Gleim CIA Part 3 Book 221-260 PDF Study Guide 2023

1 STUDY UNIT ONE STRATEGIC MANAGEMENT, PLANNING, AND PERFORMANCE MEASURES 1.1 Strategic Management, Planning, and Globalization............................ 2...

1 STUDY UNIT ONE STRATEGIC MANAGEMENT, PLANNING, AND PERFORMANCE MEASURES 1.1 Strategic Management, Planning, and Globalization............................ 2 1.2 Performance Measures -- Costs of Quality................................... 12 1.3 Performance Measures -- Balanced Scorecard................................ 14 This study unit is the first of five covering Domain I: Business Acumen from The IIA’s CIA Exam Syllabus. This domain makes up 35% of Part 3 of the CIA exam and is tested primarily at the basic cognitive level. Performance measures and business processes are tested at the proficient cognitive level. The five study units are  Study Unit 1: Strategic Management, Planning, and Performance Measures  Study Unit 2: Organizational Behavior  Study Unit 3: Leadership and Organizational Structure  Study Unit 4: Business Processes and Data Analytics  Study Unit 5: Project Management and Contracts The learning objectives of Study Unit 1 are  Describe the strategic planning process and key activities (objective setting, globalization and competitive considerations, alignment with the organization’s mission and values, etc.)  Examine common performance measures (financial, operational, qualitative vs. quantitative, productivity, quality, efficiency, effectiveness, etc.) A strategy is an entity’s plan to  Allocate resources and actions to succeed in its competitive environment,  Obtain a competitive advantage, and  Attain its highest level goals. Performance measures, targets, and tolerances (the range of acceptable variation in performance) are established to evaluate the achievement of objectives. Performance measures must be designed so that they relate directly to accomplishment of goals. They may be financial or nonfinancial. GLEIM REVIEW PART 3 2023 1 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 2 SU 1: Strategic Management, Planning, and Performance Measures 1.1 STRATEGIC MANAGEMENT, PLANNING, AND GLOBALIZATION An organization’s strategic planning process flows from an understanding of its mission, its businesses and their markets, and the appropriate competitive strategy for each business. Strategic Management Strategic management is the set of decisions and activities needed to create strategies and allocate resources and actions to succeed in the entity’s competitive environment. Strategic management is a five-step process: 1. The board of directors drafts the organization’s mission statement, a general statement of what the organization intends to accomplish and its reason for existing. The statement may be accompanied by one or more goals, which are specific targets for measuring the organization’s success. 2. The organization performs a situational analysis, also called a SWOT analysis, involving identification of strengths, weaknesses, opportunities, and threats. 3. Based on the results of the situational analysis, upper management develops a group of strategies describing how the mission statement will be fulfilled. 4. Strategic plans are implemented through the execution of component plans at each level of the entity. 5. Strategic controls and feedback are used to monitor progress, isolate problems, and take corrective action. Over the long term, feedback can be used to adjust the original mission and goals. GLEIM REVIEW PART 3 2023 2 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 3 Organizational Planning Planning generally involves setting goals and specifying the means to be used. Plans must be established at each level of a complex organization.  At the strategic level, a mission statement is drafted (generally by the board of directors) to explain the organization’s purposes and values. It is also the ultimate basis for the goals and plans at each level of the organization and for stating the organization’s primary competitive scopes. These scopes may extend to  Industries,  Products and services,  Applications,  Core competencies,  Market segments,  Degree of vertical integration, and  Geographic markets.  Businesses should also be defined in market terms, that is, needs and customer groups. Moreover, a distinction should be made between a target market definition and a strategic market definition.  For example, a target market for a ride share company may be people transportation, but a strategic market might be transporting items like food and groceries.  A business also may be defined with respect to customer groups and their needs and the technology required to satisfy those needs.  A large firm can have multiple businesses. Thus, the concept of the strategic business unit (SBU) is useful for strategic planning by large firms.  An SBU has its own competitors and a manager who engages in strategic planning and is responsible for the major determinants of profit. Organizational planning has the following three phases: 1. Plan development includes drafting a mission statement setting strategic goals and an overall plan. 2. Translation of the plan at the tactical level includes  Establishing objectives and plans and  Contingency planning (including crisis prevention and preparation). 3. Operational planning and execution requires choosing performance targets that are  Specific,  Measurable,  Challenging but reasonably attainable,  Time limited, and  Related to the entity’s key performance indicators. GLEIM REVIEW PART 3 2023 3 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 4 SU 1: Strategic Management, Planning, and Performance Measures Implementation Strategic plans must be passed down the organizational structure through development of plans at each lower level. This process is most likely to succeed if  The organizational structure is compatible with strategic planning,  Personnel have the necessary abilities,  The organizational culture is favorable or flexible, and  Controls exist to facilitate implementation. Controls Strategic controls should be established to monitor progress, isolate problems, identify invalid assumptions, and take prompt corrective action.  As plans are executed at each organizational level, control measurements are made to determine whether objectives have been achieved. Thus, objectives flow down the organizational hierarchy, and control measures flow up.  One category of strategic control measures relates to external effectiveness.  A second category of strategic control measures relates to internal efficiency.  Senior managers broadly define strategic goals and plans for the entire organization. Middle managers develop tactical goals and plans needed to achieve strategic goals.  Tactical plans are shorter-term and more detailed than strategic plans. Lower managers and supervisors develop operational goals and plans to achieve the strategic and tactical goals and plans.  Operational plans are short-term, detailed, and measurable at the departmental or lower levels. GLEIM REVIEW PART 3 2023 4 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 5 Competitive Advantage Strategic management seeks to obtain a competitive advantage that differentiates the organization and allows it to be successful in its market. A competitive advantage has four aspects. 1. Strategies should be developed that target specific customers whose needs can be met by the organization. 2. The organization must be able to take advantage of core competencies, which are the things it does better than its competitors. 3. Strategic management is facilitated when managers think synergistically. Synergy exists when a combination of formerly separate elements has a greater effect than the sum of their separate individual effects.  Market synergy results when products or services have positive complementary effects. An example in the entertainment industry is a distributor’s acquisition of content providers.  Cost synergy reduces costs. It occurs in many ways, for example, in the recycling of by-products or enhancing value by combining the design, production, marketing, and sales of a line of products by the same enterprise.  Technological synergy is the transfer of technology among applications. For example, technology developed for military purposes often has civilian uses.  Management synergy also involves knowledge transfer. For example, a firm may hire a manager with skills that it lacks or share management knowledge with another department. 4. Providing value to the customers is crucial to an effective strategy. GLEIM REVIEW PART 3 2023 5 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 6 SU 1: Strategic Management, Planning, and Performance Measures Competitive Strategies Competitive strategies influence a firm’s relative position in its industry.  Michael E. Porter’s generic strategies model treats each competitive advantage as either a cost advantage (e.g., low cost) or a differentiation advantage (e.g., a unique product).  