow’s needs hierarchy, and Herzberg’s two-factor theory) is shown in Figure 16.3. All the four
theories stress the significance of higher-level needs as sources of motivation. Forecasting employees’ needs for
personal growth is particularly important in today’s complex business environment, because of the pressing need
in organizations for innovative ideas, improved quality, and greater capacity to implement changes.
McClelland’s Alderfer’s Herzberg’s

Acquired ERG Needs Two Factors
Needs Theory
Need for
SELF-AC TU ALIZATIO N
Achievement
Need for Growth
Power
ESTEEM : Self, O thers Motivation
Need for
Affiliation SO CIAL
Relatendness
SAFETY
PHYSIO LO G IC AL Hygiene
Existence Factors
The relationship between McClelland’s Acquired Needs, Alderfer’s ERG Needs, Maslow’s five-level
Fig. 16.3 hierarchy, and Herzberg’s two-factor theory
Adapted from Fred Luthans, Organizational Behaviour (India: Irwin McGraw-Hill, Eighth edition, 1998) 174
Process Theories of Motivation

The content theories of motivation only identify the needs (for example, self-actualization, responsibility,
and growth) that drive the behaviour of individuals. They fail to explain the process through which
behaviour is energized, directed and sustained. Thus, content theories of motivation fail to provide managers
with direction for motivating employees to higher levels of productivity. On the contrary, process theories
of motivation attempt to explain the thought processes of individuals when they decide whether or not to
behave in a certain way. These motivation approaches outline the factors to be considered if the workplace
is to be made productive. Process theories are sometimes called cognitive theories due to their focus on
the thought processes associated with motivation. There are many process theories of motivation discussed
in management literature. Among these, two theories are of particular significance: the expectancy theory
and the equity theory.
Vroom’s Expectancy Theory

The expectancy theory of motivation was originally proposed by Victor H. Vroom. He contends that
before putting in the effort to perform at a given level, individuals consider the following three issues:
What is the probability that the performance will be up to the required level?
What is the probability that the performance will lead to the desired outcomes?
What is the value assigned by the individual to the potential outcomes?
Figure 16.4 depicts the basic components of the expectancy theory. Their relationship is stated in the
following formula:
Valence * Expectancy * Instrumentality = Motivation
M otivational Force Expectancy Instrum entality Valence
Force Directing Perceived probability Perceived probability Value of expected

Specific Behavioural = that effort will lead to x that good performance x outcomes to the
Alternatives good performance will lead to desired individual
outcomes
Self-Efficacy Goal Trust Values

Difficulty Control Needs
Perceived Control Policies Goals Preferences
Fig. 16.4 Basic Components of Expectancy Theory
Source: Richard W. Scholl, “Motivational Processes - Expectancy Theory,” University of Rhode Island, October 12,
2002, <http://www.cba.uri.edu/Scholl/Notes/Motivation_Expectancy.html>
Valence
Valence is the motivational component that refers to the preference of an individual for a particular
outcome. In simple words, it signifies ‘how much reward one wants.’ The valence component helps an
individual assess the anticipated value of various outcomes. If the possible reward or outcome of the work
is of interest to the individual performing it, the valence component will be high. However, it is likely that
the value of possible negative outcomes (loss of leisure time, disruption of family life, etc.) may offset the
value of rewards in a given situation. The valence is set in the range of +1, through 0, to -1. When an
individual has a strong desire for the outcome, the valence is positive. On the other hand, if the individual
wishes to avoid the outcome, the valence is negative. However, if an individual is indifferent to the
outcome, the valence is zero.
Expectancy
Expectancy is the probability that certain efforts will lead to the required performance. In other words,
expectancy is the probability (ranging from 0 to 1) that a particular action or effort will lead to a particular
outcome. For an individual to exert efforts towards a goal, he must see a non-zero probability of effort
leading to that goal. In other words, all individuals will be motivated to reach their goal only when they
see some connection between their effort and performance.
Instrumentality
This refers to the probability that successful performance will lead to certain outcomes. The major
outcomes we consider are the potential rewards such as incentives or bonuses, or a good feeling of
accomplishment. “If I get a first class in MBA, how likely is it that I’ll get a good job?” This example
illustrates instrumentality. Like effort-performance-expectancy, performance-outcome-instrumentality can
range in magnitude from 0 to 1.
Combining the Elements

The expectancy theory holds that individuals consider all three elements – valence, expectancy and
instrumentality – to decide whether or not to put in an effort in a particular direction. People are likely
to make judgments about each of the three elements in a given situation and then combine the elements
according to the general formula given by the expectancy theory:
(E -> P) * (P -> O) * Valence = Motivation
where,
E represents the effort,
P represents the performance, and
O represents the outcome.
For example, in an examination situation, suppose the MBA student assesses all three elements as
relatively high, the student will be highly motivated to work hard for the examination.
The crux of the expectancy theory is that all three elements must be present, at least at a minimum
level, before an individual is motivated to perform at a desired level. That is, none of these elements should
be zero or -1. Unlike the content theories, Vroom’s theory does not have a simplistic approach. It tries to
analyze the complex motivational process and does not strive to describe how motivational decisions are
actually made or to solve actual motivational problems faced by a manager.
To understand this model, let us consider three possible scenarios involving Jacob, Hari and Rasheed.
In the first scenario, Jacob performs well, receives a bonus from the boss (extrinsic reward), feels good
about the achievement (intrinsic reward) and ultimately feels satisfied. In this scenario, the boss’s action
of rewarding Jacob makes him conclude that the chances of achieving a valued outcome are higher by
putting in a good performance and results in enhanced expectancy in his case. In the second scenario,
Hari works hard, feels good about his performance (intrinsic reward), but the boss does not even say “Well
done!” much less give him a bonus. Hari is so annoyed with the boss that his satisfaction is low, because
he does not feel that he has been adequately rewarded. In this case, Hari is likely to conclude that hard
work doesn’t result in desired organizational outcome. Hari will hence have reduced instrumentality. In the
third scenario, Rasheed does very little work but receives a sizeable bonus at the end of the year, which
pleases him greatly. In this case, low efforts have resulted in high satisfaction. Hence, Rasheed is likely
to conclude that high performance is not required to obtain the desired organizational outcome and will
have reduced instrumentality.
Implications of the Theory

Rewarding high performance is an important component of motivation.
Poor performance should not be rewarded (as was done in the case of Rasheed). Rewarding poor
performance leads to low instrumentality, and ultimately to low motivation for performance among
subordinates.
The Porter-Lawler Model

The Porter-Lawler model, developed by Lyman W. Porter and Edward E. Lawler III, is an expansion
of the expectancy theory model (shown in Figure 16.5). They start with the premise that motivation does
not equal satisfaction or performance.
Exhibit 16.2 Use of Vroom’s Expectancy Theory to Motivate Employees at Wal-Mart
Wal-Mart Stores, Inc., the Arkansas-based retail giant, operates more than 2600 stores, super centres and
neighbourhood markets in the United States. In addition to these, it also runs 472 Sam’s Clubs (warehouse
clubs for small businesses) in the US. Wal-Mart operates more than 1000 stores worldwide. In an annual
survey of the nation’s Most Admired Companies carried out by Fortune in February 2003, Wal-Mart topped
the list. Ten thousand executives, directors and financial analysts rated the companies on the basis of eight
criteria. One of the criteria used was the quality of management of the company. Wal-Mart’s management
believes in motivating its employees to help the company retain the title of No. 1 retailer in the world. The
managers at Wal-Mart take the help of Victor Vroom’s expectancy theory to motivate employees to deliver
their best performance and give their 100% to the company everyday. According to Vroom’s expectancy
theory, the behaviour of an individual, or the way in which an individual will tend to act, depends on his
expectations that his actions will result in a certain outcome and his perception of the attractiveness of the
outcome. The theory thus led to the identification of three variables:
Expectancy or effort-performance linkage, which refers to the individual’s perception of the probability that
exerting a certain amount of effort will lead to a certain level of performance.
Instrumentality or performance-reward linkage, which refers to the degree to which the individual believes
that a certain level of performance will lead to the attainment of a desired outcome.
Valence or attractiveness of the reward, which refers to the importance that the individual places on the
potential outcome or rewards that can be achieved by performing at a certain level.
At Wal-Mart, all employees (referred to as Associates) are valued highly and provided with a lot of benefits
to motivate them to work hard and give their 100% to the job everyday. The benefits provided by the company
to its Associates include
vacation and personal time
pay during holidays
payment for the period when the employee is required to report for jury duty
medical and bereavement leave
maternity/paternity leave
The company also provides its Associates and their spouses a 10% discount on select merchandise;
confidential counselling services; Child Care Discounts; and GED (General Educational Development)
scholarships and reimbursements on completion of GED. The company also has an in-house relocation and
real estate centre, which provides Associates who are relocating with information, advice and counselling and
all possible assistance during the relocation process. Wal-Mart is one of the few companies that provide
healthcare benefits to its part-time as well as full-time Associates. Part-time Associates at Wal-Mart also
receive benefits such as incentive bonus, stock purchase programmes, holiday bonuses and free professional
counselling.
Adapted from Norman Romaine Foster, “Motivation Leads to Change at Wal-Mart,” 28 November 2001, Emporia
State University, <http://academic.emporia.edu/smithwil/001fmg456/eja/foster.html>
Value of
rewards
Perceived
equitable
Ability to do rewards
a specified
task
Intrinsic
rewards Satisfaction
Performance
Effort
accomplishment
Extrinsic
rewards
Perception
of task
Perceived required
effort-reward
probability
Fig. 16.5 The Porter and Lawler Motivation Model
Adapted from L.W. Porter and E.E. Lawler, Managerial Attitudes and Performance (Homewood, Ill.: Richard
D.Irwin, Inc., 1968) 165
According to Vroom’s theory, if valued rewards stem from high performance, workers will relate
performance and satisfaction. According to Porter and Lawler, satisfaction does not lead to performance.
Rather, the reverse is true: performance can (but does not always) lead to satisfaction through the reward
process.
The Porter-Lawler model advocates that managers should carefully assess their reward structures. In
order to do so, they can integrate the effort-performance-reward-satisfaction system into their system of
managing by careful planning, managing by objectives, and clearly defining duties and responsibilities of
the employees.
Equity Theory
J. Stacy Adams is the proponent of the equity (or inequity) theory. His theory of motivation focuses
on people’s sense of fairness or justice. The equity theory refers to the subjective judgment of an individual
about the fairness of his reward, relative to the inputs (which include many factors such as effort, experience,
education, etc.), in comparison with the rewards of others. The essential aspects of the equity theory may
be shown in an equation as follows:
Inequity occurs when
Person ' s outcomes Other ' s outcomes

<
Person' s inputs Other ' s inputs
Person ' s outcomes Other ' s outcomes
>
Person' s inputs Other ' s inputs
The inputs individuals consider in assessing the ratio of their inputs and outcomes, relative to those
of others, may cover a broad range of variables including educational background, skills, experience, hours
worked and performance results. Outcomes can be pay, bonuses, appreciation, amount of responsibility
and type of work assignments, and status symbols like parking places, job titles, office space, furniture, etc.
When individuals feel that their rewards are not in accordance with their inputs, they may be
dissatisfied, reduce the quantity or quality of output, or resign from the organization. When people perceive
that they have been equitably rewarded (output = input), they will probably contribute the same level of
production output. When people perceive the rewards as being more than equitable (output > input), they
may work harder. In such situations, there is every chance that some individuals may discount the reward.
Figure 16.6 illustrates these three situations.
Inequitable rewards R Result in dissatisfaction, decline in

E employee productivity and increase
in employee turnover
Equitable rewards E R Results in employee satisfaction and
maintenance of productivity level by
the employee.
More than equitable E May result in increased productivity or
rewards R some may even discount the reward.
E Employee efforts R Rewards
Fig. 16.6 Equity Theory

Assessment of the Theory

The most serious limitation of the equity theory is its lack of concrete guidance on how to restore
equity. However, research on the equity theory supports its primary contentions. The theory highlights the
importance of social comparison processes, and goes beyond the expectancy theory as a cognitive explanation
of work motivation.
MOTIVATIONAL TECHNIQUES
In motivating people toward higher productivity and better performance, an important step is to
identify what they want out of their jobs. People look for a variety of things when they work. To fulfil their
demands and expectations, various motivation techniques are used by managers. In this section, we
discuss some of the major motivational techniques.
Rewards
Managers have found that job performance and satisfaction can be improved by properly administered
rewards. Rewards may be defined as material or psychological payoffs for the accomplishment of tasks.
Rewards can be broadly categorized into extrinsic and intrinsic rewards. Extrinsic rewards are pay-offs
granted by others. They include money, perks and amenities, promotion, recognition, status symbols, and
praise. Intrinsic (job content) rewards are self-granted and internally experienced pay-offs. Individuals
prefer intrinsic rewards such as satisfaction from performing challenging and interesting jobs. The motivation
theories discussed in this chapter throw light on the role of the extrinsic and intrinsic rewards in improving
productivity, and offer constructive suggestions about how to use these rewards in organization settings.
Exhibit 16.3 Steps to Enhance Job Satisfaction and Productivity of Subordinates

A business can increase its productivity and limit its employee turnover by ensuring that its employees are
satisfied with their job, which in turn, helps increase their productivity. The more productive an individual is,
the more satisfied he will be. And the more satisfied he is, the less likely he will be to leave the company.
To ensure high productivity, it isn’t sufficient for a company to recruit efficient people and pay them high
salaries. Enhancing the productivity of the company has more to do with making the employees like the work
they are doing for the company and making them realize how important their contribution is to the success
of the company.
There are several factors which are known to lead to job dissatisfaction: being in the wrong job, being unclear
about one’s responsibilities, poor communication within the organization, being caught up in red tape and
being in a boring job are some of them. Managers and supervisors can influence their subordinates’ job
satisfaction and hence their productivity to a great extent. They need to take the following steps to enhance
subordinates’ satisfaction with the job:
Clarify responsibilities of subordinates and set goals: Employees require a clear understanding of their
roles and duties in order to excel in their work. Managers should therefore give their subordinates copies of
their job descriptions and clearly explain each area to them. When employees are placed in teams, they
should be made to understand that cooperative rather than competitive behaviour is essential for the successful
completion of the task.
Goals provide a sense of purpose, give direction and guide the behaviour of individuals. Managers should ask
their subordinates to record several goals that are specific and reachable, and stretch over the short-term (3
to 6 months) as well as the long-term (6 months to 1 year).
Provide subordinates with effective training: The effectiveness of the training provided to subordinates has
a significant impact on their performance. Managers should establish training objectives and criteria for the
subordinates and ensure that the training provided relates to their work. Trainers should not only be good at
their job, they should also enjoy it. Employees placed under a poor trainer or one who resents training them
feel very discouraged. For training to be effective, the trainees should receive hands-on practice and immediate,
specific and positive feedback about their development.
Teach time management: Managers can make their subordinates more productive by teaching them how
to manage their time efficiently. They can teach their subordinates how to plan projects or tasks before
actually performing them, how to set priorities and deadlines, and how to focus one’s efforts on accomplishing
important tasks first. Subordinates should be encouraged to complete unpleasant tasks first instead of
postponing them endlessly.
Ensure participatory management: Managers can enhance the productivity of subordinates by directing
their efforts towards accomplishment of the shared goals of the management and the subordinates. They
should involve their subordinates in the formulation of the mission statement, in the framing of policies and
procedures, and in the determination of the perks and bonuses to be given to them. By so doing, managers
can improve their communication with their subordinates and improve their morale. Moreover, by making them
feel important, managers can help increase subordinates’ loyalty towards the company.
Reduce red tapism: Managers should carefully study the policies and procedures of the organization to
eliminate unnecessary paperwork and rules and minimize delay in obtaining approvals. To increase the
productivity and satisfaction of their subordinates, managers should simplify work procedures wherever possible.
Modify behaviour wherever necessary: Managers should reinforce the positive and desirable behaviour of
subordinates through praise and rewards. If it is necessary to reprimand a subordinate, the manager should
ensure that the reprimand is specific and focused on the issue. Most importantly, the subordinate should not
be reprimanded in front of others.
Adapted from Thomas P. Sattler and Julie E. Mullen, “Enhancing Job Satisfaction and Productivity,” 17 May 2001,
Marquette University, <http://www.marquette.edu/coa/productivity.html>
Participation
Motivation theories encourage the use of the participation techniques. The right kind of participation
ensures an increase in the motivation and knowledge levels which contribute to the success of an enterprise.
Participation allows an individual to satisfy his or her need for esteem (from self and from others). It
gratifies the need for affiliation and acceptance. Above all, it gives people a sense of accomplishment and
a chance for advancement. MBO (discussed in Chapter 5) is the most popular and modern method of
motivating employees at all levels for better performance, since it ensures participation and freedom in
setting goals and achieving them.
Quality of Work Life (QWL)

One of the most interesting approaches to motivation is the quality of work life (QWL) programme.
QWL is not only a very broad approach to job enrichment but also an interdisciplinary field of inquiry
and action. It is a combination of several fields which include industrial and organization psychology and
sociology, industrial engineering, organization theory and development, motivation and leadership theory,
and industrial relations. Managers see this concept as a promising means of dealing with productivity
problems and workers’ grievances. Workers also see it as a means of improving working conditions and
justifying higher pay. QWL is a widely accepted concept and has been adopted by many large companies
like General Motors, Procter & Gamble and AT&T.
Job Enrichment
A modern and more permanent approach to motivation is job enrichment. Here, the attempt is to
build a higher sense of challenge and achievement in jobs. A job may be enriched in the following ways:
1. Allowing workers to make independent decisions on issues like work methods, sequence and pace
or the acceptance or rejection of materials;
2. Encouraging involvement and participation of employees and interaction between workers;
3. Making workers feel personally responsible for their tasks;
4. Ensuring that workers get to know how their tasks contribute to the finished product and the
welfare of the enterprise;
5. Giving people feedback on their job performance; and
6. Involving workers when bringing about changes in the physical aspects of their work environment,
such as the layout of office or plant, temperature, lighting and cleanliness.
Texas Instruments was the first firm to introduce the “job enrichment” concept on a fairly large scale.
Other companies such as AT&T, Procter & Gamble and General Foods have had considerable experience
with it. Companies that have adopted the job enrichment techniques reaped three major benefits:
Increase in productivity
Reduction in employee turnover and absenteeism
Improved morale
A SYSTEMS AND CONTINGENCY APPROACH TO MOTIVATION

Various aspects of motivation discussed in the previous sections reveal that motivation must be
considered from both a system and a contingency point of view. The nature of people and various
situational factors make the process of motivation complex. If a manager applies any single motivator or
a group of motivators without taking individual differences and other situational variables into consideration,
then the chances of failure will be high.
Motivating factors do not exist in a vacuum. Employees’ needs and drives are conditioned by
physiological needs or by needs arising from a person’s background. However, the desires for which
people are willing to strive, are also affected by the organizational climate in which they operate. In some
cases, the climate reduces motivation; in other cases it strengthens motivation. Motivation also depends
on and influences leadership styles and management practice. Leaders and managers (who, if effective,
will almost certainly be leaders) must respond to the motivations of individuals if they are to design an
environment in which people perform willingly and well. They can also create an environment that will
strengthen motivation. Various concepts related to leadership are discussed in Chapter 17. A manager’s
style of leadership and his ability to solve communication problems contribute to his managerial ability.
Managers can create an environment where motivation is high, when they possess ways to derive accurate
information and approaches that furnish feedback to employees.
SUMMARY
Managers cannot lead unless subordinates are motivated to follow them. In this chapter, we first
defined motivation and then moved on to a classification of motivation theories. Motivation theories are
broadly classified into content and process theories. Content theories specify what motivates individuals,
and process theories focus on the dynamics of motivation and how the motivation process takes place.
Abraham Maslow, Frederick Herzberg, David McClelland and Clayton Alderfer are the major contributors
to the content theories. Maslow developed ‘hierarchy of needs theory’ in which he classified human needs
into five groups – physiological needs, security needs, social needs, self-esteem needs, and self-actualization
needs. McClelland identified three types of basic motivating needs (need for achievement, need for affiliation,
and need for power) in his ‘acquired needs theory.’ Alderfer developed ‘ERG’ theory based on Maslow’s
five needs, and classified human needs into three groups of core needs – existence, relatedness and growth
needs. Though many different process theories have been discussed in management literature, two among
them are of particular significance – the expectancy theory and the equity theory. Victor H. Vroom, in his
expectancy theory, contends that individuals consider three elements – valence, expectancy and
instrumentality – when they decide whether or not to put in the necessary effort in a particular direction.
Porter and Lawler expanded the expectancy theory model. According to them, satisfaction does not lead
to performance. Rather, the reverse is true; performance can (but does not always) lead to satisfaction
through the reward process. The equity theory developed by J. Stacy Adams refers to an individual’s
subjective judgments about the fairness of the reward he or she gets, relative to the inputs, in comparison
with the rewards of others. The next section of the chapter explained briefly various motivation techniques
used by managers. Finally, we discussed the significance of a systems and contingency approach to
motivation.
Oriental Bank of Commerce: The Best Bank for The Year 2003
Oriental Bank of Commerce, one of the nationalized banks in India was adjudged Business
CASE STUDY
India’s best bank for the year 2003. ‘People management”, one of the key factors that
rejuvenated the Ailing bank was pointed out as the key factor behind this achievement.
The HR initiatives were actually introduced to resolve a crisis of ‘sub-staffing’, following
a voluntary retirement scheme (VRS) introduced in the nineties, as part of its cost reduction
drive (The VRS had reduced the bank staff strength to 13,500.) The bank undertook widespread
promotion drives which enhanced the motivation level of the employees and this had a direct
bearing on the bank’s services to its customers, (It introduced mobility especially for the
workmen who were confined to the same towns and cities for ages.) This is evident from the
OBC’s productivity per employee (Rs 343 lacks) and profits per employee (Rs 3.38 lacks)
figures, and these are the highest in the Banking industry for the year 2003.
The bank has also recruited adequate technical staff to maintain its cutting edge in the
new tech-driven age. Besides, the management has also drawn plans to tackle the ‘excess’
manpower.
Problem once it computerizes its 1000-branch strong network (on a technical platform
provided by the software consultancy firm, Infosys), where it is likely to render nearly 40 per
cent of its staff surplus, through their redeployment in the marketing of its financial services.
1. What are the assumptions of the bank about its employees?

2. what are the theories and techniques of motivation that are put in practice in the above case?
][][
Chapter 17 Leadership 351
17
Leadership
H Definition and Meaning of Leadership
H Key Elements of Leadership
H Leadership Theories
INTRODUCTION
The success or failure of managers depends on their leadership qualities. They can be successful
leaders by helping subordinates to find solutions to their problems. Managers are involved with bringing
together resources, developing strategies, organizing and controlling activities in order to achieve objectives.
At the same time managers, as leaders, have to select the goals and objectives of an organization, decide
what is to be done and motivate people to do it. Thus, leadership is that function of management which
is largely involved with establishing goals and motivating people to help achieve them. Leaders set goals
and help subordinates find the right path to achieve these goals.
A person may be an effective manager – a good planner, and an organized administrator – but lack
the motivational skills of a leader. Another may be an effective leader – skilled at inspiring enthusiasm and
devotion – but lack the managerial skills to channel the energy he/she arouses in others. Given the
challenges of dynamic engagement in today’s business world, most organizations today are putting a
premium on managers who also possess leadership skills.
In this chapter, we will first define leadership, then discuss the key elements of leadership, and
different theories of leadership.
DEFINITION AND MEANING OF LEADERSHIP

Harold Koontz and Heinz Weihrich have defined leadership as the art or process of influencing people
so that they will strive willingly and enthusiastically towards the achievement of group goals. In other
words, leadership is the ability to persuade others to work towards defined objectives enthusiastically. It
is the human factor, which binds a group together and motivates it towards goals. Leaders help a group
attain objectives through the best use of its capabilities.
Based on the above definition, some of the features of leadership can be set out as follows:
Leadership is the use of non-coercive influence to shape the group or organization’s goals, and
motivate behaviour towards the achievement of those goals.
It is a process in which one individual exerts influence over others.
Leadership involves other people – employees or followers – who by the degree of their willingness
to accept direction, help to define the leader’s status.
It involves authority and responsibility, in terms of deciding the way ahead and being held responsible
for the success or failure in achieving the agreed objectives.
Leadership involves an unequal distribution of power between leaders and group members. Group
members are not powerless; they can and do shape group activities in a number of ways. Still, the
leader will usually have more power.
Leadership involves the application of certain values. Leadership based on moral principles requires
that followers be given enough knowledge of alternatives to make intelligent choices when it comes to
responding to a leader’s proposal.
Exhibit 17.1 Methods for Developing Effective Leaders
The keys to an organization’s success are managers who are able to inspire subordinates to perform
exceedingly well. Substantial research has been undertaken to arrive at a description of a ‘good manager’
so that the desirable traits can be identified and measured. The following methods are used by most
successful managers to bring out the best from their subordinates.
1. Proper use of management by objectives: Management by objectives is a very effective technique for
establishing specific and challenging goals. Once managers define clear, specific and challenging goals, they
provide direction to subordinates. Managers can also help subordinates if they encounter any problems.
2. Providing employees meaningful and interesting work: Subordinates have an inherent desire for
achievement. Managers should provide work which is interesting and challenging, to subordinates. Moreover,
the subordinates should be rewarded when they perform a task well. Finally, as they gain experience and
become proficient in their work, subordinates should be given higher responsibilities.
3. Focusing on improving communication skills: Managers should remove all major barriers to effective
communication. The manager must communicate clearly, specifically and unambiguously when giving
instructions. The leader should not only be able to communicate well, but should also be a good listener.
By being a good listener, managers will be able to understand employee concerns and can address them
in an appropriate manner. Another important aspect managers must take care of is feedback. They should
provide necessary feedback to subordinates so that they can improve their performance.
4. Using an effective performance appraisal for subordinates: The manager should determine how well the
subordinate has performed. The actual performance should be compared with the desired results. Performance
appraisal should reward and reinforce effective employee performance. The appraisal should also highlight the
areas of concern, and show subordinates how to improve their performance.
5. Proper delegation of authority and responsibility: The manager should give adequate authority and
responsibility to subordinates to perform the appointed task. The motivation level of subordinates increases
if they are given greater responsibilities or tasks which they perceive to be important.
6. Building a team: The manager should ensure that each subordinate understands his/her role and
responsibilities. The manager should also make the employees understand the mission of the organization,
and how each subordinate contributes to the profitability of the organization. They should make subordinates
feel they are part of a team.
7. Using standard procedures for effective decision-making: The manager should ensure that the decisions
made have merit, and are made within a scheduled time frame and is accepted by employees. For this, the
manager should establish procedures for decision-making.
Adapted from Brain James Porteous, “Ten Techniques for Effective Practice Leadership,” Dynamic Chiropractic, 27
May 2003, <http://www.chiroweb.com/archives/09/23/03.html>
KEY ELEMENTS OF LEADERSHIP

It has been observed that every group that attains its goals or performs efficiently has a skilled leader.
A leader’s skill comprises of four major elements: (1) the ability to use power effectively and in a responsible
manner, (2) the ability to understand the fact that people are motivated by different forces at different times
and in different situations, (3) the ability to inspire and (4) the ability to behave in a manner that will
develop a harmonious work culture.
Exhibit 17.2 Developing Leaders at Infosys
The founders of Infosys wanted to build an organization that would last and could operate even under uncertain
conditions. With this in mind, the Chairman of Infosys, Narayana N.R. Murthy, established an advisory body
known as the Management Council entrusted with taking strategic decisions for the company. He noticed
that during the management council meetings, young achievers in the company were reluctant to make
suggestions. On probing further, Murthy found that these employees did have plenty of good ideas, but
hesitated to contribute to the discussions due to the fear of intimidating their superiors. This troubled
Narayana Murthy and he decided to build a leadership institute, that would help promising employees at all
levels to develop into leaders. It would also provide them opportunities to shape the future of Infosys.
Infosys Leadership Institute (ILI) was created in early 2001 to help promising Infoscions develop into good
leaders. The aim of Infosys was to respond to the following specific challenges:
To help people manage the phenomenal growth of the company.
To make the employees of Infosys ready for the complexities of the market and the dynamic external
environment.
To create greater customer value through ‘thought leadership.’
In Infosys, leadership is regarded as a journey, and it begins with the selection of high-potential employees.
The top management identifies a pool of candidates on the basis of their past performance. They are also
assessed for leadership potential. Each high-potential employee has an ILI faculty assigned to him. The
faculty members guide these employees by developing personal development plans (PDPs) and by creating
action plans for employees. Most high-potential employees are trained in one or more leadership skills. The
duration of this training is three years and helps high-potential employees to develop into effective leaders.
Infosys employs the ‘nine pillar’ model of leadership development. This model was developed after a careful
analysis of the processes followed by 18 highly successful global corporations. Each pillar in the model has
a unique relevance to development of individual’s leadership competencies. The nine pillars in this model are:
1. 360 degree feedback
2. Development assignments
3. Infosys culture workshops
4. Developmental relationships
5. Leadership skills training
6. Feedback intensive programmes
7. Systemic process learning
8. Action learning
9. Community empathy
An employee can choose one or more these pillars for his or her personal development. The starting point
of the leadership journey is the 360 degree feedback. Participation in other areas is optional and depends
on the employee.
360 degree feedback: This a method of systematic collection of data regarding a person’s performance and
abilities from many co-workers, including peers, direct reporters, managers, and internal and external customers.
Feedback thus obtained is used to prepare individual personal development plans (PDPs). These serve as
guides to the individuals for acquiring new skills, and to enhance their existing skills. Each individual is
assigned an ILI faculty to help him/her draw up a PDP and put it into action.
Development assignments: Highly talented employees are offered experience in diverse functions by means
of job rotations and cross-functional assignments. Development assignments help employees to develop
practical leadership skills beyond their areas of experience.
Infosys Culture Workshops: These workshops give employees an understanding of the core values, purpose
and processes used in leadership development. These workshops allow participants to interact with each
other and reinforce the culture of Infosys. They also ensure adherence to culture and help in empowerment
of people.
Developmental relationships: Infosys regards mentoring as a development relationship. The employees

have a mentor who facilitate the sharing and transfer of knowledge and experience.
Leadership skills training: Infosys has initiated the ‘Leaders Teach Series’, which are workshops conducted
by the Board of directors with assistance from the ILI faculty. Workshops are also conducted by the Chairman
and Chief Mentor, Narayana Murthy, and the CEO and MD, Nandan Nilekani, and other directors of the board.
This indicates the commitment of the senior management to the development of future leaders.
Feedback intensive programmes: These programmes are based on formal and informal feedback received
from different people who come in contact with the employee. In these programmes, participants receive and
give feedback and work out a plan for continuous personal and professional development.
Systemic process learning: This allows the participants to view an organization as a system which consists
of different interacting subsystems. Employees learn how to develop and implement plans for continuous
improvement in systemic processes.
Action learning: This is a team-based approach which uses the process of solving unresolved, real life
organizational problems. The process also involves setting goals for continuous development and framing
strategies for attaining them.
Community empathy: ILI provides opportunities for talented personnel to get involved in social causes.
Infosys believes that community empathy is necessary for overall leadership development. Therefore, social
conscience has to be nurtured and enhanced in potential leaders.
Adapted from “Developing Leaders @ Infosys, “Praxis, Vol.3,Issue 4(June, 2002):p 38-43,<http://blonnet.com/
praxis/pr0304/03040380.pdf>
The first element of leadership is using power in a responsible manner. Power is the control a person
can exercise over others. In other words, it is the capacity to affect the behaviour of others. Leaders in
organizations typically rely on some or all of the five major bases of power. These five bases of power –
coercive, reward, legitimate, expert, and referent power– were discussed in Chapter 10.
The second element of leadership is the ability of a leader to understand people at a fundamental level.
Understanding of motivation theories, kinds of motivational forces, and the nature of a system of motivation
is not sufficient; the leader must also be able to apply this knowledge to people and situations. A manager
or a leader, who understands the elements of motivation, should be able to use his greater awareness of
the nature and strengths of human needs to work out ways of satisfying these needs, so as to get the
desired results.
The third element of leadership is the ability of a leader to inspire followers to perform a task to the
best of their capacities. Although the superiors can inspire subordinates by means of various incentives,
the behaviour of superiors acts as a stronger motivating force. A leader’s charismatic nature and personality
may give rise to loyalty, devotion, and a strong desire on the part of the followers to carry out instructions.
In such a situation, the followers do not merely try to satisfy their own needs but give unconditional support
to the leader.
The fourth element of leadership concerns the style adopted by the leader, and the resulting influence
on the work climate in the group or organization. The strength of motivation of followers is influenced by
expectancies, perceived rewards, the task to be done, and other factors that are a part of the work climate
in an organization. Leadership behaviour has a considerable impact on these factors that affect the work
climate, and therefore there has been a large amount of research into this area of leadership behaviour.
Many management scholars regard good leadership to be the result of an appreciation of the psychology
of interpersonal relationships. Given that the most important function of managers is to design and
maintain an environment which will help the organization to achieve its goals, a good manager-leader
should attempt to make the work of almost every member in the organization more productive and
satisfying by acting on an understanding of their underlying motivations such as status, power, money,
pride, etc. and working to fulfil them.
In sum, the fundamental principle of leadership can be described as follows: “Since people tend to
follow those who, in their view, offer them a means of satisfying their own personal goals, the more
managers understand what motivates their subordinates and how these motivations operate, and the more
they reflect this understanding in carrying out their managerial actions, the more effective they are likely
to be as leaders.”
LEADERSHIP THEORIES
Attempts to explain and understand leadership have led to the formulation of various leadership
theories. There are four broad categories of leadership theories: trait theory, behavioural theory, situational
or contingency theory, and transformational theory.
Trait Theory of Leadership

In the 1940s, most early leadership studies concentrated on trying to determine the traits of a leader.
The trait theory was the result of the first systematic effort of psychologists and other researchers to
understand leadership. This theory held that leaders share certain inborn personality traits. The earliest
theory in this context was the “great man” theory, which actually dates back to the ancient Greeks and
Romans. According to this theory, leaders are born, not made. Many researchers have tried to identify the
physical, mental, and personality traits of various leaders. However, the “great man” theory lost much of
its relevance with the rise of the behaviourist school of psychology.
In his survey of leadership theories and research, Ralph M. Stogdill found that various researchers
have related some specific traits to leadership ability. These include five physical traits (such as appearance,
energy and height); four intelligence and ability traits; sixteen personality traits (such as adaptability,
enthusiasm, aggressiveness, and self-confidence); six task-related characteristics (such as achievement,
drive, initiative and persistence), and nine social characteristics (such as interpersonal skills, cooperativeness,
and administrative ability).
More recently, researchers have identified the following key leadership traits: leadership motivation
(having a desire to lead but not hungry for power), drive (including achievement, energy, ambition,
initiative, and tenacity), honesty and integrity, self-confidence (including emotional stability), cognitive
ability, and an understanding of the business.
In general, the study of leadership in terms of traits has not been a very successful approach for
explaining leadership. All leaders do not possess all the traits mentioned in these theories, whereas many
non-leaders possess many of them. Moreover, the trait approach does not give one an estimate of how
much of any given trait a person should possess. Different studies do not agree about which traits are
leadership traits, or how they are related to leadership behaviour. Most of these traits are really patterns
of behaviour.
Behavioural Theories
When it became evident that effective leaders did not seem to have a particular set of distinguishing
traits, researchers tried to study the behavioural aspects of effective leaders. In other words, rather than
try to figure out who effective leaders are, researchers tried to determine what effective leaders do – how
they delegate tasks, how they communicate with and try to motivate their followers or employees, how they
carry out their tasks, and so on.
In this section, we review major efforts to identify important leadership behaviours. This research
grew largely out of work at the University of Iowa, the University of Michigan, and the Ohio State
University. We also discuss about Likert’s four systems of management and the Managerial Grid.
Iowa and Michigan Studies

Kurt Lewin, a researcher at the University of Iowa, and his colleagues, made some of the earliest
attempts to scientifically determine effective leader behaviours. They concentrated on three leadership
styles: autocratic, democratic, and laissez-faire. The autocratic leader tends to make decisions without
involving subordinates, spells out work methods, provides workers with very limited knowledge of goals,
and sometimes gives negative feedback. The democratic or participative leader includes the group in
decision-making; he consults the subordinates on proposed actions and encourages participation from
them. Democratic leaders let the group determine work methods, make overall goals known, and use
feedback to help subordinates. Laissez-faire leaders use their power very rarely. They give the group
complete freedom. Such leaders depend largely on subordinates to set their own goals and the means of
achieving them. They see their role as one of aiding the operations of followers by furnishing them with
information and acting primarily as a contact with the group’s external environment. They too avoid giving
feedback.
To determine which leadership style is most effective, Lewin and his colleagues trained some persons
to exhibit each of the styles. They were then placed in charge of various groups in a preadolescent boys’
club. They found that on every criterion in the study, groups with laissez-faire leaders under performed in
comparison with both the autocratic and democratic groups. While the amount of work done was equal
in the groups with autocratic and democratic leaders; work quality and group satisfaction was higher in
the democratic groups. Thus, democratic leadership appeared to result in both good quantity and quality
of work, as well as satisfied workers.
Later research, however, showed that democratic leadership sometimes produced higher performance
than did autocratic leadership, but at other times produced performance that was lower than or merely
equal to that under the autocratic style. While a democratic leadership style seemed to make subordinates
more satisfied, it did not always lead to higher, or even equal, performance.
These findings put managers in a dilemma over which style to choose. Moreover, many managers are
not used to operating in a democratic mode. To help managers decide which style to choose, particularly
when decisions had to be made, management scholars Robert Tannenbaum and Warren H. Schmidt
devised a continuum of leader behaviours (see Figure 17.1).
Subordinate-
Boss- Centered
Centered Leadership
Leadership
Use of Authority
by the Manager
Area of Freedom
for Subordinates
Manager Manager Manager Manager Manager Manager Manager

makes sells presents presents presents defines permits
decision decision ideas and tentative problem, gets limits; asks subordinates
and invites decision suggestions, group to to function
announces questions subject to makes make within limits
it change decision decision defined by
superior
Fig. 17.1 Continuum of Leader Behaviours

Source: Robert Tannenbaum and Warren H. Schmidt, “How to Choose a Leadership Pattern,” Harvard Business
Review, Vol. 51, May-June 1973, p 164
The continuum depicts various gradations of leadership behaviour, ranging from the boss-centered
approach at the extreme left to the subordinate-centreed approach at the extreme right. A move away from
the autocratic end of the continuum represents a move towards the democratic end and vice versa.
According to Tannenbaum and Schmidt, while deciding which leader behaviour pattern to adopt, a
manager should consider forces within themselves (such as their comfort level with the various alternatives),
within the situation (such as time pressures), and within subordinates (such as readiness to assume
responsibility). The researchers suggested that in the short run, depending on the situation, the managers
should exercise some flexibility in their leader behaviour. However, in the long run, the managers should
attempt to move towards the subordinate-centreed end of the continuum, as such leader behaviour has
the potential to improve decision quality, teamwork, employee motivation, morale, and employee
development.
Further work on leadership at the University of Michigan seemed to confirm that the employee-
centreed approach was much more useful as compared to a job-centreed, or production-centreed approach.
In the employee-centreed approach, the focus of the leaders was on building effective work groups which
were committed to delivering high performance. In the job-centreed approach, the work was divided into
routine tasks and leaders monitored workers closely to ensure that the prescribed methods were followed
and productivity standards were met. There were still variations in the level of the output produced.
Sometimes the job-centreed approach resulted in the production of a higher output as compared to the
employee-centreed approach. Therefore, no definite conclusions could be drawn and further studies appeared
necessary.
Low Initiating High Initiating

Consideration Consideration
Continuum of Cons ideration
Low Initiating High Initiating

Structure Structure
Continuum of Initia ting Structure
Fig. 17.2 Ohio State Model of Leader Behaviour
Ohio State Studies

In 1945, a group of researchers at Ohio University began extensive investigations on leadership. They
initiated the process by identifying a number of important leader behaviours. The researchers then designed
a questionnaire to measure the behaviours of different leaders and track factors such as group performance
and satisfaction to see which behaviours were most effective. The most publicized aspect of the studies
was the identification of two dimensions of leadership behaviour: ‘initiating structure’ and ‘consideration.’
Initiating structure is the extent to which a leader defines his or her own role and those of subordinates
so as to achieve organizational goals. It is similar to the job-centreed leader behaviour of the Michigan
studies, but includes a broader range of managerial functions such as planning, organizing, and directing.
It focuses primarily on task-related issues. Consideration is the degree of mutual trust between leader and
his subordinates; how much the leader respects subordinates’ ideas and shows concerns for their feelings.
Consideration is similar to the employee-centreed leader behaviour of the Michigan studies. It emphasizes
people-related issues. A consideration-oriented leader is more likely to be friendly towards subordinates,
encourages participation in decision-making, and maintains good two-way communication.
As opposed to the Iowa and Michigan studies, which considered leadership dimensions, i.e. employee-
centreed approach and job-centreed approach, as the two opposite ends of the same continuum, the Ohio
State studies considered initiating structure and consideration as two independent behaviours. Therefore,
the leadership behaviours operated on separate continuums. A leader could thus be high on both the
dimensions, or high on one dimension and low on the other, or could display gradations in between. This
two-dimensional mode of leader’s behaviour made sense as many leaders display both initiating structure
and consideration dimensions. The Ohio State two-dimensional approach is shown in Figure 17.2.
The two-dimensional approach led to the interesting probability that a leader might be able to place
emphasis on both task- and people-related issues. They may be able to produce high levels of subordinate
satisfaction by being considerate, and at the same time can be specific about the results expected, thereby
focusing on task issues too.
However, this theory was too simplistic. It later became apparent that situational factors like the
nature of the task and the expectations of subordinates affected the success of leadership behaviour.
Likert’s Four Systems of Management

