Principles of Management PDF Textbook

Principles of Management OpenStax Rice University 6100 Main Street MS-375 Houston, Texas 77005 To learn more about OpenStax, visit https://openstax.org. Individual print copies and bulk orders can be purchased through our website. ©2019 Rice University. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). 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The future of education. openstax.org TABLE OF CONTENTS Preface 1 1 Managing and Performing 7 1.1 What Do Managers Do? 8 1.2 The Roles Managers Play 9 1.3 Major Characteristics of the Manager's Job 12 2 Managerial Decision-Making 21 2.1 Overview of Managerial Decision-Making 23 2.2 How the Brain Processes Information to Make Decisions: Reflective and Reactive Systems 26 2.3 Programmed and Nonprogrammed Decisions 28 2.4 Barriers to Effective Decision-Making 31 2.5 Improving the Quality of Decision-Making 35 2.6 Group Decision-Making 45 3 The History of Management 55 3.1 The Early Origins of Management 58 3.2 The Italian Renaissance 61 3.3 The Industrial Revolution 61 3.4 Taylor-Made Management 63 3.5 Administrative and Bureaucratic Management 68 3.6 Human Relations Movement 71 3.7 Contingency and System Management 75 4 External and Internal Organizational Environments and 81 Corporate Culture 4.1 The Organization's External Environment 84 4.2 External Environments and Industries 88 4.3 Organizational Designs and Structures 91 4.4 The Internal Organization and External Environments 103 4.5 Corporate Cultures 109 4.6 Organizing for Change in the 21st Century 111 5 Ethics, Corporate Responsibility, and Sustainability 119 5.1 Ethics and Business Ethics Defined 121 5.2 Dimensions of Ethics: The Individual Level 122 5.3 Ethical Principles and Responsible Decision-Making 125 5.4 Leadership: Ethics at the Organizational Level 129 5.5 Ethics, Corporate Culture, and Compliance 136 5.6 Corporate Social Responsibility (CSR) 139 5.7 Ethics around the Globe 143 5.8 Emerging Trends in Ethics, CSR, and Compliance 147 6 International Management 157 6.1 Importance of International Management 159 6.2 Hofstede's Cultural Framework 164 6.3 The GLOBE Framework 172 6.4 Cultural Stereotyping and Social Institutions 177 6.5 Cross-Cultural Assignments 183 6.6 Strategies for Expanding Globally 186 6.7 The Necessity of Global Markets 189 7 Entrepreneurship 207 7.1 Entrepreneurship 209 7.2 Characteristics of Successful Entrepreneurs 215 7.3 Small Business 219 7.4 Start Your Own Business 222 7.5 Managing a Small Business 231 7.6 The Large Impact of Small Business 234 7.7 The Small Business Administration 235 7.8 Trends in Entrepreneurship and Small-Business Ownership 237 8 Strategic Analysis: Understanding a Firm’s Competitive 247 Environment 8.1 Gaining Advantages by Understanding the Competitive Environment 249 8.2 Using SWOT for Strategic Analysis 250 8.3 A Firm's External Macro Environment: PESTEL 252 8.4 A Firm's Micro Environment: Porter's Five Forces 257 8.5 The Internal Environment 261 8.6 Competition, Strategy, and Competitive Advantage 266 8.7 Strategic Positioning 269 9 The Strategic Management Process: Achieving and Sustaining 279 Competitive Advantage 9.1 Strategic Management 281 9.2 Firm Vision and Mission 281 9.3 The Role of Strategic Analysis in Formulating a Strategy 283 9.4 Strategic Objectives and Levels of Strategy 284 9.5 Planning Firm Actions to Implement Strategies 288 9.6 Measuring and Evaluating Strategic Performance 297 This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 10 Organizational Structure and Change 305 10.1 Organizational Structures and Design 306 10.2 Organizational Change 313 10.3 Managing Change 318 11 Human Resource Management 339 11.1 An Introduction to Human Resource Management 340 11.2 Human Resource Management and Compliance 343 11.3 Performance Management 345 11.4 Influencing Employee Performance and Motivation 349 11.5 Building an Organization for the Future 354 11.6 Talent Development and Succession Planning 356 12 Diversity in Organizations 369 12.1 An Introduction to Workplace Diversity 370 12.2 Diversity and the Workforce 371 12.3 Diversity and Its Impact on Companies 382 12.4 Challenges of Diversity 386 12.5 Key Diversity Theories 391 12.6 Benefits and Challenges of Workplace Diversity 394 12.7 Recommendations for Managing Diversity 396 13 Leadership 407 13.1 The Nature of Leadership 408 13.2 The Leadership Process 410 13.3 Types of Leaders and Leader Emergence 415 13.4 The Trait Approach to Leadership 421 13.5 Behavioral Approaches to Leadership 424 13.6 Situational (Contingency) Approaches to Leadership 428 13.7 Substitutes for and Neutralizers of Leadership 433 13.8 Transformational, Visionary, and Charismatic Leadership 436 13.9 Leadership Needs in the 21st Century 440 14 Work Motivation for Performance 449 14.1 Motivation: Direction and Intensity 451 14.2 Content Theories of Motivation 454 14.3 Process Theories of Motivation 469 14.4 Recent Research on Motivation Theories 486 15 Managing Teams 497 15.1 Teamwork in the Workplace 498 15.2 Team Development Over Time 500 15.3 Things to Consider When Managing Teams 504 15.4 Opportunities and Challenges to Team Building 508 15.5 Team Diversity 510 15.6 Multicultural Teams 512 16 Managerial Communication 523 16.1 The Process of Managerial Communication 524 16.2 Types of Communications in Organizations 526 16.3 Factors Affecting Communications and the Roles of Managers 530 16.4 Managerial Communication and Corporate Reputation 533 16.5 The Major Channels of Management Communication Are Talking, Listening, Reading, and Writing 534 17 Organizational Planning and Controlling 549 17.1 Is Planning Important 550 17.2 The Planning Process 553 17.3 Types of Plans 559 17.4 Goals or Outcome Statements 563 17.5 Formal Organizational Planning in Practice 565 17.6 Employees' Responses to Planning 569 17.7 Management by Objectives: A Planning and Control Technique 583 17.8 The Control- and Involvement-Oriented Approaches to Planning and Controlling 586 18 Management of Technology and Innovation 597 18.1 MTI—Its Importance Now and In the Future 600 18.2 Developing Technology and Innovation 606 18.3 External Sources of Technology and Innovation 608 18.4 Internal Sources of Technology and Innovation 610 18.5 Management Entrepreneurship Skills for Technology and Innovation 611 18.6 Skills Needed for MTI 612 18.7 Managing Now for Future Technology and Innovation 615 Index 659 This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Preface 1 Preface Welcome to Principles of Management, an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining the highest standards of academic rigor at little to no cost. About OpenStax OpenStax is a nonprofit based at Rice University, and it’s our mission to improve student access to education. Our first openly licensed college textbook was published in 2012, and our library has since scaled to over 30 books for college and AP® courses used by hundreds of thousands of students. OpenStax Tutor, our low-cost personalized learning tool, is being used in college courses throughout the country. Through our partnerships with philanthropic foundations and our alliance with other educational resource organizations, OpenStax is breaking down the most common barriers to learning and empowering students and instructors to succeed. 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Art Attribution In Principles of Management, most art contains attribution to its title, creator, or rights holder, host platform, and license within the caption. Because the art is openly licensed, anyone may reuse the art as long as they provide the same attribution to its original source. Errata All OpenStax textbooks undergo a rigorous review process. However, like any professional-grade textbook, errors sometimes occur. Since our books are web based, we can make updates periodically when deemed pedagogically necessary. If you have a correction to suggest, submit it through the link on your book page on openstax.org. Subject matter experts review all errata suggestions. OpenStax is committed to remaining transparent about all updates, so you will also find a list of past errata changes on your book page on openstax.org. Format You can access this textbook for free in web view or PDF through openstax.org, and for a low cost in print. 2 Preface About Principles of Management Principles of Management is designed to meet the scope and sequence requirements of the introductory course on management. This is a traditional approach to management using the leading, planning, organizing, and controlling approach. The table of contents of this book was designed to address two main themes. What are the variables that affect how, when, where, and why managers perform their jobs? What theories and techniques are used by successful managers at a variety of organizational levels to achieve and exceed objectives effectively and efficiently throughout their careers? Management is a broad business discipline, and the Principles of Management course covers many management areas such as human resource management and strategic management, as well behavioral areas such as motivation. No one individual can be an expert in all areas of management, so an additional benefit of this text is that specialists in a variety of areas have authored individual chapters. Finally, we all made an effort to present a balanced approach to gender and diversity throughout the text in the examples used, the photographs selected, and the use of both male (odd- numbered chapters) and female (even-numbered chapters) when referring to generic managers or employees. Pedagogical Foundation We have taken a structured approach in the writing of the chapters that reduces inconsistencies throughout and makes selecting topics to match the course syllabus easier for faculty. Exploring Managerial Careers. Each chapter starts with a profile that describes a manager and illustrates how the content of the chapter is vital for a successful managerial career. Consistent, integrated learning. Targeted learning outcomes are listed at the beginning of each chapter and then repeated throughout the chapter. The learning outcomes connect to the text and the additional resources that accompany Principles of Management. After reading each section, students can test their retention by answering the questions in the Concept Checks. Every learning goal is further reinforced by a summary at the end of the chapter. Hundreds of business examples to bring concepts to life. This book is designed to speak to the typical student. We have done a lot of research about student needs, abilities, experiences, and interests, and then we have shaped the text around them. We have used experiences both inside and outside the classroom to create a book that is both readable and enjoyable. We believe that the real applications found throughout every chapter set the standard for readability and