EXECUTIVE DIPLOMA BUSINESS

MANAGEMENT AND
ADMINISTRATION
Contents
Introduction ............................................................................................................................................. 6
Chapter 1. Nature of Business Management and Administration ........................................................... 8
1.1 Definition of Management............................................................................................................ 9
1.2 Characteristics of Management .................................................................................................. 12
1.3 Nature of Management .............................................................................................................. 13
1.4 Management vs. Administration ................................................................................................ 16
1.5 Management Competencies for Today’s World ......................................................................... 19
1.6 The Basic Functions of Management .......................................................................................... 20
1.7 Planning....................................................................................................................................... 22
1.8 Organizing ................................................................................................................................... 22
1.9 Leading ........................................................................................................................................ 22
1.10 Controlling................................................................................................................................. 23
Chapter 2. Characteristic and Structure of Organization ...................................................................... 37
2.1 Structure and Characterization of Organizations ....................................................................... 38
2.2 Organizing the Vertical or Tall Structure..................................................................................... 39
2.3 Departmentalization ................................................................................................................... 40
2.4 Vertical Functional and Divisional Structure ............................................................................... 41
2.5 Matrix Structure .......................................................................................................................... 44
2.6 Team Structure ........................................................................................................................... 46
2.7 Virtual Network Structure ........................................................................................................... 47
Chapter 3. Functions within Business Organization: Purchasing Management ................................... 52
3.1 A New Competitive Environment ............................................................................................... 53
3.2 Why Purchasing Is Important Increasing Value and Savings ...................................................... 55
3.3 Building Relationships and Driving Innovation ........................................................................... 55
3.4 Improving Quality and Reputation.............................................................................................. 56
3.5 Reducing Time to Market............................................................................................................ 57
3.6 Managing Supplier Risk ............................................................................................................... 57
3.7 Contributing to Competitive Advantage ..................................................................................... 58
3.8 Understanding the Language of Purchasing and Supply Chain Management............................ 58
3.9 Purchasing and Supply Management ......................................................................................... 59
3.10 Supply Chains and Value Chains ............................................................................................... 61
Chapter 4. Functions within Business Organization: Project Management .......................................... 79
4.1 Defining a Project ........................................................................................................................ 79
4.1.1 Sequence of Activities .......................................................................................................... 80
4.1.2 Unique Activities .................................................................................................................. 80
 4.1.3 Complex Activities ................................................................................................................ 81
4.1.4 Connected Activities ............................................................................................................ 81
4.1.5 One Goal .............................................................................................................................. 81
4.2 What Is Project Management? ................................................................................................... 98
4.2.1 Understanding the Fundamentals of Project Management ................................................ 99
4.2.2 What Business Situation Is Being Addressed by This Project?........................................... 100
4.2.3 What Does the Business Need to Do? ............................................................................... 100
4.2.4 What Are You Proposing to Do? ........................................................................................ 100
4.2.5 How Will You Do It? ........................................................................................................... 101
Chapter 5. Introduction to e-business and e-commerce ...................................................................... 139
Introduction of e-business and e-commerce .................................................................................. 140
5.1 The impact of the electronic communications on traditional businesses ................................ 141
5.2 Difference between e-commerce and e-business .................................................................... 142
5.3 E-commerce defined ................................................................................................................. 142
5.4 E-business defined .................................................................................................................... 144
5.5 Intranets and extranets............................................................................................................. 145
5.6 Business or consumer models of e-commerce transactions .................................................... 147
5.7 E-government defined .............................................................................................................. 148
5.8 E-business risks and barriers to business adoption .................................................................. 149
Chapter 6. Functions within Business Organization: Business Accounting ...................................... 151
6.1 Accounting of Sectors in the economy ..................................................................................... 152
6.1.2 The public sector ................................................................................................................ 152
6.1.3 The private sector .............................................................................................................. 152
6.1.4 Types of business organization ............................................................................... 152
6.1.5 Business objectives ..................................................................................................... 153
6.2 Double-entry bookkeeping ....................................................................................................... 157
6.2.1 What does the account show? ................................................................................ 158
6.2.2 Rules for double-entry transactions .................................................................................. 158
6.2.3 Further information for double-entry bookkeeping ......................................... 161
6.2.4 Accounting for inventory .......................................................................................... 161
6.2.5 What do we mean by inventory? .......................................................................... 162
6.3 Financial statements ................................................................................................................. 174
6.3.1 Trial balance .................................................................................................................. 174
6.3.2 Statement of comprehensive income .................................................................... 176
6.3.3 Calculation of profit ........................................................................................................... 177
6.3.4 Difference between gross and net profits ......................................................................... 177
 6.3.5 Trading account ................................................................................................................. 179
6.4 Control accounts ................................................................................................................. 189
6.4.1 Information used in the control accounts ......................................................................... 189
6.4.2 Location of information for control accounts .................................................................... 190
6.4.3 Memorandum accounts .............................................................................................. 190
6.4.4 Layout of control accounts ....................................................................................... 191
6.4.5 Purchases ledger control account ...................................................................................... 193
Returns inwards .............................................................................................................................. 198
6.5 Financial Statement Analysis .................................................................................................... 200
6.5.1 Meaning and definition ..................................................................................................... 200
6.5.2 Income Statement.............................................................................................................. 201
6.5.3 Position Statement ............................................................................................................ 201
6.5.4 Statement of Changes in Owner’s Equity .......................................................................... 201
6.5.5 Statement of Changes in Financial Position ....................................................................... 201
Chapter 7. Functions within Business Organization: Human Resources or Personnel Management . 215
7.1 The essence of human resource management (HRM) ............................................................. 216
7.1.1 The development of the HRM concept .............................................................................. 216
7.1.2 The conceptual framework of HRM ................................................................................... 217
7.1.3 HRM practice today ........................................................................................................... 217
7.1.4 Aim of this chapter ............................................................................................................. 218
7.1.5 HRM Defined ...................................................................................................................... 218
7.2 Workforce planning .................................................................................................................. 229
7.2.1 Workforce planning defined .............................................................................................. 229
7.2.2 Incidence of workforce planning ....................................................................................... 230
7.2.3 The link between workforce and business planning.......................................................... 231
7.2.4 Reasons for workforce planning ........................................................................................ 231
7.2.5 Workforce planning issues ................................................................................................. 231
7.3 Recruitment and selection ........................................................................................................ 237
7.3.1 The recruitment and selection process ............................................................................. 237
7.3.2 Defining requirements ....................................................................................................... 238
7.3.3 Role profiles ....................................................................................................................... 238
7.3.4 Person specification ........................................................................................................... 238
7.3.5 Attracting candidates ......................................................................................................... 239
7.4 Talent management .................................................................................................................. 265
7.4.1 Talent management defined.............................................................................................. 265
7.4.2 Talent defined .................................................................................................................... 267
 7.4.3 The war for talent .............................................................................................................. 267
7.4.4 The process of talent management ................................................................................... 270
7.4.5 Talent management strategy ............................................................................................. 273
Chapter 8. Functions within Business Organization: Marketing Management.......................... 285
8.1 Nature of Marketing ................................................................................................................. 286
8.2 Marketing Defined .................................................................................................................... 287
8.3 The Marketing Process.............................................................................................................. 287
8.4 Understanding the Marketplace and Customer Needs ............................................................ 288
8.5 Customer Needs, Wants, and Demands ................................................................................... 288
8.6 Market Offerings—Products, Services, and Experiences .......................................................... 288
8.7 Customer Value and Satisfaction .............................................................................................. 289
8.8 Exchanges and Relationships .................................................................................................... 290
8.9 Markets ..................................................................................................................................... 290
8.10 Marketing Management Orientations .................................................................................... 291
Chapter 9. Functions within Business Organization: Research and Development Management
............................................................................................................................................................ 307
9.1 What is research and development? ........................................................................................ 308
9.2 Research categories .................................................................................................................. 309
9.3 Mission-Oriented Research Organizations ............................................................................... 311
9.4 Scientific Institutional Research Organizations......................................................................... 311
9.5 Academic Research Organizations ............................................................................................ 312
9.6 What to research ...................................................................................................................... 312
9.7 Economic Index Model.............................................................................................................. 317
9.8 Portfolio Model ......................................................................................................................... 317
9.9 Emphasis on basic versus applied research .............................................................................. 319
9.10 What is unique about managing R&D organizations? ............................................................ 320
Chapter 10. Managerial Leadership .................................................................................................... 348
10.1 Nature of Leadership .............................................................................................................. 349
10.2 How Leadership Differs from Management ........................................................................... 350
10.3 Providing Direction ................................................................................................................. 350
10.4 Aligning Followers ................................................................................................................... 351
10.5 Building Relationships ............................................................................................................. 352
10.6 Developing Personal Leadership Qualities.............................................................................. 352
10.7 Creating Outcomes ................................................................................................................. 353
10.8 What is Leadership? ................................................................................................................ 353
10.9 Leadership Styles .................................................................................................................... 354
 10.10 Leadership Theory................................................................................................................. 355
Chapter 11. Business and Administrative Communication ................................................................ 357
11.1 Mastering the Tools for Success in the Twenty-First-Century Workplace.............................. 358
11.2 Definition of Communication.................................................................................................. 358
11.3 Characteristics of Communication .......................................................................................... 359
11.4 Understanding the Communication Process .......................................................................... 359
11.5 Types of Communication ........................................................................................................ 362
11.6 Barriers to Communication ..................................................................................................... 365
11.7 How can Communication be more Effective .......................................................................... 367
Reference ............................................................................................................................................ 370
Introduction
Today’s managers and organizations are being buffeted by massive and far-reaching
competitive, social, technological, and economic changes. Every businesses operation needs
skilled business managers and administrators to succeed, no matter how small or large, local
or global. With increasing complexities managing the business has become a difficult task.
This text book is designed to provide a framework for analysis of the problems encountered by
the senior and junior manager by introducing the concepts and techniques in both day-to-day
operations and long-range planning.

Internal management of the firm is obviously more easily controlled by the manager.
Small businessmen may personally assume responsibility for each of the functional areas of
management. Larger firms may employ a human resource manager, an accountant, a financial
manager, a marketing manager, an operations manager, and so on. An understanding of the
role of each of these managers is essential to the success of a firm.

Management is essential not only for business concerns but also for banks, schools, colleges,
hospitals, hotels, religious bodies, charitable trusts etc. Every business unit has some objectives
of its own. These objectives can be achieved with the coordinated efforts of several personnel.

Management is that regulates man's productive activities through coordinated use of

material resources. Without the leadership provided by management, the resources of
production remain resources and never become production. Management is the integrating
force in all organized activity. Thus, management is not unique to business organizations but
common to all kinds of social organizations.

There is a significant gap between the management effectiveness in developed and

underdeveloped countries. It is rightly held that development is the function not only of capital,
physical and material resources, but also of their optimum utilization. Effective management
can produce not only more outputs of goods and services with given resources, but also expand
them through better use of science and technology. A higher rate of economic growth can be
attained in our country through more efficient and effective management of our business and
other social organizations, even with existing physical and financial resources. That is why it
is now being increasingly recognized that underdeveloped countries are indeed somewhat
inadequately managed countries.

The emergence of management in modern times may be regarded as a significant

development as the advancement of modern technology. It has made possible organization of
economic activity in giant organizations. It is largely through the achievements of modern
management that western countries have reached the stage of mass consumption societies, and
it is largely through more effective management of our economic and social institutions that
we can improve the quality of life of our people. It is the achievements of business management
that hold the hope for the huge masses in the third world countries that they can banish poverty
and achieve for themselves decent standards of living.

In this text book, there are lots of management competencies for current and future
managers find innovative solutions to the problems that plague today’s organizations—whether
they are everyday challenges or once-in-a-lifetime crises. The world in which most students
will work as managers is undergoing a tremendous upheaval. Ethical turmoil, the need for crisis
management skills, mobile business, economic recession and rampant unemployment, rapidly
changing technologies, globalization, outsourcing, increasing government regulation, social
media, global supply chains, the Wall Street meltdown, and other challenges place demands on
managers that go beyond the techniques and ideas traditionally taught in management courses.

Managing today requires the full breadth of management skills and capabilities. This text book
provides comprehensive coverage of both traditional management skills and the new
competencies needed in a turbulent environment characterized by economic turmoil, political
confusion, and general uncertainty.
Chapter 1. Nature of Business Management and Administration

Learning Outcomes

After studying this chapter, you should be able to:

1. Describe five management competencies that are becoming crucial in today’s fast-
paced and rapidly changing world.
2. Define the four management functions and the type of management activity associated
with each.
3. Explain the difference between efficiency and effectiveness and their importance for
organizational performance.
4. Describe technical, human, and conceptual skills and their relevance for managers.
5. Describe management types and the horizontal and vertical differences between them.
6. Summarize the personal challenges involved in becoming a new manager.
7. Define ten roles that managers perform in organizations.
8. Explain the unique characteristics of the manager’s role in small businesses and
nonprofit organizations.
1.1 Definition of Management
Although management as a discipline is more than 80 years old, there is no common
agreement among its experts and practitioners about its precise definition. In fact, this is so in
case of all social sciences like psychology sociology, anthropology, economics, political
science etc. As a result of unprecedented and breath-taking technological developments,
business organizations have grown in size and complexity, causing consequential changes in
the practice of management.

Changes in management styles and practices have led to changes in management

thought. Moreover, management being interdisciplinary in nature has undergone changes
because of the developments in behavioral sciences, quantitative techniques, engineering and
technology, etc. Since it deals with the production and distribution of goods and services,
dynamism of its environments such as social, cultural and religious values, consumers' tastes
and preferences, education and information explosion, democratization of governments, etc.,
have also led to changes in its theory and practice. Yet, a definition of management is necessary
for its teaching and research, and also for improvement in its practice.

Many management experts have tried to define management. But, no definition of

management has been universally accepted. Let us discuss some of the leading definitions of
management:

Peter F. Drucker defines, "management is an organ; organs can be described and

defined only through their functions".

According to Terry, "Management is not people; it is an activity like walking, reading,

swimming or running. People who perform Management can be designated as members,
members of Management or executive leaders."

Ralph C. Davis has defined Management as, "Management is the function of executive
leadership anywhere."

According to Mc Farland, "Management is defined for conceptual, theoretical and

analytical purposes as that process by which managers create, direct, maintain and operate
purposive organization through systematic, coordinated co-operative human effort."

Henry Fayol, "To manage is to forecast and plan, to organize, to compound, to co-
ordinate and to control."
 Harold Koontz says, "Management is the art of getting things done through and within
formally organized group."

William Spriegal, "Management is that function of an enterprise which concerns itself

with direction and control of the various activities to attain business objectives. Management
is essentially an executive function; it deals with the active direction of the human effort."

Kimball and Kimball, "Management embraces all duties and functions that pertain to
the initiation of an enterprise, its financing, the establishment of all major policies, the
provision of all necessary equipment, the outlining of the general form of organization under
which the enterprise is to operate and the selection of the principal officers."

Sir Charles Reynold, "Management is the process of getting things done through the
agency of a community. The functions of management are the handling of community with a
view of fulfilling the purposes for which it exists."

E.F.L. Brech, "Management is concerned with seeing that the job gets done, its tasks
all center on planning and guiding the operations that are going on in the enterprise."

Koontz and O'Donnel, "Management is the creation and maintenance of an internal

environment in an enterprise where individuals, working in groups, can perform efficiently and
effectively toward the attainment of group goals. It is the art of getting the work done through
and with people in formally organized groups."

James Lundy, "Management is principally a task of planning, coordinating, motivating

and controlling the efforts of other towards a specific objective. It involves the combining of
the traditional factors of production land, labor, capital in an optimum manner, paying due
attention, of course, to the particular goals of the organization."

Wheeler, "Management is centered in the administrators or managers of the firm who

integrate men, material and money into an effective operating limit."

J.N. Schulze, "Management is the force which leads guides and directs an organization
in the accomplishment of a pre-determined object."

Oliver Scheldon, "Management proper is the function in industry concerned in the

execution of policy, within the limits set up by the administration and the employment of the
organization for the particular objectives set before it."

Keith and Gubellini, "Management is the force that integrates men and physical plant
into an effective operating unit."
 Newman, Summer and Warren, "The job of Management is to make co-operative
endeavor to function properly. A manager is one who gets things done by working with people
and other resources in order to reach an objective."

G.E. Milward, "Management is the process and the agency through which the execution
of policy is planned and supervised."

Ordway Tead, "Management is the process and agency which directs and guides the
operations of an organization in the realizing of established aims."

Mary Parker Follett defines management as the "art of getting things done through
people". This definition calls attention to the fundamental difference between a manager and
other personnel of an organization. A manager is one who contributes to the organization’s
goals indirectly by directing the efforts of others – not by performing the task himself. On the
other hand, a person who is not a manager makes his contribution to the organization’s goals
directly by performing the task himself. Sometimes, however, a person in an organization may
play both these roles simultaneously. For example, a sales manager is performing a managerial
role when he is directing his sales force to meet the organization’s goals, but when he himself
is contacting a large customer and negotiating a deal, he is performing a non-managerial role.
In the former role, he is directing the efforts of others and is contributing to the organization’s
goals indirectly; in the latter role, he is directly utilizing his skills as a salesman to meet the
organization’s objectives.

A somewhat more elaborate definition of management is given by George R. Terry. He

defines management as a process "consisting of planning, organizing, actuating and
controlling, performed to determine and accomplish the objectives by the use of people and
other resources". According to this definition, management is a process – a systematic way of
doing things. The four management activities included in this process are: planning, organizing,
actuating and controlling. Planning means that managers think of their actions in advance.
Organizing means that managers coordinate the human and material resources of the
organization. Actuating means that managers motivate and direct subordinates. Controlling
means that managers attempt to ensure that there is no deviation from the norm or plan. If some
part of their organization is on the wrong track, managers take action to remedy the situation.

To conclude, we can say that various definitions of management do not run contrary to
one another. Management is the sum-total of all those activities that (i) determine objectives,
plans, policies and programs; (ii) secure men, material, machinery cheaply (iii) put all these
resources into operations through sound organization (iv) direct and motivate the men at work,
(v) supervises and control their performance and (iv) provide maximum prosperity and
happiness for both employer and employees and public at large.

1.2 Characteristics of Management

Management is a distinct activity having the following salient features:

Economic Resource: Management is one of the factors of production together with

land, labor and capital. As industrialization increases, the need for managers also increases.
Efficient management is the most critical input in the success of any organized group activity
as it is the force which assembles and integrates other factors of production, namely, labor,
capital and materials. Inputs of labor, capital and materials do not by themselves ensure
production, they require the catalyst of management to produce goods and services required by
the society. Thus, management is an essential ingredient of an organization.

Goal Oriented: Management is a purposeful activity. It coordinates the efforts of

workers to achieve the goals of the organization. The success of management is measured by
the extent to which the organizational goals are achieved. It is imperative that the organizational
goals must be well-defined and properly understood by the management at various levels.

Distinct Process: Management is a distinct process consisting of such functions as

planning, organizing, staffing, directing and controlling. These functions are so interwoven that
it is not possible to lay down exactly the sequence of various functions or their relative
significance.

Integrative Force: The essence of management is integration of human and other

resources to achieve the desired objectives. All these resources are made available to those who
manage. Managers apply knowledge, experience and management principles for getting the
results from the workers by the use of non-human resources. Managers also seek to harmonize
the individuals' goals with the organizational goals for the smooth working of the organization.

System of Authority: Management as a team of managers represents a system of

authority, a hierarchy of command and control. Managers at different levels possess varying
degree of authority. Generally, as we move down in the managerial hierarchy, the degree of
authority gets gradually reduced. Authority enables the managers to perform their functions
effectively.
 Multi-disciplinary Subject: Management has grown as a field of study (i.e. discipline)
taking the help of so many other disciplines such as engineering, anthropology, sociology and
psychology. Much of the management literature is the result of the association of these
disciplines. For instance, productivity orientation drew its inspiration from industrial
engineering and human relations orientation from psychology. Similarly, sociology and
operations research have also contributed to the development of management science.

Universal Application: Management is universal in character. The principles and

techniques of management are equally applicable in the fields of business, education, military,
government and hospital. Henri Fayol suggested that principles of management would apply
more or less in every situation. The principles are working guidelines which are flexible and
capable of adaptation to every organization where the efforts of human beings are to be
coordinated.

1.3 Nature of Management

Management has been conceptualized earlier in this lesson, as the social process by
which managers of an enterprise integrate and coordinate its resources for the achievement of
common, explicit goals. It has developed into a body of knowledge and a separate identifiable
discipline during the past six decades. Practice of management as an art is, of course, as old as
the organized human effort for the achievement of common goals. Management has also
acquired several characteristics of profession during recent times. Large and medium-sized
enterprise in India and elsewhere are managed by professional managers – managers who have
little or no share in the ownership of the enterprise and look upon management as a career.

The nature of management as a science, as art and as a profession is discussed below:

Management as a Science: Development of management as a science is of recent origin, even
though its practice is ages old. Fredrick W. Taylor was the first manager-theorist who made
significant contributions to the development of management as a science. He used the scientific
methods of analysis, observation and experimentation in the management of production
function. A perceptive manager, as he was, he distilled certain fundamental principles and
propounded the theory and principles of scientific management. His work was followed by
many others including Gantt, Emerson, Fayol, Barnard, etc. During the last few decades, great
strides have been made in the development of management as a systematized body knowledge
which can be learnt, taught and researched. It has also provided powerful tools of analysis,
prediction and control to practicing managers. The scientific character of management has been
particularly strengthened by management scientists who have developed mathematical models
of decision making. Another characteristic of science in management is that it uses the
scientific methods of observation, experimentation and laboratory research. Management
principles are firmly based on observed phenomena, and systematic classification and analysis
of data. These analyses and study of observed phenomena are used for inferring cause-effect
relationships between two or more variables. Generalizations about these relationships result
in hypotheses. The hypotheses when tested and found to be true are called principles. These
principles when applied to practical situations help the practitioner in describing and analyzing
problems, solving problems and predicting the results. Even though management is a science
so far as to possess a systematized body of knowledge and uses scientific methods of research,
it is not an exact science like natural sciences. This is simply because management is a social
science, and deals with the behavior of people in organization. Behavior of people is much
more complex and variable than the behavior of inanimate things such as light or heat. This
makes controlled experiments very difficult. As a result, management principles lack the rigor
and exactitude which is found in physics and chemistry. In fact, many natural sciences which
deal with living phenomena such as botany and medicine are also not exact. Management is a
social science like economics or psychology, and has the same limitations which these and
other social sciences have. But this does not in any way diminish the value of management as
a knowledge and discipline. It has provided powerful 20 tools of analysis, prediction and
control to practicing managers and helped them in performing their material tasks more
efficiently and effectively.

Management as an art: Just as an engineer uses the science of engineering while

building a bridge, a manager uses the knowledge of management theory while performing his
managerial functions. Engineering is a science; its application to the solution of practical
problems is an art. Similarly, management as a body of knowledge and a discipline is a science;
its application to the solution of organizational problems is an art. The practice of management,
like the practice of medicine, is firmly grounded in an identifiable body of concepts, theories
and principles. A medical practitioner, who does not base his diagnosis and prescription on the
science of medicine, endangers the life of his patient. Similarly, a manager who manages
without possessing the knowledge of management creates chaos and jeopardizes the well-being
of his organization. Principles of management like the principles of medicine are used by the
practitioner not as rules of thumb but as guides in solving practical problems. It is often said
that managerial decision making involves a large element of judgment. This is true too. The
raging controversy whether management is a science or an art is fruitless. It is a science as well
as an art. Developments in the field of the knowledge of management help in the improvement
of its practice; and improvements in the practice of management spur further research and study
resulting in further development of management science.

Management as a Profession: We often hear of professionalization of management in

our country. By a professional manager, we generally mean a manager who undertakes
management as a career and is not interested in acquiring ownership share in the enterprise
which he manages. But, is management a profession in the true sense of the word? or, is
management a profession like the professions of law and medicine? According to McFarland
a profession possesses the following characteristics:

1. a body of principles, techniques, skills, and specialized knowledge;

2. formalized methods of acquiring training and experience;
3. the establishment of a representative organization with professionalization as its
goal;
4. the formation of ethical codes for the guidance of conduct; and
5. the charging of fees based on the nature of services.

Management is a profession to the extent it fulfills the above conditions. It is a

profession in the sense that there is a systematized body of management, and it is distinct,
identifiable discipline. It has also developed a vast number of tools and techniques. But unlike
medicine or law, a management degree is not a prerequisite to become a manager. In fact, most
managers in India as elsewhere do not have a formal management education. It seems
reasonable to assume that at no time in the near future, the possession of a management degree
will be a requirement for employment as a career manager.

Management is also a profession in the sense that formalized methods of training is

available to those who desire to be managers. We have a number of institutes of management
and university departments of management which provide formal education in this field.
Training facilities are provided in most companies by their training divisions. A number of
organizations such as the Administrative Staff College of India, the Indian Institutes of
Management, Management Development Institute, the All India Management Association, and
the university departments of management offer a variety of short-term management training
programs.

Management partially fulfills the third characteristic of profession. There are a number
of representative organizations of management practitioners almost in all countries such as the
All India Management Association in India, the American Management Association in U.S.A.,
etc. However, none of them have professionalization of management as its goal.

Management does not fulfill the last two requirements of a profession. There is no
ethical code of conduct for managers as for doctors and lawyers. Some individual business
organizations, however, try to develop a code of conduct for their own managers but there is
no general and uniform code of conduct for all managers. In fact, bribing public officials to
gain favors, sabotaging trade unions, manipulating prices and markets are by no means
uncommon management practices. Furthermore, managers in general do not seem to adhere to
the principle of "service above self". However little regard is paid to the elevation of service
over the desire for monetary compensation is evidenced by switching of jobs by managers.
Indeed, such mobile managers are regarded as more progressive and modern than others.

It may be concluded from the above discussion that management is a science, an art as
well as a profession. As a social science, management is not as exact as natural sciences, and
it is not as fully a profession as medicine and law.

1.4 Management vs. Administration

The use of two terms management and administration has been a controversial issue in
the management literature. Some writers do not see any difference between the two terms,
while others maintain that administration and management are two different functions. Those
who held management and administration distinct include Oliver Sheldon, Florence and Tead,
Spriegel and Lansburg, etc. According to them, management is a lower-level function and is
concerned primarily with the execution of policies laid down by administration. But some
English authors like Brech are of the opinion that management is a wider term including
administration. This controversy is discussed as under in three heads:

1. Administration is concerned with the determination of policies and management

with the implementation of policies. Thus, administration is a higher-level
function.
2. Management is a generic term and includes administration.
3. There is no distinction between the terms management and administration and
they are used interchangeably.

Administration is a Higher-Level Function: Oliver Shelden subscribed to the first

viewpoint. According to him, "Administration is concerned with the determination of corporate
policy, the coordination of finance, production and distribution, the settlement of the compass
of the organization and the ultimate control of the executive. Management proper is concerned
with the execution of policy within the limits set up by administration and the employment of
the organization in the particular objects before it... Administration determines the
organization; management uses it. Administration defines the goals; management strives
towards it".

Administration refers to policy-making whereas management refers to execution of

policies laid down by administration. This view is held by Tead, Spriegel and Walter.
Administration is the phase of business enterprise that concerns itself with the overall
determination of institutional objectives and the policies unnecessary to be followed in
achieving those objectives. Administration is a determinative function; on the other hand,
management is an executive function which is primarily concerned with carrying out of the
broad policies laid down by the administration. Thus, administration involves broad policy-
making and management involves the execution of policies laid down by the administration as
shown in Table 1.

Table 1: Administration Vs. Management

Basis Administration Management

1 Meaning Administration is Management means

concerned with the getting the work done
formulation of objectives, through and with
plans and policies of the others.
organization

2 Nature of work Administration relates to Management refers to

the decision- making. It is execution of decisions.
a thinking function. It is a doing function

3 Decision Making Administration determines Management decides

what is to be done and who shall implement
when it is to be done the administrative
decisions.

4 Status Administration refers to Management is

higher levels of relevant at lower levels
management in the organization.
 Management is a Generic Term: The second viewpoint regards management as a
generic term including administration. According to Brech, "Management is a social process
entailing responsibility for the effective and economic planning and regulation of the operation
of an enterprise in fulfillment of a given purpose or task. Administration is that part of
management which is concerned with the installation and carrying out of the procedures by
which the program is laid down and communicated and the progress of activities is regulated
and checked against plans". Thus, Brech conceives administration as a part of management.
Kimball and Kimball also subscribe to this view. According to them administration is a part of
management. Administration is concerned with the actual work of executing or carrying out
the objectives.

Management and Administration Are Synonymous: The third viewpoint is that

there is no distinction between the term 'management' and 'administration'. Usage also
provides no distinction between these terms. The term management is used for higher executive
functions like determination of policies, planning, organizing, directing and controlling in the
business circles, while the term administration is used for the same set of functions in the
Government circles. So there is no difference between these two terms and they are often used
interchangeably. It seems from the above concepts of administration and management that
administration is the process of determination of objectives, laying down plans and policies,
and ensuring that achievements are in conformity with the objectives. Management is the
process of executing the plans and policies for the achievement of the objectives determined
by an administration. This distinction seems to be too simplistic and superficial. If we regard
chairmen, managing directors and general managers as performing administrative functions, it
cannot be said that they perform only planning functions of goal determination, planning and
policy formulation, and do not perform other functions such as staffing functions of selection
and promotion, or directing functions of leadership, communication and motivation. On the
other hand, we cannot say that managers who are responsible for the execution of plans and
formulation of plans and policies, etc. do not contribute to the administrative functions of goal
determination, and formulation of plans and policies. In fact, all manages, whether the chief
executive or the first line supervisor, are in some way or the other involved in the performance
of all the managerial functions. It is, of course, true that those who occupy the higher echelons
of organizational hierarchy are involved to a greater extent in goal determination, plans and
policy formulation and organizing than those who are at the bottom of the ladder.
1.5 Management Competencies for Today’s World
Management is the attainment of organizational goals in an effective and efficient
manner through planning, organizing, leading, and controlling organizational resources, as Jon
Bon Jovi does for his rock band, and as he did as co-owner of the Philadelphia Soul indoor
football team in the Arena Football League.

There are certain elements of management that are timeless, but environmental shifts
also influence the practice of management. In recent years, rapid environmental changes have
caused a fundamental transformation in what is required of effective managers. Technological
advances such as social media and mobile apps, the rise of virtual work, global market forces,
the growing threat of cybercrime, and shifting employee and customer expectations have led
to a decline in organizational hierarchies and more empowered workers, which calls for a new
approach to management that may be quite different from managing in the past. Exhibit 1.1
shows the shift from the traditional management approach to the new management
competencies that are essential in today’s environment.

Instead of being a controller, today’s effective manager is an enabler who helps people
do and be their best. Managers help people get what they need, remove obstacles, provide
learning opportunities, and offer feedback, coaching, and career guidance. Instead of
“management by keeping tabs,” they employ an empowering leadership style. Much work is
done in teams rather than by individuals, so team leadership skills are crucial.
 People in many organizations work at scattered locations, so managers can’t monitor
behavior continually. Some organizations are even experimenting with a boss less design that
turns management authority and responsibility completely over to employees. Managing
relationships based on authentic conversation and collaboration is essential for successful
outcomes. Social media is a growing tool for managers to enhance communication and
collaboration in support of empowered or boss less work environments. In addition, managers
sometimes coordinate the work of people who aren’t under their direct control, such as those
in partner organizations, and they sometimes even work with competitors. They have to find
common ground among people who might have disparate views and agendas and align them
to go in the same direction.

Also, as shown in Exhibit 1.1, today’s best managers are “future-facing.” That is, they
design the organization and culture to anticipate threats and opportunities from the
environment, challenge the status quo, and promote creativity, learning, adaptation, and
innovation. Industries, technologies, economies, governments, and societies are in constant
flux, and managers are responsible for helping their organizations navigate through the
unpredictable with flexibility and innovation. Today’s world is constantly changing, but “the
more unpredictable the environment, the greater the opportunity—if [managers] have them.
skills to capitalize on it.

1.6 The Basic Functions of Management

Every day, managers solve difficult problems, turn organizations around, and achieve
astonishing performances. To be successful, every organization needs good managers. The
famed management theorist Peter Drucker (1909–2005), often credited with creating the
modern study of management, summed up the job of the manager by specifying five tasks, as
outlined in Exhibit 1.2.8 In essence, managers set goals, organize activities, motivate and
communicate, measure performance, and develop people. These five manager activities apply
not only to top executives such as Mark Zuckerberg at Facebook, Alan Mulally at Ford Motor
Company, and Ursula Burns at Xerox, but also to the manager of a restaurant in your
hometown, the leader of an airport security team, a supervisor at a Web hosting service, or the
director of sales and marketing for a local business.

The activities outlined in Exhibit 1.2 fall into four fundamental management functions:
planning (setting goals and deciding activities), organizing (organizing activities and people),
leading (motivating, communicating with, and developing people), and controlling
(establishing targets and measuring performance). Depending on their job situation, managers
perform numerous and varied tasks, but they all can be categorized within these four primary
functions.

Exhibit 1.3 illustrates the process of how managers use resources to attain
organizational goals through the functions of planning, organizing, leading, and controlling.
1.7 Planning
Planning means identifying goals for future organizational performance and deciding
on the tasks and use of resources needed to attain them. In other words, managerial planning
defines where the organization wants to be in the future and how to get there. A good example
of planning comes from General Electric (GE), where managers have sold divisions such as
plastics, insurance, and media to focus company resources on four key business areas: energy,
aircraft engines, health care, and financial services. GE used to relocate senior executives every
few years to different divisions so that they developed a broad, general expertise. In line with
recent strategic refocusing, the company now keeps people in their business units longer so
they can gain a deeper understanding of the products and customers within each of the four
core businesses.

1.8 Organizing
Organizing typically follows planning and reflects how the organization tries to
accomplish the plan. Organizing involves assigning tasks, grouping tasks into departments,
delegating authority, and allocating resources across the organization. In recent years,
organizations as diverse as IBM, the Catholic Church, Estée Lauder, and the Federal Bureau
of Investigation (FBI) have undergone structural reorganization to accommodate their
changing plans. Organizing was a key task for Oprah Winfrey as she tried to turn around her
struggling start-up cable network, OWN. She took over as CEO of the company, repositioned
some executives and hired new ones, and cut jobs to reduce costs and streamline the company.

Along with programming changes, such as the comedy series Tyler Perry’s for Better
or Worse and the drama series The Haves and the Have Nots, structural changes brought a lean,
entrepreneurial approach that helped put OWN on solid ground. Winfrey said “I prided myself
on leanness,” referring to the early days of her TV talk show. “The opposite was done here.”

1.9 Leading
Leading is the use of influence to motivate employees to achieve organizational goals.
Leading means creating a shared culture and values, communicating goals to people throughout
the organization, and infusing employees with the desire to perform at a high level. As CEO of
Chrysler Group, Sergio Marchionne spends about two weeks a month in Michigan meeting
with executive teams from sales, marketing, and industrial operations to talk about his plans
and motivate people to accomplish ambitious goals. Marchionne, who spends half his time in
Italy running Fiat, rejected the 15th-floor executive suite at Chrysler headquarters so he could
provide more hands-on leadership from an office close to the engineering center. One doesn’t
have to be a top manager of a big corporation to be an exceptional leader. Many managers
working quietly in both large and small organizations around the world provide strong
leadership within departments, teams, nonprofit organizations, and small businesses.

1.10 Controlling
Controlling is the fourth function in the management process. Controlling means
monitoring employees’ activities, determining whether the organization is moving toward its
goals, and making corrections as necessary. One trend in recent years is for companies to place
less emphasis on top-down control and more emphasis on training employees to monitor and
correct themselves. However, the ultimate responsibility for control still rests with managers.
Michael Corbat, the new CEO of Citigroup, for example, is taking a new approach to control
at the giant company, which was kept afloat during the financial crisis with $45 billion in
government aid. “You are what you measure,” Corbat says, and he is implementing new tools
to track the performance of individual managers as a way to bring greater accountability and
discipline.

1.11 Organizational Performance

The definition of management also encompasses the idea of attaining organizational

goals in an efficient and effective manner. Management is so important because organizations
are so important. In an industrialized society where complex technologies dominate,
organizations bring together knowledge, people, and raw materials to perform tasks that no
individual could do alone. Without organizations, how could technology be provided that
enables us to share information around the world in an instant; electricity be produced from
huge dams and nuclear power plants; and millions of songs, videos, and games be available for
our entertainment at any time and place? Organizations pervade our society, and managers are
responsible for seeing that resources are used wisely to attain organizational goals.

Our formal definition of an organization is a social entity that is goal-directed and

deliberately structured. Social entity means being made up of two or more people. Goal
directed means designed to achieve some outcome, such as make a profit (Target Stores), win
pay increases for members (United Food & Commercial Workers), meet spiritual needs
(Lutheran Church), or provide social satisfaction (college sorority Alpha Delta Pi).
 Deliberately structured means that tasks are divided, and responsibility for their
performance is assigned to organization members. This definition applies to all organizations,
including both profit and nonprofit ones. Small, offbeat, and nonprofit organizations are more
numerous than large, visible corporations—and just as important to society.

Based on our definition of management, the manager’s responsibility is to coordinate

resources in an effective and efficient manner to accomplish the organization’s goals.
Organizational effectiveness is the degree to which the organization achieves a stated goal, or
succeeds in accomplishing what it tries to do. Organizational effectiveness means providing a
product or services that customer’s value. Organizational efficiency refers to the amount of
resources used to achieve an organizational goal. It is based on how much raw material, money,
and people are necessary for producing a given volume of output. Efficiency can be defined as
the amount of resources used to produce a product or service. Efficiency and effectiveness can
both be high in the same organization.

Many managers are using mobile apps to increase efficiency, and in some cases, the
apps can enhance effectiveness as well. The current winner in this category is Square, created
by Twitter-founder Jack Dorsey in 2010. Square is revolutionizing small business by enabling
any smartphone to become a point-of-sale (POS) terminal that allows the user to accept credit
card payments. Millions of small businesses and entrepreneurs in the United States and Canada
who once had to turn customers away because they couldn’t afford the fees charged by credit
card companies can now use Square to process credit cards. Customers get their need to pay
with a card met, and businesses get a sale that they might have missed.

All managers have to pay attention to costs, but severe cost cutting to improve
efficiency—whether it is by using cutting-edge technology or old-fashioned frugality— can
sometimes hurt organizational effectiveness. The ultimate responsibility of managers is to
achieve high performance, which is the attainment of organizational goals by using resources
in an efficient and effective manner. Consider the example of Illumination Entertainment, the
film production company behind Dr. Seuss’ The Lorax. Managers continually look for ways to
increase efficiency while also meeting the company’s goal of producing creative and successful
animated films.

1.12 Management Skills

A manager’s job requires a range of skills. Although some management theorists

propose a long list of skills, the necessary skills for managing a department or an organization
can be placed in three categories: conceptual, human, and technical. As illustrated in Exhibit
1.4, the application of these skills changes dramatically when a person is promoted to
management.

Although the degree of each skill that is required at different levels of an organization
may vary, all managers must possess some skill in each of these important areas to perform
effectively.

1.13 Technical Skills

Many managers get promoted to their first management jobs because they have
demonstrated understanding and proficiency in the performance of specific tasks, which is
referred to as technical skills. Technical skills include mastery of the methods, techniques, and
equipment involved in specific functions such as engineering, manufacturing, or finance.
Technical skills also include specialized knowledge, analytical ability, and the competent use
of tools and techniques to solve problems in that specific discipline. Technical skills are
particularly important at lower organizational levels. However, technical skills become less
important than human and conceptual skills as managers move up the hierarchy. Top managers
with strong technical skills sometimes have to learn to step back so others can do their jobs
effectively.

David Sacks, founder and CEO of Yammer, designed the first version of the product
himself, but now the company has 200 employees and a dozen or so product managers and
design teams. Sacks used to “walk around and look over the designers’ shoulders to see what
they were doing,” but says that habit prevented some people from doing their best work.

1.14 Human Skills

Human skills involve the manager’s ability to work with and through other people and
to work effectively as a group member. Human skills are demonstrated in the way that a
manager relates to other people, including the ability to motivate, facilitate, coordinate, lead,
communicate, and resolve conflicts. Human skills are essential for frontline managers who
work with employees directly on a daily basis. A recent study found that the motivational skill
of the frontline manager is the single most important factor in whether people feel engaged
with their work and committed to the organization.

Human skills are increasingly important for managers at all levels and in all types of
organizations. Even at a company such as Google, which depends on technical expertise,
human skills are considered essential for managers. Google analyzed performance reviews and
feedback surveys to find out what makes a good manager of technical people and found that
technical expertise ranked dead last among a list of eight desired manager qualities, as shown
in Exhibit 1.5. The exhibit lists eight effective behaviors of good managers. Notice that almost
all of them relate to human skills, such as communication, coaching, and teamwork.

People want managers who listen to them, build positive relationships, and show an
interest in their lives and careers. A recent study found that human skills were significantly
more important than technical skills for predicting manager effectiveness. Another survey
compared the importance of managerial skills today with those from the late 1980s and found
a decided increase in the role of skills for building relationships with others.

1.15 Conceptual Skills

 Conceptual skills include the cognitive ability to see the organization as a whole system
and the relationships among its parts. Conceptual skills involve knowing where one’s team fits
into the total organization and how the organization fits into the industry, the community, and
the broader business and social environment. It means the ability to think strategically—to take
the broad, long-term view—and to identify, evaluate, and solve complex problems.

Conceptual skills are needed by all managers, but especially for managers at the top.
Many of the responsibilities of top managers, such as decision making, resource allocation, and
innovation, require a broad view. For example, Ursula Burns, who in 2009 became the first
African American woman to lead a major U.S. corporation, needs superb conceptual skills to
steer Xerox through the tough economy and the rapidly changing technology industry. Sales
of copiers and printers have remained flat, prices have declined, and Xerox is battling stronger
competitors in a consolidating industry. To keep the company thriving, Burns needs a strong
understanding not only of the company, but also of shifts in the industry and the larger
environment.

1.16 When Skills Fail

Good management skills are not automatic. Particularly during turbulent times,
managers really have to stay on their toes and apply all their skills and competencies in a way
that benefits the organization and its stakeholders—employees, customers, investors, the
community, and so forth. In recent years, numerous highly publicized examples have shown
what happens when managers fail to apply their skills effectively to meet the demands of an
uncertain, rapidly changing world.

Everyone has flaws and weaknesses, and these shortcomings become most apparent
under conditions of rapid change, uncertainty, or crisis. Consider the uproar that resulted in
2013 from the decision of managers at the Internal Revenue Service (IRS) to apply additional
screening to tax-exempt applications from conservative Tea Party groups. When a manager for
so-called “Group 7822,” an IRS office that screens and processes thousands of applications a
year from organizations seeking tax-exempt status, noticed a growing number of applications
from groups identifying themselves as part of the Tea Party, the manager advised workers to
flag them and similar groups to see if their purpose was too political to be eligible under the
rules for tax exemption. It has long been a practice to give extra scrutiny to certain kinds of
groups that present a potential for fraudulent use of tax exempt status, but critics say the agency
went too far in how it applied the practice Congressional investigators are probing whether
agency activities constituted discrimination against conservative groups, and the full story of
what happened and why is still emerging.

IRS managers at all levels involved in the decision appear to have needed stronger
conceptual skills to prevent this crisis from happening, and higher-level executives had to call
upon all their conceptual and human skills to resolve the dilemma and work to restore the public
trust.

The numerous ethical and financial scandals of recent years have left people cynical
about business and government managers and even less willing to overlook mistakes. Crises
and examples of deceit and greed grab the headlines, but many more companies falter or fail
less spectacularly. Managers fail to listen to customers, are unable to motivate employees, or
can’t build a cohesive team. For example, the reputation of Zynga, maker of games like
Farmville that were ubiquitous on Facebook for a while, plummeted along with its share price
in 2012. Although there were several problems at Zynga, one was that founder and former CEO
Mark Pincus had an aggressive style that made it difficult to build a cohesive team. The exodus
of key executives left the company floundering, and the company’s shares fell 70 percent.
Pincus stepped down as CEO in July 2013, and former Xbox executive Don Mat trick took
over to try to revive the once-hot game maker.

Exhibit 1.6 shows the top ten factors that cause managers to fail to achieve desired
results, based on a survey of managers in U.S. organizations operating in rapidly changing
business environments. Notice that many of these factors are due to poor human skills, such as
the inability to develop good work relationships, a failure to clarify direction and performance
expectations, or an inability to create cooperation and teamwork. The number one reason for
manager failure is ineffective communication skills and practices, cited by 81 percent of
managers surveyed. Especially in times of uncertainty or crisis, if managers do not
communicate effectively, including listening to employees and customers and showing genuine
care and concern, organizational performance and reputation suffer.
1.17 Types of Management

Managers use conceptual, human, and technical skills to perform the four management
functions of planning, organizing, leading, and controlling in all organizations—large and
small, manufacturing and service, profit and nonprofit, traditional and Internet based. But not
all managers’ jobs are the same. Managers are responsible for different departments, work at
different levels in the hierarchy, and meet different requirements for achieving high
performance. Twenty-five-year-old Daniel Wheeler is a first-line supervisor in his first
management job at Del Monte Foods, where he is directly involved in promoting products,
approving packaging sleeves, and organizing people to host sampling events. Kevin Kurtz is a
middle manager at Lucas film, where he works with employees to develop marketing
campaigns for some of the entertainment company’s hottest films. And Denise Morrison is
CEO of Campbell Soup Company, the company that also makes Pepperidge Farm baked goods.
All three are managers and must contribute to planning, organizing, leading, and controlling
their organizations—but in different amounts and ways.

1.18 Vertical Differences

An important determinant of the manager’s job is the hierarchical level. Exhibit 1.7
illustrates the three levels in the hierarchy. A study of more than 1,400 managers examined
how the manager’s job differs across these three hierarchical levels and found that the primary
focus changes at different levels. For first-level managers, the main concern is facilitating
individual employee performance. Middle managers, though, are concerned less with
individual performance and more with linking groups of people, such as allocating resources,
coordinating teams, or putting top management plans into action across the organization.

For top-level managers, the primary focus is monitoring the external environment and
determining the best strategy to be competitive. Let’s look in more detail at differences across
hierarchical levels. Top managers are at the top of the hierarchy and are responsible for the
entire organization. They have titles such as president, chairperson, executive director, CEO,
and executive vice president. Top managers are responsible for setting organizational goals,
defining strategies for achieving them, monitoring and interpreting the external environment,
and making decisions that affect the entire organization. They look to the long-term future and
concern themselves with general environmental trends and the organization’s overall success.
Top managers are also responsible for communicating a shared vision for the organization,
shaping corporate culture, and nurturing an entrepreneurial spirit that can help the company
innovate and keep pace with rapid change.
 Middle managers work at middle levels of the organization and are responsible for
business units and major departments. Examples of middle managers are department head,
division head, manager of quality control, and director of the research lab. Middle managers
typically have two or more management levels beneath them. They are responsible for
implementing the overall strategies and policies defined by top managers. Middle managers
generally are concerned with the near future, rather than with long-range planning. The middle
manager’s job has changed dramatically over the past two decades. Many organizations
improved efficiency by laying off middle managers and slashing middle management levels.
Traditional pyramidal organization charts were flattened to allow information to flow quickly
from top to bottom and decisions to be made with greater speed. In addition, technology has
taken over many tasks once performed by middle managers, such as monitoring performance
and creating reports.36 Exhibit 1.7 illustrates the shrinking of middle management.

Yet even as middle management levels have been reduced, the middle manager’s job
has taken on a new vitality. Research shows that middle managers play a crucial role in driving
innovation and enabling organizations to respond to rapid shifts in the environment. “These are
the people who figure out ‘how’ to do the ‘what,’” says Andrew Clay, a manager

at a medical devices company. The success of an organization depends partly on middle

managers effectively implementing the company’s strategy, which can make the middle
manager’s job quite stressful. “No glory, no fame,” says middle manager Ruby Charles. “All
the glory goes to your subordinates, and all the fame goes to your boss. Meanwhile, none of it
could happen without you.

Middle managers’ status also has escalated because of the growing use of teams and
projects. A project manager is responsible for a temporary work project that involves the
participation of people from various functions and levels of the organization, and perhaps from
outside the company as well. Many of today’s middle managers work with a variety of projects
and teams at the same time, some of which cross geographical and cultural boundaries as well
as functional ones.

First-line managers are directly responsible for the production of goods and services.
They are the first or second level of management and have such titles as supervisor, line
manager, section chief, and office manager. They are responsible for teams and non-
management employees. Their primary concern is the application of rules and procedures to
achieve efficient production, provide technical assistance, and motivate subordinates. The time
horizon at this level is short, with the emphasis on accomplishing day-to-day goals. Consider
the job of Alistair Boot, who manages the menswear department for a John Lewis department
store in Cheadle, England. Boot’s duties include monitoring and supervising shop floor
employees to make sure those sales procedures, safety rules, and customer service policies are
followed. This type of managerial job might also involve motivating and guiding young, often
inexperienced workers; providing assistance as needed; and ensuring adherence to company
policies.

1.19 Horizontal Differences

The other major difference in management jobs occurs horizontally across the
organization. Functional managers are responsible for departments that perform a single
functional task and have employees with similar training and skills. Functional departments
include advertising, sales, finance, human resources, manufacturing, and accounting. Line
managers are responsible for the manufacturing and marketing departments that make or sell
the product or service. Staff managers are in charge of departments, such as finance and human
resources that support line departments.

General Managers are responsible for several departments that perform different
functions. A general manager is responsible for a self-contained division, such as a Nordstrom
department store or a Honda assembly plant, and for all the functional departments within it.
Project managers also have general management responsibility because they coordinate people
across several departments to accomplish a specific project.

1.20 Manager Roles

Mintzberg’s observations and subsequent research indicate that diverse manager

activities can be organized into ten roles. A role is a set of expectations for a manager’s
behavior. Exhibit 1.9 describes activities associated with each of the roles. These roles are
divided into three conceptual categories: informational (managing by information),
interpersonal (managing through people), and decisional (managing through action). Each role
represents activities that managers undertake to ultimately accomplish the functions of
planning, organizing, leading, and controlling. Although it is necessary to separate the
components of the manager’s job to understand the different roles and activities of a manager,
it is important to remember that the real job of management isn’t practiced as a set of
independent parts; all the roles interact in the real world of management.
1.21 Informational Roles

Informational roles describe the activities used to maintain and develop an information
network. General Managers spend about 75 percent of their time communicating with other
people. The monitor role involves seeking current information from many sources. The
manager acquires information from others and scans written materials to stay well informed.
The disseminator and spokesperson roles are just the opposite: The manager transmits current
information to others, both inside and outside the organization, who can use it. Boeing CEO
Jim McNerney struggled with the spokesperson role after the 787 Dreamliner passenger plane
was grounded around the world in early 2013 due to problems with the electrical system that
led to battery fires. As soon as it became apparent that the first fire wasn’t an isolated incident,
McNerney orchestrated an intense internal investigation, but he left the job of communicating
with investors, analysts, the media, and the general public to other executives, including chief
engineer Mike Sinnett. A few weeks after the first fire, during a conference call to discuss
fourth-quarter financial results, McNerney deflected questions from investors and analysts,
saying “I can’t predict the outcome and I’m not going to. We’re in the middle of an
investigation.” Although McNerney has been harshly criticized for not being more forthcoming
with investors and analysts, some customers have praised Boeing for its overall
communications strategy during the crisis. Explaining his decision to stay behind the scenes,
McNerney said, “I’m the one who has to stand up with absolute confidence when Boeing
proposes a solution. . .. And the only way I know how is to dive in deeply with the people doing
the scientific and technical work.”

1.22 Interpersonal Roles

Interpersonal roles pertain to relationships with others and are related to the human
skills described earlier. The figurehead role involves handling ceremonial and symbolic
activities for the department or organization. The manager represents the organization in his or
her formal managerial capacity as the head of the unit. The presentation of employee awards
by a branch manager for Commerce Bank is an example of the figurehead role. The leader role
encompasses relationships with subordinates, including motivation, communication, and
influence. The liaison role pertains to the development of information sources both inside and
outside the organization. Consider the challenge of the leader and liaison roles for managers at
National Foods, Pakistan’s largest maker of spices and pickles. Managers in companies
throughout Pakistan struggle with growing political instability, frequent power outages,
government corruption and inefficiency, and increasing threats of terrorism, all of which makes
the leader role even more challenging. “In the morning, I assess my workers,” says Sajjad
Farooqi, a supervisor at National Foods. If Farooqi finds people who are too stressed or haven’t
slept the night before, he changes their shift or gives them easier work. Farooqi also pays a lot
of attention to incentives because people are under so much pressure. As for the liaison role,
managers have to develop information sources that are not only related to the business, but
safety and security concerns as well.

1.23 Decisional Roles

Decisional roles pertain to those events about which the manager must make a choice
and take action. These roles often require conceptual as well as human skills. The entrepreneur
role involves the initiation of change. Managers are constantly thinking about the future and
the changes needed to achieve a future goal or vision. The disturbance handler role involves
resolving conflicts among subordinates or between the manager’s department and other
departments. The resource allocator role pertains to decisions about how to assign people, time,
equipment, money, and other resources to attain desired outcomes. The manager must decide
which projects receive budget allocations, which of several customer complaints receive
priority, and even how to spend his or her own time. The homicide rate in New York City
dropped significantly in 2013 due to decisions managers made regarding resource allocation.

Kelly’s decisions, such as the surveillance network and revised search practices, have
not come without criticism of civil rights violations, but many people credit him with making

life in New York City safer and giving foreign investors the confidence to bring hundreds of
millions of dollars back to the city.

The relative emphasis that a manager puts on the ten roles shown in Exhibit 1.9 depends
on a number of factors, such as the manager’s position in the hierarchy, natural skills and
abilities, type of organization, or departmental goals to be achieved. Exhibit 1.10 illustrates the
varying importance of the leader and liaison roles as reported in a survey of top-, middle-, and
lower-level managers. Note that the importance of the leader role typically declines, while the
importance of the liaison role increases, as a manager moves up the organizational hierarchy.

Other factors, such as changing environmental conditions, also may determine which
roles are more important for a manager at any given time. Robert Dudley, who took over as
CEO of troubled oil giant BP after Tony Hayward was forced out due to mishandling the
Deepwater Horizon crisis in 2010, found informational roles and decisional roles at officials,
mend fences with local communities, carve a path toward restoring the company’s reputation,
and take steps to prevent such a disastrous event from ever happening again.

Managers stay alert to needs both within and outside the organization to determine
which roles are most critical at various times. A top manager may regularly put more emphasis
on the roles of spokesperson, figurehead, and negotiator, but the emergence of new competitors
may require more attention to the monitor role, or a severe decline in employee morale and
direction may mean that the CEO has to put more emphasis on the leader role. A marketing
manager may focus on interpersonal roles because of the importance of personal contacts in
the marketing process, whereas a financial manager may be more likely to emphasize
decisional roles such as resource allocator and negotiator. Despite these differences, all
managers carry out informational, interpersonal, and decisional roles to meet the needs of the
organization.
Reference

Daft, R. L. (2016). Management. USA: Cengage Learning, 12th Edition. P. 4-28

Chapter 2. Characteristic and Structure of Organization

Learning Outcomes

After studying this chapter, you should be able to:

1. Discuss the fundamental characteristics of organizing and explain work specialization,

chain of command, span of management, and centralization versus decentralization.
2. Describe functional and divisional approaches to structure.
3. Explain the matrix approach to structure and its application to both domestic and
international organizations.
4. Describe the contemporary team and virtual network structures and why they are being
adopted by organizations.
5. Explain why organizations need coordination across departments and hierarchical
levels, and describe mechanisms for achieving coordination.
6. Identify how structure can be used to achieve an organization’s strategic goals.
2.1 Structure and Characterization of Organizations
In characterizing an organization, various social, economic, legal, and marketing
aspects may be considered. It may be observed, for instance, if the organization is public,
private or non-governmental; if it belongs to the primary, secondary or tertiary sector; if it is
an individual firm (individual ownership) or an anonymous society (corporation); if it is of
national, regional or global actuation, and so on. Internally, several aspects may also be
examined to characterize an organization: size, physical location of workers and equipment,
technology, financial peculiarities such as gross revenue, and the behavioral and cultural
characteristics of the staff, among others.

Organizing is the deployment of organizational resources to achieve strategic goals.

The deployment of resources is reflected in the organization’s division of labor into specific
departments and jobs, formal lines of authority, and mechanisms for coordinating diverse
organization tasks.

One way of describing organizations that has received much attention in the literature
on organizational theories is the one of the organizational structure studies. Through such
studies the disposition of units, departments, positions, groups and staff within a firm, and the
existing relations among them are explored.

One of the several advantages of this perspective is that it offers an appropriate

explanation of how organizations, apart from attaining the size and complexity that they have
these days, have survived and accomplished their objectives or functions. In truth, in a
structuralize perspective, the balance, or the equilibrium, between the division of labor and the
integration of the parts responsible for the divided work, may be identified as the principal
factor for the existence of modern organizations.

It is important to emphasize that the division of labor and the maintenance of interaction
among the parts responsible for divided work are not new phenomena in history. Since the start
of the Industrial Revolution, however, the magnitude of such phenomena has been
unprecedented, which is of great importance to studies on organizational structure. It is drawn
the conclusion that a structure presents the following functions:

1. Technical function – to present more appropriate ways to accomplish a given

task in order to produce a certain outcome;
2. Relational function – to regulate and establish behavior and decision-making
policies.
 3. Power regulation or regulatory function – to regulate authority and
subordination.
4. Values formation function – to present values, norms, beliefs, assumptions,
dispositions and shared principles.

As to this last function, it should be pointed out that it is neither being proposed that the
structure is a simple consequence of the organizational culture, nor is the contrary being
posited, that is, that culture is a consequence of the structure and its diverse aspects.

2.2 Organizing the Vertical or Tall Structure

The organizing process leads to the creation of organization structure, which defines
how tasks are divided and resources deployed. Organization structure is defined as (1) the set
of formal tasks assigned to individuals and departments; (2) formal reporting relationships,
including lines of authority, decision responsibility, number of hierarchical levels, and span of
managers’ control; and (3) the design of systems to ensure effective coordination of employees
across departments. Ensuring coordination across departments is just as critical as defining the
departments to begin with. Without effective coordination systems, no structure is complete.

The set of formal tasks and formal reporting relationships provides a framework for
vertical control of the organization. The characteristics of vertical structure are portrayed in the
organization chart, which is the visual representation of an organization’s structure. A sample
organization chart for a water bottling plant is illustrated in Exhibit 10.1. The plant has four
major departments accounting, HR, production, and marketing. The organization chart
delineates the chain of command, indicates departmental tasks and how they fit together, and
provides order and logic for the organization. Every employee has an appointed task, line of
authority, and decision responsibility.

The average span of control used in an organization determines whether the structure
is tall or flat. A tall structure has an overall narrow span and more hierarchical levels. A flat
structure has a wide span, is horizontally dispersed, and has fewer hierarchical levels. Having
too many hierarchical levels and narrow spans of control is a common structural problem for
organizations.

One recent study found that the span of management for CEOs has doubled over the
past two decades, rising from about 5 to around 10 managers reporting directly to the top
executive, with the span of management for those managers also increasing. At the same time,
the types of positions in the top team are shifting, with the position of chief operating officer
(COO) declining and positions such as CIO or chief marketing officer being added to the top
team. A number of factors may influence a top executive’s optimum span of control. People
who are new to their positions typically want a wider span of control to help them evaluate
their executives and learn about more aspects of the business.

A CEO who must spend a lot of time interacting directly with customers, partners, or
regulators as part of his or her job will need a narrower span of control, allocating more
responsibility to direct reports and freeing up more time for external activities, while a CEO
involved in a major internal transformation may need a wider span of control to stay on top of
what is happening all across the organization. Exhibit 10.2 illustrates how an international
metals company was reorganized. The multilevel set of managers shown in panel a was
replaced with 10 operating managers and 9 staff specialists reporting directly to the CEO, as
shown in panel b. The CEO welcomed this wide span of 19 management subordinates because
it fit his style, his management team was top-notch and needed little supervision, and they were
all located on the same floor of an office building.

2.3 Departmentalization
Another fundamental characteristic of organization structure is departmentalization,
which is the basis for grouping positions into departments and departments into the total
organization. Managers make choices about how to use the chain of command to group people
together to perform their work. Five approaches to structural design reflect different uses of
the chain of command in departmentalization, as illustrated in Exhibit 10.3. The functional,
divisional, and matrix are traditional approaches that rely on the chain of command to define
departmental groupings and reporting relationships along the hierarchy. Two innovative
approaches are the use of teams and virtual networks, which have emerged to meet changing
organizational needs in a turbulent global environment.

The basic difference among structures is the way in which employees are
departmentalized and to whom they report. Each structural approach is described in detail in
the following sections.

2.4 Vertical Functional and Divisional Structure

In a functional structure, also called a U-form (unitary structure), activities are grouped
together by common function from the bottom to the top of the organization.37 The functional
structure groups positions into departments based on similar skills, expertise, work activities,
and resource use. A functional structure can be thought of as departmentalization by
organizational resources because each type of functional activity—accounting, HR,
engineering, and manufacturing—represents specific resources for performing the
organization’s task.

People, facilities, and other resources representing a common function are grouped into
a single department. One example is Blue Bell Creameries, which relies on in-depth expertise
in its various functional departments to produce high-quality ice cream for a limited regional
market. The quality control department, for example, tests all incoming ingredients and ensures
that only the best go into Blue Bell’s ice cream. Quality inspectors also test outgoing products
and, because of their years of experience, can detect the slightest deviation from expected
quality. Blue Bell also has functional departments such as sales, production, maintenance,
distribution, research and development (R&D), and finance.

The functional structure is a strong vertical design. Information flows up and down the
vertical hierarchy, and the chain of command converges at the top of the organization. In a
functional structure, people within a department communicate primarily with others in the same
department to coordinate work and accomplish tasks or implement decisions that are passed
down the hierarchy. Managers and employees are compatible because of similar training and
expertise. Typically, rules and procedures govern the duties and responsibilities of each
employee, and employees at lower hierarchical levels accept the right of those higher in the
hierarchy to make decisions and issue orders.

In contrast to the functional approach, in which people are grouped by common skills
and resources, the divisional structure occurs when departments are grouped together based
on similar organizational outputs. With a divisional structure, also called an M-form
(multidivisional) or a decentralized form, separate divisions can be organized with
responsibility for individual products, services, product groups, major projects or programs,
divisions, businesses, or profit centers.

The divisional structure is also sometimes called a product structure, program structure,
or self-contained unit structure. Each of these terms means essentially the same thing: Diverse
departments are brought together to produce a single organizational output, whether it is a
product, a program, or service to a single customer.

Most large corporations have separate divisions that perform different tasks, use
different technologies, or serve different customers. When a huge organization produces
products for different markets, the divisional structure works because each division is an
autonomous business. For example, Google has seven product divisions, including YouTube,
Chrome and Apps, Android, Knowledge (search), Ad Products, Geo and Commerce, and
Google+ (social networking). Walmart uses three major divisions for Wal-Mart Stores, Sam’s
Club (U.S.), and International Stores. Each of these three large divisions is further subdivided
into smaller geographical divisions to better serve customers in different regions.

Functional and divisional structures are illustrated in Exhibit 10.4. In a divisional

structure, divisions are created as self-contained units, with separate functional departments for
each division. For example, in Exhibit 10.4, each functional department resource needed to
produce the product is assigned to each division. Whereas in a functional structure, all R&D
engineers are grouped together and work on all products, in a divisional structure, separate
R&D departments are created within each division. Each department is smaller and focuses on
a single product line or customer segment. Departments are duplicated across product lines.

The primary difference between divisional and functional structures is that in a

divisional structure, the chain of command from each function converges lower in the
hierarchy. In a divisional structure, differences of opinion among R&D, marketing,
manufacturing, and finance would be resolved at the divisional level rather than by the
president. Thus, the divisional structure encourages decentralization. Decision making is
pushed down at least one level in the hierarchy, freeing the president and other top managers
for strategic planning. Only if the divisions can’t agree, fail to coordinate, or start making
decisions that hurt the organization are some decisions pulled back up to the top.
2.5 Matrix Structure
The matrix approach combines aspects of both functional and divisional structures
simultaneously, in the same part of the organization. The matrix structure evolved as a way to
improve horizontal coordination and information sharing. One unique feature of the matrix is
that it has dual lines of authority. In Exhibit 10.6, the functional hierarchy of authority runs
vertically, and the divisional hierarchy of authority runs horizontally. The vertical structure
provides traditional control within functional departments, and the horizontal structure
provides coordination across departments.

The U.S. operation of Starbucks, for example, uses geographic divisions for Western/
Pacific, Northwest/Mountain, Southeast/Plains, and Northeast/Atlantic. Functional
departments including finance, marketing, and so forth are centralized and operate as their own
vertical units, as well as supporting the horizontal divisions. The matrix structure, therefore,
supports a formal chain of command for both functional (vertical) and divisional (horizontal)
relationships. As a result of this dual structure, some employees actually report to two
supervisors simultaneously.
 The dual lines of authority make the matrix unique. To see how the matrix works,
consider the global matrix structure illustrated in Exhibit 10.7. The two lines of authority are
geographic and product. The geographic boss in Germany coordinates all subsidiaries in
Germany, and the plastics products boss coordinates the manufacturing and sale of plastics
products around the world. Managers of local subsidiary companies in Germany would report
to two superiors, both the country boss and the product boss.

The dual authority structure violates the unity-of-command concept described earlier
in this chapter, but that is necessary to give equal emphasis to both functional and divisional
lines of authority. Dual lines of authority can be confusing, but after managers learn to use this
structure, the matrix provides excellent coordination simultaneously for each geographic
region and each product line.

The success of the matrix structure depends on the abilities of people in key matrix
roles. Two-boss employees, those who report to two supervisors simultaneously, must resolve
conflicting demands from the matrix bosses. They must work with senior managers to reach
joint decisions. They need excellent human relations skills with which to confront managers
and resolve conflicts. The matrix boss is the product or functional boss, who is responsible for
one side of the matrix. The top leader is responsible for the entire matrix. The top leader
oversees both the product and functional chains of command. His or her responsibility is to
maintain a power balance between the two sides of the matrix. If disputes arise between them,
the problem will be kicked upstairs to the top leader.
2.6 Team Structure
Probably the most widespread trend in departmentalization in recent years has been the
implementation of team concepts. The vertical chain of command is a powerful means of
control, but passing all decisions up the hierarchy takes too long and keeps responsibility at the
top. The team approach gives managers a way to delegate authority, push responsibility to
lower levels, and be more flexible and responsive in a complex and competitive global
environment.

One approach to using teams in organizations is through cross-functional teams, which

consist of employees from various functional departments who are responsible to meet as a
team and resolve mutual problems.

For example, at Total Attorneys, a Chicago-based company that provides software and
services to small law firms, CEO Ed Scanlan realized that the functional structure, which broke
projects down into sequential stages that moved from one department to another, was slowing
things down so much that clients’ needs had sometimes changed by the time the product was
completed. He solved this problem by creating small, cross-functional teams to increase
horizontal coordination. Now, designers, coders, and quality-assurance testers work closely
together on each project.50 Cross-functional teams can provide needed horizontal coordination
to complement an existing divisional or functional structure. A frequent use of cross-functional
teams is for change projects, such as new product or service innovation. Team members
typically still report to their functional departments, but they also report to the team, one
member of whom may be the leader.
 The second approach is to use permanent teams, groups of employees who are
organized in a way similar to a formal department. Each team brings together employees from
all functional areas focused on a specific task or project, such as parts supply and logistics for
an automobile plant. Emphasis is on horizontal communication and information sharing
because representatives from all functions are coordinating their work and skills to complete a
specific organizational task.

Authority is pushed down to lower levels, and front-line employees are often given the
freedom to make decisions and take action on their own. Team members may share or rotate
team leadership. With a team-based structure, the entire organization is made up of horizontal
teams that coordinate their work and work directly with customers to accomplish the
organization’s goals.

At Whole Foods Market, a team structure is considered a major contributor to the

company’s success. Each Whole Foods store is made up of eight or so self-directed teams that
oversee departments such as fresh produce, prepared foods, dairy, or checkout. Teams are
responsible for all key operating decisions, such as product selection, pricing, ordering, hiring,
and in-store promotions, and they are accountable for their performance. Teams are related to
the “boss less” trend, which is described further in the Manager’s Shoptalk.

2.7 Virtual Network Structure

The most recent approach to departmentalization extends the idea of horizontal
coordination and collaboration beyond the boundaries of the organization. In a variety of
industries, vertically integrated, hierarchical organizations are giving way to loosely
interconnected groups of companies with permeable boundaries. Outsourcing, which means
farming out certain activities, such as manufacturing or credit processing, has become a
significant trend. British retailer J. Sainsbury, for example, lets Accenture handle its entire IT
department.

Ohio State University plans to outsource its parking system. And the City of Maywood,
California, decided to outsource everything from street maintenance to policing and public
safety. The budget for the police department used to be nearly $8 million. Now the city pays
about half that to the Los Angeles County Sheriff ’s Department, and residents say that service
has improved. The pharmaceuticals company Pfizer is using an innovative approach that lets
some employees pass off certain parts of their jobs to an outsourcing firm in India with a click
of a button. Rather than shifting entire functions to contractors, this “personal outsourcing”
approach allows people to shift only certain tedious and time-consuming tasks to be handled
by the outsourcing partner while they focus on higher-value work.

Some organizations take this networking approach to the extreme to create an

innovative structure. The virtual network structure means that the firm subcontracts most of
its major functions to separate companies and coordinates their activities from a small
organization at headquarters. Philip Rosedale, the founder of Linden Labs, created and runs
Send Love (formerly called Love Machine) from his home and coffee shops around San
Francisco. Send Love makes software that lets employees send Twitter-like messages to say
“Thank you” or “Great job!” When the message is sent, everyone in the company gets a copy,
which builds morale, and the basic software is free to companies. The firm has no full-time
development staff; instead, it works with a network of freelancers who bid on jobs such as
creating new features, fixing glitches, and so forth. Rosedale also contracts out payroll and
other administrative tasks.

The organization may be viewed as a central hub surrounded by a network of outside

specialists, sometimes spread all over the world, as illustrated in Exhibit 10.8. Rather than
being housed under one roof, services such as accounting, design, manufacturing, and
distribution are outsourced to separate organizations that are connected electronically to a
central office.

Networked computer systems, collaborative software, and the Internet enable

organizations to exchange data and information so rapidly and smoothly that a loosely
connected network of suppliers, manufacturers, assemblers, and distributors can look and act
as one seamless company.

The idea behind networks is that a company can concentrate on what it does best and
contract out other activities to companies with distinctive competence in those specific areas,
which enables a company to do more with less. The “heart-healthy” food company Smart
Balance has been able to innovate and expand rapidly by using a virtual network approach.
With a network structure such as that used at Smart Balance, it is difficult to answer the
question “Where is the organization?” in traditional terms. The different organizational parts
are drawn together contractually and coordinated electronically, creating a new form of
organization. Much like building blocks, parts of the network can be added or taken away to
meet changing needs.

Exhibit 10.9 summarizes the major advantages and disadvantages of each type of
structure that we have discussed.
 Exhibit 10.10 illustrates the evolution of organizational structures, with a growing
emphasis on horizontal coordination. Although the vertical functional structure is effective in
stable environments, it does not provide the horizontal coordination that is needed in times of
rapid change.

Innovations such as cross-functional teams, task forces, and project managers work
within the vertical structure but provide a means to increase horizontal communication and
cooperation. The next stage involves reengineering to structure the organization into teams
working on horizontal processes. Reengineering refers to the radical redesign of business
processes to achieve dramatic improvements in cost, quality, service, and speed. Because the
focus of reengineering is on horizontal workflows rather than function, reengineering generally
leads to a shift away from a strong vertical structure to one emphasizing stronger horizontal
coordination. The vertical hierarchy is flattened, with perhaps only a few senior executives in
traditional support functions such as finance and HR.

Reference

Daft, R. L. (2016). Management. USA: Cengage Learning, 12th Edition. P. 320-346

Oliveira, N. (2012). Automated Organizations: Development and Structure of the Modern

Business Firm. Berlin Heidelberg: Springer.
Chapter 3. Functions within Business Organization: Purchasing
Management

Learning Outcomes

After studying this chapter, you should be able to:

1. Understand the differences between purchasing and supply management.

2. Understand the differences between supply chains and value chains.

3. Identify the activities that are part of supply chain management.

4. Appreciate the importance of supply chain enablers.

5. Identify the historical stages of purchasing’s evolution.

6. Understand the key objectives of any supply management function.

7. Understand the responsibilities of the supply management function.

8. Understand the purchasing process and the role of e-procurement tools in the process.

9. Understand the different types of purchases made by organizations.

10. Understand how organizations are seeking to improve the procurement process.
3.1 A New Competitive Environment
Today’s business climate features increasing numbers of world-class competitors,
domestically and internationally, that are forcing organizations to improve their internal
processes to stay competitive. Sophisticated customers, both industrial and consumer, no
longer talk about price increases—they demand price reductions! Information that is available
over the Internet will continue to alter the balance of power between buyers and sellers. An
abundance of competitors and choices have conditioned customers to want higher quality,
faster delivery, and products and services tailored to their individual needs at a lower total cost.
The widespread use of “social media” through Twitter and blogs spread information about
products and services at an accelerated rate. If a company is not meeting its requirements,
consumers will quickly “spread the word” and they will find someone who is more
accommodating.

In the work environment, mobile devices permit constant contact with job activities
enabling purchasers to be connected on a 24/7 basis. One of the major facilitators of increased
mobility is the dramatic drop in cost of storing and retrieving data. Part of this efficiency is
driven by “cloud-based” storage systems that provide all sized firms and individuals access to
massive amounts of data at very low costs. The lines between work, play, buying, and
promotion are both blurred and shifting to the individual. These trends in mobility have
significant impact on where and when work is performed in purchasing.

While historically, the speed at which information moved was slower than current
times, firms still valued customer loyalty. In the 1960s and 1970s, companies began to develop
detailed market strategies that focused on creating and capturing this loyalty. Before long,
organizations also realized that this required a strong engineering, design, and manufacturing
function to support these market requirements. Design engineers had to translate customer
requirements into product and service specifications, which then had to be produced at a high
level of quality at a reasonable cost. As the demand for new products increased throughout the
1980s, organizations had to become flexible and responsive to modify existing products,
services, and processes, or to develop new ones to meet ever changing customer needs.

As organizational capabilities improved further in the 1990s, managers began to realize

that material and service inputs from suppliers had a major impact on their ability to meet
customer needs. This led to an increased focus on the supply base and the responsibilities of
purchasing. Managers also realized that producing a quality product was not enough. Getting
the right products and services to customers at the right time, cost, and place, and in the right
condition, and quantity constituted an entirely new type of challenge. The twenty-first century
has spawned a whole set of time-reducing information technologies and logistics networks
aimed at meeting these new challenges.