Professor Rensis Likert and his associates at the University of Michigan studied the patterns and styles
of leaders and managers over three decades and developed certain ideas and approaches for understanding
leadership behaviour. Likert considers an effective manager as one who is strongly oriented to subordinates
and relies on communication to a great extent in order to keep all the departments or individuals working
in unison. He suggested four systems of management.
System 1 Management: This is also described as an “exploitive-authoritative” style. This represents
dictatorial leadership behaviour, with all decisions made by the managers, and little employee participation.
These managers are highly autocratic, hardly trust subordinates, use negative motivation tactics like fear
and punishment, and keep the decision-making powers with them.
System 2 Management: This management style is called the “benevolent-authoritative” style.
Here, managers are patronizing but have confidence and trust in subordinates. They permit upward
communication to a certain degree and ask for participation from subordinates. Managers in this system
use both rewards and punishment to motivate employees. They allow subordinates to participate to some
extent in decision-making but retain close policy control.
System 3 Management: System 3 management is referred to as the “consultative” style. Managers
in this system do not have complete confidence and trust in subordinates. However, they solicit advice
from subordinates while retaining the right to make the final decision. This management style involves (i)
motivating employees with rewards and occasionally punishment (ii) broad policy and general decisions
being made at the top while specific decisions are made at lower levels, (iii) using both upward and
downward communication flow, and (iv) managers acting as consultants in order to resolve various
problems.
System 4 Management: This style of management is called the ‘participative leadership’ style.
Managers in this system trust their subordinates completely and have confidence in their abilities. They
always ask the opinions of the subordinates and use them constructively. They encourage participation of
employees at all levels in decision-making and use both upward and downward communication. The
managers in this system work with their subordinates and other managers as a group. Participation of
employees in areas like the setting of objectives and accomplishment of goals is financially rewarded.
Likert found that those managers who adopted the system 4 approach had the greatest success as
leaders, as they were most effective in setting goals and achieving them, and were generally more productive.
The research by Likert and his team concluded that high productivity is associated with systems 3 and
4, while systems 1 and 2 are characterized by lower output.
The Managerial Grid

The managerial grid, developed by Robert Blake and Jane Srygley Mouton, is a popular approach
for defining leadership styles. Blake and Mouton argue that managerial behaviour is a function of two
variables: concern for people and concern for production. They use the managerial grid as a framework
to help managers identify their leadership style and to track their movement toward the ideal management
style. This grid shown in Figure 17.3 is used all over the world for training managers and for identifying
various combinations of leadership styles.
(H igh)
9 1,9 9,9
Country C lub Managem ent Team M anagem ent
Thoughtful attention to needs of
8
people for satisfying relationships
leads to a comfortable, friendly
organization atmosphere and
CO NCER N FOR P EO P LE
7
work tempo.
6 5,5
Middle of the Road M anagem ent
5 Adequate organization performance is
possible through balancing the necessity
to get out work with maintaining morale
4 of people at a satisfactory level.
9,1
3 1,1
Authority-Com pliance
Im poverished M anagem ent
1
(Low )
1 2 3 4 5 6 7 8 9
(Low ) (H igh)
CON CE R N FOR P ROD UCTIO N
Fig. 17.3 The Leadership Grid
The level of concern for people (employees) is shown on the vertical axis and the level of concern for
production on the horizontal axis of the grid. Each axis has a scale ranging from 1 to 9, with the higher
numbers indicating greater concern for the specified variable. Depending on the degree of the managerial
concern for people and production, a manager can fall anywhere on the grid. The management grid
reflects five leadership styles:
Leadership style 1,1 is called ‘impoverished management.’ In this context, there is a low concern for
people and low concern for tasks or production. In other words, neither people nor production is emphasized,
and little leadership is exhibited. This management style does not provide leadership in a positive sense
but believes in a “laissez-faire” approach, relying on previous practice to keep the organization going.
Leadership style 1,9 is called ‘country club management.’ There is high concern for people but low
concern for production. Here managers try to create a work atmosphere in which everyone is relaxed,
friendly, and happy. However, no one is bothered about putting in the effort required to accomplish
enterprise goals. This management style may be based on a belief that the most important leadership
activity is to secure the voluntary cooperation of group members in order to obtain high levels of productivity.
Subordinates of such managers generally report high levels of satisfaction, but the managers may be
considered too easy-going and unable to make decisions.
Leadership style 9,1 which reverses the emphasis of style 1,9 is called ‘authority-compliance
management.’ There is high concern for production but low concern for people in this management style.
This management style is task-oriented and stresses the quality of production over the wishes of subordinates.
Such managers may be loyal, conscientious, and personally capable, but may become alienated from their
subordinates, who may do only enough work to keep themselves out of trouble.
Leadership style 5,5 is called ‘organization-man management.’ It is also called ‘middle-of-the-road
management.’ Here there is an intermediate (or moderate) amount of concern for both production and
people. Managers with this management style believe in compromise, so that decisions are taken but only
if endorsed by subordinates. Such managers may be dependable and may support the status quo, but are
not likely to be dynamic leaders. Moreover, they may have difficulty in bringing about innovation and
change.
Leadership style 9,9 is called ‘team management.’ Here there is a high concern for both production
as well as employee morale and satisfaction. Team managers believe that concern for people and for tasks
are compatible. They believe that tasks need to be carefully explained and decisions endorsed by subordinates
to achieve a high level of commitment. According to Blake and Mouton, 9,9 orientation is the most
desirable one.
The Blake and Mouton managerial grid is widely used as a training device for managers. It is a useful
device for identifying and classifying managerial styles, but it does not tell us why a manager falls into one
part or another of the grid.
In order to determine the reason, one has to look at underlying causes, such as the personality
characteristics of the leader or the followers, the ability of managers, the enterprise environment, and other
situational factors that influence how leaders and followers act.
Situational or Contingency Theories

The use of the trait and behavioural approaches to leadership showed that effective leadership
depended on many variables, such as organizational culture and the nature of tasks. No one trait was
common to all effective leaders. No one style was effective in all situations. Researchers, therefore, began
trying to identify those factors in each situation that influenced the effectiveness of a particular leadership
style. They started looking at and studying different situations in the belief that leaders are the products
of given situations. A large number of studies have been made on the premise that leadership is strongly
affected by the situations in which the leader emerges, and in which he or she operates. Taken together,
the theories resulting from this type of study constitute the contingency approach to leadership.
Situational or contingency approaches obviously are of great relevance to managerial theory and
practice. They are important for practicing managers, who must consider the situation when they design
an environment for performance. The contingency theories focus on the following factors.
1. Task requirements
2. Peers’ expectations and behaviour
3. Organizational culture and policies
There are four popular situational theories of leadership: (1) Fiedler’s contingency approach to leadership
(2) The path-goal theory, (3) The Vroom-Yetton model and (4) Hersey and Blanchard’s situational leadership
model. We will discuss each of these briefly.
Fiedler’s Contingency Approach to Leadership

Fred E. Fiedler provided a starting point for situational leadership research. Fiedler and his associates
at the University of Illinois suggested a contingency theory of leadership, which holds that people become
leaders not only because of their personality attributes, but also because of various situational factors and
the interactions between leaders and followers. Fiedler’s basic assumption is that it is quite difficult for
managers to alter the management styles that made them successful. In fact, Fiedler believes that most
managers are not very flexible, and trying to change a manager’s style to fit unpredictable or fluctuating
situations is ineffective or useless. Since styles are relatively inflexible, and since no one style is appropriate
for every situation, effective group performance can be achieved only by matching the style of the manager
to the situation or by changing the situation to fit the manager’s style.
On the basis of his studies, Feidler identified three critical dimensions of the leadership situation that
would help in deciding the most effective style of leadership.
Position Power: This is the degree to which the power of a position enables a leader to get group
members to obey instructions. In the case of managers, this is the power derived from the authority granted
by the organizational position. According to Fiedler, a leader who has considerable position power can
obtain followers more easily than one who lacks this power.
Task Structure: This refers to the degree to which tasks can be clearly spelled out and people be
held responsible for them. When task structure is clear, it becomes easier to assess the quality of performance
of the employees, and their responsibility with respect to accomplishment of the task can be precisely
defined.
Leader-Member Relations: This refers to the extent to which group members believe in a leader
and are willing to comply with his instructions. According to Fiedler, the quality of leader-member relations
is the most important dimension from a leader’s point of view, since the leader may not have enough
control over the position power and task structure dimensions.
Fiedler identified two major styles of leadership: (1) task-oriented (the leader gives importance to the
tasks being performed), (2) employee-centreed (the leader gives importance to maintaining good interpersonal
relations and gaining popularity).
In order to determine whether a leader is task-oriented or employee-centreed and to measure leadership
styles, Fiedler employed an innovative testing technique. His findings were based on two sources: (1)
scores on the least preferred co-worker (LPC) scale – these are ratings made by group members to indicate
those persons with whom they would least like to work with; and (2) scores on the assumed similarity
between opposites (ASO) scale – ratings based on the degree to which leaders identify group members
as being like themselves. This scale is based on the assumption that people work best with those with
whom they can relate. Even today the LPC scale is used in leadership research.
On the basis of LPC measures, Fiedler found that the leaders who rated their co-workers favourably
were those who found satisfaction from maintaining good interpersonal relationships. On the other hand,
leaders who rated their co-workers negatively were inclined to be task-oriented.
Fiedler’s model suggests that an appropriate match of the leader’s style (as measured by the LPC
score) with the situation (as determined by the three dimensions – position power, task structure, leader-
member relations) leads to effective managerial performance. For instance, a situation characterised by
lack of adequate position power of a leader, unclear definition of the task structure, and absence of cordial
leader-member relationships would favour a task-oriented leader.
At the other extreme, even in a favorable situation wherein the leader has considerable position
power, a well-defined task structure and good leader-member relations exist, Fiedler found that a task-
oriented leader would be the most effective. Therefore, Fieldler concluded that an employee-oriented leader
would be the most effective in moderate situations or situations which fall between these two extremes.
Path-goal Theory
This theory was developed largely by Robert J. House and Terence R. Mitchell. The path-goal theory
of leadership attempts to explain how a leader can help his subordinates to accomplish the goals of the
organization by indicating the best path and removing obstacles to the goals.
The path-goal theory indicates that effective leadership is dependent on, firstly, clearly defining, for
subordinates, the paths to goal attainment; and, secondly, the degree to which the leader is able to improve
the chances that the subordinates will achieve their goals. In other words, the path-goal theory suggests
that the leaders should set clear and specific goals for subordinates. They should help the subordinates find
the best way of doing things and remove the impediments that hinder them from realizing the set goals.
Expectancy theory is the foundation of the path-goal concept of leadership. Expectancy theory (discussed
in detail in Chapter 16) indicates that employee motivation is dependent on those aspects of the leader’s
behaviour that influence the employee’s goal-directed performance and the relative attractiveness to the
employee of the goals involved. The theory holds that an individual is motivated by his perception of the
possibility of achieving a goal through effective job performance. However, the individual must be able to
link his or her efforts to the effectiveness of his/her job performance, leading to the accomplishment of
goals.
The expectancy theory comprises three main elements: (1) effort-performance expectancy (the
probability that efforts of the employees will lead to the required performance level), (2) performance-
outcome expectancy (the probability that successful performance by subordinates will lead to certain
outcomes or rewards), and (3) valence (the perception regarding the outcomes or rewards). The path-goal
theory uses the expectancy theory of motivation to determine ways for a leader to make the achievement
of work goals easier or more attractive.
The path-goal theory suggests that four leadership styles (behaviours) can be used in order to affect
subordinates’ perceptions of paths and goals.
1. Instrumental leadership behaviour involves providing clear guidelines to subordinates. The leaders
describe the work methods, develop work schedules, identify standards for evaluating performance,
and indicate the basis for outcomes or rewards. It corresponds to task-centreed leadership, as
described in some of the earlier models.
2. Supportive leadership behaviour involves creating a pleasant organizational climate. It also entails
the leaders showing concern for the subordinates and their being friendly and approachable. It is
a similar concept to relationship-oriented behaviour or consideration, in earlier theories.
3. Participative leadership behaviour entails participation of subordinates in decision-making and
encouraging suggestions from their end. It can result in increased motivation.
4. Achievement-oriented leadership behaviour involves setting formidable goals in order to help the
subordinates perform to their best possible levels. Here, leaders have a high degree of confidence
in subordinates.
The path-goal theory, unlike Fiedler’s theory, suggests that these four styles are used by the same
leader in different situations. Apart from the expectancy theory variables, the other situational factors
contributing to effective leadership include: (1) characteristics of subordinates, such as their needs, self-
confidence, and abilities; and (2) the work environment, including such components as the task, the
reward system, and the relationship with co-workers (see Figure 17.4)
Employee/Subordinate
Characteristics
Needs
Self-confidence
Abilities
Leader Behaviour Outcomes

Instrumental Motivated subordinates
Supportive Enhanced performance
Participative Employee satisfaction
Achievement-oriented
Factors pertaining to the work

environment
Task
Reward system
Relationship with
coworkers
Fig. 17.4 The Path-Goal Theory
Two general propositions have emerged from the path-goal theory of House and Mitchell: (1) the
behaviour of the leader is acceptable and satisfying to subordinates to the extent that the subordinates see
such behaviour as either an immediate source of satisfaction, or as instrumental to future satisfaction, (2)
the behaviour of the leader will be motivational to the extent that (a) such behaviour makes the satisfaction
of subordinates’ needs contingent on effective performance and (b) such behaviour complements the
environment of the subordinates by providing the training, guidance, support, and rewards or incentives
necessary for effective performance.
The path-goal theory makes a great deal of sense to the practicing manager. However, this model
needs further testing before the approach can be used as a definitive guide for managerial action.
VROOM-YETTON MODEL
Another important issue in the study of leadership is the degree of participation of subordinates in
the decision-making process. Two researchers, Victor Vroom and Philip Yetton, developed a model of
situational leadership to help managers to decide when and to what extent they should involve employees
in solving a particular problem. The Vroom-Yetton model identifies five styles of leadership based on the
degree to which subordinates participate in the decision-making process. The five leadership styles are as
follows:
Autocratic I (AI) – Managers solve the problem or make the decision themselves, using information
available at that time.
Autocratic II (AII) – Managers obtain the necessary information from subordinates, then make the
decision themselves.
Consultative I (CI) – Managers discuss the problem with relevant subordinates individually, getting
their ideas and suggestions without bringing them together as a group. Then the managers make the
decision, which may or may not reflect subordinates’ influence.
Consultative II (CII) – Managers share the problem with subordinates as a group, collectively
obtaining their ideas and suggestions. Then they make the decision, which may or may not reflect
subordinates’ influence.
Group II (GII) – Managers share a problem with subordinates as a group. Managers and subordinates
together generate and analyze alternatives and attempt to reach a consensus on the solution. Managers
do not try to get the group to adopt the managers’ own preferred solution; they accept and implement any
solution that has the support of the entire group.
Vroom and Yetton prepared a list of seven ‘yes-no’ questions that managers can ask themselves to
determine which leadership style to use for the particular problem they are facing (see Table 17.1).
Table 17.1: Situational Characteristics and Diagnostic Questions developed by Vroom and Yetton
Situational Characteristic Diagnostic Question

Quality of the decision How important is the technical quality of the decision?
Availability of information Do you have enough information to be able to take a high quality decision?
Structure of the issue Is the problem well-structured?
Necessity of commitment of How important is the subordinates’ commitment in putting the decision into
subordinates practice?
Probability of commitment If you took the decision by yourself are you certain the subordinates will commit
themselves to putting it into practice?
Congruency of objectives Do your subordinates share the organizational objectives that will be reached
by solving the issue?
Conflicts among subordinates Can conflicts among subordinates come up because of their preferences for
certain solutions?
Adapted from Romeo Cretu, “Decision-Making,” The School for Young Serb and Romanian Political Leaders, http:/
/www.pluralism.ro/dec.htm
Vroom and Yetton developed a decision model by matching the decision styles to the situation
according to the answers given to the seven questions. The managers can identify the most suitable
leadership style for each type of problem by answering these questions. Depending on the nature of the
problem, more than one leadership style might be suitable. Research conducted by Vroom and other
management scholars has demonstrated that decisions consistent with the model have been successful.
Hersey and Blanchard’s Situational Leadership Model

One of the major contingency approaches to leadership is Paul Hersey and Kenneth H. Blanchard’s
situational leadership model. It is based on the premise that leaders need to alter their behaviours depending
on a major situational factor – the readiness of followers. Hersey and Blanchard define readiness as the
desire for achievement, willingness to accept responsibility and task-related ability, experience and skill. In
other words, the readiness of employees refers to their willingness and ability to handle a particular task.
Hersey and Blanchard believe that the relationship between a leader and follower moves through four
phases as followers develop over time. Accordingly, leaders need to alter their leadership style (see Table
17.2).
Table 17.2: Hersey and Blanchard’s Model of Leadership
Relationship Behaviour Task Behaviour Leader Behaviour

Initial phase of ‘readiness’
Low High Managers need to spell out duties and responsibilities clearly to the
group
Employees need to be instructed in their tasks
High High Overtime, employees learn to perform their tasks

Leaders still need to provide guidance
High Low Employees become more capable, actively begin to seek
responsibility
Leader need not be as task-oriented as earlier, but still needs to be
supportive and considerate
Employees become more experienced and confident
Low Low Leader can reduce the amount of support and encouragement
Employees no longer need to be guided and can take their own
decisions.
Task behaviour refers to the extent to which the leader has to provide guidance to the individual or
group. It includes telling people what to do, when to do it, how to do it, and who is to do it. Relationship
behaviour refers to the degree to which the leader engages in two-way communication. It includes listening,
facilitating and supportive behaviours.
In the initial phase of ‘readiness’, the manager must spell out duties and responsibilities clearly for
the group. This is appropriate since employees need to be instructed in their tasks and should be familiarized
with the organization’s rules and procedures. It would be inappropriate to use participatory relationship
behaviour at this stage because the employees need to understand how the organization works.
Exhibit 17.3 Distributed Leadership
Leadership has fascinated many researchers and has been studied very extensively. However, there is no
generally accepted approach to leadership. Until World War II, leadership was defined by the personality traits
of the leader. It was considered that leaders were born and not made. An alternative approach considered
leadership as ‘a set of behaviours and actions’ which could be learnt. A third approach is the situational or
contingency leadership approach, which holds that leadership styles depend on the situation. According to
this approach, there is no particular leadership style that is effective in all situations, and the leader must
use a leadership style appropriate for the situation.
A new approach to leadership called ‘distributed’ leadership is becoming popular these days. Distributed
leadership involves the sharing of leadership functions in an organization. This approach is based on five
assumptions:
The powers and functions of a leader are shared, and are not limited only to a particular person or an
elite group.
Individuals have the potential to lead, if they are provided suitable training and support.
Individuals, groups and organizations tend to be effective, when leadership is distributed.
Leadership is not just a set of independent characteristics, but a process.
Leadership is organization-centreed rather than person-centreed.
In this approach to leadership, there are three different and complementary types of leadership. Each of these
types of leadership requires a different role, mindset and timescale. At the top level there is a need for a
visionary who can frame strategies and goals for the organization. This ‘visionary’ element of leadership should
take care of not just organizational strategies but should also respond to and anticipate the changes taking
place in the industry. Such leadership requires farsightedness.
Next comes ‘integrative’ leadership, where leaders integrate the corporate vision, values and strategy and
develop the necessary systems and processes for operational needs. They should resolve conflicts between
units. The leaders should be able to see beyond the present situation and should have a broad mindset,
which encompasses a wider sphere than just the organization.
Finally, at the team or project level, there lies a need for ‘fulfilment’ leadership. This involves getting the project done
or achieving the results efficiently and effectively. The time-scale here is short. The leader should focus on the project
and make the customer happy.
These three types of leadership require different abilities. Moreover, different organizational contexts demand
different skills. For instance, leading in a marketing position requires different skills from those in a finance
position. Further, different leadership situations demand different leadership styles. For instance, certain
situations may demand a quick decision, whereas others require consultation of different members of the
organization. Distributed leadership requires a strong communication system through which leaders at various
levels can relate to each other. The key to successful distributed leadership is the discretion, or freedom to
operate, permitted to each leader in the organization.
Adapted from Andrew Thomson, “Leaders All,” Praxis, Vol.3, Issue 4 (June, 2002): p 6-10, <http://blonnet.com/praxis/
pr0304/03040060.pdf>
Over time, as employees learn their tasks, it is still necessary for the leaders to provide guidance, as
the new employees are not very familiar with the way the organization functions. However, as the leader
becomes acquainted with the employees, he trusts them more. It is at this stage that the leader needs to
increase relationship behaviour.
In the third phase, employees become more capable and they actively begin to seek greater responsibility.
The leader need not be as task-oriented as before, but will still have to be supportive and considerate so
that the employees can take on greater responsibilities.
As followers gradually become more experienced and confident, the leader can reduce the amount of
support and encouragement. In this fourth phase, followers no longer need direction from their manager
and can take their own decisions.
Hersey and Blanchard’s situational leadership model holds that the leadership style should be dynamic
and flexible. In order to determine which style combination is more appropriate in a given context, the
motivation, experience and ability of followers must be assessed; and re-assessed, as the context changes.
According to Hersey and Blanchard, if the style is appropriate, it will not only motivate employees but will
also help them develop in their professions. Therefore, the leader who wants to help his followers to
progress, and wants to increase their confidence, should change his style in accordance with their needs.
If managers are flexible in their leadership style, they can be effective in a variety of leadership situations.
If, on the other hand, managers are relatively inflexible in leadership style, they will be effective only in
those situations that best match their style or that can be adjusted to match their style.
Table 17.3: Comparison of Popular Situational Theories of Leadership
Points of Fiedler’s Path-Goal Theory Vroom-Yetton Hersey-

comparison Contingency Theory Theory Blanchard
Theory
1. Theme No best style. Leader Most successful leaders Successful leadership Successful
success determined by are those who increase style varies with leaders adapt
the interaction of subordinate motivation situation. Leader can their styles to
environment and leader by charting out and learn how to recognize the demands of
personality variables clarifying paths to requirements of a situation
effective performance situation and how to
fit style to meet these
requirements
2. Leadership styles Task-or-relationship Directive to Autocratic to Task behaviour
(range of choice) oriented achievement participative to relationship
behaviour
3. Research base Large in many Moderate to low. Low but increasing. Low but generally
(number of settings: military, Generally supportive Generally supportive supportive
supportive educational, industrial.
studies) Some contradictory
results
4. Application value Moderate to low: Moderate High: leaders can be Moderate but
for managers leaders cannot trained, increasing
generally be trained
Source: Donnelly, Gibson, and Ivancevich, Fundamentals of Management, p 406.
There are a growing number of situational theories of leadership. Each approach adds some insight
into a manager’s understanding of leadership. Table 17.3 contains a brief explanation of the four popular
leadership theories that stress the importance of situational variables. Though Fiedler’s theory has the
largest research base, since it was formulated earliest, the Vroom-Yetton theory appears to offer the most
promise for managerial training.
Transformational Leadership Theory

Recently, it has been realized that managers are not necessarily leaders. According to one point of
view, managers do things right, but it takes leaders to innovate and do the right things. Leaders bring about
major changes, and inspire followers to put in extraordinary levels of effort. The German sociologist, Max
Weber, introduced the concept of charisma into discussions of leadership. He regarded charisma as an
adaptation of the theological concept of possessing divine grace. Charismatic leaders have great influence
over their followers. The followers are attracted to the leader’s magnetic personality, oratory skills, and
exceptional ability to respond to crises.
James MacGregor Burns, a pioneer in the study of leadership, discussed the concept of ‘hero.’
According to Burns, heroic leadership was displayed by those leaders who inspired and transformed
followers. Leadership expert Bernard M. Bass has extended Burn’s view, characterizing a transformational
leader as one who motivates individuals to perform beyond normal expectations by inspiring them to focus
on broader missions that transcend their own immediate self-interests, to concentrate on intrinsic higher-
level goals (such as achievement and self-actualization) rather than extrinsic lower-level goals (such as
safety and security), and to have confidence in their abilities to achieve the extraordinary missions
articulated by the leader.
According to Bernard M. Bass, a transformational leader displays the following attributes: (1) charismatic
leadership, (2) individualized consideration and (3) intellectual stimulation (offering new ideas to stimulate
followers, encouraging followers to look at problems from multiple vantage points, and fostering creative
breakthroughs to obstacles that had seemed insurmountable). The insight provided by Burns and Bass
suggest that leaders are able to stimulate, transform, and use the values, beliefs, and needs of their
followers to accomplish tasks. Leaders who do this in a rapidly changing or crisis-laden situation are
transformational leaders.
The other approaches to leadership such as behavioural or situational approaches typically focus on
transactional leadership. Leaders who are accepted by followers as transformational are depicted as more
charismatic and intellectually stimulating than leaders described as transactional. One major distinction
between a transactional leader and a transformational leader is that a transactional leader motivates
subordinates (followers) to perform at expected levels, whereas a transformational leader motivates individuals
to perform beyond normal expectations.
Transformational leadership is not a substitute for transactional leadership. It is a supplementary form
of leadership with an add-on effect – performance beyond expectations. The reason for this is that even
the most successful transformational leaders require transactional skills as well to effectively manage the
day-to-day events that form the basis of a broader mission.
A potential area of concern in discussing and learning more about transformational leadership
characteristics is that the discussion and interpretations are beginning to resemble the early trait approaches
to leadership theory. Searching for what constitutes divine grace, attraction and power to influence, is like
examining such traits as intelligence, self-confidence and physical attributes, to determine what produces
success.
SUMMARY
Leadership is the art or process of influencing people so that they will strive willingly and enthusiastically
toward the achievement of group goals. It involves establishing goals and motivating people to achieve
them. The key elements of leadership are power, a fundamental understanding of people, the ability to
inspire followers, and the style of the leader and the work climate he or she creates.
There are four broad categories of leadership theories: trait theory, behavioural theory, situational or
contingency theory, and transformational theory. The trait theory was the result of an attempt to identify
the traits that leaders possess. According to this theory, the traits that are generally related to leadership
ability are: leadership motivation, drive, honesty and integrity, self-confidence, cognitive ability, and so on.
When it became evident that effective leaders did not seem to have a particular set of distinguishing traits,
researchers tried to study the behavioural aspects of effective leaders. This give rise to several behavioural
theories of leadership, which include: (1) the Iowa and Michigan studies, (2) the Ohio State studies, (3)
Likert’s four systems of management, and (4) the Managerial Grid. All these have been discussed in detail
in the chapter.
The use of the trait and behavioural approaches to leadership showed that effective leadership also
depended on many variables such as organizational culture and the nature of the tasks. No one trait or
style was common to all effective leaders. Researchers, therefore, began trying to identify those factors in
each situation that influenced the effectiveness of a particular leadership style. This resulted in the formulation
of different situational (or contingency) theories of leadership. These are important for practicing managers,
who must consider the situation when they design an environment for performance. The four popular
situational theories of leadership are: (1) Fiedler’s contingency approach to leadership, (2) the path-goal
theory (3) the Vroom-Yetton model, and (4) Hersey and Blanchard’s situational leadership model.
The last leadership theory discussed in the chapter was the transformational theory of leadership. A
transformational leader is one who motivates individuals to perform beyond normal expectations. Such
leaders inspire subordinates to focus on goals above their self-interest and to use their abilities to perform
extraordinarily well. According to Bernard M. Bass, a transformational leader displays three qualities: (1)
charismatic leadership, (2) individualized consideration, and (3) intellectual stimulation.
Palmer Machinery Company

Palmer Machinery Company has encountered hard times, not only because of an economic
recession but also because of competition from products imported from Japan. In the past,
CASE STUDY
labor relations have been rather poor. The unions usually asked for big pay increases for the
workers and got them. But things have changed during the last few months, and labour and
management have realized that they are in for some bad times ahead.
The company, maintaining it is in a precarious condition, has asked labour for concessions
and give backs. The union has called a membership meeting to discuss the situation. While
Ann Stewart, an assembler, thinks that she is overpaid and argues for a wage reduction, the
majority of those present disagree and do not want to make any concessions. In fact, there
is a great mistrust managements intentions and the workers feel that giving concessions will
encourage the company any to ask for additional ones. After a long discussion some workers
are more agreeable to concessions if management makes similar sacrifices. But management
does not make any compliments. During the next few weeks the situation gets worse; faced
with a layoff, the union agrees; Some cutbacks with the understanding that employees will
share in some way in the profits of company when things get better.
One month later, a national-magazine survey of executives’ salaries at major companies
shows that the executives at Palmer received a substantial increase in compensation. One
worker remarks; “You just can’t trust top management. I wish our situation was like the one
in Japan, where in hard times the dividends are cut first, then the salary of top management
is reduced, and later middle-level managers get a pay cut; the workers’ pay is affected last”.
1. Do you think the workers should have made concessions and agreed to give backs?
2. If you were the president of the company, how would you have handled the situation?
3. What do you think of the Japanese approach to dealing with economic problems?
Communication
18
Managing
H Definitions of Communication
H Significance of Communication in
Organizations
H Communication Process
H Communication Flows in an
Organization
H Barriers to Communication
H Gateways to Effective Communication
Chapter 18 Managing Communication 373
INTRODUCTION
Although good communication is essential for carrying out all managerial functions, it is particularly
important in the function of leading. Since approximately 70 to 80 percent of a manager’s time is spent
interacting with subordinates and others, the manager must possess effective communication skills. To
achieve the goals of an organization, the manager must interact with his superiors, subordinates, and
various external parties. The interaction between a manager and other organizational participants can be
productive only if he is able to communicate effectively.
In this chapter, we will first examine a few definitions of the term “communication” and then study
the significance of communication in organizations. The various ways in which communication flows
throughout an organization are also discussed. In addition, the barriers as well as the gateways to effective
communication are described in detail.
DEFINITIONS OF COMMUNICATION
The term communication is freely used by behavioural theorists, management scholars and the
general public. Despite the widespread use of the term, very few people have been able to come up with
a precise definition of it. Let us look at a few definitions proposed by management theorists.
Newman and Summer define communication as “an exchange of facts, ideas, opinions or emotions
by two or more persons.”
Bellows, Gilson and Odirone define communication as “a communion by words, letters, symbols,
or messages, and as a way that one organization member shares meaning with another.”
According to L.A. Allen, communication is “the sum of all things, one person does when he wants
to create an understanding in the mind of another. It involves a systematic and continuous
understanding.”
According to Koontz and O’Donnel, communication may be understood “as the exchange of
information at least between two persons with a view to create an understanding in the mind of
the other, whether or not it gives rise to conflict.”
From the above definitions, we can conclude that communication is the process of sending information
to a receiver so that the receiver understands it and responds to it.
SIGNIFICANCE OF COMMUNICATION IN ORGANIZATIONS

Modern organizations are complex social systems. No social system functions effectively without
meaningful interaction between its participants. Thus, communication can be described as a means
through which organizational participants are linked. We cannot expect effective management without
communication. According to some estimates, communication takes up nearly three-fourths of an active
human being’s life; in the case of a manager, this percentage may be even higher.
Communication is essential for the functioning of an organization. Everyday a vast amount of
information flows from managers to employees, employees to managers, and from employee to employee.
Apart from this internal communication, a considerable amount of information is also carried in and out
This communication, internal and external, takes place in a non-verbal and verbal manner: through
gestures, expressions, meetings, listening, speaking and writing.
M ANA GEM ENT ST AKEHOL DE RS

FUNCTIONS
Customers
Planning
Suppliers
Organizing
CO M M UNIC ATIO N
Staffing Government
Leading Community
Others
Controlling
Fig. 18.1 The Purpose and Function of Communication
Good communication is essential for the functioning of enterprises, as communication helps coordinate
the various managerial functions of enterprises. Communication serves the following purposes in
organizations:
Helps establish and disseminate the goals of an organization.
Facilitates the development of plans for the achievement of goals.
Helps managers utilize manpower and other resources in the most effective and efficient way.
Helps managers select, develop, and appraise members of the organization.
Helps managers lead, direct, motivate and create a climate in which people are willing to contribute.
Facilitates control and evaluation of performance.
In an organization, effective communication not only helps managers discharge their duties but also
builds a bridge between managers and the external environment of the organization. The external environment
consists mainly of customers, suppliers, stockholders, government, community and others that affect the
success of the enterprise. By means of an effective communication network, a manager can understand
the needs of customers, the demands of the stockholders and the expectations of the community, and be
aware of the presence of quality suppliers and relevant government regulations. An organization can
function as an open system only by communicating with the environment. Figure 18.1 shows the purpose
and function of communication.
COMMUNICATION PROCESS
Since communication involves the exchange of ideas and/or information between two persons, the
presence of at least two persons (i.e., a sender and a receiver) is required. Figure 18.2 shows the steps
in the communication process. The key elements in the communication process – the sender, transmission,
noise, the receiver and feedback – are discussed below:
TRANSM ISSIO N
Reception of
Transmitting the Message
the Message
Encoding the
Decoding the
Message
Message
NO ISE Acceptance/
Developing
an Idea Rejection of the
Message
SENDER
Giving Feedback Using the

Information
FEEDBACK
RECEIVER
Fig. 18.2 The Communication Process
Sender
Communication starts with the sender, who is the initiator of the message. After generating an idea,
the sender encodes it in a way that can be comprehended by the receiver. Encoding refers to the process
by which the sender translates his thoughts into a series of verbal and non-verbal actions that he feels will
communicate the message to the intended receiver. For example, translating the thought into any language.
Transmission
The information that the sender wants to communicate is transmitted over a channel through which
the message travels to the receiver. A channel connects the sender to the receiver. Channels for communication
may include a memorandum, a computer, a telephone, a telegram, or a television. The choice of a channel
depends on the communication situation. For instance, when dealing with confidential information, direct
face-to-face interaction or a sealed letter are more effective channels than a telephone conversation.
Noise
Noise is anything that has a disturbing influence on the message. Since noise hinders communication,
the sender should choose a channel that is free from noise. Noise may occur at the sender’s end, during
transmission, or at the receiver’s end. Examples of noise include:
ambiguous symbols that lead to faulty encoding
a poor telephone connection
an inattentive receiver
faulty decoding (attaching the wrong meaning to the message)
prejudices obstructing the poor understanding of a message
gestures and postures that may distort the message
Receiver
The receiver is the person to whom the message is transmitted. In order to decode the message, the
receiver has to be ready to receive the message. That is, the receiver should not be preoccupied with other
thoughts that might cause him to pay insufficient attention to the message. Decoding refers to the process
of translation of symbols encoded by the sender into ideas that can be understood.
Communication can be considered effective only when both the sender and the receiver attach similar
meanings to the symbols that compose the message. For example, a message in technical jargon requires
a recipient who understands such terms. Communication is not complete unless it is understood by both
the sender and the receiver.
Feedback
A message generated by the receiver in response to the sender’s original message is known as
feedback. Feedback is necessary to ensure that the message has been effectively encoded, transmitted,
decoded and understood. It helps a sender evaluate the effectiveness of his message, so that he can modify
his subsequent messages. Feedback also confirms whether there has been any change in the behaviour
of the individual or in the organization as a result of communication.
The communication model discussed above provides the basic framework of the communication
process, identifies the key elements (sender, transmission, receiver, noise and feedback), and shows their
relationships. This framework helps managers pinpoint communication.
COMMUNICATION FLOWS IN AN ORGANIZATION

In well-managed organizations, communication flows in three directions: downwards, upwards and
crosswise. Traditional organizations emphasize downward communication. Modern managers, however,
emphasize upward communication because they feel effective communication is possible only when the
subordinate is involved. Communication also flows horizontally (between people of the same rank) and
diagonally (involving people from different levels who do not report to each other directly). These different
kinds of information flows in an organization are shown in Figure 18.3.
Upward and Diagonal

Horizontal communication
downward
communication
communication
Fig. 18.3 Information Flow in an Organization
Downward Communication
Most decisions in an organization flow through the organization’s structure level by level. Communication
flow from people at higher levels to those at lower levels in the organizational hierarchy is referred to as
downward communication. Generally, the communication flow in organizations with an authoritarian
leadership is predominantly downward. Oral downward communication may take place by means of
instructions, meetings, the telephone, loudspeakers and even the grapevine. Written downward
communication involves the use of memorandums, letters, handbooks, pamphlets, policy statements,
procedures, and electronic news displays. Obviously, the downward flow of information through organization
levels is a time-consuming process.
The delays may frustrate top-level managers to such an extent that they may insist on sending the
information directly to the person or group concerned rather than allow information to slowly flow down
the hierarchy.
Upward Communication
Upward communication originates from subordinates and continues up the organizational hierarchy
to superiors. In other words, it is an upward flow of information from employees at the operational level
to the top executive along the chain of command. This flow of communication is sometimes impeded by
managers in the communication chain, who distort messages while communicating them to their bosses.
Upward communication can also take place through suggestion systems, appeal and grievance procedures,
complaint systems, counseling sessions, joint setting of objectives, the grapevine, group meetings, the
practice of an open-door policy, morale questionnaires and exit interviews.
The responsibility for creating a free flow of upward communication rests to a great extent with
superiors. In order to facilitate effective upward communication, the upper level of management must
create an environment in which subordinates feel free to communicate.
Crosswise Communication
Crosswise communication consists of two types of information flows, horizontal flow and diagonal
flow. Horizontal flow refers to the flow of information among people at the same or similar organizational
levels, whereas diagonal flow refers to the flow of information among persons at different levels, who have
no direct reporting relationships. Crosswise communication helps improve understanding between employees
and enhances coordination for achieving organizational goals. It can take place orally during informal
meetings of the company’s fund-raising team or over lunch. It can also take place during formal conferences,
board meetings, and meetings of task teams and/or project organizations. The company newspaper,
magazine and bulletin board notices are the usual mediums for the written form of crosswise communication.
As crosswise communication does not follow the chain of command, proper care should be taken to
prevent potential problems from arising between personnel at various levels and between various departments
of the organization. Despite the potential problems that may arise due to crosswise communication, this
form of communication is necessary for the organization to respond to the needs of the complex and
dynamic business environment.
Exhibit 18.1 Creating an Energized Workplace with Open Channels of Communication
Organizations need to involve their employees in decision-making to a great extent if they want to survive in
the fiercely competitive world of business. In today’s world, coercive and authoritarian means of controlling
employee behaviour are no longer feasible. Managers must create environments which motivate people to
behave in the desired manner instead of forcing them to do something. The best way to guide subordinates
is through one-to-one interactions with them. However, this method is not always feasible. Therefore, managers
should strive to create an energized workplace, which allows employees to put in their best efforts, regardless
of the presence or absence of the managers. One of the best ways to create an energized workplace is to
communicate openly and honestly. Open channels of communication are crucial for an organization’s success.
The quick and effective transmission of information can help an organization gain an edge over its competitors.
Many organizations use innovative methods to breakdown communication barriers between managers and
subordinates. For instance, a Canadian forest products company organized a series of 30 dinners, spread
over a year, for employees and their superiors. At each dinner, 10 of the employees and their spouses were
invited and they socialized with the employees’ superiors. After the dinner, a question and answer session
was held about all aspects of the company. The top-level managers observed a tremendous difference in the
attitude of the employees after these sessions. This interaction helped employees and superiors know each
other better and created trust between them. Hal Rosenbluth, the CEO of Rosenbluth International (a chain
of travel agencies), is accessible to all his employees through a ‘voice-mail box.’ Employees are encouraged
to use the voice-mail facility to give their suggestions, express their grievances, or to convey their praise for
the company. On an average, around seven employees call in every day. At Preston Trucking in Maryland,
an employee suggestion programme generated almost 8000 suggestions from employees. Many of these
suggestions were implemented and all the employee suggestions were printed in the company newsletter.
(Many of the suggestions were of a very simple nature, like using rechargeable batteries for pagers and
placing a rubber mat in front of the ice machine to prevent employees from slipping). By listening to
employees and implementing their suggestions, a company creates an energized workplace. The employees
feel motivated as their views are being heard and examined with interest. Open channels of communication
can help an organization improve its productivity substantially. For instance, Pizza Hut substantially reduced
its paperwork and its layers of hierarchy by implementing the suggestions of its employees. The suggestions
also boosted sales by 40 per cent. The employees of Hughes Aircraft in Los Angeles generated more than
23,000 ideas in a particular year, most of which were adopted by the management. This resulted in a savings
of $ 477 million for the company. This shows that open channels of communication can help organizations
become profitable.
Adapted from Bob Nelson, “Engineering Your Employees,” Refresher Publications Inc.,<http://www.refresher.com/
!energy.html>
BARRIERS TO COMMUNICATION
One of the most important problems faced by managers is the breakdown in communication due to
the presence of communication barriers. In some organizations, communication barriers within the
organization indicate deep rooted problems. Managers can perform more effectively if communication
barriers are removed. Some of the factors that impede effective communication are discussed below:
Exhibit 18.2 Barriers to Listening
Although studies reveal that we spend 45 per cent of our communication time listening to others, very few
people are able to listen effectively. According to Ralph G. Nicols and Leonard A. Stevens, an average person
remembers only half of what he has heard once the message has been delivered, and after two months,
remembers only 25 per cent of what he has heard. People generally tend to regard communication as a one-
way process, through which the speaker communicates his ideas, instead of viewing it as a two-way process
in which both the speaker and listener are important. For the smooth functioning of an organization, people
must learn to listen well.
Poor listening skills can be overcome by clearly identifying and understanding the barriers to listening. The
most common barriers are described below.
Prejudging that the subject is boring: Instead of listening to the speaker, many people tend to assume
that the subject is boring or dull. During the speech, they turn their attention to other things or simply
daydream. Good listeners, however, listen to the speaker and hunt for information which may be useful later
on.
Focusing on appearance and delivery of the speaker: Bad listeners observe the appearance and the
delivery of the speaker instead of listening to what is being said. They keep looking for faults in the speaker’s
appearance instead of judging the speaker by the content of his speech. Good listeners understand the good
points in the speech and focus on the subject matter.
Reacting to the speech too fast: People tend to react to a part of the speaker’s message before understanding
it in its totality. They get so angry or excited about a portion of the message that they stop listening halfway.
As a result, they mentally switch off and start thinking of ways to criticize the speaker.
Listening for gathering facts: Many people listen to gather facts instead of trying to understand the
underlying idea and integrating it with non-verbal communication. By focusing too much on the facts, the
listener may miss the message that the speaker is trying to convey. Good listeners try to grasp the message
that the speaker is trying to convey instead of mentally recording a lot of unconnected facts.
Inflexibility while listening: Many formal speeches are not carefully outlined and organized. As a result,
many listeners try to mentally outline the presentation instead of paying attention to what is being said. Good
listeners, however, tend to make a note of facts and ideas which can be applied later.
Pretending to listen: When a subject is not interesting many people only pretend to listen. Poor listeners
blame their inattention on the speaker or their inability to understand the subject. Good listeners, however,
realize that listening requires attention, patience and effort on their part. They maintain eye contact with the
speaker, send non-verbal hints to show that they are listening, and seek clarification if they do not understand
something.
Allowing distractions: Poor listeners tend to do other things while they are conversing with someone. They
may give instructions to employees when they are in the middle of a conversation or may sign letters while
talking to someone. As a result, the listener may not be able to understand what the speaker is trying to
say. For good listening, it is essential to eliminate distractions.
Avoiding complicated subjects: When the subject is rather technical or complicated, many people stop
listening altogether. They feel that since the subject is unfamiliar, they won’t be able to understand what the
speaker is trying to convey. Good listeners, however, do some research beforehand, so that they have some
idea of what the speaker is talking about.Effective communication begins with good listening skills. Unless
listeners are willing to make an effort to listen seriously, managers and employees may not be able to
communicate their ideas.
Adapted from Frank K. Sonnenberg, “Barriers to Communication,” Journal of Business Strategy, Vol.11, Issue 4
(July/August 1990): p 56-59.
Lack of Planning
Communication would be ineffective if the manager did not devote sufficient time to thinking, planning,
and stating the purpose of the message. By providing the reasons for a particular instruction, selecting the
most appropriate channel, and releasing the message at the right time, a manager can ensure his message
is understood by the receivers. Effective communication also reduces subordinates’ resistance to change.
Badly Expressed Messages