understanding of key concepts. Learning business terminology, made easy. As students begin to study management, they will explore new words and concepts. To help them learn this language, we define each new term in the chapter, display the terms in bold, and offer a complete glossary at the end of the book. Applied Features Rather than provide a dry recitation of facts, we illustrate concepts with contemporary examples. In addition to the in-text examples, we have several boxed features that provide more extensive examples in areas of importance in today’s business environment. Each of the boxed features described below includes a series of critical thinking questions to prompt the student to consider the implications of each business strategy. Ethics in Practice. Ethics in Practice features demonstrate how businesses are responsible not only to the bottom line, but to providing goods and services in a responsible manner. Managing Change. The turbulent business climate requires companies to adapt their business strategies in response to a variety of economic, social, competitive, and technological forces. The Managing Change feature This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Preface 3 highlights how businesses have altered their business strategies in response to these forces. Catching the Entrepreneurial Spirit. This feature highlights the challenges and opportunities available in small businesses and other entrepreneurial ventures. Managerial Leadership. It is generally agreed that in a turbulent business climate leadership is an important function of management that helps to maximize efficiency and to achieve organizational goals. Leaders initiate action, motivate organizations, provide guidance, build morale, and create a sense of confidence within the organization and to outside stakeholders. Sustainability and Responsible Management. This feature highlights the knowledge, skills, tools, and self- awareness that are needed to become responsible managers. While the area of corporate social responsibility and sustainability has gained wide general support and commentary, these featured boxed items should provide the reader with insights of how managers can embed responsible practices in their careers. Activities and Cases That Put Knowledge to Work Principles of Management helps students develop a solid grounding in the skills that they can apply throughout their managerial careers. These skill-building activities and resources help build and polish competencies that future employers will value. Chapter Review Questions. These questions provide a broad set of challenging questions that students can use to assure themselves that they have mastered the chapter concepts. Management Skills Application Exercises. These activities at the end of each chapter present real-world challenges and provide assignment material for students to hone their business skills. Managerial Decision Exercises. These activities provide assignment material that challenge students’ decision-making processes. There are a variety of exercises for individual or team assignments. Critical Thinking Case. The Critical Thinking case in each chapter invites students to explore business strategies of various companies, analyze business decisions, and prepare comments. Additional Resources Student and Instructor Resources We’ve compiled additional resources for both students and instructors, including Getting Started Guides. Instructor resources require a verified instructor account, which you can apply for when you log in or create your account on openstax.org. Instructor and student resources are typically available within a few months after the book’s initial publication. Take advantage of these resources to supplement your OpenStax book. Comprehensive instructor’s manual. Each component of the instructor’s manual is designed to provide maximum guidance for delivering the content in an interesting and dynamic manner. The instructor’s manual includes an in-depth lecture outline, which is interspersed with lecture “tidbits” that allow instructors to add timely and interesting enhancements to their lectures. Test bank. With nearly 2,000 true/false, multiple-choice, fill-in-the-blank, and short-answer questions in our test bank, instructors can customize tests to support a variety of course objectives. The test bank is available in Word format. PowerPoint lecture slides. The PowerPoint slides provide images and descriptions as a starting place for instructors to build their lectures. 4 Preface Community Hubs OpenStax partners with the Institute for the Study of Knowledge Management in Education (ISKME) to offer Community Hubs on OER Commons—a platform for instructors to share community-created resources that support OpenStax books, free of charge. Through our Community Hubs, instructors can upload their own materials or download resources to use in their own courses, including additional ancillaries, teaching material, multimedia, and relevant course content. We encourage instructors to join the hubs for the subjects most relevant to your teaching and research as an opportunity both to enrich your courses and to engage with other faculty. To reach the Community Hubs, visit www.oercommons.org/hubs/OpenStax. Technology Partners As allies in making high-quality learning materials accessible, our technology partners offer optional low-cost tools that are integrated with OpenStax books. To access the technology options for your text, visit your book page on openstax.org. Contributing Authors David S. Bright, Wright State University Anastasia H. Cortes, Virginia Tech University Donald G. Gardner, University of Colorado-Colorado Springs Eva Hartmann, University of Richmond Jason Lambert, Texas Woman’s University Laura M. Leduc, James Madison University Joy Leopold, Webster University Jeffrey Muldoon, Emporia State University James S. O’Rourke, University of Notre Dame K. Praveen Parboteeah, University of Wisconsin-Whitewater Jon L. Pierce, University of Minnesota-Duluth Monique Reece Amit Shah, Frostburg State University Siri Terjesen, American University Joseph Weiss, Bentley University Margaret A. White, Oklahoma State University Reviewers Susan Adams, Bentley University Shane Bowyer, Minnesota State University Kim S. Cameron, University of Michigan Linda Davenport, Klamath Community College Allyson Foster John Goldberg, University of California-Davis Regina Greenwood, Nova University Gina Hagler Nai H. Lamb, University of Tennessee at Chattanooga Kristie J. Loescher, University of Texas This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Preface 5 Marcia Marriott, Monroe Community College Therese Madden, Notre Dame de Namur University Eleonor Moore, Kirtland Community College Robert McNulty, Bentley University Jeffrey Muldoon, Emporia State University John Parnell, University of North Carolina-Pembroke Jim Pennypacker Karli Peterson, Colorado State University Raymond Pfang, Tarrant Community College Jodell Raymond, Monroe Community College Richard Savior, SUNY Empire State Carolyn Stevenson, Kaplan University Amit Shah, Frostburg State University Linda Tancs Maria Vitale, Chaffey College Valerie Wallingford, Bemidji State University Preface This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 1 Managing and Performing Exhibit 1.1 (Credit: Steve Bowbrick/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) Introduction Learning Outcomes After reading this chapter, you should be able to answer these questions: 1. What do managers do to help organizations achieve top performance? 2. What are the roles that managers play in organizations? 3. What are the characteristics that effective managers display? EXPLORING MANAGERIAL CAREERS You So, you’re in this course and you may have pondered, or discussed with others, what this course will be about. You probably have some preconceptions of what management is all about. You must manage your time, deciding on how much study time you will devote to your management and accounting classes, for instance. You may have had a summer or part-time job where you had a manager whom you had to report to. You may have followed news reports on successful managers like Jeff Bezos of Amazon or Sheryl Sandberg of Facebook and want to learn what made them successful so you can emulate their practices in your business career. You may have the impression (not an accurate one) that management is basically just common sense and that you really don’t need to take this course except that you must meet your degree requirement. You may be an accounting or marketing major who is taking this class because it is required for completion of your degree requirements, but you don’t think that you will ever require what you learn in 8 Chapter 1 Managing and Performing this class during your career since you don’t plan on applying for HR jobs upon graduation. If you’re believing this, you could not be more mistaken. Regardless of where you are in your career, be it as an individual contributor, project leader, or middle or senior manager, what you will get out of this course will be valuable. If your first job out of college is as an accountant, sales representative, or another entry- level position, you will appreciate the roles that your managers, both direct and senior level, play in an organization and the behaviors and actions that will get you recognized and appreciated. Best of luck! Most management textbooks would say, as does this one, that managers spend their time engaged in planning, organizing, staffing, directing, coordinating, reporting, and controlling. These activities, as Hannaway found in her study of managers at work, “do not, in fact, describe what managers do.” 1 At best they seem to describe vague objectives that managers are continually trying to accomplish. The real world, however, is far from being that simple. The world in which most managers work is a “messy and hectic stream of ongoing activity.”2 1.1 What Do Managers Do? 1. What do managers do to help organizations achieve top performance? Managers are in constant action. Virtually every study of managers in action has found that they “switch frequently from task to task, changing their focus of attention to respond to issues as they arise, and engaging in a large volume of tasks of short duration.”3 Mintzberg observed CEOs on the job to get some idea of what they do and how they spend their time. He found, for instance, that they averaged 36 written and 16 verbal contacts per day, almost every one of them dealing with a distinct or different issue. Most of these activities were brief, lasting less than nine minutes.4 Kotter studied a number of successful general managers over a five-year period and found that they spend most of their time with others, including subordinates, their bosses, and numerous people from outside the organization. Kotter’s study found that the average manager spent