The firm’s advantages should be used within its competitive scope (target) to achieve its objectives. This scope may be broad (e.g., industry-wide) or narrow (e.g., a market segment).  Using the variables of competitive advantage (cost or differentiation) and competitive scope (broad or narrow), four generic strategies may be implemented. Figure 1-1  Quadrant 1 - Cost leadership seeks competitive advantage through lower costs. It has a broad scope. Such a firm can earn higher profits than its competitors at the industry average price or charge a lower price to increase market share.  A cost leader usually has low profit margins, high sales, a large market share, and efficient supply and distribution channels.  Quadrant 2 - Differentiation seeks to provide a unique product or service. It has a broad scope. Such a firm may earn higher profits if consumers are willing to pay a higher price. But the price difference must exceed the additional cost of the differentiated product or service.  Successful differentiation creates a buyer belief that few, if any, substitutes are available. Thus, the firm may be able to pass supplier cost increases to buyers.  Quadrant 3 - Cost focus seeks lower costs but with a narrow scope (e.g., a regional market or specialized product line). The reason is that the narrower market can be better served because the firm knows it well.  Firms that successfully adopt a cost-focus strategy achieve strong customer loyalty. Their strengths and attributes are similar to those of cost leaders.  Quadrant 4 - Focused differentiation seeks to provide a unique product or service but with a narrow scope.  The analysis of these firms is similar to that for cost-focus firms. GLEIM REVIEW PART 3 2023 6 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 7 Operations Strategies An operations strategy is reflected in a long-term plan for using resources to reach strategic objectives. The following are five operations strategies: 1. A cost strategy is successful when the enterprise is the low-cost producer. However, the product (e.g., a commodity) tends to be undifferentiated in these cases.  A product is undifferentiated when competitors sell essentially the same thing, such as the same kind of grain. 2. A quality strategy involves competition based on product quality or process quality. 3. A delivery strategy may permit an enterprise to charge a higher price when the product is consistently delivered rapidly and on time and deemed convenient by the customer. 4. A flexibility strategy involves offering many different products or an ability to shift rapidly from one product line to another or improve a product/process. 5. A service strategy seeks to gain a competitive advantage and maximize customer value by providing services that benefit the customer. SWOT (Strengths, Weaknesses, Opportunities, and Threats) SWOT analysis facilitates development of an overall strategy as a basis for planning to achieve the organization’s mission. This process considers organizational strengths and weaknesses (a capability profile) and their interactions with environmental opportunities and threats.  Strengths and weaknesses (the internal environment) usually are identified by considering the firm’s capabilities and resources. What the firm does particularly well or has in greater abundance are its core competencies.  Core competencies are the source of competitive advantages that in turn are the basis for an overall strategy.  Opportunities and threats (the external environment) are identified by considering  Macroenvironmental factors such as economic (e.g., changes in financial and labor markets), demographic, political, legal, social, cultural, and technological factors; and  Microenvironmental factors such as suppliers, customers, distributors, competitors, and other competitive factors in the industry.  For example, speed in reacting to environmental changes or introducing new products is an important competitive advantage. To achieve it, the organization may have to reengineer its processes. GLEIM REVIEW PART 3 2023 7 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 8 SU 1: Strategic Management, Planning, and Performance Measures Growth-Share Matrix The growth-share matrix is a means of analyzing a portfolio of investments in strategic business units (SBUs).  This approach supports  Resource allocation,  New business startups and acquisitions,  Downsizing, and  Divestitures.  The Boston Consulting Group’s model for portfolio strategy has two variables.  The business growth rate (BGR) (also referred to as market growth rate) is on the vertical axis. It relates to  The maturity and attractiveness of the market and  The relative need for cash to finance expansion.  Market share (MS) is on the horizontal axis.  The MS reflects an SBU’s position in the market segment relative to competitors. Figure 1-2  SBUs are represented in the quadrants by circles. A circle is proportional to the SBU’s position in the entity’s portfolio.  Dogs (low MS, low BGR) are weak competitors in low-growth markets. They are candidates for disposal. Net cash flow is modest.  Question marks (low MS, high BGR) are weak competitors that need cash infusions from cash cows. A question mark may become a star or a dog depending on whether MS increases significantly. GLEIM REVIEW PART 3 2023 8 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 9  Cash cows (high MS, low BGR) are strong competitors and cash generators. A cash cow ordinarily enjoys high profit margins and economies of scale. The SBU’s excess cash can be used for investments in other SBUs. But marketing and R&D expenses should not necessarily be reduced significantly.  Stars (high MS, high BGR) are strong competitors in high growth markets. Such an SBU is profitable but needs large amounts of cash for expansion, R&D, and meeting competitors’ attacks.  Each SBU should have objectives, a strategy should be formulated to achieve those objectives, and a budget should be allocated.  A hold strategy is used for strong cash cows and stars.  A build strategy is necessary for a question mark with potential to be a star.  A harvest strategy maximizes short-term net cash inflow. Harvesting means zero- budgeting R&D, reducing marketing costs, not replacing facilities, etc. This strategy is used for weak cash cows and possibly question marks and dogs.  A divest strategy is normally used for question marks and dogs that reduce the firm’s profitability. The proceeds of sale or liquidation are then invested more favorably.  A harvest strategy may undermine a future divestiture by decreasing the fair value of the SBU. Globalization Globalization is the degree to which ideas, information, data, investment, and trade cross national borders. The unavoidable extent of globalization requires managers to have a global mindset. It is defined by Daft and Marcic (Understanding Management, 10th edition) as the “ability to appreciate and influence individuals, groups, organizations, and systems that represent different social, cultural, political, institutional, intellectual, and psychological characteristics.”  The cognitive element is the ability to understand cultural differences and adjust to global changes.  The social element is the ability to develop relationships with people from different cultures.  The psychological element is the ability to enjoy diverse modes of thought and behavior and cope with uncertainty. GLEIM REVIEW PART 3 2023 9 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 10 SU 1: Strategic Management, Planning, and Performance Measures Multinationals Multinational corporations (MNCs) also are known as global, stateless, or transnational. These entities have become numerous and powerful, some with revenues equivalent to the gross domestic products of countries.  An MNC usually receives at least 25% of its sales from sources outside its home country.  Some MNCs have senior management with a global approach that treats the world as a single market (geocentric). A geocentric company is one where management looks at opportunities on a global scale. Instead of focusing on the way that business gets done in a given country, it looks at how to conduct business anywhere in the world, based on common ways of communicating.  But some MNCs are not geocentric; that is, they are internationally oriented and seek to absorb the best that various cultures offer, including managerial talent.  Ethnocentric MNCs identify with the home country.  Polycentric MNCs emphasize host country markets, and control is primarily local. The Global Environment Management of operations in more than one country addresses the same functions as in the domestic environment: (1) planning, (2) organizing, (3) leading, and (4) controlling. Economic issues include the degrees of development and interconnection. Political and legal issues are complex in the international environment because of substantial statutory and regulatory differences from country to country. GLEIM REVIEW PART 3 2023 10 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 11 Social and cultural differences may be even more difficult to resolve than economic, legal, and political issues, but they are crucial.  