Even if the sender is clear about the message he wants to convey, the message may not be conveyed
clearly. Poorly chosen words, careless omissions, lack of coherence, poor organization of ideas, awkward
sentence structure, inadequate vocabulary, unnecessary jargon, and the failure to clarify implications are
some of the common reasons for the poor transmission of messages. Lack of clarity and precision lead
to costly errors. These can be avoided by carefully encoding the message.
Faulty Translations
Managers receive many types of messages from superiors, peers and subordinates. They, in turn, must
translate information meant for subordinates, peers, and superiors into a language that can be easily
understood by them. When a message is transmitted from a sender to a receiver, it must be accompanied
with an interpretation so as to enable the receiver to understand the message. This process requires the
sender to have good communication and analytical skills. Since organizational participants do not fully
understand the implications of poor communication, communication may not be very effective in many
organizations.
Unclarified Assumptions
People’s assumptions about a message can hinder communication. Suppose a customer sends a
message to a vendor stating that he will visit the vendor’s plant at a particular time. The customer assumes
that the vendor will meet him at the airport, make arrangements for his stay and transportation, and set
up a full-scale review of the programme at the plant. But the vendor may assume that the customer is
arriving mainly to attend some personal business and is only making a routine call at the plant. Since both
parties assume certain things and do not attempt to get their assumptions clarified, some confusion will
arise. These assumptions may also result in loss of goodwill.
Semantic Distortion
Semantic distortion, either deliberate or accidental, acts as a barrier to effective communication. An
advertisement which declares “We sell better products” is quite ambiguous, as it raises the question “better
than what?” Some words may have ambiguous meanings and may generate different responses in different
people.
Loss by Transmission and Poor Retention

Successive transmissions of a message by different people tends to decrease its accuracy. In other
words, if a message is transmitted from one person to another in a series, the message tends to lose
accuracy. While communicating orally, approximately 30 per cent of the information is lost in each
transmission. Therefore, in large organizations, it is quite impossible to rely only on oral communication
from one level to another. Poor retention of information is another serious problem. Studies indicate that
employees are able to retain approximately 50 per cent of what they are told, and supervisors are able to
retain around 60 per cent of the information they receive. Hence, it is necessary to repeat the message
and use more than one channel to communicate the message.
Communication Barriers in the International Environment

Communicating in an international environment is particularly difficult because of wide variations in
language, culture and etiquette. For instance, in Western culture, the colour black is often associated with
mourning, while in the Far East, white is the colour of mourning. In business dealings in the United States,
people generally use the first name while in many other countries, people generally address one another
by their last names.
Many large organizations have taken different steps to overcome communication barriers caused by
differences in culture and language. These include providing extensive language training, hiring many
translators, and hiring local citizens for top positions as they know the language and culture of the host
nation.
Inattention and Premature Evaluation

Poor listening seems to be a chronic human failing; many problems arise due to the fact that people
do not pay adequate attention to the speaker. Instead of listening to what is being said, people tend to
remain preoccupied with their problems. Listening requires attention and self-discipline on the part of the
listener. The listener should also avoid premature evaluation of what another person has to say. Listening
without jumping to hasty conclusions can improve communication. And listening with empathy can result
in better labour-management relations in an organization.
Impersonal Communication
Communication is much more than just relaying information to employees. For communication to be
effective, face-to-face contact in an environment of openness and trust is required. Instead of investing in
expensive and sophisticated gadgets which only serve to make communication impersonal, organizations
should encourage face-to-face communication between superiors and subordinates.
Insufficient Adjustment Period

Sometimes a message announces changes in an employee’s work pattern, such as shifts in time,
place, type and order of work, or shifts in group arrangements, or changes in the employee skills required
for accomplishing a task. Some messages may identify the need for further training, career adjustment, or
a change in status. These messages may evoke different responses from people and they may need time
to understand the implications of the messages. To increase the efficiency of an organization, people
should be given time to understand messages and adjust to the changes recommended by the messages.
Information Overload
An unrestricted flow of information may result in excess information for employees. They may react
to information overload in different ways. They may:
disregard certain information

make errors in processing the information
delay information processing
filter information
ignore communication or fail to communicate the necessary information due to information overload
These responses to information overload may hamper effective communication. At times, tactics like
delaying information processing until the work load is reduced may help in effective management. However,
ignoring communication may cause more problems. Organizations can handle the problem of information
overload by reducing the demand for information. This can be achieved by insisting that only essential
data should be communicated, e.g. information regarding critical deviations from plans.
Other Communication Barriers

Apart from the barriers mentioned above, many other barriers hamper communication. One of these
barriers is selective perception by listeners. They listen to what they want to listen and ignore other relevant
information. This can cause problems and render communication ineffective. An individual’s attitude can
also affect communication. Attitude refers to a person’s outlook or mental predisposition regarding a fact
or a state. A negative attitude is an obstacle to effective communication. If people have already made up
their minds regarding something, they may not listen to it with an open mind. Another barrier to
communication is the difference in status and power between the sender and the receiver of the message.
A message also tends to get distorted when information has to pass through several hierarchical levels.
Lack of Trust in the Communicator

Some superiors may send messages that contradict an earlier instruction. This type of inconsistent
behaviour by superiors may cause the subordinates to distrust their superiors. Subordinates may also
distrust superiors if they were punished for reporting true but unfavorable information to their superiors.
Such experiences gradually condition subordinates to delay action or to work without enthusiasm. Superiors
should try to create a climate of trust in the organization to encourage open and honest communication.
GATEWAYS TO EFFECTIVE COMMUNICATION

The following are the gateways to effective communication:
1. Interpersonal trust
2. Effective listening
3. Proper feedback
4. Understanding non-verbal cues
5. Non-directive counselling
Interpersonal Trust
It is impossible to communicate effectively without interpersonal trust. A subordinate will not be able
to communicate freely with his manager unless he trusts the latter. By being fair, open and receptive to
new ideas, top managers can create a favourable atmosphere for developing interpersonal trust.
Effective Listening
Listening is one of the most essential elements of effective communication. A message can never be
conveyed effectively unless the receiver is attentive and listens to what is being said. The listener should
be open- minded in order to understand the correct meaning of a message. According to a research study,
these are the ten prerequisites for effective listening.
Exhibit 18.3 Effective Communication for Leadership
To be effective leaders, managers must have a thorough understanding of the work, a charismatic personality,
a style that commands respect and loyalty, a thirst for knowledge and learning, and a drive to excel. Since
highly talented and successful employees look for advancement in their careers, managers should provide
employees the opportunity for growth by developing their skills, job enrichment and job enlargement. In
addition to these qualities, managers should be able to communicate effectively. In an organization, effective
communication involves a variety of activities. Some of these are discussed below.
Managers must understand their employees needs and concerns, their ambitions, and their perceptions
of superiors, company rules and policies. They should also recognize their talent and ambition and provide
them suitable avenues for growth.
Managers should inform subordinates of the quality of their work-related performance and the way in which
it can be improved. At the same time, managers should be empathetic and encourage subordinates to
discuss their problems.
Managers should set up task force groups to facilitate cross-functional thinking and encourage the
exchange of ideas. Such communication helps managers and employees deal with problems and
bottlenecks.
Managers should communicate management policies, objectives and the philosophy of the organization
on a regular basis. They should also obtain feedback from subordinates and encourage them to give their
suggestions.
The managers should follow an open door policy, i.e. the subordinates should have access to their
superior. The managers should encourage subordinates to bring forth their problems, their ideas and
suggestions, so that the organizational processes and functioning can be improved.
Managers should update employees about organizational changes. They should be kept informed about
the plans of the organization. This will help reaffirm the employees’ faith in the organization. As leaders,
managers should help subordinates perform effectively. They can do this only if they know how to
communicate effectively with their subordinates. Through effective communication, managers can delegate
work to subordinates. Delegation of work helps people feel important and makes both the managers’ and
subordinates’ work more productive and rewarding.
Adapted from R.S. Dreyer, “What It Takes to Be A Leader – Today!” Supervision, Vol.55, Issue 5 (May 1994):
p 22, 3 p.
(i) Finding something of interest in what the other person is saying.

(ii) Judging the content of the message, but not the weaknesses of the speaker.
(iii) Avoiding premature evaluation.
(iv) Looking for the central idea.
(v) Being flexible and not expecting the message to follow a fixed pattern.
(vi) Concentrating on the message.
(vii) Being mentally alert to grasp the meaning of the message.
(viii) Practicing active listening.

(ix) Having an open mind.
(x) Trying to benefit from one’s own rapid ‘thought process’ rather than ‘talk processes’ of the speaker.
Effective listening helps managers improve their relationships with their subordinates. It also helps
them give feedback and provide non-directive counselling.
Proper Feedback
As we have already discussed, feedback enables the sender to assess the effect of a message transmitted
to the receiver. Both giving and receiving feedback are important aspects of management. To be effective,
the feedback provided by managers should be descriptive, specific, and directed towards changing specific
behaviours. When receiving feedback, managers should be open-minded. They should be able to handle
both positive as well as negative feedback. While receiving negative feedback, managers should ask for
clarification and examples about points which seem ambiguous or unclear. They should also avoid acting
defensively. Nowadays, many organizations encourage their customers to give feedback regarding their
products or services. This helps organizations make improvements in their products or services.
Non-verbal Cues
Another important prerequisite for effective communication is an awareness of and sensitivity to non-
verbal cues in communication. The following pie chart (Figure 18.4), based on a research study, reveals
the significance of non-verbal communication. According to this graph, only 7 per cent of a receiver’s
response is determined by the verbal content of a message, while 38 per cent of the response is determined
by the speaker’s vocal characteristics (tone and tenor of the voice) and 55 per cent of the response is
determined by the speaker’s facial expressions.
55%
Facial
Expression
38%
Vocal
Characteristics
7%
Words
Fig. 18.4 Impact of Non-Verbal Communication on the Receiver

The above figure reveals the enormous impact of non-verbal communication on the receiver. Non-
verbal cues include body posture, eye contact, distance from the receiver, voice inflection, rate of speech,
gestures, emphasis of particular words, silence, etc. An awareness of non-verbal cues helps managers
become sensitive to the needs of their subordinates. Such awareness helps managers assess the current
state of their interpersonal relationships with subordinates and manage them effectively.
Non-directive Counselling
In non-directive counselling, the manager helps the employee examine his own ideas, feelings and
attitudes about a problem. Non-directive counselling can be done by holding an interview with the employee.
In a non-directive counselling interview, a manager should
(i) be attentive and friendly
(ii) raise appropriate questions
(iii) be tactful and enable the employee to think through the problem clearly
(iv) create an atmosphere of privacy to ensure that the employee can communicate freely
(v) be a patient listener to help the employee to express his emotions freely
(vi) encourage the employee to do some introspection.
SUMMARY
Research reveals that approximately 70 to 80 per cent of a manager’s time is spent in communication.
Communication refers to the transfer of information from a sender to a receiver, in a form that can be
understood by the receiver. Communication serves many purposes in organizations. It helps managers
discharge their duties and also build a bridge between the organization and its external environment. The
key elements in the communication process are the sender, transmission, noise, the receiver and feedback.
Communication in organizations flows basically in three ways, downwards, upwards, and crosswise.
Downward communication refers to the rules, regulations, and instructions conveyed by superiors to
subordinates. Upward communication refers to the flow of information from employees at the operational
level upward to the top executive along the chain of command. Crosswise communication consists of two
types of information flows, horizontal flow and diagonal flow. Horizontal flow refers to the flow of information
among people at the same level in the organizational hierarchy, whereas diagonal flow refers to the flow
of information among people at different levels in the hierarchy. There are many different barriers to
communication, e.g. lack of planning, faulty translations, unclarified assumptions, semantic distortions,
loss by transmission and poor retention, cultural misunderstandings, inattention and premature evaluation,
impersonal communication, insufficient adjustment period, information overload, lack of trust in the
communicator, and other barriers (selective perception, attitudes, power and status, etc.). The communication
process can be made effective by improving: interpersonal trust, effective listening, providing proper
feedback, and through non-verbal communication and non-directive counselling.
Ganesh Fashion Stores, Incorporated

After graduating from college, Lalitha Ganesh went to work for her father, Ganesh, who
was president of Ganesh Fashion Stores, Incorporated, a chain of women’s apparel stores.
The company had been founded by Ms. Lalitha’s grandfather over 50 years ago. With her
grandfather’s and, for the past 20 years, her father’s drive and knowledge of women’s
fashions and of how to buy and sell them, the company had developed from a single store
in Chennai to a fairly large and highly profitable chain of thirty sotres in the Mylapore area.
Ganesh was much like his father. He knew what he was doing and how to do it, and he
prided himself on being able to keep his hands on details; in buying, advertising and store
CASE STUDY
management. Everyone of his store managers, as well as his top vice-presidents and headquarters
staff people, met with him every 2 weeks in Mount Road. Between these meetings, Mr.
Ganesh spent 2 or 3 days each week visiting the stores and working with store managers.
His major worries were communication and motivation. Although he felt that all his
managers and staff people listened carefully at the conferences he held, their subsequent
actions made him wonder whether they had heard him at all. He observed that many of his
policies were not being strictly followed in the stores; he often had to rewrite advertising copy;
and in some of the stores the employees had joined the clerks union. He increasingly heard
things he did not like, such as reports that many employees and even some managers felt
they did not know the company’s goals and believed they could do better if they had a
chance to communicate with the executives at headquarters. He also had a strong feeling that
many of his managers and most of the store clerks were merely doing their jobs without
showing any real imagination or drive. An additional concern was the fact that some of his
best people had quit and taken positions with a competitor.
When his daughter walked into his office to begin work as his special assistant, he said:
“Lalitha, I’m worried about how things are going. Apparently, my two problems are
communication and motivation. Now, I know that you took some courses in management
in school; I’ve heard you talk if the problems, barriers and techniques of communication, and
you’ve mentioned some fellows—Maslow, Herzberg, Vroom, McClelland, and others—who
knew a great deal about motivation, while I doubt that these psychology types knew much
about business and I feel that I know what activates people—primarily money, good bosses
and a good place to work—I wonder if you’ve earned anything that will help me communicate
better. I hope so, for that college education of hours has cost me a lot of money.
What do you suggest?”
1. If you were Ms. Lalitha, what would you say to your father?
2. How would you go about analyzing the communication problem, and what difficulties do you see already from
the case?
3. Suggest ways that the motivation and communication theories you have studied might be applied to Ganesh
Fashion Stores. Is there anything else you would want to know?
][][
Chapter 19 The Control Function 387
19
The Control
H
Planning and Controlling
Function
H Importance of Controlling
H Levels of Control
H Basic Control Process
H Types of Control
H Requirements for Effective Controls
INTRODUCTION
Control is an essential function of management in every organization. The management process is
incomplete and sometimes useless without the control function. The management process includes planning,
organizing, staffing, leading, and controlling. Planning sets forth the objectives a manager intends to
achieve. Organizing provides the structure of an organization by determining how and where the employees
will be placed in the organization and the responsibilities that they will need to fulfil to attain predefined
objectives. Staffing involves the managerial function of placing the right person in the right job in the
organization. Leading involves the managerial function of influencing, motivating and directing the human
resources of the organization to achieve organizational goals. The control function is concerned with
ensuring that the planning, organizing, staffing and leading functions result in the attainment of organizational
objectives. In other words, control is a tool that helps organizations measure and compare their actual
progress with their established plan.
The term ‘control’ has different meanings in different contexts. In the management context, ‘control’
refers to the evaluation of performance and the implementation of corrective actions to accomplish
organizational objectives. Some people confuse ‘control’ with ‘supervision.’ Supervision is a part of control;
it helps identify deviations from the established standards of performance.
The modern concept of control envisages a system that not only provides a historical record of what
has happened to the business as a whole but also pinpoints the reasons why it has happened and provides
data that enables the management to take corrective steps, if there is any deviation from the plan. It also
enables managers to identify trends in costs, markets, and other aspects of the business, and acts as a
guide for future action.
Thus, control ensures that what is done is what is intended. Control must be exercised by everyone
in the organization, from the top level to the bottom level. There is a misconception that it is the duty of
only the top level of an organization to exercise control. This is because many managers see control,
discipline and supervision as the same thing. Control is also perceived as tight supervision by others. Such
misconceptions must be removed, if the control function is to contribute to the betterment of the organization.
According to Robert J. Mockler, “Management control is a systematic effort to set performance
standards with planning objectives, to design information feedback systems, to compare actual performance
with these predetermined standards, to determine whether there are any deviations and to measure their
significance, and to take any action required to assure that all corporate resources are being used in the
most effective and efficient way possible in achieving corporate objectives.”
PLANNING AND CONTROLLING

The process of controlling involves comparing the actual results with the planned results. Therefore
there is considerable overlap between controlling and other managerial functions like planning, organizing
and leading. All these functions, as we know, are interrelated. Likewise, planning and controlling are also
interrelated. Planning establishes organizational objectives and helps managers develop strategies to achieve
these objectives; while controlling establishes standards of performance and compares the actual results
with the planned results to determine whether organizational activities are progressing according to plan.
A cyclical relationship exists between planning and controlling. The planning/control cycle begins with
the identification of the mission of the organization, the establishment of goals and objectives, and the
formulation of plans to accomplish them. When these plans are implemented, the control function monitors
the actual performance and compares it with the predetermined standards. If any deviations are discovered,
corrective action is taken. Corrective action involves the modification of existing plans or their method of
implementation, or the creation of new plans. If there are no deviations, the operations process continues.
Feedback during the planning/control cycle results in a dynamic process in which the means for accomplishing
organizational objectives continuously evolve in response to changes in the external environment.
IMPORTANCE OF CONTROLLING
The control function is gaining importance in today’s organizations due to a number of factors. These
factors include the need for accountability in organizations, the need to detect environmental changes that
significantly affect organizations, the growing complexity of present day organizations and the need to
identify operational errors in organizations to avoid incurring excessive costs.
In addition to addressing the above mentioned factors, controlling plays an important role in helping
managers detect irregularities, identify opportunities, handle complex situations, decentralize authority,
minimize costs, and cope with uncertainty.
Coping with Uncertainty

In today’s turbulent business environment, all organizations must cope with change. When organization
goals are established, they are based on the knowledge available at that point of time. However, by the
time the goals are accomplished, many changes may have occurred in the organization or its environment.
The pace at which environmental and other factors change creates a lot of uncertainty. A constant
evaluation and revaluation of the organization’s strategic and tactical plans is necessary to keep up with
changes and cope with uncertainty. The environmental factors that bring about change in organizations
include customer demand, technology, and the availability of raw materials. A properly designed control
system can help managers anticipate, monitor and react quickly to changes in the environment. An
improperly designed control system, however, may result in poor organizational performance.
Detecting Irregularities
Control systems help managers detect undesirable irregularities, such as product defects, cost overruns,
or rising personnel turnover. Although small mistakes and errors may not seriously damage the financial
health of an organization, they may accumulate and become very serious over time. Early detection of such
irregularities can prevent minor problems from mushrooming into major ones and often save a great deal of
time and money for the organization. For example, Whistler Corporation, a large radar detector manufacturer
in the US, was once faced with such rapidly escalating demand that it stopped giving attention to quality.
This led to a rise in the defect rate from 4 per cent to 9 per cent to 15 per cent and, finally, to 25 per cent.
A manager observed that 100 out of 250 employees of the company were spending all their time fixing
defective units and that an inventory worth $ 2 million was still awaiting repair. Had the company detected
the defects and rectified them early, the problem would never have increased to such proportions. Problems
such as missing important deadlines or selling faulty merchandise to customers are sometimes difficult to
rectify. Identifying aberrations in the early stages helps organizations avoid such problems.
Exhibit 19.1 Organizational Performance Measurement
Modern organizations need to measure quality, productivity, on-time delivery, innovativeness, agility and
customer satisfaction to assess organizational performance. Traditional financial performance measures such
as ROI and inventory turnover are not able to measure these parameters. In addition, the use of such
measures often leads to employee behaviour that is not aligned with the strategic interests of the organization.
Let’s consider the case of a multinational organization in which the performance of business units is
determined on the basis of adherence to budgeted monthly inventory levels. During the period of auditing, the
purchasing department of an under stocked business unit placed an order for stock from another business
unit that had surplus stock. The accounting department tried to show in the records that the bill was paid
and that the order was received. Once the auditing was over, the fictitious orders were then cancelled. A lot
of time was wasted before (and after) auditing in doing all kinds of manipulation to meet the requirements
of the performance measurement system of the company. Clearly, the use of such measures encourages
undesired behaviour in employees and prevents organizations from achieving their goals. Once an organization
realizes that the measures adopted by it have failed to measure the performance along important parameters,
it should select other proven measures or develop a new measure customized to its needs. If the organization
wants to develop a measure of its own, it should form a cross-functional team for the purpose. The team
should consist of key members from various departments in the organization and be headed by one of the
top managers. The team members should be trained in problem-solving methods before they work on the
project assigned to them. When developing a new measurement system, the team should ensure that it is
simple, easy to understand and guides employee behaviour and actions in the right direction. The performance
measurement system developed by the team should be discussed with managers at the operational level
since they are familiar with the practical problems faced by workers on the shop-floor. The measurement
system may then be refined with the help of their suggestions. The details of the new performance system
should be communicated throughout the organization. The management should try to convince the key
influencers in the organization to adopt the new measurement system. These individuals can help management
to obtain the cooperation of other employees in accepting the new system.
Adapted from Brain H. Maskell, “Implementing Performancce Measurements, “www.ceoreview.com
Identifying Opportunities
Control also helps managers identify areas in which things are going better than expected, thereby
alerting management to possible future opportunities. For example, division managers at the St. Louis-
based May Department stores prepare and generate monthly reports that specify the items that have high
demand and the amount of money those items are generating. On the basis of these reports, the chain
develops successful merchandising strategies for all its stores (e.g. what to buy, which vendors to buy from,
and how to display the merchandise).
Handling Complex Situations

Another important factor contributing to the need for a control mechanism is the growing complexity
of today’s organizations. When a company requires only one kind of raw material, produces only one kind
of product, has a simple organization design, and enjoys constant demand for its products, it can afford
to have a very basic and simple system of control. But, as organizations grow or engage in producing
many products from a number of different raw materials, and operate in a large market area with many
competitors, efficient and effective coordination becomes necessary. In such cases, managers have to
keep track of various activities to make sure that they are well synchronized. Thus, sophisticated control
systems become necessary to maintain adequate control in large and complex organizations. When Emery
Worldwide (airfreight), a profitable company, bought Purolator Courier Corporation, the new Emery that
emerged after the acquisition was much bigger and more complex. Initially, no new controls were adopted
for the operations of the new entity. This led to increased costs, loss of money and market share, and
deterioration in the quality of service. Eventually, the organization could turn itself around from the verge
of bankruptcy only by adopting more elaborate controls.
Decentralizing Authority
Controls also help managers decentralize authority. With the help of controls, managers can allow
their subordinates to take decisions while ensuring that the ultimate authority remains in their hands. For
example, Alfred Sloan, former chairman of General Motors, set the standard for the level of return on
investment that he wanted the various units of GM to achieve. This type of control allowed him to achieve
the required level of investment while maintaining the philosophy of decentralization.
Minimizing Costs
When implemented or practiced effectively, control also helps reduce the costs and boost the output
of an organization. Georgia-Pacific Corporation, a large wood products company, developed a new
technology for making thinner blades for its saws. The company used its control system to evaluate how
much wood could be saved by the new blades, relative to the cost of replacing the old blades. It was found
that the wood saved by the new blades each year was sufficient to fill eight hundred railcars. Thus, the
organization discovered that effective control systems could improve output per unit of input, eliminate
waste and lower labour costs.
LEVELS OF CONTROL
The various managerial levels – strategic, tactical and operational – have different planning and
control responsibilities. The presence of various degrees of control at each level of management increases
the probability of the successful implementation of plans at these levels (see Table 19.1).
Strategic Control
Strategic control involves monitoring critical environmental factors to ensure that strategic plans are
implemented as intended, assessing the impact of strategic plans, and adjusting such plans when necessary.
Top-level managers usually view things from an organizational perspective and are concerned with strategic
issues. They usually have a long-term focus except in situations involving unstable environmental conditions
and/or intense competition which necessitate shorter reporting cycles.
Thus, strategic control is mainly the function of top-level managers. These managers may also exercise
tactical or operational control to monitor the implementation of plans at the middle and lower levels of
management to ensure that strategic plans are being implemented as intended or planned.
Table 19.1: Levels of Control
Levels of Management Type of Planning Type of Control
Top management
Organization-wide perspective
Concerned with strategic issues
Long time frame Strategic planning Strategic control
Middle management
Department perspective
Concerned with department goals and
objectives, programmes and budgets
Medium time frame Tactical planning Tactical control
First level management
Unit/individual perspective
Concerned with schedules, budgets, rules, and
specific individual output requirements
Short time frame Operational planning Operational control
Tactical Control
Tactical control usually have a long-term focus except in situations involving unstable environmental
conditions and/or intense competition which necessitate shorter reporting cycles. Thus, strategic control is
mainly the function of top-level managers. These managers may also exercise tactical or operational
control to monitor the implementation of plans at the middle and lower levels of management to ensure
that strategic plans are being implemented as intended or planned.
Tactical control focuses on assessing the implementation of tactical plans at department levels,
monitoring associated periodic results, and taking corrective action when necessary. Middle-level managers
are concerned with department-level goals and objectives, and programmes and budgets. They concentrate
on medium time frames and therefore use weekly, fortnightly, and monthly reporting cycles in their plans.
Middle-level managers exercise tactical control to test the impact of tactical initiatives of their departments
on the organizational environment. Middle-level managers also exercise operational control by monitoring
critical aspects of the implementation of operational plans. They are also involved in strategic control to
a certain extent, because they provide information to top-level managers on strategic issues.
Operational Control
Operational control involves overseeing the implementation of operational plans, monitoring day-to-
day results, and taking corrective action when necessary. Lower-level managers concerned with schedules,
budgets, rules, and specific individual output requirements make use of operational control. Using operational
control, a lower-level manager provides feedback regarding the tasks being carried out on a day-to-day
basis (in the very near term) in order to achieve the short-term and long-term goals of the organization.
The three levels of control – strategic, tactical, and operational – must be integrated and interrelated
to make the control function effective.
BASIC CONTROL PROCESS

Even though control systems need to be tailored to suit specific situations, they all involve the same
basic process. When exercising the control function, a manager measures the performance of an individual,
a plan, or a programme against certain predetermined standards and takes corrective action if there are
any deviations. The process involves the following steps:
(i) Determining areas to control
(ii) Establishing standards
(iii) Measuring performance
(iv) Comparing performance against standards
(v) Recognizing good or positive performance
(vi) Taking corrective action when necessary
(vii) Adjusting standards and measures when necessary
Determining Areas to Control

It is quite expensive and virtually impossible to control each and every aspect of an organization’s
activities. Moreover, employees resent having every move of theirs being controlled by their superiors or
the management. Therefore, before initiating the control process, the manager must determine the major
areas that need to be controlled. The organizational goals and objectives defined during the planning
process must form the basis on which managers decide upon the areas in which to exercise control.
The areas selected for control should be of critical importance to the organization. Exercising control
over critical areas helps a manager manage a large number of subordinates effectively, reduce costs, and
improve communication in the organization.
Establishing Standards
Standards constitute the foundation of the control process. They state the criteria on the basis of
which employee performance and related behaviour can be evaluated. Thus, establishing standards is an
essential part of the control process. (A standard is any guideline established as the basis for measurement.
It is a precise, explicit statement of expected results from a product, service, machine, individual, or
organizational unit.) Standards are often incorporated into goals when the goals are established during the
planning process. In such cases, the standards merely need to be reiterated. Sometimes, however, they
need to be developed during the control process. Thus, standards are predetermined points in the control
process at which performance is measured. The setting of standards and measuring organizational
performance against these standards helps the manager know how things are progressing in the organization
and eliminates the need to watch every step in the execution of plans. Standards are expressed numerically
and aim at achieving the desired quality and quantity within a specific cost and time frame. For instance,
a worker must produce a number of units per day or per week or per month (quantity); he or she must
maintain a rejection rate of not more than 2 per cent (quality); the cost of producing a specified number
of units must not exceed the specified amount (cost); he or she must complete his or her work within three
months (time).
Exhibit 19.2 Setting Performance Standards
In hospitals, the commonly used measure for assessing the performance of employees is the patient census,
i.e. the number of active patients at the end of the month. This number is obtained by adding the number
of new admissions and subtracting the number of discharged patients from the number of patients at the
beginning of the month. Given the importance of patient care in the health care industry, a better way to
measure the performance of employees is by means of the utilization rate. The utilization rate is the number
of first time (chargeable) visits made during a given month divided by the patient census at the end of the
month. This figure also helps management find out the number of visits made by a patient per month. On
the basis of past experience, management can establish the level of utilization rate to be achieved in a given
year. If the utilization rate is low, it could be because of lack of proper patient care. Management can then
immediately take steps to improve the hospital’s service. In health insurance firms, the process measure of
‘Final Bills on Hold’ is more useful than Gross Revenue in measuring the revenue generated. The measure
of Final Bills on Hold indicates the number of claims made during a month and the total dollar value of
accounts payable in that month. Since customers prefer firms which settle their claims fast, health insurance
firms should establish a standard that requires that not more than 10% of the bills be kept on hold. When
the bills on hold exceed 10%, the management should quickly take appropriate measures to improve the
speed of processing and ensure customer satisfaction. In international transportation agencies, the measure
of international shipping delays can be a better indicator of performance rather than the traditionally used
measure of on-time deliveries because international shipments bring more revenue to the company than local
shipments. Hence, organizations involved in the international transportation business need to pay special
attention to avoiding international shipping delays. If a firm’s total on-time delivery rate is satisfactory, but 40%
of the international shipments are delayed, the problem may be ignored by the management. If there is a
special indicator for international shipments, the problem will be quickly noticed by the management, which
can then take the necessary action to address the problem. In financial institutions, standards that assess
the transaction cycle time and return (on investment) per employee will help companies gauge their performance
in relation to other firms in the industry.
Adapted from Mark Henderson, “Balancing Performance Metrics: Establishing Process and Results Measures,” www.
clemmer.net
Establishing standards serves three major purposes in the context of employee behaviour. First, it
helps employees understand what is expected of them and how their work will be evaluated, thus helping
them perform effectively. Second, it provides a basis for identifying job difficulties with reference to the
personal limitations of employees, which may include lack of experience, ability or training or any other
task-related deficiency. Such deficiencies prevent an employee from performing his or her task efficiently.
Timely detection of such personal limitations makes it possible for the organization to take remedial
measures before the deficiencies become serious. Finally, standards help reduce the potential negative
effects of goal incongruence. Goal incongruence takes place when the goals of the employee and those of
the organization fail to match. Goal incongruence may occur due to various reasons, such as lack of
support of the employees for organizational activities, lack of clarity in organizational goals, etc. For
example, knowing that their job is temporary, employees may only put in minimal effort while performing
their jobs. This type of behaviour is incompatible with organizational goals.
Unforeseen circumstances sometimes necessitate changes in established standards. In order to avoid
making frequent changes in established standards, a ‘cushion’ is provided in the control process. This
‘cushion’ is known as tolerance and specifies the acceptable level of degree of variations in the established
standards. It is the permissible deviation from the standard. In order to provide this type of ‘cushion,’ the
standards in some industries may be set in terms of a range, such as 2 to 3 per cent acceptable rejection
rate, and so on.
In order to make standards more effective, a participative approach may be followed while setting
them. The management by objectives method (MBO) encourages such an approach by involving the
employees’ participation in the setting of objectives.
Measuring Performance
Once standards are established, the actual performance must be measured. A manager must decide
how to measure the actual performance and how frequently it is necessary to do so. The measurement
of performance against standards should be done on a forward-looking basis. Measuring performance on
such a basis helps managers detect deviations in their early stages. They can, then, be countered by
appropriate action. If performance standards are clearly established and means for exactly determining
what subordinates are doing are available, evaluating the expected or actual performance becomes fairly
easy. However, there are certain activities which are difficult to measure, and for which it is difficult to
establish standards.
For many production jobs and other such activities, the motion and time study technique is used to
set standards. As a result, the measurement of actual performance tends to be simple. Though quantitative
measures are used whenever possible, many important aspects of performance are difficult to measure
quantitatively. For jobs that involve less technical expertise (such as the job of Vice President of Finance
or the job of Director, Industrial Relations, definite standards cannot be easily developed. This makes it
difficult to set and measure the standards of performance. Thus, superiors find it difficult to measure the
performance of some managers. They are forced to depend on vague criteria to measure the performance
of managers at these levels. These criteria include financial health of the business, attitude of labour
unions, absence of strikes and lockouts, expressed admiration of business associates, enthusiasm and
loyalty of subordinates, and overall success of the department (this is often measured in a negative way
by lack of evidence of failure). Similarly, in areas such as research and development, it can be difficult
to measure performance quantitatively in the short run because it may take years to determine the final
outcome of research programmes.
As a result, most organizations use a combination of quantitative and qualitative performance measures.
Qualitative performance measures may include qualitative judgment by peers. One of the popular techniques
for setting standards and coordinating the measurement of performance is management by objectives.
After selecting the means of measurement, a manager has to decide how frequently performance is
to be measured. Managers may need control data on an annual, semiannual, quarterly, monthly, fortnightly,
weekly, daily, hourly or even more frequent basis (as in the case of managers of air traffic control).
Depending on how important the goal (or objective) is to the organization, the nature of the deviation from
the standards, and the expenses that the organization will incur to correct the problem, the superior decides
at what intervals performance should be measured.
Comparing Performance Against Standards

In this stage, the performance measured in step 3 is compared with the standards established in step
2. Such a comparison enables managers to determine whether actual performance meets the standards
established (predetermined or planned performance). Managers often perform the task of comparison on
the basis of information provided in reports. These reports, which may be presented in an oral or written
form or generated by a computer, summarize planned versus actual results. Written data might include
time cards, production tallies, inspection reports and sales tickets. Oral reports allow for fast and
comprehensive feedback. Computers give supervisors direct access to real time, unaltered data and
information. Online systems enable supervisors to identify problems as they occur. Computer systems are
particularly useful for identifying situations requiring a management by exception approach. Management
by exception is a control principle which suggests that managers should be informed about a problematic
situation only when the data shows a significant deviation from the established standards. Only a problem
that is difficult for subordinates to handle and requires managerial intervention should be brought to the
notice of managers. This saves managers’ time and leaves them free to concentrate on major problems
instead of routine ones.
Personal observation is another method for measuring the performance of subordinates against
established standards. Management by walking around (MBWA) work areas and observing conditions
allows the manager to obtain unfiltered information about the work activities of the employees. This is also
referred to as management by wandering around. For example, executives in Wal-Mart discount chains
use the MBWA technique to manage the company’s stores. They visit the stores, check the merchandise,
and talk to their employees and customers. Though this technique helps managers provide useful insights,
employees may interpret it as mistrust.
Exhibit 19.3 HSBC – Management by Walking Around
Many managers practice “Management by Walking Around” to monitor the performance of employees while
they are performing their tasks. At HSBC, management by walking around involves much more than simply
monitoring employees. It has become a tool for helping employees and the organization in a variety of ways.
There is no fixed time for walking around. As part of ‘walking-the-job,’ senior managers make unscheduled
visits to employees. ‘Walking-the-job’ enables senior managers to directly view employees when they are
performing the tasks associated with their jobs. Such unscheduled visits by the managers ensure that
managers get to know of any problem that the employee may be facing, while at the same time ensuring
that the employees are not prepared beforehand with readymade answers. By talking to employees while they
are carrying out their tasks, managers are able to get a clear understanding of their problems and thus help
employees resolve them.
The purpose of management by walking around is to improve employee performance, not disrupt performance.
If an employee is busy serving a customer, he is always free to tell the manager that he is busy. By not
disturbing an employee who is serving a customer, a manager, while walking around, can make employees
aware of how important the customer is to the organization. Thus, by adopting this approach, managers can
increase employee awareness about the importance the firm attaches to customer satisfaction.
At HSBC, management by walking around is very much a part of the organizational practice and new staff
recruits are briefed about it. Although walking-the-job was formally defined as part of the bank’s global
philosophy only a few years ago, it has now become a part and parcel of HSBC’s culture.
At HSBC, the aim of walking around is not just to note the performance of the employees but also to break
barriers between peers and employees and bosses. It gives managers the opportunity to sense the atmosphere
outside their cabins and to hold short professional chats with other employees of the organization. Managers
who walk-the-job prefer to personally obtain or deliver a file (or information) within the organization. By so
doing, they are able to avoid delays and overcome ego problems.
Adapted from Namrata Singh, “Management by walking around - HSBC on the job, “ Financial Express, 19 July 1999
Database programmes allow supervisors to query, reduces the time spent on gathering facts, and
reduces their dependency on other people. Such programmes give supervisors quick and easy access to
information. Statistical reports make visualization easy and are effective at demonstrating relationships.
Written reports provide comprehensive feedback that can be easily filed and retrieved.
Recognizing Good or Positive Performance

