The general pattern of authority throughout an organization determines the extent to which that organization is centralized or decentralized.
A centralized organization systematically works to concentrate authority at the upper levels. In a decentralized organization, management consciously attempts to spread authority to the lower organization levels.
A variety of factors can influence the extent to which a firm is centralized or decentralized. The following is a list of possible determinants:
• The external environment in which the firm operates. The more complex and unpredictable this environment, the more likely it is that top management will let low-level managers make important decisions. After all, low-level managers are closer to the problems because they are more likely to have direct contact with customers and workers. Therefore, they are in a better position to determine problems and concerns.
• The nature of the decision itself. The riskier or the more important the decision, the greater the tendency to centralize decision making.
• The abilities of low-level managers. If these managers do not have strong decision-making skills, top managers will be reluctant to decentralize. Strong low-level decision-making skills encourage decentralization.
• The organization's tradition of management. An organization that has traditionally practiced centralization or decentralization is likely to maintain that posture in the future.
In principle, neither philosophy is right or wrong. What works for one organization may or may not work for another. Kmart Corporation and McDonald's have both been very successful — both practice centralization. By the same token, decentralization has worked very well for General Electric and Sears. Every organization must assess its own situation and then choose the level of centralization or decentralization that works best.
The Informal Organization
In addition to formal organizational structures, an organization may also have a hidden side that doesn't show up on its organizational chart. This hidden informal organization is defined by the patterns, behaviors, and interactions that stem from personal rather than official relationships
In the informal organization, the emphasis is on people and their relationships; in the formal organization, the emphasis is on official organizational positions. The leverage, or clout, in the informal organization is informal power that's attached to a specific individual. On the other hand, in the formal organization, formal authority comes directly from the position. An individual retains formal authority only so long as he or she occupies the position. Informal power is personal; authority is organizational.
Firmly embedded within every informal organization are informal groups and the notorious grapevine; the following list offers descriptions of each:
• Informal groups. Workers may create an informal group to go bowling, form a union, discuss work challenges, or have lunch together every day. The group may last for several years or only a few hours.
Sometimes employees join these informal groups simply because of its goals. Other times, they simply want to be with others who are similar to them. Still others may join informal groups simply because they want to be accepted by their coworkers.
• The grapevine. The grapevine is the informal communications network within an organization. It is completely separate from — and sometimes much faster than — the organization's formal channels of communication.
Formal communication usually follows a path that parallels the organizational chain of command. By contrast, information can be transmitted through the grapevine in any direction — up, down, diagonally, or horizontally across the organizational structure. Subordinates may pass information to their bosses, an executive may relay something to a maintenance worker, or employees in different departments may share tidbits.
Grapevine information may be concerned with topics ranging from the latest management decisions to the results of today's World Series game to pure gossip. The information may be important or of little interest. By the same token, the information on the grapevine may be highly accurate or totally distorted.
The informal organization of a firm may be more important than a manager realizes. Although managers may think that the informal organization is nothing more than rumors that are spread among the employees, it is actually a very important tool in maintaining company-wide information flow. Results of studies show that the office grapevine is 75 percent to 90 percent accurate and provides managers and staff with better information than formal communications.
Rather than ignore or try to suppress the grapevine, managers should make an attempt to tune in to it. In fact, they should identify the people in the organization who are key to the information flow and feed them information that they can spread to others. Managers should make as big an effort to know who their internal disseminators of information are as they do to find the proper person to send a press release. Managers can make good use of the power of the informal organization and the grapevine
Thursday, April 15, 2010
Authority
Authority is the formal and legitimate right of a manager to make decisions, issue orders, and allocate resources to achieve organizationally desired outcomes. A manager's authority is defined in his or her job description.
Organizational authority has three important underlying principles:
• Authority is based on the organizational position, and anyone in the same position has the same authority.
• Authority is accepted by subordinates. Subordinates comply because they believe that managers have a legitimate right to issue orders.
• Authority flows down the vertical hierarchy. Positions at the top of the hierarchy are vested with more formal authority than are positions at the bottom.
In addition, authority comes in three types:
• Line authority gives a manager the right to direct the work of his or her employees and make many decisions without consulting others. Line managers are always in charge of essential activities such as sales, and they are authorized to issue orders to subordinates down the chain of command.
• Staff authority supports line authority by advising, servicing, and assisting, but this type of authority is typically limited. For example, the assistant to the department head has staff authority because he or she acts as an extension of that authority. These assistants can give advice and suggestions, but they don't have to be obeyed. The department head may also give the assistant the authority to act, such as the right to sign off on expense reports or memos. In such cases, the directives are given under the line authority of the boss.
• Functional authority is authority delegated to an individual or department over specific activities undertaken by personnel in other departments. Staff managers may have functional authority, meaning that they can issue orders down the chain of command within the very narrow limits of their authority. For example, supervisors in a manufacturing plant may find that their immediate bosses have line authority over them, but that someone in corporate headquarters may also have line authority over some of their activities or decisions.
Why would an organization create positions of functional authority? After all, this authority breaks the unity of command principle by having individuals report to two bosses. The answer is that functional authority allows specialization of skills and improved coordination. This concept was originally suggested by Frederick Taylor. He separated “planning” from “doing” by establishing a special department to relieve the laborer and the foreman from the work of planning. The role of the foreman became one of making sure that planned operations were carried out. The major problem of functional authority is overlapping relationships, which can be resolved by clearly designating to individuals which activities their immediate bosses have authority over and which activities are under the direction of someone else.