The availability of low-cost alternatives has led to unprecedented shifts toward

outsourcing and offshoring. The impact of China as a major world competitor poses
tremendous challenges for U.S. firms in both the manufacturing and services sectors. Because
the services sector now accounts for over 70 percent of the Gross Domestic Product, new
strategies are required for effective supply management in this sector. Recent economic trends
in Chinese wages, complexity of supply chains, and well publicized quality problems have
caused firms to reassess the economics of Chinese sourcing strategies. Chinese labor rates
increased 14 percent in 2012 and are up 71 percent since 2008.2 Supply strategies must now
evaluate the economics of re-shoring and near-shoring. Re-shoring involves bringing some
sourcing back to the United States, while near-shoring involves evaluating suppliers located
closer to United States. Such suppliers may be located in Mexico and Central and South
America.

All these changes have made twenty-first century organizations realize how important
it is to actively manage their supply base. The supply base consists of all the suppliers that
provide and organization with its materials and services. In some organization’s this supply
base extends to the network of downstream firms responsible for delivery and aftermarket
service of the product to the end customer. The realization that competitive advantage could be
achieved by managing both upstream (suppliers) and downstream (customers) flows led to a
focus on supply chains and supply chain management.

Several factors are driving an emphasis on supply chain management. First, the low
cost and increased availability of information resources among entities in the supply chain
allow easy linkages that eliminate time delays in the network. Second, the level of competition
in both domestic and international markets requires organizations to be fast, agile, and flexible.
Third, customer expectations and requirements are becoming much more demanding. Fourth,
the ability of an organization’s supply chain to identify and mitigate risk minimizes disruptions
in both supply and downstream product or services to mitigate the impact on lost sales. As
customer demands increase, organizations and their suppliers must be responsive or face the
prospect of losing market share. Competition today is no longer between firms; it is between
the supply chains of those firms. The companies that configure the best supply chains will be
the market winners and gain competitive advantage.
3.2 Why Purchasing Is Important Increasing Value and Savings
As companies struggle to increase customer value by improving performance, many
companies are turning their attention to purchasing and supply management. Consider, for
example, CSX, the company featured at the beginning of this chapter. Almost 45 percent of the
total sales of CSX is expended with suppliers for the purchase of materials and services. It does
not take a financial genius to realize the impact that suppliers can have on a firm’s total cost.
Furthermore, many features that make their way into final products originate with suppliers.
The supply base is an important part of the supply chain. Supplier capabilities can help
differentiate a producer’s final good or service, increasing their value to the final customer.

In the manufacturing sector, the percentage of purchases to sales averages 55 percent.

This means that for every dollar of revenue collected on goods and services sales, more than
half goes back to suppliers. It is not difficult to see why purchasing is clearly a major area for
cost savings. Cost savings also encompasses avoiding costs through early involvement with
design and proactively responding to supplier requests for price increases.

3.3 Building Relationships and Driving Innovation

As mentioned above, savings come in different forms; the traditional approach is to
bargain hard for price reductions. A newer approach is to build relations with suppliers to
jointly pull costs out of the product or service and expect suppliers to contribute innovative
ideas that continually add value to a firm’s products and services.

Examples of supply managers building these relationships are occurring in many

industries. For example, that’s what happened a few years ago when two senior executives, one
from Shell and one from Hewlett-Packard (HP), were having a conversation. HP is a strategic
supplier of end-user services, service desk, and hardware to Shell and, as part of Shell’s focus
on supplier relationship management, the executives meet to discuss business value. Because
both companies focus on innovation, the conversation eventually turned to what’s new in R&D.
The HP executive talked about research into a new wireless printer head the size of a postage
stamp that works by picking up vibrations (using sensing technology). The information piqued
Shell’s interest because its deep-water oil explorations use sensing technology to discover rock
formations that could hold oil several miles under the ocean. That simple conversation sparked
a collaboration between the two companies to produce a system to sense, collect, and store
geophysical data.
 David H. Cummins, senior supplier manager, strategic sourcing for Shell Global
Projects U.S. in Houston, says the example proves that dedication to uncovering supplier value
and capabilities is a never-ending process. “The value that was uncovered was part of a
conversation that had nothing to do with the current services provided,” he says. “Finding
hidden capabilities is about putting each other’s brains to work on challenges and to come up
with something that is new and tangible. Very often capabilities are revealed when you are
having deep conversations about mutual interests.”

For these relationships to work, both the buyer and supplier must agree to acceptable
paybacks from their investments so that each realizes a positive gain. If the suppliers’ strategic
intent is to be the customer of choice, then they need to provide necessary technical
infrastructure to assist the buyer. As the above example illustrates, when both parties cooperate,
a climate of trust emerges between the parties setting the stage for innovative ideas.

3.4 Improving Quality and Reputation

Purchasing and supply management also has a major impact on product and service
quality. In many cases, companies are seeking to increase the proportion of parts, components,
and services they outsource in order to concentrate on their own areas of specialization and
competence. This further increases the importance of the relationships among purchasing,
external suppliers, and quality. The following example illustrates this important link between
supplier quality and product quality. Lululemon Athletica is a provider of high-end yoga pants
and other athletic gear for women. The company experienced vibrant growth in its athletic
apparel until supplier quality problems created a “brand nightmare.” In March of 2013, the
apparel maker had to recall its yoga pants as they were too “shear.” This sheerness created a
“see through” look that did not sit well with high-end consumers who had paid a premium for
the product. Lulu lemon’s supplier claimed it was making the pants in accordance with the
specifications. The results showed otherwise and eliminating the sheer pants from the market
proved more difficult than expected. While steps have been taken to correct the problem, the
toll on the company has been significant. In June of 2013 came the announcement that CEO
Christine Day would leave her position. Lululemon’s stock price was also affected by both
these events, and it slid from $79 a share earlier in the year to $61 in late June of 2013.5 This
example illustrates the importance of the supplier quality in the selection process and how a
poor quality input affects the entire supply chain, including finished product and brand name
reputation. This example further illustrates how lapses in managing supplier quality can
potentially tarnish a firm’s reputation.
3.5 Reducing Time to Market
Purchasing, acting as the liaison between suppliers and engineers, can also help
improve product and process designs. For example, companies that involve suppliers early,
compared to companies that do not involve suppliers, achieve an average 20 percent
improvement on materials costs, material quality, and product development times.
Development teams that include suppliers as members also report they receive more
improvement suggestions from suppliers than teams that do not involve suppliers. Thus,
involving suppliers early in the design process is a way purchasing can begin to add new value
and contribute to increasing competitiveness.

3.6 Managing Supplier Risk

Every time purchasing places an order with a supplier a potential risk arises; this risk
could be as minor as a late delivery or as major as loss of an entire supplier due to bankruptcy
or natural disaster (fire, etc.). The example in the paragraph above illustrates the major impact
poor quality can have on an organization. Unfortunately, poor quality is only one supply threat;
others include natural disasters, financial instability, operational problems, transportation
delays, and so on. These risks are magnified by sourcing strategies that emphasized global
sourcing, single sourcing, and JIT inventory. Certainly there were benefits realized from these
strategies, however, often the increased vigilance necessary to mitigate and manage these
additional risks was not established. For example, the 2011 tsunami that hit Japan left Honda
and Toyota with supply shortages for months and cost millions of dollars in sales. Progressive
supply managers must continually monitor their supply base for risk and develop business
continuity plans to mitigate these risks.

Generating Economic Impact

The power of organizational purchasers as a group is significant. The ISM Report on

Business is one of the most closely followed indicators of economic activity. This monthly
survey of purchasing managers in both the manufacturing and non-manufacturing sectors is
closely monitored by the financial sector, and the results of both reports have the power to
move financial markets. The ISM Report on Business is a change index, and generally a rating
over 50 indicates the economy is expanding. A full discussion of the ISM Report on Business
can be found at http://www.ism.ws/ISMReport/
3.7 Contributing to Competitive Advantage
Many executives will agree that a focus on effective purchasing has become a critical
way to gain competitive advantage. An indication of this enhanced status, reputation, and
recognition is the higher salaries being paid to purchasing professionals. The most recent Inside
Supply Management magazine salary survey showed an average annual income of $103,793.

Entry level professionals averaged $51,600 annually, supply managers $102,300, and
those classified as vice presidents $217,100. Having a bachelor’s degree counts, as they earned
20 percent more than colleagues with a high school degree and 13 percent more than those
purchasers with an associate’s degree. Continuing education through certification also fattens
the wallet. Those purchasers who attained their Certified Professional in Supply Management
(CPSM) earned 9 percent more than those without a CPSM designation.6 This study also
reported that bonuses averaged over 13 percent of base salaries. The bonus was based on a
combination of company, department, and individual performance.

Managing talent requires a constant focus on finding, developing, and promoting

individuals who will contribute to making the supply management department recognized as a
strategic contributor to the organization. One major integrated oil company developed a core
training program for its purchasing/supply chain management group (PSCM) to develop talent.
The program consisted of a four-phased approach and recognized experience differences. The
four phases were: (1) PSCM common buying processes; (2) PSCM curriculum consisting of
classes in areas such as contracting, negotiations, strategic cost management, and so on; (3)
Professional accreditation and education such as the CPSM and MBA programs; and (4)
Professional leadership development program. This program recognized the differences
between those with one to three years of experience and those with four years and above.
Finding, developing, and retaining top-tier talent is vital to furthering supply management’s
impact on company strategies and competitiveness.

3.8 Understanding the Language of Purchasing and Supply Chain

Management
Anyone who has written about purchasing and supply chain management has defined
the various terms associated with these concepts one way or another, making confusion about
the subjects a real possibility. How, for example, is purchasing different from supply
management? Are supply chains and value chains the same? What is supply chain
management? What is an extended enterprise? It is essential to define various terms before
proceeding with this book.
3.9 Purchasing and Supply Management
We need to recognize the differences between purchasing and supply management.
Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a
functional activity (i.e., buying goods and services). The purchasing group performs many
activities to ensure it delivers maximum value to the organization. Examples include supplier
identification and selection; buying, negotiation, and contracting; supply market research;
supplier measurement and improvement; and purchasing systems development. Purchasing has
been referred to as doing “the five rights”: getting the right quality, in the right quantity, at the
right time, for the right price, from the right source. In this text we will interchange the terms
“purchasing” and “procurement.”

Supply management is not just a new name for purchasing but a more inclusive concept.
We feel supply management is a strategic approach to planning for and acquiring the
organization’s current and future needs through effectively managing the supply base, utilizing
a process orientation in conjunction with cross-functional teams (CFTs) to achieve the
organizational mission. Similar to our definition, the Institute for Supply Management defines
supply management as the identification, acquisition, access, positioning, and management of
resources and related capabilities an organization needs or potentially needs in the attainment
of its strategic objectives. 7 Exhibit 1.1 depicts the key elements in our definition of supply
management.

Supply management requires pursuing strategic responsibilities, which are those

activities that have a major impact on the long-term performance of the organization. These
long term responsibilities are not pursued in isolation, but should be aligned with the overall
mission and strategies of the organization. These strategies exclude routine, simple, or dayto-
day decisions that may be part of traditional purchasing responsibilities. The routine ordering
and follow-up of basic operational supplies is not a strategic responsibility. The development
of the systems that enable internal users to order routine supplies, however, is considerably
more important.
 Supply management is a broader concept than purchasing. Supply management is a
progressive approach to managing the supply base that differs from a traditional arm’s-length
or adversarial approach with sellers. It requires purchasing professionals to work directly with
those suppliers that are capable of providing world-class performance and advantages to the
buyer. Think of supply management as a strategic and supercharged version of basic
purchasing.

Supply management often takes a process approach to obtaining required goods and
services. We can describe supply management as the process of identifying, evaluating,
selecting, managing, and developing suppliers to realize supply chain performance that is better
than that of competitors. We will interchange the terms “purchasing,” “supply management,”
and “strategic sourcing” throughout this book.

Supply management is cross-functional, meaning it involves purchasing, engineering,

supplier quality assurance, the supplier, and other related functions working together as one
team, early on, to further mutual goals. Instead of adversarial relationships, which characterize
traditional purchasing, supply management features a long-term, win-win relationship between
a buying company and specially selected suppliers. Except for ownership, the supplier almost
becomes an extension of the buying company. Supply management also recognizes the mutual
benefits to both parties, through shared information, provisions for on-site resources, and
frequent help to suppliers in exchange for dramatic and continuous performance improvements,
including steady price reductions. In short, supply management is a new way of operating,
involving internal operations and external suppliers to achieve advances in cost management,
product development, cycle times, and total quality control.

Organizationally, leading and coordinating strategic supply management activities have

largely become the responsibility of the functional group called purchasing. Practicing
professionals often use the terms “supply management” and “purchasing” interchangeably.
Through the above discussion we have sought to clarify some of the differences while
recognizing that good purchasing and supply management practices can have significant
impact on the organization’s overall performance.

3.10 Supply Chains and Value Chains

Over time, researchers and practitioners have developed dozens of definitions to
describe supply chains and supply chain management. One group of researchers has indicated
that defining supply chain management both as a philosophy and as a set of operational
activities creates confusion.8 These researchers break down the concept into three areas and
separate supply chains from supply chain orientation and from supply chain management.

A supply chain is a set of three or more organizations linked directly by one or more of
the upstream or downstream flows of products, services, finances, and information from a
source to a customer. It is important to acknowledge that anytime business is conducted a
supply chain will exist. A supply chain orientation is a higher-level recognition of the strategic
value of managing operational activities and flows within and across a supply chain. Supply
chain management then, endorses a supply chain orientation and involves proactively
managing the two-way movement and coordination of goods, services, information, and funds
(i.e., the various flows) from raw material through end user. According to this definition, supply
chain management requires the coordination of activities and flows that extend across
boundaries. Organizations that endorse a supply chain orientation are likely to emphasize
supply chain management.

Regardless of the definition or supply chain perspective used, we should recognize that
supply chains are composed of interrelated activities that are internal and external to a firm.
These activities are diverse in their scope; the participants who support them are often located
across geographic boundaries and often come from diverse cultures.

Although many activities are part of supply chain management (which a later section
discusses), an improved perspective visualizes supply chains as composed of processes rather
than discrete, often poorly aligned activities and tasks. A process consists of a set of interrelated
tasks or activities designed to achieve a specific objective or outcome. New product
development (NPD), customer-order fulfillment, supplier evaluation and selection, and
demand and supply planning are examples of critical organizational processes that are part of
supply chain management. Recent product recalls of consumer products such as automobiles,
toys, peanut butter, and dog food have placed increasing emphasis on a new supply chain
concept: the reverse supply chain; its goal is to rapidly identify and return these tainted products
back through the supply chain. Toyota’s much publicized quality breakdowns that created
acceleration and braking problems led to massive recalls and forced Toyota to temporarily
suspend the sales of certain models.

In this case the creation of a reverse supply chain was necessary to fix defective brakes
and gas pedals was necessary to fix these problems and restore confidence in the Toyota brand.

3.11 Value chains vs. Supply chains

A question that often arises, and one that has no definite answer, involves the difference
between a value chain and a supply chain. Michael Porter, who first articulated the value chain
concept in the 1980s, argues that a firm’s value chain is composed of primary and support
activities that can lead to competitive advantage when configured properly. The accumulation
of these activities results in the total value added by the firm. Exhibit 1.2 presents a modified
version of Porter’s value chain model. This exhibit also defines some important supply chain-
related terms and places them in their proper context.

One way to think about the difference between a value chain and a supply chain is to
conceptualize the supply chain as a subset of the value chain. All personnel within an
organization are part of a value chain. The same is not true about supply chains. The primary
activities, or the horizontal flow across Exhibit 1.2, represent the operational part of the value
chain, or what some refer to as the supply chain. At an organizational level, the value chain is
broader than the supply chain, because it includes all activities in the form of primary and
support activities. Furthermore, the original value chain concept focused primarily on internal
participants, whereas a supply chain, by definition, is both internally and externally focused.
 To reflect current thinking, we must expand the original value chain model, which
focused primarily on internal participants, to include suppliers and customers who reside well
upstream and downstream from the focal organization. Multiple levels of suppliers and
customers form the foundation for the extended value chain or the extended enterprise concept,
which states that success is a function of effectively managing a linked group of firms past
first-level suppliers or customers. In fact, progressive firms understand that managing cost,
quality, and delivery requires attention to suppliers that reside several tiers from the producer.
The extended enterprise concept recognizes explicitly that competition is no longer between
firms but rather between coordinated supply chains or networks of firms.

Notice that Exhibit 1.2 identifies purchasing as a support activity. This means that
purchasing provides a service to internal customers. Although purchasing is the central link
with suppliers that provide direct materials, which is the upstream or left-hand side of Exhibit
1.2, purchasing can support the materials and service requirements of any internal group. Direct
materials are those items provided by suppliers and used directly during production or service
delivery. Purchasing is becoming increasingly responsible for sourcing indirect goods and
services required by internal groups. Examples of indirect items include personal computers,
office and janitorial supplies, health care contracts, transportation services, advertising and
media, and travel. Although indirect items are not required for production, they are still vital
to the effective running of an organization. The right-hand side of the model illustrates the
customer, or downstream, portion of the supply chain. Because meeting or exceeding customer
expectations is the lifeblood of any organization, it should become the focal point of supply
chain activities.

Exhibit 1.2 presents a relatively straightforward and linear view of the value and supply
chain, which is often not the case. First, the flows of materials, information, funds, and
knowledge across a supply chain are often fragmented and uncoordinated. The “hand-off”
points from one group to the next or from one organization to the next usually provide
opportunity for improvements. Second, the value chain model shows suppliers linking with
inbound logistics and then operations. Although this is usually the case with direct materials,
indirect items and finished goods sourced externally can result in suppliers delivering to any
part of the supply chain.

The increasing importance of supply chain management is forcing organizations to

rethink how their purchasing and sourcing strategies fit with and support broader business and
supply chain objectives. Supply chains involve multiple organizations as we move toward the
raw material suppliers or downstream toward the ultimate customer. Simple supply chains pull
materials directly from their origin, process them, package them, and ship them to consumers.

A good example of a simple supply chain involves cereal producers (see Exhibit 1.3).
A cereal company purchases the grain from a farmer and processes it into cereal.
 The cereal company also purchases the paperboard from a paper manufacturer, which
purchased the trees to make the paper, and labels from a label manufacturer, which purchased
semi-finished label stock to make the labels. The cereal is then packaged and sent to a
distributor, which in turn ships the material to a grocer, who then sells it to an end customer.
Even for a simple product such as cereal, the number of transactions and of material and
information flows can be considerable.

The supply chain for the cereal manufacturer features an extensive distribution network
that is involved in getting the packaged cereal to the final customer. Within the downstream
portion of the supply chain, logistics managers are responsible for the actual movement of
materials between locations. One major part of logistics is transportation management,
involving the selection and management of external carriers (trucking companies, airlines,
railroads, shipping companies) or the management of internal private fleets of carriers.
Distribution management involves the management of packaging, storing, and handling of
materials at receiving docks, warehouses, and retail outlets.

For products such as automobiles, which feature multiple products, technologies, and
processes, the supply chain becomes more complicated. The materials, planning, and logistics
supply chain for an automotive company is shown in Exhibit 1.4, which illustrates the
complexity of the chain, spanning from automotive dealers back through multiple levels or
tiers of suppliers. The automotive company’s supplier base includes the thousands of firms that
provide items ranging from raw materials, such as steel and plastics, to complex assemblies
and subassemblies, such as transmissions, brakes, and engines.

Participants in a supply chain are willing to share such information only when there is
trust between members. Thus, the management of relationships with other parties in the chain
becomes paramount. Effective supply chain organizations are built on relationships (sometimes
called “partnerships” or “alliances”) that require shared resources.

For instance, organizations may provide dedicated capacity, specific information,

technological capabilities, or even direct financial support to other members of their supply
chain so that the entire chain can benefit.

3.12 Achieving Purchasing and Supply Chain Benefits

When the pieces come together, can the assumption of a supply chain orientation with
the right kinds of activities really produce the results envisioned by proponents? Consider the
rebirth of Apple Computer, which had BusinessWeek asking in 1997, “Is Apple
mincemeat?”10 Apple made a great comeback through an impressive, steady stream of new
and innovative products such as the iPod, iPod Nano, iPhone, iPad and the new iPhone 5s and
less expensive iPad. Apple has reengineered itself from being considered “mincemeat” to now
once again being a great company. While recent increased competition from android phones
and other mobile devices have slowed Apple’s growth, the company is still a powerhouse. It
was ranked by Gartner as the number 1 supply chain company for the sixth straight year. The
ratings are based on five criteria: Gartner analysts’ opinion, peer opinion, three-year weighted
return on assets, inventory turns, and three-year weighted revenue growth.
 Apple has developed of an impressive array of purchasing and supply chain activities
to manage product demand, inventory investment, channel distribution, and supply chain
relationships. The company consistently maintains a manageable product line, forecasts sales
weekly with daily adjustments to production, and expects suppliers to manage inventory for
standard parts and components. Apple also formalized a partnership with a supplier to build
components close to Apple facilities with just-in-time (JIT) delivery, created a direct ship
distribution network through the Web, and simplified its finished goods distribution channel.
Apple is even re-shoring by returning some of its production to the United States.

3.13 The Supply Chain Umbrella-Management Activities

A large set of activities besides purchasing are part of supply chains. As previously
discussed, management’s ability to align, coordinate, integrate, and synchronize these activities
and the physical, information, and monetary flows is supply chain management. What are the
activities that are part of this concept called supply chain management? The management
activities that are covered by the supply chain umbrellas are illustrated in Exhibit 1.5 and briefly
described in the following paragraphs.

3.14 Purchasing

Most organizations include purchasing as a major supply chain activity. Because

purchasing is the central focus of this book, there is no need to provide more detail here.

3.15 Inbound Transportation

Larger organizations usually have a specialized traffic and transportation function to

manage the physical and informational links between the supplier and the buyer. Transportation
is a major cost for many organizations; as a result, there are usually opportunities to coordinate
the purchase of transportation services.

3.16 Quality Control

As previous examples have shown, quality control is vital to all organizations. Today’s
focus on supplier quality has shifted from detecting defects at the time of receipt or use to
prevention early in the materials-sourcing process. Progressive organizations work directly
with suppliers to develop proper quality control procedures and processes.

3.17 Demand and Supply Planning

Demand planning schedules the firm’s output. This includes forecasts of

anticipated demand, inventory adjustments, orders taken but not filled, and spare-part and
aftermarket requirements. Supply planning is the process of taking demand data and developing
a supply, production, and logistics network capable of satisfying demand requirements.

3.18 Receiving, Materials Handling, and Storage

All inbound material must be physically received as it moves from a supplier to a

purchaser. In a non-just-in-time environment, material must also be stored or staged.
Receiving, materials handling, and storage are responsible for the physical control over
inventory. Receipts from users indicating that services have been performed are also run
through receiving to trigger invoice payment.
3.19 Materials or Inventory Control

The terms “materials control” and “inventory control” are sometimes used
interchangeably. Within some organizations, however, these terms have different meanings.
The materials control group is often responsible for determining the appropriate quantity to
order based on projected demand and then managing materials releases to suppliers. This
includes generating the materials release, contacting a supplier directly concerning changes,
and monitoring the status of inbound shipments. The inventory control group is often
responsible for determining the inventory level of finished goods required to support customer
requirements, which emphasizes the physical distribution (i.e., outbound or downstream) side
of the supply chain.

Order Processing

Order processing helps ensure that customers receive material when and where they
require it and represents the key link between the producer and the external customer. Problems
with order processing have involved accepting orders before determining if adequate
production capacity is available, not coordinating order processing with order scheduling, and
using internal production dates rather than the customer’s preferred date to schedule the order.

3.20 Production Planning, Scheduling, and Control

These activities involve determining a time-phased schedule of production, developing

short-term production schedules, and controlling work-in-process production. The production
plan often relies on forecasts from marketing to estimate the volume of materials that are
required over the near term. Because operations is responsible for carrying out the production
plan and meeting customer-order due dates, order processing, production planning, and
operations must work together closely.

3.21 Shipping/Warehousing/Distribution

The shipping activity involves physically getting a product ready for transportation to
the customer. Shipping activities include: (1) proper packaging to prevent damage,
(2) attaching any special labeling requirements, (3) completing all required shipping
documents, and (4) arranging transportation with an approved carrier. For obvious reasons,
shipping and outbound transportation must work together closely.

Before a product is shipped to the customer, it may be stored for a period in a warehouse
or distribution center. This is particularly true for companies that produce according to a
forecast in anticipation of future sales. Increasingly, as companies attempt to make a product
only after receiving a customer order and information systems become more sophisticated, this
part of the supply chain may become less important.

3.22 Outbound Transportation

Many organizations have outsourced the transportation link to their customers. Full
service transportation providers called third party logistics providers (3PLs) are designing and
managing entire distribution networks for their clients. Firms operating in this space include
familiar names such as UPS, DHL, CH Robinson, and Ryder.

3.23 Customer Service

Customer service includes a wide set of activities that attempt to keep a customer
satisfied with a product or service. The three primary elements of customer service are
pretransition, transaction, and post-transaction activities.

3.24 Four Enablers of Purchasing and Supply Chain Management

Now that we have a better understanding of the terminology surrounding purchasing

and supply chain management, we must recognize that excellence in these areas does not just
happen. A commitment to the four enablers of purchasing and supply chain excellence permits
firms to reap real benefits (see Exhibit 1.6). These enablers provide the support that makes the
development of progressive strategies and approaches possible. Later chapters present these
four areas in detail.

The four enablers model shows that firms have certain guiding philosophies and
business requirements that are the foundation of all supply chain activities. These guiding
philosophies and requirements may relate to areas such as globalization, customer
responsiveness, or supply chain integration. The four enablers, in turn, support the development
of strategies and approaches that not only align with an organization’s philosophies and
requirements but also support the attainment of purchasing, supply chain, and organizational
objectives and strategies.

3.25 Capable Human Resources

 The key to the success of any company is the quality of its employees. This is certainly
true for purchasing. Exhibit 1.6 identifies, from previous research, the various kinds of
knowledge and skills demanded of today’s supply chain professional. Previous research
indicated that the top five knowledge areas for purchasers should include: (1) supplier
relationship

management, (2) total cost analysis, (3) purchasing strategies, (4) supplier analysis, and
(5) competitive market analysis.12 Effective supply chain management requires close
collaboration with suppliers as well as internal coordination with engineering, procurement,
logistics, customers, and marketing to coordinate activities and material flows across the supply
chain. These relationships with key suppliers become the basis for purchasing strategies. The
Babson College Good Practice Example illustrates how suppliers and the college benefit from
developing these strong ties with key outsourced suppliers. At Babson, these strong ties require
bi-weekly meetings to search for ways to provide increased value.

Cost management has become an integral part of purchasing and supply chain
management. With an inability to raise prices to customers, cost management becomes
essential to long-term success. Purchasing specialists at a major U.S. chemical company, for
example, evaluate major supply decisions using total cost models with data provided by
suppliers and other sources. Another company requires its teams to identify upstream cost
drivers past immediate suppliers, which the teams then target for improvement. These analyses
of total cost are then imposed upon the market situation and analysis of supplier capabilities to
arrive at an overall purchasing strategy.

Gaining access to the right skills will require a sound human resources strategy that
includes internal development of high-potential individuals, recruiting talent from other
functional groups or companies, and hiring promising college graduates.

3.26 Proper Organizational Design

Organizational design refers to the process of assessing and selecting the structure and
formal system of communication, division of labor, coordination, control, authority, and
responsibility required to achieve organizational goals and objectives, including supply chain
objectives.13 Formal charts portray only a portion of the workings of an organization. For
example, many organizations are now utilizing center-led supply management structures.
These hybrid forms of organization utilize various coordinating mechanisms that are not part
of a formal organizational chart.

The use of teams as part of supply chain design will continue to be important. However,
managers should use teams selectively. Few studies have established a clear connection
between teaming and higher performance, and even fewer have quantitatively assessed the
impact of teaming on corporate performance. The use of organizational work teams to support
purchasing and supply chain objectives does not guarantee greater effectiveness.

3.27 Real-Time Collaborative Technology Capabilities

 The development of information technology (IT) software and platforms that support
an end-to-end supply chain have grown rapidly in the twenty-first century. There are cloud-
based storage systems, a new wave of mobile devices that permit skyping for visual meetings,
and shared software platforms that permit visibility between all size supply chain partners.
Further identification technologies such as radio frequency identification (RFID) and voice
recognition systems are getting better and better.

For example, the e-supply chain company ULTRIVA which states on its website
“Ultriva solutions are helping manage the supply chains and improve the inventory velocity of
leading organizations at 150 plants in 20 countries. This cloud-based e-solutions provider’s
product is being used to transact over $2 billion of material spend on an annual basis and have
contributed to over $400 million in inventory savings for its customers. “cloud based solutions
continue to gain acceptance in supply management. Cloud computing refers to the shared
software and information that users access via the web. Rather than storing information on their
own physical servers or computer hard drives, users rely on servers that are maintained by the
cloud computing software providers (e.g., IBM Smart Cloud). According to Gartner, Inc., the
adoption rates are highest in the areas of collaborative (1) sourcing and procurement, (2)
demand planning, (3) global trade management (GTM), and (4) transportation management
systems (TMS).

These categories follow the two general software categories of planning and execution.
Planning software seeks to improve forecast accuracy, optimize production scheduling, reduce
working capital costs, shorten cycle times, cut transportation costs, and improve customer
service. Execution software helps obtain materials and manage physical flows from suppliers
through downstream distribution to ensure that customers receive the right products at the right
location, time, and cost. It can be summed up as “lean logistics,” “lean operations,” and “lean
supply.”

Regardless of the type of information technology platform or software used, supply

chain systems should capture and share information across functional groups and
organizational boundaries on a real-time or near-real-time basis. This may involve transmitting
the location of transportation vehicles using global positioning systems (GPSs), using Internet-
based systems to transmit material requirements to suppliers, or using bar code technology to
monitor the timeliness of receipts from suppliers. RFID tags are being used in more
applications to capture real-time data about material and product movement across the supply
chain.
 Examples regarding the relationship between information technology and supply chain
excellence are not hard to find. SanDisk Corporation is a global leader in flash memory storage
solutions. By using JDA’s software, SanDisk was able to improve its on-time deliveries to over
90 percent and was able to facilitate improved collaboration with its channel partners. This
increased delivery performance was achieved with less inventory as turnover increased from
three to eight in terms of petabytes of storage.

3.28 Right Measures and Measurement Systems

The right measures and measurement systems represent the fourth pillar supporting
purchasing and supply chain excellence. Unfortunately, there are many roadblocks between
measurement and improved performance. Some of these include (1) too many metrics, (2)
debate over the correct metrics, (3) constantly changing metrics, and (4) old data. Overcoming
these roadblocks requires that the organization know what it wants to measure, has a process
in place to measure it, and has accessibility to the right data. The next step involves taking
action on the measurement data.18 Finally, as with any planning system, the targets are revised
to reflect the realities of the marketplace, competition, and changing goals of the organization.

Why is measurement so important? First, objective measurement supports fact-based

rather than subjective decision making. Second, measurement is also an ideal way to
communicate requirements to other supply chain members and to promote continuous
improvement and change. When suppliers know their performance is being monitored, they
are likely to perform better. Many firms use the measurement system not only to improve future
supplier performance but also to recognize outstanding performance. For example, Lockheed-
Martin Corporation awarded Southwest Research Institute (SwRI) its STAR supplier award.19
Of Lockheed’s Electronic Systems’ 4700 suppliers, only 38 have received the STAR award.
Measurement also conveys what is important by linking critical measures to desired business
outcomes. The measurement process also helps determine if new initiatives are producing the
desired results. Finally, measurement may be the single best tool to control purchasing and
supply chain activities and processes.

Although there is no definitive or prescriptive set of supply chain measures, and there
certainly is no one best way to measure supply chain performance, we do know that effective
measures and measurement systems satisfy certain criteria. These criteria, which Exhibit 1.6
summarizes, provide a set of principles with which to assess supply chain measures and
measurement systems.
 These four enablers support the pursuit of progressive approaches and strategies that
begin to define purchasing and supply chain excellence. If organizations ignore these areas,
they will see their ability to develop progressive practices and approaches fall short of
competitors that have stressed these enabling areas.

3.29 Purchasing Objectives

The objectives of a world-class purchasing organization have evolved far beyond the
traditional mantra of ensuring we “get a good price!” To understand how this role has changed,
let’s review the major objectives of a world-class purchasing organization.

Objective 1: Supply Assurance

Purchasing must perform a number of activities to satisfy the operational requirements

of internal customers, which is the traditional role of the purchasing function. More often than
not, purchasing supports the needs of operations through the purchase of services, raw
materials, components, subassemblies, and repair and maintenance items. Purchasing may also
support the requirements of physical distribution centers responsible for storing and delivering
replacement parts or finished products to end customers. Purchasing also supports engineering
and technical groups (such as IT), particularly during new-product/service development and
outsourcing of key processes. As noted by one executive, “purchasing exists because a decision
was made to outsource something that could have been done internally.” In effect, purchasing
occurs because that outsourced product or service still needs to be managed, or performance
will atrophy.

With the dramatic increase in outsourcing, enterprises are relying increasingly on

external suppliers to provide not just materials and products, but information technology,
services, and design activities as well. As a greater proportion of the responsibility for
managing key business processes shifts to suppliers, purchasing must support this strategy by
providing an uninterrupted flow of high-quality goods and services that internal customers
require. Supporting this flow requires purchasing to do the following:

1. Source products and services at the right price.

2. Source them from the right source.
3. Source them at the right specification that meets users’ needs.
4. Source them in the right quantity.
 5. Arrange for delivery/service performance at the right time to the right internal
customer.

Supply managers must be responsive to the materials and support needs of their internal
users (sometimes also called internal customers). Failing to respond to the needs of internal
customers will diminish the confidence these users have in purchasing, and they may try to
negotiate contracts themselves (a practice known as maverick buying).

Objective 2: Manage the Sourcing Process Efficiently and Effectively

Purchasing must manage its internal operations efficiently and effectively, by

performing the following:

1. Determining staffing levels

2. Developing and adhering to administrative budgets
3. Providing professional training and growth opportunities for employees
4. Introducing improved buying channels within the procure-to-pay systems that
lead to improved spending visibility, efficient invoicing and payment, and user
satisfaction

Purchasing management has limited resources available to manage the purchasing

process and must continuously work toward improved utilization of these resources. Limited
resources include employees working within the department, external consulting, training,
travel, and IT budget limitations, other budgeted funds, time, information, and knowledge.
Organizations are therefore constantly looking for people who have developed the skills
necessary to deal with the wide variety of tasks faced by purchasing. Procurement people must
be focused on continuously improving transactional-level work through efficient purchasing
systems that keep suppliers satisfied, which makes life easier for internal users.

Talent management is proving to be an important task for procurement, as the need for
qualified purchasing personnel is growing globally. As organizations expand their production
boundaries to emerging countries such as Brazil, Russia, India, China, and other parts of Asia,
the challenge of finding people in these regions is increasing.

Objective 3: Supplier Performance Management

One of the most important objectives of the purchasing function is the selection,
development, and maintenance of suppliers, a process that is sometimes described as supplier
performance management (SPM). Purchasing must keep abreast of current conditions in supply
markets to ensure that purchasing (1) selects suppliers that are competitive, (2) identifies new
suppliers that have the potential for excellent performance and develops closer relationships
with these suppliers, (3) improves existing suppliers, and (4) develops new suppliers that are
not competitive with current suppliers. In so doing, purchasing can select and manage a supply
base capable of providing performance advantages in product cost, quality, technology,
delivery, and new-product development.

Supplier performance management requires that purchasing pursue better relationships

with external suppliers and develop reliable, high-quality supply sources. This objective also
requires that purchasing work directly with suppliers to improve existing capabilities and
develop new capabilities. In some cases, supply managers may need to challenge internal
customers who want to add new but unqualified suppliers to the supply base. A good part of
this text focuses on how purchasing can effectively meet these objectives.

Objective 4: Develop Aligned Goals with Internal Stakeholders

Global organizations have traditionally maintained organizational structures that have

resulted in limited cross-functional interaction and cross-boundary communication. Purchasing
must communicate closely with functional groups that represent their internal customers.
Internal customers are sometimes called stakeholders, in that they have a significant stake in
the outcome of purchasing’s decision. As such, purchasing’s activities are largely driven by
stakeholder requirements. If a supplier’s components are defective and causing problems for
manufacturing, then purchasing must find ways to improve supplier quality. Similarly, if
marketing is planning to launch a major advertising and promotion campaign, then purchasing
must work to understand supplier capabilities and help build effective service-level agreements
and pricing. In order to achieve this objective, purchasing must work closely alongside these
internal stakeholder groups, which may mean having procurement professionals who are
embedded in these groups, which may include marketing, manufacturing, engineering,
technology, IT, human resources, and finance.

Objective 5: Develop Integrated Supply Strategies That Support

Business Goals and Objectives

Perhaps the single most important objective for supply management is to support
business goals and objectives. Although this sounds easy, it is not always the case that
purchasing goals match organizational goals. This objective implies that purchasing can
directly affect (positively or negatively) the long-term growth, revenue, and operating
outcomes and plans of stakeholders and business units. For example, let’s assume an
organization has an objective of reducing the amount of working capital across its supply chain.
Purchasing can work with suppliers to deliver smaller quantities more frequently, leading to
inventory reductions and lower working capital levels. Such policies will show up as improved
performance on the firm’s balance sheet and income statements. In so doing, purchasing can
be recognized as a strategic asset that provides a powerful competitive advantage in the
marketplace.

Unfortunately, it is often the case that supply management fails to develop strategies
and plans that align with or support organizational strategies or the plans of other business
functions. There are a number of reasons why purchasing may fail to integrate their plans with
company plans. First, purchasing personnel have not historically participated in senior forums
discussing strategic business plans, because they have often been regarded as a tactical support
function. Second, executive management has frequently been slow to recognize the value that
a world-class procurement organization can provide to the business. As these two conditions
are rapidly changing, supply management executives have been promoted to a higher role and
are being invited to engage and participate in the strategic planning process. Some of the
industries that have already recognized the value of strategic supply include automotive,
consumer goods, electronics, and manufacturing. A supply management executive actively
involved in business strategy discussions can provide critical supply market intelligence,
budget forecasts, and other insights that contribute to more effective strategic business
planning. Examples of such inputs include:

1. Updates on supply market conditions and trends (e.g., material price increases,
shortages, changes in suppliers) and translation of these impacts on key business
outcomes.
2. Identification of emerging materials and service technologies to support
company strategies in key performance areas, particularly during new-product
development.
3. Development of supply options and contingency plans to reduce risk.
4. Support the requirements for a diverse and globally competitive supply base.
Chapter 4. Functions within Business Organization: Project
Management

Learning Outcomes

After studying this chapter, you should be able to:

1. Express a business need in terms of a problem or opportunity.

2. Understand how goal and solution can be used to define project types.
3. Appreciate the challenges of the complex project landscape.
4. Define a project, program, and portfolio.
5. Define a complex project.
6. Understand the Scope Triangle.
7. Envision the Scope Triangle as a system in balance.
8. Prioritize and apply the Scope Triangle for improved change management.
9. Know the importance of classifying projects.
10. Understand the project landscape and how it is applied.
11. Understand the challenges of effective project management.
12. Apply a business value definition of requirements.
13. Understand the Requirements Breakdown Structure (RBS) as the key to choosing and
adapting a best-fit Project Management Life Cycle (PMLC).
14. Know the characteristics of Traditional Project Management (TPM), Agile Project
Management (APM), Extreme Project Management (xPM), and Emertxe Project
Management (MPx).
15. Know how complexity and uncertainty affect the project landscape.
16. Understand the similarities and differences between Linear, Incremental, Iterative,
Adaptive, and Extreme PMLC models.

4.1 Defining a Project

Projects arise out of unmet needs. Some projects have been done several times under
similar situations and are relatively risk free. Others can be quite complex for a variety of
reasons. Those unmet needs might be to find a solution to a critical business problem that has
evaded prior attempts at finding a solution. Or those needs might be to take advantage of an
untapped business opportunity. In either case, a sponsor or customer prepares a business case
to advocate approval to pursue the appropriate project. Beginning with the projects that fall
somewhere between these very different types of projects, the main focus of this book is to
develop the best-fit project management approaches. This is and will continue to be a major
challenge even for the most skilled and creative project teams. The formal definition of that
effort follows.

DEFINITION: PROJECT

A project is a sequence of unique, complex, and connected activities that have

one goal or purpose and that must be completed by a specific time, within budget, and
according to specification.

This definition works well for simple projects, but we will find reason to modify it for
more complex projects. It is a commonly accepted definition of a project and tells you quite a
bit. Let’s take a closer look at each part of the definition.

4.1.1 Sequence of Activities

A project comprises a number of activities that must be completed in some specified
order, or sequence. For now, an activity is a defined chunk of work. Chapter 7, “How to Plan
a TPM Project,” formalizes this definition. The sequence of the activities is based on technical
requirements, not on management prerogatives. To determine the sequence, it is helpful to
think in terms of inputs and outputs. The output of one activity or set of activities becomes the
input to another activity or set of activities. Specifying a sequence based on resource constraints
or statements such as “Pete will work on activity B as soon as he finishes working on activity
A” should be avoided because this establishes an artificial relationship between activities. What
if Pete wasn’t available at all? Resource constraints aren’t ignored when you actually schedule
activities. The decision of what resources to use and when to use them comes later in the project
planning process.

4.1.2 Unique Activities

The activities in a project are unique. Something is always different each time the
activities of a project are repeated. Usually the variations are random in nature—for example,
a part is delayed, someone is sick, or a power failure occurs. These random variations are the
challenge for the project manager and what contributes to the uniqueness of the project.
4.1.3 Complex Activities
The activities that make up the project are not simple, repetitive acts, such as mowing
the lawn, painting the rooms in a house, washing the car, or loading the delivery truck. Instead
they are complex. For example, designing an intuitive user interface to an application system
is a complex activity. Most activities in the contemporary project are complex while some are
still simple.

4.1.4 Connected Activities

Being connected implies a logical or technical relationship between pairs of activities.
There is an order to the sequence in which the activities that make up the project must be
completed. They are considered connected because the output from one activity is the input to
another. For example, you must design the computer program before you can program it.

You could have a list of unconnected activities that must all be complete in order to
complete the project. For example, consider painting the interior rooms of a house. With some
exceptions, the rooms can be painted in any order. The interior of a house is not completely
painted until all its rooms have been painted, but they can be painted in any order. Painting the
house is a collection of activities, but it is not considered a project according to the definition.

4.1.5 One Goal

Projects must have a single goal—for example, to design an inner-city playground for
AFDC (Aid to Families with Dependent Children) families. However, very large or complex
projects may be divided into several subprojects, each of which is a project in its own right.
This division makes for better management control. For example, subprojects can be defined
at the department, division, or geographic level. This artificial decomposition of a complex
project into subprojects often simplifies the scheduling of resources and reduces the need for
interdepartmental communications while a specific activity is worked on. The downside is that
the projects are now interdependent. Even though interdependency adds another layer of
complexity and communication, it can be handled.

4.1.6 Specified Time

Projects are finite. They have a beginning and an end. Processes are continuous. They
repeat themselves. Projects have a specified completion date. This date can be self-imposed by
management or externally specified by a client or government agency. The deadline is beyond
the control of anyone working on the project. The project is over on the specified completion
date whether or not the project work has been completed.
 Being able to give a firm completion date requires that a start date also be known.
Absent a start date the project manager can only make statements like, “I will complete the
project 6 months after I start the project.” In other words, the project manager is giving a
duration for the project. Senior management wants a deadline.

4.1.7 Within Budget

Projects also have resource limits, such as a limited amount of people, money, or
machines that can be dedicated to the project. These resources can be adjusted up or down by
management, but they are considered fixed resources by the project manager. For example,
suppose a company has only one web designer. That is the fixed resource available to project
managers. If the one web designer is fully scheduled, the project manager has a resource
conflict that he or she cannot resolve.

Resource constraints become operative when resources need to be scheduled across

several projects. Not all projects can be scheduled because of the constraining limits on finite
resources. That brings management challenges into the project approval process.

4.1.8 According to Specification

The client, or the recipient of the project’s deliverables, expects a certain level of
functionality and quality from the project. These expectations can be self-imposed, such as the
specification of the project completion date, or client specified, such as producing the sales
report on a weekly basis.

Although the project manager treats the specification as fixed, the reality of the situation
is that any number of factors can cause the specification to change. For example, the client may
not have defined the requirements completely at the beginning of the project, or the business
situation may have changed (which often happens in projects with long durations). It is
unrealistic to expect the specification to remain fixed through the life of the project. Systems
specification can and will change, thereby presenting special challenges to the project manager.

Specification satisfaction has been a continual problem for the project manager and
accounts for a large percentage of project failures. Project managers deliver according to what
they believe are the correct specifications only to find out that the customer is not satisfied.
Somewhere there has been an expectation or communications disconnect. The Conditions of
Satisfaction (COS) process (discussed in Chapter 6, “How to Scope a TPM Project”) is one
way of managing potential disconnects.
4.1.9 A Business-Focused Definition of a Project

The major shortcoming of the preceding definition of a project is that it isn’t focused
on the purpose of a project, which is to deliver business value to the client and to the
organization. So, lots of examples exist of projects that meet all of the constraints and
conditions specified in the definition, but the client is not satisfied with the results. The many
reasons for this dissatisfaction are discussed throughout the book. So, I offer a better definition
of a project for your consideration.

DEFINITION: BUSINESS-FOCUSED PROJECT

A project is a sequence of finite dependent activities whose successful completion

results in the delivery of the expected business value that validated doing the project.

The major focus of every project is the satisfaction of client needs through the
generation of the expected business value. That will be the primary metric for assessing project
performance and progress.

4.1.10 An Intuitive View of the Project Landscape

Projects are not viewed in isolation. The enterprise will have collections of all types of
projects running in parallel and drawing on the same finite resources, so you will need a way
of describing that landscape and providing a foundation for management decision-making. I
like simple and intuitive models, so I have defined a project landscape around two
characteristics: goal and solution. Every project must have a goal and a solution. You could
use a number of metrics to quantify these characteristics, but the simplest and most intuitive
will be two values: clear and complete or not clear and incomplete. Two values for each
characteristic generate the four quadrant matrix shown in Figure 1.1.
 Figure 1.1: The four quadrants of the project landscape

I don’t know where the dividing line is between clear and not clear, but that is not
important to this landscape. These values are conceptual, not quantifiable, and their
interpretation is certainly more subjective than objective. A given project can exhibit various
degrees of clarity. The message in this landscape is that the transition from quadrant to quadrant
is continuous and fluid. To further label these projects, traditional projects are found in
Quadrant 1; Agile projects are found in Quadrant 2; Extreme projects are found in Quadrant 3,
and Emertxe (pronounced ee-MERT-zee) projects are found in Quadrant 4.

Traditional projects are defined and discussed in Part II, “Traditional Project
Management.” Complex projects (Agile, Extreme, and Emertxe) are defined and discussed in
Part III, “Complex Project Management.”

As an example, say that the project goal is to cure the common cold. Is this goal
statement clear and complete? Not really. The word cure is the culprit. Cure could mean any
one of the following:

1. Prior to birth, the fetus is injected with a DNA-altering drug that prevents the
person from ever getting a cold.
2. As part of everyone’s diet, they take a daily dose of the juice from a tree that
grows only in certain altitudes in the Himalayas. This juice acts as a barrier and
prevents the onset of the common cold.
3. Once a person has contracted a cold, they take a massive dose of tea made from
a rare tree root found only in central China, and the cold will be cured within 12
hours.
 So, what does cure really mean? As another example, consider this paraphrasing of a
statement made by President John F. Kennedy during his Special Message to Congress on
urgent national needs on May 25, 1961: By the end of the decade, we will have put a man on
the moon and returned him safely to earth. Is there any doubt in your mind that this goal
statement is clear and complete? When the project is finished, will there be any doubt in your
mind that this goal has or has not been achieved?

Every project that ever existed or will exist falls into only one of these four quadrants
at any point in time. This landscape is not affected by external changes of any kind. It is a
robust landscape that will remain in place regardless. The quadrant in which the project lies
will provide an initial guide to choosing a best-fit project management life cycle (PMLC)
model and adapting its tools, templates, and processes to the specific characteristics of the
project. As the project work commences and the goal and solution become clearer, the project’s
quadrant can change, and perhaps the PMLC will then change as well; however, the project is
always in one quadrant. The decision to change the PMLC for a project already underway may
be a big change and needs to be seriously considered. Costs, benefits, advantages, and
disadvantages are associated with a mid-project change of PMLC. “Hybrid Project
Management Framework,” offers some advice for making this decision.

Beyond clarity and completeness of the goal and solution, you have several other
factors to consider in choosing the best-fit PMLC and perhaps modifying it to better
accommodate these other factors. By way of example, one of those factors is the extent to
which the client has committed to be meaningfully involved. If the best-fit PMLC model
requires client involvement that is heavy and meaningful, as many complex projects do, and
you don’t expect to have that involvement, you may have to fall back to an approach that
doesn’t require as much client involvement or includes other preparatory work on your part.

For example, you may want to put a program in place to encourage the desired client
involvement in preparation for using the best-fit PMLC model. This is a common situation,
and you learn strategies for effectively dealing with it in Part III, “Complex Project
Management.”

4.1.11 Defining a Program

A program is a collection of related projects. The projects may have to be completed in

a specific order for the program to be considered complete. Because programs comprise
multiple projects, they are larger in scope than a single project. For example, the United States
Government had a space program that included several projects such as the Challenger Project.
A construction company contracts a program to build an industrial technology park with several
separate projects. Unlike projects, programs can have many goals. For example, every launch
of a new mission in the NASA space program included several dozen projects in the form of
scientific experiments. Except for the fact that they were all aboard the same spacecraft, the
experiments were independent of one another and together defined a program.

1. The projects may all originate from the same business unit—for example, information
technology.
2. The projects may all be new product development projects.
3. The projects may all be research and development projects.
4. The projects may all be infrastructure maintenance projects from the same business
unit.
5. The projects may all be process improvement projects from the same business unit.
6. The projects may all be staffed from the same human resource pool.
7. The projects may request financial support from the same budget.

Each portfolio will have an allocation of resources (time, dollars, and staff) to
accomplish whatever projects are approved for that portfolio. Larger allocations usually reflect
the higher importance of the portfolio and stronger alignment to the strategic plan. One thing
is almost certain: whatever resources you have available for the projects aligned to the
portfolio, the resources will not be enough to meet all requests. Not all projects proposed for
the portfolio will be funded and not all projects that are funded will necessarily be funded 100
percent. Hard choices have to be made, and this is where an equitable decision model is needed.

Your organization will probably have several portfolios. Based on the strategic plan,
resources will be allocated to each portfolio based on its priority in the strategic plan, and it is
those resources that will be used as a constraint on the projects that can be supported by the
specific portfolio.

4.1.12 Understanding the Scope Triangle

You may have heard of the term Iron Triangle or Triple Constraint. It refers to the
relationship between Time, Cost, and Scope. These three variables form the sides of a triangle
and are an interdependent set. If any one of them changes, at least one other variable must also
change to restore balance to the project. That is all well and good, but there is more to explain.
 Consider the following constraints that operate on every project:

1. Scope
2. Quality
3. Cost
4. Time
5. Resources
6. Risk

Except for Risk these constraints form an interdependent set—a change in one
constraint can require a change in one or more of the other constraints in order to restore the
equilibrium of the project. In this context, the set of five parameters form a system that must
remain in balance for the project to be in balance. Because they are so important to the success
or failure of the project, each parameter is discussed individually in this section.

4.1.13 Scope

Scope is a statement that defines the boundaries of the project. It tells not only what
will be done, but also what will not be done. In the information systems industry, scope is often
referred to as a functional specification. In the engineering profession, it is generally called a
Statement of Work (SOW). Scope may also be referred to as a document of understanding, a
scoping statement, a project initiation document, or a project request form. Whatever its name,
this document is the foundation for all project work to follow. It is critical that the scope be
correct. Scope is the most important of the six factors as it changes over the life of the project
and can cause significant changes to the project plan.

Beginning a project on the right foot is important, and so is staying on the right foot. It
is no secret that a project’s scope can change. You do not know how or when, but it will change.
Detecting that change and deciding how to accommodate it in the project plan are major
challenges for the project manager.

4.1.14 Quality

The following two types of quality are part of every project:

1. Product quality—The quality of the deliverable from the project. As used here
“product” includes tangible artifacts like hardware and software as well as
business processes. The traditional tools of quality control, discussed in
 Chapter 5, “What Are Project Management Process Groups?” are used to ensure
product quality.
2. Process quality—The quality of the project management process itself. The
focus is on how well the project management process works and how it can be
improved. Continuous quality improvement and process quality management
are the tools used to measure process quality.

A sound quality management program with processes in place that monitor the work in
a project is a good investment. Not only does it contribute to client satisfaction, but it helps
organizations use their resources more effectively and efficiently by reducing waste and
revisions. Quality management is one area that should not be compromised. The payoff is a
higher probability of successfully completing the project and satisfying the client.

4.1.15 Cost

The dollar cost of doing the project is another variable that defines the project. It is best
thought of as the budget that has been established for the project. This is particularly important
for projects that create deliverables that are sold either commercially or to an external customer.

Cost is a major consideration throughout the project management life cycle. The first
consideration occurs at an early and informal stage in the life of a project. The client can simply
offer a figure about equal to what he or she had in mind for the project. Depending on how
much thought the client put into it, the number could be fairly close to or wide of the actual
cost for the project. Consultants often encounter situations in which the client is willing to
spend only a certain amount for the work. In these situations, you do what you can with what
you have. In more formal situations, the project manager prepares a proposal for the projected
work. That proposal includes an estimate (perhaps even a quote) of the total cost of the project.
Even if a preliminary figure has been supplied by the project manager, the proposal allows the
client to base his or her go/no-go decision on better estimates.

4.1.16 Time

The client specifies a time frame or deadline date within which the project must be
completed. To a certain extent, cost and time are inversely related to one another. The time a
project takes to be completed can be reduced, but costs increase as a result.

Time is an interesting resource. It can’t be inventoried. It is consumed whether you use

it or not. The objective for the project manager is to use the future time allotted to the project
in the most effective and productive ways possible. Future time (time that has not yet occurred)
can be a resource to be traded within a project or across projects. Once a project has begun, the
prime resource available to the project manager to keep the project on schedule or get it back
on schedule is time. A good project manager realizes this and protects the future time resource
jealously.

4.1.17 Resources

Resources are assets such as people, equipment, physical facilities, or inventory that
have limited availabilities, can be scheduled, or can be leased from an outside party. Some are
fixed; others are variable only in the long term. In any case, they are central to the scheduling
of project activities and the orderly completion of the project.

For systems development projects, people are the major resource. Another valuable
resource for systems projects is the availability of computer processing time (mostly for testing
purposes), which can present significant problems to the project manager with regard to project
scheduling.

4.1.18 Risk

Risk is not an integral part of the Scope Triangle, but it is always present and spans all
parts of the project both external as well as internal, and therefore it does affect the management
of the other five constraints.

4.1.19 Envisioning the Scope Triangle as a System in Balance

The major benefit of using the Scope Triangle shown in Figure 1.2 instead of the three-
variable Iron Triangle can now be discussed. Projects are dynamic systems that must be kept
in equilibrium. Not an easy task, as you shall see! Figure 1.2 illustrates the dynamics of the
situation.
 Figure 1.2: The Scope Triangle

The geographic area inside the triangle represents the scope and quality of the project.
Lines representing time, cost, and resource availability bound scope and quality. Time is the
window of time within which the project must be completed. Cost is the dollar budget available
to complete the project. Resources are any consumables used on the project. People, equipment
availability, and facilities are examples.

The project plan will have identified the time, cost, and resource availability needed to
deliver the scope and quality of a project. In other words, the project is in equilibrium at the
completion of the project planning session and approval of the commitment of resources and
dollars to the project. That will not last too long, however. Change is waiting around the corner.

The Scope Triangle offers a number of insights into the changes that can occur in the
life of the project. For example, the triangle represents a system in balance before any project
work has been done. The sides are long enough to encompass the area generated by the scope
and quality statements. Not long after work begins, something is sure to change. Perhaps the
client calls with an additional requirement for a feature that was not envisioned during the
planning sessions. Perhaps the market opportunities have changed, and it is necessary to
reschedule the deliverables to an earlier date, or a key team member leaves the company and
is difficult to replace. Any one of these changes throws the system out of balance.

Part III, “Complex Project Management,” discusses projects whose final scope cannot
be known until the project is nearly complete. That presents some interesting management
 challenges to the client and the project manager. Those challenges revolve around the business
value delivered by the final solution and the final goal.

The project manager controls resource utilization and work schedules. Management
controls cost and resource level. The client controls scope, quality, and delivery dates. Scope,
quality, and delivery dates suggest a hierarchy for the project manager as solutions to
accommodate the changes are sought.

4.1.20 Prioritizing the Scope Triangle Variables for Improved Change

Management

The critical component of an effective project management methodology is the scope

management process. The five variables that define the Scope Triangle must be prioritized so
that the suggested project plan revisions can be prioritized. Figure 1.3 gives an example.

Figure 1.3: Prioritized Scope Triangle variables

A common application of the prioritized Scope Triangle variables occurs whenever a

scope change request is made. The analysis of the change request is documented in a Project
Impact Statement (PIS). If the change is to be approved, there will be several alternatives as to
how that change can be accommodated. Those alternatives are prioritized using the data in
Figure 1.3.

4.1.21 Applying the Scope Triangle

There are only a few graphics that I want you to burn into your brain because of their
value throughout the entire project life cycle. The Scope Triangle is one such graphic. It will
have at least two major applications for you: as a problem escalation strategy and as a reference
for the Project Impact Statement, which is created as part of the scope change process.

4.1.22 Problem Resolution

The Scope Triangle enables you to ask the question, “Who owns what?” The answer
will give you an escalation pathway from project team to resource manager to client to sponsor.
The client and senior management own time, budget, and resources. The project team owns
how time, budget, and resources are used. Within the policies and practices of the enterprise,
any of these may be moved within the project to resolve problems that have arisen. In solving
a problem, the project manager should try to find a solution within the constraints of how the
time, budget, and resources are used. Project managers do not need to go outside of their sphere
of control.

The next step in the escalation strategy would be for the project manager to appeal to
the resource managers for problem resolution. The resource manager owns who gets assigned
to a project as well as any changes to that assignment that may arise.

The final step in the problem escalation strategy is to appeal to the client and perhaps
to the sponsor for additional resources. They control the amount of time and money that has
been allocated to the project. Finally, they control the scope of the project. Whenever the
project manager appeals to the client, it will be to get an increase in time or budget and some
relief from the scope by way of scope reduction or scope release.

4.1.23 Scope Change Impact Analysis

The second major application of the Scope Triangle is as an aid in the preparation of
the Project Impact Statement. This is a statement of the alternative ways of accommodating a
particular scope change request of the client. The alternatives are identified by reviewing the
Scope Triangle and proceeding in much the same way as discussed in the previous paragraph.
Chapter 9, “How to Execute a TPM Project,” includes a detailed discussion of the scope change
process and the use of the Project Impact Statement.

The Importance of Classifying Projects

There are many ways to classify a project, such as the following:

1. By size (cost, duration, team, business value, number of departments affected,

and so on)
 2. By type (new, maintenance, upgrade, strategic, tactical, operational)
3. By application (software development, new product development, equipment
installation, and so on)
4. By complexity and uncertainty (see Chapter 11, “Complexity and Uncertainty
in the Project Landscape”)

Projects are unique and to some extent so is the best-fit model to manage them. Part III,
“Complex Project Management,” is devoted to exploring the best fit models and when to use
them. For now, it is sufficient to understand that a one-size-fits-all approach to project
management doesn’t work and has never worked. It is far more effective to group projects
based on their similarities and to use a project management approach designed specifically for
each project type. That is the topic of this section.

4.1.24 Establishing a Rule for Classifying Projects

For the purposes of this chapter, two different rules are defined here. The first is based
on the characteristics of the project, and the second is based on the type of project.

4.1.25 Classification by Project Characteristics

Many organizations choose to define a classification of projects based on such project

characteristics as the following:

1. Risk—Establish levels of risk (high, medium, and low).

2. Business value—Establish levels (high, medium, and low).
3. Length—Establish several categories (such as 3 months, 3 to 6 months, 6 to 12
months, and so on).
4. Complexity—Establish categories (high, medium, and low).
5. Technology used—Establish several categories (well-established, used
occasionally, used rarely, never used).
6. Number of departments affected—Establish some categories (such as one, a
few, several, and all).
7. Cost

The project profile determines the classification of the project. The classification
defines the extent to which a particular project management methodology is to be used. In Part
III, “Complex Project Management,” you use these and other factors to adjust the best-fit
project management approach.
 I strongly advocate this approach because it adapts the methodology to the project.
“One size fits all” does not work in project management. In the final analysis, I defer to the
judgment of the project manager. In addition to the parts required by the organization, the
project manager should adopt whatever parts of the methodology he or she feels improves his
or her ability to help successfully manage the project. Period.

Project characteristics can be used to build a classification rule as follows:

1. Type A projects—These are high-business-value, high-complexity projects.

They are the most challenging projects the organization undertakes. Type A
projects use the latest technology, which, when coupled with high complexity,
causes risk to be high also. To maximize the probability of success, the
organization requires that these projects utilize all the methods and tools
available in their project management methodology. An example of a Type A
project is the introduction of a new technology into an existing product that has
been very profitable for the company.
2. Type B projects—These projects are shorter in length, but they are still
significant projects for the organization. All of the methods and tools in the
project management process are probably required. Type B projects generally
have good business value and are technologically challenging. Many product
development projects fall in this category.
3. Type C projects—These are the projects that occur most frequently in an
organization. They are short by comparison and use established technology.
Many are projects that deal with the infrastructure of the organization. A typical
project team consists of five people, the project lasts 6 months, and the project
is based on a less-than-adequate scope statement. Many of the methods and tools
are not required for these projects. The project manager uses those optional tools
only if he or she sees value in their use.
4. Type D projects—These just meet the definition of a project and may require
only a scope statement and a few scheduling pieces of information. A typical
Type D project involves making a minor change in an existing process or
procedure or revising a course in the training curriculum.

Table 1.1 gives a hypothetical example of a classification rule. These four types of
projects might use the parts of the methodology shown in Figure 1.4. The figure lists the
methods and tools that are either required or optional, given the type of project.
 Table 1.1: Example of Project Classes and Definitions

CLASS DURATION RISK COMPLEXITY TECHNOLOGY LIKELIHOOD

OF
PROBLEMS

Type A >18 months High High Breakthrough Certain

Type B 9-18 months Medium Medium Current Likely

Type C 3-9 months Low Low Best breed Some

Type D < 3 months Very Very low Practical Few

low

Figure 1.4: The use of required and optional parts of the methodology by type of project

4.1.26 Classification by Project Application

 Many situations exist in which an organization repeats projects that are of the same
type. Following are some examples of project types:

1. Installing software
2. Recruiting and hiring
3. Setting up hardware in a field office
4. Soliciting, evaluating, and selecting vendors
5. Updating a corporate procedure
6. Developing application systems

These projects may be repeated several times each year and probably will follow a
similar set of steps each time they are done.

4.2.27 The Contemporary Project Environment

The contemporary project environment is characterized by high speed, high change,

lower costs, complexity, uncertainty, and a host of other factors. This presents a daunting
challenge to the project manager as is described in the sections that follow.

4.1.28 High Speed

The faster products and services get to market, the greater will be the resulting value to
the business. Current competitors are watching and responding to unmet opportunities, and
new competition is waiting and watching to seize upon any opportunity that might give them
a foothold or expansion in the market. Any weakness or delay in responding may just give
them that advantage. This need to be fast translates into a need for the project management
approach to not waste time—to rid itself, as much as possible, of spending time on non-value-
added work. Many of the approaches you will study are built on that premise.

The window of opportunity is narrowing and constantly moving. Organizations that can
quickly respond to those opportunities are organizations that have found a way to reduce cycle
times and eliminate non-value-added work as much as possible. Taking too long to roll out a
new or revamped product can result in a missed business opportunity. Project managers must
know how and when to introduce multiple release strategies and compress project schedules to
help meet these requirements. Even more importantly, the project management approach must
support these aggressive schedules. That means that these processes must protect the schedule
by eliminating all non-value-added work. You simply cannot afford to burden your project
management processes with a lot of overhead activities that do not add value to the final
deliverables or that may compromise your effectiveness in the markets you serve.

Effective project management is not the product of a rigid or fixed set of steps and
processes to be followed on every project. Rather, the choice of project management approach
is based on having done due diligence on the project specifics and defined an approach that
makes sense. I spend considerable time on these strategies in later chapters.

4.1.29 High Change

Clients are often making up their minds or changing their minds about what they want.
The environment is more the cause of high change than is any ignorance on the part of the
client. The business world is dynamic. It doesn’t stand still just because you are managing a
project. The best-fit project management approach must recognize the realities of frequent
change, accommodate it, and embrace it. The extent to which change is expected will affect
the choice of a best-fit PMLC model.

Change is constant! I hope that does not come as a surprise to you. Change is always
with you and seems to be happening at an increasing rate. Every day you face new challenges
and the need to improve yesterday’s practices. As John Naisbitt says in The Third Wave,
“Change or die.” For experienced project managers as well as “wannabe” project managers,
the road to breakthrough performance is paved with uncertainty and with the need to be
courageous, creative, and flexible. If you simply rely on a routine application of someone else’s
methodology, you are sure to fall short of the mark. As you will see in the pages that follow, I
have not been afraid to step outside the box and outside my comfort zone. Nowhere is there
more of a need for change and adaptation than in the approaches we take to managing projects.

4.1.30 Lower Cost

With the reduction in management layers (a common practice in many organizations)

the professional staff needs to find ways to work smarter, not harder. Project management
includes a number of tools and techniques that help the professional manage increased
workloads. Your staffs need to have more room to do their work in the most productive ways
possible. Burdening them with overhead activities for which they see little value is a sure way
to failure.

In a landmark paper, “The Coming of the New Organization,” written more than 20
years ago but still relevant, Peter Drucker [Drucker, 1988] depicts middle managers as either
ones who receive information from above, reinterpret it, and pass it down, or ones who receive
information from below, reinterpret it, and pass it up the line. Not only is quality suspect
because of personal biases and political overtones, but also the computer is perfectly capable
of delivering that information to the desk of any manager who has a need to know. Given these
factors, plus the politics and power struggles at play, Drucker asks why employ middle
managers? As technology advances and acceptance of these ideas grows, we have seen the
thinning of the layers of middle management. Do not expect them to come back; they are gone
forever. The effect on project managers is predictable and significant. Hierarchical structures
are being replaced by organizations that have a greater dependence on projects and project
teams, resulting in more demands on project managers.

4.1.31 Increasing Levels of Complexity

All of the simple problems have been solved. Those that remain are getting more
complex with each passing day. At the same time that problems are getting more complex, they
are getting more critical to the enterprise. They must be solved. We don’t have a choice. Not
having a simple recipe for managing such projects is no excuse. They must be managed, and
we must have an effective way of managing them. This book shows you how to create
common-sense project management approaches by adapting a common set of tools, templates,
and processes to even the most complex of projects.

4.1.32 More Uncertainty

With increasing levels of complexity come increasing levels of uncertainty. The two
are inseparable. Adapting project management approaches to handle uncertainty means that the
approaches must not only accommodate change, but also embrace it and become more effective
as a result of it. Change is what will lead the team and the client to a state of certainty with
respect to a viable solution to its complex problems. In other words, we must have project
management approaches that expect change and benefit from it.

4.2 What Is Project Management?

I suspect that for many of you this chapter will be your first exposure to just how broad
and deep the world of managing projects can be. It never ceases to amaze me that even after
more than 50 years of practicing project management I am still encountering new challenges
and learning wondrous things about this amazing discipline. I do know that it requires courage,
creativity, and flexibility to be successful.
 UNIQUE VALUE PROPOSITION

Project management is a process that answers six questions:

1. What business situation is being addressed by this project?

2. What does the business need to do?

3. What are you proposing to do?

4. How will you do it?

5. How will you know you did it?

6. How well did you do?

COMMENT ON THE SIX QUESTIONS

Being an effective project manager is a creative pursuit!

You’re not in Kansas anymore! Once you might have expected (and sometimes
got) a recipe for managing any project you might be assigned. If that is the case in your
organization, be suspect—please. You now have to think your way through to the way
you will manage a project. Effective project managers have to think rather than
routinely react. The discipline of project management has morphed to a new state and,
as this book is being written, that state has not yet reached a steady state. In fact, the
practice of effective project management may never reach a steady state. The business
world is in a constant state of flux and change and it will always be that way. That
continues to influence how you need to approach managing projects. And your
approach to a given project is going to be in a constant state of flux and change. What
does this mean to the struggling project manager? Take courage: it’s not as grim as it
may seem.

4.2.1 Understanding the Fundamentals of Project Management

The Project Management Institute (PMI) formally defines project management as
follows:

Even though that definition is open to broad interpretation I have no problem with it because I
prefer to keep things simple and intuitive and that is what PMI has done. The devil is in the
details. For our purposes here, I’m going to add a little more content to the PMI definition. The
definition that I offer is designed to be a working definition.

Regardless of how you choose to define your project management process it will always
reduce to the six-question litmus test given in the Unique Value Proposition stated above. So,
if you or your enterprise are designing a project management process, check its validity by
using it to answer these six questions. In my mind this is a simple and intuitive definition of
project management and it is couched in terms that make sense to the business person. Let’s
quickly look at each of these questions.

4.2.2 What Business Situation Is Being Addressed by This Project?

The business situation is either a problem that needs a solution or an untapped
opportunity. If it is a problem, the solution may be clearly defined and the delivery of that
solution will be rather straightforward. If the solution is not completely known, then the project
management approach must iteratively embrace the learning and discovery of that solution.
Obviously, these will be higher-risk projects than the first case simply because the deliverables
are not clearly defined and may not be discovered despite the best collaborative efforts of the
client and the project team.

4.2.3 What Does the Business Need to Do?

The obvious answer is to solve the problem or take advantage of the untapped business
opportunity. That’s all well and good but given the business circumstances under which the
project will be undertaken, it may not be possible or even advisable. Even if the solution is
clearly known, you might not have the skilled resources to successfully execute the project,
and if you do have the resources, they may not be available when you need them. For maximum
business value to be delivered, senior management must consider the entire portfolio of projects
and assign/reassign resources based on the changing priorities of the projects in its portfolio.
That is a challenge to be addressed but it is out of scope for this book.

When the solution is not known or only partially known, you might not be successful
in finding the complete solution or even an acceptable solution. These are high-risk projects
with uncertain outcomes. In any case, you need to document what needs to be done. You’ll do
this through a statement of solution requirements.

4.2.4 What Are You Proposing to Do?

The answer to this question will be framed in your goal and objective statements.
Maybe you and others will propose partial solutions to the problem or ways to take advantage
of the untapped opportunity. In any case, your goal and objective statements are given as part
of a Project Overview Statement (POS).

4.2.5 How Will You Do It?

This answer will document your approach to the project and your detailed plan for
meeting the goal and objective statements discussed in the POS. That approach might be fully
documented at the outset or only developed iteratively, but it will be developed.

4.2.6 How Will You Know You Did It?

Your solution will deliver some business value to the organization. The expected
business value will have been used as the basis for approving you’re doing the project in the
first place. That success criterion may be expressed in the form of Increased Revenue (IR) or
Avoid Costs (AC) or Improved Services (IS). IRACIS is the acronym that represents these
three areas of business value. Whatever form that success criterion takes, it must be expressed
in quantitative terms so that there is no argument as to whether or not you achieved the expected
business results. As part of the post-implementation audit (see Chapter 10, “How to Close a
TPM Project”), you will compare the actual business value realized to the expected business
value stated in the POS.

4.2.7 How Well Did You Do?

The answer to this question can be determined by the answers to the following four
questions:

✓ How well did your deliverables meet the stated success criteria? The project
was sold to management based on the incremental business value that would be
returned to the organization if the project were successful. Did the project
deliver those results and to what extent? Sometimes the answer will not be
known for some time.
✓ How well did the project team perform? The project team was following
some project management life cycle (PMLC) model. There should be some
assessment of how well they followed that model.
✓ How well did the project management approach work for this project? In
addition to doing things right the team needed to do the right thing. Given that
several approaches could have been used, the team should have used the best-
fit model.
 ✓ What lessons were learned that can be applied to future projects? This
question is answered through the post-implementation audit.

The answers to these four questions are provided in the post-implementation audit,
“How to Close a TPM Project.”

The answers to the original six questions discussed in the preceding sections reduce
project management to nothing more than organized common sense. In my world to be
“organized” means that the process(es) used are continuously adapted to meet the changing
needs of the project. To be “common sense” means the management process did not require
that non-value-added work be done. If it weren’t organized common sense, you need to
question why you are doing it at all. So a good test of whether or not your project management
approach makes sense lies in how you answered the preceding six questions. With all of that
as background our working definition of project management can be succinctly stated as
follows:

DEFINITION: PROJECT MANAGEMENT

Project Management is an organized common-sense approach that utilizes the

appropriate client involvement in order to meet sponsor needs and deliver the expected
incremental business value.

This definition is a marked change from any you may have seen before. First, it is the
only definition that I have seen in print that explicitly refers to business value. Business value
is the responsibility of the client through their requirements statements. The project manager
is responsible for meeting those requirements. Meeting requirements is the cause and
incremental business value is the effect.

Second, and equally important in the definition through the common-sense term is the
implication that effective project management is not a “one size fits all” approach. Because it
is a “common-sense approach” it must adapt to the changing project conditions. You will learn
the rules of the engagement for effectively managing projects. The definition of the PMLC
models given in the section “Introducing Project Management Life Cycles” is the beginning of
your journey to become an effective complex project manager. You will become a leader who
at the same time is creative, adaptive, flexible, and courageous. In effect I will define the
contents of the pantry from which you will build the recipes you will need for managing your
projects. It will be up to you to be the chef.
 Third, it is essential that you clearly understand requirements. Requirements and their
documentation will establish the project characteristics and be your guide to choosing and
adapting the project-management approach you will be using. I am going to take a rather
unconventional approach based on my own definition of requirements. But my approach has
successfully passed the test of time.

4.2.8 Challenges to Effective Project Management

As discussed earlier in this chapter the contemporary project environment presents the
project manager and the client with a number of challenges to managing such projects
effectively. The use of the best-fit PMLC model will rise to these challenges and adapt as
necessary.

4.2.9 Flexibility and Adaptability

TPM practices were defined and matured in the world of the engineer and construction
professional where the team expected (and got, or so they thought) a clear statement from
clients as to what they wanted, when they wanted it, and how much they were willing to pay
for it. All of this was delivered to the project manager wrapped in a neat package. The “i” s
were all dotted, and the “t” s were all crossed. All the correct forms were filed, and all the boxes
were filled in with the information requested. Everyone was satisfied that the request was well
documented and that the deliverables were sure to be delivered as requested. The project team
clearly understood the solution they would be expected to provide, and they could clearly plan
for its delivery. That describes the naive world of the embryonic project manager until the
1950s. By the mid-1950s the computer was well on its way to becoming a viable commercial
resource, but it was still the province of the engineer. Project management continued as it had
under the management of the engineers.