Communication varies because of the distinction between high-context and low-context cultures.  In high-context cultures (e.g., Japanese, Chinese, Arabic, and Korean), much meaning is transmitted by nonverbal cues and situational circumstances.  In low-context cultures (e.g., in northern European and North American countries), primary meanings are transmitted by words. For example, precise written contracts are highly valued in a low-context culture.  Cultural intelligence (CQ) has been defined as the ability to observe, reason about, interpret, and respond to culturally unfamiliar situations.  Social trends, such as changes in labor markets, reflect social, cultural, and demographic factors in the organization’s macroenvironment that may constitute opportunities or threats (identified in a SWOT analysis). The attributes of people (age, education, income, ethnicity, family status, etc.) and their beliefs, attitudes, and values shape and are shaped by social trends that in turn affect the organization. GLEIM REVIEW PART 3 2023 11 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 12 SU 1: Strategic Management, Planning, and Performance Measures 1.2 PERFORMANCE MEASURES -- COSTS OF QUALITY Performance Measures -- Financial vs. Nonfinancial Measures Financial performance measures are derived from financial accounting data stated in monetary units. Nonfinancial performance measures are not standardized and may have any appropriate form, except that nonfinancial performance measures are not expressed in monetary values.  Product quality measures include but are not limited to returns and allowances and the number and types of customer complaints.  Manufacturing measures include but are not limited to  Throughput time (the time required to convert materials into finished goods),  The ratio of equipment setup time to total production time, and  The ratio of reworked units to completed units.  The balanced scorecard includes other nonfinancial measures (Subunit 1.3). Key performance indicators (KPIs) are quantitative measures that indicate how well the company is doing. The costs of quality must be assessed in terms of relative costs and benefits. Thus, an organization should attempt to optimize its total cost of quality.  Moreover, nonquantitative factors also must be considered. For example, an emphasis on quality improves competitiveness, enhances employee expertise, and generates goodwill. GLEIM REVIEW PART 3 2023 12 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 13 Conformance costs include costs of prevention and costs of appraisal, which are financial measures of internal performance.  Prevention attempts to avoid defective output. These costs include  Preventive maintenance,  Employee training,  Review of equipment design, and  Evaluation of suppliers.  Appraisal includes such activities as statistical quality control programs, inspection, and testing. Nonconformance costs include internal failure costs (a financial measure of internal performance) and external failure costs (a financial measure of customer satisfaction).  Internal failure costs occur when defective products are detected before shipment and additional costs are incurred on defective products. Examples are scrap, rework, tooling changes, and downtime.  External failure costs, e.g., warranty costs (including repairs), product liability costs, and loss of customer goodwill, result when problems occur after shipment.  Environmental costs also are external failure costs, e.g., fines for nonadherence to environmental law and loss of customer goodwill. GLEIM REVIEW PART 3 2023 13 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 14 SU 1: Strategic Management, Planning, and Performance Measures 1.3 PERFORMANCE MEASURES -- BALANCED SCORECARD Critical Success Factors (CSFs) The balanced scorecard is a management control approach that connects CSFs with measures of performance. The balanced scorecard also is a goal congruence tool that informs managers about the factors that senior management believes to be important.  CSFs are specific measures that may be (1) financial or nonfinancial, (2) internal or external, and (3) short-term or long-term.  The balanced scorecard facilitates best practice analysis. Best practices are methods of performing a function that are superior to all other known methods. CSFs are vital to competitive advantage. Measures Specific measures for each CSF should be relevant to the success of the firm and reliably stated.  Thus, the balanced scorecard varies with the strategy adopted by the firm. The scorecard should include lagging indicators (such as output and financial measures) and leading indicators (such as many types of nonfinancial measures, e.g., customer satisfaction, returns, and repeat customers).  Leading indicators should be used to predict future financial performance. The scorecard should permit a determination of whether certain objectives are being achieved at the expense of other objectives.  For example, reduced spending on customer service may improve short-term financial results at a significant cost that is revealed by a long-term decline in customer satisfaction measures. GLEIM REVIEW PART 3 2023 14 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 1: Strategic Management, Planning, and Performance Measures 15 Possible CSFs and Measures A typical balanced scorecard classifies objectives into one of four perspectives: 1. The financial performance perspective addresses current and long-term results. Possible CSF Possible Measure Sales New product sales Fair value of stock Price-earnings ratio Profitability Return on investment, EVA Liquidity Quick ratio, current ratio, net working capital 2. The customer service perspective includes customer retention, customers’ opinions about the firm, and their level of satisfaction. CSF Financial Measure Nonfinancial Measure Customer satisfaction Trends in monetary amounts of returns Market share Dealer and distributor Trends in monetary amounts of discounts taken Lead time relationships Marketing and selling Trends in monetary amounts of sales Market research results performance Prompt delivery Trends in delivery expenses On-time delivery rate Quality Monetary amounts of defects Rate of defects 3. The internal business processes perspective emphasizes production and other operational measures. CSF Financial Measure Nonfinancial Measure Quality Scrap costs Rate of scrap and rework Change in company revenue/ Productivity Units produced per machine hour change in company costs Flexibility of response Cost to repurpose machine for Time to repurpose machine for new to changing conditions new use use Operating readiness Setup costs Downtime Safety Monetary amount of injury claims Number and type of injury claims GLEIM REVIEW PART 3 2023 15 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 16 SU 1: Strategic Management, Planning, and Performance Measures 4. The learning and growth perspective relates to resource management and innovation. CSF Financial Measure Nonfinancial Measure Development of new Number of new patents applied R&D costs products for Lost revenue (from slow Promptness of product Length of time to bring a product introduction of new products to introduction to market market) Human resource Recruiting costs Personnel turnover development Morale Orientation and team-building costs Personnel complaints Competence of workers Training or retraining costs Hours of training Example Balanced Scorecard PERFORMANCE OBJECTIVES TARGETS OUTCOMES CORRECTIVE INITIATIVES MEASURES PERSPECTIVE: Financial Performance Expand into new markets Increase sales Gross revenues Increase 15% Increase 3% Improve same-store sales PERSPECTIVE: Customer Service Reduce number of defects Number of Reduce returns Decrease 10% Decrease 2% Determine customer needs returns prior to sale PERSPECTIVE: Internal Business Processes Improve employee training Reduce scrap Costs of scrap Decrease 5% Increase 4% Seek higher quality materials PERSPECTIVE: Learning and Growth Reduce personnel Length of time Improve hiring practices Increase 50% Increase 10% turnover employed Reevaluate compensation plan GLEIM REVIEW PART 3 2023 16 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  1 STUDY UNIT TWO ORGANIZATIONAL BEHAVIOR 2.1 Motivational Theories and Behaviors....................................... 2 2.2 Motivation -- Process-Based Theories, Behavior, Job Design, and Other............ 8 2.3 Organizational Politics and Group Dynamics................................. 11 This study unit is the second of five covering Domain I: Business Acumen from The IIA’s CIA Exam Syllabus. This domain makes up 35% of Part 3 of the CIA exam and is tested primarily at the basic cognitive level. Performance measures and business processes are tested at the proficient cognitive level. The five study units are  Study Unit 1: Strategic Management, Planning, and Performance Measures  Study Unit 2: Organizational Behavior  Study Unit 3: Leadership and Organizational Structure  Study Unit 4: Business Processes and Data Analytics  Study Unit 5: Project Management and Contracts The learning objectives of Study Unit 2 are  Explain organizational behavior (individuals in organizations and groups, how organizations behave, etc.).  