Final Exam - The Nature of the Firm PDF

**FINAL EXAM** Topic 1 ======= **THE NATURE OF THE FIRM** An organization is a deliberate arrangement of people to accomplish some specific purpose. Organizations have three common characteristics: - Distinct purpose: An organization seeks to accomplish certain goals. - People: An organiza...

**FINAL EXAM** Topic 1 ======= **THE NATURE OF THE FIRM** An organization is a deliberate arrangement of people to accomplish some specific purpose. Organizations have three common characteristics: - Distinct purpose: An organization seeks to accomplish certain goals. - People: An organization is a social entity composed of people. - Deliberate structure: Tasks are divided and responsibility for their performance is assigned to organization members. A firm is a profit-seeking organization that provides goods or services designed to satisfy customers' needs by transforming lower-value inputs into higher-value outputs. Firms are affected by the environment, in which they operate. The functions of the firm: - The firm as an economic reality: Its function is to create value by transforming resources into products and services. - The firms as a social reality: It also creates value for its stakeholders and society. - A disproportionate level of inequality in income reduces the level of social cohesion, increases social conflict, and hinders the potential for economic growth. Unemployment is the cause of inequality. This is why the firm plays a key role in inclusive growth. Theoretical approaches to the firm: - Neoclassical theory of the firm: - The firm is seen as a "black box" that transforms inputs into outputs for sale in the market, and the goal of the firm is to maximize profit. - Neoclassical theory of the firm makes no attempt to explain what is inside the "black box". - The firm is concerned about the factors and products markets in which it operates. - The market is seen as an "invisible hand" that achieves the coordination of supply and demand through price information. - Transaction costs theory: - The firm and the market are two mechanisms for governing a transaction, an exchange of goods or services between economic agents. - There are costs involved in carrying out a market transaction; these include information costs, and costs involved in negotiation, monitoring and enforcing a contract. - The existence of firms lies in the fact that markets do not function well due to the existence of costs derived from their use. - Agency theory: - The firm is seen as a nexus of contracts among varies parties. These contracts define the roles and responsibility of the principals and agents. - Agency relationship: A principal hires an agent to act on his behalf. - Agency problem: The interests of the principal and the agent differ, and there is no incentive for the agent to do his maximum effort. - For the efficient functioning of the firm, the parties must invest resources to create incentives to align the interests of the principal and the agent. - Focus: optimal contract to govern principal-agent relationships and reduce agency costs. - Resource-based view of the firm (RBV): - A firm is seen as a unique bundle of resources and capabilities; the firm's ability to access and use these resources effectively gives rise to competitive advantage. - Firm resources can lead to sustained competitive advantage if they are valuable, rare, difficult to imitate, and non-substitutable. - The firm should retain in-house the functions that are the source of competitive advantage. - Different criteria for classifying firms: - Ownership of capital: - State-owned firms - Mixed equity firms - Privately-owned firms - Size: - Micro-enterprises - Small enterprises, - Medium-sized enterprises, - Large companies **TYPES OF FIRMS** Nature of the productive activity: - Industrial firms: Extractive firms and manufacturing firms. - Commercial firms: Wholesale companies, retail companies, and commission agents. - Service firms: Personal service firms, transport firms, hotel and catering firms, communication firms, media firms, financial and insurance firms, health firms, and educational firms. - Scope or location: - Local - Domestic - International. - Legal form: - Sole proprietorship - Partnership - Corporation - Cooperative. **OWNERSHIP AND MANAGEMENT** Firm owner: A person or people to whom the firm belongs, the owner of the firm's capital - Family-owned firm: a firm owned by one or several families who control decision making within it. - Firm owner as an entrepreneur: the person, who owns the firm, creates and manages the firm. - Firm owner as an investor: the people, who own the firm, hire someone to manage the firm on their behalf. - There is a relationship between the size and age of the firms and whether the owners perform management functions within them. In large companies, particularly those in which the capital is provided by many owners or shareholders, a separation between ownership and management occurs. Separation between ownership and management: - A firm's shareholders own the business; their elected representatives on the board of directors hire the corporate officers. - Corporate officers: top executives who manage and run the company. Corporate governance: mechanisms to prevent any potential conflicts of interest between owners and managers. **ENTREPRENEURSHIP** Entrepreneur: a person who undertakes innovative actions, especially if this involves risk: - An entrepreneur recognizes a viable idea for a product or service and carries it out by finding the necessary resources to start a business, assumes the risks and takes rewards from the business. - Intrapreneur: a person who implements innovative projects within an existing company. - Innovation is a key aspect of entrepreneurship and is defined as the process of changing, experimenting, transforming, and revolutionizing. Approaches to entrepreneurship: - Risk-taking/ Innovator entrepreneur: An entrepreneur innovates, discovers, evaluates and exploits business opportunities, assumes risk and confronts the uncertainty of the business activity. - Manager entrepreneur: An entrepreneur coordinates the factors of production; estimates the demand by analysing the economic situation and manages the factors of production to achieve high productivity. - Owner entrepreneur: An entrepreneur is a sole owner of a business that he personally manages and assumes risk; he is a speculator whose motivation is to seek profit and accumulate capital for himself. Characteristics of an entrepreneur: - Creativity and originality. - A tendency towards action and proactiveness. - Initiative, determination, and need to achieve self-improvement. - Spirit of risk, self-confidence, and tolerance of ambiguity and uncertainty. - Ability to learn from experience. - Independence, autonomy and internal locus of control. - Leadership skills. Launching an entrepreneurial start-up: Idea Business plan Set up The business idea is often derived from: - Repetition of the experience of others - Business opportunities identified in undersupplied, newly established or high-growth markets. - Knowledge about specific markets, industries or businesses. - The experience of the entrepreneur - An innovative product which the entrepreneur believes may create a market Business plan: a written document that summarizes a business opportunity and articulates how the identified opportunity is to be seized and