The first sign that change was in the wind for the project manager arose in the early
1960s. The use of computers to run businesses was now a reality, and we began to see position
titles like programmer, programmer/analyst, systems analyst, and primitive types of database
architects emerging. These professionals were really engineers in disguise, and somehow, they
were expected to interact with the business and management professionals (who were totally
mystified by the computer and the mystics that could communicate with it) to design and
implement business applications systems to replace manual processes. This change represented
a total metamorphosis of the business world and the project world, and we would never look
back.
 In the face of this transformation into an information society, TPM wasn’t showing any
signs of change. To the engineers, every IT project-management problem looked like a nail,
and they had the hammer. In other words, they had one solution, and it was supposed to fit
every problem. One of the major problems that TPM faced, and still faces, is the difference
between wants and needs. If you remember anything from this introduction, remember that
what the client wants is probably not what the client needs. If the project manager blindly
accepts what the clients say they want and proceeds with the project on that basis, the project
manager is in for a rude awakening. Often in the process of building the solution, the client
learns that what they need is not the same as what they requested. Here you have the basis for
rolling deadlines, scope creep, and an endless trail of changes and reworks. It’s no wonder that
70-plus percent of projects fail. That cycle has to stop. You need an approach that is built
around change—one that embraces learning and discovery throughout the project life cycle. It
must have built-in processes to accommodate the changes that result from this learning and
discovery.

I have talked with numerous project managers over the past 30 years about the problem
of a lack of clarity and what they do about it. Most would say that they deliver according to the
original requirements and then iterate to improve the solution one or more times before they
satisfy the client’s current requirements. I asked them, “If you know you are going to iterate,
why don’t you use an approach that has that feature built in?” Until recently, with the
emergence of APM approaches, the silence in response to that question has been deafening.
All of the agile and extreme approaches to project management emerging in practice are built
on the assumption that there will be changing requirements as the client gains better focus on
what they actually need. Sometimes those needs can be very different than their original wants.

Obviously, this is no longer your father’s project management. The Internet and an
ever-changing array of new and dazzling technologies have made a permanent mark on the
business landscape. Technology has put most businesses in a state of confusion. How should a
company proceed to utilize the Internet and extract the greatest business value? Businesses are
asking even the more basic questions— “What business are we in?” “How do we reach and
service our customers?” “What do our customers expect?” The dot-com era began quickly with
a great deal of hyperbole and faded just as quickly. A lot of companies came into existence on
the shoulders of highly speculative venture capitalists in the 1990s and went belly up by the
end of the century. Only a few remain, and even their existence is tenuous. The current
buzzwords e-commerce, e-business, and knowledge management have replaced B2B and B2C,
and businesses seem to be settling down. But we are still a long way from recovery.

The question on the table is this: “What impact should this have on your approach to
project management?” The major impact should be that project-management approaches must
align with the business of the enterprise. Project management needs to find its seat at the
organization’s strategy table. Project managers must first align to the needs of the organization
rather than their own home department. That is today’s critical success factor. The appearance
of the business analyst has added new challenges, as discussed in the next section.

4.2.10 Deep Understanding of the Business and Its Systems

The best project managers understand the business context in which project deliverables
must be defined, produced, and function. This means not only an understanding of the internal
systems and their interaction, but also the external systems environment of suppliers and
customers in whose environments the deliverables must function. The systems analyst and
business analyst are key components in that understanding. There is a good argument that can
be offered for the morphing of the project manager and the business analyst into one
professional having the requisite skills and competencies of both. That discussion is out of
scope for this book, but it is a discussion that needs to take place.

4.2.11 Take Charge of the Project and Its Management

I like simplicity, and I believe my definition of the project landscape using only two
variables—goal and solution—with two values each—clear and not clear—is simple yet all-
inclusive of all projects. The result is four quadrants of projects. Each quadrant maps to one or
more project management processes, which we label as shown here:

1. When the goal and solution are clear, it generates the Traditional Project
Management (TPM) category.
2. When the goal is clear but the solution is not, it generates the Agile Project
Management (APM) category.
3. When neither the goal nor the solution is clear, it generates the Extreme Project
Management (xPM) category.
4. And finally when the goal is not clear but the solution is, it generates the
Emertxe Project Management (MPx) category (though this may seem
nonsensical, it is not—more on this one later).
 Every project that has ever existed or will exist falls into one and only one of these four
quadrants at a point in time. Change the point in time and you may change the quadrant of the
project. Each quadrant gives rise to one or more PMLC models. This four-quadrant
classification gives rise to five PMLC models. It is these models—their recognition and use—
that is the subject of this book.

4.2.12 Project Management Is Organized Common Sense

The PMBOK® Guide Sixth Edition definition of project management is crisp, clean,
and clearly stated. It has provided a solid foundation on which to define the process groups and
processes that underlie all project management. But I think there is another definition that
transcends the PMBOK® Guide Sixth Edition definition and is far more comprehensive of
what project management entails. As I have noted, I offer that definition as nothing more than
organized common sense with a focus on business value. Projects are unique, and each one is
different than all others that have preceded it. That difference might simply be caused by the
passage of time, newer processes or technologies too. That uniqueness requires an approach
that continually adapts as new characteristics of the project are discovered. These
characteristics can and do emerge anywhere along the project life cycle. Being ready for them
and adjusting as needed means that we must be always attentive to doing what makes the most
sense given the circumstances. In addition to the project characteristics the environment in
which the project is executed has an effect. From an internal perspective the organizational
culture and business processes either support or constrain project management efforts. And
finally, the dynamic market will have a major impact. The emergence of new technologies can
completely reverse the direction of a project or render it obsolete even before it is deployed.
Competitors are global and may not even be identified until it is too late. In the face of all these
factors, project management is nothing more than organized common sense.

4.2.13 Managing the Creeps

While some of your team members may occasionally seem like creeps to you, that is
not the creep management I am talking about. Creeps here refer to minute changes in the project
due to the obscure, and for a while unnoticeable, actions of team members. Many of these go
undetected until their cumulative effect creates a problem that raises its ugly head. There are
four types of creeps.

4.2.14 Scope Creep

Scope creep is the term that has come to mean any change in the project deliverables
that was not in the original plan. Change is constant. To expect otherwise is simply unrealistic.
Changes occur for several reasons that have nothing to do with the ability or foresight of the
client, the project manager, or a project team member. Market conditions are dynamic. The
competition can introduce or announce an upcoming new version of its product. Your
management might decide that getting the product to market before the competition is
necessary. Scope may not be affected by the schedule change. Scope creep isn’t necessarily
anyone’s fault. It is just a reality that has to be dealt with. It doesn’t matter how good and
thorough a job you and the client did in planning the project, scope creep is still going to
happen. Deal with it!

Your job as project manager is to figure out how these changes can be accommodated—
tough job, but somebody has to do it. Regardless of how the scope creep occurs, it is your job
as project manager to figure out how, or even if, you can accommodate the impact.

4.2.15 Hope Creep

Hope creep happens when a project team member falls behind schedule but reports that
he or she is on schedule, hoping to get back on schedule by the next report date. Hope creep is
a real problem for the project manager. There will be several activity managers within your
project team who manage a hunk of work. They do not want to give you bad news, so they are
prone to tell you that their work is proceeding according to schedule when, in fact, it is not. It
is their hope that they will catch up by the next report period, so they mislead you into thinking
that they are on schedule. The activity managers hope that they will catch up by completing
some work ahead of schedule to make up for the slippage. The project manager must be able
to verify the accuracy of the status reports received from the team members. This does not
mean that the project manager has to check into the details of every status report. Random
checks can be used effectively.

4.2.16 Effort Creep

Effort creep is the result of the team member working but not making progress
proportionate to the work expended. Every one of us has worked on a project that always seems
to be 95 percent complete no matter how much effort is expended to complete it. Each week
the status report records progress, but the amount of work remaining doesn’t seem to decrease
proportionately. Other than random checks, the only effective thing that the project manager
can do is to increase the frequency of status reporting by those team members who seem to
suffer from effort creep.

4.2.17 Feature Creep

Closely related to scope creep is feature creep. Feature creep results when team
members arbitrarily add features and functions to the deliverable that they think the client
would want to have even though they are not included in requirements or the scope statements.
The problem is that the client didn’t specify the feature, probably for good reason. If the team
member has strong feelings about the need for this new feature, formal change management
procedures can be employed.

4.2.18 What Are Requirements, Really?

The first substantive part of the project life cycle is the identification of what is needed.
That is initiated by the sponsor or the client, and with the help of the client, needs are further
described through a process to elicit requirements. Requirements define things that a product
or service is supposed to do to satisfy the needs of the sponsor or the client and deliver expected
business value. A more formal definition is given by the International Institute of Business
Analysis (IIBA) in “The Guide to the Business Analysis Body of Knowledge”:

A requirement is:

1. A condition or capability needed by a stakeholder to solve a problem or achieve

an objective.
2. A condition or capability that must be met or possessed by a solution or solution
component to satisfy a contract, standard, specification, or other formally
imposed documents.
3. A documented representation of a condition or capability as in (1) or (2). [IIBA,
2009]

That is all well and good and I’m not going to challenge the definition. I assume it does
what it is supposed to do. But let me offer a different perspective for your consideration and
practical application.

Two things link the deliverables to the requirements:

 1. The need to deliver business value—The more the better
2. Complexity and uncertainty—All of the simple projects have been done

Complexity and uncertainty dominate the elicitation of requirements. In a typical

complex project complete and clear definition of requirements (using the IIBA definition) is
unlikely at the outset of the project. That compromises the IIBA definition. Generating
acceptable business value is really the only measure of project success. Meeting time, cost, and
specifications is not a business definition of success. I’ve long felt that the criterion for defining
project success as meeting a specification within the constraints of time and cost has always
been misdirected. It really ignores the business, the client, and organizational satisfaction. My
criterion is that project success is measured by delivering expected business value. Nothing
more. After all, isn’t it expected business value that justified the need to do the project in the
first place? There are of course some exceptions in the case of mandated and otherwise required
projects regardless of whether or not they deliver business value.

Here is a working definition of a requirement:

WORKING DEFINITION: REQUIREMENT

A requirement is a desired end-state whose successful integration into the

solution meets one or more client needs and delivers specific, measurable, and
incremental business value to the organization.

Furthermore, the set of high-level requirements forms a necessary and sufficient

set for the attainment of incremental business value.

In other words, a requirement describes what a solution must do but not how it must do
it. So, the requirement is solution independent. Even if a solution is not known, the
requirements of that solution can be established. That is critical to complex projects because
we may know the requirements but not how to achieve them.

The necessary and sufficient conditions statement means that all requirements are
needed in order to achieve the success criteria and none of the requirements are superfluous.
This is important because the project was justified based on the expected business value as
described through the success criteria. Linking requirements to the success criteria provides a
basis on which to prioritize requirements.

This definition of a requirement is quite different than the IIBA definition but in its
simplicity and uniqueness it puts the connection between requirements and the project in a
much more intuitive light. I have no particular issue with the IIBA definition but I believe that
a working definition linked to business value is a better choice. I will use my definition
throughout this book.

Requirements will be the causal factors that drive the attainment of the success criteria
as stated in the POS. Every requirement must be directly related to a project success statement.
This definition results in a small number (8–12, for example) of high-level requirements at the
beginning of the project, whereas the IIBA definition generates hundreds and even thousands
of requirements that can never be considered complete at the beginning of the project. The last
time I applied the IIBA definition, the client and my team generated over 1,400 requirements!
The human mind cannot possibly absorb and understand that many requirements. To expect
that a decision as to completeness can be made is highly unlikely. Subject to the learning and
discovery that may uncover other requirements, the list generated using my high-level
requirements definition can be considered complete at the beginning of the project. The
decomposition of those high-level requirements may not be fully known at the beginning of
the project, however. My requirement is a more business-value-oriented definition than the
IIBA definition. The learning and discovery derived from completed project cycles will clarify
the requirements through decomposing them to the function, sub-function, process, activity,
and feature levels. The first-level decomposition of a requirement is to the functional level and
can be considered equivalent to IIBA requirements. So while you can identify all requirements
at the beginning of the project you cannot describe the details of the requirements at the
functional, sub-functional, process, activity, and feature levels. This detail is learned and
discovered in the context of the cycles that make up the project.

I’ll have much more to say about requirements elicitation, gathering, decomposition,
and completeness in Chapter 6, “How to Scope a TPM Project,” and in Part III, “Complex
Project Management,” where you will learn how requirements completeness relates to the
choice of best-fit PMLC model.

I have always strived for simplicity and intuitiveness in all the tools, templates, and
processes that I use. I find that my higher-order definition of a requirement meets that goal for
me and makes sense too. My clients have validated that for me.

The RBS is the key input to choosing the best-fit PMLC model. This decision-making
process is really quite simple. By working through the process of generating the RBS, you and
the client will be able to assess the completeness and confidence you have in the resulting RBS.
If the project is one that you have done several times, you should have a high degree of
confidence that the RBS is complete. This might be the case with repetitive infrastructure
projects.

However, don’t be lulled to sleep thinking that the RBS can’t change. Remember, the
world doesn’t stand still just because you are managing a project. Change is inevitable during
any project, especially complex projects. That change can be internal to the organization and
come from the client or even from the team, and it is unpredictable except for the fact that it
can happen and you must be able to respond appropriately. Change can also come from some
external source such as the market, the competition, or the arrival of some new technological
breakthrough. These changes could have no effect, a minimal effect, or a major effect on your
project. Again, you must be able to respond appropriately.

Traditional practices require client requirements to be clearly and completely defined

before any planning can take place. Most contemporary thinkers on the topic would suggest
that it is impossible to completely and clearly document requirements at the beginning of any
project. Whether you agree or not, that condition is likely to exist in most contemporary
projects, and there are many reasons for that:

1. Changing market conditions

2. Actions of competitors
3. Technology advances
4. Client discovery
5. Changing priorities

That is the motivation that resulted in my defining requirements as given earlier. In Part
III you will consider these situations as well as how the scope change process is handled and
its impact on project management processes. In doing that, you will learn alternative project
management approaches to handle these difficult situations while maintaining a client focus
throughout the entire project life cycle.

So you are probably wondering if my definition is better than the IIBA definition and
whether using it in your organization makes business sense. Here are five reasons that I put
forth for you to think and talk about with your team members.

Reduces the number of high-level requirements from hundreds to less than a

dozen I think of requirements at a higher level than most professionals. Using the IIBA
definition it is unlikely that requirements can be listed completely at the beginning of a project.
In fact, most professionals would agree that a complete and documented set of requirements
cannot possibly be generated at the beginning of a project. They can only be learned or
discovered as part of project execution. That is the approach I take in my Effective Complex
Project Management (ECPM) Framework. (See Chapter 14, “Hybrid Project Management
Framework.”) On the other hand, using my higher-order definition I expect to generate a
complete set of requirements at the beginning of a project. At the high level these requirements
are robust in the sense that they do not include how they will be done (i.e., with further
decomposed requirements) but are only focused on what an acceptable solution must include
in the way of functionality and properties. Through experience I have found that my higher-
order definition gives the client and the project team a more holistic view of the project and
enables much better business decisions that impact the solution.

Identifying the complete definition of most requirements happens only through

iteration The requirements list will be complete using my higher-order definition. The
challenge arises in identifying the component parts of each requirement—the Requirements
Breakdown Structure (RBS):

✓ Requirement
✓ Functions
✓ Sub-functions
✓ Processes
✓ Activities
✓ Features

A simple way of explaining the RBS is that it is a hierarchical list of what must be
developed to meet requirements. Many of these details can only be documented during project
execution. Chapter 7, “How to Plan a TPM Project,” discusses the RBS in more detail.

Choosing among alternative solution directions is simplified Business value is the

great tie breaker when faced with competing alternatives from which choices must be made. I
have had experiences where a component part didn’t seem to generate business value early on
and so wasn’t included, but at some later iteration the team or client learned that it did and so
was included. So “when in doubt, leave it out” is a good practice as you build out the details of
a solution. If a component part can contribute business value it will be discovered later in the
project.
 Provides for better use of scarce resources (money, time, and people) Using this
higher-order definition of a requirement there is a return on investment from every part of the
solution. The complex project is filled with uncertainty and risk and knowing that your
approach uses available resources effectively and efficiently is reassuring to the client and your
management.

It is a working definition It is directly related to the expected business value that will
result from a successful project. These requirements can be prioritized with respect to that
business value.

4.2.19 Introducing Project Management Life Cycles

DEFINITION: PROJECT MANAGEMENT LIFE CYCLE (PMLC)

A project management life cycle (PMLC) is a sequence of five processes:

■ scoping

■ planning

■ launching

■ executing

■ closing

the projects to which it applies. Each of the processes must be done at least once and
some may be repeated as necessary in some logical order.

To plan your journey, you need a project landscape that is simple and intuitive and will
remain valid despite the volatility of the business environment. The project landscape will be
your unchanging roadmap for further analysis and action. For several years now, project
management professionals have proclaimed, “One size does not fit all.” If it did, the life of a
project manager would be boring and this book would be less than 100 pages in length.
Unfortunately, (or fortunately for those with an adventuresome spirit) being an effective project
manager is exhilarating and demanding of all your creative energies. A “one size fits all”
mentality doesn’t work and probably never worked.

To help you build a decision-making model for choosing a project management model,
I first defined a very general project landscape. In this chapter I will drill down in that landscape
to a specific project management life cycle (PMLC) model, and then discuss the tools,
templates, and processes and their adaptation to the specific characteristics of the project. You
need to understand at the outset that there are no silver bullets. Project management is not a
matter of following a recipe. Rather it is the ability to create and use recipes. I want you to be
a chef not just a cook. You are going to have to work hard to reach a point where you can create
recipes.

These process groups are defined in Chapter 5, “What Are Project Management Process
Groups?” The logical ordering of these processes is a function of the characteristics of the
project. This book defines five different PMLC models. Each is constructed to meet the specific
needs of a project type to which it is aligned. To that end I defined the following five models
across the four quadrants:

1. Quadrant 1: TPM—Linear and Incremental models

2. Quadrant 2: APM—Iterative and Adaptive models
3. Quadrant 3: xPM—Extreme model
4. Quadrant 4: MPx—Extreme model

These five models form a continuum that ranges from certainty about the solution (both
the goal and solution are clearly defined) to some uncertainty about the solution (the goal is
clearly defined, but the solution is not clearly defined) to major uncertainty about the solution
(neither the goal nor solution are clearly defined).

In Figure 2.1, certainty is measured with respect to requirements and solution. The less
certain you are that you have clearly defined requirements and a solution to match, the more
you should choose an approach at the high uncertainty end of the continuum. Once you
understand the nature of the project to be undertaken, you can confidently choose the model
that offers the best chance of a successful completion.

Figure 2.1 shows how the five PMLC models are distributed across the four quadrants
of projects that were defined in Chapter 1, “What Is a Project?” Note that there is some overlap.
It would seem that as the project solution and its requirements becomes less clear, the best-fit
PMLC could be chosen from among Linear, Incremental, Iterative, Adaptive, or Extreme. That,
in fact, is the case. The decision as to which of these five PMLCs is best for the project is based
on factors that include solution clarity. For projects that are near the boundaries of TPM and
APM, you will always have a judgment call to make as to which PMLC model is the best-fit
model. In Chapter 15, “Comparing TPM and CPM Models,” the ramifications of that
subjective decision are described.
 Figure 2.1: Five PMLC types

I have practiced project management since 1963, which pre-dates the Project
Management Institute (PMI) by a few years. Across the years, I have seen project management
mature from a simple approach based mostly on Gantt charts and critical paths to a multi-
disciplined array of tools, templates, and processes tailored to fit all types of situations. Project
management is no longer just another tool in the toolkit of an engineer. It is now a way of life
as many businesses have morphed themselves into some form of project-based organization.
Although there will continue to be applications for which the old ways are still appropriate,
there is a whole new set of applications for which the old ways are totally inappropriate. The
paradigm must shift and is shifting. Take APM, for example, which formally came on the scene
in 2001 [Fowler and Highsmith, 2001]. It represented a marked formal departure from the then-
current practices. Any company that hasn’t embraced that shift is sure to risk losing project
management as a strategic asset and market share as a consequence. “Change or die” was never
a truer statement than it is today. From that humble introduction in 2001 has emerged an entire
portfolio of project management types. Many of these are mentioned in detail in Parts II and
III.

Why do we need yet another way of managing projects? Don’t we have enough options
already? Yes, there certainly are plenty of options, but projects still fail at an unacceptably high
rate. In the past, the efforts of project managers have not been too fruitful. There are lots of
reasons for that failure. I believe that part of the reason is because we haven’t yet completely
defined, at a practical and effective level, how to adjust our management approaches to embrace
the types of projects that we are being asked to manage in today’s business environment. Too
many project managers are trying in vain to put square pegs in round holes because all they
have are square pegs. We need to approach project management as the art and science that it
truly is. Chapter 14, “Hybrid Project Management Framework,” may be the answer we have
sought for many years. That means basing it on irrefutable principles and concepts and building
on those to produce a scientifically defined discipline.

To me the answer to our project management difficulties is obvious. Project managers

must open their minds to the basic principles on which project management is based so as to
accommodate change, avoid wasted dollars, avoid wasted time, and protect market positions.
“Lean” practices are emerging to handle these difficulties, “Agile Complex Project
Management Models,” and “Extreme Complex Project Management Models.” For as long as I
can remember, I have been preaching that one size does not fit all. The characteristics of the
project must be the basis on which project management approaches are defined. This concept
has to be embedded in your approach to project management. Your thinking must embrace a
project management approach that begins by choosing the best-fit PMLC model based on the
characteristics of the project at hand. The RBS is the artifact that will allow you to do that.
Then you can choose how that model should be adapted to effectively manage the project.

4.2.20 Traditional Project Management Approaches

How could it be any better than to clearly know the goal and the solution? This is the
simplest of all possible project situations, but it is also the least likely to occur in today’s fast-
paced, continuously changing business world. Testimonial data that I have gathered from all
over the world suggests that about 20 percent of all projects legitimately fall in the TPM
quadrant. Projects that fall into the TPM quadrant are familiar to the organization. Many
infrastructure projects will fall in the TPM quadrant. Perhaps they are similar to projects that
have been done several times before. There are no surprises. The client has clearly specified
the goal, and the project team has defined how they will reach that goal. Little change is
expected. There are different approaches that are in use for such projects, and you will learn
how to choose from among them the approach that best fits your project. The limiting factor in
the TPM plan-driven approaches is that they are change-intolerant. They are focused on
delivering according to time and budget constraints, and rely more on compliance to plan than
on delivering business value. The plan is sacred, and conformance to it is the hallmark of the
successful project team. That has proven to be misdirected.

Because of the times we live in, the frequency of projects legitimately delivered via the
TPM quadrant is diminishing rapidly. The simple projects have all been done. The projects that
remain in the TPM quadrant are those which have been done many times before and well-
established templates are probably in place. As TPM approaches are becoming less frequent,
they are giving way to a whole new collection of approaches that are more client-focused and
deliver business value rather than strict adherence to a schedule and budget.

In addition to a clearly defined goal and solution, projects that correctly fall into the
TPM quadrant have several identifying characteristics as briefly identified in the following
sections.

4.2.21 Low Complexity

Other than the fact that a low-complexity project really is simple, this characteristic will
often be attributable to the fact that the project rings of familiarity. It may be a straightforward
application of established business rules and therefore take advantage of existing designs and
coding. Because these projects have been done many times, they will often depend on a
relatively complete set of templates for their execution. To the developer, it may look like a
cut-and-paste exercise.

4.2.22 Few Scope Change Requests

This is where TPM approaches get into trouble. The assumption is that the RBS and
WBS are relatively complete, and there will be few, if any, scope change requests. Every scope
change request requires that the following actions be taken:

1. Someone needs to decide if the request warrants an analysis by a project team

member.
2. The project manager must assign the request to the appropriate team member.
3. The assigned team member conducts the analysis and writes the Project Impact
Statement.
4. The project manager informs the client of the recommendations.
5. The project manager and client must make a decision as to whether the change
will be approved and if so how it will be accomplished.
6. If the scope change request is approved, the project scope, cost, schedule,
resource requirements, and client acceptance criteria are updated.

All of this takes time away from the team member’s schedule commitments. Too many
scope change requests and you see the effect they will have on the project schedule.
Furthermore, much of the time spent planning the project before the request was made becomes
non-value-added time.
 So the answer to too-frequent scope change requests is some form of management
monitoring and control. Those management controls can be built into every TPM, APM, xPM,
and MPx approach but are different for each type of project.

4.2.23 Well-Understood Technology Infrastructure

A well-understood technology infrastructure is stable and will have been the foundation
for many projects in the past. That means the accompanying skills and competencies to work
with the technology infrastructure are well grounded in the development teams. If the
technology is new or not well understood by the project team, there are alternative strategies
for approaching the project.

4.2.24 Low Risk

The requirement for TPM projects is that their environment is known and predictable.
There are no surprises. All that could happen to put the project at risk has occurred in the past,
and there are well-tested and well-used mitigation strategies that can be used. Experience has
rooted out all of the mistakes that could be made. The client is confident that they have done a
great job identifying requirements, functions, and features, and they are not likely to change.
The project manager has anticipated and prepared for likely events (not including acts of nature
and other unavoidable occurrences). There will be few unanticipated risks in TPM projects.
That doesn’t mean you can skip the risk management process in these projects. That will never
be the case, regardless of the quadrant the project occupies. However, the intensity, analysis,
monitoring, and mitigation strategies will be different in each quadrant.

4.2.25 Experienced and Skilled Project Teams

Past projects can be good training grounds for project teams. Team members will have
had opportunities to learn or to enhance their skills and competencies through project
assignments. These skills and competencies are a critical success factor in all projects. As the
characteristics of the deliverables change, so does the profile of the team that can be most
effective in developing the deliverables. TPM project teams can include less experienced team
members and project managers. They can be geographically dispersed and still be effective.

4.2.26 Plan-Driven TPM Projects

Because all of the information that could be known about the project is known and
considered stable, the appropriate PMLC model would be the one that gets to the end as quickly
as possible. Based on the requirements, desired functionality, and specific features, a complete
project plan can be developed. It specifies all of the work that is needed to meet the
requirements, the scheduling of that work, and the staff resources needed to deliver the planned
work. TPM projects are clearly plan-driven projects. Their success is measured by compliance
and delivery to that plan.

Knowing this, you can use a TPM approach to managing such projects. For example,
you can build a complete Work Breakdown Structure (WBS) and from that estimate duration,
estimate resource requirements, construct the project schedule, and write the project proposal.
This is a nice neat package and seemingly quite straightforward and simple. Oh, that the life of
a project manager was that simple. But it isn’t, and that’s where the real challenge comes in.
You’ll see that later as I show how to adjust this quadrant for more complex project situations
discussed in Part III, “Complex Project Management.”

Testimonial data that I have gathered from more than 10,000 project managers
worldwide suggests that not more than 20 percent of all projects require some form of TPM
approach. The two models discussed in the subsections that follow are special cases of the TPM
approach.

4.2.27 Linear Project Management Life Cycle Model

I start with the simplest TPM approach—the Linear PMLC model—as a foundation for
the variations presented in this section. Figure 2.2 illustrates a Linear model approach to project
management.

Figure 2.2: Linear PMLC model

Note that the five process groups are each executed once in the order shown in the figure. There
is no looping back to repeat a process group based on learning from a later process group. This
is a major weakness of all Linear PMLC models in that knowledge gained from one process
group, such as Launching, cannot be used to revise and improve the deliverables from a
previously completed process group, such as Scoping. There is no going back to improve
deliverables. For example, suppose the project involves the development of a software
application. The Monitoring and Controlling Phase includes a systems development life cycle,
which might simply consist of Design, Build, Test, and Implement. That, too, is done without
going back to an earlier part of the systems development life cycle, so an improved solution
discovered during Build cannot be reflected in a revised and improved Design. There is no
going back.

So, you might argue that going back and improving the solution is in the best interest
of the client. It probably is, but if that is the possibility you are willing to accept, why not make
the decision at the beginning of the project and choose a PMLC model that includes repeating
process groups? And you have several to choose from.

A scope change request from the client upsets the balance in the Linear PMLC model
schedule and perhaps the resource schedule as well. One or more of the team members must
analyze the request and issue a Project Impact Statement. (The Project Impact Statement is
discussed in Chapter 9, “How to Execute a TPM Project.”) This takes one or more team
members away from their scheduled project work, potentially putting the project behind
schedule.

You can always choose to use a Linear PMLC, but if a better choice was another PMLC,
you are in for a rough ride.

4.2.28 Incremental Project Management Life Cycle Model

On the surface, the only difference between the Linear and Incremental approaches is
that the deliverables in the Incremental approach are released according to a schedule. That is,
a partial solution is initially released, and then at some later point in time, additional parts of
the solution are added to the initial release to form a more complete solution. Subsequent
releases add to the solution until the final increment releases the complete solution. The
decision to use an Incremental PMLC model over the Linear PMLC model is a market-driven
decision. In both models, the complete solution is known at the outset. Getting a partial solution
into the market is viewed as a way to get an early entry position and therefore create some
leverage for generating increased market share.

All of this incremental release happens in a linear fashion, as shown in Figure 2.3, so
that in the end, the solution is the same as if a Linear PMLC model had been followed. Ideally,
the project ends with the same deliverables and at approximately the same time. There is some
additional management overhead associated with the Incremental PMLC model, so those
projects will finish later than the Linear PMLC model.
 Figure 2.3: Incremental PMLC model

The sequences of Launch Increment through Next Increment decision boxes are
strung out in series over time.

A more in-depth investigation would show that significant differences exist

between the Incremental PMLC model and the Linear PMLC model. The following two are
worth mentioning:

1. The first difference has to do with scope change requests. In the Linear
PMLC model, these are not expected or encouraged. As a hedge against the
time they require, management reserve is often added to the end of the
schedule. See Chapter 7, “How to Plan a TPM Project,” for a discussion of
management reserve. Because of the structure of the Incremental PMLC
model, change is actually encouraged. It happens in a subtle and
unsuspecting way. The initial release of a partial solution gives the client
and the end user an opportunity to experiment with the partial solution in a
production scenario and find areas that could be improved. That encourages
change requests. A smart project manager will build schedule contingencies
into the plan in the event of these scope change requests.
2. The second difference is related to how the full solution is decomposed into
partial solutions whose development would then be planned in a sequential
fashion and released in that same order. The release schedule needs to be
consistent with the dependencies that exist between each partial solution. To
be clear, what if a particular release depended upon the features and
functions scheduled for development in a later release? There goes the
integrity of the release schedule. Extensive re-planning often follows,
significantly changing the release schedule.

4.2.29 Agile Project Management Approaches

What about cases where what is needed is clearly defined but how to produce it
isn’t at all that obvious? These are complex projects and occupy a space in the landscape
somewhere between traditional and extreme projects. Many managers have observed that the
vast majority of their projects are a closer fit to APM approaches than either TPM or xPM
approaches. Clearly TPM won’t work when the solution is not known. For TPM to work, you
need complete requirements and a detailed plan. But if you don’t know how you will get what
is needed, how can you generate a detailed plan? Projects that correctly use an APM approach
have several defining characteristics as briefly identified in the sections that follow.

4.2.30 A Critical Problem without a Known Solution

These are projects that must be done. You have no choice. Because there is no known
solution, a TPM approach, which requires a complete RBS and WBS, will not work. Despite
the realities, it amuses me how many project managers try to use a hammer when a screwdriver
is needed (maybe some of them only have hammers). The only approaches that make sense are
those that enable you to discover an acceptable solution by doing the project. These projects
fly in the face of all of the traditional practices of project management. Executives are
uncomfortable with this situation because all of the valid agile approaches have variable scope.
Resources are being requested without knowing what final product will be delivered and if it
has the requisite business value.

4.2.31 A Previously Untapped Business Opportunity

In these types of projects, the company is losing out on a business opportunity and must
find a way to take advantage of it through a new or revamped product or service offering. The
question is what is that business opportunity and how can you take advantage of it? Here very
little of the solution is known.

4.2.32 Change-Driven APM Projects

Whereas TPM projects were plan-driven, APM projects are change-driven. This is a
significant difference. TPM projects are change constrained and changes give rise to wasted
time and resources due to the need to revise plans. APM projects cannot succeed without
change. APM projects utilize just-in-time planning models. They don’t waste resources and are
“lean” in that sense.

4.2.33 APM Projects Are Critical to the Organization

You should have guessed by now that an APM project can be very high risk. If previous
attempts to solve the problem have failed, it means the problem is complex and there may not
be an acceptable solution. The organization will just have to live with that reality and make the
best of it. Projects to find that elusive solution might work better if they are focused on parts
of the problem or if approached as process-improvement projects.

4.2.34 Meaningful Client Involvement Is Essential

The solution will be discovered only if the client and the development team
meaningfully collaborate in an open and honest environment. For the client this means fully
participating with the project team and a willingness to learn how to be a client in an agile
world. For the development team this means a willingness to learn about the client’s business
and how to communicate in their language. For the project manager this means preparing both
the client team and the development team to work together in an open and collaborative
environment. It also means that the project manager will have to share responsibility and
leadership with a client manager.

My project governance model is a co-project manager model. See Chapter 4, “What Is

a Collaborative Project Team?” for more details. I share project management with the client
representative. This could be the client manager or a senior business analyst assigned to the
business unit. I have found that this fosters ownership on the part of the client and that is
important to implementation success.

4.2.35 APM Projects Use Small Co-located Teams

If the project requires a team of more than 30 professionals, you probably should
partition the project into several smaller projects with more limited scopes. As a rule, APM
approaches do not scale well. To manage a 30+ project team, partition it into smaller teams,
with each of these teams being responsible for part of the scope. Set up a temporary program
office to manage and coordinate the work of the smaller project teams.

Two model types fall into the APM quadrant. The first is the Iterative PMLC model. It
is appropriate to use with projects for which some of the features are missing or not clearly
defined. When the solution is less clearly specified— functions as well as features are missing
or not clearly defined—then the best-fit choice favors using the other model type: The Adaptive
PMLC model.

There are various Iterative and Adaptive approaches to managing APM projects.
Imagine a continuum of projects that range from situations where almost all of the solution is
clearly and completely defined to situations where very little of the solution is clearly and
completely defined. This is the range of projects that occupy the APM quadrant. As you give
some thought to where your projects fall in this quadrant, consider the possibility that many, if
not most, of your projects are really APM projects. If that is the case, shouldn’t you also be
considering using an approach to managing these projects that accommodates the goal and
solution characteristics of the project rather than trying to force fit some other approach that
was designed for projects with much different characteristics?

I contend that the Iterative and Adaptive classes of APM projects are continuously
growing. I make it a practice at all “rubber chicken” dinner presentations to ask about the
frequency with which the attendees encounter APM projects. With very small variances in their
responses, they say that at least 70 percent of all their projects are APM projects, 20 percent
are TPM projects, and the remaining 10 percent is split between xPM and MPx projects.
Unfortunately, many project managers try to apply TPM approaches (maybe because that is all
they have in their project management arsenal) to APM projects and meet with very little
success. The results have ranged from mediocre success to outright failure. APM projects
present a different set of challenges and need a different approach. TPM approaches simply
will not work with APM projects. For years I have advocated that the approach to the project
must be driven by the characteristics of the project. I find it puzzling that we define a project
as a unique experience that has never happened before and will never happen again under the
same set of circumstances, but we make no assertion that the appropriate project management
approach for these unique projects will also be unique. I would say that the project management
approach is unique up to a point. Its uniqueness is constrained to using a set of validated and
certified tools, templates, and processes. To not establish such a boundary on how you can
manage a project would be chaotic. Plus, the organization could never be a learning
organization when it comes to project management processes and practices.

As the solution moves from those that are clearly specified toward those that are not
clearly specified, you move through a number of situations that require different handling. For
example, suppose only some minor aspects of the solution are not known, say the background
and font color for the login screens. How would you proceed? An approach that includes as
much of the solution as is known at the time should work quite well. That approach would
allow the client to examine, in the sense of a production prototype, what is in the solution in an
attempt to discover what is not in the solution but should be. At the other end of the APM
quadrant, when very little is known about the solution, projects have higher risk than those
where a larger part of the solution is known. A solution is needed, and it is important that a
solution be found. How would you proceed? What is needed is an approach that is designed to
learn and discover most of the solution. Somehow that approach must start with what is known
and reach out to what is not known. In Chapter 14, “Hybrid Project Management Framework,”
I will share a process that I developed called Effective Complex Project Management
Framework (ECPM). ECPM is the only APM PMLC model I know of that includes work
streams designed specifically to discover rather than implement aspects of the solution. I call
these work streams “Probative Swim Lanes.”

There are several approaches to APM projects. These approaches all have one thing in
common—you cannot build a complete WBS without guessing. Because guessing is
unacceptable in good project planning, you have to choose an approach designed to work in
the absence of the complete WBS. All APM approaches are structured so that you will be able
to learn and discover the missing parts of the solution. As these missing parts are discovered,
they are integrated into the solution. There are two distinct PMLC models for use in APM
projects: Iterative PMLC models and Adaptive PMLC models. The choice of which model to
use depends somewhat on the initial degree of uncertainty you have about the solution.

4.2.36 Iterative Project Management Life Cycle Model

As soon as any of the details of a solution are not clearly defined or perhaps are even
missing, you should favor some form of Iterative PMLC model. For software development
projects, the most popular models are Evolutionary Development Waterfall, Scrum, Rational
Unified Process (RUP), and Dynamic Systems Development Method (DSDM). See Appendix
D for references to all four models. The Iterative PMLC model is shown in Figure 2.4.

Figure 2.4: Iterative PMLC model

You might notice that this is quite similar to production prototyping. That is, a working
solution is delivered from every iteration. The objective is to show the client an intermediate
and perhaps incomplete solution and ask them for feedback on changes or additions they would
like to see. Those changes are integrated into the prototype, and another incomplete solution is
produced. This process repeats itself until either the client is satisfied and has no further
changes to recommend or the budget and/or time runs out. The Iterative PMLC model differs
from the Incremental PMLC model in that change is expected. In fact, change is a necessary
part of this model.

Iterative PMLCs definitely fit the class of projects that provide opportunity to learn and
discover. In Figure 2.4, the learning and discovering experience takes place as part of each
feedback loop. With each iteration, more and more of the breadth and depth of the solution is
produced. That follows from the client having an opportunity to work with the current solution
and give feedback to the project team. The assumption is that the client learns and discovers
more details about the solution from the current iteration. In the prototyping mode, the
development team usually takes client input and presents alternatives in the next version of the
prototype. As you can see, there is a strong collaborative environment in APM approaches that
is usually not present and not required in TPM approaches.

4.2.37 Adaptive Project Management Life Cycle Model

The next step away from a complete solution is the Adaptive PMLC model. Here the
missing pieces of the solution extend to functionality that is missing or not clearly defined. At
the extreme end of the APM, part of the landscape would be projects where almost nothing
about the solution is known. In other words, the less you know about the solution, the more
likely you will choose an Adaptive PMLC model over an Iterative PMLC model.
Unfortunately, all of the current Adaptive PMLC models were designed for software
development projects. Because not all projects are software development projects, that left a
giant gap in the PMLC model continuum. In my consulting practice, this was a serious
shortcoming in the Agile space and led me to develop the ECPM Framework for application to
any type of project. ECPM is an APM approach that spans the gap between TPM and xPM
approaches for all types of projects. I have successfully used ECPM on product development,
business process design, and process improvement projects.

Figure 2.5 is a graphic portrayal of how the Adaptive PMLC is structured. At the
process group level, it is identical to the Iterative PMLC model. Within each process group,
the differences will become obvious. Chapter 12, “Agile Complex Project Management
Models,” covers the Adaptive PMLC model in considerable detail.
 Figure 2.5: Adaptive PMLC model

4.2.38 Extreme Project Management Approach

The third model type arises in those projects whose solution and goal are not known or
not clearly defined. Here you are in the world of pure R&D, new product development, and
process improvement projects. These are high-risk, high-change projects. In many cases, they
are also high-speed projects. Failure rates are often very high.

When so little is known about the goal and solution, you might be concerned about how
to approach such projects. What tools, templates, and processes will work in these cases? Will
any of them work? This can be a high-anxiety time for all but the most courageous, risk-taking,
flexible, and creative project teams. Very heavy client involvement is essential. When you are
venturing into the great unknown, you won’t get very far unless an expert (the client) is
standing at your side.

What do you do if what is needed is not clearly defined? What if it isn’t defined at all?
Many have tried to force-fit the traditional approach into these situations, and it flat-out doesn’t
work. xPM is designed to handle projects whose goal can only be fuzzily defined or really not
defined at all. Building a Business-to-Business (B2B) website with no further specification is
an excellent example. Much like the early stages of an R&D project, building the B2B website
starts out with a guess, or maybe several guesses. As the project commences, the client reflects
upon the alternatives chosen and gives some direction to the development team. This process
repeats itself. Either the partial solution converges on a satisfactory solution, or it is killed along
the way. In most cases, there is no fixed budget or time line. Obviously, the client wants it
completed ASAP for as little as possible. Furthermore, the lack of a clear goal and solution
exposes the project to a lot of change. Unfortunately, the nature of this project does not lend
itself to fixed time and cost constraints.

4.2.39 The xPM Project Is a Research and Development Project

The goal of an R&D project may be little more than a guess at a desired end state.
Whether it is achievable and to what specificity are questions to be answered by doing the
project. In this type of xPM project, you are trying to establish some future state through some
enabling solution. Because you don’t know what the final solution will be, you cannot possibly
know what the goal will be. The hope is that the goal can be achieved with a solution and that
the two together deliver acceptable business value.

4.2.40 The xPM Project Is Very High Risk

Any journey into the great unknown is fraught with risk. In the case of an xPM project,
it is the risk of project failure and that is very high. In some cases, the goal may be nothing
more than a desirable end state and not achievable given current technologies. What can be
achieved may be a very different statement than the original goal statement. Whatever goal can
be achieved; the cost of the solution may be prohibitive. The direction that was chosen to find
the solution may be the wrong direction entirely and can only result in failure. If the project
management process can detect that early, it will save money and time. “Hybrid Project
Management Framework,” defines an acceptable approach.

Failure is difficult to define in an xPM project. For example, the project may not solve
the original problem, but it may deliver a product that has uses elsewhere. The 3M Post-It Note
Project is one such example. Nearly 7 years after the project to develop an adhesive with certain
temporary sticking properties failed (that was an xPM project), an engineer discovered an
application that resulted in the Post-It Note product (that was an MPx project).

xPM extends to the remotest boundaries of the project landscape. xPM projects are
those projects whose goal and solution cannot be clearly defined. For example, R&D projects
are xPM projects. What little planning is done is done just in time, and the project proceeds
through several phases until it converges on an acceptable goal and solution. Clearly the PMLC
for an xPM project requires maximum flexibility for the project team, in contrast to the PMLC
for a TPM project, which requires adherence to a defined process. If instead, there isn’t any
prospect of goal and solution convergence, the client may pull the plug and cancel the project
at any time and save the remaining resources for alternative approaches.

If goal clarity is not possible at the beginning of the project, the situation is much like
a pure R&D project. Now how would you proceed? In this case, you use an approach that
clarifies the goal and contributes to the solution at the same time. The approach must embrace
a number of concurrent Probative Swim Lanes. Concurrent Probative Swim Lanes might be
the most likely ones that can accomplish goal clarification and the solution set at the same time.
Depending on time, budget, and staff resources, these probes might be pursued sequentially or
concurrently. Alternatively, the probes might eliminate and narrow the domain of feasible
goal/solution pairs. Clearly, xPM projects are an entirely different class of projects and require
a different approach to be successful.

The goal is often not much more than a guess at a desired end state with the hope that
a solution to achieve it can be found. In most cases, some modified version of the goal statement
is achieved. In other words, the goal and the solution converge on something that hopefully has
business value.

In addition to a goal and solution where neither one is clearly defined, projects that
correctly fall into xPM have several identifying characteristics as briefly identified in the
sections that follow.

4.2.41 The Extreme Model

By its very nature, xPM is unstructured. It is designed to handle projects with “fuzzy
goals” or goals that cannot be defined because of the exploratory nature of the extreme project.
The theme here is that the learning and discovery take place between the client and the
development team in each phase, thus moving the project forward. Note that the major
difference between APM and xPM PMLC models is the use of the Scope Process Group. In an
APM project, scope is done once at the beginning of the project. That flows mostly from the
fact that the goal is clearly defined. In the xPM project, scope is adjusted at each phase. That
follows from the fact that the goal can change. The Extreme PMLC model is shown in
Figure 2.6.

Figure 2.6: Extreme PMLC model

Similar to APM PMLC models, the Extreme PMLC model is iterative. It iterates in an
unspecified number of short phases (1- to 4-week phase lengths are typical) in search of the
solution (and the goal). It may find an acceptable solution, or it may be canceled before any
solution is reached. It is distinguished from APM in that the goal is unknown, or, at most,
someone has a vague but unspecified notion of what the goal consists of. Such a client might
say, “I’ll know it when I see it.” That isn’t a new revelation to experienced project managers—
they have heard this many times before. Nevertheless, it is their job to find the solution (with
the client’s help, of course).

xPM is further distinguished from APM in that xPM requires the client to be more
involved within and between phases. In many xPM projects, the client takes a leadership
position instead of the collaborative position they took in APM projects. Drug research
provides a good example. Suppose, for example, that the goal is to find a natural food additive
that will eliminate the common cold. This is a wide-open project. Constraining the project to a
fixed budget or fixed time line makes no sense whatsoever. More than likely, the project team
will begin by choosing some investigative direction or directions and hope that intermediate
findings and results will accomplish the following two things:

1. The just-finished phase will point to a more informed and productive direction
for the next and future phases. In other words, xPM includes learning and
discovery experiences just as APM does.
2. Most important of all is that the funding agent will see this learning and
discovery as potentially rewarding and will decide to continue the funding
support.

There is no constraining Scope Triangle in xPM as there is in TPM and APM projects.
Recall that TPM and APM projects have time and funding constraints that were meaningful.
“Put a man on the moon and return him safely by the end of the decade” is pretty specific. It
has a built-in stopping rule. When the money or the time runs out, the project is over. xPM
does have stopping rules, but they are very different. An xPM project stops when one of the
following occurs:

1. The project is over when a solution and the goal it supports are found and they
both make business sense. Success!
2. The project is over when the sponsor is not willing to continue the funding. The
sponsor might withdraw the funding because the project is not making any
meaningful progress or is not converging on an acceptable solution. In other
words, the project is killed. Failure! But all is not over. It is common to restart
such projects but to search for a solution in a different direction.

4.2.42 Emertxe Project Management Approach

The solution is known, but the goal is not. Don’t be tempted to dismiss this as the
ranting of professional service firms who have the answer to your problem. They are out there,
and you probably know who they are. All you have to do is state your problem, and they will
come to your rescue armed with their one size-fits-all solution! That is not where I am going
with this discussion.

MPx projects are a type of R&D project but in reverse. When you think of an R&D
project, you think of some desired end state and the project has to figure out if and how that
end state might be reached. In so doing, it might be necessary to modify the end state. So for
the MPx project, you reverse the R&D situation. You have some type of solution, but you have
not yet discovered an application for that solution (unknown goal). You hope to find an
application that can be achieved through some modification of the solution. You are successful
if the application has business value.

Note here that each phase is a complete project in its own right. Scoping starts each
phase, and the decision to begin another phase ends the current phase. In an MPx project, phase
and project are basically identical.

These approaches are for MPx projects whose solution is completely and clearly
defined but whose goal is not. This sounds like nonsense, but actually it isn’t. “Extreme
Complex Project Management Models.”) I find it easiest to think of these projects as a
backward version of an extreme project, hence the name “Emertxe” (pronounced ee-MERT-
see). The solution or a variant of it is used to help converge on a goal that it can support and
that hopefully delivers acceptable business value. So rather than looking for a solution as in the
xPM project, you are looking for a goal.

You have the solution; now all you need is to find the problem it solves. This is the
stuff that academic articles are often made of, but that’s okay. It’s a type of R&D project but
in reverse. Post your solution and hope somebody responds with a problem that fits it. It has
happened. Take the 3M Post-It Note saga, for example. The product sat on the shelf for several
years before someone stumbled onto an application. The rest is history. Major drug research
firms encounter these projects often.

In addition to a goal that is not clearly defined and solution that is clearly defined,
projects that correctly fall into the MPx category have several identifying characteristics as
briefly identified in the sections that follow.

4.2.43 A New Technology without a Known Application

 I’m reminded of the Radio Frequency Identification (RFID) technology for reading
coded information embedded in an object as it moved down a conveyor belt and routing the
object to a destination based on the encoded information found. When RFID was first
announced, several warehouse applications came to mind. One of the largest retailers in the
world commissioned a project team to find applications for RFID in its logistics and supply
chain management systems. The technology was only about 70 percent accurate at the time,
and the team concluded that it would have good business value if only the accuracy could be
significantly improved. That has since happened, and RFID is now commonly used in
warehousing and distribution operations.

4.2.44 A Solution Out Looking for a Problem to Solve

Commercial off-the-shelf application software provides several examples of these

situations. For example, say a new Human Resources Management System (HRMS) or Human
Resource Information System (HRIS) has just been introduced to the commercial software
market by a major software manufacturer. Your project is to evaluate it for possible fit in the
new HRMS/HRIS design that has just been approved by your senior management team. Among
all MPx projects, this example is the simplest case. You already know the application area.
What you need to find out is the degree of fit and business value. At the other extreme would
be to have something whose application is not known. A juice taken from the root of some
strange Amazon tree would be an example of a more complex situation. The project is to find
an application for the juice that has sufficient business value.

4.2.45 Hybrid Project Management Approach

There is strong evidence that the practitioner community is practicing a different project
management discipline than we have been led to believe. In a recent survey Mark Mulally
[Mulally, 2017] estimated that about 2% of the surveyed companies practice project
management at CMMI Level 2 Maturity with very few at higher levels. Most of the other 98%
must be practicing “Do It Yourself” project management. My guess is that most of that is
informal, perhaps spontaneous and certainly not in keeping with accepted practices. Figure 2.7
is my way of characterizing what they are doing. Their Hybrid PMLC is a concatenation of
pieces and parts taken from their versions of Traditional, Agile, and Extreme PMLCs. If it
works, do it!
 Figure 2.7: Hybrid Project Management

4.2.46 Recap of PMLC Models

The five PMLC models bear a closer look and comparison. If you have been counting,
you expected to see six PMLC models. Because the xPM PMLC and MPx PMLC models are
identical, there are really only five distinct PMLC models. Figure 2.8 gives you that view.

Figure 2.8: The five PMLC models

 There is a very simple and intuitive pattern across the life cycle when viewed at the
process group level. A note on terminology before I proceed. In the APM and xPM approaches,
I use the terms iteration, cycle, and phase to distinguish between the Iterative, Adaptive, and
Extreme model types, respectively. I’ll need that later on in the discussion to clarify what I am
referring to. To reinforce your understanding of the PMLC models, I want to point out their
similarities and differences.

4.2.47 Similarities between the PMLC Models

Their similarities are as follows:

1. All five process groups are used in each PMLC model.

2. Each PMLC model begins with a Scope Process Group.
3. Each PMLC model ends with a Close Process Group.

4.2.48 Differences between the PMLC Models

Their differences are evident when viewed from the degree of solution uncertainty, as
follows:

1. The models form a natural ordering (Linear, Incremental, Iterative, Adaptive,

Extreme) by degree of solution uncertainty.
2. The processes that form repetitive groups recognize the effect of increasing
uncertainty as you traverse the natural ordering. Those groups move more
toward the beginning of the life cycle as uncertainty increases.
3. Complete project planning is replaced by just-in-time project planning as the
degree of uncertainty increases.
4. Risk management becomes more significant as the degree of solution
uncertainty increases.
5. The need for meaningful client involvement increases as the degree of solution
uncertainty increases.

4.2.49 Choosing the Best-Fit PMLC Model

Choosing and adapting the best-fit PMLC model is a subjective decision based on
several variables. Figure 2.9 is a display of the decision process. Part III, “Complex Project
Management,” and “Comparing TPM and CPM Models,” discuss the details further. It is
sufficient at this point to be aware of the fact that having chosen a specific project approach
you are not yet prepared to begin the project. Specific internal and external factors will have to
be taken into account and final adjustments to that approach made. These are discussed
throughout Part III.

Figure 2.9: PMLC model choice process

Although you may have easily arrived at a best-fit approach and best-fit PMLC model
based on the confidence you have with the RBS and the degree of completeness of the WBS,
there is more work to be done before you can proceed with the project. First you have to assess
the impact, if any, of a number of other factors. These are discussed in the following sections.
Second, you have to make the necessary adjustments to the chosen PMLC model to account
for that impact. These are discussed in Chapter 14, “Hybrid Project Management Framework.”
The factors that I’m talking about here are those that might affect, and even change, your choice
of the best-fit PMLC model. For example, if the PMLC model requires meaningful client
involvement, and you have never been able to get that, what would you do? You’ll examine
the options in the chapters of Part III. For now, I want to take a look at those other factors and
how they might impact the PMLC model.

4.2.50 Total Cost

 As the total cost of the project increases, so does its business value and so does its risk.
Whatever PMLC model you have chosen; you might want to place more emphasis on the risk
management plan than is called for in the chosen model. If one of the team members isn’t
already responsible for managing risk, appoint someone. Losses are positively correlated with
the total cost, so you should be able to justify spending more on your mitigation efforts than
you would for a project of lesser cost.

4.2.51 Duration

A longer duration project brings with it a higher likelihood of change, staff turnover,
and project priority adjustments. None of these are for the good of the project. Pay more
attention to your scope change management plan and the Scope Bank (see Chapter 14, “Hybrid
Project Management Framework”). The Scope Bank contains all of the suggested ideas for
change that have not been acted upon and the total labor time available for their integration
into the solution. Make sure the client understands the implications of the Scope Bank and how
to manage their own scope change requests. Staff turnover can be very problematic. Put more
emphasis on the mitigation plans for dealing with staff turnover. Project priority changes are
beyond your control. The only thing you control is the deliverables schedule. That needs to be
on an aggressive schedule to the extent possible.

4.2.52 Market Stability

Any venture into a volatile market is going to be risky. You could postpone the project
until the market stabilizes, or you could go forward but with some caution. One way to protect
the project would be to implement deliverables incrementally. A time box comprising shorter
increments than originally planned might make sense, too. As each increment is implemented,
revisit the decision to continue or postpone the project.

4.2.53 Technology

We all know that technology is changing at an increasing rate. It is not only difficult to
keep up with it, but it is difficult to leverage it to your best advantage. If the current technology
works, stick with it. If the new technology will leverage you in the market, you might want to
wait but make sure you can integrate it when it is available. Don’t forget that the competition
will be doing the same, so rapid response is to your advantage.

4.2.54 Business Climate

 The more volatile the business climate, the shorter the total project duration should be.
For APM projects, the cycle time boxes could also be shorter than typically planned. Partial
solution releases will have a higher priority than they would in business climates that are more
stable.

4.2.55 Number of Departments Affected

As the number of departments that affect or are affected by the project increases, the
dynamics of the project change. That change begins with requirements gathering. The needs of
several departments will have to be taken into account. Here are three possible outcomes you
need to consider:

1. The first possible outcome is scope creep during the project scoping process.
Each department will have its list of “must haves” and “wouldn’t it be nice to
haves.” Not all of these will be compatible across departments, but one thing is
for certain: these differences will cause scope creep. You may have to think
about versioning the project—that is, decomposing it into several versions or
releases.
2. The second possible outcome is a higher incidence of “needs contention,” which
means the needs from two or more departments may contradict one another.
You will have to resolve the conflicts as part of validating requirements.
3. The third possible outcome impacts the PMLC model. As the project becomes
more of an enterprise-wide project, the likelihood of the project becoming a
multiple team project increases.

4.2.56 Organizational Environment

If your company announces reorganizations and changes in senior-management

responsibilities quite frequently you have a problem. The single most-frequent reason for
project failures as reported in the past several Standish Group (“The Standish Group was
formed in 1985, with a vision. It was to collect case information on real-life IT failures and
environments.”) surveys is lack of executive-level support. That includes loss of support
resulting from company reorganization. For example, say a sponsor who was very enthusiastic
about your project, and a strong and visible champion for you, has been replaced. Does your
new sponsor feel the same? If so, you dodged a bullet. If not, you have a very serious problem
to contend with, and you will need to amend the risk list and provide suggested mitigation
strategies.
4.2.57 Team Skills and Competencies

The types of skilled professionals you ask for in your plan are often not what you
eventually get. It’s almost like availability is treated as a skill! One of the principles I follow
in proposing resource requirements is to ask for the “B” player and build my plan on the
assumption that that is what I will get. Requesting the “A” player can only lead to
disappointment when a “B” or even a “C’ player shows up. In general, TPM projects can handle
a team of “B’ players, and they don’t even have to be co-located. APM projects are different.
They use two different PMLCs. When you are missing some of the features of the solution,
“B” players, with supervision, will often suffice. When you are missing some of the functions
of the solution, you would prefer “A” players, but you may be able to work with a few “B”
players under supervision. The less you know about the solution, the more you are going to
have to staff your project with “A” players or at least with team members who can work
independently.

Reference

Wysocki, R. K. (2019). Effective Project Management: Traditional, Agile, Extreme, Hybrid.

United States of America: John Wiley & Sons, Inc., Eight Edition.
Chapter 5. Introduction to e-business and e-commerce

Learning outcomes

After completing this chapter, the reader should be able to:

1. Define the meaning and scope of e-business and e-commerce and their different
elements.
2. Summarize the main reasons for adoption of e-commerce and e-business and barriers
that may restrict adoption.
3. Outline the ongoing business challenges of managing e-business and e-commerce in an
organization.
Introduction of e-business and e-commerce
Organizations have now been applying technologies based on the Internet, World Wide
Web and wireless communications to transform their businesses for over 15 years since the
creation of the first web site (http://info.cern.ch) by Sir Tim Berners-Lee in 1991. Deploying
these technologies have offered many opportunities for innovative e-businesses to be created
based on new approaches to business. Table 1.1 highlights some of the best-known examples
and in Activity 1.1 you can explore some of the reasons for success of these e-businesses.

For the author, e-business and e-commerce is an exciting area to be involved with,
since many new opportunities and challenges arise yearly, monthly and even daily.
Innovation is a given, with the continuous introduction of new technologies, new business
models and new communications approaches. For example, Google innovates relentlessly. Its
service has developed a long way since 1998 (Figure 1.1) with billions of pages now indexed
and other services such as web mail, pay per click adverts, analytics and social networks all
part of its offering. Complete Activity 1.1 or view Table 1.1 to see other examples of the rate
at which new innovations occur.
5.1 The impact of the electronic communications on traditional businesses
During the same period managers at established businesses have had to determine how
to apply new electronic communications technologies to transform their organizations.
Existing businesses have evolved their approaches to e-business through a series of stages.

Innovation in e-business is relentless, with the continuous introduction of new

technologies, new business models and new communications approaches. So all organizations
have to review new electronic and Internet-based communications approaches for their
potential to make their business more competitive and also manage ongoing risks such as
security and performance. For example, current opportunities which many businesses are
reviewing the benefits, costs and risks of implementing include:

1. the growth in popularity of social networks such as Bebo, Facebook and

Myspace, virtual worlds such as Habbo Hotel and Second Life, and blogs
created by many individuals and businesses;
2. rich media such as online video and interactive applications into their web sites;
3. selection of mobile commerce services which exploit the usage of mobile
phones and other portable wireless devices such as laptops around the world.
The potential of mobile commerce is evident from research by Wireless
Intelligence (2008) which found that at the end of 2007, globally there were 3
billion subscriber connections (representing half the planet’s population) with
penetration rates in developing countries such as India (21%) and China (41%)
showing the potential for future growth;
4. using location-based tracking of goods and inventory as they are manufactured
and transported.

You can see that an organization’s capability to manage technology-enabled change is

the essence of successfully managing e-business. The pace of change and the opportunities for
new communications approaches make e-business and e-commerce an exciting area of business
to be involved in.

In E-Business and E-Commerce Management we will explore approaches managers

can use to assess the relevance of different e-business opportunities and then devise and
implement strategies to exploit these opportunities. We will also study how to manage more
practical risks such as delivering a satisfactory service quality, maintaining customer privacy
and managing security.
 In this chapter we start by introducing the scope of e-business and e-commerce. Then
we review the main opportunities and risks of e-business together with the drivers and barriers
to adoption of e-business services. Finally, we will look at some of the organizational
challenges of managing e-business using the classic McKinsey 7S strategy framework.

5.2 Difference between e-commerce and e-business

The rapid advancement of technology and its application to business has been
accompanied by a range of new terminology and jargon. The use of the term ‘electronic
commerce’ has been supplemented by additional terms such as e-business and e-marketing,
and more specialist terms such as e-CRM, e-tail and e-procurement. Do we need to be
concerned about the terminology? The short answer is no; Mougayer (1998) noted that it is
understanding the services that can be offered to customers and the business benefits that are
obtainable through e-business that are important. However, labels are convenient in defining
the scope of the changes we are looking to make within an organization through using
electronic communications.

Managers need to communicate the extent of changes they are proposing through
introducing digital technologies to employees, customers and partners. E.g. General Electric is
one of the world’s largest companies, has embraced e-business.

5.3 E-commerce defined

Electronic commerce (e-commerce) is often thought simply to refer to buying and
selling using the Internet; people immediately think of consumer retail purchases from
companies such as Amazon. But e-commerce involves much more than electronically mediated
financial transactions between organizations and customers. E-commerce should be considered

as all electronically mediated transactions between an organization and any third party it deals
with. By this definition, non-financial transactions such as customer requests for further
information would also be considered to be part of e-commerce. Kalakota and Whinston (1997)
refer to a range of different perspectives for e-commerce:

1. A communications perspective – the delivery of information, products or

services or payment by electronic means.
2. A business process perspective – the application of technology towards the
automation of business transactions and workflows.
3. A service perspective – enabling cost cutting at the same time as increasing the
speed and quality of service delivery.
 4. An online perspective – the buying and selling of products and information
online.

The UK government also used a broad definition when explaining the scope of e-
commerce to industry:

E-commerce is the exchange of information across electronic networks, at any stage

in the supply chain, whether within an organization, between businesses, between businesses
and consumers, or between the public and private sector, whether paid or unpaid. (Cabinet
Office, 1999)

These definitions show that electronic commerce is not solely restricted to the actual
buying and selling of products, but also includes pre-sale and post-sale activities across the
supply chain.

E-commerce is facilitated by a range of digital technologies that enable electronic

communications. These technologies include Internet communications through web sites and
e-mail as well as other digital media such as wireless or mobile and media for delivering digital
television such as cable and satellite.

When evaluating the strategic impact of e-commerce on an organization, it is useful to

identify opportunities for buy-side and sell-side e-commerce transactions as depicted in Figure
1.2, since systems with different functionalities will need to be created in an organization to
accommodate transactions with buyers and with suppliers. Buy-side e-commerce refers to
transactions to procure resources needed by an organization from its suppliers. E-commerce
transactions between organizations can be considered from two perspectives: sell-side from the
perspective of the selling organization and buy-side from the perspective of the buying
organization.
5.4 E-business defined
Given that Figure 1.2 depicts different types of e-commerce, what then is e-business?
Let’s start from the definition by IBM (www.ibm.com/e-business), which was one of the first
Suppliers to use the term, in 1997 to promote its services: e-business (e’biz’nis) – the
transformation of key business processes through the use of Internet technologies. Today, IBM
calls the e-business services it provides for its clients ‘on-demand’ web services.

You will find that the term ‘e-business’ is used in two main ways within organizations.
The first is as a concept which can be applied to strategy and operations. For example, ‘our
organization needs an improved e-business strategy (or e-business technology)’.

Secondly, ‘e-business’ is used as an adjective to describe businesses that mainly operate

online, i.e. they have no physical presence on the high streets and seek to minimize customer
service and support through enabling ‘web self-service’, i.e. customers serve themselves
before, during and after sales.

In the dot-com era e-businesses used to be known as ‘pure plays’. Amazon

(www.amazon.com) and eBay (www.ebay.com, Case Study 1.3) are the world’s two biggest
e-businesses. In an international benchmarking study analyzing the adoption of e-business in
SMEs the Department of Trade and Industry emphasizes the application of technology
(information and communications technologies (ICTs)) in the full range of business processes,
but also emphasizes how it involves innovation. DTI (2000) describes e-business as follows:

when a business has fully integrated information and communications technologies

(ICTs) into its operations, potentially redesigning its business processes around ICT or
completely reinventing its business model . . . e-business, is understood to be the integration of
all these activities with the internal processes of a business through ICT. (DTI, 2000)

Referring back to Figure 1.2, the key business processes referred to in the IBM and DTI
definitions are the organizational processes or units in the center of the figure. They include
research and development, marketing, manufacturing and inbound and outbound logistics.

The buy-side e-commerce transactions with suppliers and the sell-side e-commerce
transactions with customers can also be considered to be key business processes.

Figure 1.3 presents some alternative viewpoints of the relationship between e-business
and e-commerce. In Figure 1.3(a) there is a relatively small overlap between e-commerce and
e-business. From Figure 1.2 we can reject Figure 1.3(a) since the overlap between buy-side and
sell-side e-commerce is significant. Figure 1.3(b) seems to be more realistic, and indeed many
commentators seem to consider e-business and e-commerce to be synonymous.

It can be argued, however, that Figure 1.3(c) is most realistic since e-commerce does

not refer to many of the transactions within a business, such as processing a purchasing order,
that are part of e-business. So, e-commerce can best be conceived of as a subset of e-business.
Since the interpretation in Figure 1.3(b) is equally valid, what is important within any given
company is that managers involved with the implementation of e-commerce or e-business are
agreed on the scope of what they are trying to achieve! These concepts are now used by many
marketing professionals, relates to the concepts of e-business and e-commerce.

5.5 Intranets and extranets

The majority of Internet services are available to any business or consumer that has
access to the Internet. However, many e-business applications that access sensitive company
information require access to be limited to qualified individuals or partners. If information is
restricted to employees inside an organization, this is an intranet as is shown in Figure 1.4.
 It is apparent that benefits focus on information delivery, suggesting that management
of information quality is a key to successful use of intranets. Notice that cost saving is not
referred to directly in the list of benefits. Direct cost reduction can be achieved through reduced
cost of printing and indirectly though reduced staff time needed to access information.
However, intranets represent a substantial investment, so careful consideration of the return on
investment is required. David Viney, who has managed implementation of intranets at Price
water house-Coopers, British Airways and Centrica PLC estimates that for a large
implementation of more than 10,000 staff, the cost could average £250 per user or seat (Viney,
2003). He suggests this cost breaks down into four categories: software (content management
systems), hardware (servers to store content and applications), integration of information
sources and applications and process change (staff costs and opportunity costs associated with
in implementation). He also suggests that if the portal project involves integration with ERP
systems, this could add £150 per seat.

If access to an organization’s web services is extended to some others, but not everyone
beyond the organization, this is an extranet. Whenever you log on to an Internet service such
as that for an e-retailer or online news site, this is effectively an extranet arrangement, although
the term is most often used to mean a business-to-business application.

5.6 Business or consumer models of e-commerce transactions

It is now commonplace to describe e-commerce transactions between an organization
and its stakeholders according to whether they are primarily with consumers (business-to
consumer – B2C) or other businesses (business-to-business – B2B).

Figure 1.8 gives examples of different companies operating in the business-to-

consumer (B2C) and business-to-business (B2B) spheres. Often companies such as BP or Dell
Computer will have products that appeal to both consumers and businesses, so will have
different parts of their site to appeal to these audiences.

Referring to the well-known online companies in Table 1.1 initially suggests these
companies are mainly focused on B2C markets. However, B2B communications are still
important for many of these companies since business transactions can drive revenue, as for
example eBay Business (http://business.ebay.com/) or the B2C service may need to be
sustained through advertising provided through B2B transactions, for example Google’s
revenue is largely based on its B2B AdWords (http://adwords.google.com/) advertising service
and advertising based revenue is also important to sites such as YouTube, Myspace and
Facebook.

Figure 1.8 also presents two additional types of transaction, those where consumers
transact directly with other consumers (C2C) and where they initiate trading with companies
(C2B). Note that the C2C and C2B monikers are less widely used (e.g. Economist, 2000), but

they do highlight significant differences between Internet-based commerce and earlier forms
of commerce. Consumer-to-consumer interactions (also known as peer-to-peer or person-to-
person, P2P) were relatively rare, but are now very common in the form of the social networks.
 Hoffman and Novak (1996) suggested that C2C interactions are a key characteristic of
the Internet that is important for companies to take into account, but it is only in recent years
with the growth of always-on broadband connections and mobile access to the web that these
have become so popular. P2P transactions are also the main basis for some online business
models for e-businesses such as Bet fair and eBay (www.ebay.com, see Case Study 1.2) which
are still run on a business basis, and some blogs which are not run by companies, but by
individuals.

Finally, the diagram also includes government and public services organizations which
deliver online or e-government services. As well as the models shown in Figure 1.8, it has also
been suggested that employees should be considered as a separate type of consumer through
the use of intranets which are referred to as employee-to-employee or E2E.

5.7 E-government defined

E-government refers to the application of e-commerce technologies to government and
public services. In the same way that e-business can be understood as transactions with
customers (citizens), suppliers and internal communications, e-government covers a similar
range of applications:
 1. Citizens – facilities for dissemination of information and use of online services
at local and national levels. For example, at a local level you can find out when
refuse is collected and at national level it is possible to fill in tax returns.
2. Suppliers – government departments have a vast network of suppliers. The
potential benefits (and pitfalls) of electronic supply chain management and e-
procurement are equally valid for government.
3. Internal communications – this includes information collection and
dissemination and e-mail and workflow systems for improving efficiency
within government departments.

E-government is now viewed as important within government in many countries. The

European Union has set up ‘i2010’ (European Information society in 2010) whose aims include
providing an integrated approach to information society and audio-visual policies in the EU,
covering regulation, research, and deployment and promoting cultural diversity. (eEurope,
2005)

5.8 E-business risks and barriers to business adoption

Opportunities have to be balanced against the risks of introducing e-business services
which vary from strategic risks to practical risks. One of the main strategic risks is making the
wrong decision about e-business investments. In every business sector, some companies have
taken advantage of e-business and gained a competitive advantage. But others have invested in
e-business without achieving the hoped-for returns, either because the execution of the plan
was flawed, or simply because the planned approaches used for their market were
inappropriate. The impact of the Internet and technology varies by industry. As Andy Grove,
Chairman of Intel, one of the early adopters of e-business has noted, every organization needs
to ask whether, for them:

The Internet is a typhoon force, a ten times force, or is it a bit of wind? Or is it a force
that fundamentally alters our business? (Grove, 1996)

This statement still seems to encapsulate how managers must respond to different
digital technologies; the impact will vary through time from minor for some companies to
significant for others, and an appropriate response is required.

As well as the strategic risks, there are also many practical risks to manage which, if
ignored, can lead to bad customer experiences and bad news stories which lead to damage to
the reputation of the company. In the section on e-business opportunities, we reviewed the
concept of soft lock-in; however, if the customer experience of a service is very bad, they will
stop using it, and switch to other online options. Examples of poor online customer experience
which you will certainly be familiar with include:

1. Web sites that fail because of a spike in visitor traffic after a peak-hour TV
advertising campaign.
2. Hackers penetrating the security of the system and stealing credit card details.
3. A company e-mails customer without receiving their permission, so annoying
customers and potentially breaking privacy and data protection laws.
4. Problems with fulfillment of goods ordered online, meaning customer orders go
missing or are delayed and the customer never returns.
5. E-mail customer-service enquiries from the web site don’t reach the right person
and are ignored.

The perception of these risks may have limited adoption of e-business in many
organizations which is suggested by the data in Figure 1.10. This is particularly the case for
small and medium enterprises (SMEs).

A DTI (2002) study evaluated some of the barriers to B2B e-commerce which remain
valid today. You can see that reasons of cost were the most important factors. This suggests
the importance of managers assessing e-business to develop a cost–benefit analysis that
considers both the initial investment costs and the ongoing costs that form the total cost of
ownership (TCO) against the value created from the tangible and intangible benefits.

Reference

Chaffey, D. (2009). E-Business and E-Commerce Management. England: Pearson Education

Limited.
Chapter 6. Functions within Business Organization: Business
Accounting

Learning Outcomes

After studying this chapter, you should be able to:

1. Understand the different sectors in the economy

2. Understand the main forms of business organization within the private
sector
3. Understand how the accounting equation can be used and what it
represents.
4. Understand the double entry bookkeeping and rules for double entry
transactions
5. Enter transactions correctly into accounts for a variety of transactions
6. Balance off accounts at the end of the accounting period.
7. Construct a trial balance from a set of ledger accounts
8. Understand the uses and limitations of a trial balance
9. Understand the meaning and different measures of profit
10. Construct the statement of comprehensive income
11. Construct the statement of financial position.
12. Select items to appear in each of the control accounts
13. Construct the sales ledger and purchases ledger control accounts
14. Set off balances that appear in both the sales and purchases ledger
against
15. Explain the uses of maintaining control accounts
16. Explain the difference between control accounts appearing as part of
the double-entry system and as memorandum accounts
17. Reconcile balances where discrepancies exist.
6.1 Accounting of Sectors in the economy
It is common to classify economic activity into two sectors: the public sector and the
private sector.

6.1.2 The public sector

The public sector is owned and controlled by the government. This covers all levels of
government – from local to central government – and includes all the organizations which are
funded by the taxpayer. The public sector is not as large as, say, thirty years ago, due to
successive governments pursuing a policy of privatization (transferring organizations from the
public to the private sector), but it still accounts for a significant proportion of the business
activity in the UK. Examples of public sector activity in the UK include the National Health
Service and the provision of libraries.

6.1.3 The private sector

The private sector consists of businesses owned and controlled by private individuals
acting either on their own or in groups. Although private sector organizations have to comply
with laws and regulations set out by the government, these businesses are free to pursue their
own ends. It is business organizations within the private sector that this textbook will be
exploring.

6.1.4 Types of business organization

There are three main types of business organization within the private sector.

Sole traders: A sole trader is a one-person business (the business is owned by one
person but others can be employed to work within the business). The sole trader is an
unincorporated business organization. This means that the legal status of the business is no
different to that of the owner. If the business cannot pay its debts, then it would be up to the
owner to clear the debts even if this meant selling personal (non-business) assets to clear the
business debt. Sole traders are generally small organizations but are very common – mainly
due to the ease of setting up as a sole trader.

Partnerships: Partnerships are also unincorporated businesses. Historically, a

partnership was owned by between two and twenty partners, although the limit on the
maximum number of partners was relaxed in 2002. A greater number of owners potentially
allows a greater contribution of capital into the business thus increasing the chances of success
and minimizing risk of failure. However, partners may still have to sell their own possessions
to clear the debts of the partnership in certain circumstances.

A limited partnership was a variant on the partnership. This form of organization

allowed some (but not all) partners to enjoy limited liability, which meant that they avoided
the risk of selling personal possessions.

The Limited Liability Partnerships Act of 2000 created a new type of partnership. The
Limited Liability Partnership (LLP) is closer in many respects to a limited company in that all
members of the LLP (partners) enjoy limited liability. However, the profits are treated as
income for the partners rather than that of the organization which is similar to how other
unincorporated organizations (sole traders and ordinary partnerships) are treated.

Limited companies: A company has undergone the process of incorporation. This

means a company exists separately from those who own the company. This means that the
company will carry on independently from the owners. The owners of limited companies are
known as shareholders.