Explain different organizational and motivational theories and methods (traits, organizational politics, motivation, job design, rewards, work schedules, etc.). In the short term (about 1 year), the organization must meet the expectations of society, owners, employees, customers, and creditors. In the intermediate term (about 2-4 years), it must adapt to change and develop its capacities. In the long term (5 or more years), it must survive in an uncertain environment with many threats and opportunities. The ideal management action motivates subordinates (such as by rewarding them for certain actions) by structuring situations and requiring behaviors that satisfy the needs of subordinates and the organization. GLEIM REVIEW PART 3 2023 17 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 2 SU 2: Organizational Behavior 2.1 MOTIVATIONAL THEORIES AND BEHAVIORS Overview According to Daft (Understanding Management, 10th ed.), an organization is a “social entity that is goal directed and deliberately structured.” The four elements of an organization have been defined as follows: 1. Coordination of effort in a cooperative social arrangement 2. A common objective or purpose 3. Division of labor (efficient work specialization) 4. A hierarchy of authority  Authority is the legitimate right to direct, and to expect performance from, other people to achieve the organization’s goals. Those people are accountable to their superiors in the hierarchy. The test of an organization is its performance, for example, its effectiveness and productivity.  In the narrow sense, effectiveness is achievement of goals by providing value to customers over time. It should be contrasted with efficiency, the ratio of output to input. In the broad sense, an organization must achieve its goals efficiently to be considered effective.  Economists define productivity as the ratio of real output to a unit of input.  For example, in a retail store, a critical output is revenue per square foot. Productivity of floor space, a limited resource, therefore should be analyzed.  Increased productivity is the goal of every organization because it improves the measures of performance, such as profit.  Depending on certain factors, the existence of competition may result in increased or decreased productivity.  For example, competition between groups whose tasks are independent will result in increased productivity. But, competition between groups whose tasks are interdependent will result in decreased productivity. The definition of organizational effectiveness includes a time dimension. Thus, an organization needs to be effective beyond the near future. It should be effective and efficient, grow, be profitable, satisfy society’s and its stakeholders’ expectations, learn, adapt, develop, and survive over a period of years. GLEIM REVIEW PART 3 2023 18 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 3 Organizational decline (inflexibility and loss of effectiveness and efficiency) may lead to downsizing, merger, reorganization, or liquidation. It results from decreased demand, resource limitations, or mismanagement.  Management complacency is one of the main causes of organizational decline. The following are its characteristics:  A lack of innovation  Faulty perception of markets and competition  Failure to observe or properly appraise the initial warnings of decline  Not focusing on daily objectives  Downsizing results from organizational decline, changes in the business cycle, or business combinations. The objectives are cost reduction, improved efficiency, and higher profits. Organizational charts represent the formal organizational structure in two dimensions: vertical hierarchy and horizontal specialization. They often resemble a pyramid, with the chief executive on top and the operating workforce on the bottom.  Lines show reporting relationships, lines of authority, and task groupings. An organizational chart also depicts promotional or career tracks and illustrates the span of control and the number of organizational levels.  A shortcoming is that organizational charts do not show informal relationships, e.g., communication, influence, power, or friendship.  Recent trends in management, including increased span of control and decreased hierarchy, have resulted in flatter organizational charts. Motivation is the set of internal and external forces that stimulate enthusiasm to persist in a course of action. Rewards Extrinsic rewards are received from others.  Social rewards normally include acknowledgment of employee achievement through actions, such as solicitation of advice.  Token rewards are normally nonrecurring. They show appreciation for the role of the employee. Examples are stock options, additional time off with pay, a stipend for employee of the month, etc.  Extrinsic threats and punishments use fear to motivate. An example is charging overweight employees more for health insurance.  This practice is based on loss aversion, the tendency to respond more to a loss than a possible gain (e.g., a monetary reward for weight loss). GLEIM REVIEW PART 3 2023 19 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 4 SU 2: Organizational Behavior Intrinsic rewards are the internal satisfactions that result from certain actions. Examples are enjoyable work and accomplishment of fulfilling tasks.  Intrinsic anxieties and self-doubts may be exploited by managers, for example, the fear of unemployment during a recession. Under the relative incentive scheme, workers’ pay depends on the ratio of individual productivity to average productivity among all co-workers in a field. Under the absolute incentive scheme (piece rates) individual pay only depends on individual productivity. According to equity theory, employee motivation is affected significantly by relative as well as absolute rewards. An employee compares the ratio of what (s)he receives from a job (outcomes such as pay or recognition) to what (s)he gives to the job (inputs such as effort, experience, ability, or education) with the ratios of relevant others.  If the ratios are equal, equity exists. If they are unequal, inequity exists, and the employee will be motivated to eliminate the inequity.  Responses may be to alter (1) inputs to the job (exert less effort), (2) the outcomes (e.g., asking for a raise), or (3) the perceptions (e.g., by inflating job status).  An extreme response is to leave the job. Need-Based Theories of Motivation According to Abraham Maslow, human needs are a hierarchy, from lowest to highest. Lower-level needs must be satisfied before higher-level needs can influence (motivate) the individual. Maslow’s hierarchy of needs is listed below, from lowest to highest:  Physiological needs are the basic requirements for sustaining human life, such as water, food, shelter, and sleep. Until these needs are satisfied to the degree needed to maintain life, higher-level needs will not be motivators.  Security or safety needs include protection from physical or emotional harm, the loss of a job, and other threats.  Affiliation or acceptance needs are the needs of people as social beings for love, affection, friendship, and belonging.  Esteem is the need to be valued by both one’s self and others. These needs are satisfied by power, prestige, status, and self-confidence.  Self-actualization is the highest need in the hierarchy. It is the need to realize one’s own potential for growth and continued development.  Thus, the job itself is an intrinsic motivation; no extrinsic motivation (such as rewards or reinforcements) is needed. Intrinsic motivation provides the worker with psychological utility. GLEIM REVIEW PART 3 2023 20 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 5 Research supports the assertion that biological needs must be satisfied before other needs become motivators. However, the strict order of the hierarchy may not always apply in other cases.  Physiological and safety needs tend to decrease in importance for fully employed people. Needs for acceptance, esteem, and self-actualization tend to increase.  Higher-level needs, esteem and self-actualization, are variable in their motivational effects, depending upon the individual. Maslow’s hierarchy does not apply equally to all situations. It is dependent on the social, cultural, and psychological backgrounds of the people involved.  People of different cultures respond differently.  Professional workers, skilled workers, and unskilled workers react differently.  Other social, ethnic, and cultural factors make people react differently.  The hierarchy is not a smooth, step-by-step path. It is a complicated and interdependent set of relationships.  