just 25% of his time working alone, and that time was spent largely at home, on airplanes, or commuting. Few of them spent less than 70% of their time with others, and some spent up to 90% of their working time this way. 5 Kotter also found that the breadth of topics in their discussions with others was extremely wide, with unimportant issues taking time alongside important business matters. His study revealed that managers rarely make “big decisions” during these conversations and rarely give orders in a traditional sense. They often react to others’ initiatives and spend substantial amounts of time in unplanned activities that aren’t on their calendars. He found that managers will spend most of their time with others in short, disjointed conversations. “Discussions of a single question or issue rarely last more than ten minutes,” he notes. “It is not at all unusual for a general manager to cover ten unrelated topics in a five-minute conversation.”6 More recently, managers studied by Sproull showed similar patterns. During the course of a day, they engaged in 58 different activities with an average duration of just nine minutes.7 Interruptions also appear to be a natural part of the job. Stewart found that the managers she studied could work uninterrupted for half an hour only nine times during the four weeks she studied them. 8 Managers, in fact, spend very little time by themselves. Contrary to the image offered by management textbooks, they are rarely alone drawing up plans or worrying about important decisions. Instead, they spend most of their time interacting with others—both inside and outside the organization. If casual interactions in hallways, phone conversations, one-on-one meetings, and larger group meetings are included, managers spend about two- thirds of their time with other people.9 As Mintzberg has pointed out, “Unlike other workers, the manager This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 9 does not leave the telephone or the meeting to get back to work. Rather, these contacts are his work.”10 The interactive nature of management means that most management work is conversational. 11 When managers are in action, they are talking and listening. Studies on the nature of managerial work indicate that managers spend about two-thirds to three-quarters of their time in verbal activity.12 These verbal conversations, according to Eccles and Nohria, are the means by which managers gather information, stay on top of things, identify problems, negotiate shared meanings, develop plans, put things in motion, give orders, assert authority, develop relationships, and spread gossip. In short, they are what the manager’s daily practice is all about. “Through other forms of talk, such as speeches and presentations,” they write, “managers establish definitions and meanings for their own actions and give others a sense of what the organization is about, where it is at, and what it is up to.”13 CONCEPT CHECK 1. What do managers do to help organizations achieve top performance? 1.2 The Roles Managers Play 2. What are the roles that managers play in organizations? In Mintzberg’s seminal study of managers and their jobs, he found the majority of them clustered around three core management roles. Interpersonal roles. Managers are required to interact with a substantial number of people in the course of a workweek. They host receptions; take clients and customers to dinner; meet with business prospects and partners; conduct hiring and performance interviews; and form alliances, friendships, and personal relationships with many others. Numerous studies have shown that such relationships are the richest source of information for managers because of their immediate and personal nature.14 Three of a manager’s roles arise directly from formal authority and involve basic interpersonal relationships. First is the figurehead role. As the head of an organizational unit, every manager must perform some ceremonial duties. In Mintzberg’s study, chief executives spent 12% of their contact time on ceremonial duties; 17% of their incoming mail dealt with acknowledgments and requests related to their status. One example is a company president who requested free merchandise for a handicapped schoolchild.15 Managers are also responsible for the work of the people in their unit, and their actions in this regard are directly related to their role as a leader. The influence of managers is most clearly seen, according to Mintzberg, in the leader role. Formal authority vests them with great potential power. Leadership determines, in large part, how much power they will realize.16 Does the leader’s role matter? Ask the employees of Chrysler Corporation (now DaimlerChrysler). When Lee Iacocca took over the company in the 1980s, the once-great auto manufacturer was in bankruptcy, teetering on the verge of extinction. He formed new relationships with the United Auto Workers, reorganized the senior management of the company, and—perhaps most importantly—convinced the U.S. federal government to guarantee a series of bank loans that would make the company solvent again. The loan guarantees, the union response, and the reaction of the marketplace were due in large measure to Iacocca’s leadership style and personal charisma. More recent examples include the return of Starbucks founder Howard Schultz to re- energize and steer his company, and Amazon CEO Jeff Bezos and his ability to innovate during a downturn in 10 Chapter 1 Managing and Performing the economy.17 Exhibit 1.2 Howard Schultz Howard Schultz, executive chairman of Starbucks Corporation, speaks after receiving the Distinguished Business Leadership Award during the Atlantic Council’s Distinguished Leadership Awards dinner in Washington, D.C. The awards recognize pillars of the transatlantic relationship for their achievement in the fields of politics, military, business, humanitarian, and artistic leadership. (Credit: Chairman of the Joint Chief of Staff/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) Popular management literature has had little to say about the liaison role until recently. This role, in which managers establish and maintain contacts outside the vertical chain of command, becomes especially important in view of the finding of virtually every study of managerial work that managers spend as much time with peers and other people outside of their units as they do with their own subordinates. Surprisingly, they spend little time with their own superiors. In Rosemary Stewart’s study, 160 British middle and top managers spent 47% of their time with peers, 41% of their time with people inside their unit, and only 12% of their time with superiors. Guest’s (1956) study of U.S. manufacturing supervisors revealed similar findings.18 Informational roles. Managers are required to gather, collate, analyze, store, and disseminate many kinds of information. In doing so, they become information resource centers, often storing huge amounts of information in their own heads, moving quickly from the role of gatherer to the role of disseminator in minutes. Although many business organizations install large, expensive management information systems to perform many of those functions, nothing can match the speed and intuitive power of a well-trained manager’s brain for information processing. Not surprisingly, most managers prefer it that way. As monitors, managers are constantly scanning the environment for information, talking with liaison contacts and subordinates, and receiving unsolicited information, much of it as a result of their network of personal contacts. A good portion of this information arrives in verbal form, often as gossip, hearsay, and speculation. In the disseminator role, managers pass privileged information directly to subordinates, who might otherwise have no access to it. Managers must not only decide who should receive such information, but how much of it, how often, and in what form. Increasingly, managers are being asked to decide whether subordinates, peers, customers, business partners, and others should have direct access to information 24 hours a day without having to contact the manager directly. In the spokesperson role, managers send information to people outside of their organizations: an executive makes a speech to lobby for an organizational cause, or a supervisor suggests a product modification to a supplier. Increasingly, managers are also being asked to deal with representatives of the news media, This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 11 providing both factual and opinion-based responses that will be printed or broadcast to vast unseen audiences, often directly or with little editing. The risks in such circumstances are enormous, but so too are the potential rewards in terms of brand recognition, public image, and organizational visibility. Decisional roles. Ultimately, managers are charged with the responsibility of making decisions on behalf of both the organization and the stakeholders with an interest in it. Such decisions are often made under circumstances of high ambiguity and with inadequate information. Often, the other two managerial roles—interpersonal and informational—will assist a manager in making difficult decisions in which outcomes are not clear and interests are often conflicting. In the role of entrepreneur, managers seek to improve their businesses, adapt to changing market conditions, and react to opportunities as they present themselves. Managers who take a longer-term view of their responsibilities are among the first to realize that they will need to reinvent themselves, their product and service lines, their marketing strategies, and their ways of doing business as older methods become obsolete and competitors gain advantage. While the entrepreneur role describes managers who initiate change, the disturbance or crisis handler role depicts managers who must involuntarily react to conditions. Crises can arise because bad managers let circumstances deteriorate or spin out of control, but just as often good managers find themselves in the midst of a crisis that they could not have anticipated but must react to just the same. The third decisional role of resource allocator involves managers making decisions about who gets what, how much, when, and why. Resources, including funding, equipment, human labor, office or production space, and even the boss’s time are all limited, and demand inevitably outstrips supply. Managers must make sensible decisions about such matters while still retaining, motivating, and developing the best of their employees. Exhibit 1.3 Thomas Pendergast Thomas F. Prendergast, the president of the Metropolitan Transit Authority of New York State, updates media on today’s labor negotiations with the LIRR unions. In his role negotiating a new contract with the union, he must take on several managerial roles. (Credit: Metropolitan Transit Authority of New York State/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) The final decisional role is that of negotiator. Managers spend considerable amounts of time in negotiations: over budget allocations, labor and collective bargaining agreements, and other formal dispute resolutions. In the course of a week, managers will often make dozens of decisions that are the result of brief but important negotiations between and among employees, customers and clients, suppliers, and others with whom managers must deal.19 A visual interpretation of the roles managers play is illustrated in Exhibit 1.4. 