exploited. - A business plan covers the following issues: objectives of the business project, activity of the firm, the market, marketing, production, location, organization and people, funding, formal aspects of the project. Setting up the firm: - Choice of a legal form: number of partners, the amount of initial shared capital, other requirements. - Legal procedures: name, registration in the Commercial Register, licenses and permits, etc. Topic 2 ======= **THEORETICAL APPROACHES TO MANAGEMENT** Classical approach; Behavioural approach; Quantitative approach; and Contemporary approaches. The early management: Organizations and managers have existed for thousands of years, such as the Egyptian Pyramids and the Great wall of China. Origins of modern management: - Division of labor: breaking down jobs into narrow, repetitive tasks. In The Wealth of Nations, Adam Smith argued that the division of labour increases productivity and brings economic advantages to organizations and society. - Industrial revolution: Transition to new manufacturing processes. - Machine powers combined with the division of labour made large, efficient factories possible, and the demand for managers increased. **CLASSICAL APPROACH** Classical approach: first studies of management that emphasize rationality and making organizations and workers as efficient as possible. Two major theories compose the classical approach: - Scientific management: Frederic W. Taylor, Frank and Lillian Gilbreth and Henry Gantt. - General administrative theory: Henri Fayol and Max Weber. Scientific management: the use of scientific methods to define the "one best way" for a job to be done. Taylor studied how to increase worker efficiency by scientifically designing jobs and published his book Principles of Scientific Management.\ Taylor's pig iron experiment: - By scientifically analysing the job to determine the "one best way" to load pig iron onto rail cars, the daily average output of workers increased almost four times. - Productivity increased by putting the right person on the job with the correct tools and equipment, ensuring that the worker follows the instructions, and motivating the worker with incentives. Taylor's Scientific Management Principles: - Develop a science for the elements of an individual's work to replace the non scientifical method. - Scientifically select, train, teach, and develop the worker. - Heartily cooperate with the workers to ensure that all work is done in accordance with the principles of the science that has been developed. - Divide work and responsibility equally between management and workers. Management does all work for which it is better suited than the workers. Many companies still use elements of scientific management today. Frank and Lillian Gilbreth were also important contributors to scientific management theory. The Gilbreths studied work to eliminate inefficient hand-and-body motions, increase productivity and reduce fatigue: - The Gilbreths were among the first to use motion picture films to study hand-and-body motions in order to eliminate wasteful motions. - Bricklaying experiments: by reducing the number of motions, a bricklayer was more productive and less fatigued. - They invented a micro-chronometer: a device that recorded a worker's motions and the amount of time spent. - The Gilbreths devised a classification scheme for labelling basic hand motions, called therbligs. Gantt developed other techniques for improving workers' productivity that are used today.\ Gantt chart: a scheduling chart that shows planned and actual output over a period of time: - A Gantt chart is a bar graph with time on the horizontal axis and the activities to be scheduled on the vertical axis. - The bars show output, both planned and actual, over a period of time. - It shows visually when tasks are supposed to be done and compares those projections with the actual progress on each task. - The Gantt chart allows managers to assess whether an activity is ahead of, behind or on schedule. General administrative theory focuses on what managers do and what constitutes good management practice. Fayol was an important contributor to general administrative theory: - Fayol was the first to identify five functions that managers perform: planning, organizing, commanding, coordinating, and controlling. - He described the practice of management as something distinct from accounting, finance, production, distribution. - Fayol developed fourteen principles of management: fundamental rules of management that can be applied to all organizations. Fayol's fourteen Principles of Management: - **Division of work**. - **Authority**. Managers must be able to give orders, and authority gives them this right. - **Discipline**. Employees must obey the rules that govern the organization. - **Unity of command**. Employee should receive orders from only one superior. - **Unity of direction**. The organization have a single plan of action to guide managers and workers. - **Subordination** of individual interests to the general interest. - **Remuneration**. Workers must be paid a fair wage for their services. - **Centralization**. The degree to which subordinates are involved in decision-making. - **Scalar chain**. The line of authority from top management to the lowest ranks. - **Order**. People and materials should be in the right place at the right time. - **Equity**. Managers should be kind and fair to their subordinates. - **Stability** of tenure of personnel. Management should provide orderly personnel planning and ensure that replacements are available. - **Initiative**. Employees allowed to originate and carry out plans will exert high levels of effort. - **Esprit de corps**. Promoting team spirit will build harmony and unity in the organization. Max Weber was also an important contributor to general administrative theory: The bureaucracy is an "ideal type" of organization characterized by division of labour, a clearly defined hierarchy, formal rules and regulations, and impersonal relationships. **BEHAVIOURAL APPROACH** Behavioural approach: Emphasizes individual attitudes and behaviours and group processes at the workplace. Early advocates of the behavioural approach: - Münsterberg: - Münsterberg was the pioneer of industrial psychology: scientific study of people at work. - He studied how to improve efficiency in organizations, considering emotional, mental and motivational elements of workers. - Münsterberg suggested that knowledge from industrial psychology can be applied by managers in the areas of employee selection, training and motivation. - M.P. Follett: - She focused on the human side of the organization and emphasized the need for worker participation and shared goals. - She argued that because the workers have knowledge about their jobs, managers should allow them to participate in the work development process. - Follett addressed issues that are relevant today, such as ethics, power and leading, in a way that encourages employees to give their best. - Chester Barnard: - Barnard viewed organizations as systems of cooperation of human activity. - He raised awareness of the informal organization: cliques and social groupings within formal organizations. - Informal relationships are powerful forces that can help the organization if properly managed. - He also studied authority and power distribution in organizations. - Barnard developed the acceptance theory of