However, the tendency to move upward as lower needs are satisfied does exist. Maslow’s Hierarchy of Needs Figure 2-1 GLEIM REVIEW PART 3 2023 21 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 6 SU 2: Organizational Behavior ERG theory (existence, relatedness, and growth) is a simplified version of Maslow’s hierarchy of needs. The classifications are the following:  Existence (physical needs)  Relatedness (satisfying relationships)  Growth (needs for development of human potential) The frustration of not fulfilling a higher-level need (e.g., growth) may result in regression to a lower level (e.g., earning more money). Organizations increasingly are finding ways to motivate employees by a better balance of personal life and work.  One method is a flexible job schedule. An extreme example is the elimination of a schedule and considering only work results. Frederick Herzberg’s two-factor theory of motivation is based on satisfaction. The following two classes of motivational factors exist in the job situation: 1. Dissatisfiers (maintenance or hygiene factors) are found in the job context.  Their presence will not especially motivate people, but their absence will lead to diminished performance. They include the following:  Organizational policy and administration  Supervision  Working conditions  Interpersonal relations  Salary and status  Job security 2. Satisfiers (motivational factors) relate to job content.  Their absence will not diminish performance, but their addition or availability will motivate employees. They include the following:  Achievement  Recognition  Challenging work  Advancement  Growth in the job  Responsibility Satisfaction and dissatisfaction are on a continuum. In the middle is the point at which an employee experiences neither job satisfaction nor dissatisfaction.  At this point, (s)he is not dissatisfied with the job context but also is not positively motivated.  If Herzberg is correct, job content should be improved through the use of job enrichment strategies. GLEIM REVIEW PART 3 2023 22 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 7  Some jobs obviously do not contain many motivators, but other jobs have the potential for more motivators than are being fully used by management. For example,  Routine, low-status work, such as mail sorting, has few motivators.  A company that may be paying above the industry average (maintenance factor) also could increase satisfaction by openly acknowledging sales or other efforts by initiating a salesperson of the week recognition program. Douglas McGregor’s Theory X and Theory Y are models that define the extremes of managers’ opinions on employee conduct. They permit a manager to evaluate his or her own tendencies.  Theory X is the perspective of the autocratic manager.  Most people dislike work.  Most people must be controlled and threatened to induce them to make an adequate effort to achieve organizational objectives.  Most people want to be directed, lack ambition, and primarily seek security.  Theory Y is the extreme opposite of Theory X. The permissive manager assumes the following:  Physical and mental effort in work is as natural as recreation or rest.  Control and threats are not the only means of motivating individuals to make an adequate effort to achieve organizational objectives. Employees will be self-directed and self-controlled if they believe the objectives are worthy.  Commitment to objectives is proportional to the rewards of accomplishment.  Most people can learn to seek responsibility.  The human ability to use imagination and creativity to solve problems is common.  In modern industrial life, the intellectual ability of most people is not fully realized.  McGregor did not suggest that Theory Y was the only correct managerial behavior. He suggested these theories as starting points from which a manager can examine his or her own views about human nature. According to the acquired needs theory, some needs are learned, not inherent.  The need for achievement is satisfied by high performance and skill in completing difficult assignments. But achievers are attracted to moderate (not high) risk. They also tend to be entrepreneurs.  The need for affiliation is satisfied by personal relationships and conflict avoidance. Affiliators tend to succeed as coordinators of business functions.  The need for power is the desire for influence or control, responsibility, and authority over subordinates. Power seekers often become chief executives. GLEIM REVIEW PART 3 2023 23 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 8 SU 2: Organizational Behavior 2.2 MOTIVATION -- PROCESS-BASED THEORIES, BEHAVIOR, JOB DESIGN, AND OTHER Process-Based Theories of Motivation According to goal-setting theory developed by Edwin Locke and Gary Latham, specific, difficult goals to which the employee is committed provide the best motivation tool.  Performance improves when goals are (1) specific rather than general, (2) difficult rather than easy, and (3) accepted by employees rather than imposed by others.  Goals therefore should be participative (self-set).  Furthermore, specific feedback, especially self-generated feedback, also improves performance compared with lack of feedback.  Goals serve as motivators because they (1) focus on specific results, (2) require continuous effort to achieve (persistence), and (3) are incentives for developing strategies and action plans. Victor Vroom’s expectancy theory is based on the thought process that involves (1) subjective expectations of rewards, (2) beliefs as to what is valuable, and (3) expectations of receiving these rewards if effort is exerted.  Thus, expectancy theory addresses individualized (1) motivations and (2) perceptions of the probability of success.  High effort expended, ability, and accurate role assessment lead to high performance. That is, putting appropriate effort into the right task and having the right amount of ability to do it lead to high performance and an expectation of desirable outcomes.  Expectancy of performance (E→P) is high if an individual perceives that (s)he has the ability, experience, resources, and opportunity to perform. But if it is low, motivation also is low.  Expectancy of outcome (P→O) is high if an individual perceives that performance leads to desirable outcomes (rewards). But if it is low, motivation also is low.  Valence is the value an individual assigns to outcomes. Motivation varies directly with valence.  Insufficient ability impedes performance despite effort.  Executing a task that is not desired or is improperly performed according to role definition impedes performance despite effort or ability.  Expectancy results from past experiences. It measures the strength of belief (the probability assessments) that a particular act will be followed by a specific outcome.  Management is more able to control the expectancy factor than the individual perception of valence because expectations are based on experience.  A consistent management policy reinforces employee expectations. GLEIM REVIEW PART 3 2023 24 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 9  Performance leads to rewards.  Individuals evaluate rewards on the basis of the fairness of their treatment compared with others in similar jobs.  If unfairness exists, individuals react, usually negatively.  Perception of the equity of rewards leads to satisfaction.  The level of satisfaction or dissatisfaction feeds back into the next cycle’s estimates of reward values, individual abilities, and role perceptions. Behavior Modification Behavior modification is based on reinforcement theory. According to the law of effect, positive reinforcement of a behavior tends to result in its repetition. Lack of positive reinforcement has the opposite effect.  Reinforcement is something that results in repetition or inhibition of a behavior. The following are types of reinforcement methods:  Positive reinforcement is providing a reward for desired behavior. The reward may be financial or nonfinancial (e.g., praise or attention).  Avoidance learning (also known as negative reinforcement) is the removal of a negative effect of prior behavior. The avoidance of unpleasant consequences (e.g., criticism by a supervisor) increases the probability that the new and preferable behavior will be repeated.  Punishment imposes a negative consequence (e.g., loss of pay, suspension, or firing) for unacceptable behavior. It decreases the probability that the behavior will recur. Immediate corrective action must be taken to establish and reinforce appropriate behavior. Delaying punishment may invite further instances of unacceptable behavior.  Extinction withholds a reward (e.g., praise or an increase in pay). The theory is that a behavior that is not positively reinforced eventually ceases. Social learning theory is based on the idea that observation of the behavior of others may be motivational.  Vicarious (observational) learning is the result of seeing that desired behaviors are rewarded.  