12 Chapter 1 Managing and Performing Exhibit 1.4 The Roles Managers Play (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) CONCEPT CHECK 1. Describe and explain how Mintzberg defines the manager’s job. 1.3 Major Characteristics of the Manager's Job 3. What are the characteristics that effective managers display? Time is fragmented. Managers have acknowledged from antiquity that they never seem to have enough time to get all those things done that need to be done. In the latter years of the twentieth century, however, a new phenomenon arose: demand for time from those in leadership roles increased, while the number of hours in a day remained constant. Increased work hours was one reaction to such demand, but managers quickly discovered that the day had just 24 hours and that working more of them produced diminishing marginal returns. According to one researcher, “Managers are overburdened with obligations yet cannot easily delegate their tasks. As a result, they are driven to overwork and forced to do many tasks superficially. Brevity, This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 13 fragmentation, and verbal communication characterize their work.”20 Values compete and the various roles are in tension. Managers clearly cannot satisfy everyone. Employees want more time to do their jobs; customers want products and services delivered quickly and at high quality levels. Supervisors want more money to spend on equipment, training, and product development; shareholders want returns on investment maximized. A manager caught in the middle cannot deliver to each of these people what each most wants; decisions are often based on the urgency of the need and the proximity of the problem. The job is overloaded. In recent years, many North American and global businesses were reorganized to make them more efficient, nimble, and competitive. For the most part, this reorganization meant decentralizing many processes along with the wholesale elimination of middle management layers. Many managers who survived such downsizing found that their number of direct reports had doubled. Classical management theory suggests that seven is the maximum number of direct reports a manager can reasonably handle. Today, high-speed information technology and remarkably efficient telecommunication systems mean that many managers have as many as 20 or 30 people reporting to them directly. Efficiency is a core skill. With less time than they need, with time fragmented into increasingly smaller units during the workday, with the workplace following many managers out the door and even on vacation, and with many more responsibilities loaded onto managers in downsized, flatter organizations, efficiency has become the core management skill of the twenty-first century. What Varies in a Manager’s Job? The Emphasis The entrepreneur role is gaining importance. Managers must increasingly be aware of threats and opportunities in their environment. Threats include technological breakthroughs on the part of competitors, obsolescence in a manager’s organization, and dramatically shortened product cycles. Opportunities might include product or service niches that are underserved, out-of-cycle hiring opportunities, mergers, purchases, or upgrades in equipment, space, or other assets. Managers who are carefully attuned to the marketplace and competitive environment will look for opportunities to gain an advantage. So is the leader role gaining importance. Managers must be more sophisticated as strategists and mentors. A manager’s job involves much more than simple caretaking in a division of a large organization. Unless organizations are able to attract, train, motivate, retain, and promote good people, they cannot possibly hope to gain advantage over the competition. Thus, as leaders, managers must constantly act as mentors to those in the organization with promise and potential. When organizations lose a highly capable worker, all else in their world will come to a halt until they can replace that worker. Even if they find someone ideally suited and superbly qualified for a vacant position, they must still train, motivate, and inspire that new recruit, and live with the knowledge that productivity levels will be lower for a while than they were with their previous employee. Managerial Responsibilities An important question often raised about managers is: What responsibilities do managers have in organizations? According to our definition, managers are involved in planning, organizing, directing, and controlling. Managers have described their responsibilities that can be aggregated into nine major types of activity. These include: 1. Long-range planning. Managers occupying executive positions are frequently involved in strategic 14 Chapter 1 Managing and Performing planning and development. 2. Controlling. Managers evaluate and take corrective action concerning the allocation and use of human, financial, and material resources. 3. Environmental scanning. Managers must continually watch for changes in the business environment and monitor business indicators such as returns on equity or investment, economic indicators, business cycles, and so forth. 4. Supervision. Managers continually oversee the work of their subordinates. 5. Coordinating. Managers often must coordinate the work of others both inside the work unit and out. 6. Customer relations and marketing. Certain managers are involved in direct contact with customers and potential customers. 7. Community relations. Contact must be maintained and nurtured with representatives from various constituencies outside the company, including state and federal agencies, local civic groups, and suppliers. 8. Internal consulting. Some managers make use of their technical expertise to solve internal problems, acting as inside consultants for organizational change and development. 9. Monitoring products and services. Managers get involved in planning, scheduling, and monitoring the design, development, production, and delivery of the organization’s products and services. As we shall see, not every manager engages in all of these activities. Rather, different managers serve different roles and carry different responsibilities, depending upon where they are in the organizational hierarchy. We will begin by looking at several of the variations in managerial work. Variations in Managerial Work Although each manager may have a diverse set of responsibilities, including those mentioned above, the amount of time spent on each activity and the importance of that activity will vary considerably. The two most salient perceptions of a manager are (1) the manager’s level in the organizational hierarchy and (2) the type of department or function for which he is responsible. Let us briefly consider each of these. Management by Level. We can distinguish three general levels of management: executives, middle management, and first-line management (see Exhibit 1.3). Executive managers are at the top of the hierarchy and are responsible for the entire organization, especially its strategic direction. Middle managers, who are at the middle of the hierarchy, are responsible for major departments and may supervise other lower- level managers. Finally, first-line managers supervise rank-and-file employees and carry out day-to-day activities within departments.21 This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 15 Exhibit 1.5 Levels in the Management Hierarchy (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Exhibit 1.5 shows differences in managerial activities by hierarchical level. Senior executives will devote more of their time to conceptual issues, while front-line managers will concentrate their efforts on technical issues. For example, top managers rate high on such activities as long-range planning, monitoring business indicators, coordinating, and internal consulting. Lower-level managers, by contrast, rate high on supervising because their responsibility is to accomplish tasks through rank-and-file employees. Middle managers rate near the middle for all activities. We can distinguish three types of managerial skills: 1. Technical skills. Managers must have the ability to use the tools, procedures, and techniques of their special areas. An accountant must have expertise in accounting principles, whereas a production manager must know operations management. These skills are the mechanics of the job. 2. Human relations skills. Human relations skills involve the ability to work with people and understand employee motivation and group processes. These skills allow the manager to become involved with and lead his group. 3. Conceptual skills. These skills represent a manager’s ability to organize and analyze information in order to improve organizational performance. They include the ability to see the organization as a whole and to understand how various parts fit together to work as an integrated unit. These skills are required to coordinate the departments and divisions successfully so that the entire organization can pull together. As shown in Exhibit 1.6, different levels of these skills are required at different stages of the managerial 16 Chapter 1 Managing and Performing hierarchy. That is, success in executive positions requires far more conceptual skill and less use of technical skills in most (but not all) situations, whereas first-line managers generally require more technical skills and fewer conceptual skills. Note, however, that human relations skills, or people skills, remain important for success at all three levels in the hierarchy. Exhibit 1.6 Difference in Skills Required for Successful Management According to Level in the Hierarchy (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Management by Department or Function. In addition to level in the hierarchy, managerial responsibilities also differ with respect to the type of department or function. There are differences found for quality assurance, manufacturing, marketing, accounting and finance, and human resource management departments. For instance, manufacturing department managers will concentrate their efforts on products and services, controlling, and supervising. Marketing managers, in comparison, focus less on planning, coordinating, and consulting and more on