Managers should not always be preoccupied with finding solutions to important problems; they should
also find the time to recognize and acknowledge good or positive performance by subordinates when their
performance meets or exceeds the established standards. Recognition may be in the form of an oral
remark, such as “well done,” for a routine achievement, or substantial rewards in the form of pay hikes,
bonuses, or training opportunities for major achievements or consistent good work.
This approach of recognizing positive performance emphasizes the importance of rewarding good
performance in order to sustain it and encourage further improvement. This approach is thus consistent
with motivation theories such as the expectancy theory (discussed in detail in Chapter 16).
Taking Corrective Action when Necessary

When a significant discrepancy occurs between the actual output or performance and planned or
predetermined performance standards, specific actions must be taken to correct the situation. Managers
must first determine the cause of the deviation from the standard, then take the required action to remove
or minimize the cause of deviation.
Sometimes, managers redraw their plans or modify their goals to correct deviations. They may also
reassign or clarify the duties and responsibilities of subordinates. In order to rectify a problem, managers
may have to train the subordinates, recruit additional staff, or remove inefficient subordinates. They may
also tackle the problem by explaining the job in detail to subordinates, thereby helping them overcome their
job-related problems.
Sometimes, the established standards may not be realistic. In such situations, managers may conclude
that the standards are inappropriate and need to be modified. Changing conditions sometimes make
standards that were set earlier seem inappropriate and unrealistic.
Adjusting Standards and Measures when Necessary

Control is a dynamic process. In order to ensure that standards and their associated performance
measures meet future needs, managers must periodically review standards. It is important for managers
to conduct a periodic review of standards for the following reasons:
(i) Changing conditions, such as the use of sophisticated machinery or improvement in the skill level
of employees, make it possible to raise standards for future projects of the organization.
(ii) Existing standards or measures may become obsolete or ineffective because of changed circumstances
or because they were not properly defined.
(iii) If the standards set have been exceeded, it may indicate unforeseen opportunities for the organization.
It encourages the organization to further raise standards in order to effectively tap the potential of
the employees to meet the new standards. It also increases the scope of the organization for making
adjustments in the organizational plan.
Table 19.2: Major Control Types based on Timing
Stages of Production Type of Control Description
Input Capital Feed forward control Inputs are monitored to ensure that they meet
Labour the standards necessary for the transformation
Raw materials process.
Market information
Equipment
Transformation process Planning Concurrent control Regulates ongoing activities that are a part of
Organizing the transformation process to ensure that
Staffing they conform to organizational standards.
Leading
Controlling
Output Goods Feedback control Exercised after a product or service has been
Services produced to ensure that the final output
Profits meets quality standards and goals.
Waste materials
If a manager feels that a particular standard may consume a lot of resources, he may lower the
standard. Thus, managers should use the control process to ensure that it meets the current needs of the
organization and that the standards set earlier are not obsolete or unrealistic.
The control process fails when the recommended corrective actions are not implemented properly. A
manager’s responsibility does not stop with recommending corrective actions; he should also ensure that
the subordinates are implementing the changes in the correct manner.
TYPES OF CONTROL
Organizations implement control in a number of different ways and at different levels. Managers need
to consider the types of control that they wish to use. In this section, we discuss various types of control.
Controls Based on Timing

On the basis of timing or stage in the production process, controls can be classified as feed forward
control, concurrent control, and feedback control (see Table 19.2).
In feed forward control, inputs are monitored to ensure that they meet the standards necessary for the
transformation process. Inputs in the production process may include materials, people, finances, time and
other resources used by an organization. For effective control, managers need a system that warns them
well in time of the need to take corrective action and informs them of the problems that could arise if they
failed
Feed Forward Control

In feed forward control, inputs are monitored to ensure that they meet the standards necessary for the
transformation process. Inputs in the production process may include materials, people, finances, time and
other resources used by an organization. For effective control, managers need a system that warns them
well in time of the need to take corrective action and informs them of the problems that could arise if they
failed to do so. Feed forward control enables managers to prevent serious difficulties from arising in the
production process. Since feed forward control is future oriented, it is sometimes referred to as preceptor,
pre-action or preliminary control. Feed forward controls use policies, procedures, and rules to limit activities
in advance and minimize the likelihood of significant deviations requiring corrective measures.
Concurrent Control
Concurrent control regulates ongoing activities that are a part of the transformation process to ensure
that they conform to organizational standards. Such controls are also known as “steering controls.” They
are used during the implementation of plans (i.e., during the performance of an activity), and are perhaps
the most frequently used controls. Concurrent control techniques help managers identify deviations from
predetermined standards and allow remedial measures to be taken while the activity is being performed.
Since concurrent controls involve checkpoints at which decisions are made regarding the continuance
of a process, they are sometimes referred to as screening or yes-no controls. Quality control inspections,
approval of requisitions, safety checks and legal approval of contracts are common examples of yes-no
controls.
Feedback Control
Feedback control measures the results and compares them against the predetermined standards. This
form of control is exercised after a product or service has been produced to ensure that the final output
meets quality standards and goals (see Figure 19.1). The aim of feedback control is to identify deviations
that went undetected earlier. A major benefit of feedback control is that it provides information that
facilitates the planning process. Data provided by this type of control helps managers revise existing plans
and formulate new ones. Feedback control is also useful for rewarding employee performance by providing
information about the output produced by the employee. Final inspections, summary of activity reports,
and balance sheets are examples of feedback control.
Feed forward control is considered as preventive control since it involves implementation of control
measures before the activities are performed. Concurrent/steering/yes-no controls and feedback controls
are known as corrective controls since they involve the implementation of control measures while the
activities are in progress or after the activities have been performed. Although preventive (feed forward)
and corrective controls (concurrent, steering, yes-no and feedback controls) are used at different phases
in a firm’s operations, both play an important role in ensuring successful performance.
Actual
Reasons for
performance
deviations
Measure the Deviations

Comparison
performance
Desired
performance
Corrective
action
Fig. 19.1 Feedback Loop of Management Control
Multiple Controls
Multiple control systems use two or more control processes and involve several strategic control points.
Such control systems were developed because of the need for different controls for different phases of a
firm’s operations. Firms that do not have such control systems experience difficulties, forcing managers to
reevaluate their control process.
Cybernetic and Noncybernetic Control

Based on the degree of human discretion required, control systems can be classified as cybernetic or
no cybernetic control systems.
Cybernetic Control System

A cybernetic control system is a self-regulating control system. Once put into operation, it can
automatically monitor the situation and take corrective action when necessary, thereby doing away with
the need for human intervention. Many large organizations today employ computerized inventory systems
which automatically place purchase orders whenever replenishment becomes necessary. The ordering is
done without human involvement, such as obtaining managerial approval before an order is placed. Table
19.3 lists the seven steps involved in a cybernetic control system.
Table 19.3: Seven Steps of a Cybernetic Control System
Step Description
Step 1 Define precisely what characteristics are to be controlled

Step 2 Standards set for each characteristic
Step 3 Sensors built to measure characteristics
Step 4 Measurements transformed to a signal to be compared to standard signal
Step 5 Difference is sent to decision maker
Step 6 If difference is significant, signal is transmitted to effector that causes system to counteract deviation
Step 7 Often system may allow effector to take one of many actions.
Source: classwork.busadm.mu.edu/classwork/ Hosseini/GPM/Control.PDF
Non Cybernetic Control System

This type of control system relies on human discretion. Areas that require control in organizations are
complex in nature. These areas, therefore, require managerial discretion to determine what corrective
actions are necessary to minimize deviations from established standards. Even firms that use computerized
inventory systems have built-in monitoring systems that are designed to alert appropriate organization
members if things are not progressing as intended. However, the growing use of computers in organizations
leading to automation is reducing dependency on non-cybernetic control systems.
REQUIREMENTS FOR EFFECTIVE CONTROLS

All managers need adequate and effective systems of control to help them make sure that events
conform to plans. Effective control systems must have the following characteristics.
Controls should reflect plans, positions and structures: A control system should provide
managers relevant information about the progress of plans that they are responsible for. Similarly,
controls should be tailored to positions. What is appropriate for a vice-president of marketing will
certainly not be suitable for a senior sales manager. Likewise, controls for the production department
may differ from controls for the finance department. Managers should use controls that are
appropriate for their positions and departments. The type of organization structure helps determine
the authority that managers at each level in the organization are vested with. The organization
structure defines who is responsible for the execution of plans and any deviations in them. Controls
that have been designed by taking the organization structure into consideration must indicate
clearly as to who is responsible for execution of plans in the organization. If the control systems
are able to clearly indicate this, it will result in enhancing managers’ ability to correct any deviations
from the actual plans.
They should be understandable: Individuals tend to distrust things they do not understand.
Therefore, control systems as well as the information generated by them should be easy to understand.
Sophisticated control techniques often fail in practice because the people who are expected to use
them cannot comprehend them. Therefore, it is better to use a fairly crude system and obtain
moderate benefits rather than use a sophisticated system which is difficult to use and provides no
benefits.
They should be cost-effective: The cost of controls is an important consideration. Managers
often find it difficult to determine what a particular control system is worth. If tailored to the job
and the size of the business enterprise, control will probably be economical. The benefits of
controls should outweigh the cost of implementing them. Efficient control systems locate the actual
or potential deviations from plans at the minimum cost.
Controls should identify only important/major exceptions: Controls that concentrate on

exceptions from planned performance make use of the exception principle. They allow managers
to benefit from this time-honoured principle by identifying only those areas that require their
attention.
Control systems should be flexible: The control system must be flexible enough to accommodate
change. When a control system is inflexible, a firm has to design and implement a new control
system. This wastes time and leads to additional expenditure. Flexible controls allow managers to
react quickly to overcome adverse changes or take advantage of new opportunities.
Control systems should provide accurate information: Effective control is usually based
on accurate information regarding performance. When data from a control system is inaccurate,
it can cause the organization to take action that will either fail to correct the problem or create a
problem that does not exist. Suppose, a sales manager makes sales projections on the basis of
inaccurate information, which provides an inflated figure of sales taking place in a particular
region. Due to the inaccuracy of the information on which they are based, the sales projections
too tend to be inaccurate and inflated. Such inflated sales projections by the sales manager may
result in the top management deciding to cut down advertising expenses, thinking that additional
expenditure on advertising is no longer needed. Thus, incorrect information provided by a control
system might adversely affect the performance of the company.
SUMMARY
Control is an essential function for managing an organization. It is used to ensure that what is done
is what was intended. The control function plays an important role from the top to the bottom level of an
organization.
Controlling involves the comparison of actual results with planned results. Thus, there is considerable
overlap between the planning, organizing and leading functions of a manager. Coinciding with the three
levels of management, there are three levels of control – strategic, tactical and operational.
Although control systems must be tailored to specific situations, they generally follow the same basic
process. The control process consists of seven steps: determining the areas to control, establishing standards,
measuring performance and comparing it against the standards, recognizing good or positive performance,
taking corrective action when necessary, and adjusting standards and measures when necessary.
Organizations implement control in a number of different ways and at different levels. Along with
determining the areas in which they wish to use controls, managers need to also consider the types of
control they wish to use. There are various types of control based on the stage in the production process
when they are used, and on the degree of human discretion they require. To be effective, control systems
should reflect organizational plans, positions and structure; should be understandable; should be cost-
effective; should identify only important exceptions; should be flexible; and should provide accurate
information.
Finding Gold in a Gutter

In Nairobi, Kenya 25 years ago travel – weary Ken Thuerbach was looking for something
to read. Discarded on the street was a magazine, which he picked up. When he read that
by 1990 the art of building authentic log homes would disappear, a business was born and
STUDY
a strategy was created.
CASE
When returned to the States, Thuerbach scoured the American West to find the few
remaining log crafts men. The journey took him to Alphine Log Homes, which was doing
poorly and had not paid its employees for six months. For $ 3000 Thuerbach purchased the
company and then spent the next few years learning all he could about the business. His
real strategic breakthrough came when he recognized he could save on inventory and labour
cost by having Alphine construct all lodgings in one location, dismantle them, and sent them
to their destinations like a Tinkertoy set.
Among the pride owners of Thuerbach log homes which can cost up to $ 9 millions, are
200 top officers of Fortune 500 companies. The company brought in sales of $ 15 millions
in 1996 and had no debt.
1. What control problem does Ken Thuerbach face in keeping his company on track?
2. Are control problems different in a small business like Ken’s than in a large company? Why or why not?
3. What lessons about strategic control can you learn from this case?
][][
20
Techniques
Control
H Major Control Systems
H Financial Control
H Budgetary Control
H Quality Control
H Inventory Control
Chapter 20 Control Techniques 405
INTRODUCTION
The primary objective of an organization is to maximize its shareholders’ wealth. This requires the
management to make optimal decisions in utilizing the assets of the organization. The management also
has to analyze, plan and control the activities of the firm. The basic nature and purpose of management
control has remained the same, but over the years, a variety of tools and techniques have been developed
to help managers exercise control. Managers use a variety of control methods and systems to deal with
various problems in their organizations. The methods and systems take many forms and are intended for
different managerial levels. In this chapter, we will discuss some of them.
MAJOR CONTROL SYSTEMS

There are six major control systems – financial control system, budgetary control system, quality
control system, inventory control system, operations management and computer-based information systems
– that enable managers to ensure that the actual performance of the organization is in tune with the
planned performance. The control systems used in leading organizations such as IBM, RJR Nabisco and
American Express are shown in Figure 20.1. We concentrate on financial, budgetary, quality and inventory
control systems in this chapter, and discuss operations management and computer-based information
system in Chapter 21 and Chapter 23 respectively. Managers use these systems in order to meet organizational
goals. For example, money matters such as the profit of an organization, sundry credit, sundry debt and
the like can be measured through financial control systems. Financial control systems help managers keep
track of money matters and take necessary steps if the organization is not able to make a profit or meet
its profit goals. The budgetary control system provides quantitative tools that help managers compare the
actual and the planned revenues and costs of various organizational activities. Quality control is an
important issue for every organization that wishes to survive in a competitive environment. The quality
control system provides a means of measuring the quality of a product or service.
Inventory control systems help managers control the inventory in such a way that the inputs are
available at the right time, at the right place and in the right quantity, thus minimizing costs such as
delivery cost, warehousing cost and the floor space occupied. Operations management is used to control
the process of manufacturing a product or delivering a service. Finally, computer-based information
systems help managers develop sophisticated systems that provide better control over information and
related functions. Data mining and data warehousing are examples of systems that give the management
control over information.
Before discussing control techniques, we take a look at the way in which control systems differ,
depending on the management level at which they are used and their emphasis on timing.
Managerial Level
As shown in Fig 20.1, for different managerial levels, different types of control systems are required.
But, there is always an overlap in the use of control systems. The design of the control system is dependent
primarily on the extent of its use by different managerial levels.
Organizational Control
Systems
Financial Budgetary Quality Inventory Operations Computer-

control control control control management based
information
Financial system
statements
Ratio TPS
analysis OAS
DSS
ESS
MISS
Fig. 20.1 Managerial Levels and Control Systems
It is the top-level management that monitors the overall financial health of an organization. Hence,
the financial control system is used by and large by the top-level management. However, middle level
managers also monitor financial matters that affect their areas of specialization. The budgetary control
system is used by middle-level and lower-level managers to ensure that the activities of the organization
are carried out according to the budgets allocated. The top management occasionally uses the system to
monitor the overall budget performance and check any major deviation from the original budget plan.
Quality control systems, since they are strategically important, are used by all levels of managers, especially
by the top management. Inventory control systems are used largely by lower-level and middle-level
managers. However, some indexes may be used by the top management to evaluate the cost of inventory.
Table 20.1: Managerial Levels and Control Systems
Level of Management Type of Control
Top level management Financial control

Middle level management Budgetary control
Quality control
Lower level management Inventory control
Exhibit 20.1 Feedback Control at Mastek
In the financial year 2000-01, Mastek, an Indian software solution provider performed poorly in comparison
with other companies in the industry. Its revenues from the US had come down by 24% while that of the
other software firms had increased by 25%-30%. Its financial measures (in 2000-2001) of total sales was Rs
258.7 crore, net profit was Rs 7.9 crore, free cash flow was Rs 10.2 crore and return on capital employed
was 17.8% while the employee costs/total income ratio was 67.3%. This indicated that the company was
far behind companies like Infosys (which started at the same time as Mastek) and i-flex (which started 10
years later than Mastek). Sudhakar Ram, the Chief Operating Officer of Mastek, began exercising feedback
control and analyzed the reasons for the company’s poor performance.
In the mid 1990s, when all the software companies were targeting the US market, Mastek chose to focus
on East Asia and its business suffered when the region was caught in the east-Asian economic crisis. By
the time Masket turned to the US, most of the big projects were bagged by its competitors. Thus, the
revenues of Mastek were much lower than other leading players. Also, Mastek offered advanced technologies
at the wrong time. For instance, in the early 1990s, it tried to market ERP packages in India when companies
were not ready to adopt them, and in 2000, it worked on CRM technology when dotcom companies were
facing a crisis. The COO of Mastek also found that the company was taking on too many small projects
which did not yield proper returns. This meant that the company had plenty of projects and the employees
worked continuously but the margins were low thus leading to less revenues and profits (low employee costs/
total income ratio).
The salespeople in Mastek were given incentives based on the volume of business they generated. Sudhakar
Ram changed this, offering instead incentives based on the size of the project. A salesperson who brought
in large projects from Fortune 1000 companies received higher incentives. Using this approach, Mastek
improved its revenue per client from Rs 60 lakh in 2001 to Rs 1.4 crore in 2003 and the revenue contributed
by its top 10 customers increased from 48% to 68%. Sudhakar Ram increased the number of employees
and the salesforce in the organization and initiated leadership development programs to develop a strong line
of managers capable of taking the organization to greater heights.
The financial performance of the company also improved significantly in the financial period 2001-2002. The
sales of the company for the period were Rs 286.9 crore, net profit was Rs 41.5 crore, free cash flow was
Rs 55.1 crore and return on capital employed was 43.9% while the employee costs/total income ratio was
63.8%. Sudhakar now wants his company’s finances to outperform major players such as Infosys and i-flex.
Adapted from Shishir Prasad, “Cleaning Up Its Act,” Businessworld, 7 April 2003.
Nature of Timing
The time limits differ from one control system to another. Some control systems come into operation
before the process of transformation (i.e. conversion of input into output) begins. They are called feedforward
control systems. The control systems which operate along with the process of transformation are called
concurrent control systems, whereas the control systems that come into operation at the end of the
transformation process are called feedback control systems. As financial control systems evaluate performance
at the end of a prescribed period (annually, semi-annually, quarterly, etc.), these constitute feedback
control (Refer Exhibit 20.1). Though it is too late to incorporate the changes recommended by feedback
control systems, these recommendations are useful in planning for the future. On the other hand, budgetary
control has more of a concurrent focus as it tries to ensure that the actual performance meets the desired
performance. Quality control is also a form of concurrent control, since it compares actual quality with
desired quality during the transformation process and ensures that quality standards are met.
Exhibit 20.2 Significance of financial measures
Investors use ratio analysis to select the best stock in which to invest. They measure a company’s share
price against its current or potential earnings to get an idea of its profitability. Financial experts may even
consider special situations like asset obsolescence before making a decision on investment.
Rating agencies such as CRISIL and Standard & Poor use various financial measures to rate companies.
Standard & Poor gave Sabre Technologies a good rating despite a fall in its revenues, due to its healthy
balance sheet with cash and marketable securities worth twice its debts. Another organization, American
Airlines was on the verge of bankruptcy at the end of March 2003. One of the reasons for bankruptcy was
negative cash flow. Standard & Poor had warned the company in advance about the cash flow. The management
attempted to address the problem and now American Airlines is recovering quickly and has debt-free assets
and reasonably good liquidity, with its balance sheet being comparable to some of the best firms in the
industry. This shows that financial measures play a crucial role in the functioning of an organization.
As one does not set out for a long journey in a car without checking the tires, petrol tank, speedometer and
other controlling equipment, the management of an organization should not operate a business for years
without using financial parameters to check its performance. Significant information can be obtained from the
company’s balance sheet, cash flow and income statements. However, performance ratings vary with industry
and the competitive environment. Hence, companies should employ financial experts to interpret their financial
statements.
By calculating the company’s debt-to-earnings ratio, the management can determine the amount of debt that
can be carried by the organization. The management can also estimate the revenue to be earned by the
organization to pay debts and meet various fixed and variable costs. In the case of established organizations
with stable earnings, a high ratio of debt to earnings is acceptable. However, in young organizations, the
management must find out the reasons for a high ratio and take measures to reduce it.
The management should constantly monitor the net profit of the organization to be able to find out its growth
rate. A higher percentage indicates a faster growth rate while a lower percentage indicates a slow growth rate.
The liquidity ratio of the company should also be closely monitored. It indicates whether the company has
sufficient cash and current assets to pay short-term debts, payable within the accounting period (one year).
A low ratio indicates the company’s inability to clear debts and the management has to look for ways to
improve the financial position.
The management also has to often make decisions about abandoning mature products. The Return on Assets
(ROA) measures the ability of the firm’s products or services to generate profits, and can be used in this
case. In the retail industry where revenues depend on volumes, an ROA of 5% is fair enough to retain a
product. However, in service industries, since there are no assets or inventories involved, the ROA should
touch a higher figure of about 600% to allow the management to retain a particular service.
Thus, the management can ensure better control over the organization’s performance, formulate effective
plans and strategies, and improve the success rate of the firm by using financial measures to monitor the
performance of the organization and help them in their decision-making.
Adapted from Michael Janicki, “Reading Your Firm’s Financial Controls,” Fortune, 1 August 1997
Inventory control is largely a feed forward control as it ensures that the inputs and products needed
are supplied at the right time.
FINANCIAL CONTROL
Financial controls have a special prominence, because financial health is crucial to the survival of an
organization (Refer Exhibit 20.2). In this section, we review some of the more common financial control
techniques – financial statements and ratio analysis – that help measure an organization’s performance.
Financial Statements
A financial statement is a summary of the major aspects of an organization’s financial status. Financial
statements contain information that is necessary to maintain financial control over organizations. They
facilitate the monitoring of an organization’s liquidity, general financial condition, profitability, etc. Liquidity
is defined as the ability of an organization to convert its assets into cash so as to meet its current financial
needs and obligations. The general financial condition of a company refers to the long-term balance
between its debt and equity, i.e. the difference between assets and liabilities. The profitability of a company
is its ability to earn profits consistently over an extended period of time.
Financial statements provide insights into an organization’s performance and long-term prospects.
Managers, creditors, investment analysts, shareholders, unions and other stakeholders use the financial
statement to evaluate the performance of the organization. For example, bankers and financial analysts
evaluate the statements of an organization and decide whether they should invest in it. On the other hand,
managers may use the information provided in the financial statements to compare the performance of the
organization in the current year with the performance in the previous year or with the performance of a
competitor in the same year.
The most common financial statements, used by large as well as small organizations, are balance
sheets, income statements and cash flow statements. Financial statements are typically prepared at the end
of reporting periods – quarterly, half-yearly and annually. But nowadays, computers facilitate the preparation
of financial statements as frequently as desired.
Balance Sheets
“A balance sheet shows the financial condition of a business at a given point of time.” Thus, a
balance sheet is a snapshot of the financial position of an organization, taken on some date.
In its simplest form, a balance sheet describes the company in terms of its assets, liabilities and net
worth. Assets are the resources that an organization controls and are of two types – current and fixed. The
assets that are in the form of cash or assets that can be converted immediately into cash and used within
one year are called current assets. Examples of such assets are money in the bank and inventory that can
be converted into cash within a relatively short period of time. The assets that have a life exceeding one
year are called fixed assets. Examples of fixed assets are land, buildings, machinery, patents and other
items used on a continuing basis to produce goods or services.
The balance sheet of Canon is given in Table 20.2. It shows that the company had current assets
worth ¥ 1,665,396 million, fixed assets (after depreciation) worth ¥ 742,312 million and total assets of
¥ 2,720,597 million in 1998 as against ¥ 1,877,740 million, ¥ 697,244 million and ¥ 2,861,927 million
respectively in 1997.
Liabilities and shareholders’ equity are tabulated in the bottom half of the balance sheet. Liabilities
are claims by non-owners against company assets, and are of two types: current liabilities and long-term
liabilities. Debts, such as accounts payable, short-term loans and unpaid taxes that are to be paid off
within a year, i.e. during the current fiscal period, are called current liabilities. Long-term liabilities are
debts usually paid over a period that exceeds one year, such as bonds, mortgages and other debts that
have to be paid gradually. Canon had ¥ 1,041,360 million in current liabilities and ¥ 325,349 million in
long-term liabilities, for a total of ¥ 1,366,709 million in liabilities in 1998.
Shareholders’ equity, which is the excess of company’s assets over its liabilities, represents claims by
owners against a company’s assets. It is also known as the organization’s net worth and is represented
on the balance sheet by stock and retained earnings (retained earnings are the funds accumulated from
the profits of the organization). Canon had a shareholder’s equity of ¥ 1,148,078 million in 1998 as
against ¥ 1,099,010 million in 1999. The balance sheet is generally balanced by placing the assets on top
and the liabilities and the net worth at the bottom. The balance sheet can also be balanced by taking the
liabilities on the left and assets on the right.
The widespread use of electronic spreadsheets has made the presentation of balance sheets much
easier. Computer packages such as ‘Wings,’ ‘Tally,’ etc. have been developed specifically to process
accounting transactions and prepare balance sheets and financial statements for business transactions.
A comparative balance sheet, which shows figures from various years, helps track the growth in
assets, the state of liabilities and current net worth.
Table 20.2: Canon’s Consolidated Balance Sheets (In yen million, except par value)
Year ended December 31 1998 1997
Cash and cash equivalents 499,182 647,097

Marketable securities 6,956 12,022
Trade receivables 412,375 445,208
Inventories 549,257 564,775
Prepaid expenses and other current assets 197,626 208,638
Noncurrent receivables and restricted funds 50,309 56,840

Investments 69,245 66,989
Net property, plant and equipment 742,312 697,244
Other assets 193,335 163,114
Short-term loans 403,332 535,703

Trade payables 401,527 457,497
Income tax 61,328 61,497
Accrued expenses 127,905 126,148
Other current liabilities 47,268 49,488
Long-term debt, excluding current instalments 180,320 226,889

Accrued pension and severance cost 132,818 88,529
Other non-current liabilities 12,211 15,504
Minority interests 205,810 201,662

Stockholders’ Equity
Common stock of ¥ 50 ($ 0.43) par value
Authorized 2,000,000,000 shares; issued and outstanding 870,305,870
shares in 1998 and 866,798,934 shares in 1997 163,033 160,411
Additional paid-up capital 375,913 372,398
Legal reserve 31,396 28,467
Retained earnings 682,663 592,268
Accumulated other comprehensive income (loss) (104,927) (54,534)
Source: Canon Annual Report, 1998

Income Statement
While the balance sheet focuses on the overall financial worth of the organization at a specific point
of time, the income statement summarizes the company’s financial performance over a given interval of
time. An income statement is a brief presentation of the financial results of a company’s operations over
a specified time period, such as a quarter or a year. Thus, an income statement clearly shows revenues
and expenses and how much profit the organization has made over a given period of time. The value of
goods and services sold is called revenues and the costs incurred in producing and selling the goods and
services are called expenses. The expenses may include cost of goods sold, interest rates, administrative
expenses, taxes, operating expenses, etc.
Table 20.3: Canon’s Consolidated Statements of Income (In yen million, except per share data)
Net sales 2,826,269 2,761,025 2,558,227

Cost of sales 1,569,197 1,528,364 1,465,437
Gross profit 1,257,072 1,232,661 1,092,790
Selling, general and administrative expenses 996,294 958,627 871,754
Operating profit 260,778 274,034 221,036
Other income (deductions):
Interest and dividend income 12,576 13,922 12,972
Interest expense (28,881) (29,789) (33,844)
Other, net (4,960) (23,362) (17,399)
(21,265) (39,229) (38,271)
Income before income taxes and minority interests 239,513 234,805 182,765
Income taxes 123,843 109,364 80,636
Income before minority interests 115,670 125,441 102,129
Minority interests 6,101 6,628 7,952
Net income 109,569 118,813 94,177
Net income per share
Basic 126.10 137.73 111.29
Diluted 123.93 134.60 106.96
Dividends per common share 17.00 17.00 15.00
Source: Canon Annual Report, 1998.
The difference between revenues and expenses yields the profits or losses for a given period of time.
This is referred to as the bottom line of the company. The managers can observe the fluctuations in various
expenses and thus profits, and take the necessary steps to curb expenses by analyzing the reasons for the
fluctuations.
The income statements for different time periods are often compared to monitor the financial condition
of the organization. Table 20.3 illustrates a comparative income statement of Canon. It indicates that the
net income of the company in 1998 is ¥ 109,569 million as compared to ¥ 118,813 million in the previous
year (1997).
Cash flow: Sources and uses-of-funds statements

Many organizations report financial data in the form of cash flow statements. The statement of cash
flow summarizes the financial performance of an organization in terms of the sources of origin of cash
or funds during the year and the areas where they were utilized.
Table 20.4: Canon’s Consolidated Statements of Cash Flows (in yen million)
Year ended December 31 1998 1997 1996
Net Income 109,569 118,813 94,177

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 161,787 139,815 119,251
Loss on disposal of property and equipment 6,631 8,289 9,235
Deferred income taxes 1,941 (9,618) (32,333)
Decrease (increase) in trade receivables 1,640 (66,975) 2,578
Decrease (increase) in inventories 15,737 (43,895) 10,183
Increase (decrease) in trade payables (46,636) 31,527 (17,637)
Increase (decrease) in income taxes 607 (12,459) 23,618
Income in accrued expenses 9,386 12,962 14,824
Other, net (14,122) (25,825) 16,382
Net cash provided by operating activities 246,540 152,634 240,278
Cash flows from investing activities:
Payment for purchase of property, plant and equipment (193,977) (161,703) (156,018)
Proceeds from sale of property, plant and equipment 3,404 4,330 6,789
Payment for purchase of marketable securities (5,386) (8,635) (3,556)
Payment from sale of marketable securities 9,439 5,145 11,251
Payment for purchase of investments (28,111) (6,797) (2,730)
Other (636) (7,485) (540)
Net cash used in investing activities (215,267) (175,145) (144,804)
Cash flows from financing activities
Proceeds from long-term debt 34,903 70,768 28,987
Repayment of long-term debt (29,458) (98,693) (109,095)
Increase (decrease) in short-term loans (167,295) 51,030 10,806
Dividends paid (15,619) (13,727) (11,136)
Other (393) 12,062 9,088
Net cash provided by (used in) financing activities (177,862) 21,440 (71,350)
Effect of exchange rate changes on cash and cash equivalents (1,326) (3,578) 5,458
Net change in cash and cash equivalents (147,915) (4,649) 29,582
Cash and cash equivalents at beginning of year 647,097 651,746 622,164
Cash and cash equivalents at end of year 499,182 647,097 651,746
Cash paid during the year for:
Interest 21,083 27,120 33,334
Income taxes 121,295 131,441 89,351
Source: Canon Annual Report, 1998.
It is also called the statement of sources and uses of funds. A cash flow statement (or statement of
sources and uses of funds) differs from a balance sheet or an income statement because a cash flow
statement indicates how the cash or funds were raised and where they were applied, rather than how
much profit was made or loss was incurred in business in a given year. The usual sources of funds are
sales, issuance of new shares, accounts receivable and other operations, and the funds thus collected are
used for various purposes such as payment of dividends, purchase of equipment, R&D, income taxes and
so on. Table 20.4 represents the consolidated cash flow statements of Canon for the years 1996, 1997 and
1998.
A limitation of financial statements is that they do not provide all the relevant information. For
example, changes in the organizational environment, such as shifts in consumer tastes and preferences,
and technological or scientific breakthroughs, which could be crucial for an organization’s success are not
mentioned in financial statements.
Ratio Analysis
Ratio analysis is the process of determining and evaluating financial ratios. It is used by managers
to assess the significance of financial data collected from various sources by studying the ratios between
various items in a financial statement. A ratio is an index that measures one variable relative to another,
and is generally expressed as a percentage or a rate. The significance of ratio analysis lies in that it makes
the related information comparable and yields significant results. Thus, ratios are meaningful only when
compared to other information. Ratio analysis helps a manager or an analyst to compare the current
performance of an organization with its performance in the past or with the performance of its competitors.
This helps the manager to answer questions regarding the adequacy of profit, efficiency of operations and
so on. Four types of financial ratios are particularly important for managerial control: liquidity ratios, asset
management ratios, debt management ratios and profitability ratios.
Liquidity Ratio
Liquidity ratios are the financial ratios that measure the ability of an organization to meet its short-
term obligations (current liabilities) by using its current assets. Some of the liquidity ratios used by
organizations are the acid test, working capital, receivables to payables, tangible net worth and current
ratios. The current ratio is the most widely used liquidity ratio. The current ratio is the ratio of total current
assets to total current liabilities and measures an organization’s ability to meet short-term obligations using
only its current assets. It is of special interest to short-term creditors who are interested in knowing how
quickly an organization can liquidate its assets and disburse short-term liabilities. The current ratio differs
from industry to industry.
Table 20.5: Ratio analysis for Canon
Ratio Formula 1998 1997 Industry average (applicable

to both 1997 and 1998)
Current Current assets/ 1,665,396/ 1.59 1,877,740/ 1.53 2

ratio current liabilities 1,041,360 1,230,333
Asset Management Ratios

Inventory Cost of goods 1,569,197/ 2.86 1,528,364/ 2.71 6
turnover sold/inventory 549,257 5,64,775
Debt Management
Debt ratio Total liabilities/ 1,366,709/ 50.23% 1,561,255/ 54.55% 40.00%
Total assets 2,720,597 2,861,927
(*100) (*100)
Profitability Ratios
Net Profit Net income/ 109,569/ 3.88% 118,813/ 4.30% 6.00%
Margin Net sales 2,826,269 2,761,025
(*100) (*100)
Return on Net Income/ 109,569 4.03% 118,813/ 4.15% 9.00%
Investment Total assets 2,720,597 2,861,927
(*100) (*100)
From Table 20.5, we can see that the current ratio of Canon is 1.59 (in 1998). It indicates that the
company has Rs 1.59 in current assets for every rupee in current liabilities. This implies that Canon is
financially healthy.
Asset Management Ratios

Asset management ratios (also called activity ratios) measure the effectiveness of an organization in
managing its assets. An activity ratio is a test of the relationship between the sales and various assets of
a firm. The higher the activity ratio, the better the profitability and lesser the investment needed in assets.
One of the most widely used asset management ratios is inventory turnover. A low inventory turnover is
a sign of excessively slow moving or obsolete inventory. High inventory turnover usually indicates efficient
management of inventory. It shows that the organization is able to forecast sales patterns intelligently and
maintain just enough inventory, so that there is minimum inventory waiting to be sold in the warehouse
and thus less money is tied up in inventory. However, a high ratio could be the result of maintaining low
inventory or too many small orders or stockouts. Hence an organization should be vigilant if inventory
turnover is too high. Canon’s inventory turnover was 2.86 in 1998, having increased from 2.71 in 1997.
If the ratio is closer to industry average or higher than it, then Canon’s performance is said to be
satisfactory. Suppose, the average inventory turnover in the industry is 6.0. Then, the performance of
Canon is unsatisfactory and needs investigation.
Debt Management Ratios

Debt management ratios (also called as leverage ratios) determine the extent of debt used by a
company to finance its investment and its ability to meet the long-term obligations that result from such
a measure. The debt ratio measures the percentage of total assets financed by debt (including current and
long-term liabilities). If an organization uses more debt to finance its needs, it has to allocate more funds
to pay interest and repay the principal. Thus, this ratio indicates what percentage of the organization’s
assets is financed by creditors. A higher percentage indicates that the creditors have greater claim over
the assets of the organization than the owners. Canon’s debt ratio of 50% (a decrease from 54% in 1997)
indicates that creditors have supplied about 50 per cent of every rupee in its assets.
If the debt ratio of Canon is higher than the industry average, problems may arise in raising additional
funds in the form of debt. Creditors may demand a higher rate of return on their investment (money)
because of the additional risk associated with the high debt ratio. Hence, the management needs to look
into the matter.
Profitability Ratios
The operating efficiency of an organization and its ability to ensure adequate returns to its shareholders,
depends on the profits it earns. Profitability ratios measure the profitability of an organization in relation
to variables such as sales and assets. They indicate the management’s ability to control expenses and earn
profits through the optimum utilization of organizational resources. In other words, profitability ratios
measure the efficiency of operations of a business. These ratios also indicate the organization’s ability to
pay debt and the scope for internal financing. Gross profit margin, net profit margin and return on
investment are commonly used as profitability ratios. Gross profit margin is the ratio of gross profit (sales
less cost of goods sold) to sales, and net profit margin is the ratio of net income to sales. If an organization
records the same gross profit margin for several years but the net profit margin comes down year after
year, it implies that either the costs of production are increasing, or general and administration expenditure
is increasing, or the tax rates have increased.
The percentage of sales rupees left after deducting all the expenses is the net profit margin. From Table
20.5, we can see that Canon has a net profit margin of 4 per cent, which indicates that the company earns
four paise on every rupee of sales. If the margin is significantly lower than the industry average, it may
be inferred that Canon’s expenses are too high or its sales are too low, or both.
The effectiveness of the management in generating profits from its total investment in assets is
measured by the return on investment (ROI). ROI is the ratio of net income to total assets. Canon has
an ROI of 4 per cent. If the industry average is much higher than that, say, 9 per cent, the organization
may have to either increase sales relative to costs, or reduce costs relative to sales, to improve its
profitability.
BUDGETARY CONTROL
While financial controls are used by the top management, budgetary controls are used by middle
managers. Budgets are also used by lower-level managers to track the progress in their own units. Thus,
budgets are widely used for planning and controlling activities at every level of the organization.
Budgeting is the process of formulating future plans for the organization for a given period of time
(usually a year) and estimating the amount of resources required to carry out the planned activities. Thus
budgeting is the formulation and quantification of plans for a particular period of time in the future.
“Budgets are formal quantitative statements of the resources set aside for carrying out planned
activities over given periods of time and include figures such as projected income, expenditure and
profits.” Thus, budgets prepared through the budgeting process are statements of anticipated results, either
in financial terms (revenue and expense and capital budgets) or in non-financial terms (budgets of materials,
physical sales volume, direct-labour-hours, or units of production).
Budgetary control is used for a variety of reasons. Some of these are mentioned below:
Budgets are a means of translating diverse activities and outcomes into a common measure, such
as currency. Budgets, when stated in monetary terms, can be used as a common denominator for
various organizational activities such as purchasing equipment, manufacturing, advertising, selling,
hiring and training personnel.
Stating the budget in monetary terms helps managers convey the information on the key
organizational resource (capital) and organizational goal (profit) in a simple form.
Budgets provide clear and unambiguous standards of performance for a given time period, usually
one year. By comparing the actual performance with the budget estimates at regular intervals
during the period of the budget, deviations can be identified and acted upon quickly.
The interaction between managers and subordinates during the budget development process helps
them understand each others’ problems and improve cooperation in the future.
Budgets are typically prepared for the organization as a whole, as well as for various sub-units such
as divisions and departments. For budgetary purposes, organizations define sub-units as responsibility
centres.
Responsibility Centres
Control systems are devised to monitor organizational functions or organizational projects. Controlling
a function is different from controlling a project. Controlling a function involves ensuring that a specified
activity (such as production or sales) is carried out in a proper way as per the plan. Controlling a project
involves ensuring that specified end results are achieved (such as development of a new product, completion
of a flyover) within a specified period of time and with the allocated resources. Budgets can be used for
both, controlling a function and controlling a project. But the discussion in this chapter is limited to the
controlling functions illustrated in Figure 20.2.
“A responsibility centre is a sub-unit headed by a manager who is responsible for achieving one or
more goals.” Thus, any organizational or functional unit that is headed by a manager, responsible for the
activities of that unit is called a responsibility centre. The responsibility centres make use of resource inputs
to produce output of value and earn revenues. There are five types of responsibility centres: standard cost
centres, discretionary expense centres, revenue centres, profit centres and investment centres. In fact, an
organization can be considered as a hierarchy of responsibility centres, ranging from small business units
at the bottom to large ones at the top. The particular designation that a unit receives for budgetary
purposes depends on its activities and the manner in which inputs and outputs are measured by the
control system (i.e. the degree of control the unit has over the major elements such as revenues and
expenses, that contribute to profits and return on investment). measured by the control system (i.e. the
degree of control the unit has over the major elements such as revenues and expenses, that contribute to
profits and return on investment).
Responsibility centres
Standard Discretionary Revenue Profit Investment

cost expense centres centres centres centres
centres
Fig. 20.2 Types of Responsibility Centres
Standard Cost Centres