There are two types of limited company: public limited companies and private limited
companies. They are run by directors elected by the shareholders. It is appropriate to talk of a
‘separation of ownership from control’ – it is the shareholders who own the company, but it is
the directors and managers who actually run the company. This can potentially cause a conflict
of interest as the two groups may have differing objectives. This conflict highlights the
importance of having clearly presented and understandable financial statements for user groups
to examine and assess.

6.1.5 Business objectives

The objectives of the business refer to the long-term aims of the business. It is
commonly assumed that all businesses in the private sector have profit maximization as their
prime objective. This means that business activity will be focused on increasing the profits of
the business. The objective of profit maximization has a certain logic to it – after all, businesses
are often set up to generate a return for the owner of the business. In the case of limited
companies, the objective of profit maximization is more formally built into the activities of the
business. A limited company is owned by shareholders who often buy shares in a company
purely to generate as high a return as possible. Therefore, the directors of the company will
ensure that the activities of the business are focused on maximizing profits.
 It is argued that businesses in reality do not always focus on profit maximization as
their prime objective. Sole traders and partnerships may have other objectives such as any of
the following:

1. Survival
2. Personal objectives
3. Market share growth

Objectives can change over time. A business trading in a period of reduced economic
activity (especially a recession) may focus on survival rather than profit maximization. This
switch in objectives may mean that decisions are taken which would not normally be
considered (e.g. selling assets at a loss simply to raise cash).

6.1.6 Fundamentals of financial accounting

As mentioned earlier, accounting is often seen as a jargon-heavy subject. First-time

students of accounting are often discouraged by the number of new terms that have to be
committed to memory. At the end of each chapter there is a list of key terms with brief
definitions or explanations. In this chapter we will be introducing you to some of the terms
which are seen as crucial and underpinning much of what follows. There are three terms which
underpin much of the system of financial accounting: assets, liabilities and capital (or equity).

Term Description

Assets Assets are the resources which are used by the business as part of
the activities of the business (e.g. property, equipment and cash).

Liabilities Liabilities represent the debts of the business – i.e. what is owed
by the business to others. These may be short-term debts which
are to be repaid soon or long-term debts which may be outstanding
and owing for many years (e.g. a mortgage).

Capital(or Capital refers to the resources supplied to the business by the

equity) owner(s) of the business. This capital could be in the form of
money or as other assets.
6.1.7 The accounting equation

Introduced to the system of double-entry bookkeeping. One of the principles that

underlie much of the financial accounting within this book is the principle of duality. This
relates to the idea that accounting transactions can be considered from two different
perspectives. The accounting equation encapsulates this duality and is as follows:

Assets = Capital + Liabilities

What this equation represents is the two sides of the business – the physical side of the
business (i.e. the assets) and the financial side of the business (i.e. the capital and the liabilities).

If you think about it the equation must always be true; if there is an increase in the
assets of the business, then these assets must have been financed through either more resources
from the owner (i.e. more capital) or more resources that have been borrowed (i.e. more
liabilities).

If the equation always holds then we can ascertain the value of the assets of the business
(or any other component of the equation) if we know the value of the capital and liabilities (or
any other two components).

The accounting equation underpins the statement of financial position of the business.
It also indirectly influences the rules of double-entry bookkeeping.

6.1.8 International standards

Accounting systems must follow rules. You may be surprised to find that there are
different ways of recording and presenting accounts and financial statements. Rules and
regulations are not as important for the purpose of internal accounts as they are for those for
external publication and external use. However, it is good practice and useful to see how the
rules and regulations which apply to larger business organizations would also apply to those of
a small organization.

Accounting standards are a set of continually evolving documents which provide

guidance on various aspects of financial accounting. This textbook will be based on the
international standards (IASs and IFRSs) rather than those set out in UK GAAP.

6.1.9 Terminology
 Terminology has evolved over time and unfortunately there are multiple terms used for
the same concept. The following table outlines some of the old terms that are used and their
equivalent new term. It will be well worth checking with the syllabus requirements of your
particular course as there may be some flexibility in which terminology is used.

Old term New term

1 Profit and loss account Statement of comprehensive income

(or income statement)

2 Balance sheet Statement of financial position

3 Fixed assets Non-current assets

4 Long-term liabilities Non-current liabilities

5 Stock Inventory/inventories

6 Debtors (or accounts receivable) Trade receivables

7 Creditors (or accounts payable) Trade payables

Turnover

8 Sales revenue

9 Shareholders’ funds Equity

10 Profit and loss account Retained earnings

(appearing as a revenue reserve)

6.1.10 Summary

Studying accounting can seem daunting at times. It is a challenging subject to study.

However, you will quickly realize that there is a certain logic to the accounting techniques and
procedures, which can be picked up relatively quickly.

A lot of the content of an accounting course can be reduced to simple rules. Commit
these rules to memory – use them through practical application and a lot of the difficulties you
may face studying accounting will be overcome.

It is vital that you don’t study accounting passively. This textbook has many questions
designed to test your understanding. Work with the text and complete the review questions as
you progress. We wish you good luck with your studies.
Key terms

Public sector: Sector in the economy owned and controlled by the government.

Private sector: Sector in the economy owned and controlled by private groups and
individuals

Sole trader: A business organization owned and controlled by one person

Partnership: A business organization owned and controlled by a small group of people

Unincorporated business: A business organization in which the owners and the

business are, in legal terms, the same as each other

Limited liability: Where one is limited to losing no more than their original investment
in a company

Limited company: A business organization which has undergone incorporation and

therefore exists as a legal entity separate from its owner(s)

Business objectives: The aim or purpose of a business – i.e. what it is trying to achieve

Profit maximization: Where a business aims to generate as much profit as is possible

Assets: Resources used within a business (e.g. equipment)

Liabilities: Debts and other borrowings of a business

Capital (or equity): Resources provided to a business by the owner(s) of the business

6.2 Double-entry bookkeeping

Business transactions are recorded in accounts. The maintenance and recording of
transactions within these accounts is known as double-entry bookkeeping. The ‘double-entry’
term is used because each transaction can be seen to have two separate effects on the business.
For example, buying a new machine for cash would affect both the asset of machinery, and the
asset of cash. Similarly, selling inventory on credit would affect the asset of inventory, and the
liability of trade payables. A double-entry account would normally appear as follows:
6.2.1 What does the account show?
Given the ‘T’ shaped appearance of the accounts they are often referred to as ‘T’
accounts. Each of these accounts will show the following:

Account name: The name of the account refers to the type of transaction. For example,
if the account is dealing with buying or selling machinery, then the account could simply be
known as ‘machinery’. This means that each different type of transaction would be recorded in
a separate account.

Debits and credits: The debit side (Dr) and credit side (Cr) refer to the left-hand and
right-hand sides of each account. These terms can be used to refer to how entries are made. For
example, if we talk of ‘debiting’ an account, all we mean is that we would be placing an entry
on the debit side – the left-hand side – of the account.

Account details: The details element of each side of the account will contain the name
of the other account which the transaction also affects. As a form of symmetry, each transaction
will affect two accounts – hence the term ‘double-entry’ – and the details included in each
account will refer to the other account to be affected.

There are some basic principles that must be applied when recording double-entry
transactions:

1. Every transaction requires two entries to be made in separate accounts.

2. Every transaction requires one debit entry and one credit entry to be made in
each of the two accounts.

6.2.2 Rules for double-entry transactions

It is vital that transactions are recorded correctly. For this we need to establish on which
‘side’ of the account each transaction needs to be recorded – i.e. should we ‘debit’ or ‘credit’
an account? This will depend on the type of account that we are dealing with.
 In Chapter 1 we were introduced to the terms asset, liability and capital. To start with
we will consider three separate types of account: for assets, liabilities and capital. The rules for
recording the double-entry transactions are as follows:

These rules will make more sense if we see some examples of them in action.

Example 1.1

On 1 November, the owner places £5,000 of her own money into the bank account of the new
business.

Explanation

The asset of bank has increased – so we debit that account.

The capital of the business has increased – so we credit that account.

Notice how the detail of each transaction cross-references the other account to be affected –
providing a useful way of locating the other account that is to be affected by the transaction.

Example 1.2

On 3 November, machinery is purchased for £2,000, payment made by cheque.

Explanation
 The asset of machinery has increased – so we debit that account.

The asset of bank has decreased due to the payment made – so we credit that account.

Example 1.3

On 9 November, equipment is purchased on credit from Perkins Ltd for £320.

Explanation

The asset of equipment has increased – so we debit that account.

The liability of creditor* Perkins Ltd has increased – so we credit that account.

Example 1.4

On 14 November, the £320 owing to Perkins Ltd is paid by cheque.

Explanation

The asset of bank has decreased – so we credit this account.

The liability of creditor has decreased – so we debit this account.

6.2.3 Further information for double-entry bookkeeping
The books which contain the accounts that record these transactions are known as
ledgers. In reality, most accounts will contain more than one transaction and one single account
could easily take up many pages in the ledger.

When completing questions that involve maintaining double-entry accounts, it is a good

idea to read through the complete list of transactions first so as to get a rough idea of how many
entries will be needed in each account. This will mean that you can leave sufficient space to
make all the entries in that account – it will start to look untidy if you have to restart an account
later on in your workings due to leaving insufficient space for transactions.

Typically, the bank and cash accounts are used frequently, whereas the capital account
is only affected by one or two entries.

6.2.4 Accounting for inventory

Goods that are bought with the intention of being sold are referred to as
inventory. Inventory is an asset and will therefore follow the rules of an asset account.
However, bookkeeping for inventory is not as straightforward as you might think. Consider the
following account:

It would be tempting to think that the balance on this account is zero – with the
inventory purchased in April all being sold in May. However, it is likely that the selling price
of the inventory differed from the purchase price of the inventory (i.e. it was sold for a profit)
and, as a result, we cannot actually determine how much inventory is left within the business.

The solution is to have separate accounts for different movements of inventory. There
are four separate accounts to record different movements in inventory:
 The four accounts for inventory

1 Purchases – for purchases of inventory

2 Sales – for sales of inventory

3Returns – when a customer returns inventory to the firm.

inwards

4Returns – when the business returns inventory to the supplier.

outwards

6.2.5 What do we mean by inventory?

Initially we will use examples where firms are not manufacturers of goods. Profits are
earned by these businesses trading in goods: buying goods and selling these goods on to
customers. This may be unrepresentative of many businesses today, but it simplifies matters to
start with.

Inventory refers to goods that the firm buys with the intention of selling at a profit.
What is counted as inventory will depend on the type of business we are dealing with. For
example, a business buying and selling computers would count purchases of computers as
inventory – and would enter these into the purchases account. However, another firm may see
the purchase of a computer as the purchase of an asset and the entry for this purchase would be
in a ‘computer’ account.

Many accounting students are initially unsure whether something counts as the
purchase of an asset or the purchase of inventory. This distinction between purchases of assets
and purchases of inventory is important as it has implications later on for calculating the profit
of the business.

6.2.6 Double-entry transactions for inventory

Inventory is an asset and will therefore follow the rules of an asset account. It is possible
that both purchases and sales will be either for immediate payment or receipt – these would
be referred to as ‘cash transactions’. However, they may be on ‘credit terms’ where the payment
or receipt is made at a later date.

It is worth pointing out that the term ‘cash’ – as in ‘cash sales’ – can include payment
or receipt by cheque; it is only referred to as ‘cash’ to distinguish it from credit terms.
 Nature of inventory transaction

Cash transaction = Immediate payment

Credit transaction = Payment made at a later

date

Credit terms are normally offered when one business trades with another business. The
credit period offered can vary, but 30 days is a typical period offered. The double entry
transactions for credit transactions will be completed in two stages: firstly, the initial credit
transaction, and secondly, the payment made or received in final settlement of the account
owing or owed.

Example 1.5: purchases of inventory

On 10 November, the business purchases £450 of inventory.

Whether the firm pays for this immediately by cheque, or purchases it on credit terms,
can be shown easily in the following accounts.

The purchase of inventory will require a debit entry into the purchases account as an
asset has increased, but there are two options for the corresponding credit entry:

A = Cash purchase

B = Credit purchase

Explanation

If the inventory is paid for immediately, then a credit entry will be made in the bank account –
an asset has decreased.
Explanation

If the inventory is bought on credit, then a credit entry will be made in the creditor’s account –
a liability has increased.

Example 1.6: sales of inventory

On 19 April, the business sells £870 of inventory. Again, we can illustrate the accounts for both
cash sales and for credit sales.

The sale of inventory will require a credit entry in the sales account as the asset of
inventory is being reduced. Again, there are two options for the corresponding debit entry:

A = Cash sale

B = Credit sale

Explanation

If the sale is for immediate we would he bank account – as a receipt, debit assets increased.
Explanation

If the sale is on credit then we would debit the account of the debtor, * as an asset is being
increased.

6.2.7 Returns of inventory

It is possible that goods will be returned to the original supplier. This is not something
that the supplier will allow automatically, but if there is some issue with the order, such as the
order itself being incorrect, or the items faulty, then it is normal practice for the goods to be
returned.

Both returns inwards and returns outwards are asset of inventory accounts and will
therefore follow the rules of an asset account.

Returns inwards refer to the goods which are sent back to the firm from the customer.
For this reason, they are also known as sales returns.

Example 1.7

Goods previously sold on credit to C Smith for £189 were returned to the firm on 12
March due to the goods being faulty.

The returns inwards represent an increase in the asset of inventory which means we will
debit that account. By returning goods C Smith will owe the firm less money which reduces
the asset of debtor which means we credit Smith’s account.
 Returns outwards refer to the goods which the business returns to the original
suppliers. They are purchases that are unsuitable and for this reason are also known as
purchases returns.

Example 1.8

Goods previously purchased from L McCormack for £212 were found to be faulty and were
subsequently returned to him on 5 April.

Returns outwards represent a decrease in the asset of inventory which will mean we credit this
account. By returning goods we will owe McCormack less money which reduces the liability
of trade payables which means we debit McCormack’s account.

Returns

Returns inwards (sales returns) Inventory returned to the business from the
customer

Returns outwards (purchases Inventory returned by the business to the

returns) supplier

6.2.8 Drawings

In Example 2.1 we looked at the owner of the business adding resources to the business
in the form of extra capital. However, it is perfectly possible that the owner will take resources
out of the business for personal use. Resources taken out of the business by the owner are
known as drawings.

As the owner will be withdrawing assets from the business, the relevant asset account
will be credited; the debit entry is in the drawings account. Hence, the double-entry for
drawings is completed as follows:
 Account to be Account to be
debited credited

Drawings Asset withdrawn by

owner

Example 1.9

On 1 October, the owner of the firm takes out £500 from the business bank account for
her own use.

The total drawings for the year would be transferred to the capital account at the end of
the trading period. This will adjust the existing capital of the business to give us the new capital
account balance for the following trading period – this adjustment will also appear on the
statement of financial position.

6.2.9 Income and expenses

Businesses will incur expenses as part of their normal trading operations. Common
expenses incurred by businesses would include rent, insurance and wages. In addition, the
business may have other income in addition to the sales revenue earned from selling goods.
Additional forms of income for the business may include rental income (known as rent
received).

The double-entry account transactions to record income and expenses are

straightforward. It is often easier to think of these transactions in terms of their effect on the
bank or cash account – as a payment will involve the bank or cash account being credited, the
debit entry for this transaction must be in the relevant expense account.

Similarly, if money is received as business income then we would debit either the cash
account or the bank account. This means that the credit entry for this transaction would be in
the relevant income account.
For expenses:

Account to be Account to be
debited credited

Expense Bank or cash

For income and other revenues:

Account to be Account to be
debited credited

Bank or cash Income

Example 1.10

On 9 March, the firm paid wages of £140 in cash.

Example 1.11

On 9 March, the firm received a cheque for £250 in respect of rent received.

6.2.10 How many different expense accounts should be opened?

An account should be opened for each separate expense generated by the

business. However, it is possible that some of the smaller expenses that are incurred, for
example tea or coffee costs for a staff office, could be kept in a ‘general’ or a ‘sundry’ expenses
account.

It is better to keep each expense separate so as to provide information for the managers
of the business as to what expenses are being incurred, and thus give them information that can
be used to control these costs and prevent them rising too quickly.

Another way of separating out the accounts is to ensure that expense and income
accounts remain separate. For example, some firms will have an account for both rent as an
expense, and rent as an income. Here, two separate accounts are maintained with the account
dealing with rental income referred to as rent received, and the account dealing with the
expense of rent simply referred to as rent.

If there is any doubt in knowing whether you are dealing with an income or an expense
account, then just look at the entries made within the account – the expense account will have
the debit entry referring to the means of payment – as in the above example. Incomes will be
credited to the income account as the money received for the income would be debited to either
bank or cash.

6.2.11 Balancing accounts

At the end of a given accounting period (which could be weekly, monthly or

yearly), the double-entry accounts will be balanced. The main purpose of balancing the
accounts is so that the financial statements of the business can be produced.

Balancing off accounts involves comparing the totals of the debit entries in the
individual accounts with the total of the credit entries. The balance on an account arises where
there is a difference between the total of the debits and the total of the credits. The different
ways in which accounts can be balanced are as follows:

Example 1.12: where no balance exists

Some accounts will exist where the totals of the debits and credits are equal. In these
cases, there is no balance on the account.
 In these two cases, the total of the debits is equal to the total of the credits. The technique to
finish the accounts is as follows:

Where there are multiple entries in the account (e.g. see the bank account above):

• Total up each column and write the totals alongside each other – on the same line down.

• Double underline these totals. Where there is only one entry on each side of the account (e.g.
the account of S Moorcroft above):

• Double underline the account.

Example 1.13: entries only on one side of the account

In the purchases account we enter the balancing figure (the amount needed to ensure
the two sides are equal) on the credit side. In the account of I Shipsom, there is only one entry
in the account (on the credit side) and so we only need the equivalent entry on the debit side of
the account. The insertion of these balancing items means the totals of each side now equal and
the totals and ruling off can take place as in the earlier example.

The term ‘balance c/d’ refers to the balance on the account to be carried down to the
next period of time. Confusingly, this term is the ‘balancing amount’ but not the balance.
Notice that on the two accounts above, the balancing figure is then brought down (‘balance
b/d’) to the opposite side of the account for the next period of time. This is the actual balance
in the case of Purchases, it is a debit balance of £411. In the case of I Shipsom, there is a credit
balance of £92 on the account.

Be careful here: it is the balance b/d which represents the actual balance on the account,
not the balance c/d which is simply the balancing figure.

It is good practice to always bring the balance down to the start of the next accounting
period even if not asked for.

Example 1.14: entries on both sides of the account

In some accounts there will be multiple entries in the accounts and the totals of each side will
not be equal, as in the following account:

In the above account, there is a debit balance of £21. This means that C Flint owes the business
£21 – a debit balance reflects the fact that the above account receivable is an asset of the
business.

6.2.12 General rules for balancing accounts

 Although balancing accounts is fairly straightforward, it can initially cause problems.
Most problems can be avoided if the following points are remembered:

✓ Balances only exist if there is a difference between the totals on each side of the
account.
✓ The totals of each side of the account are not the balances.
✓ The balancing figure on the account will be the amount needed to ensure the
totals of each side are equal.
✓ Ensure that the totals of the accounts are written on the same line down.
✓ Bring the balance down on to the opposite side of the account from the
balancing figure.

Key terms

Bookkeeping -The system of recording and maintaining financial transactions in accounts

Double-entry -The system by which accounting entries are recorded in two accounts

Debit -Accounting entry on the left-hand side of an account

Credit -Accounting entry on the right-hand side of an account

Account -A place where a particular type of transaction is recorded

Ledger -A book containing double-entry accounts

Inventory -Goods purchased with the intention of being sold by the business for a profit

Debtor -A person or business that owes a business money and will repay in the near future

Creditor -A person or business that a business owes money to and that is expected to be repaid
within the near future

Purchases -Inventory purchased by a business for the purpose of resale

Sales -Inventory sold by a business

Returns inwards -Inventory previously sold by a business which is returned to the firm by the
customer (usually because of unsuitability of the inventory)

Returns outwards -Inventory previously purchased by a business which is returned to the

original supplier (usually because of unsuitability of the inventory)

Drawings -Resources (e.g. cash) taken out of a business by the owner for private use
Expenses -Costs incurred by a business in the day-to-day running of the business

Income -Revenue earned by a business as part of the business’s operations

Balance -The outstanding amount remaining when an account is balanced – measured by the
difference between the totals of the debit column and the credit column in an individual account
6.3 Financial statements
One of the most important uses of the double-entry system of bookkeeping is to produce
the financial statements of the business (also known as the final accounts of the business).
These statements provide crucial information on business performance. According to IAS 1,
the following are classified as the financial statements:

1. Statement of comprehensive income

2. Statement of financial position
3. Statement of changes in equity
4. Statement of cash flows
5. Notes providing a summary of accounting policies and other explanations.

According to IAS 1, the objective of the financial statements is to provide information

about the financial position and financial performance of the business for a period of time. In
this chapter we will only be looking at the following:

1. Statement of comprehensive income

2. Statement of financial position.

Once the double-entry accounts have been balanced off (see Chapter 2) then it is
possible to construct a trial balance for the business which will facilitate our construction of
the financial statements.

In this chapter we will be looking at the financial statements of a sole trader – that is
an organization owned by one person. Although accounting standards do not apply to sole
traders as they would to limited companies we will still introduce some of the terminology used
in the presentation of limited company accounts.

6.3.1 Trial balance

Double-entry accounts are used to calculate the level of profit earned by a business.
They can also be used to take a measure of the business’s size and financial structure. Before
any of this is completed it is customary to extract a trial balance.

The trial balance is simply a list of the closing balances on each individual ledger
account. The debit balances and credit balances are listed in separate columns. If the double-
entry bookkeeping has been conducted correctly then the totals of these columns should
‘agree’, that is, should total the same amount. This is no coincidence.
 It is logical that the totals of each column should be the same. For every debit entry, a
credit entry of equal amount was made in an account. In other words, every time we added an
amount to the debits we always added an equal amount to the credits – meaning it has to be the
case that the debits and credits agree in total. It doesn’t matter which accounts have been
affected because the trial balance looks at the system as a whole.

A trial balance that fails to agree would indicate that mistakes have been made in the
double-entry bookkeeping. Common errors shown up by the trial balance would include:

1. Only entering half of a transaction (i.e. missing out a debit or a credit entry)
2. Entering two debits or two credits for a transaction rather than one of each
3. Entering different amounts for the two entries.

However, even if a trial balance agrees this does not mean that the bookkeeping has
been error-free. For example, any of the following errors would not prevent the trial balance
agreeing:

1. Missing out a whole transaction (i.e. both the debit and the credit entry)
2. Entering the same incorrect figure on both halves of the transaction
3. Reversing the debit and credit entries.

A trial balance will normally appear as follows:

Inventory at 31 December 2008 was valued at £600.

 In the trial balance there will be a mixture of balances from different types of accounts.
Some accounts will have no outstanding balance and therefore will not appear in the trial
balance.

Any inventory left unsold at the end of the period would be treated as an asset and
would be stated outside the trial balance (as there is no individual account for inventory).

For financial statements, it is important to get the correct format of the title. Think of this as a
three-part process:

1. Who? – the name of the person or business

2. What? – what type of statement
3. When? – for what time period

This may be referred to as the three Ws.

Whether the financial statement is for a particular point in time (i.e. a day) or for a
period of time (e.g. a year) is an important distinction to make and be aware of.

The focus of some examination questions will be on constructing or correcting a trial

balance, which means that is important that you can remember the balances of particular types
of account – whether debit or credit. The common balances are as follows:

Common balances in the trial balance

Debit balances Credit balances

Assets Liabilities
Drawings Capital
Expenses Revenues
Provisions*

Some balances can be debit or credit. For example, the bank balance can be either be a
debit balance if there is money in the bank or a credit balance if there is an overdrawn balance.

6.3.2 Statement of comprehensive income

The statement of comprehensive income is the statement which shows the profit or
loss earned by a business for a particular period of time. For many years, this was known as
the profit and loss account. More recently, it was also known as the income statement of the
business. In this chapter we will use the IAS 1 terminology for the full statement of
comprehensive income.
 As we construct this statement we will refer to the two sections of the statement as the
trading account and the profit and loss account respectively. In fact, some older texts still refer
to the statement of comprehensive income as a ‘trading and profit and loss account’. Although
the introduction of alternative names for this one statement may seem confusing, this is
designed to make understanding the full statement and how it is constructed easier.

A statement of comprehensive income is also known as a profit and loss account or

an income statement.

6.3.3 Calculation of profit

Profit maximization – where managers and owners aim to make as much profit as
possible – is the main objective of many businesses. Even if a business has other objectives,
such as growth or survival, the calculation of profit will be of great importance for the following
reasons:

Calculation of tax – tax paid to the government will be based on the profits earned

Obtaining credit – lenders (such as banks) will want to see that they will be repaid and
profit is a good indicator of this ability

Expansion – profits enable a firm to grow.

Profit is measured over a period of time. The calculation of the profit will involve
calculation of both total income and total expenses generated for a particular time period with
profit being the difference between these two. The profit of a business is calculated in the
statement of comprehensive income. However, there is more than one measurement of profit
which can be calculated.

6.3.4 Difference between gross and net profits

Although the final profit figure is important, managers and owners will also want to
know the size of the profit made on the actual sales that have been made before any other
expenses are deducted. As a result, statements of comprehensive income are normally split into
two sections, the trading account and the profit and loss account.

Sections found in the statement of comprehensive income

 Trading account Calculates the gross profit – calculated as the profit
made on the buying and selling of goods.

Profit and loss Calculates the net profit – calculated as the profit
account remaining after all other expenses are deducted.

Given that the gross profit is only calculated as the profit made on the buying and
selling of goods, it is possible that a firm earns a gross profit, but still ends up with a net loss.
It is also possible (though unlikely) that the business makes a gross loss, which would make it
highly unlikely that they would make anything other than a net loss.

The information needed to calculate gross and net profits will come from the trial
balance. For the purpose of the next few examples, we will continue to use the trial balance of
I Fraser.

Inventory at 31 Dec 2008 was valued at £600.

The statement of comprehensive income will be constructed from many of the balances
found on the trial balance.

To calculate profit, we need the balances from the accounts that refer to flows of income
and expenditure – look for the balances that are not dealing with assets, liability or capital –
these will be the balances that we need. (The asset of inventory will be the only asset balance
which is used within the statement of comprehensive income – it is needed in the calculation
of the cost of goods sold.)

The unused balances will be used when we construct the statement of financial position
and appear in blue to indicate that they are not used in this stage.

Trade receivables and trade payables are the names given to the totals of debtors and
creditors respectively. In the double-entry accounts these balances would appear as the name
of the relevant debtor or creditor.

In each of the ledger accounts that appear in the statement of comprehensive income
the balance on the account would be transferred to the income statement. In effect, each ledger
account is ‘emptied’ into the statement of comprehensive income (though this doesn’t apply to
all accounts).

6.3.5 Trading account

In the trading account we calculate the gross profit. This is calculated as the difference
between sales and the cost of goods sold.
Gross profit = Sales less Cost of goods sold
The cost of goods sold refers to the cost of any purchases made by the firm. However,
we would not include any purchases that remain unsold at the end of the period so we would
always subtract the value of any closing inventory from this purchases figure. In our example,
the cost of goods sold would be £8,000 − £600 = £7,400 (i.e. purchases − closing inventory).

In this case, the trading account section of the statement of comprehensive income
would look as follows:
 Statements of comprehensive income and the trading account can be shown either in
what is known as ‘horizontal’ or ‘vertical’ presentation. The example above shows the trading
account in its vertical format. In this book we will stick to using the vertical format as it is more
in line with how financial statements are presented in annual reports.

Note that the title of the trading account contains the three Ws – who, what and for
when. The trading account should not really be thought of as an account. Think of it as part of
the business’s financial statements – a section of the statement of comprehensive income.

6.3.6 Profit and loss account

The second section of the statement of comprehensive income is sometimes referred to

as the profit and loss account. Once we have calculated the gross profit (or gross loss) of the
business, it is now time to include all the other expenses that the business has incurred so as to
arrive at the net profit.

Net profit = Gross profit − Expenses

It is important that we only include the income and expenses belonging to the particular
time period we are concerned with. This means that we must be careful not to include the
purchase of any non-current assets as expenses. How we account particularly for non-current
assets will be dealt with in Chapter 10.

As with the sales account, the expenses and other income accounts have their balances
transferred to the profit and loss section of the statement of comprehensive income. The profit
and loss section will appear as follows:
 Any additional income – in this case ‘rent received’ – would be added on to the gross
profit before we deduct the total of the expenses.
The total of gross profit (with any additional income added on) is greater than the total
of the expenses. This means that the business has made a net profit for the year.
The full statement of comprehensive income would appear as follows:

* Note: In the published version of these accounts, sales are referred to as ‘revenue’. Here we
will continue to use the term ‘sales’ as this enables you to see more closely the link between
the statement of comprehensive income and the double-entry bookkeeping.
Although the trading account and profit and loss account can be shown separately (and
can appear separately in assessment questions) It is normal to combine the two accounts into
one overall accounting statement – the statement of comprehensive income. The net profit of
£2,120 does not mean that the firm has this amount of money in the bank – a common confusion
by students new to the subject. The profit earned could have already been ‘spent’ on new assets,
inventory, or taken as personal drawings.
 All the profit represents is that the business generated more in income than it managed
to spend on business expenses for that period of time.

6.3.7 Statement of financial position

The other main part of a set of financial statements is the statement of financial
position (previously known as the balance sheet). This is also constructed from the balances
found on the trial balance. Again, we will use the trial balance of I Fraser. Balances remaining
unused after the construction of the statement of comprehensive income will be used to
construct the balance sheet. The balances appearing on the statement of financial position will
be those of assets, liabilities and capital accounts. The balances that are not being used in the
construction of the statement of financial position appear in blue on the version of the trial
balance below.

Trade receivables and Trade payables are the names given to the totals of debtors
and creditors respectively. In the double-entry accounts these balances would appear as the
name of the relevant debtor or creditor.

Inventory at 31 Dec 2008 was valued at £600.

6.3.8 Sections within the statement of financial position

A statement of financial position can be thought of as a list of the assets of the business.
It shows the assets of the business and how those assets were financed. Assets can be financed
by either the owner’s own resources – capital – or by borrowing – liabilities. As we know from
Chapter 1, the total value of assets should always be equal to the combined total of capital and
liabilities. Given that the statement of financial position reflects this it will always balance.

Rather than simply list assets, liabilities and capital, further subdivisions are shown on
a statement of financial position.

6.3.9 Non-current assets

Non-current assets (also known as fixed assets) are those assets which are not bought
with the intention of resale. They are often bought to be used within the business, either to
facilitate production or, in the case of investments, to generate further income. Common
examples of non-current assets would include property, plant and equipment. More detail about
the accounting treatment of non-current assets is given in the accounting standard IAS 16.

Non-current assets are also known as fixed assets.

6.3.10 Current assets

Current assets are assets which are likely to be converted into cash before the end of
the current year (i.e. before the date of the next statement of financial position). Liquidity is
used to refer to how easily an asset can be converted into cash (without any significant loss in
value). Current assets are deemed to be liquid assets. Common examples of current assets
would include inventory, trade receivables, bank and cash.

6.3.11 Current liabilities

In line with IAS 1, current liabilities would be those expected to be settled before the
date of the next statement of financial position – in other words, in the next year. Common
examples of current liabilities would include trade payables, overdrafts and any other short-
term borrowings.

6.3.12 Non-current liabilities

Non-current liabilities include any debts that the business incurs which are not due for
repayment until at least after the date of the next statement of financial position (i.e. at least
one full year away). Common examples of non-current liabilities would include non-current
loans, mortgages and debentures (though debentures are only available for limited companies).

Non-current liabilities are also known as long-term liabilities.

6.3.13 Capital
 In our example the double-entry account for capital would be updated as shown
opposite. It will be affected by the net profit earned for the year and will also be reduced by
any drawings taken during the period. (NB: Any net loss would be debited to the capital
account.)

The statement of financial position will now appear as follows:

Note that the title of the statement of financial position contains the three Ws – who,
what and for when. However, the ‘when’ aspect of the title is a specific date as the statement
of financial position can only represent a point in time (i.e. a day) and not a period of time.

Working capital is presented as the difference between current assets and current
liabilities.

The top section of the statement of financial position represents the net assets of the
business which are calculated as follows:

Non-current assets + Current assets − Current liabilities − Non-current liabilities

 The bottom section of the statement of financial position represents the capital of the
business, which is adjusted by adding any net profit and deducting any drawings.

6.3.14 Use of the statement of financial position

The statement of financial position provides the following uses:

1. It gives an estimate for the overall value of the business (this would not include
any value of the business which cannot be measured – such as the value of a
brand name).
2. The financial structure of the business can be examined. For example, a business
that relies on loans and other borrowings for its non-current finance will often
be seen as a greater risk for investment purposes.
3. Working capital is a useful calculation in providing information about the
overall liquidity position of the business. A business with low levels of working
capital may face problems in the future.

6.3.15 Bringing the statements together

The statement of comprehensive income and the statement of financial position are
normally constructed together – with the statement of comprehensive income being constructed
first.

The net profit from the statement of comprehensive income will be added to the capital
balance on the statement of financial position. As a result, if a mistake is made in calculating
the net profit of the business it is unlikely that the statement of financial position will balance.

If the statement of financial position does not balance, then don’t forget to check the
statement of comprehensive income – the mistake might be there!

6.3.16 Further adjustments to the statement of comprehensive

Opening inventory
So far we have looked at a business in its first year of trading. Once a business trades
for more than one accounting period of time then it will be likely we will have inventory in
hand at the start of the period (opening inventory) as well as inventory at the end of the period
(closing inventory).
 Opening inventory is available for use and resale so it will be added into the cost of
goods sold calculation. The opening inventory will be a debit entry in the trial balance (closing
inventory will always be found in the additional information to the trial balance).

6.3.17 Carriage

Carriage is an expense relating to the transport of goods. There are two types of
carriage, and their treatment is as follows:

Treatment of carriage

Type of carriage Definition Appears as

expense in

Carriage inwards The cost of transporting goods Trading account

from suppliers into the business

Carriage outwards The cost of transporting goods Profit and loss

from the business to customers account

The reason why the two types of carriage expense are treated in different ways is that carriage
inwards is connected with the cost of getting goods ready for sale and therefore belongs in the
cost of goods sold calculation

6.3.18 Returns

We have already dealt with the accounting entries for both returns inwards and returns
outwards in Chapter 2. However, we will also need to make adjustments in the trading account
for the returns. These adjustments are as follows:

Adjustments needed for returns

Returns inwards Deduct from sales

Returns outwards Deduct from purchases

This means that the full cost of goods sold calculation would appear as follows:

Adjustments needed for the cost of goods sold

 Opening inventory The order in which the cost of goods sold is adjusted for
returns outwards and carriage is not important.
Add Purchases
However, it is good practice to show your full workings
Add Carriage inwards
when the adjustments are made.
Less Returns outwards
Less Closing inventory
Equals Cost of goods sold

Example
Consider the following trial balance extract:

Inventory at 31 December 2009 was valued at £4,300.

The trading account – with all these further adjustments – would appear as follows:

Some points to note:

In the above example the term net turnover is introduced for the difference between
sales and returns inwards.

The carriage outwards would appear with the other business expenses in the profit and
loss section of the statement of comprehensive income.
6.3.19 Relevant accounting standards
IAS 1 Presentation of Financial Statements
IAS 16 Property, Plant and Equipment
Handy hints
The following hints will help you avoid errors.
1. The trial balance will always agree – there is no reason for each column to total
different amounts.
2. Use full workings when constructing a statement of comprehensive income –
try not to list items without showing the necessary additions or subtractions.
3. Keep columns of data aligned – use margins to stop columns drifting.
4. For the statement of financial position, ensure that items belong in the
appropriate section.
5. Remember – the statement of financial position must balance.
6. Again, show full workings in calculations – especially for the capital section.
Key terms

Financial statements: The statements produced by a business to provide a summary

of the overall performance and the financial position of the business

Statement of comprehensive income: A statement which shows the profits (or losses)
of a business calculated by comparing revenues and expenses

Statement of financial position: A statement which shows the assets, liabilities and
capital of a business, enabling an assessment to be made of the strength of the business

Trial balance: A list of all the balances from the double-entry accounts providing an
arithmetical check on the accuracy of the bookkeeping

Gross profit: the difference between sales revenue and the cost of the goods sold,
before taking other expenses into account

Net profit: the profit earned by deducting all expenses from the revenue for the period

Trade receivables: The collective term used to represent the total of the debtors of a
business

Trade payables: The collective term used to represent the total of the creditors of a
business

Non-current assets: Assets held within a business in order to generate future economic
benefits
 Current assets: Liquid assets which are held as part of the operations of a business,
and which are unlikely to be held continuously for more than the next year

Current liabilities: Short-term borrowings and other debts incurred by a business

which are to be repaid in the next year

Non-current liabilities: Borrowings by a business which are not expected to be repaid

in the next year

Carriage inwards: The cost of delivering goods (purchases) into a business

Carriage outwards: The cost of delivering goods (sales) to the customers of a business

Working capital: The circulating capital of a business which is used to finance its day-
to-day operations, calculated as current assets less current liabilities

Net assets: The total value of all assets of a business less the total value of any liabilities

6.4 Control accounts

The chances of errors occurring in the double-entry accounting are, unfortunately, too
likely. Given the need for producing accurate and up-to-date information it is important that if
errors are made in the books they can be located quickly.

A trial balance will show the existence of arithmetical errors in the ledger accounts.
However, locating these errors may still be very time-consuming once the business has passed
beyond a certain size. Therefore, it is useful to have other methods of locating errors. One such
method is through the construction of control accounts. Control accounts are used to provide
a check on the personal ledger accounts; the sales ledger control account monitors the sales
ledger (accounts of trade receivables) and the purchases ledger control account monitors the
purchases ledger (accounts of trade payables).

6.4.1 Information used in the control accounts

To check the accuracy of the personal ledgers we can construct control accounts as
follows:

Sales ledger control account – for checking the accuracy of the sales ledger

Purchases ledger control account – for checking the accuracy of the purchase’s
ledger.

A control account is constructed from the data found within both day books and ledgers
of the business. If we use these total amounts that we can construct a control account which
represents the total entries for a period of time relating to items either in the sales ledger or in
the purchases ledger. In effect, this control account would appear as an overall account for
trade receivables or trade payables.

6.4.2 Location of information for control accounts

The information to construct the control accounts would be found as follows:
Sales ledger control account
Item in account Location of item
Opening balance Sales ledger accounts
Credit sales Sales day book
Money received Cash book
Returns inwards Returns inwards day book
Bad debts General ledger
Discounts allowed Cash book/General ledger
Closing balance Sales ledger accounts
Purchases ledger control account

Item in account Location of item

Opening balance
Credit purchases
Money paid
Returns outwards
Discounts received
Closing balance
Purchases ledger accounts
Purchases day book
Cash book
Returns outwards day book
Cash book/General ledger
Purchase ledger accounts

The closing balance on each control account should be equal to the total of all the
closing balances from the relevant ledger. This is because they are using the same data – they
are simply taking the data from different places (either the individual accounts or the day books
and ledger totals).

6.4.3 Memorandum accounts

Control accounts appear to follow the rules of double-entry bookkeeping. A sales ledger
control account would appear similar to the account of a debtor of the business – with amounts
owing to the business, further credit sales, and other adjustments that arise out of credit sale
transactions between the business and its debtors. Similarly, the purchases ledger control
account will appear as though it is the account of a creditor of the business.

However, the control accounts are not necessarily part of the double-entry system. If
they are not part of the double-entry system, they will act as memorandum accounts. A
memorandum account is separate from the double-entry system. The memorandum control
accounts would act as a device for monitoring the sales and purchases ledgers.

One further twist is that some firms actually use the control accounts as part of the
double-entry system. For these businesses, transactions dealing with credit sales and credit
purchases would be dealt within the sales ledger and purchases ledger control account
respectively. The individual accounts of each debtor and each creditor would then act as the
memorandum account and would merely provide information for the business and not act as
part of the double-entry system.

Given the prevalence of computerized account systems, it is just as easy to maintain

control accounts either as memorandum accounts or as an integrated part of the double-entry
system. In any examination questions, you would always be informed which system was in use
if this was to affect how you would answer the question.

6.4.4 Layout of control accounts

It will help you to construct control accounts with confidence if you think of each
control account as simply the individual accounts for trade receivables and trade payables. The
control accounts represent all the individual personal accounts totaled up and will still obey the
basic principles of accounts for debtors and creditors. Therefore, if you can commit to memory
the basic layout of the individual accounts, then it will greatly increase your chances of being
able to construct the control accounts. The typical layouts for trade payables and trade
receivables are presented below.

Many assessment questions will focus on the construction of control accounts. In this case it
is crucial that you know not only where in the account the data should appear, but also in which
control account the data belongs. Most items will appear in only one of the control accounts.
However, there are exceptions to this rule. Exceptions will be explored later.
Example 1.1: a sales ledger control account

The following data relates to the credit sales transactions for the month of May 2009.

Information from the sales ledger £

Balances of trade receivables as at 1 May 2009 3,124
Balances of trade receivables as at 31 May 2009 4,324
Information from other day books and ledgers for month of May £
Credit sales 23,130
Cash book entries representing receipts from trade receivables 20,855
Discounts allowed 432
Returns inwards 531
Bad debts 112

The control account would appear as follows:

Sales ledger control account

2009 £ 2009 £

1 May Balances b/d 3,124 31 May Cash book 20,855

31 Credit sales 23,130 31 May Discounts allowed 432

May
31 May Returns inwards 531

31 May Bad debts 112

31 May Balances c/d 4,324

26,254 26,254

In this example the control account balances which implies that there are no arithmetical
errors in the sales ledger (there could be other errors though).

Example 1.2: a purchases ledger control account

The following data relates to the credit sales transactions for the month of June 2009.
Information from the purchases ledger £
Balances of creditors as at 1 June 2009 1,897
Balances of creditors as at 30 June 2009 1,676
Information from other day books and ledgers for month of June £
Credit purchases 8,790
Cash book entries representing payments to creditors 8,328
Discounts received 424
Returns outwards 259

The control account would appear as follows:

6.4.5 Purchases ledger control account
Another way to ensure that you remember the layout of the control account is to take a
refresher on basic double-entry.
6.4.6 Double-entry and control accounts

Trade receivables is an asset account, and trade payables a labiality account. Each
control account will therefore follow the basic rules of double-entry for assets and liabilities.

In the case of the sales ledger control account, anything that increases what we owed
(e.g. more credit sales) will require a debit entry. At the same time, anything that reduces what
we are owed (e.g. money received in respect of debt settlement, or goods returned to us) will
require a credit entry.

The same principles can be applied to the purchases ledger control account. The
following may help you to decide where things belong in the control account.

6.4.7 Other items found in control accounts

The earlier examples show very simple control accounts. There are other items that can appear
in the control account.

6.4.8 Contra entries

It is possible that a business can be both a debtor and a creditor at the same time. If we
have both bought from and sold to the same business, then they would have an account in both
the sales ledger and the purchases ledger. However, it will usually make more sense to partially
set off the debt rather than allow both amounts to be settled in full. For example, if you owe
someone £10 and they, at the same time, owe you £5 then it would be sensible for you to simply
pay them £5. What you have done here is set off a debt of £5. The entries for these are known
as contra entries as they affect the same account (well, the account of the same person) in the
ledgers.

Contra entries will therefore reduce both the amount owing and the amount owed. They
will appear in both the sales ledger and purchases ledger control accounts.

Example 1.3

We owe £56 to J Evans, who at the same time owes us £29. The set-off would be completed as
follows:

The result of the set-off is that the amount owed to Evans is reduced to £27 (£56 − £29)
and the amount owed to us by Evans is wiped out.

The set-offs would appear on both the credit side of the sales ledger control account
and the debit side of the purchases ledger control account.

Set-offs are often known as contra entries as they, in effect, only affect the same
account.

6.4.9 Dishonoured cheques

Occasionally we will receive a cheque that our bank will fail to honor. This means that
the money we thought we had received will not actually be added to our bank balance. This
will be because the payee has insufficient funds (or insufficient overdraft arrangements) in their
account and their bank will not pay out on the cheque.

In this case, we need to ensure that the entry we had made for receiving money is, in
effect, cancelled out. Given that the money received would be credited to the sales ledger
control account, it should make sense to debit the control account with any dishonored cheques.
A rationale for this is that a dishonored cheque increases what we are owed and therefore we
would debit any debtor’s account to reflect this.

6.4.10 Other balances

It is possible that we will have unusual balances in each control account. For example,
we may have an opening credit balance in the sales ledger account. Why is this unusual? The
credit entry implies an amount owing and this would mean that we owed money to one or more
of our debtors which appears unusual. However, the explanation for this could be that we
received payment from a debtor shortly before the goods were then returned. Perhaps a fault
with them was found after payment was made. In this case we would owe the debtor the amount
they had paid – hence the credit balance. Similar reasoning can also be applied to the purchases
ledger control account.

6.4.11 Layout of control accounts (Detection of errors)

One of the main benefits of constructing control accounts as memorandum accounts is
that it can help to localize errors. This saves time as the location of an error would normally
take considerably more time if it were left until after the construction of the trial balance.

The total of closing balances on all trade receivables should match the closing balance
in the control account for the sales ledger as they both show the same data (the total amount
owed to the firm by its credit customers). If they are not the same then this would indicate that
an error has been made.

Errors which would not be detected by constructing control accounts alone would
include the following:

1. A transaction is missed out entirely.

2. The amounts in a transaction are incorrectly recorded in all records.
3. Transactions entered in the wrong personal account (but otherwise recorded
correctly).

The inability to detect these errors is the main limitation on the usefulness of control
accounts.
6.4.12 Prevention of fraud

If the maintenance of the double-entry accounts is conducted by someone different from

the person who oversees the construction of control accounts, then this will also act to make
fraud by employees more difficult. This is because the control account will act as a check on
the records and will highlight any discrepancies (e.g. under recording receipts on a personal
account).

6.4.13 Incomplete records

If a business does not have a complete set of financial data available, the construction
of control accounts can help to determine the missing data. For example, if no data existed for
the amount for credit sales, then this could be ascertained by constructing the control account
in full and the missing figure would be whatever amount was needed for the account to balance.
This technique is a fairly common topic for examination questions.

Example 1.4

The following sales ledger control account was constructed for the month of June 2012:

However, the total of balances from the sales ledger as at 30 June 2012 was £1,006. The
following errors were discovered:

1. A bad debt of £65 was recorded in the sales ledger but missed out of the journal.
2. A sales invoice received from D Jack for £120 was missed out completely.
3. The total of balances from trade receivables was overcast by £50.
4. Returns inwards of £31 were entered in all records as £13.
5. There are a number of steps needed to be completed to ensure that we find the
correct totals for balances on the accounts of trade receivables.

Firstly, we need to establish whether or not the errors made affect the control account,
the individual accounts in the sales ledger or both.
 Adjustment 1 By being included in the sales ledger it would have been
included in the individual accounts, but by missing the entry
out of the journal for bad debts we would need to include this
in the control account.

Adjustment 2 The credit sales of £120 would need to be added both to the
control account total and to the totals of the individual
accounts.

Adjustment 3 The total for the balances on the individual accounts will need
reducing by £50.

Adjustment 4 The error made here will need adjusting both in the control
account and in the individual accounts (an increase is needed
of £18).

The control account can now be updated and would appear as follows:

We would then reconcile the balances for trade receivables from the control account
and also the total of the individual balances as follows:

Less overcast returns

Balance as per updated control account

The reconciliation illustrates the differences in the two balances. However, given that
the reconciliation is completed successfully we can infer that the errors have now been located
and corrected (there could be some other errors but these would not be located through this
process).

Example 1.5: a more comprehensive example

The following example shows construction of both the sales ledger and the purchases
ledger control account. It also contains items which may not actually belong in the control
accounts.
From the following data we will construct the sales ledger and purchases ledger control
accounts.
£
Sales ledger balances as at 1 March 2016 1,001
Purchases ledger balances as at 1 March 2016 666
Credit sales for March 8,305
Credit purchases for March 3,825
Cash sales 2,434
Cash purchases 4,535
Cash and bank receipts in respect of credit sales 8,640
Dishonoured cheques 280
Credit balances in sales ledger as at 1 March 2016 41
Set-offs from sales ledger against purchase ledger balances 66
101
Returns inwards
Bad debts 105
Payments made for credit purchases 3,888
Discounts allowed 265
Discounts received 210
Returns outwards 95
Sales ledger balances as at 31 March 2016 368
Purchases ledger balances as at 31 March 2016 232
The sales ledger control account will be as follows:
Sales ledger control account

2016 £ 2016 £
1 Mar Balances b/d 1,001 31 Mar Balances b/d 41

31 Credit sales 8,305 31 Mar Cash book 8,640

Mar
31 Dishonoured 280 31 Mar Discounts allowed 265
Mar cheques

31 Mar Bad debts 105

31 Mar Returns inwards 101

 31 Mar Set-offs 66

31 Mar Balances c/d 368

9,586 9,586

The purchases ledger control account will be as follows:

Purchases ledger control account

2016 £ 2016 £

Mar Cash book 3,888 Mar 1 Balances b/d 666

31
Mar Discount 210 Mar 31 Credit purchases 3,825
31 received
Mar Returns outwards 95
31
Mar Set-offs 66
31
Mar Balances c/d 232
31
4,491 4,491

Note that the data for cash sales and purchases should not appear in the control account
– we are only interested in the items which generate entries into the sales and purchases ledgers.
Handy hints
The following hints will help you avoid errors.

1. If you are to construct control accounts, just think of each control account as if
it were the individual account of either a debtor or creditor of the business.
2. Set-offs appear in both the sales ledger and purchases ledger control accounts –
in both cases set-offs reduce the outstanding balances.
3. All other items in control accounts can only appear in one of the control
accounts.

Key terms

Control account -An account which checks the accuracy of a designated ledger

Sales ledger control account -An account used to verify that the sales ledger has been
correctly maintained

Purchases ledger control account -An account used to verify that the purchases ledger
has been correctly maintained
 Memorandum accounts -Accounts which are not part of the double-entry system and
are used as a guide

Setting off -Reducing an outstanding balance owed by one party to another by an

amount owed the other way round

6.5 Financial Statement Analysis

A financial statement is an official document of the firm, which explores the entire
financial information of the firm. The main aim of the financial statement is to provide
information and understand the financial aspects of the firm. Hence, preparation of the
financial statement is important as much as the financial decisions.

6.5.1 Meaning and definition

According to Hamptors John, the financial statement is an organized

collection of data according to logical and consistent accounting procedures. Its
purpose is to convey an understanding of financial aspects of a business firm. It may
show a position at a moment of time as in the case of a balance-sheet or may reveal a
service of activities over a given period of time, as in the case of an income statement.

Financial statements are the summary of the accounting process, which,

provides useful information to both internal and external parties. John N. Nyer also
defines it “Financial statements provide a summary of the accounting of a business
enterprise, the balance-sheet reflecting the assets, liabilities and capital as on a certain
data and the income statement showing the results of operations during a certain period”.

Financial statements generally consist of two important statements:

1. The income statement or profit and loss account.

2. Balance sheet or the position statement.

3. A part from that, the business concern also prepares some of the other
parts of statements, which are very useful to the internal purpose such
as:

4. Statement of changes in owner’s equity.

5. Statement of changes in financial position.

 Fig. Financial Statement

6.5.2 Income Statement

Income statement is also called as profit and loss account, which reflects the
operational position of the firm during a particular period. Normally it consists of one
accounting year. It determines the entire operational performance of the concern like total
revenue generated and expenses incurred for earning that revenue.

Income statement helps to ascertain the gross profit and net profit of the concern.
Gross profit is determined by preparation of trading or manufacturing a/c and net profit is
determined by preparation of profit and loss account.

6.5.3 Position Statement

Position statement is also called as balance sheet, which reflects the financial position
of the firm at the end of the financial year. Position statement helps to ascertain and
understand the total assets, liabilities and capital of the firm. One can understand the strength
and weakness of the concern with the help of the position statement.

6.5.4 Statement of Changes in Owner’s Equity

It is also called as statement of retained earnings. This statement provides information
about the changes or position of owner’s equity in the company. How the retained earnings are
employed in the business concern. Nowadays, preparation of this statement is not popular
and nobody is going to prepare the separate statement of changes in owner’s equity.

6.5.5 Statement of Changes in Financial Position

Income statement and position statement shows only about the position of the
finance; hence it can’t measure the actual position of the financial statement. Statement of
changes in financial position helps to understand the changes in financial position from one
period to another period.

Statement of changes in financial position involves two important areas such as fund
flow statement which involves the changes in working capital position and cash flow
statement which involves the changes in cash position.

6.5.6 Types of financial statement analysis

Analysis of Financial Statement is also necessary to understand the financial positions

during a particular period. According to Myres, “Financial statement analysis is largely a
study of the relationship among the various financial factors in a business as disclosed by
a single set of statements and a study of the trend of these factors as shown in a series of
statements”.

Analysis of financial statement may be broadly classified into two important types on
the basis of material used and methods of operations.

Based on Material Used

Based on the material used, financial statement analysis may be classified into two
major types such as External analysis and internal analysis.

1. External Analysis: Outsiders of the business concern do normally external

analyses but they are indirectly involved in the business concern such as
investors, creditors, government organizations and other credit agencies.
External analysis is very much useful to understand the financial and
operational position of the business concern. External analysis mainly
depends on the published financial statement of the concern. This analysis
provides only limited i n f o r m a t i o n about the business concern.

2. Internal Analysis: The company itself does disclose some of the valuable
information’s to the business concern in this type of analysis. This analysis is
used to understand the operational performances of each and every
department and unit of the business concern. Internal analysis helps to take
decisions regarding achieving the goals of the business concern.
 Based on Method of Operation

Based on the methods of operation, financial statement analysis may be

classified into two major types such as horizontal analysis and vertical analysis.

A. Horizontal Analysis
Under the horizontal analysis, financial statements are compared with several
years and based on that, a firm may take decisions. Normally, the current year’s
figures are compared with the base year (base year is considering as 100) and how the
financial information are changed from one year to another. This analysis is also
called as dynamic analysis.

B. Vertical Analysis
Under the vertical analysis, financial statements measure the quantities
relationship of the various items in the financial statement on a particular period. It is also
called as static analysis, because, this analysis helps to determine the relationship with
various items appeared in the financial statement. For example, a sale is assumed as 100
and other items are converted into sales figures.

6.5.7 Techniques of financial statement analysis

Financial statement analysis is interpreted mainly to determine the financial and

operational performance of the business concern. A number of methods or
techniques are used to analyses the financial statement of the business concern. The
following are the common methods or techniques, which are widely used by the
business concern.
 Fig. 2.3 Techniques of Financial Statement Analysis

1. Comparative S t a t e m e n t A n a l y s i s
A. Comparative Income Statement Analysis
B. Comparative Position Statement Analysis
2. Trend Analysis

3. Common Size Analysis

4. Fund Flow Statement
5. Cash Flow Statement
6. Ratio Analysis
6.5.8 Comparative Statement Analysis

Comparative statement analysis is an analysis of financial statement at different

period of time. This statement helps to understand the comparative position of
financial and operational performance at different period of time.

Comparative financial statements again classified into two major parts such as
comparative balance sheet analysis and comparative profit and loss account analysis.

6.5.9 Comparative Balance Sheet Analysis

Comparative balance sheet analysis concentrates only the balance sheet of the
concern at different period of time. Under this analysis the balance sheets are compared
with previous year’s figures or one-year balance sheet figures are compared with other
years. Comparative balance sheet analysis may be horizontal or vertical basis. This
type of analysis helps to understand the real financial position of the concern as well
as how the assets, liabilities and capitals are placed during a particular period.
Exercise 1

The following are the balance sheets of Tamil Nadu Mercantile Bank Ltd., for the
years 2003 and 2004 as on 31st March. Prepare a comparative balance sheet and
discuss the operational performance of the business concern.

Balance Sheet of Tamil Nadu Mercantile Bank Limited

As on 31st March (Rs. in thousands)

Liabilities 2003 2004 Assets 2003 2004

Rs. Rs. Rs. Rs.
Capital Reserve 2,845 2,845 Cash and Balance with
and RBI
27,06,808 22,37,601
Surplus Balance with Banks
Deposits 39,66,009 47,65,406 and Money at call &
4,08,45,783 4,40,42,730 and short notice
Borrowings
Other Liabilities Investments
Provisions Advances Fixed 11,36,781 16,07,975
7,27,671 2,84,690 Assets Other Assets 2,14,21,060 2,35,37,098
16,74,165 17,99,197 1,95,99,764 2,11,29,869
4,72,16,473 5,08,94,868 4,72,16,473 5,08,94,868
4,93,996 5,36,442
Solution
18,58,064 18,35,883

Comparative Balance Sheet Analysis

Increased/ Increased/
Decreased Decreased
Particulars Year ending 31st March (Amount) (Percentage)
2003 2004

Rs. Rs. Rs. Rs.

Assets
 Current Assets

Cash and Balance with

RBI
Balance with Banks and
money at call and short notice 11,36,781 16,07,975 (–) 4,71,194 (–) 41.45

Total Current Assets 38,43,589

27,06,808 38,45,576
22,37,601 1987
(+) 4,69,207 0.052
(+) 17.33
Fixed Assets
Investments 2,14,21,060 2,35,37,098 (-) 21,16,038 (-) 9.88
Advances 1,95,99,764 2,11,39,869 (-) 15,40,105 (-) 7.86
Fixed Assets 4,93,996 5,36,442 (-) 42,446 (-) 8.59
Other Assets 18,58,064 18,35,883 (+) 22,181 (+) 1.19

Total Fixed Assets 4,33,72,884 4,70,49,292 (+) 36,76,408 8.48

Total Assets 4,72,16,473 5,08,94,868 36,78,395 7.79
Current Liabilities
Borrowings 7,27,671 2,84,690 (+) 4,42,981 60.88
Other Liability and
Provisions 16,74,165 17,99,197 (–) 1,25,032 7.47

Total Current Liability 24,01,836 20,83,887 3,17,949 13.24

Fixed Liability Capital 2,845 2,845 — —
Reserves surplus 39,66,009 47,65,406 (+) 7,99,397 20.16
Deposit 4,08,45,783 4,40,42,730 (+) 31,96,947 7.83

Total Fixed Liability 4,48,14,637 4,88,10,981 (+) 39,96,344 8.92

Total Liability 4,72,16,473 5,08,94,868 36,78,395 7.79

6.5.10 Comparative Profit and Loss Account Analysis

Another comparative financial statement analysis is comparative profit and loss
account analysis. Under this analysis, only profit and loss account is taken to compare with
previous year’s figure or compare within the statement. This analysis helps to understand
the operational performance of the business concern in a given period. It may be analyzed on
horizontal basis or vertical basis.

6.5.11 Trend Analysis

The financial statements may be analyzed by computing trends of series of

information. It may be upward or downward directions which involve the percentage
relationship of each and every item of the statement with the common value of 100%.
Trend analysis helps to understand the trend relationship with various items, which
appear in the financial statements. These percentages may also be taken as index
number showing relative changes in the financial information resulting with the various
period of time. In this analysis, only major items are considered for calculating the trend
percentage.

Exercise 2
Calculate the Trend Analysis from the following information of Tamilnadu
Mercantile Bank Ltd., taking 1999 as a base year and interpret them (in thousands).

Year Deposits Advances Profit

1999 2,05,59,498 97,14,728 3,50,311
2000 2,66,45,251 1,25,50,440 4,06,287
2001 3,19,80,696 1,58,83,495 5,04,020
2002 3,72,99,877 1,77,26,607 5,53,525
2003 4,08,45,783 1,95,99,764 6,37,634
2004 4,40,42,730 2,11,39,869 8,06,755

Solution
Trend Analysis (Base year 1999=100)
(Rs. in thousands)
Deposits Advances Profits

Amount Rs. Trend Amount Rs. Trend Amount Rs. Trend

Year Percentage Percentage Percentage

1999 2,05,59,498 100.0 97,14,728 100.0 3,50,311 100.0

2000 2,66,45,251 129.6 1,25,50,440 129.2 4,06,287 115.9
2001 3,19,80,696 155.5 1,58,83,495 163.5 5,04,020 143.9
2002 3,72,99,877 181.4 1,77,26,607 182.5 5,53,525 150.0
2003 4,08,45,783 198.7 1,95,99,764 201.8 6,37,634 182.0
2004 4,40,42,730 214.2 2,11,39,869 217.6 8,06,755 230.3

6.5.12 Common Size Analysis

Another important financial statement analysis technique is common size
analysis in which figures reported are converted into percentage to some common base.
In the balance sheet the total assets figures is assumed to be 100 and all figures are
expressed as a percentage of this total. It is one of the simplest methods of financial
statement analysis, which reflects the relationship of each and every item with the base
value of 100%.

Exercise 3
Common size balance sheet of Tamilnadu Mercantile Bank Ltd., as on 31st March
2003 and 2004.

Particulars 31st March 2003 Amount 31st March 2004 Amount

Percentage Percentage

Fixed Assets
Investments
2,14,21,060 45.37 2,35,37,098 46.25
Advances 1,95,99,764 41.51 2,11,39,869 41.54
Fixed Assets 4,93,996 1.05 5,36,442 1.05
Other Assets 18,58,064 3.94 18,35,883 3.61
Total Fixed Assets 4,33,72,884 91.86 4,70,49,292 94.44
 Current Assets
Cash and Balance with
RBI
Balance with banks 27,06,808 5.73 22,37,601 4.40
and money at call
and short notice 11,36,781 2.41 16,07,975 3.20
Total Current Assets 38,43,589 8.14 38,45,576 7.60
Total Assets 4,72,16,473 100.00 5,08,94,868 100.00
Fixed Liabilities
Capital
2,845 0.01 2,845 0.01
Reserve and Surplus 39,66,009 8.40 47,65,406 9.36
Deposits 4,08,45,783 86.50 4,40,42,730 86.54
Total Fixed Liabilities 4,48,14,637 94.91 4,88,10,981 95.91
Current Liability
Borrowings
7,27,671 1.54 2,84,690 0.56
Other Liabilities
Provisions 16,74,165 3.55 17,99,197 3.53
Total Current Liability 24,01,836 5.09 20,83,887 4.09
Total Liabilities 4,72,16,473 100.00 5,08,94,868 100.00

6.5.13 Funds flow statement

Funds flow statement is one of the important tools, which is used in many ways.
It helps to understand the changes in the financial position of a business enterprise
between the beginning and ending financial statement dates. It is also called as statement
of sources and uses of funds.

Institute of Cost and Works Accounts of India, funds flow statement is defined
as “a statement prospective or retrospective, setting out the sources and application of
the funds of an enterprise. The purpose of the statement is to indicate clearly the
requirement of funds and how they are proposed to be raised and the efficient
utilization and application of the same”.

6.5.14 Cash flow statement

Cash flow statement is a statement which shows the sources of cash

inflow and uses of cash out-flow of the business concern during a particular period of
time. It is the statement, which involves only short-term financial position of the
business concern. Cash flow statement provides a summary of operating, investment
and financing cash flows and reconciles them with changes in its cash and cash
equivalents such as marketable securities. Institute of Chartered Accountants of India
issued the Accounting Standard (AS-3) related to the preparation of cash flow statement
in 1998.

6.5.15 Difference Between Funds Flow and Cash Flow Statement

 Funds Flow Statement Cash Flow Statement

1. Funds flow statement is the report on the movement

1. Cash flow statement is the report showing sources
of funds or working capital and uses of cash.
2. Funds flow statement explains how working capital2.is Cash flow statement explains the inflow and out flow
raised and used during the particular of cash during the particular period.
3. The main objective of fund flow statement is to show
3. The main objective of the cash flow s t a t e m e n t is to
the how the resources have been balanced mobilized show the causes of changes in cash between two
and used. balance sheet dates.
4. Cash flow statement indicates the factors
4. Funds flow statement indicates the results of current
financial management. contributing to the reduction of cash balance in spite
of increase in profit and vice-versa.
5. In a cash flow statement only cash receipt and
5. In a funds flow statement increase or decrease in
payments are recorded.
working capital is recorded.
6. Cash flow statement starts with opening cash
6. In funds flow statement there is no opening and
balance and ends with closing cash balance.
closing balances.

Exercise 4
From the following balance sheet of A Company Ltd. you are required to prepare a
schedule of changes in working capital and statement of flow of funds.

Balance Sheet of A Company Ltd., as on 31st March

Liabilities 2004 2005 Assets 2004 2005

Share Capital 1,00,000 1,10,000 Land and Building 60,000 60,000
Profit and Loss a/c 20,000 23,000 Plant and Machinery 35,000 45,000
Loans — 10,000 Stock 20,000 25,000
Creditors 15,000 18,000 Debtors 18,000 28,000
Bills payable 5,000 4,000 Bills receivable 2,000 1,000
Cash 5,000 6,000
1,40,000 1,65,000 1,40,000 1,65,000
Solution

Schedule of Changes in Working Capital

Particulars 2004 2005 In Charge Rs. D Charge Rs.

Rs. Rs.
Current Assets
Stock
20,000 25,000 5,000 —
Debtors 18,000 28,000 10,000 —
Bills Receivable 2,000 1,000 — 1,000
Cash 5,000 6,000 1,000
A 45,000 60,000
Less Current Liabilities
Creditors
15,000 18,000 3,000
Bills Payable 5,000 4,000 1,000
B 20,000 22,000 17,000 4,000
A-B 25,000 38,000 — 13,000
 Increase in W.C. 38,000 38,000 17,000 17,000

Fund Flow Statement

Sources Rs. Application Rs.

Issued Share Capital 10,000 Purchase of Plant and Machinery 10,000
Loan 10,000 Increase in Working Capital 13,000
Funds From Operations 3,000
23,000 23,000

Exercise 5
From the above example 4 prepare a Cash Flow Statement.

Solution
Cash Flow Statement

Inflow Rs. Outflow Rs.

Balance b/d 5,000 Purchase of plant 10,000
Issued Share Capital 10,000 Increase Current Assets
Loan 10,000 Stock
Cash Opening Profit 3,000 Decrease in Bills Payable 5,000
Decrease in Bills 1,000 Balance c/d 10,000
Receivable 3,000 1,000
Increase in Creditors 6,000
32,000 32,000

6.5.16 Ratio analysis

Ratio analysis is a commonly used tool of financial statement analysis. Ratio is a

mathematical relationship between one number to another number. Ratio is used
as an index for evaluating the financial performance of the business concern. An
accounting ratio shows the mathematical relationship between two figures, which have
meaningful relation with each other. Ratio can be classified into various types.
Classification from the point of view of financial management is as follows:

● Liquidity Ratio

● Activity Ratio

● Solvency Ratio

● Profitability Ratio

6.5.17 Liquidity Ratio

 It is also called as short-term ratio. This ratio helps to understand the liquidity in
a business which is the potential ability to meet current obligations. This ratio expresses
the relationship between current assets and current assets of the business concern
during a particular period. The following are the major liquidity ratio:

6.5.18 Activity Ratio

It is also called as turnover ratio. This ratio measures the efficiency of the
current assets and liabilities in the business concern during a particular period. This
ratio is helpful to understand the performance of the business concern. Some of the
activity ratios are given below:

6.5.19 Solvency Ratio

It is also called as leverage ratio, which measures the long-term obligation of the
business concern. This ratio helps to understand, how the long-term funds are used in
the business concern. Some of the solvency ratios are given below:
6.5.20 Profitability Ratio
Profitability ratio helps to measure the profitability position of the business concern.
Some of the major profitability ratios are given below.

Exercise 6
From the following balance sheet of Mr. Arvind Industries Ltd., as 31st March 2007.

Other information:

1. Net sales Rs. 60,000

2. Cost of goods sold Rs. 51,600
3. Net income before tax Rs. 4,000
 4. Net income after tax Rs. 2,000
Calculate appropriate ratios.
Solution
6.5.21 Short-term solvency ratios

6.5.22 Long-term solvency ratios

6.5.23 Activity Ratio

Profitability Ratios
Chapter 7. Functions within Business Organization: Human
Resources or Personnel Management
Learning outcomes

After completing this chapter, the reader should be able to:

1. The nature of workforce planning

2. The link between workforce and business planning
3. The rationale for workforce planning
4. Workforce planning issues
5. Approaches to workforce planning
6. The recruitment and selection process
7. Defining requirements
8. Attracting candidates
9. Processing applications
10. Selection methods – interviewing and tests
11. References and offers
12. Dealing with recruitment problems
13. The meaning of talent management
14. The process of talent management
15. Developing a talent management strategy
16. Management succession planning
17. Career management
7.1 The essence of human resource management (HRM)
Human resource management (HRM) is concerned with all aspects of how people are
employed and managed in organizations. It covers the activities of strategic HRM, human
capital management, knowledge management, corporate social responsibility, organization
development, resourcing (workforce planning, recruitment and selection and talent
management), learning and development, performance and reward management, employee
relations, employee well-being and the provision of employee services. It also has an
international dimension. As described in Chapter 3, HRM is delivered through the HR
architecture of systems and structures, the HR function and, importantly, line management.

The practice of referring to people as resources as if they were any other factor of
production is often criticised. Osterby and Coster (1992: 31) argued that: ‘The term “human
resources” reduces people to the same category of value as materials, money and technology –
all resources, and resources are only valuable to the extent they can be exploited or leveraged
into economic value.’ People management is sometimes preferred as an alternative, but in spite
of its connotations, HRM is most commonly used.

7.1.1 The development of the HRM concept

The term HRM has largely taken over that of ‘personnel management’, which took over
that of ‘labor management’ in the 1940s, which took over that of ‘welfare’ in the 1920s (the
latter process emerged in the munitions factories of the First World War). HRM largely
replaced the human relations approach to managing people founded by Elton Mayo (1933) who
based his beliefs on the outcome of the research project conducted in the 1920s known as the
Hawthorne studies. Members of this school believed that productivity was directly related to
job satisfaction and that the output of people would be high if someone they respected took an
interest in them. HRM also shifted the emphasis away from humanism – the belief held by
writers such as Likert (1961) and McGregor (1960) that human factors are paramount in the
study of organizational behavior and that people should be treated as responsible and
progressive beings.

An early reference to human resources was made by Bakke (1966). Later, Armstrong
(1977: 13) observed that in an enterprise ‘the key resource is people’. But HRM did not emerge
in a fully-fledged form until the 1980s through what might be called its founding fathers. In
the UK they were followed by a number of commentators who developed, explained and
frequently criticized the concept of human resource management. Legge (2005: 101)
commented that: ‘The term [HRM] was taken up by both UK managers (for example,
Armstrong, 1987; Fowler, 1987) and UK academics’. Hendry and Pettigrew (1990: 18) stated
that HRM was ‘heavily normative from the start: it provided a diagnosis and proposed
solutions’. They also mentioned that: ‘What HRM did at this point was to provide a label to
wrap around some of the observable changes, while providing a focus for challenging
deficiencies – in attitudes, scope, coherence, and direction – of existing personnel management’
(ibid: 20). Armstrong (1987: 31) argued that:

HRM is regarded by some personnel managers as just a set of initials or old wine in
new bottles. It could indeed be no more and no less than another name for personnel
management, but as usually perceived, at least it has the virtue of emphasizing the virtue of
treating people as a key resource, the management of which is the direct concern of top
management as part of the strategic planning processes of the enterprise. Although there is
nothing new in the idea, insufficient attention has been paid to it in many organizations.

However, commentators such as Guest (1987) and Storey (1995) regarded HRM as a
substantially different model built on unities (employees share the same interests as
employers), individualism, high commitment and strategic alignment (integrating HR strategy
with the business strategy). It was also claimed that HRM was more holistic than traditional
personnel management and that, importantly, it emphasized the notion that people should be
regarded as assets rather than variable costs.

7.1.2 The conceptual framework of HRM

HRM as conceived in the 1980s had a conceptual framework consisting of a philosophy
underpinned by a number of theories drawn from the behavioral sciences and from the fields
of strategic management, human capital and industrial relations. The HRM philosophy has
been heavily criticized by academics as being managerial list and manipulative but this
criticism has subsided, perhaps because it became increasingly evident that the term HRM had
been adopted as a synonym for what used to be called personnel management. As noted by
Storey (2007: 6): ‘In its generic broad and popular sense it [HRM] simply refers to any system
of people management.’

7.1.3 HRM practice today

HRM practice is no longer governed by the original philosophy – if it ever was. It is
simply what HR people and line managers do. Few references are made to the HRM conceptual
framework. This is a pity – an appreciation of the goals, philosophy and underpinning theories
of HRM and the various HRM models provides a sound basis for understanding and developing
HR practice. But account needs to be taken of the limitations of that philosophy as expressed
by the critics of HRM set out later in this chapter.

7.1.4 Aim of this chapter

The aim of this chapter is to remedy this situation. It starts with a selection of definitions
(there have been many) and elaborates on these by examining HRM goals. Because the original
concept of HRM is best understood in terms of its philosophy and underpinning theories these
are dealt with in the next two sections. Reference is then made to the reservations made about
HRM but it is noted that while these need to be understood, much of what HRM originally set
out to do is still valid. However, as explained in the next section of the chapter, HRM is more
diverse than interpretations of the original concept can lead us to believe. This is illustrated by
the various models summarized in this section which provide further insights into the nature of
HRM. The chapter ends with an assessment of where the concept of HRM has got to now.
Following this analysis, the next two chapters explain how in general terms HRM is planned
through the processes of strategic HRM and delivered through the HR architecture and system,
the HR function and its members, and, importantly, line managers.

7.1.5 HRM Defined

Human resource management can be defined as a strategic, integrated and coherent
approach to the employment, development and well-being of the people working in
organizations. It was defined by Boxall and Purcell (2003: 1) as ‘all those activities associated
with the management of employment relationships in the firm’. A later comprehensive
definition was offered by Watson (2010: 919):

HRM is the managerial utilization of the efforts, knowledge, capabilities and committed
behaviors which people contribute to an authoritatively coordinated human enterprise as part
of an employment exchange (or more temporary contractual arrangement) to carry out work
tasks in a way which enables the enterprise to continue into the future.

7.1.6 The goals of HRM

The goals of HRM are to:

1. support the organization in achieving its objectives by developing and

implementing human resource (HR) strategies that are integrated with the
business strategy (strategic HRM);
 2. contribute to the development of a high-performance culture;
3. ensure that the organization has the talented, skilled and engaged people it
needs;
4. create a positive employment relationship between management and employees
and a climate of mutual trust;
5. encourage the application of an ethical approach to people management.

An earlier list of HR goals was made by Dyer and Holder (1988: 22–28) who analyzed
them under the headings of contribution (what kind of employee behavior is expected?),
composition (what headcount, staffing ratio and skill mix?), competence (what general level of
ability is desired?) and commitment (what level of employee attachment and identification?).
Guest (1987) suggested that the four goals of HRM were strategic integration, high
commitment, high quality and flexibility. And Boxall (2007: 63) proposed that ‘the mission of
HRM is to support the viability of the firm through stabilizing a cost-effective and socially
legitimate system of labor management’.

7.1.7 The philosophy of human resource management

Doubts were expressed by Noon (1992) as to whether HRM was a map, a model or a
theory. But it is evident that the original concept could be interpreted as a philosophy for
managing people in that it contained a number of general principles and beliefs as to how that
should be done. The following explanation of HRM philosophy was made by Legge (1989: 25)
whose analysis of a number of HRM models identified the following common themes:

That human resource policies should be integrated with strategic business planning and
used to reinforce an appropriate (or change an inappropriate) organizational culture, that human
resources are valuable and a source of competitive advantage, that they may be tapped most
effectively by mutually consistent policies that promote commitment and which, as a
consequence, foster a willingness in employees to act flexibly in the interests of the ‘adaptive
organization’s’ pursuit of excellence.