authority, implying that managers should treat employees properly, because their acceptance of authority is necessary for success. Human relations perspective: - Hawthorne studies and Elton Mayo: - A series of studies conducted at the Western Electric Company Works - They examine the effects of various factors such as changes in lighting levels, working hours and wage plans on worker productivity, using control and experimental groups. - Unexpected findings: When the level of light was increased, the productivity for both groups increased, "something else" has contributed to the results, the researchers learned that just the awareness of being observed alters the behaviour of people. - "The Hawthorne effect": worker's attitude toward their managers affects the level of worker's performance. - He concluded that social norms and group standards were the key determinants of individual work behaviour. - From this view emerged the human relations movement, which advocates that supervisors be behaviourally trained to manage subordinates in ways that elicit their cooperation and increase their productivity. - Douglas McGregor: Theory X and Theory Y: - Theory X: A set of negative assumptions about workers, the worker is lazy and wishes to avoid responsibility, so manager's task is to supervise workers closely and control their behaviour. - Theory Y: A set of positive assumptions about workers, the worker likes his work and will do what is good for the organization, so manager's task is to create a work setting that encourages commitment to organizational goals and provides opportunities for workers to exercise initiative and self-direction. **QUANTITATIVE APPROACH** Quantitative approach: The use of quantitative techniques to improve decision making: - Quantitative approach evolved from mathematical and statistical solutions developed for military problems during World War II. - It involves applying statistics, optimization models, linear programming, etc... to management activities. - Quantitative techniques are frequently applied in areas such as resource allocation, optimum inventory levels, total quality management, planning and control. **CONTEMPORARY APPROACHES** Systems approach views an organization as an open system: - A system is a set of interrelated and interdependent parts arranged in a manner that produces a unified whole. - Open systems interact with their environment, closed systems do not. - Nowadays, when we describe organizations as systems, we mean open systems. Organizations are systems comprised of many components like individuals, groups, goals, etc... that need to be coordinated. The systems approach implies that decisions and actions in one organizational area will affect other areas. The systems approach recognizes that organizations are not self-contained; they rely on and are affected by factors in their external environment. By viewing an organization as an open system, managers can understand the importance of the environment and the interdependence among different components in the organization. Contingency approach: organizations are different, they face different situations and require different ways of managing: - As organizations differ, it is difficult to find universally applicable management rules that would work in all situations. - Appropriate management behaviour depends on contingency variables. - Popular contingency variables include organization size, environmental uncertainty, and individual differences, among others. Summary of people: - Taylor: Scientific methods for choosing the best worker for each position - Gilbreth: Study with camaras the movement to reduce it and increase the productivity - Gantt: Gantt chart for efficiency and planning - Fayol: 14 Principles of Management - Weber: Bureaucracy - Münsterberg: Industrial psychology - Follett: Human side of organizations, letting workers participate - Barnard: Informal organization and acceptance of authority - Hawthorn and Mayo: Managers help their subordinates to coordinate and be more efficient - McGregor: Theory X and Theory Y Topic 3 ======= **Business Environment** The term environment refers to institutions or forces that are outside the organization and potentially affect the organization's performance. Environment is important because not all environments are the same. They differ by environmental uncertainty. Environmental uncertainty is the degree of change and complexity of the environment:\ - **Degree of change**: whether the components in the organizational environment change frequently.\ - **Complexity**: the number of components in an organization's environment and the extent of the organization's knowledge about those components. **General Environment** An organization's external environment has two levels:\ - **General environment** includes political, economic, socio-cultural, technological, environmental, and legal factors that affect all organizations.\ - **Competitive environment** is the industry-specific environment comprising the organization's customers, suppliers, and competitors. Major forces in the general environment:\ - **Economic:** include interest rates, inflation, unemployment, and economic growth.\ - **Technological**: the presence of infrastructures and technological advancements, industrial innovations, outcomes of changes in the technology of producing and distributing goods and services.\ - **Political and legal**: political conditions and stability, government regulation, outcomes of changes in laws and regulations.\ - **Socio-cultural**: customs, values, traditions, lifestyles, beliefs, and patterns of behavior.\ - **Demographic**: Characteristics of the population, such as age, gender, ethnic origin, race, sexual orientation, and social class.\ - **Environmental**: Production methods that pollute the environment, sustainable energy consumption and climate change.\ - **International**: The extent to which an organization is involved in or is affected by business in other countries. An international PESTEL analysis:\ - **Political**: Government attitudes to foreign investment, political stability, patent and intellectual property policy.\ - **Economic**: Growth rates, distribution of wealth, currency stability, exchange rates.\ - **Socio-cultural**: National cultures, attitudes towards foreign companies and staff.\ - **Technological**: Telecommunications, stability of power supply, transport infrastructure for imports and exports.\ - **Environmental**: Natural resources, environmental quality and effects of climate change.\ - **Legal**: Tariff policies and trade agreement, employment protection, company taxation. **COMPETITIVE ENVIRONMENT** Competitive environment: forces that originate with suppliers, distributors, customers, and competitors and affect the ability to obtain inputs and dispose of its outputs:\ - **Suppliers** provide an organization with the input resources it needs to produce goods and services; the suppliers receive payment for those goods and services.\ - **Distributors** are organizations that help other organizations sell their goods or services to customers.\ - **Customers** are the individuals and groups that buy the goods and services an organization produces.