A standard cost centre is a responsibility centre whose budgetary performance is determined on the
basis of its ability to achieve goals within the given standard cost constraints. These centres are also called
‘engineered expense centres’ as standard costs are often determined using engineering methods. Managers
of these cost centres have to ensure that their centres produce the desired output within the specified cost
constraints.
Discretionary Expense Centres

A discretionary expense centre is a responsibility centre whose budgetary performance is determined
on the basis of expense constraints established at the discretion of the manager. The inputs necessary for
the expense centres are measured in monetary terms but not the output. It is because the output of the
expense centres cannot be used directly to produce revenues. For instance, the output of the departments
such as maintenance, administration and R&D cannot be measured in monetary terms. Hence, the
budgets for such cost centres are developed only in terms of the maximum resources that can be consumed
by them in a particular period of time.
Revenue Centres
A revenue centre is a responsibility centre whose performance is determined by its ability to generate
a specified level of revenue. Here, outputs are measured in monetary terms but are not directly compared
with input costs. Sales and marketing divisions are examples of revenue centres. These departments are
evaluated on the sales that they generate and the resources that they are allocated. For example, Britannia’s
biscuits are delivered directly to supermarkets and other outlets by sales personnel, who form a part of the
company’s revenue centres. Though the salespeople can influence the revenues (by trying to sell more
packs to more stores) they have little control over the costs of the products that they handle. A useful
picture of the effectiveness of sales personnel of the centre can thus be determined by comparing the
budgeted figures with actual sales or sales orders. It is difficult to hold the revenue centre responsible for
changes in profit levels because the unit is responsible only for revenues and has no control over the costs
associated with the product or service.
Exhibit 20.3 Profit and cost centres
According to the professor of information systems and management at the Stanford Business School, Haim
Mendelson, a profit centre is a unit of an organization that has been set up as a self-contained business with
its own revenue and profit targets. On the other hand, a cost centre is the unit of an organization that incurs
expenses without making any contribution to the revenues or profits of the organization. Hence, although a
human resources department offers valuable services to an organization by way of recruiting, training and
supporting its employees, it is considered as a cost centre because the company has to incur costs to run
the department and there is no immediate revenue or profit that accrues to the organization from this
department.
IT departments in organizations were traditionally considered as cost centres. For instance, an IT department
in an insurance company charges the policy issuance division of the company for the monthly transaction
processing or the use of its other systems. However, since these services are charged at cost without the
inclusion of any margin, the IT department cannot make any profits in the process. Often, the money is not
paid at all and the costs have to be absorbed by the company as part of its overheads. Hence, the IT
department, in such a case, appears to be incurring costs (on employees’ salaries, maintenance, etc.)
without earning any revenues. Consequently, the IT department is viewed as a cost centre by the rest of the
organization.
It is commonly found that organizations in highly regulated industries, such as finance and power, set up an
IT department as a cost centre and charge its costs to their other business units. In the cost-centre setup,
there is a possibility that business units will overuse the IT services and IT department too will not curtail
its expenditure. This leads to a misuse of resources. Hence, there is now a growing trend in organizations
to set up the IT department as a profit centre. In this type of approach, the IT department can charge a
reasonable price from other business units for its services. If the price charged by the IT department is
perceived to be too high, the business units can opt for services externally. Similarly, the IT department too
is free to offer its services to other companies. This approach promotes a competitive spirit among the
business units, enhances their efficiency and thus increases the profitability of the company.
The Hartford Financial Services Group (Hartford, Connecticut, USA), for instance, set up its IT unit as a profit
centre. However, it has not set ambitious goals for the IT unit but wants it to generate revenue equal to its
expenses. Thus, it is the responsibility of the head of the IT department to provide value for money to its
clients by providing them quality services at an economical cost.
In 1986, AMR Corporation, the parent company of American Airlines, set up an IT unit called Sabre as a profit
centre. This unit offered its information services to other airlines as well. As airlines keep changing their fares,
travel agencies use Sabre’s technology to find out the latest fares. Airlines pay Sabre about $10 per ticket
purchased by travel agencies through such searches.
However, the profit centre approach has its own risks. Some companies give bonuses to IT managers and
staff if their department exceeds the profit goals. This may lead to a misalignment of the interests of the IT
department and those of other units as the IT unit may seek to earn more profits by selling its services to
outsiders.
Organizations like the Pittsburgh-based Dollar Bank have sought a balance by adopting a combination of the
profit centre and cost centre approaches. While Dollar Bank uses a cost centre approach for services such
as payroll processing, it uses a profit centre approach for systems that deal with commercial loans, mortgages
and credit-card transactions.
Adapted from “Profit Centres vs Cost Centres,” Computerworld, 2 August 1999, Vol. 33, Issue 31, p. 47
Profit Centres
A profit centre is a type of responsibility centre in which the financial performance is measured in
terms of profits, that is, the difference between revenues and expenses. In a profit centre, performance is
measured by the numerical difference between output (revenues) and input (expenditure). An organizational
unit is known as a profit centre when it has significant control over both costs and revenues and the unit
is a major contributor of profits to the organization (Refer Exhibit 20.3). For example, in the case of ABB,
a European multinational in the power generation, transmission and distribution sector, the organization
is divided into small units, each responsible for generating profits. The manager of the business unit is
responsible for improving the profits of the centre. Thus, a profit centre is used to determine how well an
organizational unit is doing economically and how well the head of the centre is performing.
Investment Centres
“An investment centre is a responsibility centre whose budgetary performance is based on return on
investment.” In an investment centre, the control system examines the role of assets in generating profit
apart from measuring the monetary value of inputs and outputs. Thus, investment centres encourage
managers to concern themselves with making good decisions about investments in facilities and other
assets by requiring them to measure the contribution of assets in producing a profit. Suppose, a plastics
division of a large conglomerate bought modern equipment worth Rs 50 lakhs and the investment in other
equipment, building and working capital amounts to Rs 1 crore. In a particular year, if the unit earns Rs
4 crore in revenue and uses Rs 2 crore in various expenses, the profit of the unit is not considered as Rs
2 crore. The management is required to make allowance for depreciation of the building and equipment
and also account for the interest that could have been earned from alternative investments. This approach
helps the top management obtain a more accurate picture of profitability of the unit, rather than the
calculation of mere inflow and outflow of currency. For example, at General Electric, businesses such as
its aircraft engine, broadcasting (NBC), and major appliance divisions operate as investment centres.
Uses of Responsibility Centres

An organization’s choice of a responsibility centre depends to a great extent on the structure of the
organization. For example, organizations with a functional organization design and organizations with
functional units in a matrix design may choose standard cost centres, discretionary expense centres and
revenue centres. Such organizations may treat manufacturing units as standard cost centres; and human
resources, research and development and finance as discretionary expense centres. Sales of marketing
units may be considered as revenue centres.
Organizations that have a divisional structure may opt for profit centres because the large divisions
in these organizations generally have control over both the revenues and expenses associated with profits.
However, the various departments operating under the divisions may choose other types of responsibility
centres. Organizations that treat their divisions as autonomous businesses may also consider them as
investment centres.
QUALITY CONTROL
Traditionally, financial control and budgetary control have been given considerable importance in
most organizations. Of late, quality control too has been receiving considerable attention. This happened
after many Japanese companies entered the global markets, offering products and services of superior
quality, and posed a challenge to the existing players. US-based companies, in particular, suffered major
setbacks on account of comparatively poor quality. A gallup poll conducted in the 1980s indicated that
top executives of major US companies rated improvements in service quality and product quality as the
most critical challenges facing their companies.
Quality means different things to different people and can be defined in numerous ways. According
to the American Society for quality control, “Quality is the totality of features and characteristics of a
product or service that bear on its ability to satisfy stated or implied needs.” Quality control will be
discussed in detail in later chapters.
INVENTORY CONTROL
Inventory control is another important control system adopted by organizations. It involves decisions
regarding the amount of assets that should be held in inventory. Inventory is a stock of materials that are
used to facilitate production or to satisfy customer demand. Inventory helps managers deal with uncertainties
in supply and demand. Organizations generally maintain three kinds of inventory: raw materials, work-in-
progress and finished goods, and each is affected by different factors.
Raw material inventory is the stock of parts, ingredients and other basic inputs to a production or
service process. Work-in-progress inventory is the stock of items currently being transformed into a final
product or service. Finished goods inventory is the stock of items that have been produced and are
awaiting sale or transit to a customer.
The level of raw materials in inventory is determined by such factors as reliability of supply sources,
seasonal nature of production and anticipated sales. Work-in-progress is affected by the length of production
cycles. The overall production is generally divided into stages and each stage is completed on a particular
shop-floor. Shop-floor level control systems may be deployed to facilitate better control over the work-in-
progress. Finished goods inventory is a function of sales levels and the time involved in making shipments
to customers. In service organizations, such as hospitals, accounting firms and hair saloons, there is no
inventory of finished goods. An organization may have to maintain high inventory to prevent stock-outs
in case of products that are in high demand or if it takes a long time to ship in the components.
Different organizations use different methods (e.g. ABC analysis, JIT) to control inventory. However,
the basic purpose of inventory control in an organization is to minimize the total costs of maintaining
inventory. Proper inventory control must, on the one hand, ensure that the costs of investment are
minimized and, on the other hand, make sure that there is no risk of lost sales or interrupted production
schedules due to lack of inventory at a given time. Inventory control is discussed in detail in the chapter
on Productivity and Operations Management.
SUMMARY
Managers use a series of control methods and systems to deal with the various problems of their
organizations. The major control systems that assist a manager in exercising control are financial control,
budgetary control, quality control, inventory control, operations management and computer-based information
systems.
In this chapter, financial and budgetary control systems were discussed. Control systems are classified
into feed forward, concurrent and feedback control systems based on the management level at which they
are used, as well as on the nature of their timing. Financial control systems are feedback control systems.
Under financial control, we discussed financial statements and ratio analysis. Financial statements
include balance sheets, income statements and cash flow statements, which contain information that helps
maintain financial control in organizations. Ratio analysis is the study of the ratios of various items in a
financial statement. Various ratios such as liquidity, asset management, debt management, and profitability
ratios help managers compare the current performance of an organization with its past performance or
with the performance of its competitors, and enable them to take appropriate measures in case of any large
deviations (eg. high debt-equity ratio).
While financial controls are a major tool of top management, budgetary controls are used by middle
managers. Budgets are a widely used means for planning and control at every level of the organization.
Budgeting is the formulation and quantification of future plans for the organization. Organizations divide
their units into responsibility centres to facilitate budgeting. The responsibility centres are classified as
standard cost centres, discretionary expense centres, revenue centres, profit centres and investment centres,
depending on the degree to which they have control on inputs and outputs and their contribution to the
organization. Quality control and inventory control help organizations reduce costs considerably by preventing
products and services of inferior quality from leaving the organization, and excess raw material from
entering the organization (or accumulation of excess products in the warehouse.
The Wholesale Drug Company

Wholesale Drug Company grew rapidly to become one of the largest firms of its kind. The
success was due primarily to the leadership of the president, Ms. Radha. Since many similar
but smaller, enterprises used computers for recordkeeping and data processing, Ms. Radha
were under pressure to install a computerized control system to keep track of twenty distribution
CASE STUDY
centres scattered throughout the nation.

Up to that time, expenses and income were recorded by means of a relatively simple
ledger sheet journal showing the data for the twenty centres. This kind of recordkeeping, which
was done hand, allowed for easy comparison of the centres. Payrolls were done in a similar
manner, and checks were usually processed within 24 hours. At that time five people and
two supervisors were employed in the accounting department.
Several computer companies looked at the system, but their analysis showed that cost
savings hardly possible. However, one firm made a rather convincing case for a new data
processing. The consulting firm predicated the following benefits: (1) faster processing of
information, ore detailed information on the operation, and (3) a reduction in costs.
After 2 years of using the new system, Ms. Radha, who had reluctantly agreed to the
computerization related the following story: “Before the use of the computer, we had seven
people in the accounting department. Now we have nine plus seven people in the data
processing centre. It is true that it takes only a few minutes to get the output from the
computer, but we cannot run the programme the last distribution centre provides the data.
Unfortunately, this means delays, because we depend on the slowest operational unit for their
input. It is true that we can get more detailed nation, but I do not know if anybody ever
looks at it. It is just too time-consuming to find the anti information in the stacks of computer
printouts and to interpret the data. I just wish we could go back to the old ledger system.
But we invested so much money, and have reached a point of no. of return.
1. Why did the computerized system not live up to its expectations? What should Ms Radha do now?
2. How would you design a computerized system? What factors would you consider?
Productivity and
21
Management
Operations
H Production and Productivity
H Productivity Problems and Measurement
H Operations Management and its Importance
H Operations Research for Planning, Controlling
and Improving Productivity
H Operations Research Methodology
H Some Operations Research Techniques
H Other Tools and Techniques for Improving
Productivity
Chapter 21 Productivity and Operations Management 423
INTRODUCTION
Productivity is one of the major concerns of organizations across the world. Japanese organizations
are considered to be the most productive in the world. However, even the Japanese are now concerned
about increasing their productivity and remaining competitive in the world market. Since the available
time, labour and other resources cannot be increased beyond a certain level in the short to medium term,
an organization has to increase its output and profitability by utilizing its resources efficiently i.e., it has
to improve its productivity. If an organization is able to produce more output with the same or a lower
amount of input, it is likely to be more profitable than its competitors and will have surplus resources to
strengthen its competitive position in the industry. Thus, the management of an organization requires tools
for measuring productivity and taking steps to improve it. Operations management deals with how managers
can manage organizational operations efficiently and improve productivity. In this chapter, we discuss the
significance of productivity and the importance of operations management in improving productivity.
PRODUCTION AND PRODUCTIVITY

Production is any process or procedure developed to transform a set of input elements like men,
materials, money (capital), information and energy into a specified set of output elements in the form of
finished products or services. The output produced must be of the desired quality and quantity to achieve
the set objectives of an organization.
Organizations aim at improving effectiveness and efficiency of performance. While effectiveness relates
to the extent to which performance meets organizational goals, efficiency addresses the usage of inputs
(resources) to produce certain outputs (finished products or services).
Productivity is a measure of the efficiency of an organization in terms of the ratio of the outputs to
inputs. The higher the numerical value of this ratio, the greater the efficiency. Productivity measures the
employees’ (or teams’ or departments’) efficiency in using the organization’s scarce resources to produce
goods and services. Productivity is an important tool for managers because it helps them track progress
in terms of the efficient use of resources in producing goods and services.
There are two basic types of productivity – total productivity and partial productivity. Total productivity
considers all the inputs involved in producing output, using the ratio: total output/total input. Partial
productivity relates to the value of all outputs to a specific input (such as labour), using the ratio: total
output/partial input. Thus, total productivity and partial productivity can be expressed as follows:
Total productivity provides little insight into how things can be changed to improve productivity.
Another problem with total productivity is that all the variables (inputs and outputs) must be expressed in
the same units. But, it is difficult to add the number of labour hours to the number of units of energy or
the number of units of an input. Therefore, most organizations prefer to calculate the partial productivity
ratio.
As labour is one of the largest elements of ongoing costs for most organizations, most productivity
ratios are calculated by considering labor as the specific input. This partial productivity ratio is referred
to as the labour productivity index or output per work-hour ratio. In addition, managers often develop
specific ratios that gauge productivity for particular outputs and inputs, such as sales per square foot of
floor space, return on investment, amount of scrap of certain units of output, and the like. Productivity
ratios can be used to measure the efficiency of operations for a given period of time, or they can be
compared with other ratios over time to measure an increase or decrease of productivity.
Goods and / or Services produced (output)
Total Pr oductivity =
[Labour + capital + energy + techno log y + materials ](inputs)
Goods and / or services produced (output )

Partial Pr oductivity =
Labour hours (input )
PRODUCTIVITY PROBLEMS AND MEASUREMENT

Productivity is one of the major concerns of managers as it helps organizations survive in a competitive
environment. The concern about productivity is seen all over the world.
As productivity measures the efficiency and competitiveness of employees or departments or
organizations, it is considered an essential element in the control process. Although the need to improve
productivity is felt in organizations, there is little consensus about the fundamental causes of low productivity
and the ways in which they can be dealt with.
Productivity in organizations is believed to be affected by several factors. Some of them are discussed
below:
Rapid technological changes are taking place in organizations across the world. Therefore, employees
need to constantly upgrade their skills. The time (unproductive) spent by them in learning new
technology reduces their productivity.
Productivity of an organization may also suffer if social and legal obligations (for example,
government policies) make it necessary for it to employ people without adequate skills.
Workers often believe that their employers are exploiting them by increasing their workload from
time to time on the pretext of improving productivity. Therefore, they resort to strikes thereby
leading to loss of productivity.
Measurement of Productivity of Knowledge Workers

It is easy to measure the productivity of quantifiable tasks (e.g., the number of units produced by an
individual working on a machine during a given time period). But it is difficult to measure the productivity
of tasks (such as research) that cannot be measured in units. In fact, the productivity of skilled workers
is difficult because of its dependence on many intangible and qualitative factors. However, in order to
improve planning and control at the organizational level, it is essential to quantify the work and keep track
of the productivity of the organization.
The productivity of a knowledge worker is much more difficult to measure than that of industrial
workers for the following reasons:
The quality of a knowledge worker’s output cannot be determined immediately. For example, the
effects of a strategic decision may not be evident for several years and even then the positive or
negative effect of the strategic decision depends on various external factors beyond the control of
those responsible for taking the decision.
Often, the output of knowledge workers contributes only indirectly to the achievement of the end
result, and is, therefore, difficult to measure. For example, a human resources manager solves the
employees’ problems, attempts to improve the quality of work life of employees and contributes
indirectly to increase in productivity.
Knowledge workers often assist other organizational units and this contribution is usually difficult
to measure. For example, a marketing manager may have designed a new promotional programme
to improve the sales, but it is difficult to measure the actual contribution of the marketing manager
in increasing sales.
OPERATIONS MANAGEMENT AND ITS IMPORTANCE

Operations management is the application of concepts, procedures and technologies by managers to
improve the process of transformation of resource inputs into outputs. The inputs may include manpower,
technology, capital, equipment, and information. Operations management requires managers to plan,
organize, control and coordinate all the activities of the production system that convert the inputs into
products or services that are of value to customers.
Importance of Operations Management

The effectiveness and efficiency of an organization depends on operations management. Any
organization provides economic utility of one kind or another. For example, Indian Airlines creates a
service that provides time and place utilities; Ashok Leyland manufactures trucks that provide form utility;
and department stores such as Food World provide place and possession utilities. The common factor in
all the three examples mentioned above is the product or service provided to the customer. Each one of
the above organizations has competitors in its industry. An organization needs to offer superior quality
products and services at the lowest possible price and yet maintain its profitability to survive in the long
run. This requires not just a well-conceived corporate strategy, but carefully managed operations (such as
sourcing material from low cost suppliers and shipping products to customers through cost-effective routes)
as well. Hence, if an organization is to remain competitive, it must develop a corporate strategy and
support it with effective and efficient operations management.
Operations management is a tool through which the management can create and improve the operations
of the firm. Some common organizational problems that call for operations management are outlined in
Exhibit 21.1. Mark Vonderembse and Gregory White (1988) proposed the following set of decisions that
can be included in a typical operations management programme.
Exhibit 21.1 Operations management problems in organizations

Customers prefer organizations which can supply customized products at the lowest cost in the minimum
possible time. On-time delivery and minimum cycle time are the major operational challenges for manufacturing
organizations. But they cannot use mass production to minimize production costs and time. They are
compelled to look for alternative sources to improve their operations management and survive the intense
competition. Several studies conducted in organizations revealed that a major percentage of production delays
occur due to the underestimation or overestimation of lead-times. If the lead-time is overestimated, the
employees have more leisure time and the product cycle time is long. If the lead-time is underestimated, the
shopfloors are overloaded with work. The employees experience fatigue and machines breakdown, leading to
delays in production. By using scientific tools like Operations Research (OR) and using computers to
determine lead-times accurately, organizations can bring down cycle times and save manufacturing costs
considerably.
In 1979, Hewlett-Packard used a simple MRP (Manufacturing Resources Planning) approach to bring down
lead-times by 70%, improve customer service levels by 80%, and saved about $1.7 million. Though TQM and
JIT are the recent approaches to improve production cycle, the traditional method, MRP, can be used
effectively in situations (where TQM and JIT fail) such as failure of critical production equipment and volatile
demand leading to unplanned production.
Maintenance of equipment to prevent unexpected breakdowns in the middle of production (or service) is
another challenge faced by organizations. The IT department of 3M had to keep track of the computer and
related equipment across the company – a difficult task. PCs had to be maintained and serviced regularly.
Often PCs and their attachments like keyboard, mouse, etc. are purchased from different vendors. Therefore,
they bear different model numbers, different warranty periods, and so on. The organization lost valuable
productive time trying to track warranty information for various products and components when they stopped
functioning. The conventional bar code systems were not helpful as they offered limited information. The
company often ended up paying huge bills for repairs or for purchasing completely new parts.
To overcome these difficulties, 3M acquired PDF417 solution developed by Symbol Technologies. PDF417 is
a two-dimensional bar code scanner that was able to hold more than one kilobyte of information in less than
one square inch of space. It generates bar codes for each computer, monitor, keyboard, mouse and other
replacement parts in the organization and maintains details such as PC serial number, model number, vendor,
3M purchase order number, warranty information and 3M asset number for each product and part in the
company. By using a hand-held scanner, a technician could obtain the history of each component at 3M.
The defective parts whose warranty period was not over were easily returned to the company and refunds/
replacements were claimed. This helped 3M to reduce the purchase of parts by about 50%. The life cycle
of products could be tracked, and obsolete products (or components that have undergone wear and tear)
could be identified and replaced with advanced technology (new) products. As the process of tracking is
continuous and automated, the productive time of employees and systems (or machines) is not wasted. The
technology reduces costs of manufacturing organizations significantly.
Adapted from Ashutosh Agarwal, Ioannis Minis and Rakesh Nagi, “Cycle Time Reduction by improved MRP-based
Production Planning,” International Journal of Production Research, Vol 38, No. 18 (2000): 4823-4841,
1. Capacity decisions
a. How much production capacity will be needed?
b. How flexible should the capacity be?
2. Facilities decisions
a. Where should the facilities be located?
b. How many facilities will be needed and what should be their size?
3. Workflow and technology decisions
a. What workflow layouts would be best?
b. What technologies should be employed?
4. Materials and inventory decisions
a. How often should inventories be ordered?
b. How large should inventory levels be?
5. Quality decisions
a. What is the desired level of quality of output?
b. How can the desired level of quality be achieved?
OPERATIONS RESEARCH FOR PLANNING, CONTROLLING AND IMPROVING

PRODUCTIVITY
Most of the special techniques employed in planning and controlling are based on mathematical
models and the use of quantitative data. These techniques are especially useful in managing operations.
Conceptual models and fairly exact quantitative data are available in many areas of production and
operations management. The tools of operations research are of special interest to production and operations
managers. In the next section, we take a look at operations research and linear programmeming.
The Concept of Operations Research

Though the scientific methods, higher mathematics and tools such as probability theory (that forms
the basis of the operations research) evolved long ago, operations research (OR) as we know it today,
evolved during World War II. This concept has gained importance because of the trend of applying the
methods used in the areas of scientific research and engineering to solve economic and political problems.
When formulating the second five-year plan for India, Professor Mahalanobis made use of operations
research applications to forecast trends in demand, availability of resources and to draw up the complex
schemes necessary for the development of the economy. The factors that contributed greatly to the rapid
growth of operations research were the development of advanced computing machines, and their ability
to handle voluminous data with complex relationships.
The definition of the term ‘operations research’ has undergone changes from time to time. During
World War II when the technique was used for the first time, OR was defined as the art of winning a war
with limited military resources. According to the OR Society of America, “OR is an experimental and
applied science devoted to observing, understanding and predicting the behaviour of purposeful man-
machine systems.”
Operations research has also been defined as the application of scientific methods to find alternatives
to a problem situation. The purpose of this tool is to obtain a quantitative basis for determining the best
solution to the problem situation.
The application of operations research techniques to the complex problems of an organization involves
taking into account the total system that influences the decision-making process and presenting them (the
factors affecting decision making) in a quantified form, so that the best means of achieving the goals can
be determined. In other words, operation research may be called “quantitative common sense.”
The Essentials of Operations Research

Operations research gives managers a definite framework for solving their problems. OR requires a
problem to be represented in a form that can be analyzed and solved mathematically. The goals and
constraints in a given situation should be well defined. The management should ensure that the input data
is collected carefully and is relevant and accurate. OR experts then evaluate data, establish and test
hypotheses, determine the relationships among various variables, develop and verify predictions based on
the hypotheses, and devise measures to evaluate the effectiveness of an action.
Some of the essential characteristics of operations research are as given below:
1. Operations research emphasizes the logical physical presentation of a problem in the form of a
model.
2. It emphasizes the setting of goals while solving a problem and the development of effective measures
to determine whether the solution arrived at will help achieve those goals.
3. Operations research incorporates in a model all the variables that are necessary to solve the
problem.
4. It presents, in mathematical terms, the model, the variables, the constraints and the goals that need
to be achieved to solve the problem.
5. To the extent possible, operations research quantifies the variables involved in a problem.
In the absence of accurate quantifiable data, operations research fills the gaps by using mathematical
and statistical devices such as probability in a situation.
OPERATIONS RESEARCH METHODOLOGY

The methodology developed for solving business problems through operations research involves the
following six steps as shown in Figure 21.1.
Model Testing Establishing

& Solution Controls &
Problem Model Building Solution
Formulation Implementation
Isolation of Quantitative Quantitative

Management Model Model Conclusions &
Testing Implementation
Problem (Formal) (Formal)
Model
Refinement
System Data
Collection
Real World
Fig. 21.1 Methodology of Operations Research
Source: V.K.Kapoor, “Operations research,” New Delhi: Sultan Chand & Sons, 1997) P11
The Essentials of Operations Research

Operations research gives managers a definite framework for solving their problems. OR requires a
problem to be represented in a form that can be analyzed and solved.
1. Formulating the problem
2. Constructing a mathematical model
3. Deriving a solution from the model
4. Testing the model
5. Providing controls for the model and the solution

6. Putting the solution into effect
Formulating the Problem

This is the first step in which the operations research team formulates the management problem and
then transforms it into an operations research problem. In order to formulate the problem, the management
has to help the operations researcher understand the objectives and policies of the organization, its
structure and functions and the communication and control systems. The problem may be related to the
entire business process or limited to a particular department/operation. Depending on the nature of the
problem, the researcher has to define the system in which the solution must operate. The system, here,
represents the environment in which the decision will be taken and defines the boundaries or the constraints
within which the solution needs to be found. Managers should attempt to simplify the system because a
comprehensive system makes a problem complex. The system may be simplified by identifying and eliminating
the alternatives that do not provide an immediate solution to the problem.
Constructing a Mathematical Model

The next stage in the operations research process is to express the relevant features of the system
under study in terms of mathematical model. For a single goal, with at least some variables subject to
control, the general form of operations research model is,
E = f (Xi, Yi)
where ‘f’ represents a system of mathematical relationships between E (the measure of effectiveness of the
system) and Xi (controllable variables) and Yi (uncontrollable variables).
This model may be classified as a decision model or a simulation model. In a decision model, the
values for Xi and Yi, i.e. controllable and uncontrollable variables, are manipulated so as to achieve the
greatest measure of effectiveness (E). For example, an HR manager may want to find out what actions
on his part would control labour turnover. For this, the model might include uncontrollable variables such
as the financial capacity and manpower planning of other companies in the industry and controllable
variables such as the benefits provided to the employees and the work environment in the given firm.
In case of simulation models, the researchers use real values for the controllable variables and assume
a set of fictitious values for the uncontrollable variables. Different sets of values may be used for uncontrollable
variables till ‘E’ yields a satisfactory level of effectiveness. However, this model does not provide a basis
to determine whether the value of E is optimum. Often, the input data is not accurate or even close to
reality because the data is very complex and difficult to obtain. The model cannot be used for practical
purposes unless reasonable level of reliable input data is available.
Deriving a Solution from the Model

Once the mathematical model is formulated, the next step is to determine the value of decision
variables that optimize the given objective function. There are two basic procedures for arriving at a
solution from a model – analytical procedure and numerical procedure.
The analytical procedure uses a mathematical approach to obtain a solution. In this approach, the
manager expresses a complex series of relationships among variables in a simple mathematical form. The
analytical procedure also helps in simplifying problems by reducing the number of variables or restating
various variables in the form of common variables. For example, if the sales or time variable in a model
appears at a number of places, it can be eliminated from some places. Certain variables that are not
important to obtain an optimum solution may be completely discarded from the model.
In the second procedure, i.e., the numerical procedure, an analyst uses a trial and error method to
obtain optimum solution. He substitutes different values for the controllable variables and calculates the
outcome of the variables. Based on the results, the analyst develops another set of values and tries to
obtain the optimum solution. The process continues till a satisfactory solution is obtained. In the case of
linear programmeming, a set of rules is laid down to help an analyst carry out trial runs in a systematic
manner, obtain the solution quickly and identify the optimum solution when it is attained.
Testing the Method

Since a model is only a partial and simplified representation of reality, the results are to be tested
against real world experience in order to establish the model’s credibility. As it is not possible to include
all the variables, models carry only some of the variables. Therefore, the models need to be tested to ensure
that the significant variables with considerable weightage are not missed. Past data can be substituted in
the model and the outcome may be compared with the results of the model to determine the validity of
the model.
Providing Controls for the Model and the Solution

A particular model may cease to represent reality after some time because of factors like changes in
uncontrollable variables, addition of new variables, deletion of old variables or changes in the relationships
between the existing variables. For this reason, the management should try to obtain control over the model
by asking for feedback from the users. This helps to identify deviations in the parameters and relationships
at the earliest, and to take appropriate action. In many complex models, such as those used for production
or distribution planning, the effect of deviations must be weighted against the cost of incorporating the
corrections or against the cost of revising the entire programme, which may actually be greater than the
benefits that can be derived from the revised model. Thus, a decision may be taken not to correct the
inputs or the model. Instead, the problem may be solved by adding a correction factor to the end result.
Putting the Solution into Effect

This is the final and most critical step in OR because it is only after the model gets implemented that
the benefits accrue to organization. Even a simple programme requires various clarifications in procedures
in order to be implemented so that the people responsible for decision-making understand, appreciate and
use the OR techniques effectively. The management has to play an active role in educating employees
about OR. The managers have to convince employees to work hard to obtain accurate information
(including control feedback information) and make it available in an orderly fashion so that it can be fed
into the models as input. The operations researcher may help managers choose the right models, implement
them and obtain useful outputs that aid in effective decision-making.
Sometimes, the implementation of a solution becomes difficult (or the outcome is too far from reality)
as models that look feasible on paper may conflict drastically with the ideas and capabilities of individuals
involved in the system, or the available data is inadequate to meet the input requirements of the model.
Hence, an operations researcher should not be bent on selling his solutions but should appraise the
managers of the nature and margin of uncertainty in the solution.
SOME OPERATIONS RESEARCH TECHNIQUES

A number of operations research techniques are available to managers to help them in decision-
making. These include linear programming, inventory control, probability, decision theory, dynamic
programming, sequencing, game theory, queueing theory, PERT/CPM and simulation. In this chapter, we
have discussed the techniques of linear programming and inventory control in detail.
Linear Programming
Linear programming is a technique for selecting an optimum combination of factors from a series of
inter-related alternatives, each subjected to certain limitations, in order to achieve a desired goal. Linear
programming is one of the most successful applications of OR. The basic assumption in this technique is
that a linear relationship exists between the variables and that the limits of variation can be determined.
For example, in a manufacturing unit, the variables may be the number of operations per unit, units of
output per machine in a given time, or direct material or labour costs per unit of output, and the like. The
relationship between most of these variables can be expressed in the form of linear equations. A manager
or a researcher may solve the linear equations and obtain the optimum solution in terms of machine
utilization, cost, time, etc. However, this technique can be applied only to problems in which the input data
and objectives can be quantified.
Linear programming is widely applied in the areas of shipping and warehouse utilization where it
helps determine cost-effective shipping rates and routes, and facilitates optimum utilization of production
and warehouse facilities. A major drawback of this technique is its dependence on linear relationships.
In case of decisions that do not involve linear relationships, the researcher has to apply non-linear
programming techniques which are highly complex.
Inventory Control
The history of operations research shows that more attention has been given to inventory control than
any other practical area of operations. In this section, we discuss inventory control and techniques of
inventory control. Some measures to control inventory are listed in Exhibit 21.2.
Exhibit 21.2 Measures for Inventory Control
In a survey conducted by the Institute of Management & Administration (New York) in 2003, the participants suggested the
following initiatives to be taken to lower inventory levels:
Focus on the entire supply chain: An organization’s aim to cut costs of excess inventory cannot be
accomplished unless it removes surplus inventory from its entire supply chain. If it cuts excess inventory
from its warehouse and ignores the inventory status of suppliers, costs cannot be curtailed. This is
because the supplier will continue to pass on his costs of excess inventory to the organization. Therefore,
the organization has to identify the factors driving up inventory at each level of the supply chain, and help
each member take steps to eliminate the excess inventory. It is only through their collective efforts and
co-operation that organizations can bring down the inventory to desired levels.
One of the manufacturing organizations that participated in the survey estimated that inventory costs and
cycle times could be reduced by up to 27% and 20% respectively by focusing on the entire supply chain.
Adopt A, B, C segmentation for products: The organizations should divide the products they manufacture
into three categories – A, B and C – depending on their sales volume and criticality to the company’s
image. The 10% of the products (or components) that account for 70% of the total sales/consumption
are graded in class A. The 10% to 20% of products that account for 20% of the total sales/consumption
are assigned class B. The rest of the items are graded in class C. One of the organizations that
participated in the survey revealed that it identifies subcategories within these categories. For instance,
50% of the items in class A that are most critical may be categorized as Super A. The classification
enables managers to schedule orders for items according to their criticality, and thus simplifies the
process of inventory management. For example, if the inventory policy for an item in class A is one week,
it may be 15 days for an item in class B. This approach, when coupled with negotiations with the
suppliers to reduce lead times, can help reduce inventory levels significantly.
Share information with suppliers: By sharing information such as annual demand forecasts and
production schedules with key suppliers, organizations can improve demand fulfilment and customer
service without increasing inventory levels. One of the participating organizations revealed that it provided
its suppliers with monthly and annual demand forecasts at the beginning of the year and kept them
informed of any subsequent changes in the demand forecasts. This helped the suppliers to manage their
inventory and production schedules and supply the required components or products on time.
Improve accuracy of demand forecasts: A majority of the participants agreed that better forecasting
and planning helped to lower inventory levels. Some of the organizations revealed plans to form focus
teams to analyze the product demand regularly and update the demand forecasts on a monthly basis.
Shift ownership of inventory to suppliers: Organizations can benefit by shifting the ownership of
inventory management to suppliers who have expertise in logistics capabilities. Some organizations
negotiate with suppliers that the latter (supplier) bear the inventory costs and the former (the buying
organization) would, in turn, reduce the cost of sales to the latter.
Adapted from “Exclusive IMR Survey: Five Inventory Reduction Initiatives that Require Attention in 2003,” The
Institute of Management & Administration, New York, <www.ioma.com/showfile.php/809>
Economic Order Quantity

Costs such as the cost of capital, storage space, obsolescence, and the like, increase when the
inventory level increases. Other costs such as ordering costs, missed sales and production control decrease
with an increase in inventory. Moreover, bulk purchases of materials may help an organization take
advantage of quantity discounts. Operations management helps achieve a balance among the various
costs by estimating the best order size and the frequency that minimizes total inventory cost. Such standards
for order size and frequency are referred to as the economic order quantity. The economic order quantity
(EOQ) is an inventory control method developed to minimize ordering and holding costs, while avoiding
stockout costs. In mathematical form, EOQ is expressed as
Qe = 2DO/H
where,
Qe = Economic order quantity (EOQ)
D = Annual demand
O = Ordering costs
H = Inventory holding (or carrying) costs per item, per year.
G O AL
In puts Optimum total cost for purchasing or
(May be variable manufacturing, inventory holding, and shortages
or constant) O utputs
(Planned events)
Purchasing/manufacturing
cost per unit
Purchasing or
Inventory cost per unit manufacturing
Goal Feedback schedule
inputs measures
Demand for product
Shipping schedule
Distribution of product
withdrawals IN VENTO RY
MO D E L Inventory schedule
Reorder lead time
Shortage
Shipping cost and lead probabilites
time
Fig. 21.2 Inventory Control Model
edition, 1994) 644
Figure 21.2 illustrates the different inputs and outputs of an ideal inventory model. It suggests that
the output (e.g. shipping schedule and purchasing schedule) should be planned and the inputs (shipping
cost and reorder lead time) should be chosen and fed to the system accordingly, so as to obtain the
optimum cost for purchasing and inventory holding. It also emphasizes the need for establishing inventory
goals, constant feedback and review of goals and the means to achieve goals. The model also furnishes
a manager with the basis for plans and with standards by which to measure the performance. However,
the major drawback of the model is that it a stand-alone subsystem and it does not consider other
subsystems such as planning, production, sales and distribution planning.
EOQ is helpful for determining desirable inventory levels when demand is predictable and fairly
constant throughout the year (that is, there are no seasonal fluctuations). EOQ helps managers to decide
how much to order; but they also need to know the reorder point (ROP). Reorder point may be defined
as the inventory level at which a new ordr is placed. In order to calculate the reorder point, lead-time has
to be calculated. Lead-time (L) is the time gap between placing an order and receiving it. It can be
calculated as follows:
ROP = LD/365
where,
ROP = Reorder point
L = Lead-time
D = Annual demand
365 = Number of days in a year
Inventory control systems deal with the replenishment of cycle stocks. Cycle stocks are the amount of
inventory that are to be used during a given period of time (cycle) as specified by a particular system.
However, as demand and supply cannot be predicted accurately, organizations often add some slack to
the estimates in the form of fluctuation. Thus organizations tend to store some surplus stock in inventory,
which is referred to as safety stock. This is the additional inventory (other than the cycle stock) maintained
by organizations to deal with unforeseen contingencies such as quality problems, stockouts, reorder delays
and the like.
The EOQ approach may not be useful for determining inventory levels of parts and materials used
in some production processes. For example, poor quality products may be returned to the manufacturer,
either for replacement or for rectification. Sending back of material to the manufacturer thus increases the
demand for production inputs. The demand created is only an intermittent demand. However, since EOQ
is not useful in determining the inventory levels of parts and materials used in production processes, the
decisions based on EOQ could lead to shortage or excess of inventory. Organizations determining inventory
levels in such situations have found that inventory control methods such as just-in-time system and
materials requirement planning (MRP) system work better than EOQ.
Just-in-time Inventory System