For example, a trainee may be mentored by someone who models the desired behavior and teaches the necessary skills. GLEIM REVIEW PART 3 2023 25 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 10 SU 2: Organizational Behavior Job Design Job design links tasks to particular jobs using motivational research to increase productivity and employee satisfaction. One approach is to adapt people to jobs. For example, job rotation is a change in boring, highly specialized jobs. It also may have such benefits as cross-functional training. Another job design method is to adapt the jobs to the people performing them.  Job enlargement is primarily intended to reduce boredom in repetitive or fast-paced jobs through the assignment of a variety of simple tasks as part of one job. Such jobs are horizontally loaded.  Job enrichment structures the job so that each worker participates in planning and controlling. The purpose is satisfaction of social and ego needs and avoidance of routine work.  Job enrichment should improve motivation by vertically loading the job, that is, increasing its complexity, challenge, and opportunities (e.g., for growth, recognition, and achievement).  According to the job characteristics model described by Hackman and Oldham, jobs are enriched by improving the following core job dimensions:  Skill variety, or the diversity of talents required  Task identity, or completion of an entire work product  Task significance, or the effect on other people  Autonomy, or level of discretion over how work is done  Feedback, or receipt of information about performance  Enrichment should produce three critical psychological states:  Meaningfulness (first three core job dimensions)  Responsibility for work outcomes (autonomy)  Knowledge of actual work outcomes (feedback)  The critical psychological states should produce high motivation, performance, and satisfaction; low turnover; and low absenteeism.  However, worker satisfaction does not necessarily lead to improved performance. It is more likely that a productive worker is a happy worker.  The job characteristics model is most effective for people with a strong need for personal challenge and achievement.  Employee growth-need strength is the last building block of the job characteristics model.  People have distinct needs for growth and development. GLEIM REVIEW PART 3 2023 26 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 11 2.3 ORGANIZATIONAL POLITICS AND GROUP DYNAMICS Organizational Politics Organizational politics (impression management) is acting in self-interest given actual or perceived opposition in the workplace. Managers must understand organizational politics (1) as a matter of self-interest and (2) its negative effects on morale, the effectiveness of needed change, and ethical behavior. Behaviors Self-interested behaviors are not based solely on competence or diligence or the results of good fortune. Positive political behaviors include coalition building, networking, and seeking mentors. Negative political behaviors include sabotage, threats, taking credit for others’ work or ideas, and building revolutionary coalitions.  Negative political behavior is considered by some managers to include whistleblowing, although this is not the prevailing view. It is the reporting to internal or external parties (e.g., internal auditors, a compliance officer, government bodies, the media, or private watchdog groups) of entity conduct asserted to be wrongful.  The prevailing view is that whistleblowing is a net social good. Revealing unethical behavior may be the only way to end misconduct that has substantial negative effects on the public interest.  Thus, many governments have enacted whistleblower protection statutes. These laws prohibit retaliation against insiders who appropriately disclose wrongdoing. GLEIM REVIEW PART 3 2023 27 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 12 SU 2: Organizational Behavior Organizational Culture The organizational culture may encourage politics by creating unreasonable obstacles to group and individual advancement. The following perceptions about organizational politics are widely held:  Political behavior increases as managers rise in the hierarchy.  The frequency of political behavior increases as the organization grows.  Line managers are less political than staff managers.  Marketing managers are the most political, and production managers are the least.  Reorganization results in more political behavior than other changes.  Political behavior helps career advancement.  Political behavior may be beneficial to the organization by promoting ideas, building teams, enhancing communication, and improving morale.  Political behavior may have a negative effect on the organization by distracting managers from focusing on entity objectives. Political Tactics The following are common political tactics:  Posturing is an attempt to make a good impression, for example, by taking credit for others’ work or seeking to stay ahead of a rival (one-upmanship).  Empire building is an attempt to control greater resources. Thus, a manager with a larger budget may believe that (s)he is in a safer position and is more influential.  Making the supervisor look good is an effort to impress the person who controls one’s career path.  Collecting and using social favors is a tactic used by someone who views favors as the currency of advancement, not as unselfish acts. Such a manager may help another to look good or not to look bad, for example, by concealing a mistake.  Creating power and loyalty cliques is a tactic based on the premise that a cohesive group has more power than an individual.  Engaging in destructive competition includes such behaviors as gossip, lying, and sabotage. GLEIM REVIEW PART 3 2023 28 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 13 Group Dynamics Group dynamics should be addressed in correlation with organizational politics. Management should improve the social capital of the organization by enhancing the relationships of the groups within its structure.  A group consists of at least two individuals who interact freely, recognize themselves as group members (common identity), and agree on the reason for the group (common purpose). Formal Groups Formal groups are work groups (designated as committees, teams, etc.) within the organization assembled to perform a productive activity.  Individuals are assigned to formal groups based on their qualifications and the organization’s purposes.  Formal groups have explicitly designated leaders.  Membership in formal groups is relatively more permanent than in informal groups.  Formal groups are more structured than informal groups. Informal Groups People seek association and group acceptance and tend to form informal as well as formal groups. Effective managers accept and take advantage of the informal organization.  Informal groups are created within organizations because of the following:  Authority relationships not definable on an organizational chart  Unwritten rules of conduct  Group preferences  The following are characteristics of informal groups:  Development primarily to satisfy esteem needs (friendship)  Membership of most employees, including managers  Conformity of most members to group pressures  Small and often very complex  They develop their own leaders, satisfy the needs of members, and usually result from the frequent work interaction among individuals. GLEIM REVIEW PART 3 2023 29 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 14 SU 2: Organizational Behavior  Favorable effects of informal groups include the following:  Reducing tension and encouraging production  Improving coordination and reducing supervision required  Assistance in problem solving  Providing another (often faster) channel of communication  The grapevine is the informal communication system in every organization. Computer networks have strengthened the grapevine.  Providing social satisfactions that supplement job satisfaction  The following are examples of potentially unfavorable effects:  Circumventing managerial actions  Reducing production (slowdowns caused by social interactions)  Dissension in the formal organization  Spreading rumors and distorting information  Adding to the cost of doing business  Forming subgroups that hinder group cohesiveness  Adoption of group norms contrary to the objectives of the organization  Developing dominant members Group Commitment Commitment to a group depends on its attractiveness and cohesiveness. Attractiveness is a favorable view from the outside. Cohesiveness is the tendency of members to adhere to the group and unite against outside pressures. Group attractiveness and cohesiveness are increased by the following:  Its prestige and status  Cooperation among the members  Substantial member interaction  Small size of the group  Similarity of members  Good public image  Common external threat Group attractiveness and cohesiveness are decreased by the following:  Unpleasant demands on members  Disagreements about activities and procedures  Bad experiences with the group  Conflict between the group’s demands and those of other activities  Bad public image  The possibility of joining other groups GLEIM REVIEW PART 3 2023 30 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 15 Roles and Norms A role is the behavior expected of a person in a specific position. Everyone is expected to have different roles.  