Delegation
A concept related to authority is delegation. Delegation is the downward transfer of authority from a manager to a subordinate. Most organizations today encourage managers to delegate authority in order to provide maximum flexibility in meeting customer needs. In addition, delegation leads to empowerment, in that people have the freedom to contribute ideas and do their jobs in the best possible ways. This involvement can increase job satisfaction for the individual and frequently results in better job performance. Without delegation, managers do all the work themselves and underutilize their workers. The ability to delegate is crucial to managerial success. Managers need to take four steps if they want to successfully delegate responsibilities to their teams.
1. Specifically assign tasks to individual team members.
The manager needs to make sure that employees know that they are ultimately responsible for carrying out specific assignments.
2. Give team members the correct amount of authority to accomplish assignments.
Typically, an employee is assigned authority commensurate with the task. A classical principle of organization warns managers not to delegate without giving the subordinate the authority to perform to delegated task. When an employee has responsibility for the task outcome but little authority, accomplishing the job is possible but difficult. The subordinate without authority must rely on persuasion and luck to meet performance expectations. When an employee has authority exceeding responsibility, he or she may become a tyrant, using authority toward frivolous outcomes.
3. Make sure that team members accept responsibility.
Responsibility is the flip side of the authority coin. Responsibility is the duty to perform the task or activity an employee has been assigned. An important distinction between authority and responsibility is that the supervisor delegates authority, but the responsibility is shared. Delegation of authority gives a subordinate the right to make commitments, use resources, and take actions in relation to duties assigned. However, in making this delegation, the obligation created is not shifted from the supervisor to the subordinate — it is shared. A supervisor always retains some responsibility for work performed by lower-level units or individuals.
4. Create accountability.
Team members need to know that they are accountable for their projects. Accountability means answering for one's actions and accepting the consequences. Team members may need to report and justify task outcomes to their superiors. Managers can build accountability into their organizational structures by monitoring performances and rewarding successful outcomes. Although managers are encouraged to delegate authority, they often find accomplishing this step difficult for the following reasons:
• Delegation requires planning, and planning takes time. A manager may say, “By the time I explain this task to someone, I could do it myself.” This manager is overlooking the fact that the initial time spent up front training someone to do a task may save much more time in the long run. Once an employee has learned how to do a task, the manager will not have to take the time to show that employee how to do it again. This improves the flow of the process from that point forward.
• Managers may simply lack confidence in the abilities of their subordinates. Such a situation fosters the attitude, “If you want it done well, do it yourself.” If managers feel that their subordinates lack abilities, they need to provide appropriate training so that all are comfortable performing their duties.
• Managers experience dual accountability. Managers are accountable for their own actions and the actions of their subordinates. If a subordinate fails to perform a certain task or does so poorly, the manager is ultimately responsible for the subordinate's failure. But by the same token, if a subordinate succeeds, the manager shares in that success as well, and the department can be even more productive.
• Finally, managers may refrain from delegating because they are insecure about their value to the organization. However, managers need to realize that they become more valuable as their teams become more productive and talented.
Despite the perceived disadvantages of delegation, the reality is that a manager can improve the performance of his or her work groups by empowering subordinates through effective delegation. Few managers are successful in the long term without learning to delegate effectively.
So, how do managers learn to delegate effectively? The following additional principles may be helpful for managers who've tried to delegate in the past and failed:
• Principle 1: Match the employee to the task. Managers should carefully consider the employees to whom they delegate tasks. The individual selected should possess the skills and capabilities needed to complete the task. Perhaps even more important is to delegate to an individual who is not only able to complete the task but also willing to complete the task. Therefore, managers should delegate to employees who will view their accomplishments as personal benefits.
• Principle 2: Be organized and communicate clearly. The manager must have a clear understanding of what needs to be done, what deadlines exist, and what special skills are required. Furthermore, managers must be capable of communicating their instructions effectively if their subordinates are to perform up to their expectations.
• Principle 3: Transfer authority and accountability with the task. The delegation process is doomed to failure if the individual to whom the task is delegated is not given the authority to succeed at accomplishing the task and is not held accountable for the results as well. Managers must expect employees to carry the ball and then let them do so. This means providing the employees with the necessary resources and power to succeed, giving them timely feedback on their progress, and holding them fully accountable for the results of their efforts. Managers also should be available to answer questions as needed.
• Principle 4: Choose the level of delegation carefully. Delegation does not mean that the manager can walk away from the task or the person to whom the task is delegated. The manager must maintain some control of both the process and the results of the delegated activities. Depending upon the confidence the manager has in the subordinate and the importance of the task, the manager can choose to delegate at several levels.
Span of control
Span of control (sometimes called span of management) refers to the number of workers who report to one manager. For hundreds of years, theorists have searched for an ideal span of control. When no perfect number of subordinates for a manager to supervise became apparent, they turned their attention to the more general issue of whether the span should be wide or narrow.
A wide span of management exists when a manager has a large number of subordinates. Generally, the span of control may be wide when
• The manager and the subordinates are very competent.