Just-in-time (JIT) inventory control approach stipulates that materials should arrive just as they are
needed, in the production process. The JIT philosophy focuses on having the right part at the right place
at the right time, so that there is no need to hold backup parts in inventory. In this system, the supplier
delivers the components and parts to the production line “just-in-time” when they are to be assembled.
The JIT system helps in minimizing inventories, and saving space and costs. It also helps to obtain better
quality than the traditional approach. Just-in-time inventory is also referred to as “zero inventory” and
“stockless production.”
The JIT method was successfully used after World War II by Toyota in Japan. Later, the technique
was transferred to Toyota’s plant in the US as well. According to a report, the US plant, designed to
produce 1000 cars per day, required 2 million square feet and a conventional inventory of $775 per car,
while a Japanese plant with the same capacity using a just-in-time system required 1 million square feet
and a just-in-time inventory of $ 150 per car. Impressed by such potential savings, many companies like
General Motors, Ford, Chrysler and Black & Decker have adopted JIT.
The JIT inventory system emphasizes the utilization of the full capabilities of workers, giving them
greater responsibilities in the production process, and inviting their active participation in efforts to obtain
continual improvement in the production process.
For the JIT system to work, the following requirements must be fulfilled:
a. The products (or parts) must be of a high quality as the materials are either delivered by suppliers
or made in-house just before they are used. As there will be no inventory to fall back on, a small
defect in the material will halt the entire production process. Hence, organizations should be very
careful in selecting suppliers.
b. Organizations should maintain a close relationship and coordination with their suppliers to ensure
that the material supplied meets the exact specifications of the organization and is delivered on
time.
c. The organizations should select supply firms that are located close to them and ensure that the
supply firms are well connected to their area by a dependable transportation method and
communication infrastructure.
As JIT seeks total reduction of waste in all areas, the organizations can readily see the benefits of
holding less inventory, speedier service and closer contact with customers. Just-in-time management
philosophy is aimed at improving profits and return on investment by involving workers in the operations
process and eliminating waste through cost reduction, inventory reduction and quality improvement.
Kanban
Kanban, a Japanese term by origin (Kan – card and ban – signal), is a subsystem of the JIT
approach. It involves the use of cards and containers to move parts and components from one work area
to another. When an empty container is sent to a workstation, it indicates that more parts will be needed
shortly. The workstations along the production process produce just enough parts or products to fill the
given containers. Once these containers are full, production is stopped. It is only when a card and an
empty container arrive from the next workstation that the production starts again. If the process at any
workstation stops due to quality problems or a machine breakdown, all the workstations involved in the
process produce only until their containers are full and then they stop further production.
Kanban helps avoid flooding the production floor with inventory resulting in improved inventory
control.
Distribution Logistics
Marketing managers have to deal with problems of cost-effective inventory procurement and product
distribution. All transportation modes such as rail, road and airways have associated shipping costs and
routes. The manager has to identify the right combination of routes to optimize distribution effectiveness.
Distribution logistics is a system that can extend its limits beyond inventory control to help in planning and
control at the organizational level. In its advanced form, distribution logistics treats the entire logistics of
a business (sales forecasting, purchasing material processing, inventorying and shipping the finished
goods) as a single system. The primary goal of distribution logistics is to optimize the total costs of the
system in operation while maintaining a certain desired level of product quality and customer service.
It is difficult to optimize costs in a single area such as transportation and manufacturing, but the total
cost of material management as a whole may be optimized. In order to optimize the system, as a whole,
a large amount of information has to be gathered and analyzed. A schematic representation of the
distribution logistic system is shown in Figure 21.3. It shows how logistics are managed to fulfil customer
orders. From the model, it can be learnt that the costs are optimized when more expensive transportation
is used on certain occasions rather than for procuring regular inventory/making regular delivery. It is also
feasible to maintain inventory less than the EOQ and yet utilize warehouses or transportation in a better
way and meet high customer service standards.
Customer Order Customer
Order Entry
Packing Transportation
Transportation
and to Customer
to Warehouse
Shipping
Production and
Inventory
Control
Plant
scheduling
Warehousing
Product and Storage
Manufacturing
Fig. 21.3 Simplified Distribution Logistic Model

Source: Sahay B S, “Supply Chain Management: For Global Competitiveness,” (Delhi: Macmillan India Limited,
2000) 365.
Limitations of Operations Research

Operations research has certain limitations which cannot be overlooked. These limitations are related
to the time and money factors involved in its application rather than its practical utility. Some of these
limitations are discussed below:
Magnitude of Computation
The sheer magnitude of the mathematical and computing aspects pushes up the cost of OR. OR tries
to arrive at the optimal solution taking all relevant factors into account. But these factors or variables are
numerous and expressing complex human relationships and reactions requires huge calculations. These
calculations call for the use of a higher order of mathematics which may not be understood by the average
person or manager with a non-mathematical background. Advanced systems may have to be deployed and
huge costs may be incurred in their installation and in training personnel. Thus all organizations cannot
afford to adopt OR practices; in most cases, only large organizations that have strong finances use OR.
Gap between Managers and Operations Research

Another limitation of OR is the gap between practicing managers and trained operations researchers.
Since OR is a specialist’s job, it is handled by a mathematician or a statistician, who may lack an
understanding of managerial problems. Similarly, the manager lacks knowledge and appreciation of
mathematics and fails to understand the logic used by the OR specialist. Many organizations try to get
managers and operations researchers to work as a team to fill the gap. But, the inability to understand
and appreciate each other’s opinions still remains a major limitation.
Lack of Quantification and Involvement of Qualitative Factors

OR provides solutions only when all the elements related to a problem can be quantified. By using
probabilities and approximations, unknown quantities can be substituted. Though OR specialists can use
various scientific methods and assign values to factors that have never been measured before, a major
portion of important managerial decisions still involve qualitative factors. These qualitative factors such as
human relations are intangible and cannot be quantified. Thus, unless these intangible factors are measured,
operations research will continue to be based on non-quantitative judgment and will have limited application.
Nowadays, attempts are being made to quantify even intangible factors to the extent possible.
OTHER TOOLS AND TECHNIQUES FOR IMPROVING PRODUCTIVITY

In addition to operations research, there are other techniques such as time-event networks, value
engineering, work simplification, quality circles, total quality management, computer aided design, computer-
aided manufacturing and manufacturing automation protocol, which can be used for improving productivity.
Exhibit 21.3 shows how organizations are trying to improve productivity using software solutions.
Time-event Networks
They are logical extension of Gantt charts. Programme Evaluation and Review Technique (PERT)
and Critical Path Method (CPM – it is used to find the minimum time and cost required to complete a
project) are examples of time-event networks and are used in planning and controlling the activities of a
project. The improved versions of PERT like PERT/COST are widely used in planning and controlling
operations. PERT/COST technique helps in finding out the point to which the project duration could be
crashed (reduced) without incurring additional cost.
Value Engineering
Value engineering involves analyzing the operations of the product or service, estimating the value of
each operation, and modifying or improving the operation so that the cost is reduced. Value engineering
involves the following steps:
Exhibit 21.3 Improving Productivity

Eisenmann Grenoble, is the world’s leading supplier of systems for surface finishing, based in Germany. The
company deployed CATIA V5 (Version 5) for the design, analysis and manufacturing of its products. CATIA
V5 is a computer-aided design, manufacturing, and engineering software developed by Dassault Systems, a
global provider of Product Lifecycle Management (PLM) solutions. CATIA V5 significantly reduces the time
taken for product development. It enables engineers to have an improved three-dimensional view of product
drawings and produce high quality prototypes. It was expected to help Eisenmann in managing all the
documents (nomenclature, drawings and other technical details) related to products, as well as updating them
throughout their lifecycle. CATIA V5 is a high-performance, user-friendly software. Designers need minimal
training before they can begin working on the software. Moreover, it is flexible and accommodates any
changes that need to be incorporated to cope with advancements in technology.
Eisenmann manages the product data by implementing another solution called CATIA Team PDM. This
enables Eisenmann to create a product database which can be studied by the company’s research teams
to find ways to optimize product development processes. The details of each product or component
manufactured in the organization are recorded in the database. Before designing a new product, the product
team can go through the details to verify whether any existing part can be reused, instead of designing the
product from scratch. This brings down the overall product development time significantly.
CATIA V5 and CATIA Team PDM together enable Eisenmann’s employees and managers to share product
data, facilitate product development processes, and enable them to work together to improve designs,
enhance work ergonomics (design factors that maximize productivity by minimizing operator fatigue and
discomfort), optimize the enterprise processes and improve productivity.
Adapted from “Eisenmann Grenoble Selects CATIA for Productivity Improvement; Industry Leader Anticipates
Large Savings in Product Development Time,” IBM, 7 November 2000,
Dividing the product into parts and operations.

Identifying the costs for each part and operation.
Identifying each part’s relative contribution value to the final unit or product.
Finding a new approach for the items of high cost and low value.
Value engineering is generally used in engineering organizations and the employees are invited to
make suggestions for improving products. Sometimes, even the customers are invited to contribute their
ideas. The ideas are screened, based on factors like feasibility, cost and time, and the best proposals are
sent to the management for approval.
Work Simplification
In this method, workers are invited to participate in simplifying their work. The process includes
teaching concepts and principles of techniques such as time and motion studies, layout of work situations
and workflow analysis, which help workers improve their work methods. They may also be presented with
details like product drawings, machine layout and operation sheets. The simplification of process is
expected to bring down time, costs and scrap rates.
Quality Circles
A quality circle is a group of people who generally belong to a particular department of an organization
and meet regularly to solve their problems at work. Small groups consisting of six to twelve members are
formed. The members are trained to apply statistical quality control techniques to solve problems. Each
group has a facilitator who prevents members from diverting to non-productive and lengthy discussions.
Quality circles receive recognition, but not monetary rewards, for their work.
Quality circles evolved from suggestions programmes, which seek the participation of workers in
solving their (day-to-day) problems. Problems related to quality circles are complex, and require the
involvement of several team members comprising rank and file workers as well as supervisors. However,
the heads of department are excluded from the team because the workers may not be able to express their
opinions freely in the presence of the higher official, thus curbing creativity.
After Japanese organizations used the technique with excellent results, other organizations also began
to adopt the technique in its original form or slightly modified to suit their organizational culture.
Total Quality Management (TQM)

TQM means effective management that ensures an organization’s long-term commitment to the
continuous improvement of quality throughout the organization. It calls for the active participation of
members at all levels of the organization, so that customers’ expectations are not just met, but exceeded.
To ensure quality management, it is necessary to analyze the needs of the firm’s customers and to
fill the gap between the existing features of the products or services and the desired features. The success
of TQM depends on the top management’s commitment to the programme. They should provide a vision,
constantly reinforce the values of the programme, emphasize quality and set quality goals for the TQM
programme. They should allocate the resources required for the implementation of the quality programme
and facilitate free flow of information in all directions, i.e. vertical, horizontal, and diagonal.
The employees should be encouraged to learn the usage of tools and techniques such as statistical
quality control, and to acquire new skills through regular training and development programmes. This
requires the organization to develop an environment conducive for learning and emerge as a “learning
organization.”
TQM is not a one-time effort but a continual, long-term endeavour which has to be recognized,
reinforced and rewarded by continuous monitoring of the ongoing data collection, evaluation, feedback
and improvement programmes. The success of the programme requires the management from the top to
the bottom levels and non-managerial employees to work as a team. Employees should be taken into
confidence and empowered to initiate and implement the changes that contribute to quality improvement.
SUMMARY
Production is a process or procedure developed to transform a set of input elements into a specified
set of output elements in the form of finished products or services, whereas productivity is an efficiency
concept that gauges the ratio of outputs relative to inputs in a productive process. Productivity is one of
the major concerns of managers as high productivity is essential to survive in a competitive environment.
Productivity is of two types – total productivity and partial productivity. The problems in measuring
productivity, especially that of the knowledge workers were also discussed in the chapter.
Operations management is the application of concepts, procedures and technologies by managers to
improve the process of transformation of resource inputs into outputs. The effectiveness and efficiency of
an organization depends on how effectively and efficiently operations are managed. The tools of operations
research are of special interest to managers of production and operations, as they help the managers
increase efficiency and profitability of the organization. Operations research and linear programming are
two mathematical approaches used for optimizing operations. The application of operations research
techniques to complex problems of an organization take into account the total system that influences the
decision-making process. The data is presented in a quantified form to the extent possible, and this helps
managers to arrive at the best means of achieving the goals. The operations research procedure comprises
six steps – formulating the problem, constructing a mathematical model, deriving a solution from the
model, testing the model, providing controls for the model and the solution, and putting the solution into
effect. Linear programming is a technique for selecting an optimum combination of factors from a series
of inter-related alternatives, each subjected to certain limitations, in order to achieve a desired goal.
Maintaining inventory helps organizations deal with uncertainties in market supply and prevent stockouts
during periods of peak demand. Different types of inventory control used in organizations are EOQ, JIT
and Kanban. Distribution logistics is a logistics system that helps in optimizing inventory procurement as
well as product distribution.
Though operations research offers many advantages, it has its own limitations. The high magnitude
of computation and the inability to accommodate qualitative factors prevent OR from being applied in
many management decisions. Other techniques that help to improve productivity are time-event networks,
value engineering, work simplification, quality circles and total quality management.
A Do–It–Yourself Factory with Start–Up Capital of $500

Tom Bushman seized an opportunity and capitalized on it with old fashioned hard work.
STUDY
In 1978 his employer, paper manufacturer Avery International, was experiencing a 50

CASE
percentage failure rate for metering rods, critical components of the paper-coating system. So
Bushman said he could produce a better rod and Avery said it would buy it.
With very little money, but a knack for machinery, Bushman scoured junkyards in his off
hours to find the material to construct a little factory. Within a few months he was selling
Avery rods with just a 2 percentage failure rate. Then he quit his job and started to advertise.
It wasn’t easy at first Buschman laboured in the basement and his wife did the books. Then
he expanded to a rundown house that he fixed almost single-handedly.
Today he employs 20 people. His 1994 revenues were $2.7 million, and he still builds
his machinery in house.
1. What could large firms having quality problems learn from Tom Buschman?
2. What techniques in this chapter can Buschman consider using to expand his company?
][][
Chapter 22 Direct Control Versus Preventive Control 441
Versus Preventive
Direct Control
22
Control
H Direct Control versus Preventive Control
H Direct Control
H Preventive Control
H Management Audit and Enterprise Self-Audit
INTRODUCTION
Most controls are designed to check whether performance conforms to the plans prepared by the
management for achieving organizational objectives. Specific areas in which controls may be employed
include selection, training, wages and salaries, quality of products or services, inventory, capital expenditure,
cash reserves, and the like. In addition to control for specific areas there is a need for a control mechanism
that covers all aspects of an organization.
Many controls, which are based on feedback, measure and rectify deviations from plans. This is direct
control. Another control is preventive control, which emphasizes control through speculation of deviations
rather than use of control after deviations have occurred. This chapter examines these two controls and
the overall control of the organization through management audits.
DIRECT CONTROL VERSUS PREVENTIVE CONTROL

In the previous chapters, we examined the different approaches that managers adopted to make
results conform to plans. But the manager acting alone cannot ensure conformance to plans. Ultimately
the success of a plan depends on the individuals who implement them. For example, a manufacturing unit
producing inferior products cannot adopt a control system of directing inferior products to the scrap heap.
Similarly, a bank receiving customer complaints deviates from the control system by ignoring the complaints.
In such cases, individuals who have made incorrect decisions are responsible for these deviations.
Unsatisfactory results mentioned in the above example can be overcome by providing additional training
to the concerned individuals, by modifying the procedures, or by adopting new policies so that the future
actions of the individuals are modified.
Two methods have been suggested to ensure that individuals vested with the responsibility to make
decisions modify their future actions: direct control and preventive control.
In direct control, the cause of an unsatisfactory outcome is traced back to the individuals responsible
for it and they are made to correct their practices. Preventive control, however, focuses on developing
better managers who will skilfully apply concepts, principles and techniques and view managing and
managerial problems from a systems point of view, so that the undesirable outcomes caused by poor
management are eliminated.
DIRECT CONTROL
In every organization, numerous standards are developed to compare the actual output of goods or
services, in terms of quality, quantity, cost and time, with the planned output. Negative deviations imply
that the performance is below normal standards and that the results are not congruent with the plans. The
deviations may be measured in terms of goal achievement, labour-hours, machine-hours, price, and cost.
Causes of Negative Deviations from Standards

Knowing the causes of negative deviations helps managers determine whether control measures are
possible. Plans may fail due to:
(i) Uncertainty
(ii) Lack of knowledge, experience or judgement on the part of the individuals who made the decisions
or implemented them
Uncertainty
A wide range of factors affect a given plan. These factors may be grouped under the following heads:
facts, risk and uncertainty. Certain things about a task are known, for instance, manpower requirements,
machine capacity, costs etc. These known things are called facts. Considerably less is known about the
element of risk. It may be insurable or non-insurable. Insurable risk may be converted to facts by paying
a known premium; and the costs of non-insurable risks may be included in a business decision on the
basis of probability. But most risks arise from uncertainty. The sum of the elements of uncertainty is more
than the sum of facts and risks. For instance, the successful implementation of a plan for manufacturing
air-conditioners depends to a great extent on such uncertainties as competition in the market and new
technological innovations rather than on known facts and risks. Even statistical tools like probability may
not be of much help in measuring uncertain factors.
Assigning personal responsibility by direct control techniques may be of little help when managerial
errors are caused by unforeseeable events.
Lack of Knowledge, Experience or Judgement

Plans may deviate in a negative direction due to lack of experience or knowledge on the part of
managers. The higher the position of managers in the organization structure, the broader the knowledge
and experience they require to handle certain situations.
In order to become a top executive, a manager not only requires long years of experience, but also
training and knowledge according to the changing business environment.
Sometimes managers make mistakes due to inadequate training, lack of experience, or the inability
to use appropriate information in decision-making. Such errors can be reduced by educating managers,
rotating them through various jobs to give them a broad idea of the different jobs in the organization, or
by providing them with basic guidelines to help them understand and deal with difficult situations.
Questionable Assumptions Underlying Direct Control

The underlying assumptions of direct control are given below:
(i) Performance can be measured.
(ii) Personal responsibility exists.
(iii) The time expenditure is warranted.
(iv) Mistakes can be discovered in time
(v) The individual who is responsible can take corrective steps.
(vi) Many aspects of these assumptions are questionable.
Assumption One: Performance can be Measured

Every organization identifies numerous performance standards expressed in terms of goal achievement,
time, ratios, money (cost), weights, averages and indexes. All these standards are determined to control
quality, cost, price, time, complaints, inputs and outputs. On paper, these standards may appear to be
correct, acceptable, or merely better than having no standards at all. But practically speaking, these
standards have two types of shortcomings: measurement and location.
The first type of shortcoming is concerned with measurement. Certain aspects of performance such
as the amount of creativity, the ability of a manager to develop potential managers, foresight and judgement
in decision-making, the effectiveness of research and the like can rarely be measured accurately.
The second type of shortcoming is concerned with the location of control. Managers are aware that
certain critical stages exist during the operations, right from acquiring the input factors, processing them
to produce a finished product or service, to finally, selling the product or service. For instance, critical
stages in a manufacturing concern may include inspection and quality check for each assembly process,
shipping and billing etc. Exercising effective control during these stages will minimize costs. No amount
of control at other points can make up for the lack of control at critical stages.
Assumption Two: Personal Responsibility Exists

Sometimes, managers cannot be held responsible for an organization’s poor performance. Certain
external factors which are beyond the control of management, such as interest rates, inflation, scarcity of
a particular fuel may have a negative impact on the performance of the organization.
Assumption Three: The Time Expenditure is Warranted

When a particular problem arises, an inquiry into the problem is conducted by the manager or
someone delegated by the manager to carry out the inquiry. The process of inquiry requires managers to
spend time identifying the causes of poor results. For example, to discuss the poor quality of a product
and its declining sales, managers must hold meetings that require the participation of individuals from
various departments such as marketing, operations, quality control, etc., By the time the meeting is held,
the individuals concerned may have forgotten some of the facts regarding the problem. These drawbacks
may convince management that the cost of investigation exceeds the benefits derived from it. This often
prevents management from investigating the reasons for the problem (in this case, the poor quality of the
product and the fall in sales).
Assumption Four: Mistakes can be Discovered in Time

Although most managers assume that mistakes can be discovered in time, it rarely happens. By the
time the deviations have been identified, it could be too late for effective action. Since most managers have
historical data, this data should therefore be utilized to interpret its implications for the future.
The cost of errors in major areas (cash or inventories) has led to the use of feedforward techniques
as the basis of control. But the difficulty in using these techniques has resulted in managers concentrating
on historical data. But feedforward control techniques are slowly being developed and used by managers
as they realize that the best way to correct mistakes is to avoid them.
Assumption Five: The Person Responsible will Take Corrective Steps

Assigning responsibility may not lead to correction of deviations. Suppose high production costs are
traced to a marketing manager. The marketing manager may argue that slight modification in the product
design will make the product attractive and easier to sell, and that this modification involves “really” no
change in the production process. The investigator, who may be from a lower level of the organization,
may feel intimidated by such a response and may not question the manager further. (After all, it is difficult
to correct an executive to whom one reports.)
Exhibit 22.1 Effectiveness of Preventive Action System for Continuous Improvement

An effective preventive control system is one of the best methods for bringing about continuous improvement
in an organization. The following are some of the steps for implementing effective preventive control systems
in organizations. The first step that an organization must take is to identify the root cause of its problems.
In order to successfully achieve this, considerable discipline, time and analytical effort is required on the part
of the organization. However, this is usually lacking in most organizations. Hence, preventive controls do not
work as expected. In order to move in the right direction in this regard, the organization has to take two
important steps. First, the responses that do not indicate the true root cause have to be rejected as these
responses seem suspect. This may be because of management oversight, employee error, failure to follow
procedure, etc. Though these responses are rejected, they can serve as hints to arrive at the root cause.
Therefore, management must adopt a diplomatic approach when rejecting these responses and sending them
back to the responsible parties.
Secondly, training can be provided to the employees to identify the root cause of the problem. A short course
can be held on root cause analysis and problem-solving. The course could cover topics related to the meaning
of root cause, techniques for determining root cause, steps in problem-solving, analytical tools required at
each stage of problem-solving, and managing team dynamics in a problem-solving environment. This training
will enable all the concerned employees at each level to become familiar with the root causes of problems.
The preventive action report forms provided to employees should be short and simple. As a paper-based
system of documentation is time-consuming, many organizations are now using an electronic system. A
preventive control system should be reviewed periodically to check whether the organization is applying the
system to a broad range of categories. Some of the categories that should be considered are: processing
problems, internal nonconformities, late deliveries, findings of internal audit, customer complaints, warranty
claims, customer returns, supplier and subcontractor problems, management review and other forums where
data is analyzed.
The verification of actions is one of the final steps in all systems of preventive control. People who are
designated to verify the actions must fulfil two basic criteria: they should be independent enough to review
the actions in an objective manner and they should have a basic technical understanding of the issues
underlying the actions.
Organizations need to broadcast the successes of their preventive control systems to make employees aware
of them. If a system has worked well in investigating and controlling a problem, then everyone should be
informed of it so that they would be motivated to use the system as an improvement tool.
Adapted from Craig Cochran, “Two Hidden Gems of Continual Improvement, “Quality Digest, March 2001,
<http://www.qualitydigest.com/mar01/html/ci.html>
PREVENTIVE CONTROL
The principle of preventive control is based on the idea that most of the negative deviations from
standards can be overcome by applying the fundamentals of management. The principle of preventive
control makes a sharp distinction between analyzing performance reports and determining whether managers
adopted the established principles in actual practice. Thus, the principle of preventive control can be stated
as “the higher the quality of managers and their subordinates, the less will be the need for direct controls.”
A thorough understanding of managerial principles, functions and techniques and management
philosophy is necessary for a broad application of the principle of preventive control. A thorough
understanding of all these concepts can be gained through university training, on-the-job experience,
coaching by knowledgeable superiors, and constant self-education. In addition, as progress is made in
‘appraising managers as managers’, the principle of preventive control can practically be more meaningful
and effective. Exhibit 22.1 illustrates the effectiveness of preventive control systems for continuous
improvements.
Assumptions of the Principle of Preventive Control

The principle of preventive control is based on the following assumptions:
(i) The application of management fundamentals can be evaluated.
(ii) Well qualified managers make minimum mistakes.
(iii) Management concepts, tools, principles and techniques are effective standards for measuring
managerial standards and performance.
Assumption One: The Application of Management Fundamentals can be Evaluated

Managers should be evaluated periodically to measure their skills in applying management fundamentals.
The performance of managers can be judged not only by evaluating their performance against the
fundamentals of management but also through objective questions about the fundamentals of management.
(The evaluation of managers has been discussed in Chapter 13).
Though a manager’s performance may be measured by evaluating his or her ability to establish and
achieve verifiable objectives, much depends on evaluating the performance of a ‘manager as a manager’
(refer Chapter 13). However, crude these standards of evaluation may be, they can still highlight the degree
to which a person possesses the knowledge and ability required to fill the role of manager.
Assumption Two: Well Qualified Managers Make Minimum Mistakes

According to J.P. Morgan, the decisions made by good managers are right only two-thirds of the time.
Therefore, judging a manager’s performance only on the quantity of errors is not advisable. And even if
a manager commits very few mistakes, those mistakes may have serious implications for the organization.
The concerned manager should be held accountable for such errors and management should check
whether the functions of the manager are in conformance with the fundamentals of management. However,
some factors may be beyond the control of the manager. In such instances, the manager cannot be held
accountable for the errors.
Assumption Three: Managerial Performance can be Measured by Using Management

Fundamentals
All management books discuss managerial concepts, principles, theories and basic techniques or
approaches to management. They also relate to the fundamentals of management and to the various
managerial functions. Depending on the manager’s knowledge and capability, the application of the
fundamentals of the management to managerial functions varies. These managerial fundamentals can be
used to measure and provide a benchmark for managerial performance.
Advantages of Preventive Control

Controlling the performance of managers and thus minimizing errors has several advantages. Toyota,
one of the top manufacturers of automobiles, has adopted preventive control and is reaping good benefits
(refer Exhibit 22.2). The advantages of preventive control are discussed below:
Exhibit 22.2 Preventive Control at Toyota

Toyota Motor Corporation, the world’s third largest automaker, offers a wide range of models, from mini-
vehicles to large trucks. The company has set a benchmark by ensuring worldclass quality in the production
process. Right from the developmental stages to the manufacturing stage, the company ensures that its
product is of superior quality. The company’s philosophy regarding quality control is adopted by the teams
involved in the production process. In order to obtain their active involvement, the team members at Toyota
are encouraged to contribute their ideas for improving the production process. In their efforts to improve design
quality, vehicle designers at Toyota use computers aided design to create and modify their specifications.
Technology enables these designers to have a clear picture of their ideas on a computer screen.
At Toyota, the principle of ‘Kaizen,’ which emphasizes continuous improvement is followed. In Toyota’s
production process, every member in the production line is regarded as a customer and efforts are made to
see that no defective part is passed on to the next stage. If any defect is found, then production is stopped
and the team member rectifies the mistake and then passes it to the next stage. In this way, preventive
control is ensured. Toyota’s quality control at every stage of the production process ensures that correct
materials and parts are used and fitted with precision and accuracy and that the production process progresses
smoothly. In addition to this system of control, team members perform a number of inspections during the
production process.
If a defect is found, production is stopped by using an ‘andon cord.’ An ‘andon cord’ is a rope strung along
the assembly line. When a problem arises, the concerned team member can pull the rope to halt production.
The production process is resumed only when the problem has been solved. At Toyota, a quality audit is
used to test the exhaust system, maintain mass production quality control levels, identify improvements for
quality, and provide detailed evaluations in the process of production.
After a vehicle has been manufactured, it is put through a series of functional inspection tests. These tests
include testing the performance of the vehicle, testing the brakes and spraying the vehicle from all sides with
water at high pressure to check whether any compartment of the vehicle is leaking. As part of the final
inspection, the team members examine every inch of the vehicle to check if any defects are present. In order
to ensure continuous improvement, Toyota makes use of Quality Circles and suggestion systems that reward
team members for their ideas.
Adapted from “Toyota Motor Manufacturing, Kentucky, Inc.,<http://www.toyotageorgetown.com/qualdex.asp
(i) Greater accuracy at work is achieved in assigning personal responsibility to managers. The
performance evaluation of managers may bring certain deficiencies to light. Once the deficiencies
have been identified, specific training can be provided to eliminate them.
(ii) By applying preventive control methods, managers will be able to take corrective actions, which
will improve the process and thereby make it more effective. Preventive control encourages control
by self-control. Since managers are aware that deficiencies would be uncovered during evaluation,
they determine their responsibility and make voluntary corrections where and when there are
deficiencies found. For example, in response to a report on excessive wastage, a department head
would seek to determine whether the wastage was due to poor direction of subordinates or some
other factor. The department head would check whether inspection employees acted properly;
whether the purchasing agent purchased materials according to the specifications; and whether the
users specified the materials properly. Managers who can admit to themselves that they have made
a mistake are likely to do their best to prevent it from recurring.
(iii) Since it is easier to prevent problems from occurring than to correct them after deviations have
been noticed, preventive control reduces the managerial burden (unlike direct controls). Food
industries are also using preventive control methods (refer Exhibit 22.3) for manufacturing quality
products.
(iv) Preventive control provides psychological advantage to the subordinates by helping them understand
the nature of managing and convincing them that a close relationship exists between performance
and measurement. Till then, many subordinates opined that managers do not measure the
performance in a fair manner, and their measurement is based on intuitive feeling and personality.
Moreover, the standards used for measuring performance were improper.
Exhibit 22.3 Hazard Analysis and Critical Control Point Method

It is said that prevention is better than cure. Most organizations, whether in manufacturing or food processing,
are adopting preventive control systems to ensure the production of quality goods. One of the preventive
control techniques used in the food manufacturing industry to identify and prevent microbial and other germs
from causing harm to food is the Hazard Analysis and Critical Control Point Method (HACCP). This technique
is being used in the US by the National Academy of Sciences and the National Advisory Committee on
Microbiological Criteria for Foods (NACMCF). NACMCF has articulated the following seven principles on which
HACCP preventive control systems should be based:
Hazard analysis: This analysis helps in the identification of preventive measures that manufacturing units can
adopt to control food safety hazards which may arise during food processing.
Identifying critical control points: Critical control points are steps or procedures in the production process
at which preventive control techniques should be applied. Establishing critical control points makes it easy
to prevent, eliminate or minimize to an acceptable level any food safety hazard that may arise during the
production process.
Critical limits: Critical limits are established for every critical control point. This involves identifying the
maximum or minimum level at which the food safety hazard has to be controlled at the critical control points
in order to reduce the hazard to an acceptable level.
Monitor activities: Effective monitoring will ensure that the process is under control. Continuous monitoring
of the production process and documentation of each monitoring procedure for future reference is essential.
Establish corrective actions: If deviations from the plan are indicated (through monitoring), immediate corrective
action must be taken at that level. This ensures that no product that is injurious to health is manufactured.
Record keeping: Record keeping is essential for future reference. HACCP regulations require all manufacturing
units to document the monitoring of critical control points, critical limits, verification activities and the handling
of processing deviations.
Establishing procedures to ensure the correct working of the HACCP system: A validation check is necessary
to ensure that the units adhere to rules and regulations so that product safety is ensured. This check is
undertaken by plant personnel and Food Safety and Inspection Service (FSIS) inspectors.
Adapted from “Key Facts: The Seven HACCP Principles, “ January 1998, United States Department of Agriculture,
<http://www.fsis.usda.gov/Oa/background/keyhaccp.htm>
MANAGEMENT AUDIT AND ENTERPRISE SELF-AUDIT

An organization can have two types of audit: management audit and enterprise self-audit. A
management audit aims at evaluating the quality of management and the quality of managing a system.
An enterprise self-audit is a much broader type of audit. It evaluates where an organization is and where
it is going, keeping in view present and future economic, social and political developments. It is, in fact,
an indirect means of auditing the managerial system.
The Management Audit

The concept of preventive control has also been applied to performance appraisal. Performance
appraisal measures the performance of an individual or a manager against the set standards and verifiable
goals. This aspect of the measurement of performance is discussed in the chapter on human resources
management. This section focuses on evaluating the entire system for managing an enterprise, not evaluating
managers as individuals.
Although little progress has been made in devising methods for conducting a management audit, some
pioneering programmes have been undertaken. In the recent past, accounting and audit firms entered the
field of management services as consultants. This has been an attractive field of expansion for auditing
companies because it allows the same firm to provide both advice and services. To avoid confusion
between the two activities, and to achieve objectivity as an accounting auditor, accounting firms have
attempted to separate these two activities. Since many auditing firms have individuals who possess the
knowledge, ability and experience, to handle both auditing and management services, these firms are into
the field of management services.
Separate operations can be started in this field if the organization has staff which has sound professional
knowledge in the field of management services and the ability to practice management auditing.
The certified management audit

A certified management audit may be defined as an independent appraisal of an organization’s
management by an outside firm. For years, investors and others have relied on an independent certified
accounting audit designed to ensure that an organization’s reports and records reflect sound accounting
principles. From the point of view of investors and managers, an audit of the quality of management is
extremely important. As the future of an organization depends on the quality of managers, we can say that
a certified management audit would provide more value than a certified accounting audit.
The responsibility of conducting a certified management audit should be given to an outside firm
which is staffed by individuals who have sufficient knowledge and are qualified to appraise a company’s
managerial system. Employing an outside firm ensures the objectivity of the audit. The employees of the
auditing firm should be accountable to the auditee firm’s board of directors or other senior executives. As
a management audit requires a thorough understanding of the internal and external environment of an
organization, it takes a longer time to carry out than an accounting audit. But once auditors become
familiar within an organization, the management audit can be carried out easily and efficiently.
A certified management audit report should be based on a thorough study of the quality of managers
and the system within which they operate. The report should assess the organization’s management
objectively and in specific terms. In practice objectivity is difficult to achieve. Since the auditors report to
the auditee firm’s management, it is not easy for them to objectively state discrepancies in the top
management of the auditee firm. To overcome this difficulty, objective standards should be agreed on in
advance and applied impartially. If the problem persists, a specially licensed group, which is independent
of the existing accounting and management consulting firms and reports to some other agency, must be
formed. The agency to which this specially licensed group reports to should also be independent of the firm
being audited.
The Enterprise Self-audit

According to J.O. McKinsey, a business organization should carry out an audit on a periodic basis
in order to appraise the organization and all its aspects in light of its present and probable future environment.
He termed this appraisal ‘management audit.’ An enterprise self-audit appraises an organization’s position
and helps it determine where it (the organization) is, where it is heading with its current plans and
programmes, whether it is meeting its objectives, and whether any revision of plans is required to enable
the organization to achieve its predefined goals and objectives. For an organization to survive and be
competitive, it must adapt to the changing social and technological environment. If the organization does
not adapt to these changes in the environment, its objectives may not be achieved and its plans may
become obsolete. The enterprise self-audit is designed to force managers to overcome such problems and
adapt to the changing external environment.
Procedure
The enterprise self-audit is usually carried out annually or every 3-5 years. The steps of an enterprise
self-audit are given below:
(i) Study the outlook of the industry in which the firm is operating
(ii) Appraise the position of the firm in the industry
(iii) Re-examine the basic objectives and major policies of the firm.
Step I: In the first step, the outlook of the industry in which the firm is operating is studied. The
outlook for the company’s product, the recent trends and prospects of the product, the technological
developments affecting the industry, changes in demand, social and political factors affecting the industry,
the position of the market (whether it is growing, or saturated, etc.) and the like are studied closely.
Step II: In the second step, enterprise self-audit is carried out to appraise the position of a firm in
the industry, both present and future. The questions raised and appraised under this step may be:
(i) Has the firm maintained its position?
(ii) Has competition in the industry lowered its position?
(iii) What is the competitive outlook of the firm?
(iv) Has the firm expanded its influence and markets?
To answer these questions, a firm must examine the factors that affect its position in the market.
These factors may be the competition in the industry, the customer response to the firm’s products when
compared to their response towards competing firms.
Step III: The final step in enterprise self-audit involves the re-examination of the firm’s objectives,
plans, policies and facilities. These are then revised in line with the firm’s aims for the next 3, 5 or 10
years. This re-examination helps companies to be prepared for future economic, social and political
developments.
Contribution of the enterprise self-audit

Top managers usually do not think of the firm’s future and also do not evaluate the overall performance
of the organization in light of the long-term objectives of the firm. Enterprise self-audit forces managers to
appraise the overall performance of the organization in relation to both its current and long-range goals.
Top executives who carry out enterprise self-audit will be surprised to find that most of their day-to-day
decisions are simplified by having a clear picture of where the organization is heading.
A similar audit is often carried out when an organization evaluates a firm it wishes to acquire. Thus,
when evaluating a firm, a study of the financial strengths of the firm should be supplemented by a study
of the firm’s research and development strengths and weaknesses, product line, marketing strengths,
personnel, quality of management, and quality of customer relations. All the above mentioned factors are
significant for a firm to survive and to face the competitive atmosphere, an enterprise self-audit has to be
carried out on a regular and continuing basis.
SUMMARY
Controls are necessary to check whether the performance conforms to the plans prepared by the
organization. This chapter examined the necessity of overall control. In this context, two types of controls
were discussed: direct control and preventive control. Direct control is carried out once the deviations from
the plans are observed and then steps are taken to rectify them. The causes of negative deviation and
direct control were discussed.
The principle of preventive control is based on the idea that most of the negative deviations from
standards can be overcome by applying the fundamentals of management. The assumptions and advantages
of preventive control were discussed in the chapter.
Two types of organization audits, the management audit and the enterprise self-audit, were discussed.
The certified management audit, its benefits and problems regarding its application were also discussed.
Finally, we examined the enterprise self-audit, its procedure, and its contribution to management.
Amitabh Bachchan Corporation Ltd.