The term also refers to actual behavior.  Different people in the same position should behave similarly.  Role conflict occurs when a person has two or more conflicting roles.  Role models may help individuals resolve role conflicts.  Roles may be formally defined in job descriptions and procedures manuals. Norms are general standards of conduct and have a broader effect than roles. Groups are guided by self-set norms of performance and behavior.  Norms vary from culture to culture and most often are unwritten.  The following are the functions of norms:  Protect the group (survival)  Better define role behavior and expectations  Safeguard members from embarrassment (self-image)  Reinforce the group’s values and common identity  Enforcement of norms in the positive sense follows from attention, recognition, and acceptance (social reinforcement).  Enforcement of norms in the negative sense may be by ridicule or criticism. The ultimate punishment is rejection. GLEIM REVIEW PART 3 2023 31 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 16 SU 2: Organizational Behavior Conformity Conformity is compliance with roles and norms. The benefit of conformity is predictability of behavior, e.g., performance of assigned tasks. The cost may be illegal, unethical, or incompetent conduct. One danger of cohesive groups is groupthink. It is the tendency of individuals committed to the group to ignore input that varies from the group opinion.  The following are symptoms of groupthink:  Over-optimism  Assumed morality of the preferred action  Intolerance of dissent  An urgent search for unanimity  The following are ways of avoiding groupthink:  Being aware of its dangers  Encouraging members to think critically  Seeking outside opinions  Expressly assigning a member of the group to advocate contrary positions  Expressly considering the consequences of different actions  Not using a group to approve a decision without discussion or dissent  Cooperative (constructive) conflict is a means of avoiding groupthink.  Groupthink in formal groups (e.g., committees) can inhibit creative thinking and innovative viewpoints. Group Decision Making Management literature distinguishes between group decision making and group-aided decision making. In group decision making, the group itself makes the final decision.  A disadvantage of group decision making is that groups submerge individual identity and accountability and conceal the link between individual effort and outcome. Thus, greater acceptance of risk results because accountability is dispersed.  Groupshift is the difference between an individual’s probable decision when the individual is alone and when the individual is in a group. GLEIM REVIEW PART 3 2023 32 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Organizational Behavior 17 In group-aided decision making, the group performs all functions except for making the final decision.  Group-aided decision making and problem solving have the following advantages:  The group has greater knowledge and experience than an individual.  Lateral thinking allows the group to explore diverse views.  Participants have a better understanding of the reasons for actions.  Active participants tend to accept the result.  Group involvement provides training for the less experienced members.  The following are the disadvantages of group-aided decision making:  The social pressure to conform may inhibit creativity.  The group may be dominated by a few aggressive members.  The decision or solution may be a product of political dealing (logrolling).  Secondary concerns, e.g., competing with a rival, may distract the group.  The process may suffer from groupthink.  Groups tend to take longer than individuals. The following are methods that may be applied to improve creativity:  Attribute listing is applied primarily to improve a tangible object. It lists the parts and essential features of the object and systematically analyzes modifications.  Brainstorming is an unstructured, nonjudgmental group approach that relies on spontaneous contribution of ideas. It breaks down broad problems into their essentials.  Brainstorming generates a large number of ideas and overcomes the pressure to conform while the group is identifying options.  Brainstorming has no predictable effect on the group’s commitment to the solution.  Creative leap formulates an ideal solution and then works back to a feasible one.  The scientific method systematically (1) states a problem, (2) collects data by observation and experimentation, and (3) formulates and tests hypotheses.  The Edisonian approach is a trial-and-error method. It should usually not be applied unless other approaches have been unsuccessful.  Free association generates ideas by reporting the first thought to come to mind in response to a stimulus, for example, a symbol or analogy pertaining to a product for which an advertising slogan is sought. The objective is to express the content of consciousness without censorship or control.  Lateral thinking explores different approaches to an issue. These alternatives increase the probability of a solution. GLEIM REVIEW PART 3 2023 33 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  1 STUDY UNIT THREE LEADERSHIP AND ORGANIZATIONAL STRUCTURE 3.1 Leadership........................................................... 2 3.2 Organizational Structure................................................. 9 This study unit is the third of five covering Domain I: Business Acumen from The IIA’s CIA Exam Syllabus. This domain makes up 35% of Part 3 of the CIA exam and is tested primarily at the basic cognitive level. Performance measures and business processes are tested at the proficient cognitive level. The five study units are  Study Unit 1: Strategic Management, Planning, and Performance Measures  Study Unit 2: Organizational Behavior  Study Unit 3: Leadership and Organizational Structure  Study Unit 4: Business Processes and Data Analytics  Study Unit 5: Project Management and Contracts The learning objectives of Study Unit 3 are  Describe management’s effectiveness to lead, mentor, guide people, build organizational commitment, and demonstrate entrepreneurial ability.  Appraise the risk and control implications of different organizational configuration structures (centralize vs. decentralized, flat structure vs. traditional, etc.). Leadership helps establish and enforce accountability and a common purpose. A leader should have  Deep knowledge of the organization’s overall strategic objectives,  Appropriate authority, and  Sufficient resources. The appropriateness of an entity’s organizational structure depends in part on the nature of its activities. Accordingly, a highly structured organization with formal reporting lines may be appropriate regardless of entity size. GLEIM REVIEW PART 3 2023 34 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 2 SU 3: Leadership and Organizational Structure 3.1 LEADERSHIP Management and Leadership Management is distinct from leadership and is defined by Daft (Understanding Management, 10th ed.) as achieving organizational goals effectively and efficiently by planning, organizing, leading, and controlling.  Leadership is defined by Daft as “the ability to influence people toward the attainment of goals.” Accordingly, the essence of effective leadership is interaction with people. Leader Traits Research suggests that the following traits may correlate with leader effectiveness:  Intelligence, knowledge, judgment, and decisiveness  Drive to excel, persistence in goal attainment, and conscientiousness  Aspiration to lead, self-confidence, honesty, and optimism tempered by reality  Energy and stamina  Education and social mobility Influence Influence is the effect of actions on not only the behaviors but also the attitudes and values of others. Influence in the work environment is an attempt to affect the behavior of superiors, peers, or lower- level employees. Influence may be exerted in many ways, including the use of power and the exercise of leadership. The following are generic influence tactics:  Rational persuasion is the use of facts and reason to convince others. This tactic is most likely to succeed when the leader has high credibility, for example, because (s)he is respected or has expertise.  Coalition tactics (development of allies) involve the creation of networks of individuals who will assist in achievement of goals. This approach includes  Understanding the needs of potential allies,  Explaining the leader’s positions, and  Consulting the network about decisions or problems. GLEIM REVIEW PART 3 2023 35 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 3: Leadership and Organizational Structure 3  Upward appeals (to higher authority) seek the support of more senior management. But inspiring trust because of a leader’s honesty and expertise results in greater influence than simply exerting formal authority.  