customer relations and external contact. Managers in both accounting and human resource management departments rate high on long-range planning, but will spend less time on the organization’s products and service offerings. Managers in accounting and finance are also concerned with controlling and with monitoring performance indicators, while human resource managers provide consulting expertise, coordination, and external contacts. The emphasis on and intensity of managerial activities varies considerably by the department the manager is assigned to. At a personal level, knowing that the mix of conceptual, human, and technical skills changes over time and that different functional areas require different levels of specific management activities can serve at least two important functions. First, if you choose to become a manager, knowing that the mix of skills changes over time can help you avoid a common complaint that often young employees want to think and act like a CEO before they have mastered being a first-line supervisor. Second, knowing the different mix of management activities by functional area can facilitate your selection of an area or areas that best match your skills and interests. In many firms managers are rotated through departments as they move up in the hierarchy. In this way they obtain a well-rounded perspective on the responsibilities of the various departments. In their day-to-day tasks they must emphasize the right activities for their departments and their managerial levels. Knowing what types of activity to emphasize is the core of the manager’s job. In any event, we shall return to this issue when This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 17 we address the nature of individual differences in the next chapter. CONCEPT CHECK 1. Describe and explain the different levels of management. 2. Describe and explain the three types of managerial skills and how they relate to each level of management. 18 Chapter 1 Managing and Performing Key Terms Decisional role One of the three major roles that a manager assumes in the organization. executive managers Generally, a team of individuals at the highest level of management of an organization. first-line management The level of management directly managing nonmanagerial employees. Informational role One of the three major roles that a manager assumes in the organization. Interpersonal role One of the three major roles that a manager assumes in the organization. middle management The managers in an organization at a level just below that of senior executives. Summary of Learning Outcomes 1.1 What Do Managers Do? 1. What do managers do to help organizations achieve top performance? Managers perform a variety of functions in organizations, but amongst one of the most important functions they perform is communicating with direct reports to help their organizations achieve and exceed goals. 1.2 The Roles Managers Play 2. What do managers do to help organizations achieve top performance? Managers perform a variety of roles in organizations, but amongst one of the most important functions they perform is communicating with direct reports to help their organizations achieve and exceed goals. Managers perform three major types of roles within organizations, interpersonal roles, informational roles, and decisional roles. the extent of each of these roles depends on the manager’s position within the organizational hierarchy. 1.3 Major Characteristics of the Manager's Job 3. What are the characteristics that effective managers display? Management is the process of planning, organizing, directing, and controlling the activities of employees in combination with other resources to accomplish organizational goals. Managerial responsibilities include long- range planning, controlling, environmental scanning, supervision, coordination, customer relations, community relations, internal consulting, and monitoring of products and services. These responsibilities differ by level in the organizational hierarchy and by department or function. The twenty-first-century manager will differ from most current managers in four ways. In essence, he will be a global strategist, a master of technology, a good politician, and a premier leader-motivator. Chapter Review Questions 1. What are the characteristics and traits that you possess that are common to all successful managers? 2. Why should management be considered an occupation rather than a profession? 3. How do managers learn how to perform the job? 4. Explain the manager’s job according to Henry Mintzberg. 5. What responsibilities do managers have towards people within the organization? How do they express these responsibilities? 6. How do managers perform their job according to John Kotter? 7. How do managers make rational decisions? This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 1 Managing and Performing 19 8. How does the nature of management change according to one’s level and function in the organization? 9. Discuss the role of management in the larger societal context. What do you think the managers of the future will be like? 10. Identify what you think are the critical issues facing contemporary management. Explain. Management Skills Application Exercises 1. During this and your other courses, there will likely be products of your and team-based assignments that can illustrate specific competencies such as the ability to prepare a spreadsheet application, write programming code, or show your communication abilities that demonstrate your skills in a video. It is a good practice to catalog and save these artifacts in a portfolio that will be a useful in demonstrating your skills in future job interviews. 2. Time management is an important skill that will impact your future as a manager. You can categorize the time that you spend as either required or discretionary. You can assess your time management skills by keeping track of your time using a schedule calendar and breaking down the time devoted to each activity over a week. After a week of logging the activity, note whether each activity was required or discretionary and whether the time was used productively or unproductively using a 10-point scale in which 10 is very productive and 1 is completely unproductive. Now write up a plan on how to manage your time by coming up with a list of what to start doing and stop doing and what you can do to manage your discretionary time more productively. Managerial Decision Exercises 1. You are a manager at a local convenience store that has been the victim of graffiti. Identify the roles you will undertake with both internal employees and others. 2. Here are three job titles. Rank which job would devote the most of its time to conceptual, human, and technical skills. a. Vice president of finance at a Fortune 100 company b. Coding for a video game producer c. General manager at a local McDonald’s franchise Critical Thinking Case New Management Challenges for the New Age Today’s news is littered with scandals, new allegations of sexual assault, and tragedy. Since 2017 and the #metoo Movement, stemming from the Harvey Weinstein scandal, more and more public figures have been put into the spotlight to defend themselves against allegations from women around the globe. Not only publically, but privately in companies around the world, there have been firings, and investigations into misconduct from co-workers, managers, and CEOs. It is a relevant topic that is getting long overdue publicity and encouraging more men and women to come forward to discuss openly rather than hide the events and injustices of the past. Other events showcase the tumultuous and on-edge society we are living in, such as the Charlottesville, VA attack, that left 1 dead and 19 injured when a person drove a car through a 20 Chapter 1 Managing and Performing crowd of protestors during a white nationalist gathering. With events on a daily business, it is important for companies to take a stand against racial hatred, harassment of any kind, and have firm policies when such events occur. Take Netflix for example, who in July of 2018 fired chief communications officer for saying the “N-word” in full form. This event occurred during an internal meeting, not directing the slur at anyone specific, but claimed it was being made as an emphatic point about offensive words in comedy programming. The “Netflix way”, the culture that is built around radical candor and transparency was put to the test during this occurrence. The offender, Jonathan Friedland attempted to apologize for his misdeed, hoping it would fade away and his apology would be accepted. However, it didn’t work that way, instead the anger was palpable between co- workers, and eventually led to the firing of Friedland after a few months of inaction. Netflixers are given a high level of freedom and responsibility within their “Netflix way” culture. Blunt feedback is encouraged, trust and discretion is the ultimate gate keeper, as employees have access to sensitive information, and are ultimately trusted for how they expense items and take vacation time. Between the insanely fast-paced streaming services industry, it is hard to keep this culture at a premium, but it is imperative for the success of the company overall. “As you scale a company to become bigger and bigger how do you scale that kind of culture?” said Colin Estep, a former senior engineer who left voluntarily in 2016. “I don’t know that we ever had a good answer.” In order to keep up, sometimes the company is seen as harsh in their tactics to keep the best of the best. “I think we’re transparent to a fault in our culture and that can come across as cutthroat,” said Walta Nemariam, an employee in talent acquisition at Netflix, in the video. Netflix has stayed true to their cultural values despite the pressures and sometimes negative connotations associated with this “cutthroat” environment. Their ability to remain agile, while displaying no tolerances for societal injustices makes them at the forefront of new age companies. It is a difficult pace to stay in line with, but it seems that they are keeping in stride and remaining true to who they are, for now. Questions: 1. How have the current cultural environment of our country shaped the way that companies are looking at their own corporate cultural standards? 2. What are the potential downfalls and positive influences of the “Netflix way”? 