Riding on the conviction that the future of hindi film industry rested on its corporatization,
Amitabh Bachchan, the famous Hindi film actor, floated an entertainment company Amitabh
Bachchan Corporation Ltd. (ABCL) in 1995. The company established as a body corporate
STUDY
CASE
primarily intended at tapping the film and entertainment business with its primary areas of
focus centreed on
(i) the film industry
(ii) the music industry and
(iii) the event management.
In the process, the company had also aimed at promoting newer talent across the country.
The share capital of the company, roughly around Rs.200 crores, was raised through private
placements, banks, financial institutions and other private parties. The charismatic influence
of Amitabh and the corporate structure of the company had augured a bright future for the
company.
However, the course of development of the company did not take shape in a smooth
fashion. The international beauty pageant show, a grand event managed by the company
resulted in a huge loss. Similarly, most of the films produced by the company, including the
one in which Amitabh himself acted, failed to pick up in the market. All compounded into
heavy dues which accumulated to about Rs.90 crores and the company was declared sick
in July 1999 by the Board of Industrial and Financial Restructuring (BIFR). Financial institutions,
banks and other private parties were literally after Amitabh to recover their dues.
However, Amitabh got a fresh lease of life with the launching of general knowledge-based
television show Kaun Banega Crorepati where he was made the host. The highly-acclaimed
TV programme not only helped Bachchan in overcoming his financial muddle but even
helped in boosting his image as a corporate brand ambassador.
Presently, Amitabh Bachchan is planning to revive the ABCL as Amitabh Bachchan
Corporation (ABC). The operation of the company would centre on
(i) brand endorsements and
(ii) film and entertainment business.
However, the company prefers to focus primarily on films because 85% of television
software and 90% of music are film-based. The company also has plans to include television
programmes, music marketing, and even construction of multiplexes in the later stages.
The company plans to have two separate revenue streams – through brand endorsements
and film and entertainment business. For all brand endorsements, there will be two signatories:
the concerned company and the ABC. For various film projects, there will be joint ventures
with companies like applause entertainment, on a 50:50 partnership basis. ABC does not
bring any cash but will contribute to its equity in the form of creative solutions. Similarly,
the company also plans to borrow funds based on the projects from the markets, as its
easier to refund such money.
On the hindsight, it has been pointed out that the ABCL suffered in its initial ventures due
to several reasons, important among them being the inexperience of its executives particularly
in the top management. Moreover, as reported in the media, Amitabh himself was busy with
his shooting schedules and could not exercise a direct control over the running of the
company.
1. In the light of experience gained from the ABCL, what safeguards would you suggest in making ABC a
success?
][][
Chapter 23 Management Information Systems 453
Information Systems
23
Management
H Management Information
H Components of an Information System
H Types of Information Systems
H Management Information System
INTRODUCTION
The modern business environment is characterized by intense competition, short product life cycles,
and advances in technology and business processes. Decision makers have often been forced to extend
planning horizons and introduce even greater levels of uncertainty in business plans and budget allocations.
In addition, the typical manager is often away from the action points, thus increasing communication
problems and making effective control more difficult. These changes have been accompanied by increasing
pressures for greater accountability.
The previous chapters in this part of the book focused on a variety of tools, techniques, and approaches
to controlling. A key element in both planning and controlling is information. Information is increasingly
recognized as not only a significant element in the planning/controlling process, but also as a major
organizational resource. An information system can be regarded as a subsystem of a control system, and
a control system as a subsystem of a management system. In this chapter, we will discuss the significance
of information systems and the types of information systems managers can implement in an organization.
MANAGEMENT INFORMATION
Information is an important resource for managers. Management information is a key element in both
planning and controlling. In most organizations, problems arise due to a gap between the actual and the
desired state. Information helps decision makers identify and describe this gap and find ways to overcome
it, thus solving the problem.
Management information, available to people with the appropriate authority and accountability in the
organization, is increasingly being recognized as a major organizational resource. Formal methods are
needed to plan, monitor, control and evaluate the utilization of this resource. Information systems are
precisely such resource management agents.
Meaning of Information
Information adds to the knowledge a person has about an entity of interest (a person, place, thing,
or event). In the field of management, the basis for all information is data. Data refers to unanalyzed and
unorganized facts and figures describing entities. All information is based on data, but not all data forms
the basis of useful information. Only data which is relevant to management needs forms the basis of useful
information. Thus, information refers to data that has been analyzed or processed into a form that is
meaningful for decision-makers. The processing of data may involve combining facts or sifting out irrelevant
details.
Information tells a person something that is otherwise difficult to know or predict and adds to his
knowledge about an entity. To understand this, let’s consider the responsibilities of sales managers.
In most companies, sales managers are responsible for the sales of products or services across
different territories and regions. The topmost priority of a new sales manager is to learn about sales in the
territories within his area of responsibility. He may be totally clueless about variations in sales from region
to region and the factors that affect the sales. In order to increase his knowledge and reduce his uncertainty
about sales levels, he requires information. Specifically, he needs to know whether sales are above, at, or
below targeted expectations (i.e. the targeted sales set by the sales budget) for his territory. The information
he needs is based on data describing individual sales transactions that take place throughout his territory.
However, he does not need to know the details of every sale. Instead, he requires aggregate information
that summarizes all the sales and compares actual sales with targeted sales. This information provides
knowledge regarding sales performance, something he did not know and could not guess. It is, therefore,
information in the truest sense.
Attributes of Information
For Information to be useful to managers, it must possess certain attributes. Some of the important
attributes are accuracy, timeliness, relevance and completeness. The list of attributes and their significance
is shown in Table 23.1.
Table 23.1: Attributes of Information
Accuracy Must be true and correct and must accurately describe the item or event.
Timeliness Available when it is needed and without excessive delay.
Relevance Pertains to the situation at hand. Information relevant at one time may not be relevant at another
if it does not add to the knowledge needed by a decision-maker.
Completeness Provides the user with all the details needed to understand a solution. Complete information
(that is, certainty) is rarely available.
Frequency Prepared or presented to users often enough to be up-to-date.
Time horizon Oriented toward past, present or future activities and events.
Scope Broad or narrow in coverage of an area of interest.
Origin May originate from sources within the organization or from external sources.
Form of Tables of numbers or graphic displays of information are the most common written or printed forms.
presentation May also include verbal presentation.
Source: David R. Hampton, Management (Third edition) 708-709.
Information Needs of Managers

All managers require information to perform their managerial functions (mainly, planning and controlling)
and make effective decisions. The information that managers require will vary, depending on the nature
of the work they do and the tasks they seek to accomplish. Information needs also vary by levels in the
managerial hierarchy (see Table 23.2). For instance, top-level managers need far less detail (as a general
rule) than lower level managers. Since top-level managers have to take a broad perspective of the organization
and its mission, they only need information that helps them develop or enhance the perspective.
Information that originates within an organization is referred to as internal information. This type of
information is essential for managing day-to-day operations. Some examples of internal information are:
Daily receipts and expenditures
Quantity of an item in hand or in inventory
Cost and selling price of the item
Salespeople’s quotas.
Table 23.2: Information Needs by Level of Organization
Characteristic Top Management Middle Management Operating Management

Planning Focus Heavy Moderate Minimum
Control Focus Moderate Heavy Heavy
Time Frame Long Term Short Term Day-to-Day
Nature of Activity Unstructured Moderately structured Highly structured
Level of Complexity Many open variables, complex Better defined variables Straightforward
Result of Activity Mission, Goals, Objectives Action Plans End products and services
Adapted from Jeffrey A. Rigsby and Guy Greco, “Mastering Strategy – Insights from the World’s Greatest Leaders
and Thinkers” (USA: McGraw-Hill, 2003).
Information that originates outside the organization is referred to as external information. Such
information is often required by top level managers to plan and guide the organization successfully. Some
examples of external information are:
Demand for new products or services
Information describing customer satisfaction with products and services
Information describing change in policies of suppliers
Knowledge of promotional campaigns, price changes, or products planned by competing firms
Details of changes in government regulations.
In many instances, firms have to provide information to external users. Some of these are:
1. Prices of items and services offered (to customers)
2. Quantity of items needed for manufacturing (to suppliers)
3. Sales revenues and profits earned (to the government).
Only an effective information system can provide managers with both internal and external information
that is timely and accurate.
COMPONENTS OF AN INFORMATION SYSTEM

If information is data that has been refined and made useful for problem solving and decision-making,
an information system is a set of interrelated components working together to provide useful information
that may be required by problem solvers and decision-makers. An information system can be defined as
an organized collection of data, equipment, procedures, and people involved in the collection, storage, and
processing of data to produce information required for the management of an organization. The functions
of an information system include gathering, organizing, and disseminating needed information. Figure 23.1
shows the basic components of a computer-based information system. The five components of the information
system – hardware, software, people, data, and procedures – are explained in the following section.
Hardware
Information system hardware refers to the equipment in the system that is used to input, store, and
retrieve data. Hardware is the physical equipment that includes input devices, output devices, storage
devices and the cables that connect these devices together.
Input devices allow data to be entered in machine-readable form into the Central Processing Unit
(CPU), the main memory and processing section of a computer. Input devices include keyboards, bar-code
readers, optical scanners and digital voice transmission synthesizers. Output devices allow a computer to
produce information in a form that is useful to the users. These devices include printers, visual display
monitors or terminals and graphic plotters. Storage devices allow information to be stored and retrieved
when needed. Floppy discs, magnetic discs and laser-generated compact discs are some examples of
storage devices.
Software
Information systems software is the means by which the system hardware and the total information
system is controlled. The term software refers to a set of programmes, documents, procedures and routines
associated with the operations of a computer system.
Software provides the instructions that enable a computer to perform various tasks. Software
programmes are designed to instruct the hardware to read inputs, store data, retrieve data, transform it
into usable formats, and print system outputs.
In addition to buying the standard software packages available in the market, organizations also
develop in-house software with the help of their own computer specialists. Though such custom-designed
software is expensive to create, it may be necessary to develop it to meet an organization’s specific
requirements or to serve unique applications. In-house software is difficult for competitors to duplicate.
People
No matter how sophisticated an information system is, it cannot function without people. The more
sophisticated the information system, the greater the need for highly skilled personnel. Most information
systems require people with different types of skills to operate them. Data-entry people are required to feed
input data into the system and extract the required information from it. Data processing managers are
required to direct the overall use of the system, the transmission of information to users, and the preparation
of reports. Systems analysts are responsible for configuring the hardware and software in the overall
system. They analyze the functioning of the existing systems and design the architecture for the new
system. Programmemers develop the software according to the specifications of the systems analyst. End
users work on the system to obtain the information required for problem solving or decision-making.
Data
The underlying element of all information systems is data. Data, as mentioned earlier, is a collection
of unorganized facts and figures. The information system should be able to tap appropriate sources of data
to generate the information required by end-users for decision-making and problem solving. When an
information system is designed, more than 60% of the efforts go in data collection and database development.
Managing the data in information systems is an important task. Therefore specialists, called data managers
or data administrators, are assigned the responsibility of ensuring that the data in the system is accurate.
Data administrators provide guidelines to employees regarding data collection, storage and retrieval so that
the data in the system is accurate and up-to-date. The administrators may have to personally observe the
employees on the job to ensure that the guidelines are followed and may have to verify the accuracy of
the data that has been collected and stored. Computers and information systems would be of no use if the
data were not accurate and current.
People Hardw are

End users (Accountants, engineers,
customers, managers, etc.) Input devices
IS specialists (System analysts, Output devices

programmers, developers, etc.)
Inform ation System
Transaction Transaction Output

entry processing
Database
Softw are
Procedures
System software
Data entry and validation
Application software
Data management
Security and integrity
Fig. 23.1 Basic Components of a Computer-based Information System
Procedures
Information system procedures are necessary to ensure that the information generated is complete,
timely and of high quality. Procedures are critical components of an information system. The implementation
of effective procedures may even be regarded as the most important factor determining the usefulness and
the success of a system.
The following are some of the essential system procedures:
1. Data entry and validation specifies the way data should be calculated and verified for accuracy
and completeness. Inaccurate or incomplete data is of little value to management or the organization.
Such data may even produce disastrous results if used in decision-making or operations.
2. Data management refers to the standards and procedures for the storage and preservation of data
in a form that ensures access across a variety of applications and uses. It minimizes data redundancy
and ensures the uniformity of data for all users.
3. Security and integrity ensures that the data will be protected from loss or destruction and that only
authorized individuals will be allowed to access the system. It also limits the actions that individuals
can take regarding the entry, retrieval or modification of data in the system.
The lack of adequate procedures can have a negative affect on the value of an information system
to an organization.
TYPES OF INFORMATION SYSTEMS

There are five major types of information systems: (1) transaction processing, (2) office automation,
(3) decision support, (4) executive support, and (5) management information system (MIS). Figure 23.2
depicts the types of systems and the organization members who use the system. In this section, we discuss
the first four systems and in the section that follows, we examine MIS.
Executive Senior level managers

Information
System
Middle level managers or

Decision Support System Operating level managers
Marketing Information System
Office Automation System
Front end
personnel
Transaction Processing System
Fig. 23.2 Types of Information System by Level and Organizational Members Served
Yet another information system that is rapidly gaining popularity among organizations across the
world is the Geographic Information System (GIS) (Refer Exhibit 23.1).
Transaction Processing Systems

Yet another information system that is rapidly gaining popularity among organizations across the
world is the Geographic Information System (GIS) (Refer Exhibit 23.1).
A transaction processing system (TPS) is a computer-based information system that executes and
records the routine transactions that take place in an organization on a daily basis and which are required
to conduct the organization’s business. A “transaction” refers to any event or activity that involves the
interaction of the organization with external agents. Except for transactions such as the placing of orders
and the billing of customers, transactions vary from organization to organization.
All firms process transactions as a major part of their daily business activities. Transaction processing
involves a set of procedures for handling transactions. Transaction systems are generally used in highly
structured and repetitive situations in which the tasks to be performed and the criteria involved are clear.
A TPS assists in the operations of an organization by performing the following procedures:
1. Storing transaction data
2. Sorting, sequencing, arranging, or updating transaction records
3. Merging the contents of two or more files
4. Performing calculations on file data
5. Sorting data for future use; retrieving stored data.
6. Listing or printing data and/or reports for use by employees and/or managers.
Exhibit 23.1 Geographic Information System (GIS)
A Geographic Information System (GIS) is a computerized set of tools for collecting, storing and retrieving
information as needed and transforming and displaying spatial data from the real world for specific purposes.
In other words, GIS refers to computer software that links geographical information with descriptive information.
GIS gives the position of objects with respect to a known coordinate system or place, describes their
attributes (such as colour and size), and provides numerous details about objects (such as travel from a
particular place to reach a specific object). GIS offers several advantages for users:
Maps can be prepared quickly and economically and updated with ease
Maps can be customized to suit the specific needs of users
Maps are automatically supplemented with statistical analyses, thus simplifying data analysis
Maps can be presented in 3D or stereoscopic format
The information selection and the procedure for using it are defined in a simple and easy to understand
manner
Though GIS generates digital maps that are similar to paper maps, these digital maps offer some additional
features. For instance, in GIS generated maps, roads are represented by black lines, cities by dots and
circles, and lakes by small blue areas. The maps gives details like the length of the roads and the area
occupied by lakes. One can even find out the number of shopping malls in a city, their area of location, and
the roads leading to them. Digital maps present information in layers, thus offering flexibility in usage. One
can choose to view only a desired amount of information or comprehensive information about a place at a
time. For instance, one can view only the roads in the city or only the shopping malls, or both of them at
the same time.
GIS is used to create a knowledge base that helps people make better decisions. For example, by obtaining
a view of large shopping malls and restaurants in a city and identifying the highways frequently used by
people, a credit card organization can decide the position of its billboard advertisements. Similarly, businesses
can view their sales territories, estimate lifestyles of people residing in these areas, prepare their future plans
for expansion, choose locations for stores, target market segments, plan distribution networks and allocate
resources. In Mississippi, GIS is being used for planning land use. In New Zealand, GIS is being used for
the automatic generation of aeronautical navigation charts. The US military makes extensive use of the
visualization capabilities of GIS. Shell uses GIS to improve the efficiency of its pipeline operations and
respond to business development opportunities. GIS is also being used by scientists to study the effects of
global warming, the rise in the sea level off the coast of Delaware, and the melting of glaciers in the
Himalayas.
In India, the government is using GIS to formulate development strategies at different units of the administration,
such as state, district and panchayat level. An indigenously developed GIS-based package called Geo-
Referenced Area Management (GRAM++) is being used for designing and implementing rural development
programmes. GRAM++ helps quantify natural resources like land and water in each panchayat, identify
backward regions, and determine boundaries of watershed projects. The government can constantly monitor
the status of local resources, allocate budgets accordingly, and make available sustainable means of livelihood
to people in each panchayat.
Adapted from “Charting a Hi-tech road map to acieve socio-economic objectives, “The Financial Express, 18
February 2003 and “Geography Matters: An ESRI White Paper, “September 2002, ESRI, <http:// www.gis.com/
whatisgis/geographymatters.pdf
There are two aspects of transaction processing systems that are particularly important. First, TPS
provides an effective tool for interacting with customers and suppliers. Second, it is the main source of
data for other types of computer-based information systems within an organization.
Office Automation Systems

An office automation system (OAS) is a computer-based information system. It aims at facilitating
communication throughout the organization and increasing the efficiency and productivity of employees
through the automation of document and message processing. The earliest, most widely used, and best-
known OASs are word-processing systems. These allow quick and easy generation, edition and printing
of text. In recent years, electronic mail systems have become very popular. They enable high-speed
exchange of written messages by means of computer text processing and communication networks.
OAS may also include the following applications:
Electronic Calendering: This allows users to maintain a schedule of appointments electronically.
Voice Mail: This allows the recording and storing of telephone messages in a computer’s memory
to enable the intended receiver to retrieve it later.
Groupware: This refers to software designed to facilitate meetings. Groupware coordinates
simultaneous computer messages from group members.
Teleconferencing: Teleconferencing allows individuals at two or more geographically separated
locations to not only have oral communication but also view each other’s image on the screen provided
for the purpose.
Facsimile transmission: This refers to the transmission of documents through a device attached
to a telephone. The documents are received in printed form at the receiving location.
Graphics: This application facilitates the conversion of data into digital images.
Initially, office automation systems were seen as a means of increasing the productivity of clerical and
secretarial staff alone. Now they are also regarded as useful aids to managers and professionals.
Some experts regard Knowledge work systems as an advanced version of OAS. Knowledge work
systems help professionals (such as engineers, researchers, scientists, and architects) create and disseminate
new information and knowledge. Knowledge work systems provide workstations for carrying out complex
mathematical calculations for obtaining graphics, and accessing huge volumes of database. They also
provide the necessary tools for designing new products, services and processes. Knowledge work systems
are especially useful for medical diagnosis, document search, scientific analysis and computer-aided
designing.
Decision Support Systems

A Decision Support System (DSS) is an interactive computer system that provides managers with the
necessary information for making intelligent decisions. It can be easily operated by people who are not
familiar with computers. DSS presents data in the form of tables and charts, making it easy for managers
to make comparisons and analyze problems.
Exhibit 23.2 Speech Recognition Technology
Speech recognition technology will enable users to communicate verbally with computers. They need not key-
in information and again read the information retrieved from the monitor. Technology has advanced enough
to provide users an audio version of the information appearing on screen. (Technologically advanced devices
like screen readers, which read the text and describe graphics, are available in the market.) Thus, computers
are able to talk to users. Research is in progress to enable computers to listen to users, understand what
they want to communicate accurately, and respond accordingly. Companies have spent millions of dollars
on the development of this technology. If this technology can be commercialized, both businesses and
individual users will benefit from it. Companies will be able to operate their call centres at 10% of the costs
required for operating human-powered call centres. They will not have to incur expenditure on the training of
operators and worry about high turnover. Because of the absence (or lower number) of live operators, the
expansion and contraction of the call centre capacity will be easier. Normally, human call centre operators
take some time to switch over from one call to another. The automated speech recognition system will
minimize or eliminate that time and improve the efficiency of the call centre as well as enhance the customer
experience. Some call centres use touch-tone systems which advice users to press some digits to obtain
the required information. However, 80% of the callers request to be transferred to the operator when they
encounter the touch-tone system. Speech recognition technology will minimize the time wasted in this
manner because the computers will talk to users and respond to their requests (without asking them to go
for self-service). Customers can obtain information such as status of the order, status of the reservation, latest
traffic reports and check the balance in their account.
However, this technology has its drawbacks. Speech recognition application requires users to speak at a
certain pitch and in a clear voice for at least some time so that the application is able to recognize the
speaker’s voice. Otherwise, the device will not be able to understand users’ requests. Users should practice
correct usage of the software and the equipment (such as headset and microphone) and talk fluently and
clearly so that the computer understands their requests correctly. Since the pattern of speech differs from
person to person, it is difficult for speech recognition systems to interpret meaning. Different people pronounce
the same word differently, pause at different places for the same sentence, take different amounts of time
to complete a sentence, and so on. Researchers found that even when people spoke at normal speed, most
of the existing speech recognition applications failed to distinguish which sounds were associated with which
words. Thus, the major challenge before researchers is to improve speech recognition technology to enable
it to interpret the user’s speech accurately in real time and make it applicable in organizations.
Adapted from Panlkaj Vaish, “Using Computers to Harness the Power of Voice,” Financial Express, 8 March 2003.
DSS is designed to help managers improve their planning and decision-making abilities. For instance,
a bank manager can use DSS to analyze trends in deposits and loans in the industry to determine suitable
targets for the year.
Generally, automated systems help managers only take those type of decisions that can be arrived at
logically. But DSS can also be used to take complex decisions that cannot be programmemed. To help
managers take such decisions, DSS uses information generated by office automation and transaction
processing systems.
A typical DSS is characterized by the following elements:

1. an MIS that supports several methodologies for accessing and summarizing data
2. a sophisticated database that allows information to be accessed in various ways
3. a user-friendly interface that allows users to use simple commands instead of technical computer
language to communicate with the DSS
4. a database that contains information from external and internal sources so that managers can
relate internal events to external forces
5. rapid response time, which makes the DSS an easy and rewarding system to use
Exhibit 23.3 Value of Information for Organizations
Despite the substantial benefits and cost savings it brings to organizations, the value of information often goes
unrecognized because it is difficult to quantify. In 1999, the United States Department of Transportation
surveyed various state Department of Transportation (DOT) agencies and private transportation companies (as
well as some organizations in sectors other than transportation) and reviewed literature in transportation
libraries. The study revealed that timely access to accurate and relevant information helps transportation
agencies save time and money, increase productivity, improve decision-making and enhance efficiency.
Many agencies have been able to save millions of dollars by learning from the experiences of others and
avoiding duplication of efforts (research for the same product/benefit). The New York State DOT (NYDOT) went
through literature in transportation libraries and used the information gathered to develop a concrete mix for
building bridges. The NYDOT brought out the product within a year as it did not have to spend time and efforts
developing the product from scratch. Thus it saved about $ 9 million annually in terms of extended product
life cycle. Similarly, the DOT of the state of Illinois saved about $ 300,000 by accessing research information
from the Louisiana State University on the heat-strengthening of steel bridges.
According to the North Carolina DOT, research methods and results should be included in the information
database as soon as possible so that other firms carrying out similar/related studies could benefit from the
information. Some corporate libraries have worked in this direction and are now able to reduce the time taken
to include information in the database from 6 months to 6 days.
In a 1993 survey of about 300 banking managers, 84% agreed that information helped them take better
decisions and 74% felt that the value of the information was more than $1 million for each decision regarding
financial transactions.
Adapted from “How Decision Makers Value Information, “18 August 1999, US Department of Transportation,
Federal Highway Administration, <http://www.fhwa.dot.gov/reports/viisvlif.htm>
A key factor in the use of DSS is determining what kind of information is needed to solve a given
problem. In well-structured situations, it is possible to identify information needs in advance. But in an
unstructured environment, it is quite difficult to do so. The manager, based on his experience, needs to
identify the type of information needed and access it from the system.
Thus, when a problem is not structured, the manager’s judgment pertaining to the required information
plays a vital role in decision-making. The DSS supports, but does not replace, the manager’s judgment.
DSS converts raw data into information that a manager can use for a specific purpose in a form that is
easily understandable. DSS supports managers at all stages of decision-making, including identifying a
problem, accessing relevant information, selecting a proper approach for solving the problem and evaluating
the alternative courses of action.
Executive Support Systems

An executive support system (ESS) is a computer-based information system that supports decision-
making at the top levels of an organization. ESS helps senior management in framing strategic decisions
that will affect the entire organization. In comparison to a DSS, an ESS offers more general computing
capabilities, better telecommunications, and more display options (such as graphs and charts). It also
makes less use of analytical models, delivers information from a variety of sources on demand, and allows
general queries to be made in a highly interactive way. As a result, senior management can use ESS to
solve a wide range of problems.
An effective ESS must provide market intelligence, investment intelligence and technology intelligence.
This information needs to be collected and presented to the decision-maker in a easy-to-read format. To
make sound decisions, executives require access to external databases, technological information such as
patent recognition, technical reports by consultants and consulting organizations, market reports by market
intelligence agencies, confidential information regarding competitors, financial information, speculative
information about markets, etc. ESSs are more effective when they are tailored to suit individual work
patterns and the needs of executives working in particular situations.
Table 23.3 summarizes the data inputs and information outputs of executive support systems, as well
as those of other major types of information systems.
Table 23.3: Data Inputs and Information Outputs of Information Processing Systems
Type of computer-based Data inputs Information outputs

information system
TPS Transactions; events Detailed reports; lists; summaries
OAS Office documents; schedules Documents; schedules; graphics; mail
MIS Summary transaction data; high-volume Summary and exception reports
data; simple models
DSS Low-volume data; analytical models Special reports; decision analyses;
responses to queries
ESS Aggregate data; external and internal data Projections; responses to queries
Adapted from Kenneth C. Laudon and Jane Price Laudon, Management Information Systems: A Contemporary
Perspective (Macmillan Publishing Co., 1990
MANAGEMENT INFORMATION SYSTEMS

Managers at all levels require access to critical information in order to perform managerial functions
effectively. Organizations therefore have to find ways to transmit information with speed, precision and
economy. A management information system allows organizations to communicate information efficiently
and thus helps managers carry out their responsibilities effectively. A management information system
(MIS) may be defined as a complex interaction among people, computer and communication technologies,
and procedures designed to quickly provide relevant data or information, collected from both internal and
external organizational sources, for organizational use. In other words, a management information system
is a system that gathers comprehensive data, organizes and summarizes it in a form that is of value to
managers, and then presents the same to the managers when they need it to carry out their responsibilities
in a format customized to the situation and the individual using the information.
MIS is designed to acquire, store, and convert data into timely, relevant information to help managers
carry out the planning, control, and operational functions of organizations. It produces routine reports and
allows online access to current and historical information. Such information is needed primarily by middle
level managers (and sometimes by top level managers).
MIS is designed to deal with tactical and operational issues. It summarizes information from transaction
processing systems to produce routine reports for managers and supervisors. It also provides information
to capacity planners about the capacity changes that would have to be made in the short-term and long-
term. In addition, it produces reports about costs, quality, and supplier activities for lower and middle-level
managers. An advanced MIS offers the user organization a wide range of services that can be used by all
levels and applied to all functional areas. It also provides external information for top management, tactical
information for middle management, and internal information for first-line operations control.
A typical MIS is based on four major components: data gathering, data entry, data transformation
and information utilization. The basis of the modern MIS is a centralized database of raw data. This
database is stored in such a way that elements of it may be selected, altered, applied to calculations, and
transformed into useful information to be used in a wide variety of applications.
Evolution of MIS
The digital computer was initially designed for carrying out scientific calculations. However, nowadays,
the commercial applications of computers have far exceeded their scientific applications. A significant
portion of such commercial applications aims at providing some form of information system support for
the management of an enterprise.
The concept of MIS evolved over the years. In the fifties and sixties, many organizations realized the
potential of computers to process large amounts of data with speed and accuracy. While the accuracy and
speed of data processing of the computing equipment of that era was far behind that of equipment in the
21st century, it exceeded that of people involved in data processing activities. The United Services Automobile
Association, one of the leading insurers in the US found that tasks that took five people more than one
day to finish could be completed by one person in 20 minutes by deploying MIS in the organization.
Typical data processing activities were wage calculation, invoicing, billing, and material accounting.
As businesses grew in size, these activities had to be performed very fast, using a very large amount of
data. Increasing the number of personnel could speed up processing, but the inaccuracy produced by
carrying out repetitive data processing tasks, could not be avoided.
Electronic Data Processing (EDP) was developed to help organizations handle a large amount of data.
Electronic Data Processing refers to the use of electronic equipment for processing a large volume of data.
The EDP approach capitalized on the ability of computers to accurately process repetitive data, thus
eliminating performance degradation generally exhibited by human beings when performing repetitive and
monotonous tasks.
EDP was primarily used for record-keeping – an activity that is absolutely essential in many
organizations. The finance and accounts departments took an early lead in EDP activity. In fact, many
EDP departments were under the administrative control of such accounting departments. A natural extension
of such accounting applications was payroll and inventory control. Over time, many specialized mechanical
and electromechanical accessories for computers were also developed for data processing, the chief among
them being card readers, card sorters, etc.
In the seventies, digital computers underwent a drastic change with the introduction of time sharing
and interactive computing. Such a change, along with easy availability of discs (floppies) and the emergence
of file processing systems, saw a discernible shift from data to information. The focus was no longer on
processing of data alone; it was more on the analysis of corporate data. While timeliness and accuracy
were important, relevance, analysis, and insight became key words. The emphasis shifted from the speedy
and efficient processing of data to the effectiveness of the analysis of the data. Such a shift in emphasis
was first conveyed through the term MIS. Management information systems stressed information. The MIS
philosophy emphasizes information (in contrast to data) and focuses on processing i.e., management usage
(in contrast to speed). MIS seeks to provide the right information to the right individual at the right time,
while EDP seeks to disseminate all the information speedily to everyone in the organization. However,
without an excellent record-keeping mechanism, no meaningful analysis of data would be possible. Therefore,
even today, MIS relies on EDP.
Computers and MIS

Though conceptually, MIS does not need computers, almost all the modern organizations have
computerized their MIS. Since computers are extensively used for the design, development and application
of MIS, to an observer, computer systems and information systems may appear synonymous. But this is
far from the truth. These are two different disciplines that overlap and yet have an independent existence.
To derive the maximum advantage from any MIS, there is a need to clearly understand the major
differences between the two disciplines. These differences are discussed below:
Computer systems provide only the technology (or automation) component, while successful
information systems call for an understanding of organizational dynamics, processes as well as
control systems in the organization.
Information systems are specific to an organization or managerial context. In other words, they
focus on solving problems specific to an enterprise. Computing systems, however, are far more
generic and they address problems beyond the managerial context. Thus, they are not limited by
organizational considerations alone and extend beyond business and commercial activities.
Information systems call for a very high level of conceptual understanding of the organization. The
complex thought processes of different individuals, the subtle interpersonal dynamics between
individuals, (both in their personal capacity and organizational capacity), their attitudes, aspirations
and goals, have to be clearly understood before any information system is successfully implemented.
Computer systems, however, focus on deriving logical solutions and require in-depth knowledge of
programmeming. They require abstract and analytical thinking, generalization and rigorous analysis
of data to come up with a solution.
Information systems being an applied area call for problem solving skills, an ability to make quick
and sensible assumptions to solve specific problems in a time-bound manner, often working under
time and budget constraints. Computer systems, however, being a relatively pure area, call for a
strong theoretical foundation in mathematics and engineering to solve general problems.
The tools of information systems are generally context specific. Many of the successful tools in the
present business environment may not be successful in a different environment. The tools of
computer systems, like database theory, are far more context independent. A change in technology
only modifies them, it does not change them completely.
SUMMARY
Information is one of the most important resources for managers. It adds to the knowledge a person
has about an entity of interest. For information to be useful to managers, it must possess certain attributes,
which include accuracy, timeliness, relevance and completeness. An information system is a set of interrelated
components working together to provide useful information as needed by problem solvers and decision
makers. The five components of an information system are: hardware, software, people, data, and
procedures.
There are five major types of information systems that serve the needs of different levels of managers
in an organization: transaction processing, office automation, management information, decision support
and executive support. A transaction processing system is a computer-based information system that
records and executes the routine day-to-day transactions required to conduct an organization’s business.
An office automation system facilitates communication throughout the organization and increases the
efficiency and productivity of managers and office workers through document and message processing. A
decision support system is an interactive computer system that provides managers with the necessary
information for making decisions. An executive support system is a computer-based information system
that supports decision-making at the top levels of an organization. A management information system is
a system that gathers data and organizes and summarizes it in a form that is of value to managers.
How Fedex Turns on Time

STUDY
Every morning at 08.30 am there is a 60 minutes daily operations review at FedEx. Fifteen
CASE
to 30 representatives of key departments like Air Operations, Computer systems and Meteorology
attend in person or participate via conference call. The purpose of the meeting is to see what
happened last night and figure out what needs to be done today to make sure that things
run as smoothly as possible. The reason this is so important? Customer service is all FedEx
offers and the heart of their strategy, and the meeting is designed to ensure that it’s reliable.
Every weekday at 05.00 am a taped recap of the night’s performance is made by voice
mail so that participants can check in before meeting and review any problems they will need
to discuss and solve.
1. What concepts discussed in this chapter is FedEx using and how do these affect the management of its
operations?
2. How would you describe the way technology has shaped the company’s strategy and its thinking?
3. How do you think FedEx will need to use technology in the future in order to maintain its competitive edge?
24
International
H
Reasons for Going International
Management
H International Management Functions
H Japanese Management and Theory Z
H Multinational Corporations
Chapter 24 International Management 469
INTRODUCTION
Organizations today need to adopt a global perspective when planning and carrying out their activities.
Viewing the entire world as their area of operations enables managers to expand their horizons and take
advantage of the unique opportunities offered by doing business on an international scale. The term
“multinational business” refers to profit-related activities conducted across national boundaries. Such
activities may include importing supplies from other countries, selling products or services to customers
abroad, and/or providing for the transfer of funds to subsidiaries in other countries.
Like any other enterprise, an international business enterprise must be effectively and efficiently
managed. The study of international management focuses on the operations of international firms in host
countries. In other words, it deals with the various processes of planning, organizing, leading and controlling
engaged in by international firms.
In future, managers of domestic companies will have to learn to counter competition from international
businesses. To deal with this competition, they will not only have to engage in international business, they
will also have to enter into business deals with them (as suppliers or customers). Under such circumstances,
managers must have a thorough understanding of different aspects of international management.
In this chapter, we first look at some of the reasons for going international. Second, we discuss
international management functions. Third, we examine the differences between Japanese and American
management practices and take a look at Theory Z. We shall conclude the chapter with a discussion on
the operations of multinational corporations.
REASONS FOR GOING INTERNATIONAL

Companies go international for various reasons. Donald Ball and Wendell Mc Culloch categorized
these reasons as aggressive or defensive. Aggressive reasons may include:
1. Exploring new markets
2. Earning greater profits
3. Acquiring products for the home market
4. Satisfying management’s desire for expanding the business.
Defensive reasons may include:
1. Protecting domestic markets
2. Protecting foreign markets
3. Ensuring a reliable supply of raw materials
4. Acquiring technology
5. Diversifying geographically
6. Seeking politically stable bases for new operations.
The reasons for entering international markets may vary with the economic conditions, the type of
industry and the nationality of the company. Exhibit 24.1 lists the reasons the reasons for Wal-Mart to go
international.
During the 1950s, many US companies went international because of the trade barriers imposed on
US goods by dollar-short countries. That is, they went overseas for defensive reasons. With the removal
of trade barriers by the 1960s, US companies started going international for aggressive reasons. Taking
advantage of their superiority over foreign companies in technology, management, and marketing, US
companies began tapping the inexpensive labour market that existed in many countries.
The reasons for going international may also vary with the nature of the industry. Firms in raw
materials-based industries (e.g. oil or mining), entered international business to gain access to a guaranteed
and/or cheaper source of the needed raw material. Manufacturing companies however, ventured overseas
to find cheaper sources of labour. The motives for going abroad are also affected by the nationality of a
company. Many foreign companies shift to the United States to enjoy political stability, and to acquire
technological expertise and knowledge in management. Recently, however, US companies have begun to
look toward Japan for new ideas in management.
Stefan H. Robock and Kenneth Simonds have identified six motives behind a company’s decision to
go international: (1) market seeking; (2) resource seeking; (3) production-efficiency seeking; (4) technology
seeking; (5) risk avoidance (companies seeking to lower chances of production interruption, and lower the
political risk through diversification and trying to stabilize demand); (6) defensive threat (when companies
in oligopolistic industries decide to follow one another into overseas markets in order to have the capability
to react to each other’s price cuts or any other competitive action).
Exhibit 24.1 International operations of Wal-Mart

In 1962, Sam Walton (Walton) and his brother opened the first Wal-Mart store in Rogers (Arkansas), USA.
By 1967, Wal-Mart had 24 stores with sales of $12.6 million. By 1980, Wal-Mart had 276 stores with annual
sales of $1.4 billion. In early 1990s, Wal-Mart announced that it would go global. It wanted to look for
international markets for the following reasons:
Wal-Mart was facing stiff competition from K-mart (a leading US retailer) and Target (one of the leading
discount retail chains in US), which adopted aggressive expansion strategies and started eating into Wal-
Mart’s market share.
Wal-Mart also realized that the US market represented only 4% of the world’s population and confining
itself to the US market would mean missing the opportunity to tap potentially vast market elsewhere.
In the early 1990s, globalization and liberalization opened up new markets and created opportunities for
discount stores such as Wal-Mart across the world. During the first five years of its globalization initiative
(1991-1995), Wal-Mart concentrated on Mexico, Canada, Argentina and Brazil, which were close to its
home market. Wal-Mart expanded its international operations through acquisitions, joint ventures, greenfield
operations and wholly owned subsidiaries. By 2003 Wal-Mart had a presence in 9 countries with 1,288
stores, which included 942 discount stores, 238 supercentres, 71 Sam’s Clubs and 37 Neighbourhood
stores.
Source: ICFAI Centre for Management Research
INTERNATIONAL MANAGEMENT FUNCTIONS

The managerial functions of planning, organizing, staffing, leading, and controlling are as important,
if not more so, to the international manager as they are to the home-based counterpart. The practice of
these functions differs considerably in domestic and international business enterprises. The five major
management functions in a global context are discussed below:
Planning
Firms that want to go international must thoroughly assess the opportunities and threats in the
external environment. A clear understanding of the external environment enables managers to match the
probable threats and opportunities with the internal strengths and weaknesses of their firms.
In many foreign countries, the organizational planning activities are dominated by technocrats.
Technocrats are staff specialists, such as engineers and budget analysts, who hold influential positions in
the bureaucracy and specialize in economic planning. In order to make their firm succeed in the international
business environment, international managers should understand the practices and beliefs of these technocrats
and develop a good working relationship with them. The conditions on which the national economic plans
are based provide a framework for international managers to develop plans for their own organizations.
Organizing
What works at home is not always appropriate in another nation. Hence, organizations must adapt
to conditions abroad. Different countries favour different organizational structures. For example, French,
Italian, Swiss, and Dutch managers prefer a traditional, formal organization structure, while German and
Scandinavian executives opt for a less rigid structure.
Organizational activities can be grouped according to geographic areas. For instance, managers can
be put in charge of regions such as North America, Latin America, Europe, Africa and the Far East.
Organizational activities can also be grouped according to product lines. For example, at corporate
headquarters, managers may be put in charge of a product line which is sold in different nations.
As a company can choose from a great variety of structures, it should consider the advantages and
disadvantages of each structure before selecting the best alternative. For large multinational corporations
any one structure may be inadequate for handling their numerous products and managing their business
units in different countries. To overcome this difficulty, such organizations have to mix different organizational
designs, depending on the environmental and task demands.
Staffing
Staffing the organization is another important responsibility of international managers. The three
important sources of managerial talent for MNCs include (1) managers with home-country nationality, (2)
managers with host-country nationality, and (3) managers who are nationals of a third country.
Managers with home-country nationality are nationals of the country in which the headquarters of the
company is located. These managers are chosen to represent and manage the branches established by the
company in foreign countries. Managers who are home-country nationals are usually familiar with the
policies and operations of the parent company.
Managers with host-country nationality belong to the country in which the company is trying to
establish itself. Being nationals of the host country, these managers are familiar with the environment,
education system, culture, legal and political processes, and the economic environment prevailing in the
country. In addition, these managers also have a thorough understanding of local customers, suppliers,
government officials, behavioural characteristics of employees, and the general public.
Third-country nationals are managers who belong to a country other than the home-country or the
host-country. Due to their work experience, these managers are easily able to adapt to different cultures.
The increasing costs of sending managers abroad, and the increasing capability of people in the host
countries to assume responsible managerial positions, have prompted international business enterprises to
employ more host-country nationals than managers from the parent company.
Leading
Leadership styles vary according to the cultural environment. Leading involves motivating and
communicating. Understanding the cultural environment of employees is essential for effectively motivating
and leading them. Suddenly introducing a participative style of management in a firm used to an autocratic
style may cause confusion among employees. Communication, an essential aspect of leadership, becomes
difficult when a firm operates in different countries, where different languages are spoken. New
communication technology has greatly improved the transmission of information across distances; the
language barrier, however, still poses many problems.
Controlling
Controlling, an essential management function, ensures that events conform to plans. In international
business, controlling is influenced by several environmental factors that are unique to international enterprises.
International managers must consider the following factors when evaluating and controlling operations: (i)
different currencies are used in different countries to measure revenues, costs and profits; (ii) due to the
considerable fluctuations that take place in the currency rates, the ratios between currencies are never
constant and are subject to change; (iii) accounting practices and financial reporting often differ from
country to country (the accounting procedures adopted by the parent company in a host country will have
to fulfil the regulations of the tax authorities of the host country as well as satisfy the regulations of the
government back home); and (iv) there is a time lag in the measurement of performance, which may delay
the detection of deviations from standards and the initiation of corrective action. These factors reveal that
controlling an international corporation is far more difficult than monitoring a domestic corporation.
JAPANESE MANAGEMENT AND THEORY Z

The managerial practices followed in Japan are quite different from those followed in economically
advanced countries in the West. In recent years, more and more companies have started using Japanese
management practices to increase productivity. Exhibit 24.2 provides an example of Samsung that used
theory Z to improve its efficiency. We discuss below some of the Japanese management practices that are
commonly cited by researchers and writers, and compare and contrast Japanese and US managerial
practices. We also examine Theory Z, developed by William Ouchi.
Exhibit 24.2 Samsung Uses Theory Z to Become a Living Organization

Many American firms are beginning to experiment with Japanese management philosophy. In order to get the
best out of both Japanese and American management philosophies, many American firms have adopted
Theory Z which combines both these philosophies. Some Korean companies, such as Samsung Group,
Lucky Goldstar, Hyundai, Daewoo and Samyang have also adopted Theory Z. The Samsung Group has
achieved success through the adoption of Theory Z. In line with the Theory Z style of management, the
company follows the practices described below.
Employment in Samsung is neither short-term nor lifelong in nature. Samsung is one of the preferred
places of employment for university graduates because of its prestigious image and its attractive salaries
and benefits. This aspect of Samsung motivates most of its employees to remain with it for a long time.
At the same time, Samsung cannot be regarded as a place for lifetime employment because its policy
of strict performance appraisal leads to vigorous competition among the employees, causing many
employees to exit the organization.
Unlike other organizations, Samsung practices collective decision-making. All decisions in the organization
begin with the circulation of a written proposal from the bottom of the organization to the top. The proposal
moves upwards only when it has been approved by a manager at each stage. An important aspect of
decision-making at Samsung is that the task of writing the proposal is given to the youngest and newest
member of the department.
At Samsung, clear lines of authority and responsibility are established. The organization does this by
setting up a responsibility centre system, an individual reward system and an individual responsibility
centre system. The establishment of such lines of authority and responsibility encourage managers to
work independently.
The frequency of evaluation at Samsung is low. This is because the Chairman believes that it takes time
to accurately assess the performance of an employee. Hence, at Samsung, an employee is evaluated
only after he has been trained and his performance has been observed for a certain number of years.
Employees have a specialized career path. At Samsung, the specialities of employees are respected and
people are given positions which suit them and in which they can work effectively.
The organizational control is both informal and formal. Samsung combines the Japanese style of future
direction and American style of quantifiable objectives. Informal evaluation at Samsung is supplemented
with various formal evaluation methods such as the personnel evaluation system. This system includes
manager appraisal, output appraisal and self-evaluation.
Adapted from Mushin Lee, “Samsung Uses Theory Z to Become Living Organization,” Industrial Management,
Vol. 34, Issue 5 (Sep/Oct 1992): p29, 2p.
Some Specific Japanese Management Practices
Lifetime employment
Lifetime employment (shushin koyo) refers to recruitment of employees immediately upon graduation,
generation of employment until retirement, and mandatory retirement. Though there is no formal contract,
employers and employees have an unwritten mutual understanding regarding their expectations about the
job. Under lifetime employment, an employee spends his entire working life with a single enterprise. This
helps generate a feeling of job security in the employee and a feeling of belongingness towards the
enterprise. The concept of lifetime employment brings about “harmony” (wa) in the enterprise. Harmony
results in employee loyalty and helps him/her identify closely with the aims of the organization. The success
of this practice depends on the caliber of the personnel recruited by the company.
On the flip side, lifetime employment increases the cost of doing business because the firm is forced
to maintain a large workforce even though it may not have work to keep them all sufficiently occupied.
Therefore, many firms have begun to question the practicality of the concept of lifetime employment. This
permanent employment policy is generally used only by large firms. Lewis cites the bonus plan, permanent
and temporary classification of the workforce, and satellite work areas as the conditions that make lifetime
employment a success in Japan.
Seniority system
This concept is closely related to the concept of lifetime employment. Companies following this
concept, provide privileges to older employees who have been with it for a long time. Promotion and wage
increases are based on an employee’s length of service (henko) in the company, not job performance. The
seniority system seems, at first glance, to be unfair to young and able people. However, they are to some
extent compensated psychologically by being assigned challenging tasks and being placed in positions
which everybody in the company knows lead to future managerial positions. Almost all promotions to
management jobs are from within the organization.
Continuous training
The secret of the success of Japanese managers may lie in “continuous training.” In Western
organizations, employees receive training only to acquire a new skill or to move to a new position. In
Japanese firms however, every young manager has a “godfather,” who is never his boss or anyone in the
direct line of authority. The “godfather” is not part of the top management, but is highly respected by
others and is over 45 years of age. He is expected to advise, counsels and looks after his “godchild.”
Because of their practice of permanent employment, Japanese corporations enjoy the benefit of
employee stability. As a result, they are in a position to provide well planned, systematic training to
employees.
Emphasis on group work