\ - **Competitors** are organizations that produce goods and services that are similar to a particular organization's goods and services. Porter's five forces model: A technique to analyze the attractiveness of an industry: - **Rivalry among competitors**: The higher the rivalry, the lower the level of attractiveness, the lower the level of industry profits. - Number of competitors: More number of competitors and balanced size, higher intensity of rivalry. - Growth in demand: The intensity of rivalry is higher when there is stagnant or decreasing demand. - Degree of differentiation: When the products are standardized, the intensity of rivalry is higher. - Barriers to exit: When the obstacles faced by firms that wish to leave the industry are high, the intensity of rivalry is higher. - **Threat of new entrants**: The lower the barriers to entry, the lower the industry profits. - Barriers to entry: Obstacles that hinder the entry of new competitors, such as capital investment required, economies of scale, special licenses, customer loyalty to existing firms. - **Bargaining power of suppliers**: The higher the relative power of suppliers to negotiate prices, the lower the industry profits. - It depends on the number of suppliers, whether the customer is a small or irregular purchaser, if the suppliers can expand their business to compete with the customer, if it is costly for customers to switch suppliers. - **Bargaining power of buyers**: The higher the relative power of buyers to negotiate prices, the lower the industry profits. - **Threat of substitutes**: Products in other industries that perform similar functions and meet the same needs, a low switching cost increases rivalry. **ORGANIZATIONAL CULTURE** The internal environment consists of those elements of the organization within which a manager works such as its people, culture, structure, and technology.\ Organizational culture is the shared values, principles, traditions, and ways of doing things that influence the way organizational members act and that distinguish the organization from other organizations.\ **Strong culture**: Strong connection between behaviors and values, which are widely shared, the employees identify with the culture and tell stories about company history.\ **Weak culture**: Values limited to top management, employees don't identify with the culture and it sends contradictory messages. Levels of organizational culture: - **Visible artefacts**: all things one can see, hear and observe by watching members of the organization. - Artefacts: manner of dress, patterns of behavior, symbols, organizational ceremonies and office layout. - **Invisible**: - Values and beliefs, which are not observable but can be interpreted from the stories, language and symbols that organization members use to represent them. - Underlying assumptions and deep beliefs that subconsciously guide behavior and decisions; these could include role modelling, myths, legends, nicknames and the use of coded language. Dimensions of organizational culture: - **Adaptability**: The degree to which employees are encouraged to be innovative and flexible and to take risks and experiment. - **Attention to detail**: The degree to which employees are expected to exhibit precision, analysis, and focus on details. - **Outcome orientation**: The degree to which management emphasizes results rather than the techniques and processes used to achieve them. - **People orientation**: The degree to which management decisions consider the effect of outcomes on people within and outside the organization. - **Team orientation**: The degree to which collaboration is encouraged and work activities are organized around teams rather than individuals. - **Integrity**: The degree to which people exhibit honesty and high ethical principles in their work. How is an organization's culture established? - The original source of the organizational culture reflects the vision of the founders. - Organizational culture is transmitted to employees through stories, material symbols and language. - Once the culture is in place, certain organizational practices help maintain it, like employee selection and socialization processes. - The actions of top managers also have a major impact on the organization's culture. **STAKEHOLDERS** A company's stakeholders are individuals or groups with an interest, claim, or stake in the company, in what it does, and in how well it performs. Stakeholders and the company: - External Stakeholders - Customers - Suppliers - Creditors - Governments - Unions - Local communities - General public - Internal Stakeholders - Stockholders - Employees - Managers - Senior executives - Board members The company's stakeholders have different claims: - **Stockholders** have a claim on a company because when they buy its stock or shares, they become its owners and want to maximize the return on their investment. - **Managers** have the responsibility to decide which goals an organization should pursue to most benefit stakeholders and how to make the most efficient use of resources to achieve those goals. - **Employees** work in various departments and functions, such as research, sales, and manufacturing, and expect to receive rewards from their performance. - **Suppliers** expect to be paid fairly and promptly for their inputs. - **Distributors** expect to receive quality products at agreed-upon prices. - **Customers**: A company needs to attract them to stay in business. - **Community**: provides a company with the physical and social infrastructure that allows it to operate. Topic 4 ======= **INFORMATION** Data vs Information: - Data: raw, unanalyzed facts. - Information: processed and analyzed data. Attributes of useful information: - **Quality**: The greater its accuracy and reliability, the higher is the quality of information. - **Timeliness**: Information often must be available on a real-time basis. - **Completeness**: Information that is complete gives managers all the information they need to exercise control, achieve coordination, or make an effective decision. - **Relevance**: Information that is relevant is useful and suits a manager's particular needs and circumstances. Incomplete information: Managers in the real world do not have access to all the information they need to make decisions because of risk and uncertainty, ambiguity, and time constraints: - **Risk**: when managers know the possible outcomes of a particular course of action and can assign probabilities to them. - **Uncertainty**: when the probabilities of alternative outcomes cannot be determined, and future outcomes are unknown. - **Ambiguity**: when information can be interpreted in multiple and often conflicting ways. - **Time constraints and information costs**: managers have neither the time nor the money to search for all possible alternative solutions and evaluate all the potential consequences of those alternatives. **4.2. DECISION MAKING** Decision-making is a process that involves the following steps:\ 1. **Identify a problem**: A discrepancy between an existing and a desired condition.\ 2. **Identify the decision criteria** that will define what is important or relevant to resolving a problem.\ 3. If the decision criteria are not equally important, **allocate weights** to the criteria to give them the correct priority in the decision.\ 4. Develop **alternatives**.\ 5. **Analyze** alternatives using the decision criteria.\ 6. **Select** an alternative.\ 7. **Implement** the alternative: Put the decision into action.