3. How does Netflix’s internal culture negatively or positively affect their ability to stay competitive and deliver cutting edge content? Sources: B. Stelter, "The Weinstein Effect: Harvey Weinstein scandal sparks movements in Hollywood and beyond," CNN Business, October 20, 2017, https://money.cnn.com/2017/10/20/media/weinstein-effect-harvey- weinstein/; https://www.washingtonpost.com/; L. Hertzler, " Talking #MeToo, one year after bombshell Weinstein allegations," Penn Today, October 30, 2018, https://penntoday.upenn.edu/news/talking-me-too- one-year-later; S. Ramachandaran and J. Flint, " At Netflix, Radical Transparency and Blunt Firings Unsettle the Ranks," Wall Street Journal, October 25, 2018, https://www.wsj.com/articles/at-netflix-radical-transparency- and-blunt-firings-unsettle-the-ranks-1540497174 This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 2 Managerial Decision-Making Exhibit 2.1 (i_yudai/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) Introduction Learning Outcomes After reading this chapter, you should be able to answer these questions: 1. What are the basic characteristics of managerial decision-making? 2. What are the two systems of decision-making in the brain? 3. What is the difference between programmed and nonprogrammed decisions? 4. What barriers exist that make effective decision-making difficult? 5. How can a manager improve the quality of her individual decision-making? 6. What are the advantages and disadvantages of group decision-making, and how can a manager improve the quality of group decision-making? EXPLORING MANAGERIAL CAREERS Up, Up, and Away: How Stephanie Korey and Jen Rubio founded their luggage company Jen Rubio and Stephanie Korey faced a number of important decisions in starting their luggage company, Away—beginning with the decision to start a business! That decision came about after Rubio’s luggage broke on a trip. She found it frustrating that all the luggage options were either inexpensive ($100 or less) but low quality, or high quality but incredibly expensive ($400 and above). There was no midrange option. So in 2015 Rubio and her friend Stephanie Korey began researching the luggage industry. They found that much of the reason for the high prices on quality luggage was because of how it was distributed and sold, through specialty retail shops and department stores. If they opted instead 22 Chapter 2 Managerial Decision-Making for a model in which they sold directly to consumers, they could provide high-quality luggage at more of a midrange ($200-$300) price. After considerable research, the two were convinced that they had an idea worth pursuing. Rubio and Korey settled on the company name “Away,” which is intended to invoke the pleasure that comes from travelling. Both of the founders had prior experience working for a start-up in the e-commerce space (Warby Parker), which helped them with making sound choices. Rubio’s background was more in branding and marketing, while Korey’s was in operations and supply chain management—so each was able to bring great expertise to various aspects of the business. They raised money initially from friends and family, but within a few months they sought venture capital funding to ensure that they had enough money to get off to a successful start. A big decision that Rubio and Korey had to make fairly early in the process of establishing their business was to settle on an initial design for the product. This decision required extensive marketing and consumer research to understand customer needs and wants. They asked hundreds of people what they liked about their existing luggage, and what they found most irritating about their existing luggage. They also contracted with a two-person design team to help create the first prototype. This research and development ultimately led to the design of an attractive hard case that is surprisingly lightweight. It also boasts extremely high-quality wheels (four of them, not two) and high-quality zippers. As a bonus, the carry-on includes a built-in battery for charging phones and other devices. The two founders also had to choose a partner to manufacture their product. Because their product had a hard, polycarbonate shell, Rubio and Korey discovered that manufacturing in the United States was not a viable option—the vast majority of luggage manufacturers using a polycarbonate shell were based in Asia. They researched a number of possible business partners and asked lots of questions. In addition, they eventually visited all of the factories on their list of options to see what they were actually like. This was an important piece of research, because the companies that looked best on paper didn’t always turn out to be the best when they visited in person. Rubio and Korey ended up working with a manufacturing partner in China that also produces luggage for many high-end brands, and they have been extremely pleased with the partnership. They continue to devote time to building and maintaining that relationship, which helps to avoid issues and problems that might otherwise come up. By the end of 2015, Rubio and Korey had developed their first product. Because the luggage was not going to be available in time for the holiday shopping season, they decided to allow customers to preorder the luggage. To drum up interest, the duo engaged in a unique storytelling effort. They interviewed 40 well-respected members of the creative community about their travel experiences and created a hardcover book of travel memoirs called The Places We Return To. Not only was the book interesting and engaging, it also made lots of people in the creative community aware of Away luggage. Starting in November 2015, the travel memoir book was available for free with the purchase of a gift card that could be redeemed in February 2016 for luggage. The book project generated tremendous advance interest in the product, and the 1,200 printed copies sold out. Away generated $12 million in first-year sales. Stephanie Corey and Jen Rubio faced many important and novel decisions in initially developing and building their business. They have been successful in part because they made those decisions wisely—by relying on shared knowledge, expertise, and lots of research before reaching a decision. They will continue to face many decisions, big and small. They have expanded their product line from one piece of luggage to four, with more luggage—and other travel accessories—in the works for the future. Their company, which is based in New York, has grown to over 60 employees in the first two years. These This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 2 Managerial Decision-Making 23 employees include the two design-team members who were contracted to help create their first prototype; Rubio and Korey appreciated working with them so much, they offered them full-time positions with Away. Each new hire represents new decisions—decisions about what additional work needs to be done and who they should hire to do it. Each new product also brings additional decisions—but it seems Rubio and Korey have positioned themselves (and their business) well for future successes. Sources: Kendall Baker, “An Interview With the Co-Founder of Away,” The Hustle, December 5, 2016, https://thehustle.co/episodes; Bond Street Blog, “Up and Away,” Bond Street, https://bondstreet.com/ blog/jen-rubio-interview/; Josh Constine, “Away nears 100k stylish suitcases sold as it raises $20M,” TechCrunch, May 19, 2017, https://techcrunch.com/; Adeline Duff, “ The T&L Carry-On: Away Travel Co- Founders Jen Rubio and Stephanie Korey,” Travel & Leisure, March 9, 2017, http://www.travelandleisure.com/; Burt Helm, “How This Company Launched With Zero Products –and Hit $12 Million in First-Year Sales,” Inc.com, July/August 2017, https://www.inc.com/; Veronique Hyland, “The Duo Trying to Make Travel More Glamorous,” The Cut, December 22, 2015, https://www.thecut.com/. Managers and business owners—like Jen Rubio and Stephanie Korey—make decisions on a daily basis. Some are big, like the decision to start a new business, but most are smaller decisions that go into the regular running of the company and are crucial to its long-term success. Some decisions are predictable, and some are unexpected. In this chapter we look at important information about decision-making that can help you make better decisions and, ultimately, be a better manager. 2.1 Overview of Managerial Decision-Making 1. What are the basic characteristics of managerial decision-making? Decision-making is the action or process of thinking through possible options and selecting one. It is important to recognize that managers are continually making decisions, and that the quality of their decision-making has an impact—sometimes quite significant—on the effectiveness of the organization and its stakeholders. Stakeholders are all the individuals or groups that are affected by an organization (such as customers, employees, shareholders, etc.). Members of the top management team regularly make decisions that affect the future of the organization and all its stakeholders, such as deciding whether to pursue a new technology or product line. A good decision can enable the organization to thrive and survive long-term, while a poor decision can lead a business into bankruptcy. Managers at lower levels of the organization generally have a smaller impact on the organization’s survival, but can still have a tremendous impact on their department and its workers. Consider, for example, a first-line supervisor who is charged with scheduling workers and ordering raw materials for her department. Poor decision-making by lower-level managers is unlikely to drive the entire firm out of existence, but it can lead to many adverse outcomes such as: reduced productivity if there are too few workers or insufficient supplies, increased expenses if there are too many workers or too many supplies, particularly if the supplies have a limited shelf life or are costly to store, and frustration among employees, reduced morale, and increased turnover (which can be costly for the organization) if the decisions involve managing and training workers. 