• The organization has a well-established set of standard operating procedures.
• Few new problems are anticipated.
A narrow span of management exists when the manager has only a few subordinates. The span should be narrow when
• Workers are located far from one another physically.
• The manager has a lot of work to do in addition to supervising workers.
• A great deal of interaction is required between supervisor and workers.
• New problems arise frequently.
Keep in mind that the span of management may change from one department to another within the same organization.
Organizational authority has three important underlying principles:
• Authority is based on the organizational position, and anyone in the same position has the same authority.
• Authority is accepted by subordinates. Subordinates comply because they believe that managers have a legitimate right to issue orders.
• Authority flows down the vertical hierarchy. Positions at the top of the hierarchy are vested with more formal authority than are positions at the bottom.
In addition, authority comes in three types:
• Line authority gives a manager the right to direct the work of his or her employees and make many decisions without consulting others. Line managers are always in charge of essential activities such as sales, and they are authorized to issue orders to subordinates down the chain of command.
• Staff authority supports line authority by advising, servicing, and assisting, but this type of authority is typically limited. For example, the assistant to the department head has staff authority because he or she acts as an extension of that authority. These assistants can give advice and suggestions, but they don't have to be obeyed. The department head may also give the assistant the authority to act, such as the right to sign off on expense reports or memos. In such cases, the directives are given under the line authority of the boss.
• Functional authority is authority delegated to an individual or department over specific activities undertaken by personnel in other departments. Staff managers may have functional authority, meaning that they can issue orders down the chain of command within the very narrow limits of their authority. For example, supervisors in a manufacturing plant may find that their immediate bosses have line authority over them, but that someone in corporate headquarters may also have line authority over some of their activities or decisions.
Why would an organization create positions of functional authority? After all, this authority breaks the unity of command principle by having individuals report to two bosses. The answer is that functional authority allows specialization of skills and improved coordination. This concept was originally suggested by Frederick Taylor. He separated “planning” from “doing” by establishing a special department to relieve the laborer and the foreman from the work of planning. The role of the foreman became one of making sure that planned operations were carried out. The major problem of functional authority is overlapping relationships, which can be resolved by clearly designating to individuals which activities their immediate bosses have authority over and which activities are under the direction of someone else.
Delegation
A concept related to authority is delegation. Delegation is the downward transfer of authority from a manager to a subordinate. Most organizations today encourage managers to delegate authority in order to provide maximum flexibility in meeting customer needs. In addition, delegation leads to empowerment, in that people have the freedom to contribute ideas and do their jobs in the best possible ways. This involvement can increase job satisfaction for the individual and frequently results in better job performance. Without delegation, managers do all the work themselves and underutilize their workers. The ability to delegate is crucial to managerial success. Managers need to take four steps if they want to successfully delegate responsibilities to their teams.
1. Specifically assign tasks to individual team members.
The manager needs to make sure that employees know that they are ultimately responsible for carrying out specific assignments.
2. Give team members the correct amount of authority to accomplish assignments.
Typically, an employee is assigned authority commensurate with the task. A classical principle of organization warns managers not to delegate without giving the subordinate the authority to perform to delegated task. When an employee has responsibility for the task outcome but little authority, accomplishing the job is possible but difficult. The subordinate without authority must rely on persuasion and luck to meet performance expectations. When an employee has authority exceeding responsibility, he or she may become a tyrant, using authority toward frivolous outcomes.
3. Make sure that team members accept responsibility.
Responsibility is the flip side of the authority coin. Responsibility is the duty to perform the task or activity an employee has been assigned. An important distinction between authority and responsibility is that the supervisor delegates authority, but the responsibility is shared. Delegation of authority gives a subordinate the right to make commitments, use resources, and take actions in relation to duties assigned. However, in making this delegation, the obligation created is not shifted from the supervisor to the subordinate — it is shared. A supervisor always retains some responsibility for work performed by lower-level units or individuals.
4. Create accountability.
Team members need to know that they are accountable for their projects. Accountability means answering for one's actions and accepting the consequences. Team members may need to report and justify task outcomes to their superiors. Managers can build accountability into their organizational structures by monitoring performances and rewarding successful outcomes. Although managers are encouraged to delegate authority, they often find accomplishing this step difficult for the following reasons:
• Delegation requires planning, and planning takes time. A manager may say, “By the time I explain this task to someone, I could do it myself.” This manager is overlooking the fact that the initial time spent up front training someone to do a task may save much more time in the long run. Once an employee has learned how to do a task, the manager will not have to take the time to show that employee how to do it again. This improves the flow of the process from that point forward.
• Managers may simply lack confidence in the abilities of their subordinates. Such a situation fosters the attitude, “If you want it done well, do it yourself.” If managers feel that their subordinates lack abilities, they need to provide appropriate training so that all are comfortable performing their duties.
• Managers experience dual accountability. Managers are accountable for their own actions and the actions of their subordinates. If a subordinate fails to perform a certain task or does so poorly, the manager is ultimately responsible for the subordinate's failure. But by the same token, if a subordinate succeeds, the manager shares in that success as well, and the department can be even more productive.
• Finally, managers may refrain from delegating because they are insecure about their value to the organization. However, managers need to realize that they become more valuable as their teams become more productive and talented.