\ 8. **Evaluate** **decision effectiveness**: Evaluate the outcome of the decision and see whether the problem was resolved. Depending on the nature of the problem, structured or unstructured, managers can use programmed or nonprogrammed decisions: - As mangers move up the organizational hierarchy, the problems they confront become more unstructured. - Structured problems: straightforward, familiar, and easily defined problems - Unstructured problems: problems that are new or unusual. Programmed decisions are decisions that have been made so many times in the past that managers have developed guidelines to be applied when certain situations inevitably occur.\ Types of programmed decisions: - **Procedure**: A series of sequential steps used to respond to a well-structured problem. - **Rule**: An explicit statement that tells managers what can or cannot be done. - **Policy**: A guideline for making decisions. Nonprogrammed decisions are unique and nonrecurring and involve custom-made solutions. Nonprogrammed decisions are made in response to unusual or novel opportunities and threats, when there are no ready-made decision rules that managers can apply to a situation.\ Programmed decisions are structured, repetitive, clear and have procedures to operate. Conditions that affect the possibility of decision failure: - **Certainty**: All the information the decision-maker needs is fully available. - **Risk**: The decision has clear-cut goals, and enough information is available to estimate the probability of a successful outcome versus failure. - **Uncertainty**: Managers know which goals they wish to achieve, but information about alternatives and future events is incomplete. - **Ambiguity**: The goal to be achieved or the problem to be solved is unclear, alternatives are difficult to define and information about outcomes is unavailable. Decision-making biases and errors: - **Overconfidence** bias: The tendency to think you know more than you do or hold unrealistically positive views of yourself or your performance. - **Immediate gratification** bias: The tendency to choose alternatives that offer immediate rewards and avoid immediate costs. - **Anchoring** effect: The tendency to fixate on initial information and ignore subsequent information. - **Confirmation** bias: The tendency to seek out information that reaffirms past choices while discounting contradictory information. - **Hindsight** bias: The tendency to falsely believe that the outcome of an event would have been accurately predicted once that outcome is known. - **Sunk costs** error: The tendency to incorrectly fixate on past expenditure of time, money, or effort in assessing choices rather than on future consequences. - **Self-serving** bias: The tendency to take credit for successes and to blame failure on others. **Decision making approaches** Approaches to decision-making: - **Rational** decision making: A decision-making approach assumes that managers will make logical and consistent choices to maximize value. This approach applies the assumption of rationality and assumes that managers are rational decision makers.\ Assumptions of rationality: - A rational decision maker would be fully objective and logical, and the problem faced would be clear and unambiguous. - The decision maker would have a clear and specific goal and know all possible alternatives and consequences. - Making decisions rationally would consistently lead to selecting the alternative that maximizes the likelihood of achieving that goal. - Decisions are made in the best interests of the organization. - **Bounded** rationality: A decision-making approach that is rational but bounded by an individual's ability to process information: - Managers cannot possibly analyze all information on all alternatives; therefore, they likely satisfice rather than maximize. Most managers settle for a satisficing rather than a\ maximizing solution. - Satisfice: Managers accept solutions that are satisfactory and sufficient or "good enough." For example, selecting the first alternative that meets the minimal decision criteria. - **Intuitive** decision making: Making decisions based on experience, feelings, and judgments. - Intuition represents a quick apprehension of a decision situation based on experience but without conscious thought. - Intuitive decision-making is not arbitrary because it is based on years of practice and hands-on experience. Innovative decision-making techniques: - **Brainstorming** uses a face-to-face interactive group to spontaneously suggest a wide range of alternatives for decision-making. - **Evidence-based** decision-making means a commitment to make more informed and intelligent decisions based on the best available facts and evidence. - **Rigorous debate**: Good managers recognize that constructive conflict based on divergent points of view can improve decision quality. - **Avoid groupthink**: Groupthink is the tendency of people in groups to suppress contrary opinions. **4.4. INFORMATION SYSTEMS AND MANAGEMENT** Information technology or IT: The set of methods or techniques for acquiring, organizing, manipulating, and transmitting information. The impact of information technology on business: - Creating portable offices: Providing Remote Access to Instant Information. - Enabling better service by coordinating remote deliveries. - Creating leaner, more efficient organizations. - Enabling increased collaboration. - Enabling global exchange. - Improving management processes. - Providing flexibility for customization. - Providing new business opportunities. Information system: A system that uses IT resources to convert data into information and to collect, process, and transmit that information for use in decision making.\ Customer Relationship Management or CRM systems: use specific software to compile information on customers so that firms can measure and monitor contacts with them.\ Enterprise Resource Planning or ERP systems: integrate operational and business processes across an entire organization (e.g., production, sales, purchases, logistics, accounting, project management,\ inventories and warehouse control, orders, payroll) to increase the productivity of the organization. Topic 5 ======= **BUSINESS ADMINISTRATORS AND MANAGERS** Management is needed in all types and sizes of organizations, at all organizational levels, in all organizational work areas, and in all organizations, regardless of where they're located The owners of the company are responsible for deciding who will be administering or managing the company. - In Sole proprietorship: the sole owner is responsible for administering or managing the company's activity. - In larger companies, the administrative body is responsible for managing or representing the company. The administrative body may be one or more individuals/ legal entities or the\ board of directors. The function of the board of directors is to ensure that the company is managed properly and in the interests of the owner(s), through: - Directing and driving company policy, strategic responsibility - Controlling management matters, supervisory responsibility - Serving as a link with the owners, communication responsibility. Characteristics of the board of directors - The board of directors of a listed company is elected by shareholders. - The minimum size of the board is three members. Board members could be internal, executive, directors such as CEO and managers, or external, non-executive, directors such as independent and blockholder directors. - The board must appoint from its members a chairman, one or more vice-chairman and a secretary. The company's maximum responsibility for decision-making needs to be concentrated in one person.