Storey (2001: 7) noted that the beliefs of HRM included the assumptions that it is the
human resource that gives competitive edge, that the aim should be to enhance employee
commitment, that HR decisions are of strategic importance and that therefore HR policies
should be integrated into the business strategy.
7.1.8 underpinning theories of HRM

The original notion of HRM had a strong theoretical base. Guest (1987: 505)
commented that: ‘Human resource management appears to lean heavily on theories of
commitment and motivation and other ideas derived from the field of organizational behavior.’
A number of other theories, especially the resource-based view, have contributed to the
understanding of purpose and meaning of HRM. These theories are summarized below.

7.1.9 Commitment

The significance in HRM theory of organizational commitment (the strength of an

individual’s identification with, and involvement in, a particular organization) was highlighted
in a seminal Harvard Business Review article by Richard Walton (1985). Business Review
article by Richard Walton (1985).

Source review
From control to commitment – Walton (1985: 77)
Workers respond best – and most creatively – not when they are tightly
controlled by management, placed in narrowly defined jobs and treated as an
unwelcome necessity, but, instead, when they are given broader responsibilities,
encouraged to contribute and helped to take satisfaction in their work. It should come
as no surprise that eliciting commitment – and providing the environment in which it
can flourish – pays tangible dividends for the individual and for the company.
The traditional concept of organizational commitment resembles the more
recent notion of organizational engagement.

7.1.10 Motivation

Motivation theory explains the factors that affect goal-directed behavior and therefore
influences the approaches used in HRM to enhance engagement (the situation in which people
are committed to their work and the organization and are motivated to achieve high levels of
performance).

7.1.11 The resource-based view

 Resource-based theory expressed as ‘the resource based view’ states that competitive
advantage is achieved if a firm’s resources are valuable, rare and costly to imitate. It is claimed
that HRM can play a major part in ensuring that the firm’s human resources meet these criteria.

7.1.12 Organizational behavior theory

Organizational behavior theory describes how people within their organizations act
individually or in groups and how organizations function in terms of their structure, processes
and culture. It therefore influences HRM approaches to organization design and development
and enhancing organizational capability (the capacity of an organization to function effectively
in order to achieve desired results).

7.1.13 Contingency theory

Contingency theory states that HRM practices are dependent on the organization’s
environment and circumstances. This means that, as Paauwe (2004: 36) explained: ‘The
relationship between the relevant independent variables (e.g. HRM policies and practices) and
the dependent variable (performance) will vary according to the influences such as company
size, age and technology, capital intensity, degree of unionization, industry/sector ownership
and location.’

Contingency theory is associated with the notion of fit – the need to achieve congruence
between an organization’s HR strategies, policies and practices and its business strategies
within the context of its external and internal environment. This is a key concept in strategic
HRM.

7.1.14 Institutional theory

Organizations conform to internal and external environmental pressures in order to gain

legitimacy and acceptance.

7.1.15 Human capital theory

Human capital theory is concerned with how people in an organization contribute their
knowledge, skills and abilities to enhancing organizational capability and the significance of
that contribution.

7.1.16 Resource dependence theory

 Resource dependence theory states that groups and organizations gain power over each
other by controlling valued resources. HRM activities are assumed to reflect the distribution of
power in the system.

7.1.17 AMO theory

The ‘AMO’ formula as set out by Boxall and Purcell (2003) states that performance is
a function of Ability + Motivation + Opportunity to Participate. HRM practices therefore
impact on individual performance if they encourage discretionary effort, develop skills and
provide people with the opportunity to perform. The formula provides the basis for developing
HR systems that attend to employees’ interests, namely their skill requirements, motivations
and the quality of their job.

7.1.18 Social exchange theory

Employees will reciprocate their contribution to the organization if they perceive that
the organization has treated them well.

7.1.19 Transaction costs theory

Transaction costs economics assumes that businesses develop organizational structures

and systems that economize the costs of the transactions (interrelated exchange activities) that
take place during the course of their operations.

7.1.20 Agency theory

Agency theory states that the role of the managers of a business is to act on behalf of
the owners of the business as their agents. But there is a separation between the owners (the
principals) and the agents (the managers) and the principals may not have complete control
over their agents. The latter may therefore act in ways that are against the interests of those
principals. Agency theory indicates that it is desirable to operate a system of incentives for
agents, i.e. directors or managers, to motivate and reward acceptable behavior.

7.1.21 Reservations about the original concept of HRM

On the face of it, the original concept of HRM as described above had much to offer, at
least to management. But for some time, HRM was a controversial topic, especially in
academic circles. The main reservations as set out below have been that HRM promises more
than it delivers and that its morality is suspect:
1. Guest (1991: 149) referred to the ‘optimistic but ambiguous label of human
resource management’.
2. HRM ‘remains an uncertain and imprecise notion’ Noon (1992: 16).
3. ‘The HRM rhetoric presents it as an all or nothing process which is ideal for any
organization, despite the evidence that different business environments require
different approaches. (Armstrong, 2000: 577)
4. HRM is simplistic – as Fowler (1987: 3) wrote: ‘The HRM message to top
management tends to be beguilingly simple. Don’t bother too much about the
content or techniques of personnel management, it says. Just manage the
context. Get out from behind your desk, bypass the hierarchy, and go and talk
to people. That way you will unlock an enormous potential for improved
performance.’
5. The unit artist approach to industrial relations implicit in HRM (the belief that
management and employees share the same concerns and it is therefore in both
their interests to work together) is questionable. Fowler (1987: 3) commented
that: ‘At the heart of the concept is the complete identification of employees
with the aims and values of the business – employee involvement but on the
company’s terms. Power in the HRM system remains very firmly in the hands
of the employer. Is it really possible to claim full mutuality when at the end of
the day the employer can decide unilaterally to close the company or sell it to
someone else?’ Later, Ramsey et al (2000: 521) questioned the unit artist
assumption underlying much mainstream management theory that claims that
everyone benefits from managerial innovation.
6. HRM is ‘macho-management dressed up as benevolent paternalism’ Legge
(1998: 42).
7. HRM is manipulative. Willmott (1993: 534) asserted that: ‘any (corporate)
practice/value is as good as any other so long as it secures the compliance of
employees. HRM was dubbed by the Labor Research Department (1989: 8) as
‘human resource manipulation’. John Storey (2007: 4) referred to ‘the potential
manipulative nature of seeking to shape human behavior at work’.
8. HRM is managerial list. ‘The analysis of employment management has become
increasingly myopic and progressively more irrelevant to the daily experience
of being employed. While the reasons for this development are immensely
 complex... it is primarily a consequence of the adoption of the managerial list
conception of the discourse of HRM’ (Delbridge and Keenoy, 2010: 813).
9. HRM overemphasizes business needs. Keegan and Francis (2010) have rightly
criticized the increasing focus on the business partnership role of HR at the
expense of its function as an employee champion. An illustration of this is
provided by the Professional Map produced by the British Chartered Institute of
Personnel and Development (CIPD), which as stated by the CIPD (2013: 2):
‘Sets out standards for HR professionals around the world: the activities,
knowledge and behaviors needed for success.’ The map refers to ‘business’ 82
times but to ‘ethics’ only once and ‘ethical’ only twice.

These concerns merit attention, but the more important messages conveyed by the
original notion of HRM such as the need for strategic integration, the treatment of employees
as assets rather than costs, the desirability of gaining commitment, the virtues of partnership
and participation and the key role of line managers are still valid and are now generally
accepted, and the underpinning theories are as relevant today as they ever were. And it should
be remembered that these objections, with the exception of the last one, mainly apply to the
original concept of HRM. But today, as explained in the final section of this chapter, HRM in
action does not necessarily conform to this concept as a whole. The practice of HRM is diverse.
Dyer and Holder (1988) pointed out that HRM goals vary according to competitive choices,
technologies, characteristics of employees (e.g. could be different for managers) and the state
of the labor market. Boxall (2007: 48) referred to ‘the profound diversity’ of HRM and
observed that: ‘Human resource management covers a vast array of activities and shows a huge
range of variations across occupations, organizational levels, business units, firms, industries
and societies.’ There are in fact a number of different models of HRM as described below.

7.1.22 Models of HRM

The most familiar models defining what HRM is and how it operates are as follows.

7.1.23 The matching model of HRM

Fombrun et al (1984) proposed the ‘matching model’, which indicated that HR systems
and the organization structure should be managed in a way that is congruent with organizational
strategy. This point was made in their classic statement that: ‘The critical management task is
to align the formal structure and human resource systems so that they drive the strategic
objectives of the organization’ (ibid: 37). Thus they took the first steps towards the concept of
strategic HRM.

7.1.24 The Harvard model of HRM

Beer et al (1984) produced what has become known as the ‘Harvard framework’. They
started with the proposition that: ‘Human resource management (HRM) involves all
management decisions and actions that affect the nature of the relationship between the
organization and employees – its human resources’ (ibid: 1). They believed that: ‘Today...
many pressures are demanding a broader, more comprehensive and more strategic perspective
with regard to the organization’s human resources’ (ibid: 4). They also stressed that it was
necessary to adopt ‘a longer term perspective in managing people and consideration of people
as a potential asset rather than merely a variable cost’ (ibid: 6). Beer and his colleagues were
the first to underline the HRM tenet that it belongs to line managers. They suggested that HRM
had two characteristic features: 1) line managers accept more responsibility for ensuring the
alignment of competitive strategy and HR policies; 2) HR has the mission of setting policies
that govern how HR activities are developed and implemented in ways that make them more
mutually reinforcing.

7.1.25 Contextual model of HRM

The contextual model of HRM emphasizes the importance of environmental factors by

including variables such as the influence of social, institutional and political forces that have
been underestimated in other models. The latter, at best, consider the context as a contingency
variable. The contextual approach is broader, integrating the human resource management
system in the environment in which it is developed. According to Martin-Alcazar et al (2005:
638): ‘Context both conditions and is conditioned by the HRM strategy.’ A broader set of
stakeholders is involved in the formulation and implementation of human resource strategies
that is referred to by Schuler and Jackson (2000: 229) as a ‘multiple stakeholder framework’.
These stakeholders may be external as well as internal and both influence and are influenced
by strategic decisions

7.1.26 The 5-P model of HRM

 As formulated by Schuler (1992) the 5-P model of HRM describes how HRM operates
under the five headings of:

1. HR philosophy – a statement of how the organization regards its human

resources, the role they play in the overall success of the business, and how they
should be treated and managed.
2. HR policies – these provide guidelines for action on people-related business
issues and for the development of HR programs and practices based on strategic
needs.
3. HR programs – these are shaped by HR policies and consist of coordinated HR
efforts intended to initiate and manage organizational change efforts prompted
by strategic business needs.
4. HR practices – these are the activities carried out in implementing HR policies
and programs. They include resourcing, learning and development, performance
and reward management, employee relations and administration.
5. HR processes – these are the formal procedures and methods used to put HR
strategic plans and policies into effect.

7.1.27 European model of HRM

Brewster (1993) described a European model of HRM as follows:

1. environment – established legal framework;

2. objectives – organizational objectives and social concern – people as a key
resource;
3. focus – cost/benefits analysis, also environment;
4. relationship with employees – union and non-union;
5. relationship with line managers – specialist/ line liaison;
6. role of HR specialist – specialist managers – ambiguity, tolerance, flexibility.

The main distinction between this model and what Brewster referred to as ‘the
prescribed model’ was that the latter involves deregulation (no legal framework), no trade
unions and a focus on organizational objectives but not on social concern.

As set out by Mabey et al (1998: 107) the characteristics of the European model are:

1. dialogue between social partners;

2. emphasis on social responsibility;
 3. multicultural organizations;
4. participation in decision-making;
5. continuous learning.

7.1.28 The hard and soft HRM models

Storey (1989: 8) distinguished between the ‘hard’ and ‘soft’ versions of HRM. He wrote
that: ‘The hard one emphasizes the quantitative, calculative and business-strategic aspects of
managing human resources in as “rational” a way as for any other economic factor. By contrast,
the soft version traces its roots to the human-relations school; it emphasizes communication,
motivation and leadership.

However, it was pointed out by Keenoy (1997: 838) that ‘hard and soft HRM are
complementary rather than mutually exclusive practices’. Research in eight UK organizations
by Truss et al (1997) indicated that the distinction between hard and soft HRM was not as
precise as some commentators have implied. Their conclusions were as follows.

Source review
Conclusions on hard and soft models of HRM – Truss et al (1997: 70)
Even if the rhetoric of HRM is ‘soft’, the reality is almost always ‘hard’, with the
interests of the organization prevailing over those of the individual. In all the
organizations, we found a mixture of both hard and soft approaches. The precise
ingredients of this mixture were unique to each organization, which implies that
factors such as the external and internal environment of the organization, its strategy,
culture and structure all have a vital role to play in the way in which HRM operates.

As a description of people management activities in organizations the term HRM is

here to stay, even if it is applied diversely or only used as a label to describe traditional
personnel management practices. Emphasis is now placed on the need for HR to be strategic
and businesslike and to add value, i.e. to generate extra value (benefit to the business) by the
expenditure of effort, time and money on HRM activities. There have been plenty of new
interests, concepts and developments, including human capital management, engagement,
talent management, competency-based HRM, e-HRM, high performance work systems, and
performance and reward management. But these have not been introduced under the banner of
the HRM concept as originally defined.
 Source review
The meaning of HRM – Boxall et al (2007: 1)
Human resource management (HRM), the management of work and people towards
desired ends, is a fundamental activity in any organization in which human beings are
employed. It is not something whose existence needs to be radically justified: HRM is
an inevitable consequence of starting and growing an organization. While there is a
myriad of variations in the ideologies, styles, and managerial resources engaged, HRM
happens in some form or other. It is one thing to question the relative performance of
particular models of HRM in particular contexts... It is quite another thing to question
the necessity of the HRM process itself, as if organizations cannot survive or grow
without making a reasonable attempt at organizing work and managing people.

HRM has largely become something that organizations do rather than an aspiration or
a philosophy and the term is generally in use as a way of describing the process of managing
people. A convincing summary of what HRM means today, which focuses on what HRM is
rather than on its philosophy, was provided by Peter Boxall, John Purcell and Patrick Wright
(2007), representing the new generation of commentators.

Key learning points: The essence of human resource management

The goals of HRM are to:

1. support the organization in achieving its objectives by developing and

implementing human resource (HR) strategies that are integrated with the
business strategy (strategic HRM);
2. contribute to the development of a high-performance culture;
3. ensure that the organization has the talented, skilled and engaged people it
needs; create a positive employment relationship between management and
employees and a climate of mutual trust;
4. encourage the application of an ethical approach to people management.

Philosophy of HRM

The beliefs of HRM included the assumptions that it is the human resource that gives
competitive edge, that the aim should be to enhance employee commitment, that HR decisions
are of strategic importance and that therefore HR policies should be integrated into the business
strategy (Storey, 2001: 7).

Underpinning theories

‘Human resource management appears to lean heavily on theories of commitment and

motivation and other ideas derived from the field of organizational behavior’ (Guest, 1987:
505).

The diversity of HRM

Many HRM models exist, and practices within different organizations are diverse, often
only corresponding to the conceptual version of HRM in a few respects.

Reservations about HRM

On the face of it, the concept of HRM has much to offer, at least to management. But
reservations have been expressed about it. There may be something in these criticisms, but the
fact remains that as a description of people management activities in organizations HRM is
here to stay, even if it is applied diversely or only used as a label to describe traditional
personnel management practices.

7.2 Workforce planning

Organizations have to know how many people and what sort of people they need to
meet present and future business requirements. This is the function of workforce planning. The
purpose of this chapter is to describe how workforce planning functions, bearing in mind that
it is not as straightforward as it was presented when the notion of ‘manpower planning’ became
popular in the 1960s and 70s. Workforce planning, or human resource planning as it used to be
called, may be well established in the HRM vocabulary but it does not seem to be embedded
as a key HR activity. This chapter starts with a definition of workforce planning and continues
with a discussion of its aims and the issues involved, including its link with business planning.
The final section of the chapter describes the processes used, namely scenario planning,
demand and supply forecasting and action planning.

7.2.1 Workforce planning defined

The following definition of workplace planning was produced by the CIPD (2010a: 4):
‘Workforce planning is a core process of human resource management that is shaped by the
organizational strategy and ensures the right number of people with the right skills, in the right
place at the right time to deliver short- and long-term organizational objectives.’ Workforce
planning may be conducted as an overall approach to establishing and satisfying people
requirements covering all major employee categories and skills. However, it frequently
concentrates on key categories of staff, for example, doctors, nurses and other health workers
in the National Health Service, skilled operatives in a manufacturing company, sales staff in a
retail store or drivers in a transport company. Rothwell (1995: 194) distinguished between HR
planning in the hard sense – ‘to serve as an indicator of the likely match or mismatch of the
supply and demand for the right number of people with appropriate skills’ – and HR planning
in the soft sense – ‘to alert the organization to the implications of business strategy for people
development, culture and attitudes as well as numbers and skills’. The CIPD (2010a: 4) made
a similar distinction between ‘hard’ and ‘soft’ workforce planning. As the report on their
research commented: Hard workforce planning is about numbers. In the past this often revolved
around using past trends to predict the future, matching supply and demand for labor with the
result that plans were often out of date before the ink was dry. Now there is more emphasis on
management information that can help understand cause and effect of certain phenomena.

Soft workplace planning focuses on general issues relating to the supply of and demand
for people and how they are deployed. The precursor to workforce planning – manpower
planning as conceived in the 1960s – was almost entirely about numbers in the shape of
quantitative demand and supply forecasts. It was the failure in many organizations to produce
accurate forecasts and therefore prepare meaningful plans that led to its decline if not fall.
Workforce planning today covers a wider range of activities such as succession planning, smart
working, flexible working and talent planning, and is not such a numbers game.

7.2.2 Incidence of workforce planning

The CIPD Annual Survey of Resourcing and Talent Planning (2010b) found that 61 per
cent of organizations conducted workforce planning, although it was most common in the
public services sector and in larger organizations: 20 per cent of organizations planned for less
than one year, 41 per cent for one to two years and only 2 per cent for more than five years.
The CIPD (2010a) research established that the top five planning activities were:

1. succession planning – 62 per cent;

2. flexible working – 53 per cent;
3. demand/supply forecasting – 53 per cent;
4. skills audit/gap analysis – 49 per cent;
5. talent management – 42 per cent.
7.2.3 The link between workforce and business planning
Workforce planning is an integral part of business planning. The strategic planning
process defines projected changes in the types of activities carried out by the organization and
the scale of those activities. It identifies the core competencies that the organization needs to
achieve its goals and therefore its skill and behavioral requirements. Workforce planning
interprets these plans in terms of people requirements. But it may influence the business
strategy by drawing attention to the ways in which people could be developed and deployed
more effectively to further the achievement of business goals. It will also address issues
concerning the supply of suitable people.

7.2.4 Reasons for workforce planning

Research conducted by the Institute for Employment Studies (Reilly, 1999) established
that there were three main reasons why organizations engaged in workforce planning:

1. Planning for substantive reasons, that is, to have a practical effect by optimizing
the use of resources and/or making them more flexible, acquiring and nurturing
skills that take time to develop, identifying potential problems and minimizing
the chances of making a bad decision.
2. Planning because of the process benefits, which involves understanding the
present in order to confront the future, challenging assumptions and liberating
thinking, making explicit decisions that can later be challenged, standing back
and providing an overview and ensuring that long-term thinking is not driven
out by short-term focus.
3. Planning for organizational reasons, which involves communicating plans so as
to obtain support/adherence to them, linking HR plans to business plans so as
to influence them, (re)gaining corporate control over operating units and
coordinating and integrating organizational decision-making and actions.

7.2.5 Workforce planning issues

The main difficulties faced by those involved in quantitative (hard) workforce planning
are the impact of change and trying to predict the future. Many organizations therefore adopt a
short-term approach and deal with deficits or surpluses of people as they arise. This problem
is compounded by what Rothwell (1995) referred to as the shifting kaleidoscope of policy
priorities and strategies within organizations. It sounds like a good idea to adopt an integrated
approach to workforce and business planning but it won’t work well if business plans are
volatile, vague, misleading or non-existent, as they easily can be. Beard well (2007: 62)
commented that HR plans should be treated as ‘tentative, flexible, and reviewed and modified
on a regular basis’. Cappelli (2009: 10) noted that: ‘The competitive environment for
businesses is so changeable, and firms adjust their own strategies and practices so frequently
that these estimates [of the demand for talent] are rarely accurate and they get much worse the
farther out one goes.’

This problem will not be so acute in a stable marketplace, with largely passive (and
static) customers, and with scope for long-term forecasting. But these are rare conditions today,
even in the public sector where for a long time workplace planning has thrived. It can be said
that workforce planning is more art than science. Perhaps the accuracy of demand and supply
forecasts is less important than the overall understanding of what the organization needs in the
way of people, which can be generated by a systematic approach to planning.

7.2.6 The systematic approach to workforce planning

A flow chart of the process of workforce planning is shown in Figure 17.1. This
identifies the main planning activities described below. Although these are referred to as
separate areas, they are interrelated and can overlap. For example, demand forecasts may be
prepared on the basis of assumptions about the productivity of employees. But a forecast of the
supply of suitable people will also have to consider productivity trends and how they might
affect the supply.

7.2.7 Business planning

The business plan provides the basis for the workforce plan insofar as it sets out what
the organization intends to do in terms of activities and the scale of those activities.

7.2.8 Forecast activity levels

Forecasts of future activity levels flow from the business plan, which will have
implications for the demand for people. Activity level forecasts will also be affected by external
factors, for example demographic and political policy trends, especially in the public sector.
Data will need to be collected and analyzed for this purpose.

7.2.9 Scenario planning

 Scenario planning is an assessment of the environmental changes that are likely to affect
the organization so that a prediction can be made of the possible situations that may have to be
dealt with in the future. The scenario may list a range of predictions so that different responses
can be considered. The scenario is best based on systematic environmental scanning, possibly
using the PESTLE approach (an assessment of the political, economic, social, legal,
technological and economic factors that might affect the organization). The implications of
these factors on the organization’s labor markets and what can be done about any human
resource issues can then be considered.

Table 23 Workforce planning flowchart

7.2.10 Data collection

The information used in workforce planning can be collected under the following
headings:

1. Qualitative internal data: business information on product/market

developments, proposed work system and organizational changes; HR
information on people (skills, performance, etc.).
 2. Quantitative internal data: workforce data on turnover, absence, demographics,
skills audits, etc.
3. Qualitative external data: PESTLE analysis covering the following factors:
political, economic, social, technological, legal and environmental.
4. Quantitative external data: labor market – demographics, skills availability.

7.2.11 Analysis

The analysis stage brings all the information together from the business plan, the
activity forecast, scenarios and internal and external data to provide the basis for demand and
supply forecasts.

7.2.12 Demand forecasting

Demand forecasting is the process of estimating the future numbers of people required
and the likely skills and competences they will need. The basis of the forecast is the annual
budget and longer-term business plan, translated into activity levels for each function and
department. In a manufacturing company the sales budget would be translated into a
manufacturing plan, giving the numbers and types of products to be made in each period. From
this information the number of hours to be worked by each skill category to make the quota for
each period would be computed. Details are required of any organizational and work plans that
would result in increased or decreased demands for employees. Examples are setting up a new
regional organization, creating a new sales department, decentralizing a head office function
to the regions, plans for new methods of working, additional outsourcing, increasing
productivity and reducing employment costs. The demand forecasting methods for estimating
the numbers of people required are described below.

7.2.13 Managerial judgement

The most typical method of forecasting used is managerial judgement. This simply
requires managers to sit down, think about their future workloads, and decide how many people
they need. It may be quite unscientific and misleading. Forecasting might be done on a ‘bottom-
up’ basis with line managers submitting proposals for agreement by senior management.
Alternatively, a ‘top-down’ approach can be used, in which company and departmental
forecasts are prepared by top management, possibly acting on advice from the personnel
departments. These forecasts are reviewed and agreed with departmental managers. A less
directive approach is for top management to prepare planning guidelines for departmental
managers, setting out the planning assumptions and the targets they should try to meet. Perhaps
the best way of using managerial judgement is to adopt both the ‘bottom-up’ and ‘top down’
approaches. Guidelines for departmental managers should be prepared, indicating broad
company assumptions about future activity levels that will affect their departments.

Targets are also set where necessary. Armed with these guidelines, departmental
managers prepare their forecasts to a laid-down format. They are encouraged to seek help at
this stage from the personnel or work study departments. Meanwhile, the HR department, in
conjunction as necessary with planning and work study departments, prepares a company
forecast. The two sets of forecasts can then be reviewed by a human resource planning
committee consisting of functional heads. This committee reconciles with departmental
managers any discrepancies between the two forecasts and submits the final amended forecast
to top management for approval. This is sometimes called the ‘right-angle method’.

7.2.14 Ratio-trend analysis

Ratio-trend analysis is carried out by analyzing existing ratios between an activity level
and the number of employees working on that activity. The ratio is applied to forecast activity
levels to determine an adjusted number of people required. Account can be taken of possible
improvements in productivity that would affect the ratio. The analysis may be extended to
cover employees connected to but not directly involved in the activity – the indirect workers
who provide support to the direct workers responsible for carrying out the activity. The existing
ratio of directs to indirect would be applied to the forecast number of directs needed to deal
with the new activity levels to forecast the number of indirect needed.

7.2.15 Work study techniques

Work study techniques are used in association with activity level forecasts to calculate
how long operations should take and the number of people required. Work study techniques
for direct workers can be combined with ratio-trend analysis to calculate the number of indirect
workers needed.

7.2.16 Forecasting skill and competency requirements

 Forecasting skill and competency requirements is largely a matter of managerial
judgement. This judgement should, however, be exercised on the basis of an analysis of the
impact of projected product/market developments and the introduction of new technology,
either information technology or computerized manufacturing.

7.2.17 Supply forecasting

Supply forecasting measures the number of people likely to be available from within
and outside the organization. The internal supply analysis covers the following areas:

1. existing number of people employed by occupation, skill and potential;

2. potential losses to existing resources through attrition (employee turnover);
3. potential changes to existing resources through internal promotions;
4. changes to the organization structure, new methods of working (including
flexible working) more part-time working and different working hours;
5. effect of increases in productivity;
6. sources of supply from within the organization – existing employees and the
outputs of talent management or training programs.

The external supply analysis examines the local and national labor markets to assess
implications for the availability of future people requirements. It will also take account of
environmental changes as revealed by scenario planning.

Forecast of future requirements

To forecast future requirements, it is necessary to analyses the demand and supply

forecasts to identify any deficits or surpluses. The analysis can be made with the help of
spreadsheets. The basic data can be set out as follows:

1. Current number employed 700

2. Annual level of turnover 10 per cent
3. Expected losses during year 70
4. Balance at end year 630
5. Number required at end year 750
6. Number to be obtained (5 – 4) = 120 during year The data on the number of
employees required may be modified by reference to the impact of any
productivity plans, organizational changes, new methods of working or revision
of role responsibilities.
7.2.18 Action planning

Action plans are derived from the broad resourcing strategies and the more detailed
analysis of demand and supply factors. However, the plans often have to be short term and
flexible because of the difficulty of making firm predictions about workforce requirements in
times of rapid change. The planning activities start with the identification of internal resources
available now or that could be made available through learning and development programs.
They continue with plans for recruitment and retention, succession and talent management, the
reduction of employee turnover and absenteeism, flexible working, outsourcing, productivity
improvement and the revision of role responsibilities. Learning and development programs
may be prepared to provide for future skill requirements. Regrettably, but sometimes
inevitably, plans for downsizing may be necessary, but these can aim to avoid compulsory
redundancies by such means as recruitment freezes.

7.2.19 Implementation

The implementation of the action plans will provide a challenge. A flexible approach
involving quick responses is needed to cope with unforeseeable changes in people
requirements.

7.2.20 Monitoring and evaluation

Because of unpredictable events, the implementation of action plans does not always
run smoothly. It is necessary to monitor progress carefully, evaluate the effects and, as required,
amend the action plan.

7.3 Recruitment and selection

Recruitment is the process of finding and engaging the people the organization needs.
Selection is that part of the recruitment process concerned with deciding which applicants or
candidates should be appointed to jobs. Recruitment can be costly. The 2013 CIPD survey of
resourcing and talent planning found that the average recruitment cost of filling a vacancy for
a director or senior manager was £8,000 while for other employees it was £3,000.

7.3.1 The recruitment and selection process

The stages of recruitment and selection are:

1. Defining requirements.
2. Attracting candidates.
 3. Sifting applications.
4. Interviewing.
5. Testing.
6. Assessing candidates.
7. Obtaining references.
8. Checking applications.
9. Offering employment.
10. Following up.

7.3.2 Defining requirements

The number and categories of people required may be set out in formal workforce plans
from which are derived detailed recruitment plans. More typically, requirements are expressed
as ad hoc demands for people because of the creation of new posts, expansion into new
activities or areas, or the need for a replacement. These short-term demands may put HR under
pressure to deliver candidates quickly. Requirements are set out in the form of role profiles and
person specifications. These provide the information required to post vacancies on the
company’s website or the internet, draft advertisements, brief agencies or recruitment
consultants and assess candidates by means of interviews and selection tests.

7.3.3 Role profiles

Role profiles define the overall purpose of the role, its reporting relationships and the
key result areas. For recruiting purposes, the profile is extended to include information on terms
and conditions (pay, benefits and hours of work); special requirements such as mobility,
travelling or unsocial hours; and learning, development and career opportunities. The
recruitment role profile provides the basis for a person specification.

7.3.4 Person specification

A person specification, also known as a recruitment or job specification, defines the
knowledge, skills and abilities (KSAs) required to carry out the role, the types of behavior
expected from role holders (behavioral competencies) and the education, qualifications,
training and experience needed to acquire the necessary KSAs. The specification is set out
under the following headings:

1. Knowledge – what the individual needs to know to carry out the role.
2. Skills and abilities – what the individual has to be able to do to carry out the
role.
 3. Behavioral competencies – the types of behavior required for successful
performance of the role. These should be role-specific, ideally based on an
analysis of employees who are carrying out their roles effectively. The
behaviors should also be linked to the core values and competency framework
of the organization to help in ensuring that candidates will fit and support the
organization’s culture.
4. Qualifications and training – the professional, technical or academic
qualifications required or the training that the candidate should have
undertaken.
5. Experience – the types of achievements and activities that would be likely to
predict success.
6. Specific demands – anything that the role holder will be expected to achieve in
specified areas, e.g. develop new markets or products; improve sales,
productivity or levels of customer service; introduce new systems or processes.
7. Special requirements – travelling, unsocial hours, mobility, etc.

It is advisable not to overstate the requirements. Perhaps it is natural to go for the best,
but setting an unrealistically high level for candidates increases the problems of attracting
applicants and results in dissatisfaction among recruits when they find their talents are not
being used.

Understating requirements can, of course, be equally dangerous, but it happens less

frequently The KSAs and competencies defined in the role profile form a fundamental feature
of the selection process, which becomes more of a person-based than a job-based approach.
They are used as the basis for structured interviews and provide guidance on which selection
techniques, such as psychological testing or assessment centers, are most likely to be useful.
The following is an example of the key KSA and competencies parts of a person specification
for an HR recruitment adviser.

7.3.5 Attracting candidates

The following steps are required when planning how to attract candidates:

1. Analyze recruitment strengths and weaknesses to develop an employee value

proposition and employer brand.
2. Analyze the requirement to establish what sort of person is needed.
3. Identify potential sources of candidates.
7.3.6 Analyze recruitment strengths and weaknesses

Attracting candidates is primarily a matter of identifying, evaluating and using the most
appropriate sources of applicants. However, in cases where difficulties in attracting or retaining
candidates are being met or anticipated, it may be necessary to carry out a study of the factors
that are likely to attract or deter candidates – the strengths and weaknesses of the organization
as an employer. The study could make use of an attitude survey to obtain the views of existing
employees. The analysis should cover such matters as the national or local reputation of the
organization, pay, employee benefits and working conditions, the intrinsic interest of the job,
security of employment, opportunities for education and training, career prospects, and the
location of the office or plant.

Candidates are, in a sense, selling themselves, but they are also buying what the
organization has to offer. If, in the latter sense, the labor market is a buyer’s market, then the
company selling itself to candidates must study their wants and needs in relation to what it can
provide. The study can be used to develop an employee value proposition (what an organization
has to offer that prospective or existing employees would value and that would help to persuade
them to join the business) and an employee brand (the image presented by an organization as
a good employer) incorporating the features set out above. They can contribute to the
recruitment material used on corporate websites and in advertisements and brochures to help
make the organization ‘an employer of choice’.

7.3.7 Analyze the requirement

First it is necessary to establish what jobs have to be filled and by when. Then turn to
an existing role profile and person specification or, if not available or out of date, draw up new
ones that set out information on responsibilities and competency requirements. This
information can be analyzed to determine the required education, qualifications and experience.
The next step is to consider where suitable candidates are likely to come from: within the
organization, from other organizations or from education establishments, and the parts of the
country where they can be found.

Next, define the terms and conditions of the job (pay and benefits). Finally, refer to the
analysis of strengths and weaknesses to assess what it is about the job or the organization that
is likely to attract good candidates, so that the most can be made of these factors when
advertising the vacancy or reaching potential applicants in other ways. Consider also what
might put them off, for example the location of the job, so that objections can be anticipated.
Analyze previous successes or failures to establish what does or does not work.

7.3.8 Identify sources of candidates

First consideration should be given to internal candidates. In addition, it is always worth

trying to persuade former employees to return to the organization or obtain suggestions from
existing employees (referrals). Talent banks that record candidate details electronically can be
maintained and referred to at this stage. If these approaches do not work, the sources of
candidates are online recruiting, social media, advertising, recruitment agencies, job centres,
consultants, recruitment process outsourcing providers and direct approaches to educational
establishments. The main sources used by employers, as established by the 2013 CIPD survey,
were:

1. own corporate website – 62 per cent;

2. recruitment agencies – 49 per cent;
3. employee referral scheme – 33 per cent;
4. professional networking, e.g. LinkedIn – 32 per cent;
5. commercial job boards – 32 per cent;
6. local newspaper advertisements – 29 per cent;
7. specialist journals – 24 per cent;
8. Job Centre Plus – 19 per cent;
9. search consultants – 17 per cent;
10. links with educational establishments – 14 per cent;
11. national newspaper advertisements – 12 per cent;
12. social networking sites – 9 per cent. Note the predominance of corporate
websites and local agencies as sources of candidates.

It is also interesting to note that referrals are the third most popular method. There is
usually a choice between different methods or combinations of them. The criteria to use when
making the choice are: 1) the likelihood that it will produce good candidates; 2) the speed with
which the choice enables recruitment to be completed; and 3) the costs involved, bearing in
mind that there may be direct advertising costs or consultants’ fees.

7.3.9 Online recruitment

 Online or e-recruitment uses the internet to advertise or ‘post’ vacancies, provides
information about jobs and the organization and enables e-mail communications to take place
between employers and candidates. The latter can apply for jobs online and can e-mail
application forms and CVs to employers or agencies. Tests can be completed online. The main
types of online recruitment sites are corporate websites, commercial job boards and agency
sites. Social media as described below is also used extensively. The advantages of online
recruiting are that it can reach a wider range of possible applicants. It is quicker and cheaper
than traditional methods of advertising, more details of jobs and firms can be supplied on the
site, and CVs can be matched and applications can be submitted electronically. More than four-
fifths of respondents to the CIPD’s 2013 survey reported that it helped them to increase the
strength of their employer brand. The disadvantages are that it may produce too many irrelevant
or poor applications and it is still not the first choice of many job seekers. Consider using it in
conjunction with other recruitment methods to maximize response.

Corporate websites may simply list vacancies and contact details. A more elaborate
approach would consist of a dedicated website area that gives details of vacancies, person
specifications, benefits and how to apply for jobs, for example by completing online application
forms and tests. Such areas may be linked directly to an organization’s home page so that
general browsers can access them. An intranet link may be available to enable internal staff to
access the website. Some organizations are building their own professional communities or
talent networks. The management of websites can be outsourced to recruitment consultants or
specialized web agencies. The following are guidelines on the use of websites:

1. Keep the content of the site up to date.

2. Ensure the site is accessible directly or through search engines.
3. Provide contact numbers for those with technical problems.
4. Take care over the wording of online copy – the criteria for good copy in
conventional advertisements apply.

Commercial job boards are operated by specialized firms such as Monster.co.uk and
Fish4jobs.com and consist of large databanks of vacancies. Companies pay to have their jobs
listed on the sites. Information about vacancies may reproduce an advertisement so that the site
is simply an additional form of communication, but some vacancies are only found online.
Links may be provided to the organization’s website. As recommended by Syedain (2012):

1. Go for specialized sites rather than generalist.

 2. Stick to one or two sites rather than spreading your vacancy everywhere.
3. If you are unsure about the best site, Google the job and browse the sites that
come up in order to see which is most authoritative.
4. Pay to obtain a prominent site.
5. Bear in mind that people who look at the site are seeking a job. Job sites are not
like print advertisements, which have to attract casual readers.
6. Ensure that the information you provide is clear about what you are offering and
the achievements, qualifications and experience you are looking for. Agency
sites are run by established recruitment agencies. Candidates register online but
may be expected to discuss their details in person before these are forwarded to
a prospective employer.

7.3.10 Social media

The use of social media means applying Web 2.0 technologies to search for recruits and
find out more about them online on sites such as LinkedIn and Facebook. Potential recruits
sometimes provide blogs from existing employees covering their experiences in working for
the organization. The 2013 survey of the Forum for In-House Recruitment Managers (FIRM),
whose members tend to be bigger employers, established that 94 per cent used LinkedIn for
attracting and recruiting candidates and the remaining 6 per cent intend to do so. LinkedIn
recruiter tools enable employers to see how the online population views their employer brand,
search the world by sector, job level, specialism and geography and directly approach strangers.
Syedain (2013) recommends that to make the most of LinkedIn it is necessary to:

1. build and prime a personal network before you recruit;

2. set aside time to seek out and engage relevant and promising talent;
3. obtain advice or training in how to use LinkedIn as a recruiting tool;
4. get buy-in from the top – encourage senior managers to keep their own profiles
up to date;
5. build the employer brand by encouraging to post information on their status
updates that give a sense of the organization;
6. talk to managers about who they know or can get introduced to online;
7. create an employer page and keep it updated;
8. personalize your direct approaches, whether In Mails or invitations to connect;
9. be selective about the number and type of jobs you publicize – it is easy to
overwhelm people’s feeds and inboxes.
 As reported by Anna Cook (2012), head of CERN’s recruitment unit, CERN, the
world’s largest particle physics laboratory, has successfully made use of social media. All job
vacancies are advertised on LinkedIn, Facebook and Twitter. These networks provide much
more than simple job boards in that they are used as communication tools to interact with the
audience, with candidates and with people who are not necessarily candidates but may know
people who may want to apply. Appropriate use is made of each medium. For example,
Facebook is used to host a weekly question and answer session between one of CERN’s
recruiters and anyone who wants to submit a question, whereas the professional network
LinkedIn provides a forum for more specialized discussions.

T-Mobile International has created a Facebook site for graduate recruitment. Potential
graduate recruits established an individual presence on this invitation-only site. The site was
used to provide information on selection procedures and processes, for example criteria and
timetables and to allow the potential recruits to communicate with each other. As well as T-
Mobile’s IT department, an internal ‘brand ambassador’ was involved in design throughout.

7.3.11 Advertising

Advertising has traditionally been the most obvious method of attracting candidates and
it is still fairly important, especially at local level and in specialized journals. However, as the
CIPD 2013 survey revealed, many organizations now prefer to use online recruitment, agencies
or consultants. A conventional advertisement will have the following aims:

1. Generate candidates – attract a sufficient number of good candidates at

minimum cost.
2. Attract attention – it must compete for the attention of potential candidates
against other employees.
3. Create and maintain interest – it has to communicate, in an attractive and
interesting way, information about the job, the company and the terms and
conditions of employment.
4. Stimulate action – the message needs to be conveyed in a way that will prompt
a sufficient number of replies from candidates with the right qualifications for
the job.

To achieve these aims, it is necessary to carry out the actions set out below. A
recruitment advertisement should start with a compelling headline and then contain information
on the following:
 1. the organization;
2. the job;
3. the person required – qualifications, experience, etc.;
4. the pay and benefits offered;
5. the location;
6. the action to be taken.

The headline is all important. The simplest and most obvious approach is to set out the
job title in bold type. To gain attention, it is advisable to quote the rate of pay and key benefits
such as a company car. Applicants are suspicious of clauses such as ‘salary will be
commensurate with age and experience’ or ‘salary negotiable’. This often means either that the
salary is so low that the company is afraid to reveal it, or that pay policies are so incoherent
that the company has no idea what to offer until someone tells them what he or she wants.

The name of the company should be given. Do not use box numbers – if you want to
be anonymous, use a consultant. Add any selling points, such as growth or diversification, and
any other areas of interest to potential candidates, such as career prospects. The essential
features of the job should be conveyed by giving a brief description of what the job holder will
do and, as far as space permits, the scope and scale of activities. Create interest in the job but
do not oversell it.

The qualifications and experience required should be stated as factually as possible.

There is no point in overstating requirements and seldom any point in specifying exactly how
much experience is wanted. Be careful about including a string of personal qualities such as
drive, determination and initiative. These have no real meaning to candidates. Phrases such as
‘proven track record’ and ‘successful experience’ are equally meaningless. No one will admit
to not having either of them.

The advertisement should end with information on how the candidate should apply.
‘Brief but comprehensive details’ is a good phrase. Candidates can be asked to write or e-mail
their response, but useful alternatives are to ask them to telephone or to come along for an
informal chat at a suitable venue.

Remember the anti-discrimination legislation set out in the Equality Act (2010). This
makes it unlawful to discriminate in an advertisement by favoring either sex, the only
exceptions being a few jobs that can be done only by one sex. Advertisements must therefore
avoid sexist job titles such as ‘salesman’ or ‘stewardess’. They must refer to a neutral title such
as ‘sales representative’, or amplify the description to cover both sexes by stating ‘steward or
stewardess’. Potential respondents should be referred to only as the ‘candidate’ or the
‘applicant’, otherwise you must specify ‘man or woman’ or ‘he or she’. It is accepted, however,
that certain job titles are unisex and therefore non-discriminatory, including director, manager,
executive and officer.

It is also unlawful to place an advertisement that discriminates against any particular

race. As long as race is never mentioned or even implied in an advertisement, you should have
no problem in keeping within the law. The Equality Act also makes it unlawful to discriminate
against employees on account of their age. Age limits should therefore not be included in
advertisements and the wording should not indicate that people below or above a certain age
are not wanted. It is essential to measure the response to advertisements to provide guidance
on the relative cost-effectiveness of different media. Cost per reply is the best ratio.

7.3.12 Recruitment agencies

Most recruitment agencies deal with secretarial and office staff who are registered with
them. They are usually quick and effective but quite expensive. Agencies can charge a fee for
finding someone of 15 per cent or more of the first year’s salary. It can be cheaper to advertise
or use the internet, especially when the company is in a buyer’s market. Shop around to find
the agency that suits the organization’s needs at a reasonable cost.

Agencies should be briefed carefully on what is wanted. They can produce unsuitable
candidates but the risk is reduced if they are clear about the requirements.

7.3.13 Job Centre Plus

The job centers operated by the government are mainly useful for manual and clerical
workers and sales or call center assistants.

7.3.14 Recruitment consultants

Recruitment consultants advertise, interview and produce a shortlist. They provide

expertise and reduce workload. The organization can be anonymous if it wishes. Most
recruitment consultants charge a fee based on a percentage of the basic salary for the job,
usually ranging from 15 to 20 per cent. When choosing a recruitment consultant check their
reputation and expertise, compare fees and meet the person who will work on the assignment
to assess his or her quality. To use them effectively:
 1. Agree terms of reference.
2. Brief them on the organization, where the job fits in, why the appointment is to
be made, terms and conditions and any special requirements.
3. Give them every assistance in defining the job and the person specification –
they will do much better if they have comprehensive knowledge of what is
required and what type of person is most likely to fit into the organization well.
4. Check carefully the proposed programmed and the draft text of the
advertisement.
5. Clarify the arrangements for interviewing and shortlisting.
6. Clarify the basis upon which fees and expenses will be charged.
7. Ensure that arrangements are made to deal directly with the consultant who will
handle the assignment.

7.3.15 Executive search consultants

Use an executive search consultant or ‘headhunter’ for senior jobs where there is only
a limited number of suitable people and a direct lead to them is wanted. Headhunters are not
cheap. They charge a fee of 30 to 50 per cent or so of the first year’s salary, but they can be
quite cost-effective.

Executive search consultants first approach their own contacts in the industry or
profession concerned. The good ones have an extensive range of contacts and their own data
bank. They will also have researchers who will identify suitable people who may fit the
specification or can provide a lead to someone else who may be suitable. The more numerous
the contacts, the better the executive search consultant. When a number of potentially suitable
and interested people have been assembled, a fairly relaxed and informal meeting takes place
and the consultant forwards a shortlist to the client with full reports on candidates.

There are some good and some not so good executive search consultants. Do not use
one unless a reliable recommendation is obtained.

7.3.16 Educational and training establishments

Many jobs can, of course, be filled by school leavers. For some organizations the main
source of recruits for training schemes will be universities and colleges as well as schools.
Graduate recruitment is a major annual exercise for some companies, which go to great efforts
to produce glossy brochures, visit campuses on the ‘milk run’ and use elaborate sifting and
selection procedures to vet candidates, including ‘biodata’ and assessment centers.

7.3.17 Recruitment process outsourcing

Recruitment process outsourcing (RPO) is the term used when an organization

commissions a provider to take responsibility for the end-to-end delivery of the recruitment
process, covering all vacancies or a selection of them. This involves liaising with hiring
managers to define requirements and specifications, deciding on the best ways to attract
candidates, processing applications, and setting up and facilitating interviews. Some companies
do not hand over all recruitment, using RPO only for high-volume vacancies. They may retain
responsibility for senior and specialist jobs. The advantage of RPO is that it can save time,
bring outside expertise to bear on recruitment problems and free up HR for more value-adding
activities. The disadvantage is the perception by some HR people and line managers that the
provider is too remote to deal with the real issues and that there is a danger of losing control.

7.3.18 comparisons of sources

A summary of sources and an analysis of their advantages and disadvantages is given

in Table 24.
 Table 24 Summary of sources of candidates

7.3.19 Dealing with applications

If recruitment agencies or consultants are used, they will deliver their client a shortlist
of candidates for interview. If not, the organization has to sift the applications itself. This means
examining the information supplied by applicants, sorting them and drawing up a shortlist of
applicants to be interviewed.

7.3.20 Examining information from candidates

Candidates may respond to an online notice or an advertisement with a formal

application (by e-mail or letter), usually supported by a CV. Applicants may be asked to
provide information about their education, qualifications, training and experience in a
standardized format to provide a structured basis for drawing up shortlists, the interview itself
and for the subsequent actions in offering an appointment and in setting up records. This
ensures that all applicants are considered on the same basis against the person specification.
An application form, as illustrated in Figure 18.1, which sets out the information required, can
be completed online (preferable if an online application has been made) or on paper. The
following suggestions have been made by Pioro and Baum (2005) on how to use application
forms more effectively:

1. Decide what the criteria for selection are and how these will be assessed by use
of the application form.
2. Keep questions clear, relevant and nondiscriminatory.
3. Ask for only the bare minimum of personal details.
4. Widen your pool of applicants by offering different options and guidance for
completing and viewing application forms.
5. Employers may also refer for further information to social networks or the
candidate’s own blog.

However, to save time and trouble, recruiters may prefer to make a decision on the
details provided in the initial application where it is clear that an applicant meets or does not
meet the specification.

7.3.21 Processing applications

When the vacancy or vacancies have been posted or advertised and a fair number of
replies received, the initial step is to list the applications on the recruitment database setting
out name, date application received and actions taken (reject, hold, interview, shortlist, offer).
A standard acknowledgement letter should be sent to each applicant unless an instant decision
can be made to interview or reject. The next steps are to sift applications prior to drawing up a
shortlist and arranging interviews.
7.3.22 Sorting applications

Applications are sifted by comparing the information available about them with the
key criteria in the person specification. The criteria should be analyzed with care so that they
are fully understood. The criteria can be classified under the following three headings so that
they can be applied consistently to guide sifting decisions:

1. Essential – applicants will not be considered unless this criterion is satisfied.

2. Very desirable – preference will be given to applicants who meet this criterion.
3. Desirable – applicants who meet this criterion will be given favorable
consideration but it is not an essential requirement. However, if a number of
applicants meet the first two criteria, satisfying desirable criteria would be a
factor in making a choice.

A highly structured method of sifting applications is provided by the use of biodata.

These are items of biographical data that are criterion-based (i.e. they relate to established
criteria in such terms as qualifications and experience that indicate whether individuals are
likely to be suitable). These are objectively scored and, by measurements of past achievements,
predict future behavior.

Following the analysis, applicants can be sorted initially into three categories: possible,
marginal and unsuitable. The more information made available and the clearer the criteria the
easier this process is. When there is a large field of applicants with many ‘possible’, sifting
may have to be repeated against more stringent criteria until a shortlist for interview is
identified.
 Ideally, the numbers on the shortlist should be between four and eight. Fewer than four
leaves relatively little choice (although such a limitation may be forced on the recruiter if an
insufficient number of good applications have been received). More than eight will mean that
too much time is spent on interviewing and there is a danger of diminishing returns.
7.3.23 Draw up an interviewing programmed

The time allowed for an interview will vary according to the complexity of the job. For
a fairly routine job, 30 minutes or so should suffice. For a more senior job, 60 minutes or more
is required. It is best not to schedule too many interviews per day for more senior jobs –
interviewers who try to conduct more than five or six exacting interviews will quickly run out
of steam and do neither the interviewee nor the organization any justice. It is advisable to leave
about 15 minutes between interviews to write up notes and prepare for the next one.

7.3.24 Administering the selection programmed

When the interviewing programmed has been drawn up shortlisted candidates can be
invited for interview, using a standard letter where large numbers are involved. Candidates
should be asked to complete an application form if they have not already done so. There is a
lot to be said at this stage for sending candidates more details of the organization and the job
so that too much time is not spent in going through this information at the interview.

Review the remaining ‘possible’ and ‘marginal’ and decide if any are to be held in
reserve. Send reserves a standard ‘holding’ letter and send the others a standard rejection letter.
The latter should thank candidates for the interest shown and inform them briefly, but not too
brusquely, that they have not been successful. A typical reject letter might read as follows:

Since writing to you on... we have given careful consideration to your application for
the above position. I regret to inform you, however, that we have decided not to ask you to
attend for an interview. We should like to thank you for the interest you have shown.

7.3.25 Selection methods

The aim of selection is to assess the suitability of candidates by predicting the extent to
which they will be able to carry out a role successfully. It involves deciding on the degree to
which the characteristics of applicants in terms of their KSAs, competencies, experience,
qualifications, education and training match the person specification and then using this
assessment to make a choice between candidates. The so-called ‘classic trio’ of selection
methods consists of application forms, interviews and references. To these should be added
selection tests and assessment centers.

Interviews are normally conducted by means of a face-to-face discussion. But, as

established by the CIPD’s 2013 survey, a considerable proportion of employers (56 per cent)
conduct interviews by telephone. Nearly one-third (30 per cent) use video or Skype interviews,
rising to 42 per cent of those who recruit from overseas.

7.3.26 Interviews

The interview is the most familiar method of selection. The aim is to elicit information
about candidates that will enable a prediction to be made about how well they will do the job
and thus lead to a selection decision.

An interview involves face-to-face discussion. When it is an individual rather than a

panel interview, it provides the best opportunity for the establishment of close contact – rapport
– between the interviewer and the candidate, thus easing the acquisition of information about
the candidate’s suitability and how well he or she would fit into the organization. As described
below, interviews should be. The advantages and disadvantages of interviews are as follows.

Advantages of interviews

1. Provide opportunities for interviewers to ask probing questions about the candidate’s
experience and to explore the extent to which the candidate’s competencies match those
specified for the job.
2. Enable interviewers to describe the job (a ‘realistic job preview’) and the organization
in more detail, providing some indication of the terms of the psychological contract.
3. Provide opportunities for candidates to ask questions about the job and to clarify issues
concerning training, career prospects, the organization and terms and conditions of
employment.
4. Enable a face-to-face encounter to take place so that the interviewer can make an
assessment of how the candidate would fit into the organization and what he or she
would be like to work with.
5. Give the candidate the same opportunity to assess the organization, the interviewer and
the job.

Disadvantages of interviews

1. Can lack validity as a means of making sound predictions of performance, and lack
reliability in the sense of measuring the same things for different candidates.
2. Rely on the skill of the interviewer – many people are poor at interviewing, although
most think that they are good at it.
3. Can lead to biased and subjective judgements by interviewers.
 These disadvantages are most common when unstructured interviews are used, but they
can be alleviated: first, by using a structured approach as described below; second, by training
interviewers. The use of other opinions can also help to reduce bias, especially if the same
structured approach is adopted by all the interviewers. Finally, selection tests, especially those
measuring intelligence or general ability, can provide valuable information that supplements
the interview.

7.3.27 Interview arrangements

Interviews are frequently conducted on a one-to-one basis but there is a case for using
a second interviewer in order to avoid a biased or superficial decision. The alternative is a
selection board or panel, which is often used in the public sector. This brings together a number
of parties interested in the selection decision. But the drawbacks are that questions tend to be
unplanned and delivered at random and the candidates are unable to do justice to themselves
because they may not be allowed to expand on their responses.

7.3.28 Structured interviews

A structured interview is one based on a defined framework. Within the framework

there may be a set of predetermined questions. All candidates are asked the same questions,
which will focus on the attributes and behaviors required to succeed in the job. The answers
may be scored through a rating system.

The most typical framework is the person specification. Interview questions aim to
analyses and build on the information provided by the candidate’s CV or application form to
establish the extent to which a candidate has the required knowledge, skills and abilities
(KSAs). In a competency-based interview the emphasis is on establishing if the candidate has
the right level of desirable behavioral competencies. A structured interview may include
experience-based questions in which candidates are asked to relate how they handled situations
in the past requiring skills and abilities necessary for effective performance in the job for which
they are applying. And/or it may include situational questions that provide candidates with
hypothetical job-relevant situations and ask how they would deal with them. Research by
Pulakos and Schmitt (1995) found that experience-based interviews yielded higher levels of
validity than situation based ones. But as described in Chapter 50, both types of questions may
be incorporated in an interview.

7.3.29 Unstructured interviews

 Unstructured interviews are essentially a general discussion during which the
interviewer asks a few questions that are relevant to what he or she is looking for but without
any specific aim in mind other than getting an overall picture of the candidate as an individual.
Questions are often random and non-specific. Candidates are judged on the general impression
they make and the process is likely to be quite subjective. Research quoted later in this chapter
has shown that the predictive validity (the extent to which it predicts performance in a job) of
an unstructured interview is fairly low. The preferred method is a structured interview, which
when conducted well has a higher level of predictive validity.

7.3.30 Selection testing

Selection tests are used to provide valid and reliable evidence of levels of abilities,
intelligence, personality characteristics, aptitudes and attainments. Psychological tests are
measuring instruments, which is why they are often referred to as psychometric tests:
‘psychometric’ means mental measurement. Psychometric tests assess intelligence or
personality. They use systematic and standardized procedures to measure differences in
individual characteristics, thus enabling selectors to gain a greater understanding of candidates
to help in predicting the extent to which they will be successful in a job. The other types of
tests described below are ability and aptitude tests.

7.3.31 Intelligence tests

Intelligence tests measure a range of mental abilities that enable a person to succeed at
a variety of intellectual tasks using the faculties of abstract thinking and reasoning. They are
concerned with general intelligence (termed ‘g’ by Spearman (1927) one of the pioneers of
intelligence testing) and are sometimes called ‘general mental ability’ (GMA) tests.
Intelligence tests measure abilities while cognitive tests measure an individual’s learning in a
specific subject area. They contain questions, problems and tasks. The meta-analysis conducted
by Schmidt and Hunter (1998) showed that intelligence tests had high predictive validity.

The outcome of a test can be expressed as a score that can be compared with the scores
of members of the population as a whole, or the population of all or part of the organization
using the test (norms). An intelligence test may be recorded as an intelligence quotient (IQ),
which is the ratio of an individual’s mental age to the individual’s actual age as measured by
an intelligence test. When the mental and actual age correspond, the IQ is 100. Scores above
100 indicate that the individual’s level of average is above the norm for his or her age, and vice
versa. It is usual now for IQs to be directly computed as an IQ test score. It is assumed that
intelligence is distributed normally throughout the population; that is, the frequency
distribution of intelligence corresponds with the normal curve shown in Figure 18.2. The
normal curve is a way of expressing how scores will typically be distributed; for example, that
60 per cent of the population are likely to get scores between x and y, 20 per cent are likely to
get scores below x and 20 per cent are likely to get more than y. Intelligence tests can be
administered to a single individual or to a group. They can also be completed online.

7.3.32 Personality tests

Personality tests attempt to assess the personality of candidates in order to make

predictions about their likely behavior in a role. There are many different theories of personality
and, consequently, many different types of personality tests. These include self-report
personality questionnaires and other questionnaires that measure interests, values or work
behavior. Personality tests can provide interesting supplementary information about candidates
that is free from the biased reactions that frequently occur in face-to-face interviews, but they
have to be used with great care. The tests should have been developed by a reputable
psychologist or test agency on the basis of extensive research and field testing, and they must
meet the specific needs of the user.

7.3.33 Ability tests

Ability tests establish what people are capable of knowing or doing. They measure the
capacity for:

1. verbal reasoning – the ability to comprehend, interpret and draw conclusions

from oral or written language;
2. numerical reasoning – the ability to comprehend, interpret and draw conclusions
from numerical information;
3. spatial reasoning – the ability to understand and interpret spatial relations
between objects;
 4. mechanical reasoning – understanding of everyday physical laws such as force
and leverage.

7.3.34 Aptitude tests

Aptitude tests are occupational or job-related tests that assess the extent to which
people can do the work. They typically take the form of work sample tests, which replicate an
important aspect of the actual work the candidate will have to do, such as using a keyboard or
carrying out a skilled task such as repair work. Work sample tests can be used only with
applicants who are already familiar with the task through experience or training.

7.3.35 Characteristics of a good test

A good test is one that provides data that enables reliable predictions of behavior or
performance to be made and therefore assists in the process of making objective and reasoned
decisions when selecting people for jobs. It will be based on research that has produced
standardized criteria derived by using the same measure to test a number of representative
people to produce a set of ‘norms’ for comparison purposes. The test should be capable of
being objectively scored by reference to the normal or average performance of the group.

The two key characteristics of a good test are first that it is reliable in the sense that it
always measures the same thing: a test aimed at measuring a particular characteristic, such as
intelligence, should measure the same characteristic when applied to different people at the
same or a different time or to the same person at different times. Second, a test should be valid
in the sense that it measures the characteristic that the test is intended to measure. Thus, an
intelligence test should measure intelligence (however defined) and not simply verbal facility.
A test meant to predict success in a job or in passing examinations should produce reasonably
convincing (statistically significant) predictions.

A criterion-related approach is used to assess validity. This means selecting criteria

against which the validity of the test can be measured. These criteria must reflect ‘true’
performance at work as accurately as possible. A single criterion is inadequate: multiple criteria
should be used. The extent to which criteria can be contaminated by other factors should also
be considered and it should be remembered that criteria are dynamic – they will change over
time.

7.3.36 Interpreting test results

Test results can be interpreted by the use of norms or through criterion scores.
7.3.37 Norms

An individual’s score in a test is not meaningful on its own. It needs to be compared

with the scores achieved by the population on whom the test was standardized – the norm or
reference group. A normative score is read from a norms table and might, for example, indicate
that someone has performed the test at a level equivalent to the top 30 per cent of the relevant
population.

7.3.38 Criterion scores

Norms simply tell us how someone has performed a test relative to other people. A
more powerful approach is to use the relationship between test scores and an indication of what
the test is designed to measure, such as job success. This is described as a criterion measure.

7.3.39 The use of tests in a selection procedure

Validated intelligence and personality tests will produce useful data, but there is much
to be said for combining them in a selection procedure with structured interviews.

Tests are often used as part of a selection procedure for occupations where a large
number of recruits are required, and where it is not possible to rely entirely on examination
results or information about previous experience as the basis for predicting future performance.
In these circumstances it is economical to develop and administer the tests, and a sufficient
number of cases can be built up for the essential validation exercise. Tests usually form part of
an assessment center programmed. They can be administered online and FIRM’s 2013
membership survey showed that they were used for 72 per cent of applications.

Intelligence tests are particularly helpful in situations where intelligence is a key factor
and there is no other reliable method of measuring it. Aptitude tests are most useful for jobs
where specific and measurable skills are required, such as word processing and skilled repair
work. Personality tests can complement structured interviews and intelligence and aptitude
tests. Some organizations use them for jobs such as selling, where they believe that
‘personality’ is important and where it is not too difficult to obtain quantifiable criteria for
validate ion purposes. They may be used to assess integrity and conscientiousness where these
characteristics are deemed to be important.

In some situations, a battery of tests may be used, including various types of

intelligence, personality and aptitude tests. These may be a standard battery supplied by a test
agency, or a custom-built battery may be developed. The biggest pitfall to avoid is adding extra
tests just for the sake of it, without ensuring that they make a proper contribution to the success
of the predictions for which the battery is being used.

Tests should be administered only by people who have been trained in what the tests
are measuring, how they should be used, and how they should be interpreted. Also, it is
essential to evaluate all tests by comparing the results at the interview stage with later
achievements. To be statistically significant, these evaluations should be carried out over a
reasonable period of time and cover as large a number of candidates as possible.

7.3.40 Assessment centers

Assessment centers assemble a group of candidates and use a range of assessment

techniques over a concentrated period (one or two days) with the aim of providing a more
comprehensive and balanced view of the suitability of individual members of the group. The
main features of assessment centers are that:

1. exercises are used to capture and simulate the key dimensions of the job;
2. these may include one-to-one role-plays and group exercises; it is assumed that
performance in these simulations predicts behavior on the job;
3. candidates are interviewed and tested;
4. performance is measured in several dimensions in terms of the competencies required
to achieve the target level of performance in a particular job or at a particular level in
the organization;
5. several candidates or participants are assessed together to allow interaction and to make
the experience more open and participative;
6. several trained assessors or observers are used in order to increase the objectivity of
assessments.

The case for assessment center’s is that they obtain much more information about
candidates than conventional interviews, even when these are supplemented by tests. But
research by Schmidt and Hunter (1998) has shown that on their own, the ability of assessment
center’s to predict how well someone will perform (predictive validity) is lower than that of
intelligence tests combined with structured interviews. Assessment centers are expensive and
time-consuming and their use tends to be restricted to large organizations for managerial
positions or for graduates.

7.3.41 Choice of selection methods

 There is a choice between the selection methods. The most important criterion is the
ability of a selection method or combination of methods to predict future performance.
Predictive ability is expressed as a coefficient – complete validity would be 1.0; no validity
would be 0.0. The meta-analysis on the validity of different selection methods conducted by
Schmidt and Hunter (1998: 265), which covered 85 years of research findings, produced the
following predictive validity coefficients:

Intelligence tests and structured

interviews .63

Intelligence tests and unstructured

Interviews .55

Assessment centers and structured

interviews .53

Intelligence tests only .51

Structured interviews only .51

Unstructured interviews only .38

Assessment centers only .37

Graphology only .02

Robertson and Smith (2001) added personality assessments to this list, with a validity
coefficient of .37. Schmidt and Hunter (1998) established that the reason why intelligence
(GMA) is such a good predictor of job performance is that more intelligent people acquire job
knowledge more rapidly and acquire more of it, and it is this knowledge of how to perform the
job that causes their job performance to be higher. Their research clearly indicates that the
combination of structured interviews and intelligence tests is the most effective in terms of
predictive validity. Graphology is useless.

7.3.42 Provisional offers and obtaining references

After the interviewing and testing procedure has been completed, a provisional decision
to make an offer by telephone or in writing can be made. This is normally ‘subject to
satisfactory references’ and the candidate should, of course, be told that these will be taken up.
If there is more than one eligible candidate for a job it may be advisable to hold one or two
people in reserve. Applicants often withdraw, especially those whose only purpose in applying
for the job was to carry out a ‘test marketing’ operation, or to obtain a lever with which to
persuade their present employers to value them more highly.

The main purpose of a reference is to obtain in confidence factual information about a

prospective employee. This information is straightforward and essential. It is necessary to
confirm the nature of the previous job, the period of time in employment, the reason for leaving
(if relevant), the salary or rate of pay and, possibly, the attendance record.

Opinions about character, competence, performance and suitability are unreliable.

Referees are reluctant to commit themselves and they are not in any position to assess
suitability – only the prospective employer can do that. Personal referees are, of course, entirely
useless. All they prove is that the applicant has at least one or two friends.

A written request for a reference could simply ask the previous employer to confirm
the candidate’s employment record. More precise answers may be obtained if a standard form
is provided for the employer to complete. The questions asked on this form should be limited
to the following:

1. What was the period of employment?

2. What was the job title?
3. What work was carried out?
4. What was the rate of pay or salary?
5. How many days’ absence was there over the last 12 months?
6. Would your re-employ (if not, why not)?

The last question is important, if it is answered honestly. Telephone references may

save time and may be more reliable. They can be used as an alternative or in addition to written
references. Ask factual questions only and keep a record of the conversation.

7.3.43 References – legal aspects

The key legal points that should be considered when asking for or giving references
are:

1. Once the decision has been made to make an offer, the letter should state that ‘this is a
provisional offer subject to the receipt of satisfactory references.
 2. It has been generally held that there is no common law duty on an employer to provide
references for a serving or past employee unless there is a term to that effect in the
employment contract. But it has been ruled (Spring v. Guardian Assurance 1994) that
there might be a moral duty to provide a reference where it is ‘natural practice’ to
require a reference from a previous employer before offering employment, and where
the employee could not expect to enter that type of employment without a reference.
3. If a reference contains a false or unsubstantiated statement that damages the reputation
of the individual, action for damages may result. It is possible to succeed in a claim for
damages if it can be shown that the reference provided was negligent because
reasonable care had not been taken in preparing it, which includes ensuring that it is
factually correct.

7.3.44 Checking applications

It is a sad fact that applicants all too often misinform their prospective employers about
their education, qualifications and employment record. This was confirmed by a survey carried
out by the CIPD (2008), which found that 25 per cent of employers had to withdraw their offers
because applicants had lied or misrepresented their application. It is always advisable to check
with universities, professional institutes and previous employers that the facts given by
applicants are correct. Other checks can be made such as:

1. interview questions about actual (not hypothetical) experiences, with deep probing to
ascertain the extent of the individual’s personal involvement, decision-making and
contribution;
2. detailed application forms with open-ended questions about specific learning related to
the skills, knowledge and competencies required for the vacancies under consideration;
3. identification check;
4. electoral register check;
5. credit reference agency checks (especially appropriate for positions in the financial
services sector);
6. confirmation of previous employment with HM Revenue and Customs or through the
Department of Work and Pensions;
7. Criminal Records Bureau check;
8. Companies House check (for directors);
 9. fraud prevention check, including Cifas staff fraud database check (to prevent an
employer unwittingly employing people previously dismissed for fraud somewhere
else). Cifas is a not-for-profit fraud prevention service.

7.3.45 Offering employment

The final stage in the selection procedure is to confirm the offer of employment after
satisfactory references have been obtained, and the applicant has passed the medical
examination required for pension and life assurance purposes or because a certain standard of
physical fitness is required for the work. The contract of employment should also be prepared
at this stage.

7.3.46 following up

It is essential to follow up newly engaged employees to ensure that they have settled in
and to check on how well they are doing. If there are any problems, it is much better to identify
them at an early stage rather than allowing them to fester.

Following up is also important as a means of checking on the selection procedure. If by

any chance a mistake has been made, it is useful to find out how it happened so that the
procedure can be improved. Misfits can be attributed to a number of causes; for example:
inadequate person specification, poor sourcing of candidates, weak advertising, poor
interviewing techniques, inappropriate or invalidated tests, or prejudice on the part of the
selector.

7.3.47 Dealing with recruitment problems

Every experienced HR professional who is responsible for recruitment and selection

will occasionally come across a vacancy that is particularly difficult to fill. In this situation any
compromise that involves appointing someone who does not meet the specification must be
avoided. To deal with the problem constructively it is necessary to take the following actions:

1. Ensure that all the possible sources of candidates have been used.
2. Consider any ways in which the advertisement or website entry could be made more
attractive.
3. Check that the person specification is realistic – that the requirements have not been
overstated.
4. Consider whether it might be necessary to improve the package offered to candidates –
check market rates to ensure that the level of pay and benefits are competitive.
 5. In discussion with the line manager, examine the possibility of reshaping the role to
increase its attractiveness.
6. If the worse comes to the worst, discuss with the manager alternative ways of carrying
out the work with existing staff.

7.4 Talent management

The process of talent management is based on the proposition that ‘those with the best
people win’. It emerged in the late 1990s when McKinsey and Company coined the phrase
‘the war for talent’. It has now been recognized as a major resourcing activity, although its
elements are familiar. The fundamental concept of talent management – that it is necessary to
engage in talent planning to build a talent pool by means of a talent pipeline – is a key concern
of human resource management. Talent management was defined by Tansley and Tietze (2013:
1804) as follows: ‘Talent management contains strategies and protocols for the systematic
attraction, identification, development, retention and deployment of individuals with high
potential who are of particular value to an organization.’ However, this definition refers to
‘individuals with high potential’ and although this may be the usual approach, some people
believe that talent management covers everybody – on the grounds that all people have talent
and talent management activities should not be restricted to the favored few. There are many
versions of talent management but in one way or another most incorporate typical HRM
activities such as potential assessment, leadership and management development, succession
planning and career planning. This chapter covers the meaning of talent management and talent
management strategy and the processes involved. Two important aspects of talent management
– management succession planning and career management – are dealt with at the end of the
chapter.

7.4.1 Talent management defined

Talent management is the process of ensuring that the organization has the talented
people it needs to attain its business goals. It involves the strategic management of the flow of
talent through an organization by creating and maintaining a talent pipeline. As suggested by
Younger et al (2007), the approaches required include emphasizing ‘growth from within’;
regarding talent development as a key element of the business strategy; being clear about the
competencies and qualities that matter; maintaining well-defined career paths; taking
management development, coaching and mentoring seriously; and demanding high
performance.
 The term ‘talent management’ may refer simply to management succession planning
and/or management development activities, although this notion does not really add anything
to these familiar processes except a new name – admittedly quite an evocative one. It is better
to regard talent management as a more comprehensive and integrated bundle of activities, the
aim of which is to create a pool of talent in an organization, bearing in mind that talent is a
major corporate resource.

According to Lewis and Hackman (2006), talent management is defined in three ways:
1) as a combination of standard human resource management practices such as recruitment,
selection and career development; 2) as the creation of a large talent pool, ensuring the
quantitative and qualitative flow of employees through the organization (ie akin to succession
or human resource planning); (3) as a good based on demographic necessity to manage talent.

Iles et al (2010: 127) identified three broad strands of thought about talent management:

1. It is not essentially different from human resource management or human resource

development. Both are about getting the right people in the right job at the right time
and managing the supply and development of people for the organization.

2. It is simply integrated HRD with a selective focus on a small ‘talented’ section of the
workforce (a ‘talent pool’).

3. It involves organizationally focused competence development through managing and

developing flows of talent through the organization. The focus is on the talent pipeline
rather than the talent pool. This strand is closely related to succession and human
resource planning.

The extent to which talent management is a new idea or simply a bundle of existing
practices has been questioned. Iles and Preece (2010: 244–45) observed that:

Many current ideas in talent management, now often presented as novel and best
practice, such as assessing potential, 360-degree feedback, assessment centers and coaching,
come from the 1950s era of large stable bureaucracies and sophisticated succession planning
as part of more general ‘manpower planning’.

And David Guest, cited by Warren (2006: 29), commented that:

Organizations espouse a lot of notions about talent management and give it a lot of
emphasis, but in practical terms it doesn’t have a very different meaning to what most
organizations have always done. Talent management is an idea that has been around a long
time. It’s been relabeled.

But he also noted that the process of bringing together some old ideas gives them a
freshness and that it can provide a means of integrating these practices so that a coherent
approach is adopted by the use of mutually supportive practices. Before describing the process
of talent management, it is necessary to answer three questions:

1. What is talent?
2. What does it mean when reference is made to ‘the war for talent’?
3. Who is covered by talent management programs?

7.4.2 Talent defined

Talent was defined by Michaels et al (2001, xii) as ‘the sum of a person’s abilities... his
or her intrinsic gifts, skills, knowledge, experience, intelligence, judgement, attitude, character
and drive. It also includes his or her ability to learn and grow.’ Talent is what people must have
in order to perform well in their roles. They make a difference to organizational performance
through their immediate efforts and they have the potential to make an important contribution
in the future. Talent management aims to identify, obtain, keep and develop those talented
people.

7.4.3 The war for talent

Following the McKinsey lead, the phrase ‘the war for talent’ has become a familiar
metaphor for talent management. Michaels (of McKinsey and Co) et al (2001) identified five
imperatives that companies need to act on if they are going to win what they called the ‘war
for managerial talent’:

1. Creating a winning employee value proposition that will make your company
uniquely attractive to talent.
2. Moving beyond recruiting hype to build a long-term recruiting strategy.
3. Using job experience, coaching and mentoring to cultivate the potential in
managers.
4. Strengthening the talent pool by investing in A player, developing B players and
acting decisively on C players.
5. Central to this approach is a pervasive mindset – a deep conviction shared by
leaders throughout the company that competitive advantage comes from having
better talent at all levels. But Pfeffer (2001: 258) expressed doubts about the
 war for talent concept, which he believed was the wrong metaphor for
organizational success.

He argued that: Fighting the war for talent can readily create self-fulfilling prophesies
that leave a large portion of the workforce demotivated or ready to quit, and produce an
arrogant attitude that makes it hard to learn or listen. It can cause the company to focus always
on getting better people, mainly from outside, instead of fixing the culture and system of
management practices that research has shown are consequential for performance. He
suggested (ibid: 249) that perceiving talent management as a ‘war’ leads to:

1. an invariable emphasis on individual performance thereby damaging team work;

2. a tendency to glorify the talents of those outside the company and downplay the skills
and abilities of insiders;
3. those labelled as less able becoming less able because they are asked to do less and
given fewer resources and training;
4. a de-emphasis on fixing the systemic, cultural and business issues that are invariably
more important for enhancing performance;
5. the development of an elitist, arrogant attitude (cf Enron).

There are different opinions about who should be involved. On the one hand there is
the view that you must pay most attention to the best, while on the other, the view is that
everyone has talent and it is not just about the favored few. Iles and Preece (2010: 248) have
identified three main perspectives:

1. Exclusive people – key people with high performance and/or potential irrespective of
position.
2. Exclusive position – the right people in the strategically critical jobs.
3. Inclusive people – everyone in the organization is seen as actually or potentially
talented, given opportunity and direction.