24 Chapter 2 Managerial Decision-Making Deciding When to Decide While some decisions are simple, a manager’s decisions are often complex ones that involve a range of options and uncertain outcomes. When deciding among various options and uncertain outcomes, managers need to gather information, which leads them to another necessary decision: how much information is needed to make a good decision? Managers frequently make decisions without complete information; indeed, one of the hallmarks of an effective leader is the ability to determine when to hold off on a decision and gather more information, and when to make a decision with the information at hand. Waiting too long to make a decision can be as harmful for the organization as reaching a decision too quickly. Failing to react quickly enough can lead to missed opportunities, yet acting too quickly can lead to organizational resources being poorly allocated to projects with no chance of success. Effective managers must decide when they have gathered enough information and must be prepared to change course if additional information becomes available that makes it clear that the original decision was a poor one. For individuals with fragile egos, changing course can be challenging because admitting to a mistake can be harder than forging ahead with a bad plan. Effective managers recognize that given the complexity of many tasks, some failures are inevitable. They also realize that it’s better to minimize a bad decision’s impact on the organization and its stakeholders by recognizing it quickly and correcting it. What’s the Right (Correct) Answer? It’s also worth noting that making decisions as a manager is not at all like taking a multiple-choice test: with a multiple-choice test there is always one right answer. This is rarely the case with management decisions. Sometimes a manager is choosing between multiple good options, and it’s not clear which will be the best. Other times there are multiple bad options, and the task is to minimize harm. Often there are individuals in the organization with competing interests, and the manager must make decisions knowing that someone will be upset no matter what decision is reached. What’s the Right (Ethical) Answer? Sometimes managers are asked to make decisions that go beyond just upsetting someone—they may be asked to make decisions in which harm could be caused to others. These decisions have ethical or moral implications. Ethics and morals refer to our beliefs about what is right vs. wrong, good vs. evil, virtuous vs. corrupt. Implicitly, ethics and morals relate to our interactions with and impact on others—if we never had to interact with another creature, we would not have to think about how our behaviors affected other individuals or groups. All managers, however, make decisions that impact others. It is therefore important to be mindful about whether our decisions have a positive or a negative impact. “Maximizing shareholder wealth” is often used as a rationalization for placing the importance of short-term profits over the needs of others who will be affected by a decision—such as employees, customers, or local citizens (who might be affected, for example, by environmental decisions). Maximizing shareholder wealth is often a short-sighted decision, however, because it can harm the organization’s financial viability in the future.1 Bad publicity, customers boycotting the organization, and government fines are all possible long-term outcomes when managers make choices that cause harm in order to maximize shareholder wealth. More importantly, increasing the wealth of shareholders is not an acceptable reason for causing harm to others. As you can see from these brief examples, management is not for the faint of heart! It can, however, be incredibly rewarding to be in a position to make decisions that have a positive impact on an organization and its stakeholders. We see a great example of this in the Sustainability and Responsible Management box. This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 2 Managerial Decision-Making 25 SUSTAIN ABILITY AND RESPONSIBLE M AN AGEMENT Brewing Sustainable Success The focus of a manager or a business owner is often primarily on doing well (making a profit). Sometimes, though, organizational leaders choose to pursue two big goals at once: doing well, and simultaneously doing good (benefiting society in some way). Why? Generally because they think it’s an important thing to do. The business provides an opportunity to pursue another goal that the founders, owners, or managers are also passionate about. In the case of New Belgium Brewing, the company’s cofounders, Jeff Lebesch and Kim Jordan, were passionate about two things: making great beer and environmental stewardship. So it should come as no surprise that their brewery is dedicated to reducing its environmental footprint. The brewery has created a culture that fosters sustainability in a wide range of ways, such as by giving employees a bicycle on their one-year anniversary as a way to encourage them to ride bicycles to work. The organization is also active in advocacy efforts, such as the “Save the Colorado” (river) campaign, and it works hard to promote responsible decision-making when it comes to environmental issues. In fact, in 1999, following an employee vote, the brewery began to purchase all of its electricity from wind power, even though it was more expensive than electricity from coal-burning power plants (which meant reduced profitability and less money for employee bonuses). While the brewery still relies primarily on wind power, it also now generates a portion of its electricity onsite—some from rooftop solar panels, and even more from biogas, the methane gas byproduct that is created by microbes in the brewery’s water treatment plant. The company cleans the wastewater generated from beer production, and in doing so it generates the biogas, which is captured and used for energy to help run the brewery. Brewing is water intensive, so New Belgium works hard to reduce water consumption and to recycle the water that it does use. The company also reduces other types of waste by selling used grain, hops, and yeast to local ranchers for cattle feed. The company, which has been employee owned since 2013, also works with the local utility through a Smart Meter program to reduce their energy consumption at peak times. All of these efforts at doing good must come at a cost, right? Actually, research shows that companies that are committed to sustainability have superior financial performance, on average, relative to those that are not. In coming up with creative ways to reduce, reuse, and recycle, employees often also find ways to save money (like using biogas). In addition, organizations that strive to do good are often considered attractive and desirable places to work (especially by people who have similar values) and are also valued by the surrounding communities. As a result, employees in those organizations tend to be extremely committed to them, with high levels of engagement, motivation, and productivity. Indeed, it seems clear that the employees at the New Belgium Brewery are passionate about where they work and what they do. This passion generates value for the organization and proves that it is, in fact, possible to do well while having also made the decision to do good. And in the case of New Belgium Brewery, that means working to protect the environment while also making delicious beer. Discussion Questions 1. What challenges does New Belgium Brewery face in pursuing environmental goals? 2. Can you think of any other examples of companies that try to “do good” while also doing well? 3. Would you like to work for an organization that is committed to something more than just 26 Chapter 2 Managerial Decision-Making profitability, even if it meant your salary or bonus would be smaller? Sources: Karen Crofton, “How New Belgium Brewery leads Colorado’s craft brewers in energy,” GreenBiz, August 1, 2014, https://www.greenbiz.com/. Darren Dahl, “How New Belgium Brewing Has Found Sustainable Success,” Forbes, February 8, 2016, https://www.forbes.com/. Jenny Foust, “New Belgium Brewing Once Again Named Platinum-Level Bicycle Friendly Business by the League of American Bicyclists,” Craft Beer.com, February 18, 2016. Robert G. Eccles, Ioannis Ioannou, & George Serafeim, “The Impact of Corporate Sustainability on Organizational Processes and Performance,” Management Science, 60, 2014, https://doi.org/10.1287/mnsc.2014.1984. New Belgium Brewery Sustainability web page, http://www.newbelgium.com/sustainability, accessed September 18, 2017. CONCEPT CHECK 1. What are some positive outcomes of decision-making for an organization? What are some possible negative outcomes? 2. How is managerial decision-making different from a multiple-choice test? 3. In addition to the owners of a business, who are some of the other stakeholders that managers should consider when making decisions? 2.2 How the Brain Processes Information to Make Decisions: Reflective and Reactive Systems 2. What are the two systems of decision-making in the brain? The human brain processes information for decision-making using one of two routes: a reflective system and a reactive (or reflexive) system.2,3 The reflective system is logical, analytical, deliberate, and methodical, while the reactive system is quick, impulsive, and intuitive, relying on emotions or habits to provide cues for what to do next. Research in neuropsychology suggests that the brain can only use one system at a time for processing information [Darlow & Sloman] and that the two systems are directed by different parts of the brain. The prefrontal cortex is more involved in the reflective system, and the basal ganglia and amygdala (more primitive parts of the brain, from an evolutionary perspective) are more involved in the reactive system.4 Reactive Decision-Making We tend to assume that the logical, analytical route leads to superior decisions, but whether this is accurate depends on the situation. The quick, intuitive route can be lifesaving; when we suddenly feel intense fear, a fight-or-flight response kicks in that leads to immediate action without methodically weighing all possible options and their consequences. Additionally, experienced managers can often make decisions very quickly because experience or expertise has taught them what to do in a given situation. These managers might not be able to explain the logic behind their decision, and will instead say they just went with their “gut,” or did what “felt” right. Because the manager has faced a similar situation in the past and has figured out how to This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 2 Managerial Decision-Making 27 deal with it, the brain shifts immediately to the quick, intuitive decision-making system. 