Despite the perceived disadvantages of delegation, the reality is that a manager can improve the performance of his or her work groups by empowering subordinates through effective delegation. Few managers are successful in the long term without learning to delegate effectively.
So, how do managers learn to delegate effectively? The following additional principles may be helpful for managers who've tried to delegate in the past and failed:
• Principle 1: Match the employee to the task. Managers should carefully consider the employees to whom they delegate tasks. The individual selected should possess the skills and capabilities needed to complete the task. Perhaps even more important is to delegate to an individual who is not only able to complete the task but also willing to complete the task. Therefore, managers should delegate to employees who will view their accomplishments as personal benefits.
• Principle 2: Be organized and communicate clearly. The manager must have a clear understanding of what needs to be done, what deadlines exist, and what special skills are required. Furthermore, managers must be capable of communicating their instructions effectively if their subordinates are to perform up to their expectations.
• Principle 3: Transfer authority and accountability with the task. The delegation process is doomed to failure if the individual to whom the task is delegated is not given the authority to succeed at accomplishing the task and is not held accountable for the results as well. Managers must expect employees to carry the ball and then let them do so. This means providing the employees with the necessary resources and power to succeed, giving them timely feedback on their progress, and holding them fully accountable for the results of their efforts. Managers also should be available to answer questions as needed.
• Principle 4: Choose the level of delegation carefully. Delegation does not mean that the manager can walk away from the task or the person to whom the task is delegated. The manager must maintain some control of both the process and the results of the delegated activities. Depending upon the confidence the manager has in the subordinate and the importance of the task, the manager can choose to delegate at several levels.
Span of control
Span of control (sometimes called span of management) refers to the number of workers who report to one manager. For hundreds of years, theorists have searched for an ideal span of control. When no perfect number of subordinates for a manager to supervise became apparent, they turned their attention to the more general issue of whether the span should be wide or narrow.
A wide span of management exists when a manager has a large number of subordinates. Generally, the span of control may be wide when
• The manager and the subordinates are very competent.
• The organization has a well-established set of standard operating procedures.
• Few new problems are anticipated.
A narrow span of management exists when the manager has only a few subordinates. The span should be narrow when
• Workers are located far from one another physically.
• The manager has a lot of work to do in addition to supervising workers.
• A great deal of interaction is required between supervisor and workers.
• New problems arise frequently.
Keep in mind that the span of management may change from one department to another within the same organization.
concepts of Organizing
The working relationships — vertical and horizontal associations between individuals and groups — that exist within an organization affect how its activities are accomplished and coordinated. Effective organizing depends on the mastery of several important concepts: work specialization, chain of command, authority, delegation, span of control, and centralization versus decentralization. Many of these concepts are based on the principles developed by Henri Fayol
Work specialization
One popular organizational concept is based on the fundamental principle that employees can work more efficiently if they're allowed to specialize. Work specialization, sometimes called division of labor, is the degree to which organizational tasks are divided into separate jobs. Employees within each department perform only the tasks related to their specialized function.
When specialization is extensive, employees specialize in a single task, such as running a particular machine in a factory assembly line. Jobs tend to be small, but workers can perform them efficiently. By contrast, if a single factory employee built an entire automobile or performed a large number of unrelated jobs in a bottling plant, the results would be inefficient.
Despite the apparent advantages of specialization, many organizations are moving away from this principle. With too much specialization, employees are isolated and perform only small, narrow, boring tasks. In addition, if that person leaves the company, his specialized knowledge may disappear as well. Many companies are enlarging jobs to provide greater challenges and creating teams so that employees can rotate among several jobs.
Chain of command
The chain of command is an unbroken line of authority that links all persons in an organization and defines who reports to whom. This chain has two underlying principles: unity of command and scalar principle.
• Unity of command: This principle states that an employee should have one and only one supervisor to whom he or she is directly responsible. No employee should report to two or more people. Otherwise, the employee may receive conflicting demands or priorities from several supervisors at once, placing this employee in a no-win situation.
Sometimes, however, an organization deliberately breaks the chain of command, such as when a project team is created to work on a special project. In such cases, team members report to their immediate supervisor and also to a team project leader. Another example is when a sales representative reports to both an immediate district supervisor and a marketing specialist, who is coordinating the introduction of a new product, in the home office.
Nevertheless, these examples are exceptions to the rule. They happen under special circumstances and usually only within a special type of employee group. For the most part, however, when allocating tasks to individuals or grouping assignments, management should ensure that each has one boss, and only one boss, to whom he or she directly reports.
• Scalar principle: The scalar principle refers to a clearly defined line of authority that includes all employees in the organization. The classical school of management suggests that there should be a clear and unbroken chain of command linking every person in the organization with successively higher levels of authority up to and including the top manager. When organizations grow in size, they tend to get taller, as more and more levels of management are added. This increases overhead costs, adds more communication layers, and impacts understanding and access between top and bottom levels. It can greatly slow decision making and can lead to a loss of contact with the client or customer.
Work specialization
One popular organizational concept is based on the fundamental principle that employees can work more efficiently if they're allowed to specialize. Work specialization, sometimes called division of labor, is the degree to which organizational tasks are divided into separate jobs. Employees within each department perform only the tasks related to their specialized function.