The first two perspectives, or a combination of the two, are the most common. Many
organizations focus on the elite. For example, Microsoft UK is most concerned with its ‘A list’,
the top 10 per cent of performers, regardless of role and level, whilst Six Continents targets
executives below board level and high-potential individuals, as the two cadres are likely to
provide their leaders of tomorrow. Huselid et al (2005) argued that talent management policies
should concentrate on ‘A positions’. McDonnell and Collings (2011: 58) suggested that talent
management is ‘primarily concerned with those who add value to the organization... those who
possess the potential to have a differential impact on organizational success’. They therefore
argued that talent management should focus on these individuals rather than including
everyone in the organization.

According to Clarke and Winkler (2006), the inclusive people approach is

comparatively rare in practice, although there have been strong advocates of it such as
Buckingham and Vosburgh (2001: 18), who wrote that talent is inherent in each person: ‘HR’s
most basic challenge is to help one particular person increase his or her performance; to be
successful in the future we must restore our focus on the unique talents of each individual
employee, and on the right way to transfer those talents into lasting performance.’ If exclusive
approaches are adopted there is a danger of talent management being perceived as an elitist
process. Creating a talent pool of a limited number of individuals may alienate those who are
left out. Thorne and Pellant (2007: 9) argued that: ‘No organization should focus all its attention
on development of only part of its human capital. What is important, however, is recognizing
the needs of different individuals within its community.’ The CIPD (2010a: 1) asserted that:
‘Talent management and diversity need to be interlinked. Diversity should be threaded through
all talent management activities and strategies to ensure that organizations make the best use
of the talent and skills of all their employees in ways that are aligned to business objectives.

The most common view seems to be that the aims of talent management are to obtain,
identify and develop people with high potential. But it should not be at the expense of the
development needs of people generally. The McKinsey prescription has often been
misinterpreted as meaning that talent management is only about obtaining, identifying and
nurturing high-flyers, ignoring the point made by Michaels et al (2001) that competitive
advantage comes from having better talent at all levels.

A case study of a global management consultancy (Tansley and Tietze, 2013) revealed
that the consultancy’s approach to talent management was both inclusive (everyone is talented)
and exclusive (key people were developed in ways different to those adopted for ‘everyday
talent’. This was expressed by the company’s Talent Development Director as follows:

Talent in the Firm means two things. One I think that everybody is a talented individual.
We recruit bright people intellectually. But our business also has the responsibility to help them
realize that. So there is a fundamental belief that everyone is talented, and there is a belief that
we do need to identify future leaders, who are going to lead key parts or have key roles in the
business in the future and these would be quite senior roles. And that identifying talent to these
spaces, and helping people to gravitate towards one of these roles, will be the key challenge for
us.

These beliefs were put into effect by the firm through a talent progression sequence of
four stages:

1. Rising talent – highly educated graduate recruits who are given education and
training for core technical or professional roles.
2. Emerging leaders – who are given training and education for management under
the guidance of sponsors or mentors.
3. Next generation leaders – who undertake leadership development programs and
may attend a corporate academy.
4. Corporate next generation leaders – who are provided with one-to-one
development through coaches and mentors and briefed on corporate/governance
strategy.

7.4.4 The process of talent management

The process of talent management can be described as a pipeline that, as illustrated in
Figure 20.1, operates within the parameters of talent strategy and policy and starts with talent
planning, followed by a sequence of resourcing and talent development activities to produce a
talent pool.

A more detailed flow chart of the process of talent management is shown in Figure
20.2. Talent management starts with the business strategy and what it signifies in terms of the
future demand for talented people. Ultimately, the aim is to develop and maintain a pool of
talented people through the talent pipeline, which consists of the processes of resourcing, career
planning and talent development that maintain the flow of talent needed by the organization.
Its elements are:

1. Talent planning – the process of establishing how many and what sort of
talented people are needed now and in the future. It uses the techniques of
workforce planning and leads to the development of policies for attracting and
retaining talent and for estimating future requirements as monitored by talent
audits.
2. Resourcing − the outcomes of talent planning are programs for obtaining people
from within and outside the organization (internal and external resourcing).
Internally they involve the identification of talent, talent development and
 career management. Externally they mean the implementation of policies for
attracting high-quality people.
3. Talent identification – the use of talent audits to establish who is eligible to
become part of the talent pool and to benefit from learning and development
and career management programs. The information for talent audits can be
generated by a performance management system that identifies those with
abilities and potential.
4. Talent relationship management – building effective relationships with people
in their roles. It is better to build on an existing relationship rather than try to
create a new one when someone leaves. The aims are to recognize the value of
individual employees, provide opportunities for growth, treat them fairly and
achieve ‘talent engagement’, ensuring that people are committed to their work
and the organization.
5. Talent development – learning and development policies and programs are key
components of talent management. They aim to ensure that people acquire and
enhance the skills and competencies they need. Policies should be formulated
by reference to ‘employee success profiles’, which are described in terms of
competencies and define the qualities that need to be developed. Leadership and
management development programs play an important part.
6. Talent retention – the implementation of policies designed to ensure that
talented people remain as engaged and committed members of the organization.
7. Career management – as discussed later in this chapter, this is concerned with
the provision of opportunities for people to develop their abilities and their
careers so that the organization has the flow of talent it needs and they can
satisfy their own aspirations.
8. Management succession planning – as far as possible, the objective is to see that
the organization has the managers it requires to meet future business needs.
9. The talent pipeline – the processes of resourcing, talent development and career
planning that maintain the flow of talent needed to create the talent pool required
by the organization.
10. The talent pool – the resources of talent available to an organization.
 Table 28 The talent management pipeline

Table 29 The talent management process

7.4.5 Talent management strategy
Cappelli (2008) suggested that the signs of a successful talent management strategy are
that it is inclusive and that it can address and resolve any incongruity between the supply and
demand of talent. He stated that too many firms have more employees than they need for
available positions, or a talent shortfall, and always at the wrong times. He argued that talent
management should not just be about employee development or succession planning, as many
of the commonplace definitions suggest, but should focus on helping the firm attain its strategic
objectives. His four principles for ‘talent on demand’ were:

1. Make and buy talent to manage the demand-side risk.

2. Reduce the uncertainty in talent demand.
3. Earn a return on investment in developing employees.
4. Employee interests should be balanced by creating an internal labor market that
offers all the advantages of the external labor market to reduce staff turnover
and to avoid the associated loss of talent and costs.

A talent management strategy consists of a view on how the processes involved in

creating a talent pool should mesh together with an overall objective – to acquire and nurture
talent wherever it is and wherever it is needed by using a number of interdependent policies
and practices. Talent management is the notion of ‘bundling’ in action. The strategy should be
based on definitions of what is meant by talent in terms of competencies and potential, who the
talent management program me should cover, and the future talent requirements of the
organization. The aims should be to:

1. develop the organization as an ‘employer of choice’;

2. plan and implement recruitment and selection programs that ensure good quality
people are recruited who are likely to thrive in the organization and stay with it
for a reasonable length of time (but not necessarily for life);

3. plan and implement talent retention programs;

4. introduce reward policies that help to attract and retain high-quality staff;

5. design jobs and develop roles that give people opportunities to apply and grow
their skills and provide them with autonomy, interest and challenge;

6. implement talent development programs;

7. provide talented staff with opportunities for career development and growth;
 8. recognize those with talent by rewarding excellence, enterprise and
achievement;

9. generate and maintain a talent pool so that ‘talent on demand’ is available to

provide for management succession.

It can be difficult to introduce comprehensive talent management processes covering

all the activities involved. A phased approach may be best. Resourcing activities take place
anyhow, although the advantages of planning them on the basis of assessments of talent
requirements are considerable; and it makes sense to devote energies to retaining key staff. But
beyond that, the starting point in practice for an extended talent management program me could
be a process of identifying people with talent through a performance management system. It
would then be possible to concentrate on leadership and management development programs.
Sophisticated approaches to career planning and, possibly, succession planning could be
introduced later.

7.4.6 What is happening in talent management

A study by CIPD (2007) of nine UK private and public sector organizations found that:

1. What is seen as talent and how it is developed is highly varied.

2. There is no one definition of talent management.

3. There was little evidence of employers adopting a formal talent management

strategy.

4. Talent management programs varied in terms of who they were aimed at and
how.

5. There were issues relating to the demotivation of individuals not selected for
talent management, especially if this meant that they had fewer resources and
opportunities for progression.

6. There was often a lack of integration with other HR programs. The CIPD 2013
learning and talent development survey revealed that the six most important
objectives of respondents’ talent management policies were:

a. Growing future senior managers/leaders (62 per cent).

b. Developing high-potential employees (60 per cent).
 c. Enabling the achievement of the organization’s strategic goals
(37 per cent).
d. Retaining key staff (36 per cent).
e. Meeting the future skills requirements of the organization (32
per cent).
f. Attracting and recruiting key staff to the organization (27 per
cent).

The most effective approach used by respondents was coaching, followed by

development programs and mentoring.

7.4.7 Career management

Career management is about providing the organization with the flow of talent it needs.
But it is also concerned with the provision of opportunities for people to develop their abilities
and their careers in order to satisfy their own aspirations. It integrates the needs of the
organization with the needs of the individual.

An important part of career management is career planning, which shapes the

progression of individuals within an organization in accordance with assessments of
organizational needs, defined employee success profiles and the performance, potential and
preferences of individual members of the enterprise. Career management also involves career
counselling to help people develop their careers to their advantage as well as that of the
organization. Career management has to take account of the fact that many people are not
interested in developing their careers in one organization and prefer to look for new experience
elsewhere. But as De Vos and Dries (2013: 1828) point out: ‘Although careers for life,
admittedly, are a reality from a distant past, the organizational career is far from dead.’

Aims: For the organization, the aim of career management is to meet the objectives of
its talent management policies, which are to ensure that there is a talent flow that creates and
maintains the required talent pool. For employees, the aims of career management policies are:
1) to give them the guidance, support and encouragement they need to fulfil their potential and
achieve a successful career with the organization in tune with their talents and ambitions; and
2) to provide those with promise a sequence of experience and learning activities that will equip
them for whatever level of responsibility they have the ability to reach.

Career management calls for an approach that explicitly takes into account both
organizational needs and employee interests. It calls for creativity in identifying ways to
provide development opportunities. Career management policies and practices are best based
on an understanding of the stages through which careers progress in organizations.

7.4.8 Career stages

The stages of a career within an organization can be described as a career life cycle.
Hall (1984) set this out as follows:

1. Entry to the organization, when the individual can begin the process of self-
directed career planning.
2. Progress within particular areas of work, where skills and potential are
developed through experience, training, coaching, mentoring and performance
management.
3. Mid-career, when some people will still have good career prospects while others
may have got as far as they are going to get, or at least feel that they have. It is
necessary to ensure that these ‘plateaued’ people do not lose interest at this stage
by taking such steps as providing them with cross-functional moves, job
rotation, special assignments, recognition and rewards for effective
performance, etc.
4. Later career, when individuals may have settled down at whatever level they
have reached but are beginning to be concerned about the future. They need to
be treated with respect as people who are still making a contribution and be
given opportunities to take on new challenges wherever this is possible. They
may also need reassurance about their future with the organization and what is
to happen to them when they leave.
5. End of career with the organization – the possibility of phasing disengagement
by being given the chance to work part-time for a period before they finally
have to go should be considered at this stage.

7.4.9 Career dynamics

Career management should be based on an understanding of career dynamics. This is

concerned with how careers progress – the ways in which people move through their careers
either upwards when they are promoted, or by enlarging or enriching their roles to take on
greater responsibilities or make more use of their skills and abilities. The three stages of career
progression – expanding, establishing and maturing – are illustrated in Table 30. This also
shows how individuals progress or fail to progress at different rates through these stages.
7.4.10 Career development strategy

A career development strategy might include the following activities:

1. a policy of promoting from within wherever possible;

2. career routes enabling talented people to move upwards or laterally in the
organization as their development and job opportunities take them;
3. personal development planning as a major part of the performance
management process, to develop each individual’s knowledge and skills;
4. systems and processes to achieve sharing and development of knowledge
(especially tacit) across the firm;
5. multidisciplinary project teams, with a shifting membership, to offer
developmental opportunities for as wide a range of employees as possible.

Table 30 Career progression stages

7.4.11 Career management activities

As described by Hirsh and Carter (2002), career management encompasses recruitment,

personal development plans, lateral moves, special assignments at home or abroad,
development positions, career bridges, lateral moves and support for employees who want to
develop. Baruch and Peiperl (2000) identified 17 career management practices, and their
survey of 194 UK companies established a rank order for their use. The practices are listed
below in order, from most frequent to least frequent use:

1. Postings regarding internal job openings.

2. Formal education as part of career development.
 3. Performance appraisal as a basis for career planning.
4. Career counselling by manager.
5. Lateral moves to create cross-functional experience.
6. Career counselling by HR department.
7. Retirement preparation programs.
8. Succession planning.
9. Formal mentoring.
10. Common career paths.
11. Dual ladder career paths (parallel hierarchy for professional staff).
12. Books and/or pamphlets on career issues.
13. Written personal career planning (as done by the organization or personally).
14. Assessment centers.
15. Peer appraisal.
16. Career workshops.
17. Upward (subordinate) appraisal.

The process of career management is illustrated in Table 31.

7.4.12 Career management policies

The organization needs to decide on the degree to which it ‘makes or buys’ talented
people, which means answering the questions: to what extent it should grow its own talent (a
promotion from within policy); how much it should rely on external recruitment (bringing
‘fresh blood’ into the organization). The policy may be to recruit potentially high performers
who will be good at their present job and are rewarded accordingly. If they are really good,
they will be promoted and the enterprise will get what it wants. Deliberately training managers
for a future that will never happen is a waste of time.
 Table 31 The process of career management

In contrast, and much less frequently, employers who believe in long-term career
planning develop structured approaches to career management. These include elaborate
reviews of performance and potential, assessment centers to identify talent or confirm that it is
there, high-flyer schemes and planned job moves in line with a predetermined program.

There may also be policies for dealing with the ‘plateaued’ manager who has got so far
but will get no further. Some managers in this position may be reconciled to reaching that level
but continue to work effectively. Others will become bored, frustrated and unproductive,
especially rising stars who are on the wane. The steps that can be taken to deal with this problem
include:

1. lateral moves into different functional areas or specialized subsidiaries, to

provide new challenges and career breadth;
2. temporary assignments and secondments outside the organization;
3. appointments as leaders of project teams set up to deal with performance
barriers inside the organization such as the slowness of responses to customer
complaints.

7.4.13 Career planning

Career planning involves the definition of career paths – the routes people can take to
advance their careers within an organization. It uses all the information provided by the
organization’s assessments of requirements, the assessments of performance and potential and
management succession plans, and translates it into the form of individual career development
programs and general arrangements for management development, career counselling and
mentoring.

It is possible to define career progression in terms of what people are required to know
and be able to do to carry out work to progress up the ‘career ladder’ (the sequence of jobs at
increasing levels of responsibility that constitutes a career). These levels can be described as
‘competency bands’. For each band, the competencies needed to achieve a move to that level
would be defined in order to produce a career map incorporating ‘aiming points’ for
individuals, as illustrated in Figure 20.5. People would be made aware of the competency levels
they must reach to achieve progress in their careers. This would help them to plan their own
development, although support and guidance should be provided by their managers, HR
specialists and, if they exist, management development advisers or mentors. The provision of
additional experience and training could be arranged as appropriate, but it would be important
to clarify what individual employees need to do for themselves if they want to progress within
the organization. At Procter & Gamble, for example, ‘destination jobs’ are identified for rising
stars, which are attainable only if the employee continues to perform, impress and demonstrate
growth potential.

Table 32 Competency band career progression system

Career family grade structures, as described in Chapter 27, can define levels of
competency in each career family and show career paths upwards within families or between
families. This is illustrated in Figure 20.6.
 Formal career planning may be the ideal but, as noted by Hirsh et al (2000), there has
been a shift from managed career moves to more open internal job markets. The process of
internal job application has become the main way in which employees progress their careers.

Table 33 Career paths in a career family structure

7.4.14 Self-managed careers

The organization may need to manage careers as part of its talent management and
management succession programs and can provide support and guidance to people with
potential. Ultimately, however, it is up to individuals to manage their own careers within and
beyond their present organization. Handy (1984) used the term ‘portfolio career’ to describe
his forecast that people will increasingly change the direction of their careers during the course
of their working life. Hall (1996) coined the phrase the ‘protean career’ in which individuals
take responsibility for transforming their career path (the name comes from the Greek god
Proteus, who could change his shape at will).

Schein (1978) originated the notion of ‘career anchors’. He defined them as the self-
concept of people, consisting of self-perceived talents and abilities, basic values and a sense of
motives and needs relating to their careers. As people gain work experience, career anchors
evolve and function as stabilizing forces, hence the metaphor of ‘anchor’.

7.4.15 Management succession planning

Management succession planning is the process of ensuring that capable managers are
available to fill vacant managerial posts. Three questions need to be answered: first, are there
enough potential successors available – a supply of people coming through who can take key
roles in the longer term? Second, are they good enough? Third, do they have the right skills
and competencies for the future? At different stages in their careers, managers may be
categorized as being ready to do the next job now, or being ready for a specified higher-grade
position in, say, two years’ time, or as a high-flyer on the ‘A list’ who has senior management
potential. Such assessments generate development plans such as leadership and development
programs, special assignments and job rotation.

As noted by Iles and Preece (2010: 256), succession planning can be seen in terms of
identifying successors for key posts and then planning career moves and/or development
activities for these potential successors. They suggested that:

Processes need to be designed round purpose, population, principles, process and

players, with senior management engagement and HR championing. The highest potential
employees are thus offered accelerated development and career paths. Of course, the downside
is that non-selected employees may feel that they are less valued and have less access to
development opportunities.

They also commented that in reality few companies have such programs and that some
are critical of attempts to equate succession planning with talent management, arguing instead
for a ‘talent on demand’ framework, ‘based on managing risk (not overestimating the places to
be filled) and using talent pools to span functions’ (ibid: 256). They reported that some people
are more positive about the value of ‘leadership pipelines’, which enable the organization to:

1. focus on development;
2. identify critical ‘lynchpin’ roles;
3. create transparent succession management systems;
4. regularly measure progress;
5. ensure flexibility.

Succession planning is based on the information about managers in supply and demand
forecasts, talent audits and performance and potential reviews. In some large organizations
where demand and supply forecasts can be made accurately.
 Table 34 Management succession schedule

However, the scope for formal succession planning may be limited in today’s more
flexible and rapidly changing organizations, where elaborate succession plans could be out of
date as soon as they are made. In these circumstances, the most that can be done is to use talent
management and management development processes to ensure that there are plenty of talented
people around in ‘talent pools’ to fill vacancies as they arise on the basis of ‘talent on demand’,
bearing in mind that the most talented or ambitious individuals may not want to wait very long.

As McDonnell and Collings (2011: 64) emphasized:

Succession planning has evolved from the traditional short-term focus on replacing
senior managers if they happened to leave without prior warning. There is now a more long-
term aim of developing a cadre of key talent who able to take on higher level roles, potentially
roles that may not currently exist... The utilization of talent pools consisting of employees with
key generic type competencies and skills allows the organization far greater scope when
positions become available. Management will be able to select the most suitable candidate
from a pool of candidates and train the person into the specific requirements of that particular
role.

7.4.16 Key learning points: Talent management

The meaning of talent management

Talented people possess special gifts, abilities and aptitudes that enable them to perform
effectively. Talent management is the process of identifying, developing, recruiting, retaining
and deploying those talented people.
7.4.17 The process of talent management

Talent management starts with the business strategy and what it signifies in terms of
the talented people required by the organization. Ultimately, its aim is to develop and maintain
a pool of talented people. Its elements are talent planning, resourcing strategies, retention
programs, talent development, career management and management succession planning.

7.4.18 Developing a talent management strategy

A talent management strategy consists of a view on how the processes should mesh
together with an overall objective – to acquire and nurture talent wherever it is and wherever it
is needed by using Key learning points: Talent management a number of interdependent
policies and practices. Talent management is the notion of ‘bundling’ in action.

7.4.19 Career management

Career management involves the definition of career paths – the routes people can take
to advance their careers within an organization. It uses all the information provided by the
organization’s assessments of requirements, the assessments of performance and potential and
management succession plans, and translates it into the form of individual career development
programs and general arrangements for management development, career counselling and
mentoring.

7.4.20 Management succession planning

Management succession planning is the process of ensuring that capable managers are
available to fill vacant managerial posts. Traditionally it has been regarded as a formal process
but it is increasingly that the need is to develop a pool of talented managers so that a ‘talent on
demand’ approach can be adopted.

Reference

Armstrong, M. (2014). Armstrong’s Handbook of Human Resource Management. United Kingdom:

Kogan Page Limited, 13th Edition.
Chapter 8. Functions within Business Organization: Marketing
Management

Learning outcomes

After completing this chapter, the reader should be able to:

8.1 Nature of Marketing
Marketing, more than any other business function, deals with customers. Although we
will soon explore more-detailed definitions of marketing, perhaps the simplest definition is this
one: Marketing is engaging customers and managing profitable customer relationships. The
twofold goal of marketing is to attract new customers by promising superior value and to keep
and grow current customers by delivering value and satisfaction.

For example, Nike leaves its competitors in the dust by delivering on its promise to
inspire and help everyday athletes to “Just do it.” Amazon dominants the online marketplace
by creating a world-class online buying experience that helps customers to “find and discover
anything they might want to buy online.” Facebook has attracted more than 1.5 billion active
web and mobile users worldwide by helping them to “connect and share with the people in
their lives.” And Coca-Cola has earned an impressive 49 percent global share of the carbonated
beverage market—more than twice Pepsi’s share—by fulfilling its “Taste the Feeling” motto
with products that provide “a simple pleasure that makes everyday moments more special.”

Sound marketing is critical to the success of every organization. Large for-profit firms
such as Google, Target, Procter & Gamble, Coca-Cola, and Microsoft use marketing. But so
do not-for-profit organizations, such as colleges, hospitals, museums, symphony orchestras,
and even churches.

You already know a lot about marketing—it’s all around you. Marketing comes to you
in the good old traditional forms: You see it in the abundance of products at your nearby
shopping mall and the ads that fill your TV screen, spice up your magazines, or stuff your
mailbox. But in recent years, marketers have assembled a host of new marketing approaches,
everything from imaginative websites and smartphone apps to blogs, online videos, and social
media. These new approaches do more than just blast out messages to the masses. They reach
you directly, personally, and interactively.

Today’s marketers want to become a part of your life and enrich your experiences with
their brands. They want to help you live their brands. At home, at school, where you work, and
where you play, you see marketing in almost everything you do. Yet there is much more to
marketing than meets the consumer’s casual eye. Behind it all is a massive network of people,
technologies, and activities competing for your attention and purchases. For those who study
business management and administration have to know the basic concepts and practices of
today’s marketing. In this chapter, we begin by defining marketing and the marketing process.
8.2 Marketing Defined
What is marketing? Many people think of marketing as only selling and advertising.
We are bombarded every day with TV commercials, catalogs, spiels from salespeople, and
online pitches. However, selling and advertising are only the tip of the marketing iceberg.
Today, marketing must be understood not in the old sense of making a sale— “telling and
selling”—but in the new sense of satisfying customer needs. If the marketer engages consumers
effectively, understands their needs, develops products that provide superior customer value,
and prices, distributes, and promotes them well, these products will sell easily.

In fact, according to management guru Peter Drucker, “The aim of marketing is to make
selling unnecessary.” Selling and advertising are only part of a larger marketing mix—a set of
marketing tools that work together to engage customers, satisfy customer needs, and build
customer relationships.

Broadly defined, marketing is a social and managerial process by which individuals and
organizations obtain what they need and want through creating and exchanging value with
others. In a narrower business context, marketing involves building profitable, value laden
exchange relationships with customers. Hence, we define marketing as the process by which
companies engage customers, build strong customer relationships, and create customer value
in order to capture value from customers in return.

8.3 The Marketing Process

Marketing is the process by which companies engage customers, build strong customer
relationships, and create customer value in order to capture value from customers in return.

Figure 1.1 presents a simple, five-step model of the marketing process for creating and
capturing customer value. In the first four steps, companies work to understand consumers,
create customer value, and build strong customer relationships. In the final step, companies
reap the rewards of creating superior customer value. By creating value for consumers, they in
turn capture value from consumers in the form of sales, profits, and long-term customer equity.
We review each step but focus more on the customer relationship steps—understanding
customers, engaging and building relationships with customers, and capturing value from
customers, including the second and third steps—designing value-creating marketing strategies
and constructing marketing programs.

8.4 Understanding the Marketplace and Customer Needs

As a first step, marketers need to understand customer needs and wants and the
marketplace in which they operate. We examine five core customer and marketplace concepts:
(1) needs, wants, and demands; (2) market offerings (products, services, and experiences); (3)
value and satisfaction; (4) exchanges and relationships; and (5) markets.

8.5 Customer Needs, Wants, and Demands

The most basic concept underlying marketing is that of human needs. Human needs are
states of felt deprivation. They include basic physical needs for food, clothing, warmth, and
safety; social needs for belonging and affection; and individual needs for knowledge and self-
expression. Marketers did not create these needs; they are a basic part of the human makeup.

Wants are the form human needs take as they are shaped by culture and individual
personality. An American needs food but wants a Big Mac, fries, and a soft drink. A person in
Papua, New Guinea, needs food but wants taro, rice, yams, and pork. Wants are shaped by
one’s society and are described in terms of objects that will satisfy those needs. When backed
by buying power, wants become demands. Given their wants and resources, people demand
products and services with benefits that add up to the most value and satisfaction.

Companies go to great lengths to learn about and understand customer needs, wants,
and demands. They conduct consumer research, analyze mountains of customer data, and
observe customers as they shop and interact, offline and online. People at all levels of the
company— including top management—stay close to customers: see example of Target’s
energetic CEO, Brian Cornell.

8.6 Market Offerings—Products, Services, and Experiences

Consumers’ needs and wants are fulfilled through market offerings—some
combination of products, services, information, or experiences offered to a market to satisfy a
need or a want. Market offerings are not limited to physical products. They also include
services— activities or benefits offered for sale that are essentially intangible and do not result
in the ownership of anything.

Examples include banking, airline, hotel, retailing, and home repair services.
 More broadly, market offerings also include other entities, such as persons, places,
organizations, information, and ideas. For example, San Diego runs a “Happiness Is Calling”
advertising campaign that invites visitors to come and enjoy the city’s great weather and good
times—everything from its bays and beaches to its downtown nightlife and urban scenes. And
the Ad Council and the National Highway Traffic Safety Administration created a “Stop the
Texts. Stop the Wrecks.” campaign that markets the idea of eliminating texting while driving.
The campaign points out that a texting driver is 23 times more likely to get into a crash than a
non-texting driver.

Many sellers make the mistake of paying more attention to the specific products they
offer than to the benefits and experiences produced by these products. These sellers suffer from
marketing myopia. They are so taken with their products that they focus only on existing wants
and lose sight of underlying customer needs. They forget that a product is only a tool to solve
a consumer problem. A manufacturer of quarter-inch drill bits may think that the customer
needs a drill bit. But what the customer really needs is a quarter inch hole. These sellers will
have trouble if a new product comes along that serves the customer’s need better or less
expensively. The customer will have the same need but will want the new product.

Smart marketers look beyond the attributes of the products and services they sell. By
orchestrating several services and products, they create brand experiences for consumers. For
example, you don’t just visit Walt Disney World Resort; you immerse yourself and your family
in a world of wonder, a world where dreams come true and things still work the way they
should. And your local Buffalo Wild Wings restaurant doesn’t just serve up wings and beer; it
gives customers the ultimate “Wings. Beer. Sports.”

8.7 Customer Value and Satisfaction

Consumers usually face a broad array of products and services that might satisfy a given
need. How do they choose among these many market offerings? Customers form expectations
about the value and satisfaction that various market offerings will deliver and buy accordingly.
Satisfied customers buy again and tell others about their good experiences. Dissatisfied
customers often switch to competitors and disparage the product to others.

Marketers must be careful to set the right level of expectations. If they set expectations
too low, they may satisfy those who buy but fail to attract enough buyers. If they set
expectations too high, buyers will be disappointed. Customer value and customer satisfaction
are key building blocks for developing and managing customer relationships.
8.8 Exchanges and Relationships
Marketing occurs when people decide to satisfy their needs and wants through
exchange relationships. Exchange is the act of obtaining a desired object from someone by
offering something in return. In the broadest sense, the marketer tries to bring about a response
to some market offering. The response may be more than simply buying or trading products
and services. A political candidate, for instance, wants votes; a church wants membership and
participation; an orchestra wants an audience; and a social action group wants idea acceptance.

Marketing consists of actions taken to create, maintain, and grow desirable exchange

relationships with target audiences involving a product, service, idea, or other object.
Companies want to build strong relationships by consistently delivering superior customer
value.

8.9 Markets
The concepts of exchange and relationships lead to the concept of a market. A market
is the set of actual and potential buyers of a product or service. These buyers share a particular
need or want that can be satisfied through exchange relationships.

Marketing means managing markets to bring about profitable customer

relationships. However, creating these relationships takes work. Sellers must search for and
engage buyers, identify their needs, design good market offerings, set prices for them, promote
them, and store and deliver them. Activities such as consumer research, product development,
communication, distribution, pricing, and service are core marketing activities.

Although we normally think of marketing as being carried out by sellers, buyers also
carry out marketing. Consumers market when they search for products, interact with companies
to obtain information, and make their purchases. In fact, today’s digital technologies, from
online sites and smartphone apps to the explosion of social media, have empowered consumers
and made marketing a truly two-way affair. Thus, in addition to customer relationship
management, today’s marketers must also deal effectively with customer-managed
relationships. Marketers are no longer asking only “How can we influence our customers?” but
also “How can our customers influence us?” and even “How can our customers influence each
other?”
 Each party in the system adds value for the next level. The arrows represent
relationships that must be developed and managed. Thus, a company’s success at engaging
customers and building profitable relationships depends not only on its own actions but also
on how well the entire system serves the needs of final consumers. Walmart cannot fulfill its
promise of low prices unless its suppliers provide merchandise at low costs. And Ford cannot
deliver a high-quality car-ownership experience unless its dealers provide outstanding sales
and service.

8.10 Marketing Management Orientations

There are five alternative concepts under which organizations design and carry out their
marketing strategies: the production, product, selling, marketing, and societal marketing
concepts.

The Production Concept: The production concept holds that consumers will favor
products that are available and highly affordable. Therefore, management should focus on
improving production and distribution efficiency. This concept is one of the oldest orientations
that guides sellers. The production concept is still a useful philosophy in some situations. For
example, both personal computer maker Lenovo and home appliance maker Haier dominate
the highly competitive, price-sensitive Chinese market through low labor costs, high
production efficiency, and mass distribution. However, although useful in some situations, the
production concept can lead to marketing myopia. Companies adopting this orientation run a
major risk of focusing too narrowly on their own operations and losing sight of the real
objective—satisfying customer needs and building customer relationships.
 The Product Concept: The product concept holds that consumers will favor products
that offer the most in quality, performance, and innovative features. Under this concept,
marketing strategy focuses on making continuous product improvements. Product quality and
improvement are important parts of most marketing strategies. However, focusing only on the
company’s products can also lead to marketing myopia. For example, some manufacturers
believe that if they can “build a better mousetrap, the world will beat a path to their doors.” But
they are often rudely shocked. Buyers may be looking for a better solution to a mouse problem
but not necessarily for a better mousetrap. The better solution might be a chemical spray, an
exterminating service, a house cat, or something else that suits their needs even better than a
mousetrap. Furthermore, a better mousetrap will not sell unless the manufacturer

designs, packages, and prices it attractively; places it in convenient distribution channels;

brings it to the attention of people who need it; and convinces buyers that it is a better product.

The Selling Concept: Many companies follow the selling concept, which holds that
consumers will not buy enough of the firm’s products unless it undertakes a large-scale selling
and promotion effort. The selling concept is typically practiced with unsought goods—those
that buyers do not normally think of buying, such as life insurance or blood donations. These
industries must be good at tracking down prospects and selling them on a product’s benefits.
Such aggressive selling, however, carries high risks. It focuses on creating sales transactions
rather than on building long-term, profitable customer relationships. The aim often is to sell
what the company makes rather than to make what the market wants. It assumes that customers
who are coaxed into buying the product will like it. Or, if they don’t like it, they will possibly
forget their disappointment and buy it again later. These are usually poor assumptions.

The Marketing Concept: The marketing concept holds that achieving organizational
goals depends on knowing the needs and wants of target markets and delivering the desired
satisfactions better than competitors do. Under the marketing concept, customer focus and
value are the paths to sales and profits. Instead of a product-centered make-and sell philosophy,
the marketing concept is a customer-centered sense-and-respond philosophy. The job is not to
find the right customers for your product but to find the right products for your customers.

In contrast, the marketing concept takes an outside-in perspective. As Herb Kelleher,

the colorful founder of Southwest Airlines, once put it, “We don’t have a marketing
department; we have a customer department.” The marketing concept starts with a well-defined
market, focuses on customer needs, and integrates all the marketing activities that affect
customers. In turn, it yields profits by creating relationships with the right customers based on
customer value and satisfaction.

Implementing the marketing concept often means more than simply responding to
customers’ stated desires and obvious needs. Customer-driven companies research customers
deeply to learn about their desires, gather new product ideas, and test product improvements.
Such customer-driven marketing usually works well when a clear need exists and when
customers know what they want.

Figure 1.3 contrasts the selling concept and the marketing concept. The selling concept
takes an inside-out perspective. It starts with the factory, focuses on the company’s existing
products, and calls for heavy selling and promotion to obtain profitable sales. It focuses
primarily on customer conquest—getting short-term sales with little concern about who buys
or why.

8.11 Customer Engagement and Today’s Digital and Social Media

The digital age has spawned a dazzling set of new customer relationship-building tools,
from websites, online ads and videos, mobile ads and apps, and blogs to online communities
and the major social media, such as Twitter, Facebook, YouTube, Snapchat, and

Instagram.

Yesterday’s companies focused mostly on mass marketing to broad segments of

customers at arm’s length. By contrast, today’s companies are using online, mobile, and social
media to refine their targeting and to engage customers more deeply and interactively. The old
marketing involved marketing brands to consumers. The new marketing is customer-
engagement marketing—fostering direct and continuous customer involvement in shaping
brand conversations, brand experiences, and brand community.
 Customer-engagement marketing goes beyond just selling a brand to consumers. Its
goal is to make the brand a meaningful part of consumers’ conversations and lives. The
burgeoning internet and social media have given a huge boost to customer engagement
marketing. Today’s consumers are better informed, more connected, and more empowered than
ever before. Newly empowered consumers have more information about brands, and they have
a wealth of digital platforms for airing and sharing their brand views with others. Thus,
marketers are now embracing not only customer relationship management but also customer-
managed relationships, in which customers connect with companies and with each other to help
forge and share their own brand experiences.

Greater consumer empowerment means that companies can no longer rely on marketing
by intrusion. Instead, they must practice marketing by attraction—creating market offerings
and messages that engage consumers rather than interrupt them. Hence, most marketers now
combine their mass-media marketing efforts with a rich mix of online, mobile, and social media
marketing that promotes brand– consumer engagement, brand conversations, and brand
advocacy among customers.

For example, companies post their latest ads and videos on social media sites, hoping

they’ll go viral. They maintain an extensive presence on Twitter, YouTube, Facebook,

Google+, Pinterest, Instagram, Snapchat, Vine, and other social media to create brand buzz.
They launch their own blogs, mobile apps, online microsites, and consumer-generated review
systems, all with the aim of engaging customers on a more personal, interactive level.

Take Twitter, for example. Organizations ranging from Dell, JetBlue, and Dunkin’
Donuts to the Chicago Bulls, NASCAR, and the Los Angeles Fire Department have created
Twitter pages and promotions. They use tweets to start conversations with and between
Twitter’s more than 307 million active users, address customer service issues, research
customer reactions, and drive traffic to relevant articles, web and mobile marketing sites,
contests, videos, and other brand activities.

Similarly, almost every company has something going on Facebook these days.
Starbucks has more than 36 million Facebook “fans”; Coca-Cola has more than 96 million.
And every major marketer has a YouTube channel where the brand and its fans post current
ads and other entertaining or informative videos. Instagram, LinkedIn, Pinterest, Snapchat,
Vine—all have exploded onto the marketing scene, giving brands more ways to engage and
interact with customers. Skilled use of social media can get consumers involved with a brand,
talking about it, and advocating it to others.

The key to engagement marketing is to find ways to enter targeted consumers’

conversations with engaging and relevant brand messages. Simply posting a humorous video,
creating a social media page, or hosting a blog isn’t enough. And not all customers want to
engage deeply or regularly with every brand. Successful engagement marketing means making
relevant and genuine contributions to targeted consumers’ lives and interactions.

8.12 Mobile Marketing

Mobile marketing is perhaps the fastest-growing digital marketing platform.
Smartphones are ever present, always on, finely targeted, and highly personal. This makes them
ideal for engaging customers anytime, anywhere as they move through the buying process. For
example, Starbucks customers can use their mobile devices for everything from finding the
nearest Starbucks and learning about new products to placing and paying for orders.

Four out of five smartphone users use their phones to shop—browsing product
information through apps or the mobile web, making in-store price comparisons, reading online
product reviews, finding and redeeming coupons, and more. Almost 30 percent of all online
purchases are now made from mobile devices, and mobile online sales are growing 2.6 times
faster than total online sales. During this past holiday season, mobile shoppers made up more
than 70 percent of traffic to Walmart.com, accounting for almost half the site’s orders over the
Black Friday weekend.

Marketers use mobile channels to stimulate immediate buying, make shopping easier,
enrich the brand experience, or all of these.

Consider Redbox: Redbox DVD rental kiosks are unmanned, so the company has to
find innovative ways to engage customers and personalize its service—most of which it does
through its website and mobile app, text messaging, and email. Customers can use the Redbox
mobile app to locate Redbox kiosks, check availability of movies and games, and reserve
rentals for quick pick up. Mobile customers can also join the Redbox Text Club to receive texts
about the latest Redbox news, releases, and members-only deals. Text Club members are
Redbox’s most valuable customers, so the company launched a 10-day-long mobile marketing
campaign to increase membership. Using large call-to-action stickers on kiosks, a blast of
email, and posts on its Facebook and other social media pages, Redbox offered discounts of
between 10 cents and $1.50 on the next DVD rental to customers who texted the word
“DEALS” to 727272. The campaign—called “The 10 Days of Deals”—generated nearly 1.5
million text messages from some 400,000 customers, resulting in more than 200,000 new Text
Club members. “Mobile is like having a kiosk in your hand,” explains Redbox’s chief marketer.
“It’s an incredibly important part of our [marketing] strategy.” Although online, social media,
and mobile marketing offer huge potential, most marketers are still learning how to use them
effectively.

The key is to blend the new digital approaches with traditional marketing to create a
smoothly integrated marketing strategy and mix. We will examine digital, mobile, and social
media marketing throughout the text—they touch almost every area of marketing strategy and
tactics.

8.13 Marketing Department Organization

The company must design a marketing organization that can carry out marketing
strategies and plans. If the company is very small, one person might do all the research, selling,
advertising, customer service, and other marketing work. As the company expands, however,
a marketing department emerges to plan and carry out marketing activities.

In large companies, this department contains many specialists—product and market

managers, sales managers and salespeople, market researchers, and advertising and social
media experts, among others.

To head up such large marketing organizations, many companies have now created a
chief marketing officer (or CMO) position. This person heads up the company’s entire
marketing operation and represents marketing on the company’s top management team.

The CMO position puts marketing on equal footing with other “C-level” executives,
such as the chief operating officer (COO) and the chief financial officer (CFO). As a member
of top management, the CMO’s role is to champion the customer’s cause—to be the “chief
customer officer.” To that end, British Airways even went so far as to rename its top marketing
position as Director of Customer Experience.

Modern marketing departments can be arranged in several ways. The most common
form of marketing organization is the functional organization, under which different marketing
activities are headed by a functional specialist—a sales manager, an advertising manager, a
marketing research manager, a customer service manager, or a new product manager. A
company that sells across the country or internationally often uses a geographic organization,
assigning sales and marketing people to specific countries, regions, and districts. Companies
with many very different products or brands often create a product management organization.
For companies that sell one product line to many different types of markets and customers who
have different needs and preferences, a market or customer management organization might be
best.

Large companies that produce many different products flowing into many different
geographic and customer markets usually employ some combination of the functional,
geographic, product, and market organization forms.

Marketing organization has become an increasingly important issue in recent years.

More and more, companies are shifting their brand management focus toward customer
management—moving away from managing only product or brand profitability and toward
managing customer profitability and customer equity. They think of themselves not as
managing portfolios of brands but as managing portfolios of customers. And rather than
managing the fortunes of a brand, they see themselves as managing customer-brand
engagement, experiences, and relationships.

Reference

Philip Kotler, Gary Armstrong, Marc Oliver Opresnik. (2018). Principles of Marketing. United
Kingdom: Pearson Education Limited, 17 Edition.
8.14 Digital Marketing Definitions and Background

This chapter explains to managers how strategy should be incorporated into the design
of the website and then through to what I call the four foundations of the digital marketing
delivery mix (see Figure 1.1), search, social, e-mail, and mobile. The importance of quality
customer data as the foundation for these strategies is also explored here with managerial
implications. Finally, guidelines for managing the successful implementation of these
marketing technologies in the organization are presented and covered.

It is worth noting how we arrived at the point where digital marketing is now one of the
proper occupations of the executive suite. Today in fact, 40 percent of marketers want to learn
more about digital marketing but only 14 percent know how to do so. Although marketing has
always been an important and sometimes overlooked occupation in the corporation, digital
marketing screams for the attention of not only the Chief Marketing Officer but the Chief
Executive Officer as well. A recent report by Exact Target indicated that marketing priorities
are now measurement and data, branding, and online conversion rates.

With the exception of branding, most of these terms were not even considered part of
traditional marketing a few years ago. Now, if you can digitize the information, you can
measure

it. The increased importance of measurement in marketing has paralleled the increase in the
importance of digital marketing. Terms used to describe the type of marketing have evolved in
usage over time, with digital marketing currently being the most popular and on an upward
trend. Digital marketing is so much more than selling products; it has come to encompass
engagement with our customer across many types of electronic channels. With the use of
Google Trends, a wonderful tool for competitive and we can see that the term digital marketing
has experienced rapid growth and outpaced the use of other terms to describe what we do as
marketers in the modern age.

Digital marketing as a practice has its basis in direct marketing, which required a
customer database to track and measure customer response. This marketing database later
became crucial in the development of the concept of interactive marketing. Interactive
marketing was a term that originated in the mid-90s to capture and describe the fact that
marketing was now a two-way conversation6 and not just the one-way communication of the
mass media world. Interactive marketing also required the use of a database that was developed
by direct marketers, most importantly to address the individual customer in a relevant fashion.
Along the way, Internet marketing came to mean using the Internet to facilitate the marketing
process (See Figure 1.2).

The goal of interactive marketing as originally theorized by Dr. John Deighton was that
marketing would become a “conversation.” What Deighton and others did not foresee was the
rapid expansion of the marketing conversation and the shift in control of the process from the
marketer to the customer. In fact, digital marketing can be defined as using any digital
technology to facilitate the marketing process, with the end goal to facilitate customer
interaction and engagement.

Taking all these trends into account, Figure 1.3 shows how the term digital marketing
has evolved from a process of response measurement to conversation to engagement.
Engagement means that customers are involved with the brand and creating and developing
their own content around the brand. What will happen beyond engagement and how it will be
named is anyone’s guess. However, if I had to guess, I would predict a continued trend toward
less control by the marketer and more control by the customer, aided and abetted by marketing
technology that will be enabled to make choices for the marketer.

Digital marketing includes the ability to interactively communicate with customers

through electronic channels, such as the web, e-mail, smart devices such as phones and tablets,
and mobile applications. The four most recognized techniques of digital marketing are social,
mobile, analytics, and e-commerce.

These digital technologies that form digital marketing can include Internet tools, such
as search engine marketing and social media, customer databases, and the like. Even print
processes, which now rely on digital technology, can be included broadly in this definition. As
noted, above, digital marketing also includes measurement and the process of customer
engagement. An interesting question is, “Is all marketing digital marketing now?” Certainly
digital marketing is getting the attention of CMOs, although most of them do not think their
teams are digitally ready.

For our purposes, it is useful to take a step back and to realize there have been several
underlying trends that have made the development of digital marketing management the proper
occupation of the executive suite. Without these trends’ convergence, shown in Figure 1.3, we
would likely be looking at marketing as a different type of occupation and perhaps less relevant
to the executive suite. These trends are the revolution in technology, the revolution in
marketing thought, and the revolutions in communication and distribution channels.

8.15 The Revolution in Marketing Thought

While technology was changing, so was the way marketers were thinking about
marketing (Figure 1.5). There has been a clear evolution from mass communication to two-
way communication to interactive forms of communication. While changes were happening
that allowed us to communicate directly with customers more easily, marketers were
beginnings to be frustrated with the traditional mass marketing approach. Mass marketing
started in the 1900s and mass advertising developed with the advent of another technology, the
television, in the 1950s. In mass advertising, while we might do some rough marketing
segmentation (breaking customers into groups with similar characteristics) in general, the
message is the same for all consumers. In direct or two-way communication, we acknowledge
that customers have true differences and customize offers to them in such a way that
demonstrates we understand that uniqueness.

For example, a catalog marketer might send a different version of catalogs to different
targeted segments. Direct marketing therefore formed the roots of Internet marketing because
of the direct marketer’s use of customer databases to create a two-way form of interaction with
the customer.
 In true interactive marketing, we take into account what the customer has said,
remember what was said, and demonstrate in our next offer to the customer that we remember
what was said. We eagerly anticipate the response from the customer so we can tailor our next
communication.

The definition of marketing changes from a marketplace based on a one-time exchange

to a conversation that is expected to be ongoing and evolving. Rogers and Peppers popularized
this notion of marketing, calling it one-to-one marketing in their original book. The two
hypothesized a future which only later became technically possible, in which customer
communications would be different for each customer based on their preferences. For this type
of communication to occur, we needed the technological developments of the Internet,
browsers, databases, and pervasive computing.

Marketers were then able to respond to customers in such a way that demonstrated that
they had taken into account the customers’ past history and expressed preferences. To do so
they used marketing concepts such as personalization and customization. Personalization
means that we use information about the customer such as name, address, and other preferences
in our communications with the customer.

Customization means that a product is actually built for that customer based on their
preferences. True customization is quite difficult to master. Think of a customized suit which
requires measuring, crafting, and fitting to the individual. Mass customization, on the other
hand, is quite easily handled by the technology used to facilitate the Internet. Mass
customization allows the customer to select from certain preprogrammed or preset options to
develop a product suited to their needs.

An example of mass customization would be Nike.com, which allows the customer to

create a shoe, based on certain parameters, which is unique to them. Another example is
modelmyoutfit.com, which allows the retail customer to see what clothes would look like on
their body type.

Both personalization and customization are firm capabilities that are related to the
development of the database within the corporation. The database allows the firm to develop
the understanding of the customer to engage in these activities. This view of the customer is
often called the 360-degree view. In other words, the firm knows about the customer, the name,
the transactions history, and other supplemental or enhanced data. This data is critical to
developing a marketing program that is “one to one” or targeted for the individual customer.
Data means that the focus shifts from the process of marketing management from the firms’
point of view to a “customer-centric” focus. A marketing program that is essentially “customer
centric” is focused on the needs, wants, and desires of the customer and not those of the
company. This customer centricity leads to the customer engagement and interaction of digital
marketing, making the next step of marketing communications collaboration.

Similarly, whereas marketing efforts have sought to attract, acquire, and retain
customers, we now seek a fourth objective, to engage customers once we have them (Figure
1.6). We will speak more about engagement later in the book, but for our purposes now,
engagement means creating customer relationships where there is a true give and take and
where the customer is a partner and participant in marketing and product efforts.

An example would be the difference between the old style airline loyalty programs
where users collected points to the innovative programs such as those at KLM (Royal Dutch
Airlines). The airline uses social media engagement for everything from customer information
dissemination to the decision to open new markets.

As we can see, at the same time that technology was developing that enabled the
collection of data about the customer and its rapid communication over the Internet, marketing
thought was developing to the point where marketers wanted to communicate with the
customer in a way that went beyond mass communications and even direct communications.

8.16 The Revolution in Communications/Distribution

 It is unlikely that the evolution of digital marketing would have been possible without
the development of communications and distribution channels. Technology meant that digital
communications were increasingly possible, creating new methods of communication with the
customer.

Evolving from traditional forms of direct communication with the customer (sales,
phone, fax, direct mail), e-mail was the first digital channel to emerge in the 1990s. This
channel allowed marketers to communicate with the customer directly but also to more quickly
respond to information gained from the customer. E-mail marketing tools also provided easy
access to data about response rates and the effectiveness of varying marketing offers.

Since that time there has been a proliferation of digital channels of communication,
including social networks, text message, RSS feeds, and so on. Communications have
proliferated to the point where we can communicate with the customer at every point in the
customer lifecycle and decision-making process in the manner in which the customer wishes
to be communicated, which is true one-to-one marketing. In this time period, a media evolution,
or more accurately a media revolution, has occurred where the types of media available to the
marketer have exploded. Figure 1.7 shows how much the world of direct marketing
communications has changed in just over a generation, with implied challenges for marketers.
From a few simple channels we now have more ways to reach the customer than ever,
including search and social media, which can in some sense are seen as direct communication.
Indirect media has evolved even in a more fragmented fashion, from simple TV, radio, print,
and display advertising in the 1990s to a list that includes the following fragmented media
channels: TV, Radio, Print, Display advertising, including behavioral, Website, Search, paid,
and Organic, Online display, Landing pages/Microsites, Online video/Picture sites, Affiliate
marketing, Webinars, Blogs, RSS, Podcasts, Wikis, Social networks, Mobile web/Apps, Social
media ads, Virtual worlds, Widgets, QR codes/Alternatives.

Another key development that facilitated Internet commerce and the rise of digital
marketing management was the rise of distribution networks in the form of Federal Express,
UPS, and other improvements in delivery service and technology. These networks meant that
orders could be delivered quickly enough and door-to-door in such a manner that customers
find ordering on the Internet an attractive alternative to brick and mortar shopping experiences.
Without these changes, the attraction of Internet shopping experiences would be considerably
less appealing.

All these changes and forces resulting in the rise of digital marketing have created a
situation where customer acquisition and relationship management and development are a
continuous process, and one not always in the control of the marketing manager. Along each
step of the way as we work to manage marketing process, we must develop clear actions for
every marketing step. As Figure 1.8 shows, objectives can be categorized as conducting
research, raising awareness, branding, generating leads, acquiring customers, customer
management and communication, up-selling and cross-selling, retention and loyalty and,
finally, the identification of customers who can be brand advocates. Technology plays a role
each step of the way but is not the main focus of the company.
Reference

Zahay, D. (2015). Digital Marketing Management: A Handbook for the Current or Future CEO.
New York: Business Expert Press.
Chapter 9. Functions within Business Organization: Research and
Development Management

Learning outcomes

After completing this chapter, the reader should be able to:

1. Obtain new knowledge, applicable to the company's business needs, that

eventually will result in new or improved products, processes, systems, or
services that can increase the company's sales and profits.
2. Define three types of R&D: basic research, applied research, and development.
3. Utilize knowledge from research toward the production of useful materials,
devices, systems, or methods, including design and development of prototypes
and processes.
9.1 What is research and development?
The National Science Foundation (NSF) classifies and defines research as follows
(Science and Engineering Indicators, 2008):

Basic Research. Basic research has as its objective “a more complete knowledge or
understanding of the subject under study, without specific applications in mind.” To take into
account industrial goals, NSF modifies this definition for the industry sector to indicate that
basic research advances scientific knowledge “but does not have specific immediate
commercial objectives, although it may be in fields of present or potential commercial interest.”

Applied Research. Applied research is directed toward gaining “knowledge or

understanding to determine the means by which a specific, recognized need may be met.” In
industry, applied research includes investigations directed “to discovering new scientific
knowledge that has specific commercial objectives with respect to products, processes, or
services.”

Development. Development is the “systematic use of the knowledge or understanding

gained from research, directed toward the production of useful materials, devices, systems or
methods, including design and development of prototypes and processes.”

In its publication The Measurement of Scientific and Technical Activities (1993), the
Organization for Economic Co-operation and Development (OECD) defines some research
activities as follows:

Basic research is experimental or theoretical work undertaken primarily to acquire new

knowledge of the underlying foundations of phenomena and observable facts, without any
particular application or use in view. Basic research analyzes properties, structures, and
relationships with a view to formulating and testing hypotheses, theories or laws. The results
of basic research are not generally sold but are usually published in scientific journals or
circulated to interested colleagues. Pure basic research is carried out for the advancement of
knowledge, without working for long-term economic or social benefits and with no positive
efforts being made to apply the results to practical problems or to transfer the results to sectors
responsible for its applications. Oriented basic research is carried out with the expectation that
it will produce a broad base of knowledge likely to form the background to the solution of
recognized or expected current or future problems or possibilities. Applied research is also
original investigation undertaken in order to acquire new knowledge. It is, however, directed
primarily towards a specific practical aim or objective.
 Applied research develops ideas into operational form. Experimental development is
systematic work, drawing on existing knowledge gained from research and practical experience
that is directed to producing new materials, products and devices; to installing new processes,
systems and services; or to improving substantially those already produced or installed.

Research and development covers many of these activities. The OECD defines R&D
as “creative work undertaken on a systematic basis in order to increase the stock of knowledge
of man, culture and society, and the use of this stock of knowledge to devise new applications.”

In order to provide functional and understandable definitions for various research

activities, Science Indicators categorizes R&D activities as efforts in science and engineering
as follows:

1. Producing significant advances across the broad front of understanding of

natural and social phenomena—basic research.
2. Fostering inventive activity to produce technological advances—applied
research and development.
3. Combining understanding and invention in the form of socially useful and
affordable products and processes—innovation.

Many United States governmental agencies have categorized research and development
activities to provide a better focus on these activities and, ostensibly, to facilitate technology
transfer. One such categorization for the U.S. Department of Defense (DOD). Since DOD
accounts for approximately 60 percent of the federal government’s R&D expenditures, some
understanding of its research program categorization would be helpful to those seeking
research support from the DOD.

9.2 Research categories

Harvey Brooks (1968) has suggested a general set of dimensions and categories of
research:

1. The degree to which the research is fundamental or applied—for example, basic

research versus applied research and development. The term “fundamental”
refers to an intellectual structure, a hierarchy of generality, while the term
“applied” refers to a practical objective. It is true that fundamental research is
generally less closely related to practical application, but not inevitably so.
2. The scientific discipline—for example, physics, chemistry, or biology.
 3. The function of the research, or its primary focus—for example, defense, health,
or environment.
4. The institutional character of research—for example, academic (university),
governmental laboratory, or industrial.
5. The scale of research or style of research—for example, big science versus little
science.
6. The extent to which the research is multidisciplinary focusing on a single class
of objects—for example, environment, space science, oceanography, or
requiring multiple disciplines

For planning purposes, Brooks (1968, p. 57) has suggested three broad categories of
research organizations: mission-oriented research, scientific institutional research, and
academic research.

TABLE 1.2 U.S. Department of Defense Research Program Categorization

Research: Directed to the Development of Fundamental Knowledge. Includes scientific

study and experimentation directed toward increasing knowledge and understanding in those
fields of the physical, engineering, environmental, biological—medical, and behavioral—
social sciences related to long-term national security needs. It provides fundamental knowledge
for the solution of identified military problems. It also provides part of the base for subsequent
exploratory and advanced developments in defense-related technologies and of new or
improved military functional capabilities in areas such as communications, detection, tracking,
surveillance, propulsion, mobility, guidance and control, navigation, energy conversion,
materials and structures, and personnel support.

Exploratory Development: Directed to the Development of New Techniques,

Methodologies, and Criteria. Includes all effort directed toward the solution of specific military
problems, short of major development projects. This type of effort may vary from fairly
fundamental applied research to quite sophisticated breadboard hardware, study, programming,
and planning efforts. It would thus include studies, investigations, and minor development
effort. The dominant characteristic of this category of effort is that it be pointed toward specific
military problem areas with a view to developing and evaluating the feasibility and
practicability of proposed solutions and determining their parameters.
 Advanced Development: Concerned with Design and Development and Hardware
(Material) Items for Experimentation. Includes all projects that have moved into the
development of hardware for experimental or operational test. It is characterized by line item
projects and program control is exercised on a project basis. A further descriptive characteristic
lies in the design of such items being directed toward hardware for test or experimentation as
opposed to items designed and engineered for eventual service use.

Engineering Development: Directed to Testing and Demonstration of New Techniques

or Methodologies, and to Technical Systems Equipment. Includes those development programs
being engineered for service use but that have not yet been approved for procurement or
operation. This area is characterized by major line item projects and program control will be
exercised by review of individual projects.

Management and Support: Directed to the Support of Installations for Their Operations
and Maintenance and for the Procurement of Special Purpose Equipment. Includes research
and development effort directed toward support of installations or operations required for
general research and development use. Included would be test ranges, military construction,
maintenance support of laboratories, operation and maintenance of test aircraft and ships, and
studies and analyses in support of the R&D program. Costs of laboratory personnel, either in-
house or contract operated, would be assigned to appropriate projects or as a line item in the
research, exploratory development, or advanced development program areas, as appropriate.
Military construction costs directly related to a major development program will be included
in the appropriate element.

9.3 Mission-Oriented Research Organizations

The term “mission” refers to an objective defined in terms of the long-range goals of
the organization rather than a specific technical objective. Examples of such organizations
include Department of Defense research laboratories and industrial research laboratories. Such
research laboratories are vertically integrated organizations that conduct both basic and applied
research and may provide technical support for operation or manufacturing. While their
research may be of the most sophisticated and fundamental type, it is directed to fulfilling the
objectives and the mission of the organization rather than to the development of science per se.

9.4 Scientific Institutional Research Organizations

This covers organizations whose mission is defined primarily in scientific terms—for
example, advancement of high-energy physics or molecular biology. Such research
organizations follow some sort of a coherent program adapted to changing frontiers in their
area of interest.

9.5 Academic Research Organizations

Academic research is usually small-scale basic research carried out in academic
departments of universities by students or research associates under the direction of university
professors who also teach.

9.6 What to research

There are few discussions of research funding, research program planning, and
execution that do not include comments about what really ought to be researched.
Governmental agency and industry management hierarchies constantly talk about the need for
a better focus on research programs so that research will meet agency and organization needs.
Users in production departments, operational personnel in agencies, and consumers often
complain about the lack of relevance of the research program and about the lack of timeliness
of research results.

Let us take the case of a research laboratory where sponsors, though quite satisfied with
the research output of the laboratory, nonetheless provided these kinds of comments about the
research program:

1. Research takes too long.

2. Our need to solve the alternative fuel problem is now, not three years from now.
We just can’t wait for years for researchers to study the problem.
3. We need answers more quickly than researchers provide them.
4. The research program is too esoteric. We need solutions that are practical.
5. Researchers study the problem to death to find a 100 percent solution. What is
wrong with a quicker solution that is not quite 100 percent?
6. This problem seems to go on forever. Five years ago, I worked at the
Department of the Interior. We thoroughly studied the problem of land disposal
of hazardous toxic waste. I thought we solved the problem or at least put the
issues to bed. When asked whose bed and what the results were, the sponsor did
not know.
7. We always hear about your previous accomplishments. How about the future?
What can we expect from you next year and the year after? Be specific.
 First and foremost, R&D managers need to understand the sponsor’s perspective and
then develop a strategy for effective communication. Consequently, the focus of such research
is rather “specific,” “commercial,” and “product-oriented.” For the sponsors to raise questions,
as exemplified in the preceding quotes, is to some degree understandable. Consequently, the
response of the R&D manager or the PI need not be defensive. For basic research, however,
issues are likely to be of a different nature.

How, then, should one respond? One could take each question and provide extensive
documentation to refute the sponsor’s assertion. For example, one could prove that studying
and solving the alternate fuel problem, which was created through decades of neglect, would
take some time. Solutions, especially cost-effective and environmentally safe solutions, may
well take three years, or even longer, to find. One could also ignore sponsor assertions and go
on with the research activity since the sponsor is not likely to find any other researcher who
could do the work any faster anyway.

Another approach that an R&D manager could utilize would be a two-part strategy:

First, empathize with the sponsor’s needs and be responsive in a genuine manner. This
would translate to providing interim solutions, to the degree possible, for critical problems.
Explain to the sponsor the limitations and uncertainties involved.

Second, educate the sponsor regarding the nature of the research enterprise. Focus on
why it is in his or her best interest to follow a systematic, though time-consuming, process of
research and development so that solutions developed are scientifically valid, are appropriate
to the problem at hand, and truly provide a more advantageous solution to the problem than the
existing technology does. This could involve undertaking a mix of research activities ranging
from basic research that might take three to five years, to applied research that might provide
some solutions within one to two years.

What to research is also affected by what our adversaries or competitors are doing.
Some governmental agencies (for example, the Department of Defense) and some industries
(for example, high technology) often are concerned about being surprised by a technological
development by an adversary or competitor. This is simply because the payoff or effectiveness
of the defense establishment of a nation, or profitability of an industry, depends on its own
capabilities and also on the capabilities of its adversaries or competitors. New technological
developments of an adversary or a competitor can have a profound effect on the security of a
nation and on the competitive success of an enterprise.
 Other questions and issues related to the issue of what to research often include the
following:

1. How should user needs be considered?

2. Who are the real users?
3. How should a comprehensive and responsive research program be formulated?
4. How should the tradeoffs between long-range research needs and short-range or
immediate requirements be made?

Many approaches to formulating research programs have been proposed. For example,
Merten and Ryu (1983, pp. 24–25) have proposed dividing an industrial laboratory’s research
activities into five categories:

1. Background research
2. Exploratory research
3. Development of new commercial activities
4. Development of existing commercial activities
5. Technical services

Schmitt (1985) has discussed generic versus targeted research and market driven versus
technology-driven research. Shanklin and Ryans (1984) contend that high-technology
companies can make a successful transition from being innovation-driven to being market-
driven by linking R&D and marketing efforts.

A considerable literature is available related to R&D project selection. The proper

approach applicable to an organization would clearly vary depending on the needs of an
organization.

Two criteria seem most important in deciding what to research: (1) What will advance
the science? (2) What do the customers of our research need? Once we have answered those
questions, we need to ask: What are the prospects for a solution?

There are other considerations that may override them. Other criteria may apply in the
solution of very specific problems. For example, in oil exploration, safety considerations may
be a top research priority. Such problems may have to be solved regardless of cost because the
organization would be wrong to ignore them. Research needed to protect human health and the
environment from improper disposal of hazardous waste falls in the same category.
 One of the most difficult problems is deciding when to abandon a problem that does
not seem to be solvable. There is always the hope that with a few more months of work the
problem will be solved. Yet, one usually has some sense of what is likely to happen. If one
researcher is sure that the problem can be solved and no one else is so convinced, it is necessary
to determine whether the one researcher is a “genius” or a “neurotic.” People do get attached
to hopeless causes, and when that happens they exhibit a variety of such symptoms as extreme
tension and the inability to be self-critical. Managers must be sensitive to clues that indicate
that the optimism about a project is unjustified. Since stopping such a project without
destroying the motivation of the scientist is important, some suggested approaches to achieve
this follow.

A manager may agree to give the scientist short deadlines and establish mutually
agreed-upon milestones to ascertain whether tangible progress toward the goal is being made.
If the project indeed is hopeless, lack of project progress during the milestone review would
reveal the problem. In most cases, the scientist would, on his or her own initiative, agree to
drop the project.

Should the scientist still request to continue the project, the manager should consider
allowing the scientist to spend some time (say 20 percent) on the project and again establish
agreed-upon milestones to review progress. If results again are not very promising and the
scientist still perseveres and wants to continue, two options are possible. One, the manager may
direct that the project be stopped. The other possibility is to still allow the scientist to spend
some time on the project but strip away all support, such as for laboratory equipment, computer
expenses, and technicians. In time the project will fade away.

The manager, however, should not be too surprised when some researchers supposedly
pursuing unpromising theories or projects thought to be nonproductive in their early stages end
up producing promising results. It is good for all concerned, especially for the manager, to keep
in mind that predictions about the success or failure of research projects are most unreliable.
Two examples come to mind, one dealing with fundamental research and the other with applied
research.

Astrophysicist S. Chandrasekhar was working on the theory of black holes and white
dwarfs. He sought to calculate what would happen in the collapse of larger stars when they
burn out. He theorized that if the mass of a star was more than 1.4 times that of the sun, the
dense matter resulting from the collapse could not withstand the pressure and thus would keep
on shrinking. He wrote that such a star “cannot pass into the white dwarf stage.” His paper on
this theory was rejected by the Astrophysical Journal, of which he was later to become a well-
respected editor.

As reported in the New York Times (October 20, 1983), Sir Arthur Edington, rejecting
Dr. Chandrasekhar’s theory, stated that “there should be a law of nature to prevent the star from
behaving in this absurd way.” Chandrasekhar was urged by other scientists to drop his research
project because it did not seem very promising. Dr. Chandrasekhar persisted and in 1983 won
the Nobel Prize for his discovery. His research led to the recognition of a state even denser than
that of a white dwarf: the neutron star. The so-called Chandrasekhar limit has now become one
of the foundations of modern astrophysics.

As another example, a group of researchers developing a complex environmental

impact analysis system and associated relational databases chose to pursue this research project
by using a higher-order computer language instead of the traditional FORTRAN. They also
wanted to experiment using an operating system developed by the Bell Laboratories.
Management attitudes ranged from enthusiastic support to tepid support, opposition, and
downright hostility. The less technically knowledgeable managers were opposed; and the
further removed they were from the research group; the more opposed they were to the
continuation of this research project. Because of the creativity of the researchers and with some
degree of support and acquiescence of the management, the project was allowed to continue in
parallel with other activities. On completion the project was one of the most successful and one
of the most widely used systems in the agency. It received the agency’s highest R&D
achievement award and became an archetype for future systems development research
activities.

No one approach for categorizing or organizing research and for identifying the
research needs of an agency or an industrial enterprise may satisfy the complex and, at times,
unique needs of an organization. We propose a two-tier model for identifying “what to
research,” in an effort to develop an approach that provides a flexible, systematic framework
for integrating various requirements that at times seem in conflict with each other. The model
includes an economic index model and a portfolio model. This two-tier model may apply more
readily to mission oriented research than to scientific institutional or academic research. Further
discussions of this model follow.
9.7 Economic Index Model
Under this model, research needs are defined as those needs designed to improve the
operation or manufacturing efficiency of the organization or the enterprise. The emphasis is on
building a “better mousetrap” to reduce the cost of doing things. Inputs for such needs come
from the users, operation units, and scientists, as well as from looking at competitive products
and operations.

9.8 Portfolio Model

Under this model, normative, comparative, and forecasted research needs are
considered. Normative needs are those of the user (a user being the primary or follow-on
beneficiary of the research product). Comparative needs relate to research needs derived from
reviewing comparable organizations, competitive product lines, and related enterprises.
Forecasted research needs focus on trend analysis in terms of consumer or organization needs
derived from new requirements, changed consumer behavior, new technological developments,
new regulations (e.g., environmental, health, and safety regulations), and new operational
requirements. Often the effectiveness of a commercial enterprise or of a national defense effort
depends not only on how well the organization itself does but also on how well the organization
does in comparison with its competitor or adversary. Consequently, it is necessary to have
effective intelligence concerning the portfolio of a competitor in order to focus properly on
comparative and forecasted research needs.

After defining research needs using these two models, some research projects would be
essentially modifying, adapting, or adopting existing scientific knowledge and would
correspond to applied research and development; other research projects would fill technology
gaps and would correspond to basic or fundamental research.

Inevitably, there are more projects to be researched than there are funds available. This
is a normal and a healthy situation. A model derived from the work of Keeney and Raiffa
(1993), which takes into account multiple objectives, preferences, and value tradeoffs, is
suggested for deciding which projects to select among competing requirements. The main
problem in using such an approach is the tendency on the part of many technical users to
quantify items that do not lend themselves to quantification.

In developing a policy (at higher levels) or in making specific project choices among
competing demands (at lower levels), the decision-maker can assign utility values to
consequences associated with each path instead of using explicit quantification. The payoffs
are captured conceptually by associating to each path of the tree a consequence that completely
describes the implications of the path. It must be emphasized that not all payoffs are in common
units and many are incommensurate. This can be mathematically described as follows (Keeney
and Raiffa, 1993, p. 6): where a and a represent choices, P probabilities, and U utilities; the
symbol ⇔ reads “such that.”

Utility numbers are assigned to consequences, even though some aspects of a choice
are not in common units or are subjective in nature. This, then, becomes a multi attribute value
problem. This can be done informally or explicitly by mathematically formalizing the
preference structure. This can be stated mathematically (Keeney and Raiffa, 1993, p. 68) as:

where ν is the value function that may be the objective of the decision-maker, xi is a
point in the consequence space, and the symbol reads “preferred to” or “indifferent to.”

After the decision-maker structures the problem and assigns probabilities and utilities,
an optimal strategy that maximizes expected utility can be determined. When a comparison
involves unquantifiable elements, or elements in different units, a value tradeoff approach can
be used either informally, that is, based on the decision-maker’s judgment, or explicitly, using
mathematical formulation.

After the decision-maker has completed the individual analysis and has ranked various
policy alternatives or projects, then a group analysis can further prioritize the policy
alternatives or specific projects. A modified Delphi technique (Jain et al., 1980) is suggested
as an approach for accomplishing this.

After research project selection and prioritization, an overall analysis of the research
portfolio should be made. The research project portfolio should contain both basic and applied
research. The mix would depend on the following:

1. Technology of the organization

2. Size of the organization
3. Research staff capabilities
4. Research facilities
 5. Access to different funding sources

It should be noted that the distinction between basic and applied research can become
rather blurred. What is basic research to one organization can be applied to another and what
is basic one year can be applied the next. Also, given the same general research project title,
different emphases during project execution can affect the nature of research. As will be
discussed below, to maximize R&D organizational effectiveness, scientists and work groups
should be involved in a mix of basic and applied research.

9.9 Emphasis on basic versus applied research

We have discussed some research organization categorization and ways of developing
an R&D portfolio. For planning purposes, three types of research organization categorization
were presented. The emphasis on basic research versus applied research within each
organization varies; consequently, there is a certain amount of conflict. The conflict is due to
the fact that basic research is often dictated by the questions that science is asking. Such
research may require activities that are not compatible with the mission-oriented research that
a commercial or government organization is supposed to do. For example, a scientist while
reading a scientific journal may have an insight that requires further experimentation. However,
his supervisor may have already asked him to develop a particular product that meets particular
specifications. Obviously the two activities are incompatible and some of the conflict that
occurs within the scientist is due to the conflict between the need to discover and the
requirements of the organization.

Some quite successful organizations—for example, 3M in Minnesota—have developed

procedures that allow their scientists a certain amount of time to work on topics that are of
interest to them. What percent of the scientist’s time will be spent on such topics, and when
such activities should take place, are matters of negotiation between the scientist and his or her
supervisor. A successful scientist, who has had a better track record, may be given more time
to discover other things by pursuing his or her own interest than one who does not have a good
track record.

Pelz and Andrews (1966a) did a study of 1300 scientists in 11 laboratories. They studied
scientists in both industrial and government laboratories and they used five criteria to identify
successful scientists: (1) the judgments of their peers, (2) the judgments of their boss, (3) the
number of papers they published, (4) the number of patents they were awarded, and (5) the
number of reports they issued. They then conducted intensive interviews to identify what
distinguished the effective from the less effective scientists. One of the findings was that the
more effective scientists did both basic and applied research.

We will return to the study of Pelz and Andrews throughout this book, but for the time
being one basic point that we should keep in mind when thinking about how to structure
research and development organizations is that both kinds of research are done by the more
effective scientists. It is obvious that if a scientist has an insight while reading a journal that
requires an experiment, the inability to do the experiment will be quite frustrating. It is exactly
this point that indicates that some sort of freedom to experiment should be allowed by the
organization. If reading scientific journals results in frequent frustration, it is very likely that
the scientist will become obsolete by giving up such reading. Similarly, the organization should
encourage its scientists to publish, since this provides an opportunity for the organization to
acquire prestige in the eyes of the scientific community and also tests the capabilities of the
individual scientist to become effective in relating to the wider scientific community.

It should be remembered that there are over 8,000 journal articles published every day
in the sciences. Thus the output of any particular individual is a minute contribution to a very
large pool of activity. However, the fact that a person has made a contribution essentially
“buys” the ticket that allows him or her to interact with other scientists, to learn from them, and
to discover what they are currently doing.

9.10 What is unique about managing R&D organizations?

R&D organizations are different from other organizations because of the people
working in such organizations, the ideas that are generated, the funds or research support that
are obtained, and the culture of the organization. These four elements—people, ideas, funds,
and culture—are the basic elements of an R&D organization and are discussed in detail in the
next chapter. A brief review of each element as related to an R&D organization’s uniqueness
follows.

9.11 People
People in R&D organizations normally would have graduate training and relatively
high aptitude. They are socialized during their graduate training to work autonomously and
show considerable initiative.

An anecdote will help convey more clearly what is special about R&D personnel. The
famous German scientist Hermann Helmholtz put a sign up on his lab: “Do not disturb.” This
was all that his students and collaborators were able to see for a month. After some 30 days
Helmholtz emerged with an important new theory that eventually led to the development of
radio and television (related in Boring, 1957).

9.12 Ideas
Ideas in an R&D organization are generated through a unique communication network
and facilitated by the ethos of a scientific community.

9.13 Funds
In general, funding sources for R&D organizations are different from those for any
similar large enterprise. For example, in the United States about 28 percent (2006) of funds for
R&D are provided by the federal government. The federal government spends over three times
as much on basic research as does industry. Even for academic institutions, the majority of
research funding support, 61 percent (2006), is derived from the federal government. This
funding support, coupled with research productivity benefits that accrue to society at large
rather than the individual or the sponsoring organization, gives R&D organizations a unique
characteristic.

9.14 Culture
The culture of an organization relates to both objective and subjective elements. For an
R&D organization, objective elements such as research laboratory facilities and equipment and
office buildings are different from those of other organizations. Subjective elements such as
rules, laws, standard operating procedures and unstated assumptions, values, and norms for an
R&D organization are also different. For example, scientific discoveries, whatever their source,
are subjected to impersonal judgments, and scientists often participate in organized skepticism
and critically evaluate scientific ideas and discoveries. This permeates all aspects of an
organization’s function. Management decisions affecting individuals are thus critically
evaluated and questioned by the researchers. After attending a senior management conference,
a newly assigned deputy administrator of a federal research organization stated that he had
never worked in an organization where people were so vocal and where management decisions
were reviewed and discussed as openly and fully.

9.15 Questions for class discussion

The culture and other elements vary from one R&D organization to another; however,
as a group, R&D organizations generally possess unique characteristics.