\ In the United States, this figure is referred to as the CEO or Chief Executive Officer. In Spain, director ejecutivo, presidente ejecutivo, or consejero delegado. **THE NATURE OF THE MANAGER'S JOB** A manager is someone who coordinates and oversees the work of other people so organizational goals can be accomplished.\ Management involves coordinating and overseeing the work activities of others, so their activities are completed efficiently and effectively: - Efficiency is getting the most output from the least amount of inputs or resources. - Effectiveness is doing those work activities that will result in achieving organizational goals. Types of managers: - According to hierarchical level or vertical differences: - First-line managers: Manage the work of non-managerial employees. - Middle managers: managers between first-line managers and the top level of the organization, mainly responsible for turning organization's strategy into action. These individuals have titles such as regional manager, store manager, and division manager. - Top managers: Managers at the upper levels of the organization responsible for making organization-wide decisions and establishing the strategy and goals that affect the entire organization. These individuals have titles such as president, executive vice president, managing director, and chief X officer. - According to the scope of the activities that managers perform or horizontal differences: - Functional managers: Responsible for a department that performs a single functional task, such as finance, marketing, production, R&D, etc. For example, sales managers, R&D managers, finance managers are functional managers. - General managers: Responsible for several departments that perform different functions to make/sell a product, serve a market. General managers are in charge of a firm, division, or subsidiary. For example, regional managers and chief executive officer are typical titles. According to Katz, managers need certain skills to perform their job: - Technical skills: job-specific knowledge and techniques needed to proficiently perform work tasks. - Interpersonal skills: the ability to work well with other people both individually and in a group. - Conceptual skill is the cognitive ability to see the organization as a whole system and the relationships among its parts; the ability to think strategically and to identify, evaluate and solve complex problems. The manager performs up to ten different types of roles in his work, which according to Mintzberg are grouped into: - Interpersonal roles: involve people and ceremonial and symbolic duties. - Figurehead: Taking visitors to dinner, attending ribbon-cutting ceremonies, etc. - Leader: Hiring, training, and motivating employees. - Liaison: Serving as a coordinator or link among people, groups, or organizations. - Informational roles: involve collecting, receiving, and disseminating information. - Monitor: Actively seeks information that may be of value. - Disseminator: Transmitting relevant information back to others in the workplace. - Spokesperson: Formally relays information to people outside the unit or organization. - Decisional roles: involve making decisions or choices. - Entrepreneur: The voluntary initiator of change. - Disturbance handler: Handling such problems as strikes, copyright infringements, or problems in public relations or with corporate image. - Resource allocator: The manager decides how resources are distributed. - Negotiator: The manager enters into negotiations with other groups or organizations as a representative of the company. Management functions: - Planning: Involves setting goals, establishing strategies for achieving those goals, and developing plans to integrate and coordinate activities. - Organizing: Involves arranging and structuring work to accomplish the organization's goals. - Leading: involves working with and through people to accomplish organizational goals. - Controlling: involves monitoring, comparing, and correcting work performance. **MANAGEMENT FUNCTIONS: PLANNING** Reasons for managers to plan: - Planning provides direction to managers and non-managerial employees. - Planning reduces uncertainty by forcing managers to look ahead, anticipate changes, and develop appropriate responses. - Planning minimizes waste and redundancy. - Planning establishes the goals or standards used in controlling. Types of plans: - Breadth - Time frame - Specificity - Frequency of Use Goals are desired outcomes for individuals, groups or entire organizations. Characteristics of effective goals: - Specific - Linked to rewards - Challenging but realistic - Defined time period - Cover key result areas **Management function: Organizing** Organizational structure is the formal arrangement of jobs within an organization; organizational chart is the visual representation of the organization's structure. Key elements of the organizational structure: - Work specialization. - Departmentalization. - Chain of command. - Span of control. - Centralization and decentralization. - Formalization. Work specialization, division of labor: Dividing work activities into separate job tasks: - Work specialization normally leads to higher productivity and efficiency. - However, overspecialization can result in boredom, fatigue, stress, poor quality, increased absenteeism, and higher turnover. Departmentalization: The basis by which jobs are grouped together, so work gets done in a coordinated and integrated way: - Functional - Geographical - Product - Process - Customer Chain of command: The line of authority extending from upper levels of an organization to the lowest levels, which clarifies who reports to whom: - Authority: The rights inherent in a managerial position to tell people what to do and to expect them to do it. - Responsibility: The obligation or expectation to perform any assigned duties. - Unity of command: The management principle that each person should report to only one manager. - Span of control: the number of employees a manager can effectively and efficiently manage. The span of control involves determining the number of levels and managers in an organization Centralization: The degree to which decision making is concentrated at upper levels of the organization: - If top managers make key decisions with little input from below, then the organization is more centralized. - Decentralization: the degree to which lower-level employees provide input or make decisions. Formalization: The degree to which jobs within the organization are standardized and the extent to which employee behavior is guided by rules and procedures. In highly formalized organizations, there are explicit job descriptions, numerous rules, defined procedures, and employees have little discretion. Basic organizational design revolves around two organizational forms. Mechanistic versus Organic organizations: - Mechanistic organization: An organizational design that is rigid and tightly controlled, and typically has the following elements: - High specialization. - Rigid departmentalization. - Clear chain of command. - Narrow span of control. - Centralization. - High formalization. - Organic organization: An organizational design that is highly adaptive and flexible, and typically has the following elements: - Cross-functional teams - Cross-hierarchical teams - Free flow of information - Wide spans of control - Decentralization - Low formalization **Management functions: Leading** Human resource management: The design and application of formal systems to ensure the effective and efficient use of human talent to accomplish organizational goals. Human resource management activities include determining and attracting an effective workforce, rewarding and developing the workforce to its potential and maintaining the workforce over the long term Effective human resource management has a positive impact on strategic performance, including higher employee productivity and stronger financial results. Human resource management process: - Recruitment: locating, identifying, and attracting capable applicants - Decruitment: reducing an organization's workforce - Selection: screening job applicants to ensure that the most appropriate candidates are hired - Orientation: introducing a new employee to his or her job and the organization - Training and development: a planned effort by an organization to facilitate employees' learning of job-related skills and behaviors - Performance appraisal: the process of observing and assessing an employee's performance, recording the assessment, and providing feedback - Compensation: different types of rewards and benefits, such as base wages and salaries, incentive payments, and other benefits and services **Management functions: Controlling** Managers can implement controls before an activity begins, during the time the activity is going on, and after the activity has been completed: - Feedforward control: control that takes place before a work activity is done, training and preventive maintenance programs. - Concurrent control: control that takes place while a work activity is in progress, ongoing monitoring and direct supervision. - Feedback control: control that takes place after the work activity is done, financial controls and feedback quality control. The control process: a three-step process of measuring actual performance, comparing actual performance against a standard, and taking managerial action to correct deviations or inadequate standards. **LEADERSHIP** Leadership is the process by which a person exerts influence over other people and inspires, motivates, and directs their activities to helps achieve group or organizational goals. Leadership styles: - Autocratic leader: a leader who dictates work methods, makes unilateral decisions, and limits employee participation. - Democratic leader: a leader who involves employees in the decision making, delegates authority, and uses feedback as an opportunity for coaching employees. - Laissez-faire leader: a leader who lets the group make decisions and complete the work in whatever way it sees fit. Differences between management and leadership: - Leadership and management reflect two different sets of qualities and skills that provide different benefits for the organization. - Manager qualities: focus on the organization, rational, maintains stability, assigns tasks, organizes, analyses, position power. - Leader qualities: focus on people, visionary, promotes change,\ defines purpose, nurtures, innovates, personal power. - Management promotes stability and efficient organizing to meet current commitments, whereas leadership often inspires engagement and organizational change to meet new conditions. - Both leadership and management are important to organizations, and people can learn to be good leaders as well as good managers. Transformational versus transactional leadership: - A transactional leader clarifies subordinates' roles and task requirements, initiates structure, provides rewards and displays consideration for followers. - A transformational leader is distinguished by a special ability to bring about innovation and change by creating and inspiring vision, shaping values, building relationships, and providing meaning for followers. - Whereas transactional leaders keep things running smoothly and efficiently, transformational leaders create significant change in both followers and the organization. Topic 6 ======= **ECONOMIC GOAL AND VALUE CREATION** All firms explicitly set one distinctly economic objective: to maximize accounting profit. Accounting profit: - Is the difference between the income that a firm generates, mainly through the sale of its products, and the costs that it incurs in order to achieve this income. - It is calculated on the basis of the account for a specific economic period, normally one year. Profitability: when accounting profit is held up against another financial indicator, like capital invested, or economic structure indicator, such as assets. The measurement of profitability, such as return on equity and return on assets, enables comparing different firms in terms of profit achievement. Shortcomings: it is imprecise, relative concept; it is a measure of present and, above all, past results; the concept of maximization, and the associated risk is not taken into account. The concept of economic profit provides a basis for the aim that firms should pursue: Value creation for shareholders. Value creation refers to increasing the value of the shares more than other companies with similar characteristics and comparable risk. Economic profit is calculated on the basis of a firm's equity market value, which reflects its ability to generate future profit.\ **EPt = (EMVt -- EMVt-1) + DIVt**,\ [EPt] is a firm\'s economic profit for the period t.\ [EMVt] is the equity market value of the firm\'s equity at the end of the period t.\ [EMVt-1] is the equity market value of the firm\'s equity at the beginning of the period t.\ [DIVt] are the dividends issued by the firm over the period t. This concept of economic profit overcomes some of the limitations of accounting profit: - It Is calculated in a manner external to the firm i.e. by market - It accounts for risk. Shareholder profitability can be used to compare shareholder returns across similar companies in terms of size, or industry, as well as among listed companies with similar risk. A close-up of a math formula Description automatically generated **SOCIAL RESPONSIBILITY, SUSTAINABILITY, AND ETHICS** Social responsibility: Opposing views: - Classical view: The view that management's only social responsibility is to maximize profits. - Socioeconomic view: The view that management's social responsibility goes beyond making profits to include protecting and improving society's welfare. Social responsibility: A firm's obligation, beyond that required by the law and economics, to pursue long-term goals that are good for society Areas of social responsibility: - Organizational stakeholders: - Customers: treat customers fairly, charge fair prices, honor warranties, meet delivery commitments. - Employees: treat workers fairly, make them a part of the team, and respect their dignity and basic human needs. - Investors: managers should follow proper accounting procedures, provide appropriate information to shareholders, and manage the organization to protect shareholder rights and investments. - Natural environment: - Companies have become more socially responsible in their release of pollutants and general treatment of the environment. - General social welfare: - Contributing financially to charities, philanthropic organizations, taking a role in improving public health and