When specialization is extensive, employees specialize in a single task, such as running a particular machine in a factory assembly line. Jobs tend to be small, but workers can perform them efficiently. By contrast, if a single factory employee built an entire automobile or performed a large number of unrelated jobs in a bottling plant, the results would be inefficient.
Despite the apparent advantages of specialization, many organizations are moving away from this principle. With too much specialization, employees are isolated and perform only small, narrow, boring tasks. In addition, if that person leaves the company, his specialized knowledge may disappear as well. Many companies are enlarging jobs to provide greater challenges and creating teams so that employees can rotate among several jobs.
Chain of command
The chain of command is an unbroken line of authority that links all persons in an organization and defines who reports to whom. This chain has two underlying principles: unity of command and scalar principle.
• Unity of command: This principle states that an employee should have one and only one supervisor to whom he or she is directly responsible. No employee should report to two or more people. Otherwise, the employee may receive conflicting demands or priorities from several supervisors at once, placing this employee in a no-win situation.
Sometimes, however, an organization deliberately breaks the chain of command, such as when a project team is created to work on a special project. In such cases, team members report to their immediate supervisor and also to a team project leader. Another example is when a sales representative reports to both an immediate district supervisor and a marketing specialist, who is coordinating the introduction of a new product, in the home office.
Nevertheless, these examples are exceptions to the rule. They happen under special circumstances and usually only within a special type of employee group. For the most part, however, when allocating tasks to individuals or grouping assignments, management should ensure that each has one boss, and only one boss, to whom he or she directly reports.
• Scalar principle: The scalar principle refers to a clearly defined line of authority that includes all employees in the organization. The classical school of management suggests that there should be a clear and unbroken chain of command linking every person in the organization with successively higher levels of authority up to and including the top manager. When organizations grow in size, they tend to get taller, as more and more levels of management are added. This increases overhead costs, adds more communication layers, and impacts understanding and access between top and bottom levels. It can greatly slow decision making and can lead to a loss of contact with the client or customer.
Organising
Going from Planning to Organizing : The second function of management is organizing. After a manager has a plan in place, she can structure her teams and resources. This important step can profoundly affect an organization's success
Not only does a business's organizational structure help determine how well its employees make decisions, but it also reflects how well they respond to problems. These responses, over time, can make or break an organization. In addition, the organizational structure influences employees' attitudes toward their work. A suitable organizational structure can minimize a business's costs, as well as maximize its efficiency, which increases its ability to compete in a global economy. For these reasons, many businesses have tinkered with their organizational structures in recent years in efforts to enhance their profits and competitive edge.
Once managers have their plans in place, they need to organize the necessary resources to accomplish their goals. Organizing, the second of the universal management functions, is the process of establishing the orderly use of resources by assigning and coordinating tasks. The organizing process transforms plans into reality through the purposeful deployment of people and resources within a decision-making framework known as the organizational structure.
The organizational structure is defined as
• The set of formal tasks assigned to individuals and departments
• The formal reporting relationships, including lines of authority, decision responsibility, number of hierarchical levels, and span of managerial control
• The design of systems to ensure effective coordination of employees across departments
The organizational structure provides a framework for the hierarchy, or vertical structure, of the organization. An organizational chart is the visual representation of this vertical structure.
The Organizational Process :
Organizing, like planning, must be a carefully worked out and applied process. This process involves determining what work is needed to accomplish the goal, assigning those tasks to individuals, and arranging those individuals in a decision-making framework (organizational structure). The end result of the organizing process is an organization — a whole consisting of unified parts acting in harmony to execute tasks to achieve goals, both effectively and efficiently
A properly implemented organizing process should result in a work environment where all team members are aware of their responsibilities. If the organizing process is not conducted well, the results may yield confusion, frustration, loss of efficiency, and limited effectiveness.
In general, the organizational process consists of five steps
1. Review plans and objectives.
Objectives are the specific activities that must be completed to achieve goals. Plans shape the activities needed to reach those goals. Managers must examine plans initially and continue to do so as plans change and new goals are developed.
2. Determine the work activities necessary to accomplish objectives.
Although this task may seem overwhelming to some managers, it doesn't need to be. Managers simply list and analyze all the tasks that need to be accomplished in order to reach organizational goals.
3. Classify and group the necessary work activities into manageable units.
A manager can group activities based on four models of departmentalization: functional, geographical, product, and customer.
4. Assign activities and delegate authority.
Managers assign the defined work activities to specific individuals. Also, they give each individual the authority (right) to carry out the assigned tasks.
5. Design a hierarchy of relationships.
A manager should determine the vertical (decision-making) and horizontal (coordinating) relationships of the organization as a whole. Next, using the organizational chart, a manager should diagram the relationships
Not only does a business's organizational structure help determine how well its employees make decisions, but it also reflects how well they respond to problems. These responses, over time, can make or break an organization. In addition, the organizational structure influences employees' attitudes toward their work. A suitable organizational structure can minimize a business's costs, as well as maximize its efficiency, which increases its ability to compete in a global economy. For these reasons, many businesses have tinkered with their organizational structures in recent years in efforts to enhance their profits and competitive edge.
Once managers have their plans in place, they need to organize the necessary resources to accomplish their goals. Organizing, the second of the universal management functions, is the process of establishing the orderly use of resources by assigning and coordinating tasks. The organizing process transforms plans into reality through the purposeful deployment of people and resources within a decision-making framework known as the organizational structure.