9.16 Summary
 We first pointed out that the essence of R&D management is the coordination of the
activities of many individuals. An effective R&D organization should have a mix of research
activities that are both basic and applied. The chapter provided definitions of terms such as
basic and applied research and development, and it reviewed proposals for a system of
categories of research. One key issue is “What to research?” A model that deals with this
question was presented. Finally, we examined what is unique about managing R&D
organizations. One unique aspect is the need for the intricate coordination of people, ideas,
funds, and culture. In the next chapter we discuss these elements and their coordination further,
and the rest of the book is concerned with how a manager can be most effective and lead an
organization that will be most productive.

9.17 2 Elements needed for an R&D organization

The basic elements required for an R&D organization are (1) people, (2) ideas, (3)
funds, and (4) cultural elements. These four basic ingredients have to be coordinated with skill
by the management of R&D organizations in order to achieve high productivity and excellence.
In this chapter we will cover some of the introductory topics concerning these basic elements.
In later chapters we will focus more specifically on the task of coordinating and managing.

It is obvious that the most important element is creative people. Such people have the
bright ideas and skills to do research and then translate research results into useful products.
However, these people must be organized into structures that permit effective cooperation. In
doing so it is important to keep in mind that certain mixes of people work better than others.
To ensure a smoothly functioning organization, one needs unstated assumptions, beliefs,
norms, and values—in other words, an organizational culture that will favor creativity and
innovation. Last, but not least, one needs funds.

9.18 People
Scarpello and Whitten (1991) have identified four different personality traits relevant to
engineers:

1. Creative Type. Creative types are idea generators, comfortable with abstract
problem solving and have a preference for working alone.
2. Entrepreneurial Type. Entrepreneurial individuals are more likely to take and
manage risk while giving the profitability of a product or project high priority.
 3. Analytical Type. Analytical people do well with complexity and prefer to have
order and organization while also avoiding risk.
4. Development Type. Development-oriented personalities tend to gravitate
toward team projects and maintain high energy levels while cooperating with
others.

Recognizing the personalities of employees helps to match the interests of the

organization with the interests of the individuals, thus creating a productive workforce.

People who are most likely to succeed in an R&D organization are analytical, curious,
independent, intellectual, and introverted and enjoy scientific and mathematical activities. Such
people tend to be complex, flexible, self-sufficient, task-oriented, and tolerant of ambiguity.
They have high needs for autonomy and change and a low need for deference (Winchell, 1984).
In their study of 2,157 researchers at nine different organizations Debackere, Buyens, and
Vandenbossche (1997) found that R&D professionals respond better to a “knowledge ladder”
system, rather than one based on a “traditional” managerial hierarchy. R&D professionals tend
to be less interested in promotion within the organizational hierarchy and more interested in
being recognized for the competence and expertise in their fields. R&D organizations should
recognize the need to reward researchers on the basis of their technical competence and
expertise, and how these contribute to the organizations’ overall R&D process.

A person with a graduate degree probably already has many of the previous attributes
listed. Other important attributes, however, may be lacking. For example, it is necessary to
scrutinize very carefully a person’s tolerance for ambiguity and need for autonomy and change.

People with internal standards and self-confidence are highly desirable, because in
many cases research can be very discouraging. The person who is not easily discouraged and
is sure of his or her goals and how to reach them is more likely to persist. Interaction with peers
is also essential, since most new ideas are generated not by reading the literature but by talking
with others who are working on similar problems. Finally, and this is admittedly cynical, a
successful scientist needs to be able to tolerate what he or she might consider “bad
management.” The kind of person who gets upset too easily if the manager is insensitive to his
or her needs may not be able to deal with a research environment. Most managers are technical
people, interested in research rather than in managing others, so they are likely to do a less than
optimal job. But there is a saving grace: Research has shown that people are surprisingly
tolerant of poor supervisors! (Clifford E. Jurgensen, 1978).
 Another desirable attribute is internal locus of control. This is the tendency to think that
the causes of events are internal (e.g., ability, hard work) rather than external (e.g., help from
others, luck). Research has shown that internals are better than externals at collecting
information and at deciding for themselves about the correct course of action (for a review, see
Spector, 1982).

Creativity is, of course, highly desirable. Unfortunately, there are few reliable and valid
tests for this attribute. However, previous creativity is a good predictor of future inventiveness.

Friedman (1992) identified primary activities performed by R&D managers at different

supervisory levels. Forty-eight tasks that managers stated they spent the most time on were
factor analyzed. Three primary activities were identified: project management, personnel, and
strategic planning. Strategic planning was rated as requiring significantly higher levels of
logical reasoning, originality, fluency of ideas, communication skills, and resistance to
premature judgment than was required for the other two primary activities. Strategic planning
in R&D organizations has become an important activity; this is outlined in Chapter 16 of this
text, “R&D Organizations and Strategy.”

In summary, an effective scientist needs to be an individualist (Allen, 1977) who has

internal standards, self-confidence (Pelz and Andrews, 1966b) and persistence; and who works
in the right organizational environment. It is important to stress that even the most creative
person will be a failure if the environment is not right. One can think of the analogy of a
rectangle. The area of the rectangle depends on the size of both its sides. Similarly, creativity
depends on the attributes of both the person and the environment. If either one is missing,
creativity can be zero. An R&D manager has to be able to integrate the activities of diverse,
autonomous, and talented people and must do well in handling activities associated with R&D
project management, personnel, and strategic planning.

9.19 Specialization
The question of specialization is also related to both person and environment. Some
people enjoy specialization, while others prefer to be generalists. Some environments
encourage and some discourage specialization. The literature suggests that successful R&D
personnel are not overspecialized. They are interested in several topics and are able to talk with
others about their problems with ease. Specialization can be tolerated in the early stages of a
career, but later there is a need for broader interests and the ability to talk constructively with
a wide range of colleagues.
 In selecting people who have such attributes, the manager can look for specific
behaviors. For example, the kind of person who tolerates answers such as “probably,”
“approximately,” and “perhaps” is likely to be tolerant of ambiguity.

Finally, when selecting members of an R&D team, it is desirable to look for managerial
talent. Since such talent is generally rare among highly technical people, when it occurs it
should receive some special attention. While technical competence is of the utmost importance
in managers of R&D organizations, the ability to deal with people is especially desirable. They
should therefore be selected over their peers who are equally technically competent but lack
interpersonal skills.

9.20 Staffing
One more criterion should be kept in mind in putting together the R&D team: It is
desirable to choose a diverse workforce. It needs entrepreneurs, project leaders, gatekeepers,
coaches, public relations people, and others (Roberts and Fusfeld, 1981). One should consider
the mix of people, as well as the fact that conditions do change and what is popular today may
not be popular or fundable in 10 years. With a sufficient mix it is possible to survive during
periods of radical change in the environment of R&D organizations.

Diversity in R&D organizations is another crucial issue. “Dealing with Diversity in

R&D Organizations,” presents key issues related to this topic. Managers often say, “People are
our most important resource.” Indeed, in an R&D organization, highly trained, able, and
motivated researchers provided with well-equipped laboratories are essential. Excellent and
productive R&D organizations are all characterized by such assets.

In staff selection and staff development, some social issues, such as equal employment
opportunity and biases against certain ethnic groups and women, are examined briefly in the
chapter on diversity. These are important issues and there is clear and ample historical evidence
of such biases. These biases first manifest themselves in the way people raise their children or
in the initial counseling received in high school. They continue during interviews for the first
job and also when decisions are made concerning pay, staff development, and promotion to
higher administrative and executive level positions. Other staffing issues such as need
identification, interviewing, selection, placement, staff development, promotion, and pay are
quite important but occur in R&D organizations just as in manufacturing organizations and are
therefore already covered in the standard personnel literature. For this reason, they will not be
discussed here.
 Staffing decisions traditionally have emphasized academic prowess and performance
in interviews. However, experience shows that academic ability alone is not always correlated
with success at an organization. Therefore, the selection of new employees should also take
into consideration the attitudes, behaviors, personalities, and biographical details of an
individual. Staffing selection needs to be done in collaboration with the people who are going
to work with them. They are the ones who are most critical and the most involved. Furthermore,
once they have participated, they will have some commitment to making that person a success
in the organization. A work team interview is a good way to accomplish this.

The discussion here will focus primarily on the types of skills an R&D organization
needs to facilitate the innovation process. These skills are categorized into three major areas:

1. Support staff
2. Technicians
3. Research staff

Support staff includes such functions as financial management, contracting, technical

editing, reference library work, typing, and other clerical duties.

Technicians include laboratory technicians, fabricators of experimental models,

computer technicians, and laboratory and field experimental support staff.

Making support staff and technicians true members of the team, along with the research
staff, is crucial for the success of the innovation process. They make a significant contribution
to the innovation process, and their contribution needs to be recognized. Clockmakers were the
first to apply scientific theories to the making of machines. Innovations came as a result of the
collaboration among scientists, craftsmen, and mechanics. This collaboration, which was
necessary for innovation centuries ago, is still required today. It is not uncommon for a clever
technician to think of ways to set up an experiment or collect field data more efficiently, or for
other support staff to facilitate administrative activities associated with the innovation process,
thus saving time and effort. Often, the project sponsor’s first contact is with the support staff
(e.g., the receptionist or the secretary), and many technical assistance activities are handled by
the technicians working closely with the user or the customer. Because of the crucial role
support staff and technicians play in the innovation process, recruiting, training, and motivating
them are quite important.

The entire staff needs to become integrated, as the following true story suggests. Not
long ago, a professor of psychology at the University of Illinois used fruit flies as part of an
experiment in behavioral genetics. Several generations of fruit flies had been developed to
obtain the particular type needed for the experiment. Then one evening a janitor opened the
laboratory windows. The resulting draft killed the fruit flies, thus inadvertently destroying
several years of the professor’s work! Obviously, had the janitor understood the significance
of the work, he would not have opened the windows.

A similar disaster to an experiment occurred on an oceanographic ship. The crew and

the scientists did not get along. One of their disagreements concerned what should be placed
in the refrigerator—the scientists’ specimens or beer. After six months of collecting specimens
in the Pacific, the scientists discovered, to their horror, that the crew had thrown the specimens
overboard and put the beer into the refrigerator!

For the research staff, more than idea-generating personnel are needed. Other critical
functions involve entrepreneur (marketing), communicating, gatekeeping, coaching, and
project leading or supervising (Roberts and Fusfeld, 1981, p. 25). There is some overlap among
these functions, and an individual can perform more than one of them.

9.21 IDEAS
For idea-generating, the personnel need to be technically competent in one or more
fields and have the ability to conceptualize. They must be comfortable with abstract thinking
and have a real interest in R&D. In an R&D organization one finds that some people are
particularly good at projecting beyond the obvious and thus generating ideas. To foster an idea
generating environment it is important to allow new ideas to be presented without immediately
making judgments about their soundness. A group of researchers was once asked to present its
ideas regarding some new research initiatives. After listening to the ideas, the managers quickly
gave their comments and told the participants why the ideas were not particularly sound and
thus could not be considered further. Participation in presenting new research decreased rapidly
and after the initial two or three research presentations no one had anything more to offer. The
research team finally disbanded because of low morale. Managers should not be too hasty to
relegate ideas to the wastebasket.

Successful entrepreneuring or marketing requires individuals with the ability to sell or

market new ideas to others and obtain resources for R&D projects. These individuals should
be technically competent, possess a wide range of interests, and be energetic and willing to
take risks. Entrepreneuring has some other important implications for organizational control
and for organizational change. An organization that obtains much of its funding through the
entrepreneuring activities of its research staff has to allow for more autonomy than others.
Initiating new directions in research requires considerable participation by the affected research
staff. A case in point is the type of research conducted at universities where much of the
research funding is generated by individual faculty members. Consequently, there is a strong
tradition of faculty autonomy and dominance in academic institutions.

An important function in a laboratory is that of key communicator (Chakrabarti and

O’Keefe, 1977). A key communicator reads the literature in the field, particularly the “hard”
papers, and talks frequently with outsiders and insiders in the laboratory. Chakrabarti and
O’Keefe studied three government laboratories and found that about one-seventh of the
professional staff could be described as doing that. Key communicators helped in a number of
ways by providing desired information to others, locating written sources, participating in the
generation of ideas, putting people in contact with each other, ending the search for non-
existing research in a particular area, evaluating ideas, offering support, selling a new idea,
briefing key decision-makers about recent developments in the field, and making contacts both
outside and inside the laboratory to promote an idea. Key communicators were in supervisory
positions only half the time. Such people, when identified, deserve an increased personal
budget to facilitate travel, release time, formal recognition, and special training and
encouragement, since they are invaluable for a laboratory.

Related to the idea of key communicator is the idea of a gatekeeper, or of a person in a

“boundary-spanning role” (Keller and Holland, 1975). Keller and Holland tested the hypothesis
that such people might suffer from role conflict and role ambiguity and might be dissatisfied
with their positions. Their data suggested that boundary-spanning activity did not produce
much conflict, and was even positively correlated with job satisfaction with co-workers, pay,
and promotions. However, it was negatively correlated with satisfaction with supervision.
Thus, on the whole, this is a useful role that does not adversely affect those in it.

Also related to the role of key communicator is the role of “champion in product
innovation” (Chakrabarti, 1974). Such individuals are technically competent, know both the
company and the market are aggressive, and are politically astute.

For gatekeeping, ∗ individuals should possess a high level of technical competence, be

personable and approachable, and enjoy contact with people and helping others. These
individuals should keep themselves informed of related developments outside the organization
via journals, professional conferences, and personal contacts. Gatekeeping is an informal role.
Formalizing this role by assigning it to an individual or group would undermine the very
purpose it is supposed to serve. In an R&D organization an individual with a high level of
technical competence who has contacts with the wider scientific community and the
appropriate personality frequently assumes this informal responsibility. Many times one hears
a statement such as, “If you have a question about acoustics, check with Dr. X; he can tell you
what is the latest.” Often the supervisor acts as a gatekeeper, especially for locally oriented
projects, which will be discussed later in this section.

It is clear from what was stated above that there is a controversy about the extent to
which gatekeepers or key communicators should be identified and rewarded. One view is that
formalizing the role will undermine it; the other view is that by encouraging and rewarding the
role these key functions could be done even better. We are inclined toward the latter view, but
without too much emphasis on the singling out of the individual. Rather, top management
might provide some extra travel allowances, some extra encouragement, and some more
rewards without formally identifying the position of a key communicator or gatekeeper. It is
the offering of support for the activity that is needed rather than a formalization of the role.

One can also make the case that it is not so much how well the role is carried out but
how the environment in which the role is carried out is structured that determines the
effectiveness of gatekeepers (Davis and Wilkof, 1988). In a bureaucratic organization the best
gatekeeper will fail; in an organic organization a moderately good gatekeeper will be effective.
As Davis and Wilkof put it: “Most R&D groups long ago discovered that they cannot
effectively operate with such a bureaucratic arrangement. They found that the restrictions and
loss of autonomy inherent in the mechanistic structure stifled individual creativity and led to a
sense of indifference and alienation, especially among those on the lower rungs of the
organizational ladder”.

In an organic organization, professionals are recognized for their expertise, and not for
their position in the organizational hierarchy. That means that an expert “Communication
Networks” and “Technology Transfer.” A gatekeeper essentially links the organization to
external information sources.at the lowest level of the organization may be heard as much as a
no expert at the top of the organization. The corporation is viewed as an individual/team
initiative system within which ideas are bought and sold, packaged, organized, and
implemented. Status is based on technical competence. Top honors go to those who generate,
package, and sell ideas. Management screens ideas to ensure their compatibility with overall
corporate objectives.
 The organic form of organization encourages every team member to be a gatekeeper.
Instead of identifying gatekeepers, the organization supports the function of gatekeeping for
all team members. Thus, gatekeeping is the rule, not the exception. With more gatekeepers
there is a higher probability of tapping broader sources of information. Information is
transferred across project lines. There is a relatively egalitarian structure and highly
participatory project management, and the emphasis is on the group’s “collective intelligence.”
It is the group that might assign the role of gatekeeper to a particular member, for a particular
topic. Group meetings are important vehicles for information transfer.

Webb’s (1992) study of relationships between management structures, firm

performance, and innovation suggested that managers move away from authoritarian styles and
toward an organic, egalitarian style. Egalitarian practices are more effective than authoritarian
management since they decrease the fear of failure while boosting innovation, decrease
deadlines while promoting flexibility, and increase participation of managers and engineers in
strategy.

For coaching, individuals should be in a more senior position in the organization, be

good listeners and helpers, and be technically competent enough to develop new ideas. They
should provide encouragement and guidance and should act as sounding boards for others in
the research group. Those coaching should have access to higher-level management within and
outside the organization and be able to buffer the projects from unnecessary organizational
constraints. These individuals should have the ability to coach the members of the research
team in a way that will enable them to develop their talents.

Project leading or supervising and coaching have some overlap and can often be
accomplished by the same person. Project leading calls for individuals who are able to plan
and organize the various project activities and can ensure that administrative and coordination
requirements are met. They should have the ability to provide leadership and motivation and
be sensitive to the needs of others. They must be able to understand the organizational structure,
both formal and informal, so that they can get things done and balance the project goals with
organizational needs. They should be interested in a broad range of disciplines and be able to
handle multidisciplinary issues.

Clearly, as a manager in an R&D organization moves up in the organization, technical

skills play a less direct role, while other skills such as human relations and administrative and
conceptual skills become increasingly important.
 As stated earlier, studies have clearly shown that research groups whose supervisors
had high technical skills were the most innovative. On the other hand, those groups that had
supervisors who did not possess high technical skills, but were in turn rated highest in
administrative skills, were least innovative (Farris, 1982). Thus, the importance of an R&D
supervisor’s technical skills cannot be overemphasized. This is especially pertinent for
organizations interested in productivity and excellence. Experience shows that an individual
who does not have the training, the appreciation, and, indeed, the aptitude for science and
technology is not likely to provide the necessary visionary leadership in an organization based
on science and technology.

Creative people are likely to have good research ideas, but good ideas also come from
communication with others. There is considerable research suggesting that communication
patterns should be structured so that people can be stimulated by others who do similar work.

In R&D laboratories, Allen (1977) indicated that only a small percentage (11–18.5
percent) of all idea-generating information comes from the scientific literature. However, the
scientific literature can be used for purposes other than generating ideas, such as problem
definition at different stages associated with the total research process. But even in the problem
definition stage, personal contacts provide more than five times the number of messages
supplied by written sources (Allen, 1977, p. 65). Therefore, communication through personal
contacts is a crucial aspect of the innovation process.

In the next sections, related items—defects in human information processing, fads in

science, communication networks, and the innovation process—will be discussed.

9.22 Communication networks

Considerable knowledge relevant to R&D activities is not always found in books. Many
ongoing R&D activities are not documented in literature for some time. Generally, the written
material is static and is a limiting medium for communication, while personal contacts allow
one to exchange ideas, analyze data more quickly, and obtain information that is more relevant
to the research project concerned.

Because of the complexity of technological problems and the importance of analyzing

and synthesizing relevant technical information, verbal communication plays an important role
in modern-day R&D activities. Research has consistently demonstrated a linkage between
high-performing individuals and projects and an extensive pattern of verbal communication
(Tushman, 1988). Many new ideas are obtained while talking with people who do similar work.
Sometimes talking with one person on Monday and another on Tuesday allows two apparently
unrelated fields of research to merge in one’s mind and leads to a new insight. Personal contacts
and verbal communication therefore provide an efficient and effective communication medium
within and between research and development communities.

The pattern of communication, however, depends on the nature of research activities.

These research activities can be divided into three main areas: research projects, development
projects, and technical service projects (Tushman, 1988).

Research Projects. These involve work oriented toward developing new knowledge
and concepts.

Development Projects. These are directed toward using existing scientific knowledge
to address specific product problems. Generally, these types of projects correspond to
technological or experimental development.

Technical Service Projects. These involve solving a specific technical problem using
well-known stable technologies.

Based on a study (Tushman, 1988) that compared and contrasted the communication
networks of high- and low-performing research, development, and technical service projects,
some patterns of communication activities were identified that are associated with high-
performing projects. These patterns, as related to project types, are described here.

High-performing research projects showed extensive and decentralized

communication patterns. People talked to many others and there were no rules prohibiting
exchanges of ideas. Direct contacts and gatekeepers were used to acquire information from
professional areas outside the firm. Within the firm, contacts were directed toward individuals
who could provide effective feedback and evaluation. Projects were strongly connected to
universities and professional societies. In general, there was less reliance on supervisory
direction and more on individual initiative and peer decision making and problem solving
(Tushman, 1988).

High-performing development projects focused on communication patterns directed

toward operationally oriented areas (how to get things done; what works, when) both within
and outside the firm. Communication outside the firm was moderate and was mediated more
often by gatekeepers than in the case of research projects. While there were some direct
contacts within the firm, the supervisor mediated much of the communication. There were also
widespread and direct communications with the user—for example, marketing and
manufacturing (Tushman, 1988).

High-performing technical service projects showed supervisor-dominated

communication patterns both within and outside the firm. Communication outside the firm
focused on suppliers, vendors, and customers. Communication within the firm related to
marketing and manufacturing. In general, the supervisor served as a mediator for all external
information sources, and there was more supervisory-dominated decision-making and
problem-solving than in research or development projects (Tushman, 1988).

Experience shows that in the development and technical assistance projects of an

organization there is an evolution of language, concepts, and values unique to the types of
projects undertaken and, at times, unique to the organization itself. This local language and
other characteristics make communications with the outside—that is, beyond the organization
project boundary—difficult and prone to bias and misunderstanding (Tushman, 1988). Since
communication external to the project (both within and outside the organization) is essential
for high-performing projects, the acquisition of information can best be handled via “boundary-
spanning individuals” whom Tushman calls “gatekeepers.” A gatekeeper then is an individual
who links the project to external information sources.

Gatekeepers in an organization perform an informal but crucial function. Others

working on the project have to feel sufficiently secure and comfortable psychologically to
approach gatekeepers with their questions without fear of adverse consequences or personal
evaluation (Katz and Tushman, 1981).

To encourage gatekeeping, individuals performing this function can be rewarded

without being given any formal title or status to their activity. Technology gatekeepers can be
easily recognized since they are high technical performers and are able to interact harmoniously
with others. For locally oriented projects, first-line supervisors act as gatekeepers for about 50
percent of the cases (Allen, 1977, p. 163).

A study was conducted to investigate the managerial roles and career paths of
gatekeepers (Katz and Tushman, 1981, p. 103). A follow-up study five years later showed that
almost all gatekeeping project leaders had been promoted up the managerial ladder. In contrast,
for the nongatekeeping project leaders, only one-half of the promotions were up the managerial
ladder. The authors concluded, “This implies that higher managerial levels (in a technology-
based R&D organization) demand strong interpersonal as well as technical skills” (Katz and
Tushman, 1981, p. 103).

Allen and colleagues (1979, p. 707) suggest that, contrary to some earlier conclusions,
the technology gatekeeping role is important for applied research and development projects
where the technology is complex and external sources of information are relevant to the project
concerned. For basic research projects and for technical assistance projects, this role is not as
critical. In the case of basic research, the problem is universally defined and contacts are best
handled directly by the researcher working on the project. In the case of technical service
projects, the technologies are well understood and stable; consequently, the organization is
capable of providing the needed information internally.

Clearly, the main purpose of the communication network is the organization and
processing of information. Also, as discussed above, different R&D activities require different
communication networks. R&D managers, recognizing the importance of communication for
the innovation process, should facilitate this process. Tushman (1988) suggests that:

1. The amount and pattern of communication within the project must match the
information processing requirements of the research project.
2. The project must be linked to interdependent areas within the firm.
3. The project must be linked to external sources of information through direct
contacts or through the gatekeepers.

To facilitate internal communication (within the work group and interdependent areas
within the firm), one must pay attention to the architecture of the workplace and to ways in
which socialization takes place. One commonly hears stories of how a scientist thought of an
idea while having tea or coffee with a colleague. Americans joke about the sanctity of the
British tea breaks. Maybe there is something to their tradition. Sir William Hawthorne of
Cambridge University once remarked that institutionalizing (or encouraging) tea breaks or
similar social interaction in an R&D organization is quite beneficial; such activities are not
common in the United States but they should be fostered.

The effects of office architecture and the no territorial office on communication have
been investigated by Allen (1977). In managing an R&D organization, it is important to
recognize the need for internal and external communication for the innovation process. A
manager should facilitate this process to the degree that resources and organization policies
permit. Questions are often raised by upper management as to why it is necessary to have
researchers participate in technical conferences and symposia. An R&D manager should be
able to justify these activities on the tangible contribution such activities make to the innovation
process.

9.23 The innovation process

An invention is an idea, a concept, a sketch, or a model for a new or improved product,
device, process, or system. Inventing is the creation of new knowledge or new ideas.

The innovation process is the integration of existing technology and inventions to create
a new or improved product, process, or system. Innovation in the economic sense is
accomplished through the first utilization and commercialization of a new or improved product,
process, or system.

Various technology-based organizations look at the overall innovation process

differently. In a general sense, the innovation process includes (1) identifying the market need
or technology opportunity, (2) adopting or adapting existing technology that satisfies this need
or opportunity, (3) inventing (when needed), and (4) transferring this technology by
commercialization or other institutional means.

The innovation process integrates project need, invention and development, and
technology transfer. Ideas and concepts are generated in each of these three major stages; the
innovation process is accomplished when these three stages culminate in the utilization and
commercialization of a new or improved product, process, or system.

9.24 Funds
While this topic is so obvious that it could be skipped, we have included it for balance.
Funds are needed for personnel, equipment, office and laboratory space, libraries, computers,
travel, supplies, and so on. This is not the place to discuss research budgets and the like. We
wish only to make sure that the reader keeps this element in mind when thinking of the four
equally important elements required by an R&D organization. It is important to emphasize the
fact that conducting research requires considerable resources. It is indeed an expensive activity.
To maintain research excellence, it is necessary to attract talented scientists and have well-
equipped laboratory facilities. None of this is probable without sufficient funding support.

9.25 Economic Trends for R&D Funding

Since 1980 private industry’s share of investment in R&D has steadily increased while
government’s share is on the decline. This can create a new set of concerns for technical
managers. Because the private sector has a larger share of R&D investment, schedules and
budgets may be monitored more closely and researchers may be forced to produce specific
outputs with fewer resources. Federal research funding provided flexibility and autonomy to
researchers to explore, create, and invent. Rigid structure of industry funded projects could
cause moral and motivational issues among employees and because of this management must
be prepared to realize this impact (Dougherty and Hardy, 1996).

Organizations that are successful in the transfer of their research outputs are more likely
to generate customer support for future research. This is particularly true for applied research
and development projects. In a way, the steps in the innovation process discussed in the
preceding section provide a link to the customer or the sponsor via need identification and
technology transfer.

One is always seeking ways to test user acceptance of research output and to determine
organization effectiveness. Seeking funds for research can be one way to test the market and
user response to the research output, and thus determine organization effectiveness.

Consider the following problem facing an R&D organization:

A premier private university experiences a substantial decline in the number of U.S.

citizens applying to its graduate program in the school of engineering. Applications are down
55 percent. Factors such as high starting salaries for baccalaureate degree holders, rising cost
of graduate training, and high opportunity cost of staying in the graduate school contribute to
this decline. Increased competition from state universities offering quality graduate training at
merely 25 percent of the private university tuition and a widespread impression that the private
university is difficult to get into and lacks the many extramural social activities normally
available at large state schools have contributed to that university’s problem. Since much of
the research at a university is conducted by graduate students with guidance from faculty, lack
of graduate students makes it difficult for the university to obtain funding for research and to
maintain research facilities.

Clearly, external factors beyond the immediate control of an R&D organization often
affect funding support.

9.26 A culture for R&D organizations

Culture is the human-made part of the environment. It consists of objective elements
(e.g., research laboratories, equipment, office buildings, office furnishings) and subjective
elements (rules, laws, values, norms). Among the most important elements of culture are the
unstated assumptions concerning “the way things get done in this lab.” Some of these
assumptions become salient only when they are challenged—for example, is safety more
important than production all the time? In some labs it is and in others it is not. The importance
of cultural elements surfaced with the 2007 recalls of Chinese manufactured consumer goods
such as pet food, toys, toothpaste, lipstick, and seafood.

One way of thinking about organizations is to conceptualize them as information

processing systems (Daft and Weick, 1984). When the information that must be processed has
certain attributes, the structure of the organization must match that type of information. For
instance, Keller (1994) studied 98 R&D project groups with a longitudinal design and found
that the effective teams showed a match between the structure of the information being
processed and the structure of the organization. The more that the tasks the team had to do were
no routine (i.e., involved radically new technology), the more the successful research teams
were capable of processing large amounts of information (e.g., there was much interpersonal
contact, permeability of group boundaries, and opportunities for informal, face-to-face
communication).

Some organizational cultures are more effective than others. A culture that emphasizes
innovation behavior (e.g., where people agree with “creativity is encouraged here” and disagree
with “this place seems to be more concerned with the status quo than with change”) and has
high-quality supervisor–subordinate relations (i.e., permits high levels of autonomy and
discretion for innovation) is likely to be more effective than a culture that does not encourage
innovation (Scott and Bruce, 1994). Furthermore, competitiveness is often not desirable. For
example, one experiment compared competitive (the highest producer gets all the reward),
individualistic (to each according to contribution), and cooperative (equal share of the reward)
conditions for building a tower. Participants randomly assigned to these three conditions had
building blocks of different colors, so their contributions could be identified. Dependent
variables included number of blocks placed, number of falls of the towers (often due to
sabotage), and so on. The major finding: The highest productivity occurred in the cooperative
condition. Of course, we do not know whether a team in a research lab working on some project
behaves like a group of college students building a tower. Nevertheless, for at least some
situations these findings must be applicable (for details see Rosenbaum et al., 1980).
Competitiveness is certainly an aspect of some organizational cultures and this experiment
questions its desirability.
 Other aspects of organizational culture worth noting are hard work, people emphasis,
status emphasis, participative climate, tolerance for disagreement, and frequent rewards.
Emphases such as these are best communicated through management actions rather than words
(Schneider, Gunnarson, and Niles, 1994). A laboratory that provides a sense of community,
encourages the loyalty of customers, and pays attention to detail is likely to have members who
are concerned about the satisfaction of customers (such as the funding agencies that provide
contracts to the laboratory) and who will be willing to contribute to every aspect of the
laboratory’s success.

A word about each of the aspects of organizational culture follows. One can see greater
emphasis on hard work in some labs than in others. In some labs, people work hard and very
long hours and usually take work home. There is no time for chatting. In other labs, people chat
a lot and stop their tasks when it is time to go home. In labs with “people emphasis,” the lab
comes to a stop if something significant happens to one of its members.

Work and achievement are generally valued more in individualist than in collectivist
cultures. In the latter cultures social relationships have priority, and when work interferes with
relationships it is likely not to get done (Stone et al., 2008).

Status emphasis is evident when titles, formal dress, or formal language are used.
Participation is an important component if people are asked to contribute their ideas and to
discuss major decisions, if they have some autonomy in those decisions.

Tolerance for disagreement can be seen when there is frank discussion and when plans
are critically evaluated no matter where they come from, whether from top management or
from a lowly researcher. In some labs, rewards, recognition, and bonuses are frequent. It seems
obvious that these qualities, with the exception of status emphasis, are desirable, but to what
extent is every lab at an optimal point on these dimensions?

The point about allowing disagreement deserves special emphasis. When important
decisions are made, people often seek others who agree with them. They avoid or reject those
who disagree with them. These tendencies result in groupthink (Janis, 1982) and in major
mistakes. One of the most striking examples cited by Janis concerned a number of the decisions
of the National Security Council (NSC) during the Vietnam conflict. Despite their own better
judgment, some of the NSC members who personally opposed certain policies contributed to
unanimous decisions. A more recent example is provided by the unwillingness or inability of
highly trained economists to recognize the economic risks of unsustainable economic growth
in the housing sector.

People often feel unjustifiably optimistic about the way their research plan will turn
out, they do not give sufficient weight to signals that something is wrong, they reject those who
criticize their plans or their accomplishments, they censor themselves when they feel critical
about actions of their team members, and they select their critics so as to receive a favorable
review of their work. All of these behaviors are aspects of groupthink. Groupthink leads to
poor performance.

To avoid groupthink, one needs to bring fresh perspectives into the group. That means
tolerating those who disagree—the gadflies. It is even better to appoint a devil’s advocate
whose role it is to shoot down research designs, to reject drafts of papers, and to warn about
disasters that could result from a particular course of action. In the case of very important
projects, having several teams tackle the problem from different angles is not duplication. It is
the best way to find a solution.

Finally, in the case of important decisions it is useful to allow a day or two between the
decision and the start of the project, as well as to review the decision from other perspectives
before committing major resources.

Experience shows that a manager has to watch out more for subservient researchers
than for unruly ones. When critical analysis of a manager’s proposals is not made early, much
is lost. When suggestions made by the manager are taken as commands without discussion and
analysis, research excellence is bound to suffer. Related to the groupthink phenomenon is the
Not-Invented-Here syndrome, discussed later in this chapter.

The extent to which some R&D units within an organization are considered by the
scientists a good place to work (i.e., its internal reputation) defines the unit’s culture. A study
of 10 science-based organizations employing 1500 scientists was conducted (Jones, 1994). A
climate of innovative work and good working conditions had the highest correlation with good
internal reputation. Thus, for effective R&D organizations, a manager needs to foster a climate
of innovation and good working conditions.

Jabri (1992) found that scientists who perceived that the tasks assigned to them were
appropriate collaborated more with team members, expended more effort on the tasks, and
showed more innovation on the job. Job satisfaction and performance were positively
correlated when the task allocation was perceived as appropriate, but satisfaction and
performance were unrelated when the tasks were seen as low in appropriateness.

9.27 Fit of Person and Job

A word should also be said about the fit of people and environment. A person whose
abilities match the demands of the job will be most satisfactory to the organization. If the job
makes greater demands than the person’s ability, the individual feels unable to cope; if it makes
too few demands, the individual becomes restless and bored. A close match between the
individual’s needs and the job’s ability to satisfy these needs leads to job satisfaction. To some
extent an individual’s needs reflect expectations. People are most satisfied if the job provides
what they expect the job to provide. There is empirical research showing that satisfaction is
maximal when there is a match between expectation and realization. If one gets more than is
expected, it can be dysfunctional. It is a bit like receiving a $100 Christmas gift when one
expects a $10 gift. Of course, when the expectation is higher than the realization, the person is
disappointed or angry, and the effect on job satisfaction is most severe.

It is a good idea to pay attention to the match between personal attributes and
organizational cultures. Some people are more competitive than others and feel comfortable in
a competitive organizational culture. Similarly, one can analyze each of the dimensions of
organizational culture just mentioned to see if the individual would fit that culture.

Some R&D organizations compensate their employees with bonuses and profit sharing
rather than with high wages. This is fine for achievement-oriented risk-takers, but more
conservative individuals will dislike this method of compensation. Go stick and Christopher
(2008) note the importance of finding a match between personal attributes and organizational
cultures in their book The Levity Effect. A corporate culture naturally attracts the right people
and repels the wrong ones. Kalleberg (2007) reports that there can be many reasons for
mismatches: skills and qualifications, geographical or spatial location, temporality and time
preference, inadequate earnings, and conflicts between work and family lives. Taking into
account the needs, interests, values, and expectations of all parties involved will help prevent
dissatisfaction, stress, underutilization of the workforce, and substantial financial loss.

9.28 Creative tensions: managing antithesis and ambiguity

When uncertainty is tolerated and accepted, creativity and innovation occur most easily
within an organization. Organizations in which innovation is truly valued have a higher
tolerance for failure and also emphasize the importance of collaboration in decreasing levels
of uncertainty (Glynn, 1996). The following are other ways in which a healthy R&D workplace
can be fostered.

Feedback. Management needs to give performance feedback to help scientists and

engineers see the value of their work and understand their purpose.

Change Tasks. It is important to alter the nature and increase the complexity of tasks at
hand. Challenging and important tasks make technical professionals take on more
responsibility for their work while also giving them a sense of self-worth.

Open Environment. Creating an environment where active exchanges of information

can take place among team members is crucial to providing continuous learning and also makes
people feel as though they are part of the same team.

For a manager in an R&D organization, creativity and innovation may not flow freely,
and many questions related to the work environment arise. Answers to these questions are
inconsistent and ambiguous. Examples of such questions are as follows:

1. In general, what kind of climate in an R&D organization is conducive to

technical accomplishment, excellence, and productivity?
2. What is the optimum degree of freedom versus control?
3. What should be the balance between basic research, applied research,
development, and technical assistance?
4. Should the scientist be isolated?
5. How about the communication network? What is optimum in an R&D
organization?
6. To what degree is the specialization of a researcher important?

Pelz and his colleagues studied 1300 scientists and engineers in 11 research and
development laboratories, 5 industrial laboratories, 5 government laboratories, and 7
departments in a major university. Their findings shed light on some of the preceding questions.
Based on this study, it was concluded that scientists and engineers were more effective when
they experienced a “creative tension” between sources of stability or security on the one hand
and sources of disruption or challenge on the other (Pelz and Andrews, 1966b). This study
indicates that achievement often flourishes in the presence of factors that seem antithetical.
Specifically, Pelz and Andrews found the following:
 1. Effective scientists and engineers in research and development laboratories
engaged in both applied and basic research, as well as a wide range of R&D
activities (e.g., serving on review panels, providing technical services).
2. Effective scientists were intellectually independent and self-reliant; they
pursued their own ideas and valued their freedom, but they also interacted
vigorously with their colleagues. They did not avoid other people.
3. In the first decade of their career the effective scientists spent a few years on
one main project, but they did not overspecialize. They developed several skills
that they used well in the next decade.
4. Mature scientists were interested both in probing deeply and in pioneering in
new areas.
5. The best work occurred in environments that were not too tightly controlled,
provided enough of a challenge as well as adequate security, and did not impose
rigid goals of the organization on the scientists. Moderate coordination,
allowing individual autonomy, usually resulted in finding the best solution. But
effective scientists were strongly influenced by a variety of internal and external
sources, including concerns about the goals of the organization.
6. The most effective scientists were those that influenced key decision makers of
the organization, but whose goals were highly coordinated with the goals of the
organization.
7. High performers received personal support and stimulation from their
colleagues, but differed from their colleagues in technical style or strategy. In
other words, they had complementary talents with their colleagues, and they
were well respected and supported by them.
8. R&D teams change over time. As they get “older” they become more and more
interested in narrow specialization and less and less interested in broad
pioneering. The most useful teams are at a “group age” that has not yet become
too interested in narrow specialization and has lost interest in broad pioneering.
9. Effective older teams had members who preferred one another as collaborators,
but remained intellectually combative and used different technical strategies.

Thus, in designing organizational cultures for R&D laboratories it is desirable to review

some dimensions identified by Pelz and Andrews (1966b). They emphasize balance between
several extremes. It is not desirable to spend all of one’s time on applied or on basic research;
a mixture of the two is more effective. One should not emphasize extreme self-reliance in a
lab; one also needs some interdependence. One should not overemphasize specialization; one
needs to be good at many things. Supervisors should not provide too much structure; the
subordinate needs some autonomy. Research scientists must find a balance between their
personal research goals and those of the organization. Projects should not be too long or too
short; a three-year project is often optimal.

Jobs, particularly in research, should be designed so that they provide opportunities for
autonomy, since research personnel is high on this need. They must also provide significance;
that is, people should have the sense that what they are doing is important for the organization,
for themselves, for the profession, and for society. Finally, jobs should provide feedback.

There is research suggesting that people who are in a good mood are more creative than
people who are in a neutral mood (Isen et al., 1985). Mood can be manipulated by having
people think pleasant thoughts for a period of time. This experiment was done with college
students and requires replication in a research setting, but it is certainly worth trying to put
people in a good mood if possible.

Stimulation by others requires that people be able to communicate easily. In some

studies, the elimination of physical barriers helped in the operation of R&D laboratories.

A desirable organizational culture allows employees to have a sense of control. In some

experiments, those without control became depressed. One increases the sense of control of
employees by allowing them to participate in decisions that affect them, such as when to start
work, what to study, and when to study it. Management by objectives is desirable since it
enables the supervisor and subordinate to sit down periodically and agree on milestones, goals,
or values. This review in turn allows for feedback, and it also allows for discussion of why the
goals were not reached and for congratulations when they were attained. Cultures that reward
frequently are more effective than cultures that do not. That does not mean that one should get
rewarded for every success. Rather, there should be uncertainty about getting a reward.
However, when something major has been achieved, the reward should be extremely probable.

Goals must be set in such a way that they are specific and difficult, but attainable. There
is research showing that this combination of goal attributes results in maximal motivation.

Companies such as John Deer, eBay, and Johnson and Johnson have achieved success
in evoking loyalty and passion from their employees. Their leaders, argue Govindarajan and
Bagchi (2008), utilize the emotional infrastructure we obtain from our families. The
infrastructure consists of the following:

1. Proximity: Leaders who are accessible to their employees.

2. Rich Communication: Leaders who respond appropriately to questions while
eliminating rumors and allowing for multi-channel communication.
3. Myths and Rituals: Bonds and relationships that are built by communicating
myths and rituals.
4. Bonding Trough Adversity: Organizational crisis that bring people together.
5. Support Networks: Supportive networks that keep bonds strong within a
company.
6. Shared Vision: Leaders who share the long-range vision with employees so
everyone is aligned.
7. Exclusivity: Development of an invisible, self-administered code of conduct and
benefits.

This emotional infrastructure confers a competitive advantage on those organizations

able to create and sustain it.

A good R&D culture will accept failure. When all experiments come out as expected,
this indicates that the research is too conservative. “If you do not have several failures, you are
not doing a good job” should be the way R&D managers talk to their subordinates. Open
communication (open doors), acceptance of suggestions, and the assumption that there is
always a better way and that the better way does not constitute a criticism of the employee are
important values and perspectives for the R&D manager.

The organizational culture should stress a win–win orientation in resolving conflict.

This orientation involves looking for a creative solution that will satisfy both sides in an
argument. Chapter 9 on conflict will discuss this approach more thoroughly.

9.29 Develop a climate of participation

Participation is the right climate for the management of R&D laboratories. Participation
makes especially good sense in the case of the management of research. Lawler (1991) argues
that it makes sense in any organization, but the kinds of factors that make it desirable are found
in particular abundance in R&D laboratories.

Lawler makes the point that participation means moving rewards, knowledge, power,
and information flow to the lowest possible levels of an organization. He states, “My prediction
is that for participative management to be effective it must put power, rewards, knowledge, and
an upward and downward information flow in place at the lower levels of an organization.
Limited moves in this direction will, according to this view, produce limited or no results.”
Thus, he criticizes many of the proposed panaceas of contemporary U.S. management (such as
quality circles, the employee survey feedback, job enrichment, work teams, union management
teams, quality-of-work-life programs, gainsharing, and the new design plants) as doing only
some of the job and so achieving only part of the results. In his last chapters, he describes the
kind of organization that he sees as optimally participative and successful in the way it deals
with organizational change.

The most important point made by Lawler is that there must be congruence between
the management actions in the areas of power, reward, knowledge, and information flow. If a
management method reduces the level of decision making in one of these ways but not the
others, the effect would be much less desirable than if all four attributes (power, rewards,
knowledge, information) were to change together.

The management philosophy that should characterize participative management is as

follows:

1. People should be treated fairly and with respect.

2. People want to participate (this is particularly true in the case of highly educated
samples, such as researchers).
3. When people participate, they accept change.
4. When people participate, they are more committed to the organization.
5. People are a valuable resource because they have ideas and knowledge.
6. When people have an input in decisions, better solutions are developed.
7. Organizations should make a long-term commitment to the development of
people because that makes them more valuable to the organization (this is
particularly true in R&D organizations).
8. People can be trusted to make important decisions about their work activities.
9. People can develop the knowledge to make important decisions about the
management of their work activities.
10. When people make decisions about the management of their work, the results
are high satisfaction and organizational effectiveness.
 This perspective requires an organizational structure that has very few levels. A
structure comprised of a director, a manager level, and researchers organized in functional or
disciplinary groups, is sufficient. The fundamental grouping should be organizational units that
are responsible for a particular product or customer or research area. People should be able to
identify with their work group. Each unit should serve some customer and receive feedback
about customer satisfaction. Members of the unit should know precisely what the budget is and
how it is being spent. They should know what is expected of them from various customers
(e.g., funding agencies). They should receive feedback concerning their success in satisfying
these customers. Ideally, information about the performance of the unit should be available at
frequent intervals. Widespread use of computer networks has improved feedback.

The physical layout of the work group should be egalitarian, safe, and pleasant. The
same informal dress should be worn by all. The physical layout should create team boundaries.

9.30 Summary

The management of R&D organizations is quite challenging. It is difficult to coordinate

numerous individuals who are socialized to work autonomously. However, one cannot leave
them totally alone, since the organization has goals that its personnel must meet. It is hard to
get ideas, funds, and the right climate at the right time and place in order to produce a top-
quality research product.

In a real sense the job of the R&D manager is to create the right climate for research.
A first-rate researcher, in the right climate, with adequate funding, is likely to come up with
important ideas. But providing the right culture is complex. A manager must select people,
match them with jobs, match them into teams, do team building, and help develop norms, roles,
and standard operating procedures that will result in high levels of innovation. An organization
must be developed that will allow people to be maximally creative. Rewards must be provided
so that people will be motivated to work hard and to seek excellence. The manager must know
how to lead, how to reduce conflict, and how to get maximum advantage from the resources
that are available.

In this chapter we examined rather superficially, and at an introductory level, the

people, ideas, funds, and culture that are required for excellence in R&D organizations. In the
subsequent chapters we will focus in greater depth on the very same topics and will also
examine how to evaluate people and how to determine a laboratory’s success. Technology
transfer and satisfaction of the laboratory’s clients are among the outcomes that are measurable
and provide clues about the success of the laboratory. We will examine also how a manager
can evaluate change in organizations and essentially learn to manage the culture of the R&D
organization.

Reference

Ravi K. Jain, Harry C. Triandis, Cynthia Wagner Weick. (2010). Management Research,
Development and Innovation. New Jersey: John Wiley & Sons, Inc., Third Edition.
Chapter 10. Managerial Leadership

Learning outcomes

After completing this chapter, the reader should be able to:

1. Understand the full meaning of leadership and see the leadership potential in
yourself and others.
2. Recognize and facilitate the six fundamental transformations in today’s
organizations and leaders.
3. Identify the primary reasons for leadership derailment and the new paradigm
skills that can help you avoid it.
4. Recognize the traditional functions of management and the fundamental
differences between leadership and management.
5. Appreciate the crucial importance of providing direction, alignment,
relationships, personal qualities, and outcomes.
6. Explain how leadership has evolved and how historical approaches apply to the
practice of leadership today.
10.1 Nature of Leadership
There is a profound difference between manager and leader, and both are essential in a
sound management system. To ‘manage’ means “to bring about, to accomplish, to have charge
of or responsibility for, to conduct”. On the other hand, the ‘Leading’ is “influencing, guiding
in direction, course, action, opinion”. The distinction is critical. Managers are people who do
things right and leaders are people who do the right thing.

In this chapter, you’ll learn that leadership is a very complex art that is essential for the
success in mission. In fact, your knowledge of effective leadership principles and concepts
coupled with their application at your work place may prove to be rewarding both
professionally and personally.

Let’s start with a simple definition of leadership. Leadership is the process of

influencing an organized group towards a common goal. This definition sounds easy, but the
application can provide a real challenge. Your goal as a leader in the organization is to do the
best job you can at influencing your people towards a common goal. Since you are dealing with
a very diverse group of people, it is important to understand the different approaches to
motivate them to meet their goals.

Leadership style is the pattern of behaviors you use when you are trying to influence
the behaviors of those you are trying to lead. Each leadership style can be identified with a
different approach to problem solving and decision making. Possessing a better understanding
of the various leadership styles and their respective developmental levels will help you match
a given style for a specific situation. The challenge is to master the ability to change your
leadership style for a given situation as the person’s development level changes.

How can you help your followers increase their development level? Here are some
practical ideas:

1. Explain to them what you want to get done.

2. Provide the guidance they might need before they start.

3. Give them the opportunity to complete the task on their own.

4. Give them a lot of positive encouragement.

Your goal should be to help your followers increase their competence and commitment
to independently accomplish the tasks assigned to them, so that gradually you can begin to use
less time-consuming styles and still get high quality results. Your organization depends on
positive, effective leaders at all levels to perform the mission. There is no single leadership
style that is appropriate in every situation; therefore, for you to be effective leaders you need
to learn to understand your environment, your situation and the circumstances to help you act
accordingly. Remember, your success as a leader will depend on your assessment of the
situation and your ability to communicate what you want in such a way those others will do as
you wish - that is the art of leadership.

10.2 How Leadership Differs from Management

Management can be defined as the attainment of organizational goals in an effective
and efficient manner through planning, organizing, staffing, directing, and controlling
organizational resources. So, what is it that distinguishes the process of leadership from that of
management? Managers and leaders are not inherently different types of people. There are
managers at all hierarchical levels who are also good leaders, and many people can develop the
qualities needed for effective leadership and management. Both are essential in organizations
and must be integrated effectively to lead to high performance. That is, leadership cannot
replace management; the two have to go hand-in-hand.

Exhibit 1.3 compares management to leadership in five areas crucial to organizational

performance—providing direction, aligning followers, building relationships, developing

personal qualities, and creating leader outcomes.

10.3 Providing Direction

Both leadership and management are concerned with providing direction for the
organization, but there are differences. Management focuses on establishing detailed plans and
schedules for achieving specific results, then allocating resources to accomplish the plan.
Leadership calls for creating a compelling vision of the future, setting the context within which
to view challenges and opportunities, and developing farsighted strategies for producing the
changes needed to achieve the vision. Whereas management calls for keeping an eye on the
bottom line and short-term results, leadership means keeping an eye on the horizon and the
long-term future.

A vision is a picture of an ambitious, desirable future for the organization or team. It

can be as lofty as Motorola’s aim to “become the premier company in the world” or as down-
to-earth as the Swedish company IKEA’s simple vision “to provide affordable furniture for
people with limited budgets.”
10.4 Aligning Followers
Management entails organizing a structure to accomplish the plan; staffing the structure
with employees; and developing policies, procedures, and systems to direct employees and
monitor implementation of the plan. Leadership is concerned instead with communicating the
vision and developing a shared culture and set of core values that can lead to the desired future
state. Whereas the vision describes the destination, the culture and values help define the
journey toward it so that everyone is lined up in the same direction.

Leadership provides learning opportunities so people can expand their minds and
abilities and assume responsibility for their own actions. Think about classes you have taken
at your college or university. In some classes, the professor tells students exactly what to do
and how to do it, and many students expect this kind of direction and control. Have you ever
had a class where the instructor instead inspired and encouraged you and your classmates to
find innovative ways to meet goals? The difference reflects a rational management versus a
leadership approach.
10.5 Building Relationships
In terms of relationships, management focuses on getting the most results out of people
so that production goals are achieved and goods and services are provided to customers in a
timely manner. Leadership, on the other hand, focuses on investing more in people so they are
energized and inspired to accomplish goals.

Whereas the management relationship is based on position and formal authority,

leadership is a relationship based on personal influence and trust. For example, in an authority
relationship, both people accept that a manager can tell a subordinate to be at work at 7:30
A.M. or her pay will be docked. Leadership, on the other hand, relies on influence, which is
less likely to use coercion. The role of leadership is to attract and energize people, motivating
them through purpose and challenge rather than rewards or punishments. The differing source
of power is one of the key distinctions between management and leadership. Take away a
manager’s formal position, and will people choose to follow her? That is the mark of a leader.

10.6 Developing Personal Leadership Qualities

Leadership is more than a set of skills; it relies on a number of subtle personal qualities
that are hard to see but that are very powerful. These include things like enthusiasm, integrity,
courage, and humility. First of all, good leadership springs from a genuine caring for the work
and a genuine concern for other people. The process of management generally encourages
emotional distance, but leadership means being emotionally connected to others. Where there
is leadership, people become part of a community and feel that they are contributing to
something worthwhile. Whereas management means providing answers and solving problems,
leadership requires the courage to admit mistakes and doubts, to listen, and to trust and learn
from others.

Developing leadership qualities takes work. For leadership to happen, leaders may have
to undergo a journey of self-discovery and personal understanding. Leadership experts agree
that a top characteristic of effective leaders is that they know who they are and what they stand
for. In addition, leaders have the courage to act on their beliefs.

True leaders tend to have open minds that welcome new ideas rather than closed minds
that criticize new ideas. Leaders listen and discern what people want and need more than they
talk to give advice and orders. Leaders are willing to be nonconformists, to disagree and say
no when it serves the larger good, and to accept nonconformity from others rather than try to
squeeze everyone into the same mindset.
10.7 Creating Outcomes
The differences between management and leadership create two differing outcomes,

as illustrated at the bottom of Exhibit 1.3. Management maintains a degree of stability,

predictability, and order through a culture of efficiency. Leadership, on the other hand, creates
change, often radical change, within a culture of agility and integrity that helps the organization
thrive over the long haul by promoting openness and honesty, positive relationships, and long-
term innovation. Leadership facilitates the courage needed to make difficult and
unconventional decisions that may sometimes hurt short-term results.

10.8 What is Leadership?

It is difficult to define the term “leadership”. However, as a starting point, we may
proceed with the workable definition that a leader is one who leads others and is able to carry
an individual or a group towards the accomplishment of a common goal. He is able to carry
them with him, because he influences their behavior. He is able to influence their behavior,
because he enjoys some power over them. They are willing to be influenced, because they have
certain needs to satisfy in collaboration with him. French and Raven have proposed the
following bases of power for a person exerting influence:

1. Legitimate- That the targets of influence, followers or sub-ordinates understand

that the power the leader enjoys is legitimate and they should comply with
his orders in order to meet their own goals.
2. Reward- That the followers know that the leader has the power to grant
promotions, monetary inducements or other rewards if his orders are complied
with.
3. Coercive- That the followers know that if the leader’s orders are not complied
with, he has the power to hire, fire, perspire and discharge the followers.
4. Expert- That the followers know that the leader possesses specialist’s
knowledge in the field they lack it.
5. Referent- That the followers feel attracted towards him because of his amiable
manners, pleasing personality or they feel that he is well connected with high-
ups.

It is apparent then that the first three power bases indicate positional power, which one
derives from one’s position. The other two indicate personal power, which is based on the
individual’s own characteristics. In any case, the leader exercises his influence because of one
or more of these types of power and obtains compliance from the followers. How far he
succeeds in his attempts will depend upon several other factors that we will discuss during the
course of this lesson.

Leadership is, therefore, regarded as the process of influencing the activities of an

individual or a group in efforts towards goal achievement in a given situation. This process, as
Heresy and Blanchard suggest, can be explained in the form of the following equation:

L = f (L, F, S,)

That is, the leadership is a function of the leader (L), the follower (F) and other
situational variables (S). One who exercises this influence is a leader whether he is a manager
in a formal organization, an informal leader in an informal group or the head of a family. It is
undoubtedly true that a manager may be a weak leader or a leader may a weak manager, but it
is also equally probable that a manager may be a true leader or a leader may be true manager.

A manager who is a true leader as well is always desirable. Situational variables

include the whole environment like the task, the group, organizational policies, etc.

10.9 Leadership Styles

Leadership style is the way a managerial leader applies his influence in getting work
done through his subordinates in order to achieve the organizational objectives. The main
attitude or belief that influences leadership style is the perceived role of the manager versus the
role of the subordinates. It depends upon the role of the leader whether he likes to work more
of a colleague, facilitator and decision maker and on the other hand the response of the
subordinates would determine the particular style to be in application. Broadly speaking, there
are three basic leadership styles:

Autocratic or Dictatorial Leadership: In this leadership style the leader assumes full
responsibility for all actions. Mainly he relies on implicit obedience from the group in
following his orders. He determines plans and policies and makes the decision-making a one-
man show. He maintains very critical and negative relations with his subordinates. He freely
uses threats of punishment and penalty for any lack of obedience. This kind of leadership has
normally very short life.

Democratic Leadership: In this case, the leader draws ideas and suggestions from his
group by discussion, consultation and participation. He secures consensus or unanimity in
decision-making. Subordinates are duly encouraged to make any suggestion as a matter of their
contribution in decision-making and to enhance their creativity. This kind of leadership style
is liked in most civilized organization and has very long life.

Laissez-faire Free Rein Leadership: Quite contrary to autocratic leadership style, in

this leadership style the leader depends entirely on his subordinates to establish their own goals
and to make their own decisions. He let them plan, organize and proceed. He takes minimum
initiative in administration or information. He is there to guide the subordinates if they are in a
problem. This kind of leadership is desirable in mainly professional organization and where
the employees are self-motivated. Leader works here just as a member of the team. We shall
now discuss the roots of such leadership styles i.e. we shall try to understand as to how these
different leadership styles have been evolved by the management scholars.

10.10 Leadership Theory

The various leadership theories can be categorized into six basic approaches, each of
which is briefly described in this section. Many of these ideas are still applicable to leadership
studies today.

Great Man Theories: This is the granddaddy of leadership concepts. The earliest
studies of leadership adopted the belief that leaders (who were always thought of as male) were
born with certain heroic leadership traits and natural abilities of power and influence. In
organizations, social movements, religions, governments, and the military, leadership was
conceptualized as a single “Great Man” who put everything together and influenced others to
follow along based on the strength of inherited traits, qualities, and abilities.

Trait Theories: Studies of these larger-than-life leaders spurred research into the
various traits that defined a leader. Beginning in the 1920s, researchers looked to see if leaders
had particular traits or characteristics, such as intelligence or energy, that distinguished them
from non-leaders and contributed to success. It was thought that if traits could be identified,
leaders could be predicted, or perhaps even trained. Although research failed to produce a list
of traits that would always guarantee leadership success, the interest in leadership
characteristics has continued to the present day.

Behavior Theories: The failure to identify a universal set of leadership traits led
researchers in the early 1950s to begin looking at what a leader does rather than who he or she
is. One line of research focused on what leaders actually do on the job, such as various
management activities, roles, and responsibilities. These studies were soon expanded to try to
determine how effective leaders differ in their behavior from ineffective ones. Researchers
 looked at how a leader behaved toward followers and how this correlated with leadership
effectiveness or ineffectiveness.

Contingency Theories: Researchers next began to consider the contextual and

situational variables that influence what leadership behaviors will be effective. The idea behind
contingency theories is that leaders can analyze their situation and tailor their behavior to
improve leadership effectiveness. Major situational variables are the characteristics of
followers, characteristics of the work environment and follower tasks, and the external
environment. Contingency theories, sometimes called situational theories, emphasize that
leadership cannot be understood in a vacuum separate from various elements of the group or
organizational situation.

Influence Theories: These theories examine influence processes between leaders and
followers. One primary topic of study is charismatic leadership, which refers to leadership
influence based not on position or formal authority but, rather, on the qualities and charismatic
personality of the leader. Leaders influence people to change by providing an inspiring vision
of the future and shaping the culture and values needed to attain it.

Relational Theories: Since the late 1970s, many ideas of leadership have focused on
the relational aspect, that is, how leaders and followers interact and influence one another.
Rather than being seen as something a leader does to a follower, leadership is viewed as a
relational process that meaningfully engages all participants and enables each person to
contribute to achieving the vision. Interpersonal relationships are seen as the most important
facet of leadership effectiveness. Two significant relational theories are transformational
leadership and servant leadership.

Relational theory includes the personal qualities that leaders need to build effective
relationships, such as emotional intelligence, a leader’s mind, integrity and high moral
standards, and personal courage. In addition, leaders build relationships through motivation
and empowerment, leadership communication, team leadership, and embracing diversity.

Reference

1. Daft, R. L. (2015). Leadership Experience. USA: Cengage Learning, Sixth Edition.

2. Pal, K. (2011). Business Management and Organizational Behavior. New Delhi: K

International Publishing House; First Edition.
Chapter 11. Business and Administrative Communication

Learning Outcomes

After studying this chapter, you should be able to:

1. Describe how solid communication skills will improve your career prospects
and help you succeed in today’s challenging digital age workplace;
2. Understand the process of communication;
3. Know the types of communication;
4. Familiarize with the barriers to communication and how to overcome them.
11.1 Mastering the Tools for Success in the Twenty-First-Century
Workplace
You may wonder what kind of workplace you will enter when you graduate and which
skills you will need to be successful in it. Expect a fast-moving, competitive, and information-
driven digital environment. Communication technology provides unmatched mobility and
connects individuals anytime and anywhere in the world.

Today’s communicators interact using mobile electronic devices and access

information stored on remote servers, “in the cloud.” This mobility and instant access explain
why increasing numbers of workers must be available practically around the clock and must
respond quickly.

This chapter presents an overview of communication in business today. It addresses the

contemporary workplace, listening skills, nonverbal communication, the cultural dimensions
of communication, and intercultural job skills.

Solid Communication Skills: Your ability to communicate is a powerful career sifter.

Strong communication skills will make you marketable even in a tough economic climate.
When jobs are few and competition is fierce, superior communication skills will give you an
edge over other job applicants. Recruiters rank communication high on their wish lists. In a
Fortune poll, 1,000 executives cited writing, critical-thinking, and problem-solving skills along
with self-motivation and team skills as their top choices in new hires. Effective writing skills
can be a stepping-stone to great job opportunities; poorly developed writing skills, on the other
hand, will derail a career.

11.2 Definition of Communication

The term “communication” is freely used by everyone. It is one of the most frequently
discussed subjects in the field of organizational behavior. According to Louis Allen,
Communication is the sum of all things, a person does when he wants to create an
understanding in the mind of another. It involves a systematic and continuous process of telling,
listening and understanding.

According to Keith Davis, “It is the process of passing information and understanding
from one person to another. It is essentially a bridge of meaning between people. By using this
bridge of meaning, a person can safely cross the river of misunderstanding that separates all
people”. Thus, in reality communication is the sum total of direct or indirect, consciously or
unconsciously transmitted words, attitudes, feelings, actions, gestures and tones. Even silence
is an effective form of communication. A twist in the face is often more expressive than 100
words put together. Tone very often than not, conveys the meaning of the words uttered.

11.3 Characteristics of Communication

The following are the characteristics of communication.

1. Communication is a two-way process because orders, instructions, directions,

guidelines, etc., are directed or communicated downwards while suggestions,
complaints, grievances etc., are communicated upwards. This not only involves
giving ideas but also receiving them.
2. No business organization can exist without communication because it is
necessary to have a congenial relationship between the different employees
working at different levels and that is why it is a continuous process.
3. The communication process continues to the extent that ideas and messages are
communicated and received.
4. It may be formal or informal and it may be in different mediums.

11.4 Understanding the Communication Process

Communication process contains the following elements:

The digital revolution has profoundly changed the way we live our lives, do business,

and communicate. People are sending more and more messages, and they are using exciting
new media as the world becomes increasingly interconnected. However, even as we have
become accustomed to e-mail, instant messaging, Facebook, Twitter, and other social media,
the nature of communication remains unchanged.
 No matter how we create or send our messages, the basic communication process
consists of the same five steps. It starts with an idea that must be transmitted. In its simplest
form, communication may be defined as “the transmission of information and meaning from a
sender to a receiver.” The crucial element in this definition is meaning. The process is
successful only when the receiver understands an idea as the sender intended it. How does an
idea travel from one person to another? It involves a sensitive process, shown in Figure 2.1.

This process can be easily sidetracked resulting in miscommunication. It is successful

when both the sender and the receiver understand the process and how to make it work. In our
discussion we will be most concerned with professional communication in the workplace so
that you can be successful as a business communicator in your career.

1. The Communicator: Communication commences with the communicator. He is the

sender of the message. He realizes the need for conveying something to someone else. A
communicator or the sender is the source of communication. He has a purpose of
communicating some information to one or more persons.

2. Encoding: Encoding means putting message into code. A message is initiated by

encoding a thought. The communicator encodes the information to be transmitted. It is done
by translating into a series of symbols or gestures. Encoding is essential because information
can be conveyed only through representations or symbols. The sender of the message should
establish mutuality of meaning with the receiver. Coded messages may be oral or written words
or gestures.

3. The message: A message is the output of encoding process. It is the physical form
of the encoded message. The message may be in any form- oral, written or gesture. But it must
be unambiguously understood by the receiver. Speech may be heard. Written words may be
read. Gestures may be seen or felt. Message must be clear and precise.

4. The Medium: The communicator can communicate the message through a medium.
The medium is the carrier of communication. The communication channel is the mode of
transmission. Air is the medium for oral message. The medium is inseparable from the
message. It links the sender with the receiver. The message may be conveyed through a
memorandum, letter, telegram, the telephone, a computer or T.V., but the channel or the
medium must be appropriate for the message. At times, multiple media are used for effective
communication. A telephone talk may be confirmed by a letter later. Since the choices of
channels are many, proper choice of the channel is vital for effective communication.

5. Decoding: Decoding refers to the finding of the meaning of something conveyed in

code. It is the process by which the receiver interprets the message. It means translating the
message that is significant and meaningful to the receiver. The recipient has to be ready for the
message. Then only the message can be decoded into thought. In decoding, the receiver
converts the message into thoughts. Decoding is affected by several factors such as the
recipient’s knowledge, past experience, personal interpretations of the symbols and gestures
used expectations and mutuality of meaning. Thus, decoding is very important for
understanding the message.

6. The Receiver: Communication requires at least a couple of people, the sender and
the receiver. One “encodes” and the other “decodes” the message. It will be complete only
when the receiver perceives the message intact. The receiver must decode the message without
distortion. If the message does not reach a receiver, communication cannot be said to have
taken place.

7. Feed Back: Feedback refers to the reaction of the receiver. It is a reversal of the
communication process. Feedback enables the communicator to know whether his message is
received and interpreted correctly or not. Further, Feedback enables the communicator to know
the reaction of the receiver so that future communication can be modified, if necessary. The
importance of Feedback is incalculable. It helps to check the effectiveness of communication.
It makes communication a two-way process.

8. Noise: “Noise” is the enemy of Feedback. It refers to any factor that interferes with
communication. Interference may occur in all the above stages of the communication process.
It hinders or blocks communication.

11.5 Types of Communication

We spend a great deal of our time in communication. No one can afford to waste time
be indulging in unnecessary communication. It is often very difficult to determine which
communication is necessary and which is not necessary. Again, it is difficult to determine the
extent of information to be passed on. The method of presentation is also to be decided -
narrative, statistical or graphical form. The following are some of the types of communication.

Verbal or Oral Communication: In this method of communication the two parties

exchange their ideas or the message with the help of word of mouth. The message, instruction,
order, directive etc., is conveyed through spoken words. Examples of verbal communications
are – telephone talk, oral orders, face to face talks, counseling etc. Some of the advantages of
verbal communication are as follows:

1. It saves time and money. No other device is so short, simple and quick. Because
of the face contact or personal touch, it is effective.
2. Oral communication is easily understood. Even when there are doubts, they can
be cleared on the spot.
3. The effect of the communication or response to the communication can be easily
measured. Suitable changes can also be done immediately.
4. During periods of emergency, oral communication is the best method.

However, oral communication is not suitable in the following cases:

1. When the communicator and the recipient are far off, (beyond the telephone
range) oral communication will not serve the purpose.
2. If the message to be transmitted is lengthy and requires a thorough clarification,
oral communication will not be suitable.
3. Oral communication does not serve as a record or as evidence. It cannot be made
use of in future.
 4. There are chances of misunderstanding and miss-interpreting the
communication.

Written Communication: A written communication is conveyed through a letter,

report, circular notes, memoranda, notice and communiqué. It is a very common form of
communication in most of the organizations and is suitable for many situations.

The usual forms of written communication are: Orders – given by the superiors to the
sub- ordinates. These can be of three types; General; Specific; Definite.

General orders are given by the top management, specific orders by the middle level
management to lower level managers and definite orders by the supervisor to workers.

Instructions given by the departmental heads to supervisors and by the supervisors to

their sub-ordinates.

Reports submitted by the authorized persons. These are of three types.

(a) Routine reports- which are prepared periodically and are a regular feature.

(b) Commission reports- which are of a non-routine nature and are prepared under
special orders.

(c) Special circumstances reports.

Written communications have the following advantages:

1. They serve as permanent record and as a source or reference.

2. More care is taken in drafting written communication (than is in the case of oral
communications) and this saves the subsequent loss of time and money.
3. When the communicator and recipient are far off, written communication is the
best method.
4. The recipient can ponder over the communication and request for changes, if
necessary.

The disadvantages are listed below:

1. As everything is to be translated into black and white, it consumes a lot of time

and money.
2. People do not care at all to pass the appropriate message. Consequently, poor
messages are to be followed by clarifications and explanations.
 3. Sometimes it may not be possible to reduce everything into writing. Any
omission will call for additional communication.
4. Written communication is subject to delay and red Taoism.
5. It is very difficult to keep some communications up to date.

Formal and Informal Communication: The formal organization chart describes the
formal lines of authority, power, responsibility and accountability of the organizational
members. All these relationships involve communication. For instance, the delegation of
authority involves the flow information from a superior to his subordinate. Formal
communications are in black and white.

On the other hand, informal communication is free from all the formalities of formal
communication. Informal communication is based on the informal relationship among the
organization members. It is conveyed by a simple gesture, glance, nod, smile or mere silence.
For instance, when the worker approaches the manager and informs about the completion of
the job entrusted to him, and if the manger simply nods his head or gives an approving smile,
then it amounts to informal communication.

The informal communication which supplements the formal organizational relationship

is referred to as the “Grapevine”. Though this relationship is structure less, it comes into
existence when formal organizational members who know each other pass on information
relating to the enterprise. It thrives on information not openly available to the entire work
group. This may be due to the fact that information is regarded as confidential. The Grapevine
may flourish, if formal lines of communication are inadequate. The Grape vine is inevitable
and valuable, because all forms of informal organization serve essential human communication
needs. It is very effective for quick communication.

Downward, Upward or Horizontal Communication: Communications are classified

as downward, upward or horizontal. Communication is said to be downward when it flows
from the top to the bottom, it is upward when it flows from the sub-ordinates to the top
management. It is horizontal when it flows between individuals at the same level (e.g. between
two departmental or section heads). All these three kinds of communications may be either oral
or written.

The Classical theorists emphasized downward communication. Downward

Communication is used by the superiors to convey their orders and directions to their
subordinates.
 The purposes of downward communication are:

1. To give job instructions.

2. To create an understanding of the work and its relations with other tasks.
3. To inform about procedures.
4. To inform sub-ordinates about their performance.
5. To indoctrinate the workers to organizational goals.

11.6 Barriers to Communication

It is not possible that every time an order, instruction, guideline, direction, program,
information etc., transmitted by the superior is properly understood and assimilated by those
for whom it is intended. Similarly, suggestions, reports, advice, recommendations, complaints,
etc., transmitted by the sub-ordinates to their superiors may be misunderstood or mis-
interpreted. In any case, the objectives of communication are defeated.

As such, the process of communication is not always smooth. It is obstructed by many

obstacles. These are referred to as barriers of communication. It refers to those factors which
cause disturbance either in the mind of the communicator or the communicate or in the process,
which will create distortion of the message, leading to lack of the response, ignoring or miss-
understanding. The important barriers to effective communication are Ineffective Expression,
Inaccurate Translation, Inattention, Loss in Transmission, Vague and Unclarified
Assumptions, Inadequate Adjustment Period, Distrust, Fear, Noise, Distance and Time and
Impression.

Ineffective Expression: The first and the most common barrier in the process of
communication is bad expression. This means that the messages suffer from omissions,
uncertainty, inaccuracies, verbosity, repetitions, ambiguity, lack of clarity and precision. In
order to remove this, the staff should be trained to draft various kinds of effective
communication. This will save time because otherwise much time has to be devoted in giving
subsequent clarifications.

Inaccurate Translation: Decisions are generally conveyed from the top to the lower
level. The superiors are known for their specialized knowledge. They generally draft messages
in a technical language which may not be clearly understood by those who have to implement
the decisions. Even if they are able to understand, they may not be able to convey it further
down the line in simple words.
 In many such cases, it becomes necessary to translate the subject matter or the message
into a simpler language, i.e., the language which the Communicate can understand easily. But
the translation may be done inaccurately. Sometimes the translator is not in a position to find
out the equivalent of many terms. With the result, the translation leads to further confusion. It
becomes necessary that competent persons are appointed for the job and are provided the
necessary equipment for the execution of the entrusted tasks.

Inattention: Inattention is a very common and chronic human failing. This barrier
generally arises in case of oral communication. It can be illustrated with the help of the
following example: a superior is giving a message on the telephone. The subordinate is busy
reading a magazine or looking through the window or his mind is occupied with some family
problem. Superiors have to face this problem of inattention quite frequently. Efforts to
communicate fails. The communicator should choose the appropriate time for communicating.
Thus, for example, communicating at lunch hour or while at rest will not invite due attention.
Holding a meeting at an odd time or calling the worker over for a talk on a holiday are some
other examples.

Loss in Transmission: Loss in transmission is another barrier of communication which

arises in oral communication. When messages are conveyed from the higher to the lower level
step by step, much of it is likely to be lost in transit. This problem may arise in case of written
communication as well. At every level the superior will interpret the message which is likely
to be distorted. Further, the meaning will change if some words are dropped, changed or
misspelt. Harold Koontz and Cyril O’Donnell estimate that about 30% of the information is
lost in each transmission. Written communications too are subject to loss in transmission. It is
no wonder that enterprises often operate in a cloud of ignorance.

Vague and Unclarified Assumptions: The object of a communication is to distinctly

tell the communicate what is desired of him. If the message is not clear in meaning, assumptions
are not clear to the personnel; communication will lose its purpose. If the personnel are not
able to know what they are supposed to do even after receiving the message, the communication
will be no more than a waste paper.

Inadequate Adjustment Period: Certain messages affect a large number of people in

their personal life. For example, a notice is issued informing change in the timings of the shift
in a factory. This requires sufficient lead time for the workers to make an adjustment. In case
sufficient time is not granted there will be a communication barrier. Similarly, communications
regarding changes in the rules about bonus, over time should allow an adjustment period.
Sufficient time should be allowed to the employees to adjust their schedule or get themselves
mentally prepared.

Distrust: It arises if the superior is known for making frequent changes in the
communication, quite often even reversing the original message. It is due to ill-conceived
adjustment, improper technology, etc. Repeated experience of this type will damage
employee’s interest in the communication.

Fear: This indicates anxiety, awe, alarm or apprehension. This arises in upward
communication and creates a barrier in communication. It may be illustrated as below. A
subordinate is not sure if the information conveyed by him to the superior will be useful or not.
He thinks if it is not liked, boss will be annoyed and might take action against him. He requests
another subordinate to transmit the information on his behalf.

Noise, Distance and Time: The world will not be worth living in, if it is quiet
everywhere. But at the same time noise is a big menace. In modern factories the constant
rattling of the machines and tools, the squeaking of the wheels constantly creates a lot of noise.
And noise proves a great barrier to communication. It is a very common experience that noise
proves a big hindering factor if two persons are talking. If somehow the noise is not controlled,
it may not be possible for communicate to listen anything or make out the sense. He will
properly feel strained.

Impression: Sometimes in an effort to impress others, the communicator starts talking

in a confused manner or speaks with a changed pronunciation. These actions hinder
communication. It leads to wastage of time, resources and energy and causes misunderstanding.

11.7 How can Communication be more Effective

The following aspects, if taken care of, will make communication effective.