Exchange tactics are based on doing favors for others to receive favors in return.  Ingratiating tactics include generating goodwill and positive impressions. Being fair, considerate, respectful, trusting, and generous with praise helps a leader to be liked by those (s)he wants to influence.  Direct requests that are clear and explicit may succeed simply because  No preferable alternative is available or  Other possibilities are unclear.  Consultation permits the other person(s) to participate in the decision or change.  Inspirational appeals are based on emotions, values, or ideals.  Pressure tactics involve intimidation, threats, and demands. Power Power is the potential to influence the behavior of others. Authority is the right to manage others. It differs from power, which affects the ability to accomplish something through influence. A manager may have one without the other. Hard power is based primarily on a leader’s authority derived from a position in the organization. Soft power is based primarily on relationships and personal traits.  The following are types of position-based hard power:  Legitimate power is closely associated with formal authority. Employees tend to accept the need to follow the direction of a manager with formal authority. But they tend not to obey completely someone who relies solely on legitimate authority.  Coercive power is based on the fear or threat of punishment.  Control of rewards includes the power to determine pay raises and promotions (formal rewards) or provide praise and attention (informal rewards).  The following are types of personal soft power:  Expert power is conferred by clearly superior skill or knowledge. It need not be held by a leader.  Referent power results from the leader’s personal traits or employees’ identification with the leader. The negative aspect of referent power is that the individuals who have it may abuse it. GLEIM REVIEW PART 3 2023 36 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 4 SU 3: Leadership and Organizational Structure Power is not always associated with a specific position or individual. Furthermore, leaders and nonleaders may access the following power sources:  Personal effort, e.g., exceptional initiative, hard work, willingness to do what others do not, and a focus on learning, may be a pathway to power.  A network of relationships provides access to information about events in the organization or industry that is not widely known.  Access to, and control over, information confers power. Access and control depend in part on a person’s status in the managerial hierarchy. Modern management theory emphasizes employee empowerment. The question is not whether employees should be empowered but the circumstances in which it should occur.  Empowered individuals need to be honest, trustworthy, unselfish, and skilled.  Empowerment is not the same as giving up total control. Appropriate management oversight is still necessary.  Empowered employees should have adequate training, relevant information, and other necessary tools.  Empowered employees should participate in decision making.  Empowered employees should be fairly compensated.  Managers who appropriately surrender power by empowering employees gain power in that they have an increased ability to achieve desired results. Leader Behavior Behavior-oriented researchers have examined leader behavior to determine whether leaders conduct themselves in certain ways. Among the significant leadership research topics are task- oriented behavior and people-oriented behavior.  Authoritarian or autocratic (task-oriented)  The manager does not share authority and responsibility. (S)he dictates all decisions to employees, so communication is downward with little employee input.  Tasks are clearly defined.  Authoritarian leaders rely on threats and punishment and do not trust employees.  Such leadership can sometimes be the most effective, such as when the time to make a decision is limited or when employees do not respond to any other leadership style. GLEIM REVIEW PART 3 2023 37 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 3: Leadership and Organizational Structure 5  Democratic (people-oriented)  The leader delegates substantial authority.  Employees participate in defining and assigning tasks, and communication is actively upward as well as downward. Thus, employees are more committed.  Laissez faire (people-oriented)  Employees in a group are given the authority and responsibility to make their own decisions.  Communication is mostly horizontal.  This style works best when employees show personal initiative, but the group also may be ineffective without the leader’s guidance. Contingency Theories The assumption of contingency (situational) theories of leadership is that the appropriate leadership style depends on the situation. The emphasis is on flexibility because no one style is best in every situation. According to Fred E. Fiedler’s contingency theory, people become leaders because of personality attributes, various situational factors, and the interaction between the leaders and the situation.  Fiedler assumed that a leadership style is difficult to alter. Thus, the style should be matched with the situation in which it is most likely to be effective.  The same person might not become an effective leader in different circumstances because of failure to interact successfully with that situation.  Whether a leadership style is favorable for a leader depends on the following factors in Fiedler’s model:  Position power is based on the formal authority structure. It is the degree to which the position held enables a leader to evaluate, reward, punish, or promote group members.  It is independent of other sources of power, such as personality or expertise.  Task structure is how clearly and carefully members’ responsibilities for various tasks are defined. Quality of performance is more easily controlled when tasks are clearly defined.  Leader-member relations reflect the extent to which group members like, trust, and are willing to follow a leader. GLEIM REVIEW PART 3 2023 38 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 6 SU 3: Leadership and Organizational Structure  Leaders tend to be task-motivated or relationship-motivated.  The task-motivated style is most effective when the situation is very favorable or very unfavorable.  The situation is very favorable when the leader’s position of power is high, tasks are well defined, and leader-member relations are good. The situation is very unfavorable when the reverse is true.  In a favorable situation, a leader has little need to address relationship issues and should therefore concentrate on the work. In an unfavorable situation, the leader must emphasize close supervision.  The relationship-motivated style is most effective in moderately favorable situations that have a combination of favorable and unfavorable factors. According to the situational leadership theory developed by Hersey and Blanchard, the appropriate style depends on the followers’ maturity.  Willingness (confidence, commitment, and motivation) and ability (knowledge, experience, and skill) are the components of maturity. These qualities determine followers’ readiness to be responsible for directing their behavior.  The dimensions of the four styles of leadership described in the model are task and people needs. 1. Selling (high focus on task and people needs). A selling leadership style explains decisions and provides opportunity for clarification. Followers are confident and moderately ready but lack ability. 2. Telling (high focus on task, low focus on people needs). This style provides specific instructions and closely supervises performance. Followers are low in confidence, ability, and readiness. 3. Participating (low focus on task, high focus on people needs). This style encourages sharing of ideas and develops followers’ confidence and ability. Followers have high readiness but low confidence. 4. Delegative (low focus on task and people needs). This style transfers responsibility for decisions and implementation. Followers have very high readiness, including ability and confidence.  Accordingly, a leader should determine the readiness of followers and choose the style appropriate to the circumstances. Situational variables may be in the form of organizational, task, or group circumstances that substitute for or neutralize task- or people-oriented leadership. A substitute eliminates the need for instructions from a leader. A neutralizer reduces or prevents leader behavior.  The presence of a substitute or neutralizer allows use of the leadership style suitable to the work group. For example, if a task-oriented style is unnecessary, the leader may concentrate on people needs. GLEIM REVIEW PART 3 2023 39 Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 3: Leadership and Organizational Structure