The organizational structure is defined as
• The set of formal tasks assigned to individuals and departments
• The formal reporting relationships, including lines of authority, decision responsibility, number of hierarchical levels, and span of managerial control
• The design of systems to ensure effective coordination of employees across departments
The organizational structure provides a framework for the hierarchy, or vertical structure, of the organization. An organizational chart is the visual representation of this vertical structure.
The Organizational Process :
Organizing, like planning, must be a carefully worked out and applied process. This process involves determining what work is needed to accomplish the goal, assigning those tasks to individuals, and arranging those individuals in a decision-making framework (organizational structure). The end result of the organizing process is an organization — a whole consisting of unified parts acting in harmony to execute tasks to achieve goals, both effectively and efficiently
A properly implemented organizing process should result in a work environment where all team members are aware of their responsibilities. If the organizing process is not conducted well, the results may yield confusion, frustration, loss of efficiency, and limited effectiveness.
In general, the organizational process consists of five steps
1. Review plans and objectives.
Objectives are the specific activities that must be completed to achieve goals. Plans shape the activities needed to reach those goals. Managers must examine plans initially and continue to do so as plans change and new goals are developed.
2. Determine the work activities necessary to accomplish objectives.
Although this task may seem overwhelming to some managers, it doesn't need to be. Managers simply list and analyze all the tasks that need to be accomplished in order to reach organizational goals.
3. Classify and group the necessary work activities into manageable units.
A manager can group activities based on four models of departmentalization: functional, geographical, product, and customer.
4. Assign activities and delegate authority.
Managers assign the defined work activities to specific individuals. Also, they give each individual the authority (right) to carry out the assigned tasks.
5. Design a hierarchy of relationships.
A manager should determine the vertical (decision-making) and horizontal (coordinating) relationships of the organization as a whole. Next, using the organizational chart, a manager should diagram the relationships
Decision Making
The Decision‐Making Process : Quite literally, organizations operate by people making decisions. A manager plans, organizes, staffs, leads, and controls her team by executing decisions. The effectiveness and quality of those decisions determine how successful a manager will be.
Managers are constantly called upon to make decisions in order to solve problems. Decision making and problem solving are ongoing processes of evaluating situations or problems, considering alternatives, making choices, and following them up with the necessary actions. Sometimes the decision-making process is extremely short, and mental reflection is essentially instantaneous. In other situations, the process can drag on for weeks or even months. The entire decision-making process is dependent upon the right information being available to the right people at the right times.
The decision-making process involves the following steps:
1. Define the problem.
2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyze the alternatives.
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.
Define the problem : The decision-making process begins when a manager identifies the real problem. The accurate definition of the problem affects all the steps that follow; if the problem is inaccurately defined, every step in the decision-making process will be based on an incorrect starting point. One way that a manager can help determine the true problem in a situation is by identifying the problem separately from its symptoms.
The most obviously troubling situations found in an organization can usually be identified as symptoms of underlying problems. (See Table 1 for some examples of symptoms.) These symptoms all indicate that something is wrong with an organization, but they don't identify root causes. A successful manager doesn't just attack symptoms; he works to uncover the factors that cause these symptoms.
Identify limiting factors
All managers want to make the best decisions. To do so, managers need to have the ideal resources — information, time, personnel, equipment, and supplies — and identify any limiting factors. Realistically, managers operate in an environment that normally doesn't provide ideal resources. For example, they may lack the proper budget or may not have the most accurate information or any extra time. So, they must choose to satisfice — to make the best decision possible with the information, resources, and time available.
Develop potential alternatives : Time pressures frequently cause a manager to move forward after considering only the first or most obvious answers. However, successful problem solving requires thorough examination of the challenge, and a quick answer may not result in a permanent solution. Thus, a manager should think through and investigate several alternative solutions to a single problem before making a quick decision.
One of the best known methods for developing alternatives is through brainstorming, where a group works together to generate ideas and alternative solutions. The assumption behind brainstorming is that the group dynamic stimulates thinking — one person's ideas, no matter how outrageous, can generate ideas from the others in the group. Ideally, this spawning of ideas is contagious, and before long, lots of suggestions and ideas flow. Brainstorming usually requires 30 minutes to an hour.
The following specific rules should be followed during brainstorming sessions:
• Concentrate on the problem at hand. This rule keeps the discussion very specific and avoids the group's tendency to address the events leading up to the current problem.
• Entertain all ideas. In fact, the more ideas that come up, the better. In other words, there are no bad ideas. Encouragement of the group to freely offer all thoughts on the subject is important. Participants should be encouraged to present ideas no matter how ridiculous they seem, because such ideas may spark a creative thought on the part of someone else.
• Refrain from allowing members to evaluate others' ideas on the spot. All judgments should be deferred until all thoughts are presented, and the group concurs on the best ideas.
Although brainstorming is the most common technique to develop alternative solutions, managers can use several other ways to help develop solutions. Here are some examples:
• Nominal group technique. This method involves the use of a highly structured meeting, complete with an agenda, and restricts discussion or interpersonal communication during the decision-making process. This technique is useful because it ensures that every group member has equal input in the decision-making process. It also avoids some of the pitfalls, such as pressure to conform, group dominance, hostility, and conflict, that can plague a more interactive, spontaneous, unstructured forum such as brainstorming.