Clarity of Thoughts: The idea to be transmitted must be absolutely clear in the mind
of the communicator. Just as it is not possible to have a clear print from a blurred negative,
similarly one can never make his views intelligible to others, if he himself is confusing at
certain points. Hence the process of communication to be complete must spring out from a
clear head. Further, the academic level of the workers, their power of grasping things etc.,
should also be taken into account. Even when the language spoken by the workers, superiors
and the management is the same, words often mean different things to people with a different
experimental background.
 Attach Importance to Actions Rather Than Words: In all communications, actions
are more significant than words. A manager who invariably says that he trusts subordinates and
then proceeds to make too many checks on the sub ordinate’s work, usually fails to make
himself understood. A boss who is not punctual cannot succeed in enforcing the timing-rules
on the subordinates.

Participation: The next most important essential point is that both the parties
(communicator and the recipient) should participate in the communication process. It is a
common complaint of the workers that proper and patient hearing is not given to their voice.
Listening plays a very fundamental part in oral communication because it is listening only
which leads to sharing, participation and understanding in oral communication. But this
listening is not merely passive hearing. It is an art which is to be perfected with practice based
on sound knowledge of the principles of human nature.

Some of such important principles are:

1. Respect the personality of employees, recognize both subjective and objective

facts,
2. Avoid moralizing, for example telling an emotionally upset worker that he
should be clam and talk reasonably and logically may only succeed in erecting
a barrier against further expression of his difficulties.
3. Hasty generalizations are dangerous; e.g., union stewards cannot be trusted, all
workers are dishonest.
4. Knowledge of one’s own prejudices will help proper listening.

Transmission: The communicator must plan carefully what to communicate, whom to

communicate and how to communicate. Further, delegation of authority without responsibility
breaks down the spirit of communication.

Keep the channel Always Alive: The channel of communication should be kept open
and alive. It is only by honest attempts that good communication relations can be developed.

Cordial Superior-Subordinate Relationship: Effective communication requires

good quality of relationship between people immediately connected with each other. It requires
sound industrial relations, policies and practices, an all-round atmosphere of friendly
cooperation and a feeling of trust and confidence throughout the organization right from the
top management down to the humblest worker. Under such conditions only, the meaning of
communication is grasped quickly and correctly. On the other hand, if the relations are not
satisfactory, much of the information may be suppressed or misunderstood.

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Mary Ellen Guffey, Dana Loewy. (2016). Essentials of Business Communication. Boston:
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 Principles of Management - 2 Mark Questions and Answers

1. ABC Analysis: ABC analysis is technique, which is used to classify the items in store based
on the demand of the stock. There may be variety of items that need to be purchased and
stocked in advance for issuing the same to various production departments. One has to
continuously monitor the stock according to the demand pattern of each item and issue the
replenishment order. If the stock on hand of a particular item becomes less than or equal to its
recorder level, immediately an order is to place for its economic quantity. it will be very
difficult to continuously monitor the stock level of each item and place order on the above-
mentioned condition. Hence it is highly efficient to classify the items of the stores into different
categories.
2. Absenteeism: Absenteeism is unauthorized absence from the work place. Absenteeism is
defined as the practice of habit of being absence and an absentee is one who habitually stays
away.
3. Acceptance Sampling: Acceptance sampling is a method to take a decision regarding
acceptance and rejection of a lot without having to examine the entire lot, thereby providing
economy of inspection.
4. Accounts Payable: This is an accounting term that refers to the credit debt your business has
incurred. Many businesses use credit for supplies, raw materials, or inventory purchases. The
organizations you owe payment to are considered an account. These accounts can be put on a
report for viewing. A quick glance at this report reveals the identities of your creditors, how
much money is owed to each creditor, and how long that money has been owed.
5. Added Value: The practice of offering extra benefits to customers to gain their purchases and
loyalty, also known as value-added marketing.
6. Aggregate Planning: Aggregate planning involves planning the best quantity to produce
during time periods in the intermediate range horizons (often 3 months to1 year) and planning
the lowest cost method of providing the adjustable capacity to accommodate the production
requirements. For manufacturing operations aggregate planning involves planning workforce
size, production rate (work hours per week) and inventory levels.
7. Annual Marketing Plan: A master plan covering a year's marketing operations; it is one part
- one-time segment - of the ongoing strategic marketing planning process.
8. Anticipation Inventory: Inventory of materials purchased in bulk quantities in anticipation of
price rise and products having seasonal demand produced in quantities more than the demand
 during off-seasons and held in inventory to meet higher demand rate (more than production
rate) during seasons of high demand.
9. Area Sample: A statistical sample that is selected at random from a list of geographic areas,
such as census collectors' districts.
10. Assets: Every business has assets, which in its simplest terms are items with value. All
businesses need assets to produce products or sell services. An asset is anything a business
owns. According to generally accepted accounting principles, the sum of the owner's
(shareholders') equity and a business' liabilities equals the total assets a business has.
11. Authority: the formal and legitimate right of a manager to make decisions, issue orders, and
allocate resources to achieve organizational goals.
12. B2B: A B2B (business to business) company is one that offers products or services directly to
other businesses. The business can be a buyer, such as when a company purchases material for
its products, or it can be a supplier providing products to other companies.
13. B2C: B2C is an acronym for business-to-consumer. A B2C business is one that sells products
or services directly to the consumer.
14. Balance Sheet: A balance sheet is a statement of the financial position of a business which
describes the assets, liabilities, and owners' equity at a particular point in time. In other words,
the balance sheet illustrates the business's net worth.
15. Balance Sheet: It is the description of the organization in terms of its assets, liabilities and net
worth.
16. Batch Production: It is used for moderate volume and variety of goods or services. A batch
production differs from the job shop with respect to volume and variety. Ex: Paints, Ice cream,
Soft drinks etc.,
17. Behavioral management theory: a method that focuses on people as individuals with needs
(also known as the human relations movement).
18. Bench Marking: Bench marking is measuring the performance against that of the best-in-class
companies and framing strategies to achieve that level in our own company.
19. Benchmarking: Benchmarking, or goal setting, allows a company to assess the opportunities
they may have for improving a number of areas in any of its functions. A baseline is established,
and metrics are developed with which to compare the future performance of the functions.
20. Body language: see nonverbal communication.
21. Bottom Line: Generally, the term bottom line refers to the last line in a financial statement of
a business, where a profit or loss is shown. It has also been adopted as a term to replace "What
this means is..." in presentations and papers.
22. Boundary spanning: the process of gathering information from the external environment to
identify current or likely events and determine how those events will affect the organization.
23. Brainstorming: an idea-generating process that encourages the development of alternatives
while withholding criticism of those alternatives.
24. Budget: Formal quantitative statement of resources allocated for planned activities over
stipulated periods of time.
25. Budgeting: It is called as a financial plan. The budget tries to equalize the revenues and
expenditures of the organization. The budgets are applicable to all functional areas of
management. A budget can be defined as a numerical statement expressing the plans, policies
and goals of the organization for a definite period in the future. Since budgets express plans,
and the organization may have large variety of plans, there may be many types of budgets.
26. Bureaucracy: a form of organization based on logic, order, and legitimate use of formal
authority.
27. Business Environment: Business environment consists of all those factors that have a bearing
on the business. The survival of the successful firm, depend on two sets of factors, namely
internal factors or internal environment and external factors or external environment. The
business decisions are conditioned by the above two sets of factors. The internal factors are
generally regarded as controllable factors. In general, the business environment is often
concerned with the external factors.
28. Business Ethics: Business is social institution, performing a social mission and having a broad
influence on the way people live and work together. The organization of the business, the way
of business functions, innovations, transmission and diffusion of information and new ideas
may affect society. Business activities highly influence the social attitudes, values, outlooks,
customs etc., Since, business is the integral part of the society, it has a social responsibilities
and ethics to be followed. Business ethics refers to the system of moral principles and rules of
conduct applied to business.
29. Business Process Re-Engineering: BPR is a fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in critical, contemporary measures of
performance such as cost, quality, service and speed to the market. Need for change is the
important idea behind BPR.
30. Capacity Planning: Capacity refers to the maximum load an operating unit can handle. The
operating unit might be a plant or a department or a machine or a store or a worker. The
production capacity of a firm is the maximum rate of production that production plant can
produce. Capacity planning is necessary when an organization decides to increase its
 production or introduce new products into the market or to increase the volume of production
to gain the advantages of economies of scale.
31. Cash Flow: Cash flow is the money that is moving (or flowing) in and out of a business in any
given month. Cash may be coming in from customers or clients, who are buying products or
services. Cash may be going out in the form of payments for expenses like rent or a mortgage.
32. Causal Research: Casual research is basically concerned with establishing cause and effect
relationship and an attempt to explain why things happen. For example, to what extent the price
elasticity of demand or the degree to which advertising campaigns have affected the sales may
be explained by casual research.
33. Cellular Manufacturing Layout: In this type of layout the machines are grouped into cells
and the cells perform somewhat like a product layout with in a larger process layout (Shop
floor).
34. Centralization: Centralization refers to concentration of power and decision making at one
point or in few hands. It is defined as the systematic and consistent reservation of authority at
central points of the organization.
35. Centralized organization: authority is concentrated at the top of the organization.
36. CEO: The Chief Executive Officer (CEO), is the top executive in an organization. That top
executive can have many titles. The top executive can also be a managing partner or president.
Most organizations are replacing the title of their top executive with CEO.
37. Chain of command: a line of authority that links all persons in an organization and defines
who reports to whom.
38. Charismatic power: see referent power.
39. Classical administrative: the branch of classical management theory that emphasizes the flow
of information in organizations.
40. Classical management theory: a theory, developed during the Industrial Revolution that
proposes "one best way" to perform tasks. Classical management theory developed into two
separate branches: the classical scientific school and the classical administrative school.
41. Classical scientific: a branch of the school of classical management theory, whose emphasis
is on increasing productivity and efficiency.
42. Closed system: an organization that interacts little with its external or outside environment.
43. Coercive power: authority to punish or recommend punishment.
44. Collective Bargaining: Collective bargaining is a process in which the representatives of the
employer and of the employees meet and attempt to negotiate a contract governing the
employer-employee union relations.
45. COMMISSION PLAN: A method of compensating a sales force whereby a salesperson is
paid for a unit of accomplishment (measured as sales volume, gross margin or a non-selling
activity); it provides much incentive for a sales representative, but little security of income.
46. Communication: It is the transfer of information from the sender to receiver with the
information being understood by the receiver. Communication flow in the organization can be
classified into, downward communication, upward communication and Crosswise
communication.
47. Communication: the exchange of ideas, messages, or information, by speech, signals, or
writing.
48. Compensation Management: Compensation management is concerned with the designing
and implementing total compensation package. It is also known as wage and salary
administration, remuneration management or reward management.
49. Compensation: all work-related payments, including wages, commissions, insurance, and
other benefits.
50. Competitive advantage: any aspect of an organization that distinguishes it from its
competitors in a positive way.
51. Competitiveness: Competitiveness is a crucial factor in determining the survival and growth
of a firm. Firms compete with one another to sell their goods and services in the market place
because now a day’s supply usually exceeds demand and no firm can enjoy monopoly.
Competitiveness is how effectively an organization meets the needs of customers relative to
other firms which offer similar goods or services.
52. Computer Aided Design (Cad) : It is an electronic system using computers for designing new
parts or products or to modify the existing design. A powerful desktop computer and graphics
software will help to manipulate geometric shapes. The computer aided design can be extended
to computer aided manufacturing (CAM), which refers to the use of computer software to direct
and control manufacturing equipment.
53. Concept of Direction: It is a function of management which is related with instructing, guiding
and inspiring human factor in the organization to achieve organizational objectives. Directing
is influencing people's behavior through motivation, communication, group dynamics,
leadership and discipline. The purpose of directing is to channel the behavior of all personnel
to accomplish the organization's mission and objectives while simultaneously helping them
accomplish their own career objectives.
54. Concurrent control: method of regulation applied to processes as they are happening.
55. Condition of certainty: situation that occurs when the decision maker has perfect knowledge
of all the information needed to make a decision.
56. Consumer Behavior: The consumer behavior studies how individuals, groups and
organizations select, buy, use and dispose of goods, services, ideas, or experiences to satisfy
their needs and desires. Understanding consumer behavior and “knowing customers” is never
simple.
57. Consumerism: It is an organized movement of the consumers – a movement that seeks to
protect the consumers from unfair practices of the producers and marketers, and to enhance the
rights of the consumers in relation to producers and marketers. According to Peter Drucker,
“consumerism is the shame of marketing”. If marketing is practiced as per the marketing
concept, the very motive for consumerism will disappear.
58. Content theory: identifies physical or psychological conditions that act as stimuli for human
behavior.
59. Contingency planning: development of alternative courses of action that can be implemented
if and when the original plan proves inadequate because of changing circumstances.
60. Contingency theory: this principle examines the fit between the leader and the situation and
provides guidelines for managers to achieve an effective fit (also known as situational theory).
61. Continuous Improvement Plan: A continuous improvement plan is a set of activities
designed to bring gradual, ongoing improvement to products, services or processes through
constant review, measurement, and action.
62. Continuous process: a system that produce goods by continuously feeding raw materials
through highly automated technology.
63. Control: the systematic process of regulating organization activities to make them consistent
with the expectations established in plans, targets, and standards of performance.
64. Controlling: The concept of control confined with correcting the deviations from the fixed
objectives. The control factors keep the employees approach in the same direction as like the
top management. The factors like performance appraisal, training and development are closely
related to controlling.
65. Cost Accounting: Costing is concerned with cost determination and indicates, what is the
approximate cost of a process or a product under existing conditions. Standard costing is the
famous technique adopted in costing, which is the method of cost accounting in which standard
costs are used in recording certain transactions and the actual costs are compared with the
standard cost to find out the amount of reasons of variations from the standard.
66. Cost-leadership strategy: system that focuses on keeping costs as low as possible through
efficient operations and tight controls.
67. Crisis problem: an unexpected problem that has the potential to lead to disaster if not resolved
quickly and appropriately.
68. Cross-functional teams: groups of experts in various specialties (or functions) who work
together on solutions to organizational problems.
69. Cycle Inventory: The position of total inventory which varies directly with lot size (i.e.,
quantity ordered). For example, if Q is the order quantity or the lot size and the supply is
received exactly when the stock is nil, then the minimum inventory is nil, maximum inventory
is Q and the average cycle inventory is half of quantity ordered.
70. Decentralization: Decisions are to be pushed down to the lowest feasible level in the
organization. The organizational structure goal is to have working managers rather than
managed workers.
71. Decentralized organizations: firms that consciously attempt to spread authority to the lowest
possible levels.
72. Decision Making: The process of decision making is the vital element in the management
process. The decision making is necessary in each and every step of managerial functions. The
basic idea of decision-making process is to identify a suitable solution for a problem provided,
by evaluating various possible solutions for that particular problem. Decision making is a
conscious and human process involving both individual and social phenomenon based upon
factual and value premises, which concludes with a choice of one behavioral activity from
among one or more alternatives with the intension of moving toward some desired state of
affairs.
73. Decision tree: a diagram that analyzes hiring, marketing, investment, equipment purchases,
pricing, and similar decisions. Decision trees assign probabilities to each possible outcome and
calculate payoffs for each decision path.
74. Decision-Support System: An internal, interactive, computer-based system that enables
marketers to develop answers to specific questions relating to their marketing activities. 243.
MARKETING MYOPIA Marketers' perspectives of products or markets that is too narrow.
75. Definition of Authority: It may be defined as the ability to make decisions which guide the
actions of another. It is the relationship between the superior and subordinate.
76. Definition of Controlling: Controlling is determining what is being accomplished, that is
evaluating the performance and, if necessary, applying corrected measures so that the
performance takes place according to plan. Controlling is a four-step process of establishing
 performance standards based on the firm's objectives, measuring and reporting actual
performance, comparing the two, and taking corrective or preventive action as necessary.
77. Delegation of Authority: Authority is legitimized power. Power is the ability to influence
others. Delegation is distribution of authority. Delegation frees the manager from the tyranny
of urgency. Delegation frees the manager to use his or her time on high priority activities. Note
that delegation of authority does not free the manager from accountability for the actions and
decisions of subordinates.
78. Delegation: It is the transfer of work from one person to another. It is different from
decentralization. Authority can be delegated and responsibility cannot be delegated. In brief
delegation is passing on to others. It is an administrative process in an organization to get things
done through the efforts of other people. A superior cannot perform all his work. In order to
reduce his burden he delegates a portion of his work to his favorable subordinates. While
delegating work, he also delegates a portion of his authority to carry out the work.
79. Delegation: the downward transfer of authority from a manager to a subordinate.
80. Demand: The demand is wants for specific products that are backed by an ability and
willingness to buy them. Marketers influence demand by making the product appropriate,
attractive, affordable and easily available to target consumers.
81. Demographics: measurements of various characteristics of the people and social groups who
make up a society.
82. Demotion: Demotion is the antithesis of promotion in which the employee marches backward
instead of forward. It was defined as, the assignments of individual to a job of lower rank and
pay usually involving lower level of difficulty and responsibility.
83. Depart mentation: Depart mentation is the grouping of jobs under the authority of a single
manager, according to some rational basis, for the purposes of planning, coordination and
control. The number of departments in an organization depends on the number of different
jobs, i.e., the size and complexity of the business.
84. Descriptive Research: Descriptive research is concerned with measuring and estimating the
frequencies with which things occur or the degree of correlation or association between various
variables. It has been seen that market research reports are often descriptive and the behavior
and attitudes of consumers in the market place.
85. Development plans: a series of steps that can help employees acquire skills to reach long-term
goals, such as job promotions.
86. Diaries: Diaries are used by a number of specially recruited consumers. They are asked to
complete a diary that lists and records their purchasing behavior of a period of time (weeks,
 months, or years). It demands a substantial commitment on the part of the respondent.
However, by collecting a series of diaries with a number of entries, the researcher has a
reasonable picture of purchasing behavior.
87. Differentiation strategy: a plan whereby a company attempts to set the organization's products
or services apart from those of other companies.
88. Directing: The concept of directing in management means the proper leadership in the
organization. Unity of direction is one of the fourteen principles of Henry Fayol, who is the
father of modern management theories. The concept of directing is also called as leading which
enhance the employees work in the right direction towards the mutual benefit of the
organization as well as the employees.
89. Discipline: A disciplined person exhibits the self-control, dedication and orderly conduct
consistent with successful performance of job responsibilities. This discipline may come
through self-discipline, co-workers or the supervisor/employer. Self-discipline is best and most
likely to come from well selected, trained, and motivated people who regularly have feedback
on their performance.
90. Distribution: Distribution is the management of the flow of materials from manufacturers to
customers and from warehouses to retailers involving the storage and transportation of the
products. Distribution broadens the market place for affirm, adding time and place value to its
products.
91. Division of Labor: Division of labor is captured in an organization chart, a pictorial
representation of an organization's formal structure. An organization chart is concerned with
relationships among tasks and the authority to do the tasks.
92. Division of labor: see work specialization.
93. Division of Work: The breakdown of complex task into components so that individuals are
responsible for a limited set of activities instead of the task as a whole. Sometimes referred to
as division of labor.
94. Embargo: a prohibition on trade in a particular area.
95. Empathy: Empathy relates to observing the things or situations from others points of view.
The ability to look at things objectively and understanding them others‟ points of view is an
important aspect of successful HR manager. Empathy requires respect for others, their rights,
beliefs, feelings and values.
96. Employee benefits: legally required or voluntary compensation provided to employees in
addition to their salaries.
97. Employee Discipline: Employee discipline may be considered as the force that prompts
individuals, or groups to observe rules, regulations, standards and procedures deemed
necessary for an organization.
98. Employee Turnover: Employee turnover is defined as the rate of change in the working
personnel of an organization during a specified period.
99. Employee Turnover: When employees leave a company and have to be replaced its called
employee turnover. A certain amount of turnover is unavoidable, but too much can ruin a
company. The two general types of turnover are voluntary (such as resigning) and involuntary
(such as layoffs).
100. Empowerment: giving individuals organization autonomy.
101. Entrepreneurial Marketing: In the companies started by the individuals, they visualize an
opportunity and knock on every door to gain attention to market their product.
102. Entrepreneurship: organizational culture that allows employees flexibility and authority in
pursuing and developing new ideas.
103. Equity: Equity is the value of the capital contributed by owners or stockholders. This is also
referred to as shareholders' equity.
104. Exception Principle: Someone must be in charge. A person higher in the organization
handles exceptions to the usual. The most exceptional, rare, or unusual decisions end up at the
top management level because no one lower in the organization has the authority to handle
them.
105. Exchange: Exchange is a core idea of marketing, is the process obtaining a desired product
from someone by offering something in return.
106. Expectancy theory: a motivational theory stating that the three factors that influence behavior
are the value of the reward, the relationship of the reward to performance, and the effort
required for performance
107. Expert power: a leader's special knowledge or skills regarding the tasks performed by
followers.
108. Exploratory Research: Exploratory research gives valuable insight, generates ideas and
hypotheses rather than measuring or testing them. Exploratory research is concerned with
identifying the real nature of research problems and perhaps of formulating relevant hypotheses
for various tests.
109. Exporting: selling of an organization's products to a foreign broker or agent.
110. Facility Location: Facility location or plant location is the process of determining a
geographical site for a firm’s operation achieving maximum operating economy and
 effectiveness. Facility location is the strategic decision taken by the top management of the
company, which greatly affects the fixed and variable cost involved in the production and
operations system.
111. Family: It is a primary reference group which influences the consumer buying process to the
maximum level. Family is a two or more individuals living together because of blood relations,
marriages or adoption.
112. Feed forward controls: method used to identify and prevent defects and deviations from
standards.
113. Financial Accounting Standards Board: The Financial Accounting Standards Board
(FASB) is the primary body in the United States that sets accounting standards. The board
updates and publishes generally accepted accounting principles for the standardization of
accounting procedures.
114. Financial audits: formal investigations to ensure that procedures, policies, laws, and ethical
guidelines are followed in the handling and reporting of financial activities.
115. Financial ratio analysis: the relationship between specific figures on an organization's
financial statements; helps explain the significance of those figures.
116. Financial Statement: It is the process of monetary analysis of the flow of goods and services
to, within, and from the organization.
117. Financial statements: reports that provide management with information to monitor financial
resources.
118. First-line management: the lowest level of management.
119. Fiscal Year: The government fiscal year (FY) generally starts on October 1 of a year and ends
on September 31 of the next year. For example, FY 2015 started on October 1, 2014, and ended
on September 31, 2015. The fiscal year for some business types mirrors the calendar year. Sole
proprietorships, partnerships, and S corporations follow the calendar year for tax purposes,
while corporations are allowed to design their own fiscal year.
120. Fixed Assets: Fixed assets are anything a business owns, such as buildings or equipment.
121. Fixed Position Layout: It involves the movement of men and machines to the product which
remains stationary. This type is followed of bulky and heavy products, such as locomotives,
ships and buildings.
122. Flexi place: see telecommuting.
123. Flextime: an employment alternative that allows employees to decide, within a certain range,
when to begin and end each work day.
124. Fluctuation Inventory: Inventory held as reserve stock to meet the unexpected fluctuating
demand over a period which cannot be predicted accurately.
125. Focus Groups: Focus groups are made up from a number of selected respondents based
together in the same room. Highly experienced researchers work with the focus group to gather
in depth qualitative feedback. Groups tend to be made up from 10 to 18 participants.
Discussion, opinion, and beliefs are encouraged, and the research will probe into specific areas
that are of interest to the company commissioning the research.
126. Force-field analysis: a technique to implement change by determining which forces drive
change and which forces resist it.
127. Formal structure: the hierarchical arrangement of tasks and people within an organization.
128. Formulated Marketing: When companies reach success, inevitably they move towards
formulated marketing by establishing a marketing department in their organization.
129. Fringe Benefits: Fringe benefits are supplements to wages received by workers at a cot to
employers. The term encompasses a number of benefits – paid vacation, pension, health and
insurance plans, etc., - which usually add up to something more than a fringe and it sometimes
applied to practice that may constitute dubious benefits for workers.
130. Functional authority: authority to make decisions about specific activities undertaken by
personnel in other departments.
131. Functional structure: an organizational design that groups positions into departments on the
basis of the specialized activities of the business.
132. Functional teams: work groups that perform specific organizational functions with members
from several vertical levels of the hierarchy.
133. GAAP: Generally accepted accounting principles (GAAP), are a set of rules and practices
having substantial authoritative support. GAAP is the standard that companies use to compile
their financial statements such as the income statement, balance sheet, and statement of cash
flows.
134. Globalization: Economic "globalization" is a historical process, the result of human
innovation and technological progress. It refers to the increasing integration of economies
around the world, particularly through trade and financial flows. The term sometimes also
refers to the movement of people (labor) and knowledge (technology) across international
borders. The growing economic interdependence of countries worldwide through increasing
volume and variety of cross border transactions in goods and services and of international
capital flows, and also through the more rapid and widespread diffusion of technology.
135. Golden Parachute: A golden parachute is a name given to the clause in a top executive's
employment agreement or contract that defines the payout the individual will receive should
they be terminated by the organization before the end of their contract.
136. Grapevine: the informal communications network within an organization (also known as
social network and informal channels).
137. Grievance: Grievance is any dissatisfaction or feeling of injustice in connection with one’s
employment situation that is brought to the attention of management.
138. Horizontal job loading: see job enlargement.
139. Human relations movement: see behavioral management theory.
140. Human Relations: Human relations is the area of management practice which is concerned
with the integration of people into a work situation in a way that motivates them to work
productively, cooperatively and with economic, social and psychological satisfaction.
141. Human Resource Accounting: Human resource accounting is accounting for people as an
organizational resource. It involves measuring the costs incurred by business firms and other
organizations to recruit, select, hire, train and develop human assets. It also involves measuring
the economic value of people to the organization.
142. Human Resource Audit: Audit is an important test of managerial control. It involves
verification of accounts and records. Human resource audit implies critical examination and
evaluation of policies, programmers‟ and procedures in the area of human resource
management.
143. Human Resource Development: It is a process by which the employees of an organization
are helped, in a continuous planned way to, acquire capabilities required to perform various
tasks and functions associated with their present or expected future roles.
144. Human Resource Management: Human resource management is a series of integrated
decisions that form the employment relationship; their quality contributes to the ability of the
organizations and the employees to achieve their objectives.
145. Human Resource Planning: Human resource planning is the process by which management
determines how an organization should move from its current man power position to its desired
man power position. Though it management strives to have the right number and the right kind
of people at the right places, at the right time, doing things which result in both the organization
and the individual receiving, long range maximum benefit.
146. Human Resource Policy: Human resource policies provide guidelines for a variety of
employment relationships and identify the organization’s intensions in recruitment, selection,
development, promotion, compensation, motivation, and integration of human resources.
147. Human Resources: Human resources are knowledge, skills, creative abilities, talents, and
attitudes obtained in the population in a national perspective and in individual perspective they
represent the total of the inherent abilities, acquired knowledge and skills as exemplified in the
talents and aptitudes of its employees.
148. Hybrid Layout: It is a combination of process, product and fixed position layouts. The
production plants are never laid out in either pure form.
149. Inbound Logistics: In inbound logistics, the goods are received from a company's suppliers.
They are stored until they are needed on the production/assembly line. Goods are moved around
the organization.
150. Incentive pay: links compensation and performance by paying employees for actual results,
not for seniority or hours worked.
151. Incentive Plan: An incentive scheme is a plan or program to motivate individuals for good
performance. An incentive is most frequently built on monetary rewards, but may also include
a variety of non-monetary rewards or prizes.
152. Income statement: a report that presents the difference between an organization's income and
expenses to determine whether the firm operated at a profit or loss over a specified time.
153. Income Statement: It is the summary of the organization’s financial performance over a
given interval of time.
154. Induction: Induction is the process of receiving and welcoming an employee when he first
joins a company and giving him the basic information he needs to settle down quickly and
happily to start the work.
155. Industrial Licensing: The Industries Development and Regulation Act, 1951 empowers the
central government to regulate the establishment and certain activities of the industrial
undertakings by means of licensing. A license is the written permission from the government
to an industrial undertaking to manufacture specific articles included in the schedule of the act.
156. Inelastic Demand: A price-volume relationship such that a change of one unit on the price
scale results in a change of less than one unit on the volume scale; that is, when the price is
increased, the volume demanded goes down but total revenue increases, and when the price is
decreased the volume goes up, but not enough to offset the price increase-so the net result is a
decrease in total revenue.
157. Informal channels: see grapevine.
158. Informal organization: the pattern, behavior, and interaction that stems from personal rather
than official relationships.
159. Informal Structure: The formal structure in each organization that has been put in place by
management has an accompanying informal structure. Management does not and cannot
control the informal structure. The informal structure has no written rules, is fluid in form and
scope, is not easy to identify, and has vague or unknown membership guidelines.
160. Innovation: Innovation is a very important factor that provides competitive advantage and
consequently determines success. Innovation is defined as, the technical, industrial and
commercial steps which lead to the marketing of new manufactured products and to
commercial use of new technical processes and equipment. The innovation is classified on the
basis, how big an impact does a technology change make on the applications.
161. Insider: An insider in a company is someone who has access to important information about
a company. This information could influence investor decisions that would impact the firm's
stock price or valuation.
162. Internal Environment: All factors that are internal to the organization are known as the
'internal environment'. They are generally audited by applying the 'Five Ms' which are Men,
Money, Machinery, Materials and Markets. The internal environment is as important for
managing change as the external. As marketers we call the process of managing internal change
“internal marketing”. Essentially we use marketing approaches to aid communication and
change management.
163. Interpersonal communication: real-time, face-to-face, or voice-to-voice conversation that
allows immediate feedback.
164. Intrapreneurial Marketing: It will happen in the large companies, where the brand and
product managers need to get out of the office and start living with their customers and visualize
new ways to add values to their customers‟ lives.
165. Inventory Control: Inventory control is a planning and controlling activity over inventory
and it is essential to provide flexibility in operating a system. The inventory can be classified
into raw materials inventory, in-process inventory and finished goods inventory. The raw
materials inventories remove dependency between suppliers and plants. The work-in-process
inventories remove dependency between machines of product line. The finished goods
inventory removes dependency between plant and its customers and market.
166. Inventory Management: Inventory may be defined as” stock of items kept on hand by an
organization to be used to meet customer demand”. Inventory also includes partially finished
products at different stages of manufacturing process, raw materials and components,
resources, finished products, labor or cash. Skillful inventory management can make a
significant contribution to the firm’s profit.
167. ISO 9000 Standards: ISO 9000 standards expect firms to have a quality manual that meets
ISO guidelines, document quality procedures and job instructions, and verification of the
compliance by third – party auditors. ISO 9000 series has five international standards on quality
management.
168. Job analysis: a study that determines all tasks and qualifications needed for each position.
169. Job Analysis: Job analyses is the process of determining by observation and study the tasks,
which comprise the job, the methods and equipment used and the skills and attitude required
for successful performance of the job.
170. Job Compensation: Job compensation includes direct cash payments, indirect payments in
the form of employee benefits and incentives to motivate employees to strive for higher levels
of productivity.
171. Job description: a written statement of a job's requirements, processes, and rationale.
172. Job Description: Job description is a functional description of what the job entails. It is the
written record of appropriate and authorized contents of a job.
173. Job enlargement: a type of job re-design that increases the variety of tasks a position includes
(also known as horizontal job loading).
174. Job enrichment: a type of job re-design that not only includes an increased variety of tasks,
but also provides the employee with more responsibility and authority (also known as vertical
job loading).
175. Job Evaluation: Job evaluation is an attempt to determine and compare demands which the
normal performance of a particular job makes on normal workers without taking into account
the individual performance of the workers concerned.
176. Job rotation: temporarily assigning employees to different job, or tasks to different people,
on a rotating basis.
177. Job Satisfaction: It is the amount of pleasure or contentment associated with a job. If you
like your job intensely, you will experience high job satisfaction. If you dislike your job
intensely, you will experience job dissatisfaction.
178. Job sharing: process in which one full-time job is split between two or more persons (also
known as twinning).
179. Job Shop: It is characterized by job shops when a low volume of high variety goods are
needed. Processing is intermittent and each job requires different process requirements. Ex:
Tool and die shop
180. Job Specification: Job specification is a statement of the minimum acceptable human
qualities required for the proper performance of a job. It is the written record of the physical,
 mental, social, psychological and behavioral characteristics which a person should possess in
order to perform the job effectively.
181. Job: Job is a group of positions involving same duties, skills knowledge and responsibilities.
Each job has definite title and is different from other jobs.
182. Joint venture: a business relationship formed between a domestic and foreign firm.
183. Kaizen: a Japanese term used in the business setting to mean incremental, continuous
improvement.
184. Layout: Layout is concerned with the configuration of production, support services, customer
services and other facilities that are used in production. It gives specific emphasis on the flow
of materials and movement of men in the organization.
185. Leadership: It is an art or process of influencing people so that they will strive willingly and
enthusiastically towards achievement of group goals.
186. Leading: establishing and influencing others to follow a specific direction.
187. Lean Production: Production system have become lean production systems which use
minimal amounts of resources to produce a high volume of high quality goods with some
variety. These systems use flexible manufacturing system and multi-skilled workforce to have
advantages of both mass production and job production.
188. Learning organizations: firms that utilize people, values, and systems to continuously
change and improve performance based on the lessons of experience.
189. Legitimate power: vested authority stemming from a formal management position in an
organization.
190. Liabilities: Liabilities are amounts owed by a business at any one time. They can be expressed
as payables for accounting purposes. Included in liabilities are loans, credit payments due,
taxes, or any other form of debt in which you are obligated to pay.
191. Licensure agreement: contract that grants one firm the right to make or sell another
company's products.
192. Line and Staff: Line functions are those 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 most effectively in accomplishing the primary objectives of the enterprise.
193. Line authority: a manager's right to direct the work of his or her employees and make
decisions without consulting others.
194. Line Manager: A line manager is a person who directly manages other employees and
operations of a business while reporting to a higher-ranking manager. The line manager term
is often used interchangeably with direct manager.
195. Liquidity ratios: measurements of an organization's ability to generate cash.
196. Maintenance Management: Maintenance management is concerned with the direction and
organization of resources in order to control the availability and performance of the industrial
plants to some specified level. It is a function supporting production function and is entrusted
with the task of keeping equipment, machinery and plant services in proper working condition.
197. Make or Buy Decisions: It is the first step in the process planning. It involves considering
whether to make or buy some or all of the goods or service. It is also possible to get all the
parts through outsourcing and the company can perform only the assembling operations.
198. Man Power Planning: It is the process- including forecasting, developing, implementing and
controlling by which a firm ensures that it has the right number of people and right kind of
people, at the right place, at the right time, doing things for which they are economically most
suitable.
199. Management by Objectives: MBO is a comprehensive managerial system that integrates
many key managerial activities in a systematic manner, consciously directed towards the
effective and efficient achievement of organizational objectives. It is both a philosophy and
approach towards management. The basic emphasis of MBO is on objectives. Periodic review
of performance is an important feature. Setting of objectives is the primary function of MBO.
200. Management Information System: It is a system in which the information flow in the way
of internal and external ways will be controlled. It is an effective system which use computers
to receive, store and retrieve data and change the data into information and made it available
at right person at the right time.
201. Management information systems: (MIS) collects, organizes, and distributes data in such a
way that the information meets managers' needs.
202. Management: During the last seven decades, management as a discipline has attracted the
attention of academicians and practitioners to a very great extent. Today management has
emerged as one of the most important disciplines of education and research and also become
an important facet of human life. Management has drawn most of its principles and concepts
from various disciplines such like economics, statistics, psychology, sociology and
anthropology etc., Management is the process of designing and maintaining an environment in
which individuals, working together in groups, efficiently accomplish selected aims.
203. Management: the process of administering and coordinating resources effectively,
efficiently, and in an effort to achieve the goals of the organization.
204. Manager: a person responsible for the work performance of one or more other persons.
205. Managerial Performance: The measure of how efficient and effective a manager is- how
well he or she determines and achieves appropriate objectives.
206. Market Aggregation: A marketing strategy in which an organization treats its entire market
as if that market were homogeneous.
207. Market Oriented Strategic Planning: Market – oriented strategic planning is the managerial
process of developing and maintaining a viable fit between the organization’s objectives, skills,
and resources and its changing market opportunities.
208. Market Potential: Market potential is the limit approached by market demand as industry
marketing expenditures approach infinity, for a given environment.
209. Market Segmentation: Segmentation is essentially the identification of subsets of buyers
within a market who share similar needs and who demonstrate similar buyer behavior. The
world is made up from billions of buyers with their own sets of needs and behavior.
Segmentation aims to match groups of purchasers with the same set of needs and buyer
behavior. Such a group is known as a 'segment'
210. Market Targeting: After identification of its market segment opportunities the company has
to decide how many and which ones to target. After the market has been separated into its
segments, the marketer will select a segment or series of segments and 'target' it/them.
Resources and effort will be targeted at the segment. It's like looking at a dart board or a
shooting target. You see that it has areas with different scores - these are your segments. Aiming
the dart or the bullet at a specific scoring area is 'targeting'.
211. Market: Market is a collection of buyers. Generally, a market is understood as a place where
commodities are bought and sold at retail or wholesale prices. In economics, however, the term
“market” does not refer to a particular place as such but it refers to a market for a commodity
or commodities. Thus economists speak of, say, a wheat market, a tea market, a gold market
and so on.
212. Market-Factor Analysis: A sales-forecasting method based on the assumption that future
demand for a product is related to the behavior of certain market factors. 235.
213. Marketing Audit: It is a systematic, comprehensive evaluation of a firms marketing
philosophy, objectives and strategy.
214. Marketing Decision Support System: It is a coordinated collection of data, systems, tools
and techniques with supporting software and hardware by which an organization gathers
interprets relevant information from business and environment and turns it into a basis for a
marketing action.
215. Marketing Environment: The marketing environment mainly formed by internal and
external environmental factors. The marketing environment surrounds and impacts upon the
organization. There are three key perspectives on the marketing environment, namely the
'macro-environment,' the 'micro-environment' and the 'internal environment'.
216. Marketing Ethics: Standards, values, moral principles etc., which govern the marketer’s
behavior in the market place.
217. Marketing Information Systems: The marketing information system consists of people,
Equipment and procedures to gather, sort, analyze, Evaluate, and distribute needed, timely, and
accurate Information to marketing decision makers.
218. Marketing Intelligence Systems: It is the set of procedures and sources used by managers to
obtain everyday information about development in marketing environment.
219. Marketing Intermediary: The business organization that is the link between producers and
consumers or industrial users; it renders services in connection with the purchase and/or sale
of products as they move from producer to their ultimate market, and either takes title to the
products or actively aids in the transfer of title; also known as middleman.
220. Marketing Management: It is an art and science of choosing target markets and getting,
keeping and growing customers through creating, delivering and communication superior
customer value. Marketing is indeed an ancient art; it has been practiced in one form or the
other since the days of Adam and eve. Its emergence as a management discipline, however, is
of relatively recent origin.
221. Marketing Mix: The marketing mix is the set of marketing tools, the firm uses to pursue its
marketing objectives in the target markets. According to McCarthy the four broad groups of
marketing mix elements are Product, Price, Place and Promotion. Marketing mix refers to the
ratio of the above elements in a customized manner for a specific marketing strategy.
222. Marketing Research: Marketing research is the systematic design, collection, analysis and
reporting of data and findings relevant to a specific marketing situation. Marketing research
instruments are, Questionnaires, Psychological tools, Mechanical devices and Qualitative
measures. Marketing research is the function that links the consumer, customer, and public to
the marketer through information - information used to identify and define marketing
opportunities and problems; generate, refine, and evaluate marketing actions; monitor
marketing performance; and improve understanding of marketing as a process.
223. Marketing System: A regularly interacting group of ideas or enterprises forming a unified
whole; these items include the organization that is doing the marketing, the thing that is being
 marketed, the target market, marketing intermediaries helping in the exchange and
environmental constraints.
224. Marketing: Marketing is societal process by which individuals and groups obtain what they
need and want through creating, offering and freely exchanging products and services of value
with others. Marketing is the process of planning and executing the conception, pricing,
promotion and distribution of ideas, goods and services to create exchanges that satisfies
individual and organizational goals.
225. Maslow’s Hierarchy of Needs: Abraham Maslow proposed the principle of need hierarchy.
It is expressed in a pyramid structure from bottom to top in the following order. Physiological
needs, Security or safety needs, Affiliation or acceptance needs esteem needs and Self-
actualization.
226. Mass production: a system used to manufacture a large number of uniform products in an
assembly line.
227. Mass Production: It is characterized by large volume of production and mostly a single goods
or services will be considered. Ex: Oil refineries, Sugar factory etc.,
228. Master Production Scheduling (MPS): The master production schedule sets the quantity of
each end item to be completed in each time period of the short range planning horizon. MPS
are developed by reviewing market forecasts, customer orders, inventory levels, facility
loading and capacity information regularly.
229. Materials Management: Materials management consists of planning, directing, co-
coordinating and controlling those activities which are concerned with materials and inventory
requirements from the point of their inception to their introduction into manufacturing process.
Modern techniques in materials management include supply chain management and logistics
management.
230. Matrix Management: Matrix management is commonly used in organizations if they have a
need to share resources across functions (i.e., different departments). In a matrix management
system, an individual has a primary report-to boss and also works for one or more managers,
most typically on projects.
231. Matrix Organizational Structure: Matrix organization is suitable for taking large number
of small projects and the activities of various projects can be accomplished through temporary
departments.
232. Mckinsey’s 7-S FRAMEWORK: Strategy, Structure, Systems, Style, Staff, Shared values
and Skills are the seven elements which form this frame work. According to McKinsey these
seven factors govern all the managerial activities in an organization.
233. Means-end chain: the effective design of organizational goals that encourages the
accomplishment of low-level goals as a way of achieving high-level goals.
234. Mechanistic structure: a highly bureaucratic organizational method, with centralized
authority, detailed rules and procedures, a clear-cut division of labor, narrow span of controls,
and formal coordination.
235. Method Study: It is defined as the systematic recording, analysis and critical examination of
existing and proposed ways of doing work and development and application of easier and more
effective work methods to replace the existing work methods.
236. Mission statement: a document that describes what an organization stands for and why it
exists.
237. Morale: Morale is basically a group phenomenon. It is a concept that describes the level of
favorable or unfavorable attitudes of the employees collectively to all aspects of their work-the
job, the company, their tasks, working conditions, fellow workers, superiors, and so on.
Attitudes express what the individuals think and feel about their jobs. The emphasis is on how
employees feel, denoting the strong emotional elements associated with attitudes.
238. Motion study: research designed to isolate the best possible method of performing a given
job.
239. Motivation: Selection, training, evaluation and discipline cannot guarantee a high level of
employee performance. Motivation, the inner force that directs employee behavior, also plays
an important role. Highly motivated people perform better than unmotivated people.
Motivation covers up ability and skill deficiencies in employees. Such truisms about motivation
leave employers wanting to be surrounded by highly motivated people but unequipped to
motivate their employees. Employers and supervisors want easily applied motivation models
but such models are unavailable.
240. Multinational corporations (MNC): organizations operating facilities in one or more
countries. The essential nature of the multinational enterprises lies in the fact that its managerial
headquarters are located in one country (home country) while the enterprise carries operations
in a number of other countries as well (host countries). Since the economic liberalization
ushered in 1991, many multinationals in different lines of business have entered the Indian
market.
241. Mystery Shopping: Companies will set up mystery shopping campaigns on an organizations
behalf. Often used in banking, retailing, travel, cafes and restaurants, and many other customers
focused organizations, mystery shoppers will enter, posing as real customers. They collect data
on customer service and the customer experience. Findings are reported back to the
 commissioning organization. There are many issues surrounding the ethics of such an approach
to research.
242. Mystery Shopping: Companies will set up mystery shopping campaigns on an organizations
behalf. Often used in banking, retailing, travel, cafes and restaurants, and many other customers
focused organizations, mystery shoppers will enter, posing as real customers. They collect data
on customer service and the customer experience. Findings are reported back to the
commissioning organization. There are many issues surrounding the ethics of such an approach
to research.
243. Need theory: a construct of motivation based upon physical or psychological conditions that
act as stimuli for human behavior.
Net Profit ÷ Cost of Investment = ROI
244. Network structure: an operating process that relies on other organizations to perform critical
functions on a contractual basis.
245. Non-Disclosure Agreement: For many companies, one of their most valuable assets is their
intellectual property which they must keep secret. A non-disclosure agreement (NDA) is a legal
document between employee and employer, in which the employer agrees to disclose certain
information to the employee for a specific purpose. The employee then becomes legally bound
not to disclose that information to anyone else.
246. Nonverbal communication: actions, gestures, and other aspects of physical appearance that
can be a powerful means of transmitting messages (also known as body language).
247. Omnibus Studies: An omnibus study is where an organization purchases a single or a few
questions on a 'hybrid' interview (either face-to-face or by telephone). The organization will be
one of many that simply want to a straightforward answer to a simple question. An omnibus
survey could include questions from companies in sectors as diverse as health care and tobacco.
The research is far cheaper, and commits less time and effort than conducting your own
research.
248. Ongoing plans: see continuing plans.
249. Open system: a method in which an individual or organization must interact with various and
constantly changing components in both the external and internal environments.
250. Operating Characteristic Curve (OCC): The following can happen when we go for
acceptance sampling; we accept good lots, We reject bad lots, We may accept bad lots and We
may reject good lots. The OCC shows how well an acceptance plan discriminates between
good and bad lots. If we define a good lot as any lot having no more than 1 percent of defectives,
it is called as Acceptable Quality Level (AQL).
251. Operational goals: specific, measurable results expected from first-level managers, work
groups, and individuals.
252. Operational plan: developed by a first level supervisor as the means to achieve operational
objectives in support of tactical plans
253. Operational Planning: Operational planning is done over a short range of time span
developed by the junior level management. It concerns with the utilization of existing facilities
rather than creation of new facilities. It involves utilization of key resources such as raw
materials, machine capacity, labor capacity and energy.
254. Operations Management: The production management which was formerly known as
manufacturing, now after inclusion of services into its scope, is broadly known as operations
management. Many non-manufacturing organizations providing services like hospitals, banks,
transportation, warehousing etc., are now covered by operations management.
255. Opinion Leader: The opinion leader is the person in informal, product related
communication, who offers advice or information about the specific product or product
category.
256. Organic structure: a management system founded on cooperation and knowledge-based
authority.
257. Organization: a group of individuals who work together to accomplish a common goal.
258. Organizational change: a significant change that affects an entire company.
259. Organizational chart: a pictorial display of the official lines of authority and communication
within an organization.
260. Organizational climate: the byproduct of organizational culture; it is the barometer for
determining the morale of the employees.
261. Organizational culture: an organization's personality.
262. Organizational design: the creation or change of an organization's structure, the
configuration and interrelationships of positions and departments.
263. Organizational development (OD): a plan that focuses on changing an entire organization
by changing processes and organizational culture.
264. Organizational Hierarchy: The organizational hierarchy is framed by three important
components i.e., the top level management, Middle level managers, and first level supervisors
and the workers. This hierarchy should be strictly followed for various activities in the
organization. Especially the flow of formal communication should be from the top level to the
bottom level.
265. Organizational Manual: Organizational manual is a small book containing information
about the organizational objectives, authority and responsibility of various positions mentioned
in the organizational chart.
266. Organizational Performance: The measure of how efficient and effective an organization is
– how well it achieves appropriate objectives.
267. Organizational Structure: 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 grew out of the planning function.
268. Organizing: Dividing the total work into various elements and getting the work done by
different people which provides a collective result is the basic principle behind organizing. It
provides sequential and systematic framework in the working condition to carry out the roles
and responsibilities in an effective way.
269. Organizing: the process of establishing the orderly use of resources by assigning and
coordinating tasks.
270. Orientation: a socialization process designed to provide necessary information to new
employees and welcome them into the organization.
271. Outbound Logistics: In outbound logistics, the goods are now finished, and they need to be
sent along the supply chain to wholesalers, retailers or the final consumer.
272. Parity Principle: Delegated authority must equal responsibility. With responsibility for a job
must go the authority to accomplish the job.
273. Participation: The concept of participation as a principle of democratic administration in an
industry implies a share by rank and file in the decision-making process of an industrial
organization through their representatives at all the appropriate levels of management in the
entire range of managerial action.
274. Performance appraisal: a formal, structured system designed to measure an employee's job
performance against designated standards.
275. Performance Appraisal: It is the systematic evaluation of the individual with regard to his
or her performance on the job and his potential for development. Effective performance
appraisal moves beyond informal communication but does not exclude it.
276. Performance Appraisal: No employee escapes performance appraisal. As a minimum, each
employee receives informal messages from his or her supervisor and co-workers. The messages
may be carefully calculated or emotional outbursts, frequent or infrequent, helpful or hurtful,
understood or misunderstood, consistent or inconsistent, fair or unfair. They may improve
performance or cause additional performance problems. They may motivate an employee or
leave the employee discouraged and disgruntled.
277. Personnel Management: Personnel management is the planning, organizing, directing, and
controlling of the procurement, development, compensation, integration, maintenance and
separation of human resources to the end that individual, organizational and social objectives
are accomplished.
278. Pert / Cpm: PERT (Program Evaluation Review Technique) was developed by the special
project office of the U.S. Navy in 1958. Almost at the same time, engineers at the Dupont
company, U.S.A. also developed CPM (Critical Path Method). The CPM assumes the duration
of every activity to be constant, therefore, every activity is either critical or not. In PERT,
uncertainty is the duration of activities is allowed and is measured by three parameters – most
optimistic duration, most likely duration and most pessimistic duration. PERT/CPM is used
either to minimize the total time, minimize total cost, minimize cost for a given total time,
minimize time for a given cost, or minimize idle resources.
279. Philosophy of management: a manager's set of personal beliefs and values about people and
work.
280. Pipe-Line Inventory: Inventory moving to point to point in the materials flow system.
Materials move from supplier to a plant, form one operation to the next in the plant and from
the plant to the warehouse or distribution center or to the customer. Pipe line inventories also
include materials that have been ordered but not received.
281. Plan: a blueprint for goal achievement that specifies the necessary resource allocations,
schedules, tasks, and other actions.
282. Planned change: the deliberate structuring of operations and behaviors in anticipation of
environmental forces.
283. Planning: Planning is defined as the process of deciding the future course of action in
advance. It is the primary function of management. Since management is a universal
phenomenon the planning function is also have universal usage.
284. Planning: the act of determining the organization's goals and defining the means for achieving
them.
285. Positioning: Positioning is undoubtedly one of the simplest and most useful tools to
marketers. Positioning is all about 'perception'. It is the act of designing the company’s offering
and image to occupy a distinctive place in the mind of the target market. The result of
positioning is creating the value-proposition.
286. Privacy laws: legal rights of employees regarding who has access to information about their
work history and job performance.
287. Privatization: Privatization means transfer of ownership and or management of an enterprise
from the public sector to the private sector. It also means the withdrawal of the state from an
industry or sector, partially or fully. Another dimension of privatization is opening up of an
industry that has been reserved for the public sector to the private sector.
288. Procedure: a set of step-by-step directions that explain how activities or tasks are to be carried
out.
289. Process Design: Process design is concerned with the overall sequences of operations
required to achieve the design specifications of the product. It specifies the type of work
stations that are to be used, the machines and equipment necessary to carry out the processes
to produce the product.
290. Process Layout: It involves a grouping together of similar machines in one department, based
upon their operational characters.
291. Process Selection: Process selection refers to the way production of goods and services is
organized. It is the basis for decisions regarding capacity planning, facilities layout, equipment
and design of work systems. Process selection is necessary when a firm takes up production of
new products or services to be offered to the customers.
292. Process theories: rationales that attempt to explain how workers select behavioral actions to
meet their needs and determine their choices.
293. Process: A process is a sequence of activities that is intended to achieve some result, typically
to create added value for customers. Process converts inputs into outputs in a production
system.
294. Procurement: The procurement function is responsible for all purchasing of goods, services
and materials. The aim is to secure the lowest possible price for purchases of the highest
possible quality. They will be responsible for outsourcing (components or operations that
would normally be done in-house are done by other organizations), and e-Purchasing (using IT
and web-based technologies to achieve procurement aims)
295. Product Class: A group of products with in the product family recognized as having a certain
functional coherence. Ex: Financial instruments
296. Product Design: Product design is concerned with the form and function of a product. Form
design involves the determination of what a product would look like. Functional design deals
with what function the product will perform and how it performs.
297. Product Differentiation: Product differentiation is a process of adding a set of meaningful
and valued differences to distinguish the company’s offering from competitors offering.
298. Product Family: All the product classes that can satisfy a core need with a reasonable
effectiveness. Ex: Savings and income
299. Product Item: A distinct unit within a product line distinguishable by size, price, appearance
or some other attribute. Ex : Money back schemes in life insurance
300. Product Layout: It involves the arrangement of machines on one line, depending upon the
sequence of operations. If there is more than one line of production, we can form many lines
of machines.
301. Product Life Cycle: Each and every product is having a life cycle and it is divided into four
stages, namely, Introduction stage - A period of low sales growth as the product is introduced;
Growth stage - A period of rapid market acceptance; Maturity stage- A period of slowdown in
sales because of maximum level of acceptance from buyers; and Decline stage- The period
when sales show downward drift and no profit.
302. Product Line: A group of products within a product class that are closely related because
they perform similar function. Ex : Life insurance
303. Product Mix: A product mix (also called as product assortment) is the set of all products and
items that a particular seller offers for sale. The width of the product mix refers to how many
different product lines the company carries. The length of the product mix refers to the total
number of items in the mix.
304. Product Tests: Product tests are often completed as part of the 'test' marketing process.
Products are displayed in a mall of shopping center. Potential customers are asked to visit the
store and their purchase behavior is observed. Observers will contemplate how the product is
handled, how the packing is read, how much time the consumer spends with the product, and
so on.
305. Product Type: A group of items with in a product line that share one of several possible
forms of the product. Ex: Term life
306. Product: Product is anything which satisfies the customer need or want. Products can be
classified as, Goods – Tangible items and Services – Intangible items. The intangible value
proposition is made physical by an offering, which can be a combination of products, services,
information and experiences.
307. Production Design: The economic considerations of the production process are known as
producibility. The concept of designing the product in the view of producibility with low
manufacturing cost is known as production design.
308. Production Function: Production function may be defined as the creation of useful products
for sale with the help of inputs such as men, machine, materials, money, methods, minutes and
management. The production function represents basically a physical relationship between
inputs and outputs.
309. Production Management: Production management is the process of planning, organizing,
directing and controlling the activities of the production function. The production function is
the conversion of raw materials into finished products.
310. Production Planning and Control: It is defined as the planning direction and coordination
of the firm’s material and physical facilities towards the attainment of predetermined
production objectives in the most economical manner.
311. Production Planning and Control: Production planning and control is concerned with the
planning, direction and co-ordination of the firms material and physical facilities towards the
attainment of predetermined production objectives in the most economical manner.
312. Production Scheduling: A schedule is a representation of the time necessary to carry out a
particular task. A job schedule shows the plan for the manufacture of a particular job. It is
created through "work / study" reviews which determine the method and times required. Most
businesses carry out several production tasks at one time - which entails amalgamating several
job schedules. This process is called "scheduling". The result is known as the production
schedule or factory schedule for the factory/plant as a whole.
313. Production: Production implies the creation of goods and services to satisfy human needs. In
involves conversion of inputs (resources) into outputs (products). Such conversion of inputs
adds to the value or utility of the products produced by the conversion or transformation
process. Any process which involves the conversion of raw materials and bought-out
components into finished products for sale is known as production.
314. Productivity: Productivity is also called as product efficiency of the efficiency of the
production process. It indicates how well a productive process is carried out to convert a set of
inputs into a set of outputs of value to the customer which also provides reasonable profits to
the manufacturer. Generally the productivity is expressed as the ratio between output and input.
315. Productivity: The output-input ratio within a time period with due consideration for quality
is called as productivity. The performance of an organization will be usually measured by its
productivity which leads to profitability.
316. Profit and Loss Statement: A profit and loss statement (called an income statement under
GAAP), is a business report that shows net income as the difference between revenue and
expenses.
317. Profitability ratios: measurements of an organization's ability to generate profits.
318. Project Organizational Structure: The major reform in the traditional functional structure
has come from a group of closely related structures having titles such as project management,
programed management, systems organization, product management, brand management and
matrix structure.
319. Project Type: It is characterized by high degree of product customization, the large scope for
each project and need for substantial resources to complete the project. Ex: Constructing a dam,
bridge , buildings and publishing a new book.
320. Projective Techniques: Projective techniques are borrowed from the field of psychology.
They will generate highly subjective qualitative data. There are many examples of such
approaches including: Inkblot tests - look for images in a series of inkblots Cartoons - complete
the 'bubbles' on a cartoon series Sentence or story completion Word association - depends on
very quick (subconscious) responses to words Psychodrama - Imagine that you are a product
and describe what it is like to be operated, warn, or used.
321. Promotion: A promotion is the advancement of an employee to all better in terms of greater
responsibilities, more prestige or status, greater skill and specially increased rate of pay or
salary.
322. Psychographics: It is the science of using psychology and demographics to better understand
consumers. If a marketer can identify consumer buyer behavior, he or she will be in a better
position to target products and services at them. Buyer behavior is focused upon the needs of
individuals, groups and organizations. It is important to understand the relevance of human
needs to buyer behavior (remember, marketing is about satisfying needs).
323. Purchasing: Purchasing is the management of the acquisition process, which includes
deciding which suppliers to use, negotiating contracts and deciding whether to buy locally.
Purchasing must satisfy the firms long term supply needs and support the firm’s capabilities to
produce goods and services.
324. Quality Assurance: It is the system of policies, procedures and guidelines which help in
building specified standards of goods or service quality. Quality assurance is about how a
business can design the way a product of service is produced or delivered to minimize the
chances that output will be sub-standard. The focus of quality assurance is, therefore on the
product design/development stage.
325. Quality Circles: A quality circle is a small group of employees in the similar work area who
voluntarily meet regularly whose assignment is to identify the problems related to quality
improvement, formulate solutions, and present their results to management with suggestions
for implementation.
326. Quality Circles: A quality circle is a small group of employees in the similar work area who
voluntarily meet regularly whose assignment is to identify the problems related to quality
improvement, formulate solutions, and present their results to management with suggestions
for implementation.
327. Quality Control: Quality control is concerned with checking and reviewing work that has
been done. For example, this would include lots of inspection, testing and sampling. Quality
control is mainly about "detecting" defective output - rather than preventing it. Quality control
can also be a very expensive process. Hence, in recent years, businesses have focused on quality
management and quality assurance.
328. Quality Management: Producing products of the required quality does not happen by
accident. There has to be a production process which is properly managed. Ensuring
satisfactory quality is a vital part of the production process. Quality management is concerned
with controlling activities with the aim of ensuring that products and services are fit for their
purpose and meet the specifications. There are two main parts to quality management namely
quality assurance and quality control.
329. Quality of Work Life: Quality of work life is concerned about the impact of work on people
as well as on organization effectiveness, and the idea of participation in organizational problem
solving and decision making.
330. Quality Systems: It is a process that combines with manufacturing process to ensure that a
manufacturing process produces quality – perfect products.
331. Quality: Quality is a measure of how closely a good or service conforms to specified standard.
Quality refers to the ability of the goods or service to meet the requirements of customers and
achieve customer satisfaction for the firm selling the goods or services. Generally, quality
relates to the customer’s perception of how well the goods or service will serve its purpose.
332. Quality: reflects the degree to which a goods or services meet the demands and requirements
of the marketplace.
333. Quantitative approach: using quantitative techniques, such as statistics, information models,
and computer simulations, to improve decision making.
334. Queuing theory: a rationale that helps allocate services or workstations to minimize customer
waiting and service cost.
335. Quotas: government regulations that limit the import of specific products within the year.
336. Recruitment: activities an organization uses to attract a pool of viable candidates.
337. Recruitment: Recruitment is concerned with the identification of sources from where the
personnel can be employed and motivating them to offer for the employment.
338. Reengineering: redesigning processes requiring input from every employee in the company
to achieve dramatic improvements in cost, quality, service, and speed.
339. Referent power: influence those results from leadership characteristics that command
identification, respect, and admiration from subordinates (also known as charismatic power).
340. Relationship Marketing: Relationship marketing has the aim of building mutually satisfying
long-term relations with key parties like customers, suppliers, distributors in order to earn and
retain their business.
341. Resources: the people, information, facilities, infrastructure, machinery, equipment, supplies,
and finances at an organization's disposal.
342. Return on Investment: The efficiency of the organization is judged by the amount of profit
it earns in relation to the size of its investment, popularly known as “Return on Investment”.
The goal of a business, accordingly, is not to optimize profit, but to optimize returns on capital
invested in the business. This standard recognizes the fundamental fact that capital is a critical
factor in almost in any business and through it, scarcity puts limit on progress.
343. Return on Investments: Return on investment (ROI) ratios are a group of business ratios that
indicate the performance of capital contributed to the company from investors. There are many
ratios for returns on investment. Generally, ROI refers to one formula used to gauge the return
of investment:
344. Revenue: A business's revenue is the money generated by all its operations before deductions
are taken for expenses. Revenue can come from the sale of the company's products or services,
from the sale of surplus equipment or property, or from the sale of shares of stock in the
company. It can come from a variety of other sources such as interest, royalties, and fees.
345. Reward power: the authority to reward others
346. Risk: the environment that exists when a manager must make a decision without complete
information.
347. Rule: an explicit statement that tells a supervisor what he or she can and cannot do.
348. Safety Stock Inventory: Safety stock inventories are held to avoid stock out conditions which
cause production stoppages and to project against uncertainties in demand, lead time, supply
and consumption rates.
349. Satisfice: the making of the best decision possible with the information, resources, and time
available.
350. Scalar Chain Of Command: The exception principle functions in concert with the concept
of scalar chain of command - formal distribution of organizational authority is in a hierarchical
fashion. The higher one is in an organization, the more authority one has.
351. Scalar principle: a system that demonstrates a clearly defined line of authority in the
organization that includes all employees.
352. Securities Exchange Board of India (SEBI): The SEBI was constituted in 1988 by a
resolution by government of India and it was made a statuary body by the Securities and
Exchange Board of India Act, 1992. The main function of SEBI is to regulate the capital market
investments and its issues in the stock exchanges.
353. Selection: It is a deliberate effort of the organization to select a fixed number of personnel
from the large number of applicants.
354. Selective perception: the tendency to single out for attention those aspects of a situation or
person that reinforce or appear consistent with one's existing beliefs, values, or needs.
355. Self-fulfilling prophecy: a belief that a manager can, through his or her behavior, create a
situation where subordinates act in ways that confirm his or her original expectations.
356. Selling: It is a concept which was famous before the evolution of marketing concept. It
activities start from the products and its focus is on promotional aspects only and it achieve the
profit through sales volume, but marketing is the activity which starts with the customer need
and ends in the customer satisfaction.
357. Senior Manager: Senior managers (typically used in large organizations with multiple layers
of management) have responsibilities and authority broader in scope than a front-line manager.
Senior managers are usually positioned to move into a director or general manager position.
358. Separation: Separation involves cessation of services of personnel from an organization.
Cessation of employee services is governed by the contract. Separation can be effected before
the expiry of the period of contract.
359. Service Facility Layout: The fundamental difference between service facility and
manufacturing facility layouts is that many service facility exist to bring together customers
and services. Service facility layouts should provide for easy entrance to these facilities from
freeways and busy thoroughfares.
360. Shewhart Cycle: The Shewhart Cycle is most often a circle with no beginning or end,
meaning that the continuous improvement processes of business never stop. The cycle has four
stages: planning (when you identify an opportunity and create a plan), doing (to test the plan
 on a small scale), checking (to evaluate the benefit of the plan), and acting (implementing the
plan on a larger scale and then monitoring results).
361. Simulation: a broad term indicating any type of activity that attempts to imitate an existing
system or situation in a simplified manner.
362. Situational theory: see contingency theory.
363. Small-batch production: manufacturing of a variety of custom, made-to-order products.
364. Social Audit: Social audit is the tool for evaluating how satisfactorily a company has
discharged its social responsibilities. It enables the public as well as the company to evaluate
the social performance of the company.
365. Social Capital: Social capital is the second element of human capital. It is derived from the
network of relationships, both internally and externally. From organization‟s point of view,
social capital relates to the structure, quality and flexibility of the human networks, which can
be created through cohorts, joint training in which people get to know each other, job rotation
through different departments of functions, long-term employment and internal culture.
366. Social network: see grapevine.
367. Social Responsibility of Business: The mission of any organization is to concentrate on the
economic development of the organization. Later they came to understand that the contribution
of society to the business was very high and hence they have to take up additional measures in
order to satisfy the society. These measures are referred as the social responsibility of the
organization.
368. Social Security: Social security is the protection which society provides for its members
through a series of public measures, against the economic and social distress that otherwise
would be caused by the stoppage of substantial reduction of earnings resulting from sickness,
maternity, employment, injury, unemployment, invalidity, old age and death, the provision of
subsidies for families with children.
369. Sources of Data in Research: There are two main sources of data - primary and secondary.
Primary research is conducted from scratch. It is original and collected to solve the problem in
hand.. Secondary research, also known as desk research, already exists since it has been
collected for other purposes.
370. Span Of Control: The number of subordinates reporting directly to a given manager. Also
called as span of control or span of management. It is divided into narrow span and wide span.
371. Staffing: Staffing is another major function in management which is related to personnel
department. The main objective of staffing is to place the right person in the right job at the
 right time. Staffing may be processed by recruitment and selection procedures adopted by the
organization.
372. Statement Of Cash Flow And Fund Flow: Summary of an organization’s financial
performance that shows where cash or funds came from during the year and where they were
applied.
373. Statistical Quality Control: A manufacturing process is in statistical in nature. A process
will never produce two pieces of a product with exact dimensions. As the process is continuous
to produce products, it is possible to setup frequency distribution. The quality control
techniques based on the above ideas are called as statistical quality control. The measurement
data in statistical quality control can be classified into variable data and attribute data.
374. Stereotyping: Stereotyping causes us to typify a person, a group, an event or a thing on
oversimplified conceptions, beliefs, or opinions. Thus, basketball players can be typed as tall,
green equipment as better than red equipment, football linemen as dumb, Ford as better than
Chevrolet, Vikings as handsome, and people raised on swine farms as interested in animals.
Stereotyping can substitute for thinking, analysis and open mindedness to a new situation.
375. Strategic change: revision that takes place when a company changes its tactics (strategy) -
possibly even its mission statement - to achieve current goals.
376. Strategic plan: an outline of steps designed with the goals of the entire organization as a
whole in mind, rather than with the goals of specific divisions or departments.
377. Strategic Planning: Strategic planning is the process by which top management determines
overall organizational purposes and objectives and how they are achieved. Strategic planning
involves establishment of objectives and formulation of strategies at three levels, namely;
corporate level, business unit level and functional level.
378. Strategy Formulation: Strategy formulation involves the choice of appropriate strategy in
the light of corporate mission and objectives, environmental opportunities and threats and
corporate strengths and weaknesses.
379. Structural change: variation that occurs when a company changes its procedures, policies,
and rules, and as a result, its organizational structure.
380. Structured problems: familiar, straightforward, and clear difficulties with respect to the
information needed to resolve them.
381. Subject Matter Expert: A subject matter expert (SME) is an individual with a deep
understanding of a particular process, function, technology, machine, material, or type of
equipment. Individuals designated as subject matter experts are typically sought out by others
 interested in learning more about, or leveraging, their unique expertise to solve specific
problems or help with particular technical challenges.
382. Supply Chains: The inter connected set of linkages between suppliers of materials and
services that spans the transformation of raw material into products and services and delivers
them to a firms customers is known as the Supply chain. An important part of this process is
provision of the information needed for planning and managing the supply chain.
383. Tactical plan: steps detailing the actions needed to achieve the organization's larger strategic
plan.
384. Tactical Planning: Tactical planning is done over an intermediate term or medium range time
horizon by middle management in each functional area of management. Generally, tactical
plans are designed to implement the strategic plans of top management.
385. Tariffs: taxes placed on imports and/or exports in response to a political event.
386. Team structure: organizational design that places separate functions into a group according
to one overall objective.
387. Technology Development: Technology is an important source of competitive advantage.
Companies need to innovate to reduce costs and to protect and sustain competitive advantage.
This could include production technology, Internet marketing activities, lean manufacturing,
Customer Relationship Management (CRM), and many other technological developments.
388. Technology: the knowledge, machinery, work procedures, and materials that transform inputs
into outputs.
389. Telecommuting: a work arrangement that allows at least a portion of scheduled work hours
to be completed outside of the office, with work at home as one of the options (also known as
flexi place).
390. Telephone Interviews: Telephone ownership is very common in developed countries. It is
ideal for collecting data from a geographically dispersed sample. The interviews tend to be
very structured and tend to lack depth. Telephone interviews are cheaper to conduct than face-
to-face interviews (on a per person basis).
391. The Customer Concept: The customer concept holds that each and every customer should
be taken carefully by the company in the basis of one-to-one marketing integration.
392. The Macro-Environment: This includes all factors that can influence and organization, but
that are out of their direct control. A company does not generally influence any laws (although
it is accepted that they could lobby or be part of a trade organization). It is continuously
changing, and the company needs to be flexible to adapt. There may be aggressive competition
and rivalry in a market. Globalization means that there is always the threat of substitute
 products and new entrants. The wider environment is also ever changing, and the marketer
needs to compensate for changes in culture, politics, economics and technology
393. The Marketing Concept: The marketing concept holds that the key to achieving its
organizational goals consists of the company being more effective than competitors in creating,
delivering and communicating superior customer value to its chosen target markets.
394. The Micro-Environment: This environment influences the organization directly. It includes
suppliers that deal directly or indirectly, consumers and customers, and other local
stakeholders. Micro tends to suggest small, but this can be misleading. In this context, micro
describes the relationship between firms and the driving forces that control this relationship. It
is a more local relationship, and the firm may exercise a degree of influence.
395. The Product Concept: The product concept holds that consumers will favor those products
that offer the most quality, performance, or innovative feature.
396. The Production Concept: The production concept holds that consumers will prefer products
that are widely available and inexpensive.
397. The Selling Concept: The selling concept holds that consumers and businesses, if left alone,
will ordinarily not buy enough of the organization’s product. So they should take an aggressive
selling effort.
398. The Societal Marketing Concept: The societal marketing concept holds that marketers
should build social and ethical considerations into their marketing practices.
399. Theory X: This is the traditional theory of human behavior. According to this theory, average
human being has an inherent dislike of work and will avoid it if they can. Because of this dislike
most people must be coerced, controlled, directed and threatened towards the work. Average
human beings prefer to be directed, wish to avoid responsibility, have relatively little ambition,
and want security above all.
400. Theory Y: According to this theory, the expenditure of physical effort and mental effort in
work is as natural as play or rest. People will exercise self-direction and self-control in the
service of objectives to which they are committed. The degree of commitment to objectives is
in proportion to the size of the rewards associated with their achievements. Under proper
conditions human beings learn and seek for responsibility.
401. Total Productive Maintenance (TPM): It is a concept put forward by the Japanese
management expert Seiichi Nakajima in his book “Introduction to Total Productive
Maintenance” in 1984. It is the function of the availability of machines after accounting for
failures, breakdowns and setup times. It ensures the total effectiveness of the plant by tackling
 utilization, quality and down-time. It uses autonomous and planned maintenance, total
employee involvement and team work and continuous improvement.
402. Total Quality Management (TQM): a philosophy that states that uniform commitment to
quality in all areas of the organization promotes a culture that meets consumers' perceptions of
quality.
403. Total Quality Management: Total Quality Management is an effective system for integrating
the quality development, quality maintenance and quality improvement efforts of various
groups in an organization continuously, so as to enable marketing , engineering, production
and service at the most economic levels which allow for full customer satisfaction.
404. Transactional Planning: Transactional planning is concerned with planning the conversion
system. It involves establishing a program of action for acquiring the necessary physical
facilities to be used in the conversion process.
405. Transfer: Transfer is another form of internal mobility of human resources which involves
movement of an employee from one section to another section of the same department or one
place to another place. It is a change in the job of an employee without a change in
responsibilities and remuneration.
406. Twinning: see job sharing.
407. Type I Error: When we apply acceptance sampling, when a good lot is rejected, the error is
known as Type I Error. Due to type I error the risk of rejecting a good lot based on sample
evidence is known as producer’s risk, which should be kept low as possible.
408. Type Ii Error: When we apply acceptance sampling, when a bad lot is accepted as a good
lot, the error is known as Type II Error. Due to type II error the risk of accepting a bad lot based
on sample evidence is known as consumer’s risk, which should be kept low as possible.
409. Unity of command: principle that states that an employee should have one and only one
supervisor to whom he or she is directly responsible.
410. Unity Principle: Ideally, no one in an organization reports to more than one supervisor.
Employees should not have to decide which of their supervisors to make unhappy because of
the impossibility of following all the instructions given them.
411. Unstructured problems: difficulties that involve ambiguities and information deficiencies
and often occur as new or unexpected situations.
412. Validity: proof that the relationship between a selection device and some relevant job criterion
exists.
413. Value Analysis: The concept of value analysis was developed during the world war II by
Lawrence D. Miles of General Electric Company. Value analysis is an intensive appraisal of
 all the elements of the design, manufacture or construction, procurement, inspection,
installation and maintenance of a product and its components including the applicable specific
and operational requirements in order to achieve the necessary performance, maintainability
and reliability of the item at minimum cost.
414. Value Chain Analysis: The value chain is a systematic approach to examining the
development of competitive advantage. It was created by M.E. Porter in his book, Competitive
Advantage (1980). The chain consists of a series of activities that create and build value. They
culminate in the total value delivered by an organization. The 'margin' depicted in the diagram
is the same as added value. The organization is split into 'primary activities' and 'support
activities.'
415. Value: It is easy to understand but difficult to define the term “value”. Value is what
customers demanding – the right combination of product quality, fair price and goods and
services.
416. Value: Value is a ratio between what customer gets and what he gives. The outcome of the
value is satisfaction, which is a feeling which come out of customer usage of a particular
product, where the need or want is fulfilled.
417. Variable Expenses: Variable expenses are those business expenses which vary depending on
the volume of business, sales, or the volume of transactions. Examples of variable expenses
include postage and shipping for customer purchases, purchase of raw materials, inventory of
products to be sold, hourly wages of employees, and sales commission.
418. Vertical job loading: see job enrichment.
419. Vision: the ability of the leader to bind people together with an idea.
420. Vision: Vision is the dream of what the owners want the organization to be. It should not be
confused with strategy, which is the large-scale plan the company follows to make the dream
happen.
421. Wholly-owned subsidiary: a foreign firm owned outright, or with a controlling interest, by
an out-of-country firm.
422. Work Measurement: It is the application of techniques designed to measure and establish
the work content of a specified task or job by determining time period for carrying out the task
or job by a qualified worker at a defined standard performance. While method study concerned
with the reduction of work content, work measurement is concerned with the investigation,
measurement and reduction of the work content by eliminating the ineffective time and
establishing a standard time and standard performance.
423. Work specialization: the degree to which organizational tasks are divided into separate jobs
(also known as the division of labor).
424. Work Study: Work study is defined as that body of knowledge concerned with the analysis
of the work methods and the equipment used in performing a job, the design of optimum work
method and the standardization of proposed work methods. Work study is an effective
management tool to achieve higher productivity in any organization.
425. Zero defects: a program that emphasizes doing it right the first time.