education. Sustainability refers to economic activities that meet the needs of the present population while preserving the environment for the needs of future generations. The triple bottom line is the idea that organizations can assess their performance on social and environmental criteria and financial ones Ethics: One's personal beliefs about whether a behavior, action, or decision is right or wrong Ethical behavior: Behavior that conforms to generally accepted social norms. Managerial ethics: Standards of behavior that guide individual managers in their work A code of ethics is a formal statement of an organization's values and the ethical rules it expects employees to follow Areas of managerial ethics: - How an organization treats its employees: includes policies such as hiring and firing, wages and working conditions, and employee privacy and respect. - How employees treat the organization: especially regarding conflicts of interest, secrecy and confidentiality, and honesty. - How employees and the organization treat other economic agents, such as customers, competitors, stockholders, suppliers, dealers, and unions: - Advertising and promotions, financial disclosures, ordering and purchasing, shipping and solicitations, bargaining and negotiation, and other business relationships. **THE GROWTH OF THE FIRM** Strategy: A plan for how the organization will do what it's in business to do, how it will compete successfully, and how it will attract and satisfy its customers in order to achieve its goals Strategic management process encompasses strategic planning, implementation, and evaluation. Mission: A statement of the purpose of an organization SWOT analysis: an analysis of the organization's strengths, weaknesses, opportunities and threats: - External analysis: Identify opportunities and threats. - Opportunities: Positive trends in the external environment. - Threats: Negative trends in the external environment. - Internal analysis: Identify strengths and weaknesses. - Strengths: Any valuable resources and capabilities that the firm has or any well-done activities. - Weaknesses: Lack of resources or any activities that the firm does not do well. Levels of organizational strategy: - Corporate strategy: Addresses decision making regarding the identification of the businesses that the firm wishes to be in and the forms of growth that it can pursue. - Competitive strategy: Focuses on determining how best to compete in a set of activities or businesses that a firm is already involved in, and how to gain a competitive advantage over rivals. - Functional strategy: Focuses on how to perform activities efficiently within each of a firm's functional areas. The scope of the firm: - Vertical scope refers to the set of activities related to the production process that a firm performs. - Horizontal scope refers to the variety and heterogeneity of the products that a firm offers. - Geographical scope reflects the physical spread of a firm and its current or initial location, possibly including different countries or geographical areas. Corporate strategies: - Vertical integration strategy: A firm augments its vertical scope, performing several activities belonging to the same production process. - Specialization vs Diversification: A firm develops its horizontal scope. - Internationalization: A firm broadens its geographical scope, entering new countries. Vertical integration: When a firm takes part in several activities within the production process: - Backward vertical integration: The organization becomes its own supplier and can control its inputs. - Forward vertical integration: The organization becomes its own distributor and can control its outputs. - Advantages of vertical integration: Coordination and planning of the production process, guarantee high quality, protect knowledge and information, controlling the final market. - Disadvantages of vertical integration: High risk, inflexibility, high costs. Specialization and diversification: - Specialization/Concentration: When a firm grows by focusing on its primary line of business and increases the number of products offered or markets served in this primary business. - Diversification: It is the path followed by firms with broad horizontal scope, like firms that offer a wide variety of products. - Related diversification: When a firm grows by moving into new businesses in related industries. - Unrelated diversification: When a firm grows by moving into new businesses in unrelated industries. - Reasons why firms pursue diversification strategies: Entering attractive industries, lowering risk, financial reasons, economies of scope, leveraging managerial capabilities, market power. Internationalization: A firm broadens its geographical scope, entering in new countries: - Multidomestic strategy: a company manages itself as a collection of relatively independent operating subsidiaries, each of which focuses on a specific domestic market; the priority is responsiveness to the needs of each country. - Global strategy: a company views the world as a single marketplace and has as its primary goal the creation of standardized goods and services that will address the needs of customers worldwide. - Transnational strategy: a company tries to combine the benefits of global scale efficiencies with the benefits and advantages of local responsiveness. Competitive strategies: - Cost leadership strategy: The organization competes on the basis of having the lowest costs in its industry. - Differentiation strategy: The company offers unique products that are widely valued by customers. - Differentiation can come from exceptionally high quality, extraordinary service, brand image, distinctive product features, innovative design, etc. Forms of growth: Growth implies a firm increasing its size in some way, such as a greater number of\ employees, owning more assets, dealing with more customers, increasing sales, etc. Firms can grow in three ways: - Internal growth: It makes investments in its own structure that lead to the creation of production capacity that did not previously exist in the economy. It is also called "organic" or "natural" growth. - Mergers and acquisitions: One firm purchases completely or partially another firm. - Strategic alliances: Stable agreements between two or more independent firms establishing a certain degree of interconnection. **INNOVATION** Creativity vs. innovation - Creativity: the ability to combine ideas in a unique way or to make unusual associations between ideas. - Innovation: Taking creative ideas and turning them into useful products or work methods. An innovative organization is characterized by its ability to generate new ideas that are implemented into new products, processes, and procedures designed to be useful, to channel creativity into useful outcomes. There are three sets of variables that have been found to stimulate innovation. They pertain to the organization's structure, culture, and human resource practices. Types of innovation: - Product innovations are embodied in the outputs of an organization, its goods or services. - Process innovations are innovations in the way an organization conducts its business, such as in the techniques of producing or marketing goods or services. - Radical innovation: an innovation that is very new and different from prior solutions. - Incremental innovation: an innovation that makes a relatively minor change from existing practices.