• Delphi technique. With this technique, participants never meet, but a group leader uses written questionnaires to conduct the decision making.
No matter what technique is used, group decision making has clear advantages and disadvantages when compared with individual decision making. The following are among the advantages:
• Groups provide a broader perspective.
• Employees are more likely to be satisfied and to support the final decision.
• Opportunities for discussion help to answer questions and reduce uncertainties for the decision makers.
These points are among the disadvantages:
• This method can be more time-consuming than one individual making the decision on his own.
• The decision reached could be a compromise rather than the optimal solution.
• Individuals become guilty of groupthink — the tendency of members of a group to conform to the prevailing opinions of the group.
• Groups may have difficulty performing tasks because the group, rather than a single individual, makes the decision, resulting in confusion when it comes time to implement and evaluate the decision.
The results of dozens of individual-versus-group performance studies indicate that groups not only tend to make better decisions than a person acting alone, but also that groups tend to inspire star performers to even higher levels of productivity.
So, are two (or more) heads better than one? The answer depends on several factors, such as the nature of the task, the abilities of the group members, and the form of interaction. Because a manager often has a choice between making a decision independently or including others in the decision making, she needs to understand the advantages and disadvantages of group decision making.
Analyze the alternatives
The purpose of this step is to decide the relative merits of each idea. Managers must identify the advantages and disadvantages of each alternative solution before making a final decision.
Evaluating the alternatives can be done in numerous ways. Here are a few possibilities:
• Determine the pros and cons of each alternative.
• Perform a cost-benefit analysis for each alternative.
• Weight each factor important in the decision, ranking each alternative relative to its ability to meet each factor, and then multiply by a probability factor to provide a final value for each alternative.
Regardless of the method used, a manager needs to evaluate each alternative in terms of its
• Feasibility — Can it be done?
• Effectiveness — How well does it resolve the problem situation?
• Consequences — What will be its costs (financial and nonfinancial) to the organization?
Select the best alternative
After a manager has analyzed all the alternatives, she must decide on the best one. The best alternative is the one that produces the most advantages and the fewest serious disadvantages. Sometimes, the selection process can be fairly straightforward, such as the alternative with the most pros and fewest cons. Other times, the optimal solution is a combination of several alternatives.
Sometimes, though, the best alternative may not be obvious. That's when a manager must decide which alternative is the most feasible and effective, coupled with which carries the lowest costs to the organization. (See the preceding section.) Probability estimates, where analysis of each alternative's chances of success takes place, often come into play at this point in the decision-making process. In those cases, a manager simply selects the alternative with the highest probability of success.
Implement the decision
Managers are paid to make decisions, but they are also paid to get results from these decisions. Positive results must follow decisions. Everyone involved with the decision must know his or her role in ensuring a successful outcome. To make certain that employees understand their roles, managers must thoughtfully devise programs, procedures, rules, or policies to help aid them in the problem-solving process.
Establish a control and evaluation system
Ongoing actions need to be monitored. An evaluation system should provide feedback on how well the decision is being implemented, what the results are, and what adjustments are necessary to get the results that were intended when the solution was chosen.
In order for a manager to evaluate his decision, he needs to gather information to determine its effectiveness. Was the original problem resolved? If not, is he closer to the desired situation than he was at the beginning of the decision-making process?
If a manager's plan hasn't resolved the problem, he needs to figure out what went wrong. A manager may accomplish this by asking the following questions:
• Was the wrong alternative selected? If so, one of the other alternatives generated in the decision-making process may be a wiser choice.
• Was the correct alternative selected, but implemented improperly? If so, a manager should focus attention solely on the implementation step to ensure that the chosen alternative is implemented successfully.
• Was the original problem identified incorrectly? If so, the decision-making process needs to begin again, starting with a revised identification step.
• Has the implemented alternative been given enough time to be successful? If not, a manager should give the process more time and re-evaluate at a later date.
Conditions that Influence Decison Making
Managers make problem-solving decisions under three different conditions: certainty, risk, and uncertainty. All managers make decisions under each condition, but risk and uncertainty are common to the more complex and unstructured problems faced by top managers.
Certainty :Decisions are made under the condition of certainty when the manager has perfect knowledge of all the information needed to make a decision. This condition is ideal for problem solving. The challenge is simply to study the alternatives and choose the best solution.
When problems tend to arise on a regular basis, a manager may address them through standard or prepared responses called programmed decisions. These solutions are already available from past experiences and are appropriate for the problem at hand. A good example is the decision to reorder inventory automatically when stock falls below a determined level. Today, an increasing number of programmed decisions are being assisted or handled by computers using decision-support software.
Structured problems are familiar, straightforward, and clear with respect to the information needed to resolve them. A manager can often anticipate these problems and plan to prevent or solve them. For example, personnel problems are common in regard to pay raises, promotions, vacation requests, and committee assignments, as examples. Proactive managers can plan processes for handling these complaints effectively before they even occur.
Risk
In a risk environment, the manager lacks complete information. This condition is more difficult. A manager may understand the problem and the alternatives, but has no guarantee how each solution will work. Risk is a fairly common decision condition for managers.