5 Reflective Decision-Making The quick route is not always the best decision-making path to take, however. When faced with novel and complex situations, it is better to process available information logically, analytically, and methodically. As a manager, you need to think about whether a situation requires not a fast, “gut” reaction, but some serious thought prior to making a decision. It is especially important to pay attention to your emotions, because strong emotions can make it difficult to process information rationally. Successful managers recognize the effects of emotions and know to wait and address a volatile situation after their emotions have calmed down. Intense emotions—whether positive or negative—tend to pull us toward the quick, reactive route of decision- making. Have you ever made a large “impulse” purchase that you were excited about, only to regret it later? This speaks to the power our emotions exert on our decision-making. Big decisions should generally not be made impulsively, but reflectively. The Role of Emotions Being aware of the role emotions play in decision-making does not mean that we should ignore them. Emotions can serve as powerful signals about what we should do, especially in situations with ethical implications. You can read more about this particular type of decision-making in the Ethics in Practice box later in this chapter. Thinking through how we feel about the possible options, and why we feel that way, can greatly enhance our decision-making.6 Effective decision-making, then, relies on both logic and emotions. For this reason, the concept of emotional intelligence has become popular as a characteristic of effective managers. Emotional intelligence is the ability to recognize, understand, pay attention to, and manage one’s own emotions and the emotions of others. It involves self-awareness and self-regulation—essentially, this is a toggling back and forth between emotions and logic so that we analyze and understand our own emotions and then exert the necessary control to manage them as appropriate for the situation. Emotional intelligence also involves empathy—the ability to understand other peoples’ emotions (and an interest in doing so). Finally, emotional intelligence involves social skills to manage the emotional aspects of relationships with others. Managers who are aware of their own emotions can think through what their emotions mean in a given situation and use that information to guide their decision-making. Managers who are aware of the emotions of others can also utilize that information to help groups function more effectively and engage in better group decision-making. While emotional intelligence seems to come easily to some people, it is something that we can develop and improve on with practice. A model of emotional intelligence is presented in Exhibit 2.2. 28 Chapter 2 Managerial Decision-Making Exhibit 2.2 Emotional Intelligence (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) CONCEPT CHECK 1. Explain the two systems used by the brain in decision-making. 2. What is emotional intelligence, and why is it important for decision-making? 2.3 Programmed and Nonprogrammed Decisions 3. What is the difference between programmed and nonprogrammed decisions? Because managers have limited time and must use that time wisely to be effective, it is important for them to distinguish between decisions that can have structure and routine applied to them (called programmed decisions) and decisions that are novel and require thought and attention (nonprogrammed decisions). Programmed Decisions Programmed decisions are those that are repeated over time and for which an existing set of rules can be developed to guide the process. These decisions might simple, or they could be fairly complex, but the criteria that go into making the decision are all known or can at least be estimated with a reasonable degree of accuracy. For example, deciding how many raw materials to order should be a programmed decision based on anticipated production, existing stock, and anticipated length of time for the delivery of the final product. As another example, consider a retail store manager developing the weekly work schedule for part-time employees. The manager must consider how busy the store is likely to be, taking into account seasonal fluctuations in business. Then, she must consider the availability of the workers by taking into account This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 2 Managerial Decision-Making 29 requests for vacation and for other obligations that employees might have (such as school). Establishing the schedule might be complex, but it is still a programmed decision: it is made on a regular basis based on well- understood criteria, so structure can be applied to the process. For programmed decisions, managers often develop heuristics, or mental shortcuts, to help reach a decision. For example, the retail store manager may not know how busy the store will be the week of a big sale, but might routinely increase staff by 30% every time there is a big sale (because this has been fairly effective in the past). Heuristics are efficient—they save time for the decision maker by generating an adequate solution quickly. Heuristics don’t necessarily yield the optimal solution—deeper cognitive processing may be required for that. However, they generally yield a good solution. Heuristics are often used for programmed decisions, because experience in making the decision over and over helps the decision maker know what to expect and how to react. Programmed decision-making can also be taught fairly easily to another person. The rules and criteria, and how they relate to outcomes, can be clearly laid out so that a good decision can be reached by the new decision maker. Programmed decisions are also sometimes referred to as routine or low-involvement decisions because they don’t require in-depth mental processing to reach a decision. High- and low-involvement decisions are illustrated in Exhibit 2.3. Exhibit 2.3 High-Involvement and Low-Involvement Decisions. (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Nonprogrammed Decisions In contrast, nonprogrammed decisions are novel, unstructured decisions that are generally based on criteria that are not well-defined. With nonprogrammed decisions, information is more likely to be ambiguous or incomplete, and the decision maker may need to exercise some thoughtful judgment and creative thinking to reach a good solution. These are also sometimes referred to as nonroutine decisions or as high-involvement decisions because they require greater involvement and thought on the part of the decision maker. For example, consider a manager trying to decide whether or not to adopt a new technology. There will always be unknowns in situations of this nature. Will the new technology really be better than the existing technology? Will it become widely accepted over time, or will some other technology become the standard? The best the manager can do in this situation is to gather as much relevant information as possible and make an educated guess as to whether the new technology will be worthwhile. Clearly, nonprogrammed decisions present the greater challenge. 30 Chapter 2 Managerial Decision-Making The Decision-Making Process While decisions makers can use mental shortcuts with programmed decisions, they should use a systematic process with nonprogrammed decisions. The decision-making process is illustrated in Exhibit 2.4 and can be broken down into a series of six steps, as follows: 1. Recognize that a decision needs to be made. 2. Generate multiple alternatives. 3. Analyze the alternatives. 4. Select an alternative. 5. Implement the selected alternative. 6. Evaluate its effectiveness. While these steps may seem straightforward, individuals often skip steps or spend too little time on some steps. In fact, sometimes people will refuse to acknowledge a problem (Step 1) because they aren’t sure how to address it. We’ll discuss the steps more later in the chapter, when we review ways to improve the quality of decision-making. Exhibit 2.4 The Decision-Making Process. (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) You may notice similarities between the two systems of decision-making in our brains and the two types of decisions (programmed and nonprogrammed). Nonprogrammed decisions will generally need to be processed via the reflective system in our brains in order for us to reach a good decision. But with programmed decisions, heuristics can allow decision makers to switch to the quick, reactive system and then move along quickly to other issues. This OpenStax book is available for free at http://cnx.org/content/col28330/1.8 Chapter 2 Managerial Decision-Making 31 CONCEPT CHECK 1. Give an example of a programmed decision that a manager might face. 2. Give an example of a nonprogrammed decision. 3. What are heuristics, and when are they helpful? 4. How are programmed and nonprogrammed decisions connected to the reflective and reactive systems in the brain? 2.4 Barriers to Effective Decision-Making 4. What barriers exist that make effective decision-making difficult? There are a number of barriers to effective decision-making. Effective managers are aware of these potential barriers and try to overcome them as much as possible. Bounded Rationality While we might like to think that we can make completely rational decisions, this is often unrealistic given the complex issues faced by managers. Nonrational decision-making is common, especially with nonprogrammed decisions. Since we haven’t faced a particular situation previously, we don’t always know what questions to ask or what information to gather. Even when we have gathered all the possible information, we may not be able to make rational sense of all of it, or to accurately forecast or predict the outcomes of our choice. Bounded rationality is the idea that for complex issues we cannot be completely rational because we cannot fully grasp all the possible alternatives, nor can we understand all the implications of every possible alternative. Our brains have limitations in terms of the amount of information they can process. Similarly, as was alluded to earlier in the chapter, even when managers have the cognitive ability to process all the relevant information, they often must make decisions without first having time to collect all the relevant data—their information is incomplete. Escalation of Commitment Given the lack of complete information, managers don’t always make the right decision initially, and it may not be clear that a decision was a bad one until after some time has passed. For example, consider a manager who had to choose between two competing software packages that her organization will use on a daily basis to enhance efficiency. She initially chooses the product that was developed by the larger, more well-established company, reasoning that they will have greater financial resources to invest in ensuring that the technology is good. However, after some time it becomes clear that the competing software package is going to be far superior. While the smaller company’s product could be integrated into the organization’s existing systems at little additional expense, the larger company’s product will require a much greater initial investment, as well as substantial ongoing costs for maintaining it. At this point, however, let’s assume that the manager has already paid for the larger company’s (inferior) software. Will she abandon the path that she’s on, accept the loss on the money that’s been invested so far, and switch to the better software? Or will she continue to invest time and money into trying to make the first product work? Escalation of commitment is the tendency of decision 32 Chapter 2 Managerial Decision-Making makers to remain committed to poor decision, even when doing so leads to increasingly negative outcomes. Once we commit to a decision, we may find it difficult to reevaluate that decision rationally. It can seem easier to “stay the course” than to admit (or to recognize) that a decision was poor

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