In most Japanese organizations, a task is not assigned to an individual; instead several tasks are
assigned to a group, which consists of a small number of people. At Kaisha’s (One’s Company), people
are treated like family members. Kaisha means “my” or “one’s” company, the community to which one
belongs and which is an important part of one’s life. Probably this is the reason why employees take great
pride in their company and its success.
Decision-making
The practice of managerial decision-making in Japan is built on the concept that change and new
ideas should come primarily from personnel belonging to lower levels in the hierarchy. Thus, in Japan,
lower-level employees prepare proposals for higher-level personnel. The “ringi system” refers to decision-
making by consensus.
The word ringi consists of two parts ‘rin,’ which means submitting a proposal to one’s superior and
getting his approval, and ‘gi,’ meaning deliberations and decisions. Before a proposal is finally approved,
it is discussed at many group meetings. Once the proposal receives the green signal, things move fast.
Thus, Japanese firms expect decision-making to take place in groups and decisions to be based on
principles of full information-sharing and consensus.
Complicated performance evaluation

When job descriptions are not well-defined, and when tasks are performed by groups, it becomes
difficult to evaluate individual job performance objectively. The evaluation of workers and managers in
Japanese corporations takes a very long time – up to ten years – and requires the use of qualitative and
quantitative information about performance.
For this reason, promotion in Japanese firms is relatively slow, and promotion decisions are made
only after interviews with many people who have had contact with the person being evaluated. Since jobs
are done on a group basis, individual merit rating systems cannot be used. In addition, since no one tries
to demonstrate individual brilliance or dynamic leadership, it is extremely difficult to isolate individual
competence or job responsibility to carry out a fair rating of each employee.
Father leadership
As a Kacho (manager), the task of a leader is not only to supervise his people at work, but also to
show fatherly concern for their subordinate’s private life. Since, promotion is based on seniority, it is not
easy to move on to a Kacho position. Sufficient training and experience are essential for an individual to
be promoted to this position.
Good benefits for employees

Japanese companies provide substantial benefits to their employees. Employees are provided benefits
such as family housing and transportation allowances. Some companies also provide bachelor
accommodations, scholarships for employees’ children, and low-interest housing loans. Salary enhancements
become rapid after about seven years of employment with the firm. Since the seniority-based wage system
assumes that the longer the experience, the more valuable the employee. Japanese factory workers also
get considerable amount of premium pay for overtime work.
Some Japanese companies pay upto half the interest charged on mortgages for all employees. As an
employee moves to the top of the corporate ladder, his company provides him with a car and a chauffeur,
and membership in social clubs including a golf club. Highly qualified managers may retain their positions
till their death or until they retire voluntarily, in which case there is a handsome pension retirement income.
In case of voluntary retirement at 55, a lum psum payment is made. In addition, Japanese companies
attempt to place these employees in subsidiary company positions or in advisory positions.
Simple and flexible organization

In Japanese firms, very often, people are trained to be generalists. For this reason, the organization
structure in Japan is relatively simple and flexible, and it is possible for people to take up a new challenge
or a new task by forming a new formal or informal group. Informal organizations (referred to as habatsu),
wield considerable power in formal organizations. Habatsu membership doesn’t overlap with other
memberships and there is total commitment from the employees. The habatsu leader enjoys a high status
in the formal organization and he patronizes his followers. Exhibit 24.3 explains the Japanese management
practices at Toshiba.
Exhibit 24.3 Toshiba: The Japanese Company with a Difference

Toshiba Corporation is Japan’s oldest manufacturing enterprise. It resembles many other distinguished Japanese
corporate giants, with regard to its range of activities. The well-diversified company is involved in a wide variety
of businesses, ranging from common household items to high technology products such as computer chips,
laptops and hospital equipment. Like other famous Japanese corporations, Toshiba followed practices such
as lifelong employment, long working hours and a rigid pay ladder. The company’s uniqueness lay in the
manner in which it recruited employees and the conditions it created for encouraging innovation. Unlike many
comparable Japanese companies, which were vertically integrated and usually worked in isolation, Toshiba
never hesitated to turn to outside sources to access technological expertise. The company has a history of
forming strategic alliances with leading foreign companies. Some of Toshiba’s partners include IBM, Time
Warner, General Electric, Siemens, United Technologies, Ericsson, Olivetti and Motorola. Toshiba, IBM and
Siemens eased trade tensions among Japan, the US and Europe by signing an eight-year, $1 billion deal
in 1992.
The company also tied up with IBM and Apple to make multimedia equipment. In the same year, the
company entered the US entertainment industry, paying $ 500 million for a 6.1% stake in Time Warner. The
company did not give too much importance to selecting top ranking students from prestigious universities.
Most of the shop floor workers at Toshiba were high school graduates. They joined the company at the age
of eighteen and were given on-the-job training for a year in key technical skills such as welding, lathe
operations and hand finishing operations. After a few years on the job, Toshiba arranged for an additional year
of schooling (involving lectures and practical work) to enable workers to upgrade their skills. One worrying
trend which Toshiba executives noted in the mid-1990s was that many Japanese high school graduates
wished to avoid shop floor jobs and instead preferred white collar assignments.
Toshiba laid great emphasis on safety procedures. Workers were covered from head to toe in protective
clothing. Before entering the manufacturing room, the workers had to put on a protective suit, long boots, tight
rubber gloves that extended over the arm of the suit, a cloth helmet covering the head and neck and a gauge
face mask.
Toshiba planned to recruit more engineers with an international background. The company also had plans to
enter into more alliances with US companies and recruit foreigners to Toshiba’s board of directors.
Adapted from “Toshiba,” Global Strategic Management Case Studies on Fortune 500 Companies, Transworld University,
Volume VI.
To sum up, Japanese managerial practices emphasize lifetime employment, concern for the individual,
seniority, and a sense of loyalty to the firm. Furthermore, decision-making is based on principles of full
information-sharing and consensus. They also carry out a complicated performance evaluation process,
emphasize ‘father-like’ leadership and offer employees good benefits.
JAPANESE VS. US MANAGEMENT PRACTICES AND THEORY Z

Rightly or wrongly, Americans are turning to Japanese management practices to find a solution to the
declining growth rate in productivity in the United States. The characteristics that distinguish Japanese
from American management practices, are summarized in Table 24.1.
Table 24.1: Japanese and US Management Approaches

Japanese Management US Management
Planning
1. Long-term orientation 1. Primarily short-term orientation
2. Collective decision-making with consensus 2. Individual decision-making
3. Involvement of many people in preparing and 3. Involvement of few people in making and “selling” the
making the decision decision to persons with divergent values
4. Decisions flow from bottom to top and back 4. Decisions initiated at the top, flowing down
5. Slow decision-making; fast implementation of 5. Fast decision-making; slow implementation requiring
the decision compromise, often resulting on suboptimal decisions
Organizing
1. Collective responsibility and accountability 1. Individual responsibility and accountability
2. Ambiguity of decision responsibility 2. Clear and specific decision responsibility
3. Informal organization structure 3. Formal, bureaucratic organization structure
4. Well-known common organization culture and 4. Lack of common organization culture, identification with
philosophy; competitive spirit toward other profession rather than with company
enterprises
Staffing
1. Young people hired out of school; hardly any 1. Young people hired out of school
mobility of people among companies
2. Slow promotion through the ranks 2. Rapid advancement desired and demanded
3. Loyalty to the company 3. Loyalty to the profession
4. Very infrequent performance evaluation 4. Frequent performance evaluation for new employees
for new (young) employees
5. Appraisal of long-term performance 5. Appraisal of short-term results
6. Promotions based on multiple criteria 6. Promotions based primarily on individual performance
7. Training and development considered a 7. Training and development undertaken with hesitancy
long-term investment (for fear of turnover)
8. Lifetime employment common in large 8. Job insecurity prevailing
companies
Leading
1. Leader acting as a social facilitator and 1. Leader acting as a decision maker and head
group member of the group
2. Paternalistic style 2. Directive style (strong firm, determined)
3. Common values facilitating cooperation 3. Often divergent values, individualism sometimes
hindering cooperation
4. Avoidance of confrontation, sometimes leading 4. Face-to-face confrontation common; emphasis on clarity
to ambiguities; emphasis on harmony
5. Bottom-up communication 5. Communication primarily top-down
Controlling
1. Control by peers 1. Control by superior
2. Control focus on group performance 2. Control focus on individual performance
3. Saving face 3. Fixing blame
4. Extensive use of quality control circles 4. Limited use of quality control circles
Adapted from Heinz Weihrich, “Management Practices in the United States, Japan, and the People’s Republic of
China” Industrial Management, <www.usfca.edu/fac-staff/weihrichh/ docs/management_practices.pdf>
However, one should be cautious when interpreting this table. Just as not all American firms are
managed the same way, not all Japanese firms follow the same managerial principles.
After researching both American and Japanese management approaches, management expert William
Ouchi outlined Theory Z. Ouchi began his study by identifying the contrasting characteristics of Japanese
and American companies. He discovered that certain successful US-based companies – including IBM,
Intel, Hewlett-Packard, Eastman Kodak, and Eli Lilly – exhibited a style of management that effectively
combined the traits of typical American and Japanese companies. He called these hybrid companies –
Theory Z organizations. Theory Z firms grew out of a desire to improve upon the typical American way
of managing. Theory Z companies were American in origin, but Japanese in conduct and experience.
They used some Japanese managerial practices, but made adjustments according to the environment
prevailing in the United States. Ouchi’s work showed that American organizations could benefit from
thoughtful incorporation of the Japanese management practices.
MULTINATIONAL CORPORATIONS
The term multinational corporation (MNC) is typically reserved for organizations that engage in
production or service activities through their own affiliates in several countries, maintain control over the
policies of those affiliates, and manage from a global perspective. Six of the ten largest multinational
corporations in the world, (ranked on the basis of sales achievement in 1990) are American companies.
The ten companies in order of rank are: (1) General Motors, (2) Royal Dutch/ Shell Group (Britain/
Netherlands), (3) Exxon, (4) Ford Motor Company, (5) International Business Machines (IBM), (6) Toyota
(Japan), (7) IRI (a government-owned Italian company), (8) British Petroleum (Britain), (9) Mobil, and
(10) General Electric. Exxon is one of the best examples of a multinationational corporation. Exhibit 24.4
illustrates the growth of this multinational.
Orientations toward International Business

The degree to which the parent company influences the operations of its subsidiaries varies. Accordingly,
top-level managers in companies that are expanding internationally tend to subscribe to one of the four
basic orientations or philosophies – ethnocentric, polycentric, regiocentric and geocentric.
In the early stages of international business, managers generally have an ethnocentric orientation
towards international management. Executives with an ethnocentric orientation assume that practices that
work at headquarters or in the home-country will also work elsewhere.
Exhibit 24.4 Birth of a Multinational: Exxon

Texas-based Exxon has been a dominant player in the integrated petroleum industry for most of the 20th
century. Exxon was one of the companies formed after the disintegration of John. D. Rockfeller’s Standard
Oil trust. Originally, the Standard Oil Company of New Jersey, Exxon was established in 1882. Even in the
early days, Exxon was an international company, selling kerosene in the United States as well as other
countries. Before it was six years old, the company formed its first affiliate outside the United States, the
Anglo-American Oil Company Limited. Anglo-American’s job was to boost the company’s kerosene sales in
what had become a very tough United Kingdom market.
The move worked. In just three years, the new affiliate increased its share of the British market for U.S.
petroleum products from 17 per cent to 70 per cent. Anglo-American also extended its marketing reach to
South Asia and the Far East. By 1910, China had become Exxon’s largest customer.
By the mid-1920s, Exxon was producing oil and gas in Romania and the Dutch East Indies (Indonesia) and
had a foothold in Latin America. In 1928 the company formed a producing company in Venezuela.
In 1933, Exxon and Mobil Oil Corporation combined their operations in East and South Africa, South and
Southeast Asia, China, Japan, Australia, New Zealand and the Pacific islands. In 1948, Exxon acquired a
30 per cent share in the Arabian-American Oil Company (ARAMCO), gaining access to the vast oil fields of
Saudi Arabia. Exxon also owned a share in Imperial Oil Limited, a Canadian company since the turn of the
century. In 1947, Imperial made a discovery that turned the province of Alberta into a major oil producer. By
1950, Exxon was operating in 140 countries, colonies and dependencies. The company now has a presence
on every continent except Antarctica.
Adapted from “Exxon,” Global Strategic Management Case Studies on Fortune 500 Companies, Tran world
University, Volume VIII.
In the polycentric approach, a firm customizes its operations for each foreign market it serves. The
parent company may maintain a very long public profile relative to the subsidiary. Regiocentric orientation
favours the staffing of foreign operations on a regional basis. For example, an European firm may have
its staffing operations based on British, French, German and Italian. The modern multinational corporation
has a geocentric orientation. In the geocentric approach, the firm analyzes the needs of its customers
worldwide and then adopts standardized operating practices for all the markets it serves.
Advantages of Multinationals
Firms with international business have several advantages over firms that operate only within the
home country. Multinational corporations are able to take advantage of business opportunities in many
different countries. They can also raise funds for their operations throughout the world. Moreover, MNCs
benefit from being able to establish production facilities in countries where their products can be produced
most efficiently, effectively and economically. Businesses with worldwide operations sometimes have access
to natural resources and materials that may not be available to domestic firms. Large MNCs can be staffed
by managers of different nationalities. This recruitment from a worldwide labour pool enables them to
select the most suitable candidates for filling key positions in their firms
Challenges for the Multinationals

Multinational operations face certain challenges. These challenges and risks must be weighed against
the advantages associated with carrying out operations in foreign countries. Initially, multinational companies
had their dominance in developing countries where people lacked managerial, marketing and technical
skills. But with people in such countries gaining these skills, the situation is changing and multinationals
are not being given that much importance. In addition, developing countries have become more adept in
international negotiations and have become aware of their natural resources. Multinationals must maintain
good relations with the host country and also keep track of changes in government. All the above changes
present challenges for MNCs. To survive, companies must learn to adapt to these changes.
SUMMARY
The study of international management is gaining importance as firms expand their operations to
various countries. International management deals with the processes of planning, organizing, staffing,
leading and controlling organizations engaged in international business. Companies go international for
various reasons: gain access to new markets, to increase profits, or to acquire products for the home
market. These are called aggressive reasons for going international. Companies also go international for
defensive reasons: to protect domestic markets, to acquire technology, and to find politically stable bases.
The reasons for entering international markets can also vary with the time, the type of industry and
the nationality of the company. Like domestic enterprises, international enterprises give attention to the
managerial functions of planning, organizing, staffing, leading and controlling. However, there is considerable
difference in the way these functions are carried out in these two types of enterprises.
Japanese management practices have recently increased in importance across companies and cultures.
Some Japanese management practices, like continuous training, and group work are believed to have
contributed to the success of Japanese companies.
Willian Ouchi outlined Theory Z, which combines the traits of typical American and Japanese
companies. His work showed that American organizations can benefit from thoughtful incorporation of
Japanese management practices. Firms that operate across international boundaries have several advantages
over firms that remain within national borders. But multinational firms also face many risks and challenges
in their host countries.
Rafel’s Bodegas Goes Global

The owners of Rafel’s Bodegas had a problem. After several years of rapid US expansion
STUDY
it was obvious that Rafael’s outside of these cities with concentrations of Hispanics were
CASE
not going to be successful. Several things accounted for this, they believed, including the
chain’s Hispanic name and its heavy emphasis on Hispanic – type food products. The owners
felt it was unrealistic to even consider changing the product line or name since these gave
the chain its unique difference. They decided to close the unprofitable stores and to regroup.
After reviewing several strategic options (including merging with other grocery chains) the
owners decided to pursue a strategy of global expansion. In particular they decide to look
south instead of north and begin the process of expanding their fledgling chain into Mexico
and South and Central America. It quickly became apparent, though that this new strategy
brought enormous risks of its own.
1. What new risks would expanding outside the United States bring the owners over and above the sorts of risks
they would face by just expanding in the United States?
2. What strategy could they use to expand their chain south of the border and which would you recommend and
why?
3. List two or three specific ways in which Rafael’s planning, organizing, leading and controlling activities would
be affected by or would have to be adapted in some way to expanding the company’s operations abroad.
][][
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56. See the discussion of the learning organization by Peter Senge in chapter 13.
57. See also Erwin Danneels, “BPS: The Dynamics of Product Innovation and Firm Competences” Academy of
Management Proceedings 2000, Toronto, Canada, August 2000.
58. For a Business Week special report see “The Future of Outsourcing — How it’s Transforming whole Industries
and Changing the way we work,” Business Week, January 30, 2006.
59. John A. Byrne, “Has Outsourcing Gone Too Far?” Business Week, April 1, 1996, pp. 26-28; “DIY in
Germany,” The Economist, March 2, 1996, p. 60. See also www.vw.com accessed 3-13-06.
60. Micheline Maynard, “Amid the Turmoil, A Race Success At DaimlerChrysler, Fortune, January 22, 2001, pp.
112C-112P. See the Daimler Chrysler website at www.daimlerchrysler.com, accessed June 29, 2002.
61. “Foresight 2020 Economist, Industry, and Corporate Trends” The Economist Intelligence Unit 2006, (April 23,
2006).
62. http://www.finfacts.ie/private/currency/fortune.htm (April 25, 2006).
63. Ibid. (April 25, 2006)
64. David A. Heenan and Howard V. Perlmutter, Multinational Organisation Development (Reading,Mass:Addison-
wesley publishing company, 1979), chap. 2.
65. http://europa.eu.int/index_en.htm (April 27, 2006).
66. See NAFTA secratriate http://www.nafta-sec-alena.org (march 17, 2002).
67. Internet site by ASJE Global Trade Working Group, http://www.stopftaa.com (March 1, 2001)
68. http://www.aseansec.org, accessed October 17,2003;http://english.peopledaily.com.cn, (October 17, 2003).
69. Hofstede,cultures and organisations, op.cit., p. 53.
70. Ibid. p. 84.
71. “France-A Civil Self-Service” The Economist, May 1, 1999, pp. 49-50.
72. See for example, Jean –Louis Barsoux and Peter Lawrence. “The Making of a French of a Manager”,Harvard
Business Review, July-August, 1991, pp. 58-67.
73. See James G. March and Herbert A.Simon, Organisations (New York: John Wiley &Sons,1958,1966).
74. Bruce Woolpert, “The Practice of TQM”, Constructor, July 1994 (reprint has no page numbers); John case,
“The Change Masters”, Inc., March 1992 (reprint has no page numbers).
75. “Facing Our Fears”, Consumer Reports, December 1996,pp.50-53.
76. “Taking Off-Boeing”, Fortune, November 9, 1993, pp. 53-54; George Taninecz,” Blue Sky Meets Blue
Sky”, Industry Week, December 18, 1995, pp. 48-52; see also http://www.boeing.com(April 27, 2006).
77. John R. P. French, Jr., and Bertram Raven, “The Bases of Social Power”, in Walter E. Natemeyer (ed.),
Classics of Organisational Behaviour (Oak Park, III.: Moore Publishing Company,1978), pp. 198-210.
78. Robert C. Ford and Myron D. Fottler, “Empowerment: a Matter of Degree”, Academy of Management
Executive, August 1995, pp. 21-29.
79. Dean and Evans, Total Quality, chapter 8.
80. Jeff Bailey, “Where the Action Is: Executives in Staff Jobs Seek Line Positions”, The Wall Street Journal,
August 12, 1986; See also S. Caudron, “Delegate for Results”, Industry Week, February 6, 1995, pp. 27-
28.
81. Robert Waterman, the former senior director at Mckinsey & Co. and coauthor of the bestseller In Search of
Excellence points out in an interview that managers hate to give up power. See William C. Bogner, “Robert H.
Waterman, Jr., On Being Smart and Lucky”, Academy of Management Executive, February 2002, pp. 45-50.
82. For a discussion of recentralizing the information systems organization, see Ernest M. Von Simson, “The
Centrally Decentralized Is Organization”, Harvard Business Review, July-August 1990, pp. 158-162.
83. Jai Ghorpade and Milton M. Chen, “Creating Quality-Driven Performance Appraisal Systems”, Academy of
Management Executive, February 1995, pp. 32-39.
84. Source: Harold Koontz and Heinz Weinhrich, Measuring Managers: A Double-Barreled Approach (New York:
AMACOM, 1981).
85. Koontz and Weinhrich.
86. Harry Levinson, “Burn Out”, Harvard Business Review, July-August 1996, pp. 152-163.
87. Hans Selye, The Stress of Life,rev. ed. (New York: McGraw-Hill Book Company, 1976), p. Vii.
88. See, for example, “Undue Diligence”, The Economist, August 24, 1996, pp. 47-49.
89. Stanley B. Malos and Michael A. Campion, “An Options-Based Model of Career Mobility in Professional
Service Firms, Academy of Management Review, July 1995, pp. 611-644.
90. “The 100 Best Companies to Work For”, Fortune,February 4, 2002. p.72.
91. Jessica Sung and Christopher Tkacyk,” Who’s on Top and Flopped”, Fortune, March 4, 2002,p.75.
92. Christine Y.Chen,”The Global Most Admired”, Fortune,March 4, 2002, p.72.
93. Richard Nelson Bolles 2002 Edition What Colour Is Your Paracbute, Berkeley, Ten Speed Prees, 2002.
94. See also Dual Career Network at Ohio State University, Web site John R. P. French, Jr., and Bertram
Raven,”The Bases of http://CSCWWW.cats.ohiou.edu/dual (February 16, 2006).
95. “Faces in the News”, Forbes, February 21, 2002.
96. Phillip L.Zweig, John Verity, Stephanie Anderson Forrest, Greg Burns, Rob Hof, and Nicole Harris, “Beyond
Bean-Counting”, Business Week, October 28, 1996, pp. 130-132.
97. Tom Dieusaert, “Grupo Modelo: Success Keeps Brewing With A Winning Record”, Business, Mexico, January
2002. http://www.gmodelo.com.mx/eng/home/home.html (May 2, 2006).
98. See also W.Brian Arthur, “Increasing Returns and the New World of Business”, Harvard Business Review,
July-August 1996, pp. 100-109.
99. See also Mary C.Lacity, Leslie P.Willcocks, and David F. Feeny, “IT Outsourcing:Maximize Flexibility and
Control”, Harvard Business Review, May-June 1995, pp. 84-94.
100. See also the articles in the various issues of Quality Digest. See for example,Steve Fleming and E.Lowry
Manson, “Six Sigma and Process Simulation”, Quality Digest, March 2002, pp. 35-39.
101. See also the article by article by invitation by Peter Drucker, “The Next Society”, The Economist, November
3, 2001, insert after page 54.
102. Thomas J. Peters and Robert H. Waterman, Jr., In Search of Excellence (New York: Harper & Row,1982),
chap. 5. For a discussion of the book see the various articles in the Academy of Management Executive,
February 2002.
103. See also ,Stever Robbins, “Communication Breakdown — Nine Mistakes Managers Make”, Harvard
Communication Letter, September 2000, pp. 3-5.
104. See also Nancy J. Adler, International Dimensions of Organizational Behavior, 4 th ed.(Cincinnati: South-
Western, a division of Thomson Learning, 2002).
105. See for example Arvind V. Phatak, International Management (Cincinanati, Ohio: South-Western College
Publishing, 1997), chap. 6.
References 485
106. For a detailed discussion of this topic, see J. D. Miller’s analysis of information overload in Daniel Katz and
Robert L. Kahn, The Social Psychology of Organizations (New York: John Wiley & Sons, 1978), pp. 451-
455.
107. John W. Newstrom, Human Behaviour At Work, 9th ed. (New York: McGraw-Hill Inc., 1993.
108. Davis and Newstrom, Human Behaviour at Work: Organisational Behaviour (1985), p. 438.
109. John S. Fieldon, “What Do You Mean You Don’t Like My Style?” Harvard Business Review, May-June 1982,
pp. 128-138.
110. William Hennefrund, “Learning from Anchors”, The Toastmaster, June 2002, pp. 17-19.
Don Tapscott and Art Caston, Paradigm Shift-The New Promise of Information Technology (New York:
McGraw-Hill, Inc., 1993); Don Tapscott, The Digital Economy-Promise and Peril in the Age of Networked
Intelligence (New York McGraw-Hill, 1996).
111. Joonathan Schwartz “If You Want To Lead, Blog:” Harvard Business Review, Nov 2005.
112. See the cover story in Fortune magazine, Richard Behar “Who is Reading Your E-Mail?” Fortune. February
3, 1997, pp. 56-58, Eryn Brown, “The Myth of E-Mail Privacy, Fortune, February 3, 1997, p. 66.
113. Stanley Fielding,”ISO 14001 Brings Change and Delivers Profit”, Quality Digest, November 200, pp. 32-35.
114. Howard R.Bowen, Social Responsibility of the Businessman (New York & Brothers, 1953)
115. “Microsoft and the Future-Busted”, The Economist, November 13, 1999, p.22
116. Bowen, Social Responsibilities of the Businessman (1953), pp. 155-156.
117. Raymond A. Bauer and Dan H. Fenn, Jr., “What is a Corporate Social Audit?” Harvard Business Review,
January-February, 1973. p. 38.
118. Manuel G. Velasquez, Business Ethics (Englewood Cliffs, N. J.: Prentice-Hall, 1982), p. 7.
119. John A. Byrne, “After Enron: The Ideal Corporation,” Business Week, August 26, 2002, pp. 68-74.
120. Jeffrey M. Kaplan, “ Busines s Ethics Conferences,” Business and Society Review, Spring 1999, p. 53 ff;
Francis J. Daly,” The Ethics Dynamics,” Business and Society Review, Spring 1999, p. 37ff.
121. Source: Public Law 96-303, July 3, 1980.
122. Weber,” Institutionalizing Ethics into the Corporation” MSU Business Topics (Spring 1981), pp. 47-52
123. Brenner and Molander,” Is the Ethics of Business Changing?” (1977), p. 63
124. Information from Interest site, Michelle L. Allen “Whistle Blowing, IS8070, Summer 1999, (http://
science.kennesaw.edu/csis/msis/stuwork/WhistleBlowing.html)”.
125. “Whistleblowing” (no author listed) The Economist, January 12, 2002, pp. 55-56.
126. Walton, The Ethics of Corporate Conduct (1977), chap.7.
127. Steve Lovett, Lee C. Simmsons, and Raja Kali,” Guanxi versus the market: Ethics and Efficiency,” Journal
of International Business Studies, Summer 1999, p. 231ff.
128. Moon Ihlwan and Gerry Khermouch,”Samsung: No Longer Unsung,” Business Week, August 6, 2001- Internet
site maintained by samsung www.samsung.com (January 14, 2002 and April 27, 2006).
129. Internet site maintained by Samsung www.samsung.com (January 14, 2002).
130. Internet site maintained by Sony www.sony.com. Sony Annual Report 2001, August 2001 www.sony.co.jp
(January 14, 2002 and April 27, 2006).
131. Sony Electronics Overview, June 1, 2001, Sony Online Press Release, September 7, 2001 www.sony.co.jp
(January 14, 2002).
132. Special advertising section in Fortune, August 7, 1995.
133. Howard Thomas, Timothy Pollock, and Philip Gorman, “Global Strategic Analyses:Frameworks and Approaches,”
The Academy of Management Executive, February 1999, pp. 70-82.
134. For a detailed discussion of various types of strategies see Fred R. David, Concepts of Strategic Management,
(Upper Saddle River, New Jersey: Prentice Hall, 1997), chap. 2.
135. See also Gary Hamel, “Strategy as Revolution,” Harvard Business Review, July-August 1996, pp. 69-82.
136. See, for example, Arthur A.Thompson, Jr. and A.J.Strickland III, Strategic Management, 9th ed. (Chicago:
Irwin, 1996), pp. 36-46.
137. “Skoda Auto-Slav Motown,” The Economist, January 6,2001. pp. 54-55.
138. Product Management is also used in non-manufacturing companies.
139. GE’s Two-Decade Transaction: Jack Welch’s Leadership,” Harvard Business School, Case 9-399-150, Rev.
May 2, 2001; Jack Welch, Jack-Straight from the Gut. New York: Warner Business Books, 2001, chap. 13.
140. Presentation “VIAG Intercom and the Challenges on the Telecommunication Market,” by Dr.Hans-Ulrich
Schroeder, July 16,2001; http://www.viag.nl/,accessed May 28,2002; http:// www.telarif.de/a/viag/,accessed
May 28,2002; http://www.telenor.no/reports/1998/20report/organizations.html,accessed May 28, 2002.
141. Christine Tierney and Joann Muller, “BMW: Speeding Into a Tight Turn,” Business Week, November 5, 2001,
pp. 54-55. see also BMW’s website www.bmw.com (April 29, 2006).
142. Tierney and Muller, p. 55
143. See http://www.bls.gov/opub/mlr/mlrhome.htm (April 29, 2006).
144. See http://www.dol.gov (April 29, 2006)
145. See http://www.dol.gov/esa (April 29, 2006).
146. Mark Giemein,”Sam Walton Made Us a Promise,” Fortune, March 18, 2002, pp. 120-130; Website
www.walmart.com (April 29,2006).
147. Nicholas Stein,” Winning the war to keep top Talent,” Fortune, May 29, 2000 pp. 132-138
148. For other definitions of leadership see Warren Bennis and James O’Toole,” Don’t hire the Wrong CEO,
Harvard Business Review, May-June, 2000.
149. See Morningstar’s web site http://corporate.morningstar.com/us/aaspsubject.aspx?xmlfile=174.xml&filter=PR3730
(April 29, 2006)
150. John J. Gabarro and John P. Kotter, “Managing Your Boss,” Harvard Business review, January-February, 2000.
151. “Fumio Mitarai-Canon,” Business Week, January 14, 2002, p .54.
152. Judy B. Rosener, “Ways Women Lead,” Harvard Business Review, November-December 1990, pp. 119-125.
153. The perspective is based on a variety of sources, including personal correspondence.
154. Fiedler, A Theory of Leadership Effectiveness(1967), p. 41.
155. The commencement speech at Stanford University 2005, http://www.mercola.com/2005/jul/5/steve_job.htm
accessed April 11, 2006.
][][
Index 487
INDEX
A Corporate-level strategy – 108
Abraham Maslow – 36 Crosswise communication – 378
Administrative theory – 29 Culture – 249
Alderfer’s erg theory – 341 Cybernetic control system – 400
Appraisal process – 287 D
Approaches to motivation – 335
Debt management ratios – 414
Asset management ratios – 414
Decentralization – 228
B Decision support systems – 462
Balance sheets – 409 Decision tree – 157
Bank wiring observation room experiments - 34 Decisional roles – 15
Barriers to communication – 379 Decision-making process – 139
BCG matrix – 109 Decision-making techniques – 153
Behavioral models – 319 Delegation of authority – 234
Behavioral theories – 357 Delphi groups – 151
Behaviorally anchored rating scales – 285 Developing an open system model – 169
Bottom-up authority – 166 Developing contingency strategies – 130
Brainstorming – 325 Diagnosis – 306
Break-even analysis – 154 Direct control – 442
Bureaucratic management – 31 Directing – 8
Business-level strategy – 112 Divisional structure - 195
C Downward communication – 377
Dynamic homeostasis – 169
Causes of negative deviations – 442
Centralization – 228 E
Change process – 303 Early approaches to management – 22
Characteristics of organizational culture – 251 Effective communication – 382
Classical approach – 24 Effective controls – 99
Coaching – 310 Equifinality – 170
Code of ethics – 61 Equity theory – 346
Comminication – 373 Ethical guidelines for managers – 60
Communication process – 375 Executive support systems – 464
Compensation – 264 Explicit and implicit coercion – 302
Compromise – 313 External recruitment – 267
Conceptual skill 13 F
Concurrent control – 399
Factors determining an effective span – 178
Contingency theory – 39
Feed forward control – 399
Control systems –405
Feedback control – 399
Control types based on timing – 398
Fiedler’s contingency approach to leadership – 363
Controlling – 9
Financial analysis – 153
Corporate culture – 250
Financial control – 408
Corporate portfolio approach – 109
Formal appraisal – 279
Forms of group decision-making – 150 L

Fourteen principles of management – 30
Leadership – 352
Functional authority – 222
Levels of control – 391
Functional structure -192
Levels of management – 10
Functional-level strategy – 112
Likert’s four systems of management – 360
Functions of management – 5
Line and staff relationships – 220
G Linear programming – 155
Game theory – 156 Linear programming – 431
Garbage-can model – 138 Liquidity ratio – 413
Grapevine – 248 Long-term plans - 74
Group decision-making – 149 M
Group inertia – 299
Management – 2,3
H
Management information – 454
Henry Fayol – 29 Management information systems – 464
Hersey and blanchard’s situational leadership Management science – 4
model – 367
Managerial creativity – 323
Herzberg’s two-factor theory – 338
Managerial ethics – 56
Human resource planning – 257
Managerial roles – 15
Human skills – 13
Managerial skills – 12
Hybrid structure - 203
Marginal analysis – 153
I Mary Parker Follet – 32
Ideal bureaucracy – 31 Maslow’s Hierarchy of needs - 336
Illumination experiments – 33 Matrix structure - 206
Incremental model – 138 MBO – 91
Informal appraisal – 279 Mcclelland’s needs theory – 340
Informational roles – 15 Mcgregor’s theory x and theory y – 321
Intermediate-term plans – 74 Measuring social responsiveness – 51
Internal labor supply – 258 Moral management – 57
Internal recruitment – 266 Motivation – 334
International management functions – 470 Motivational techniques – 347
Interpersonal roles – 15 Multinational corporations - 478
Intervention – 306 Multiplicity of roles – 319
Inventory control – 420 N
Inventory control – 431
Nature of planning – 66
Iowa and michigan studies – 357
Negative entropy – 169
J Nominal groups – 153
Japanese and us management approaches – 476 Non-programmed decisions – 144
Japanese management - 472 O
Job rotation – 309
Objectives of od - 305
Just-in-time inventory system – 434
Office automation systems – 461
K Ohio state studies – 359
Kanban – 435 On-the-job training – 309
Index 489
Open systems – 167 Quality of work life (qwl) – 349

Operational control – 392 Quantitative approach – 37
Operational plans – 71 Queuing or waiting-line method – 156
Operations management – 38 R
Operations management – 425
Ratio analysis – 155
Operations research – 427
Ratio analysis – 413
Operations research techniques – 155
Rational decision-making – 136
Organization charts – 245
Rational-economic assumptions – 320
Organization development – 305
Recruitment – 265
Organization’s culture – 60
Recruitment process – 268
Organizational assessment – 120
Recycling – 54
Organizational change – 297
Relay assembly test room experiments – 33
Organizational conflict – 312
Replacement planning – 259
Organizational culture change – 308
Risk analysis – 146
Organizational development process – 306
Robert Owen – 22
Organizational levels – 180
Organizing – 162 S
Organizing – 7 Satisficing model – 137
P Scientific management – 25
Selection process – 271
Path-goal theory- 364
Sensitivity training – 310
Performance appraisal – 264
Short-term plans – 74
Performance rating methods – 283
Significance of planning – 67
Piece-rate incentive system – 27
Simulation – 157
Planning – 6
Single-use plans – 71
Planning – 65
Situational or contingency theories – 362
Planning is goal oriented – 66
Social audits – 56
Porter’s competitive strategies – 123
Social responsibilities of management – 44
Porter’s five competitive forces model – 119
Social stakeholers – 49
Position descriptions – 247
Socialization process – 253
Power – 219
Socialization process – 275
Prerequisites for effective planning – 78
Sources of recruitment – 266
Preventive control – 445
Span of management – 174
Process consultation – 307
Staffing – 263
Process of organizing – 184
Staffing – 7
Process theories of motivation – 342
Stages of moral development – 58
Production and productivity – 423
Steps in the mbo process – 94
Profit centers – 418
Steps in the planning process – 75
Profitability ratios – 415
Strategic business units – 212
Programmed decisions – 143
Strategic control – 391
Q Strategic planning – 112
Quality circles – 438 Strategic planning process – 114
Quality control – 419 Strategic plans – 69
Quality of work life – 55 Strategy implementation – 127
Structural change – 314 Total quality management (TQM) – 439

Structural variables – 60 Training and development – 263
Survey feedback – 307 Trait theory of leadership – 356
Systems approach to decision-making – 148 Transformational leadership theory – 369
Systems approach to mbo – 93 Types of control – 398
Systems theory – 38 Types of information systems – 459
T Types of managerial decisions – 143
Types of plans – 68
Tactical control – 392
Tactical plans – 70 U
Tall versus flat structure – 175 Upward communication – 377
Team building – 307 Utility theory – 146
Technical skills – 12 V
Technostructural activities – 308
Value engineering - 437
The managerial grid – 360
Values-based approach – 109
The porter-lawler model – 344
Volunteerism – 53
The three levels of strategy – 108
Vroom’s expectancy theory – 342
“Theory X” and “Theory Y - 36
Vroom-yetton model – 365
Time-and-motion study – 27

Principles of Management - Concepts & Cases (PDFDrive)

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Principles of Management:

Concepts & Cases

Rajeesh Viswanathan MBA, Ph.D.

First Edition : 2009

First Edition : 2009

Published by : Mrs. Meena Pandey

Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,

Chennai : No. 85/50, Bazullah Road, T. Nagar, Chennai - 600 017.

Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth,

Ernakulam : 39/104 A, Lakshmi Apartment, Karikkamuri Cross Rd., Ernakulam,

Bhubaneswar : 5 Station Square, Bhubaneswar (Orissa) - 751 001.

DTP by : HPH, Editorial Office, Bhandup (Sunanda)

Printed by : Geetanjali Press, Nagpur.

What makes this book unique?

2. Evolution of Management Thought 21 - 42

3. Social and Ethical Responsibilities of Management 43 - 63

5. Objectives and Process of Planning 86 - 105

6. Strategies, Policies and Planning 106 - 134

7. Managerial Decision-making 135 - 160

9. Strategic Organization Structure 188 - 216

10. Line and Staff Authority and Decentralization 217 - 240

11. Effective Organizing and Organizational Culture 241 - 255

12. Human Resource Management and Staffing 256 - 276

13. Performance Appraisal and Career Strategy 277 - 295

14. Organizational Change and Organization Development 296 - 316

15. Managing and the Human Factor 317 - 332

16. Motivating Employees for Job Performance 333 - 350

18. Managing Communication 372 - 386

19. The Control Function 387 - 403

20. Control Techniques 404 - 421

21. Productivity and Operations Management 422 - 440

22. Direct Control Versus Preventive Control 441 - 452

23. Management Information Systems 453 - 467

24. International Management 468 - 480

References 481 - 486

Chapter 1 - Introduction of Management — Define the Term Management, Approaches to Management,

Chapter 2 - Evolution of Management Thought — Early Approaches to Management, Classical Approach,

Chapter 7 - Managerial Decision-making — Significance and Limitations of Rational Decision-making,

Chapter 9 - Strategic Organization Structure — Designing Organizational Structures: An Overview, Major

Chapter 18 - Managing Communications — Significance of Communication in Organizations, Communication

IMPORTANCE OF MANAGEMENT THEORY

Need For Management Principles

MANAGEMENT SCIENCE OR ARTS

SCIENCE AND ART IN MANAGEMENT PRACTICE

Fig. 1.1 Functions of Management

Nandan Nilikani, CEO of Infosys, Bangalore, India,

Source: Infosys website

NEED FOR LEVELS OF MANAGEMENT

Top Level President

Middle Level Vice President Vice President Vice President

First Level Supervisor Production Supervisor Supervisor

Employees Employees Employees

Levels of M anagem ent

Top Level Management

Middle Level Management

Lower Level Management

Exhibit 1.1 Types of Managers

Fig. 1.2 Distribution of Time per Activity by Organizational Level

Top management meeting and framing polices

Top Conceptual Human

Skill Distribution at Various Management Levels

Fig. 1.3 Relative Need for the Main Categories of Skills

Adapted from “The Role of the Supervisor,” Open Learning Agency