When new and unfamiliar problems arise, nonprogrammed decisions are specifically tailored to the situations at hand. The information requirements for defining and resolving nonroutine problems are typically high. Although computer support may assist in information processing, the decision will most likely involve human judgment. Most problems faced by higher-level managers demand nonprogrammed decisions. This fact explains why the demands on a manager's conceptual skills increase as he or she moves into higher levels of managerial responsibility.
A crisis problem is an unexpected problem that can lead to disaster if it's not resolved quickly and appropriately. No organization can avoid crises, and the public is well aware of the immensity of corporate crises in the modern world. The Chernobyl nuclear plant explosion in the former Soviet Union and the Exxon Valdez spill of years past are a couple of sensational examples. Managers in more progressive organizations now anticipate that crises, unfortunately, will occur. These managers are installing early-warning crisis information systems and developing crisis management plans to deal with these situations in the best possible ways.
Uncertainty
When information is so poor that managers can't even assign probabilities to the likely outcomes of alternatives, the manager is making a decision in an uncertain environment. This condition is the most difficult for a manager. Decision making under conditions of uncertainty is like being a pioneer entering unexplored territory. Uncertainty forces managers to rely heavily on creativity in solving problems: It requires unique and often totally innovative alternatives to existing processes. Groups are frequently used for problem solving in such situations. In all cases, the responses to uncertainty depend greatly on intuition, educated guesses, and hunches — all of which leave considerable room for error.
These unstructured problems involve ambiguities and information deficiencies and often occur as new or unexpected situations. These problems are most often unanticipated and are addressed reactively as they occur. Unstructured problems require novel solutions. Proactive managers are sometimes able to get a jump on unstructured problems by realizing that a situation is susceptible to problems and then making contingency plans. For example, at the Vanguard Group, executives are tireless in their preparations for a variety of events that could disrupt their mutual fund business. Their biggest fear is an investor panic that overloads their customer service system during a major plunge in the bond or stock markets. In anticipation of this occurrence, the firm has trained accountants, lawyers, and fund managers to staff the telephones if needed.
Decision Making with Quantitative Tools
Quantitative techniques help a manager improve the overall quality of decision making. These techniques are most commonly used in the rational/logical decision model, but they can apply in any of the other models as well. Among the most common techniques are decision trees, payback analysis, and simulations.
Decision trees : A decision tree shows a complete picture of a potential decision and allows a manager to graph alternative decision paths. Decision trees are a useful way to analyze hiring, marketing, investments, equipment purchases, pricing, and similar decisions that involve a progression of smaller decisions. Generally, decision trees are used to evaluate decisions under conditions of risk.
The term decision tree comes from the graphic appearance of the technique that starts with the initial decision shown as the base. The various alternatives, based upon possible future environmental conditions, and the payoffs associated with each of the decisions branch from the trunk.
Decision trees force a manager to be explicit in analyzing conditions associated with future decisions and in determining the outcome of different alternatives. The decision tree is a flexible method. It can be used for many situations in which emphasis can be placed on sequential decisions, the probability of various conditions, or the highlighting of alternatives.
Payback analysis : Payback analysis comes in handy if a manager needs to decide whether to purchase a piece of equipment. Say, for example, that a manager is purchasing cars for a rental car company. Although a less-expensive car may take less time to pay off, some clients may want more luxurious models. To decide which cars to purchase, a manager should consider some factors, such as the expected useful life of the car, its warranty and repair record, its cost of insurance, and, of course, the rental demand for the car. Based on the information gathered, a manager can then rank alternatives based on the cost of each car. A higher-priced car may be more appropriate because of its longer life and customer rental demand. The strategy, of course, is for the manager to choose the alternative that has the quickest payback of the initial cost.
Many individuals use payback analysis when they decide whether they should continue their education. They determine how much courses will cost, how much salary they will earn as a result of each course completed and perhaps, degree earned, and how long it will take to recoup the investment. If the benefits outweigh the costs, the payback is worthwhile.
Simulations : Simulation is a broad term indicating any type of activity that attempts to imitate an existing system or situation in a simplified manner. Simulation is basically model building, in which the simulator is trying to gain understanding by replicating something and then manipulating it by adjusting the variables used to build the model.
Simulations have great potential in decision making. In the basic decision-making steps, Step 4 is the evaluation of alternatives. If a manager could simulate alternatives and predict their outcomes at this point in the decision process, he or she would eliminate much of the guesswork from decision making.
Managers are constantly called upon to make decisions in order to solve problems. Decision making and problem solving are ongoing processes of evaluating situations or problems, considering alternatives, making choices, and following them up with the necessary actions. Sometimes the decision-making process is extremely short, and mental reflection is essentially instantaneous. In other situations, the process can drag on for weeks or even months. The entire decision-making process is dependent upon the right information being available to the right people at the right times.
The decision-making process involves the following steps:
1. Define the problem.
2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyze the alternatives.
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.
Define the problem : The decision-making process begins when a manager identifies the real problem. The accurate definition of the problem affects all the steps that follow; if the problem is inaccurately defined, every step in the decision-making process will be based on an incorrect starting point. One way that a manager can help determine the true problem in a situation is by identifying the problem separately from its symptoms.
The most obviously troubling situations found in an organization can usually be identified as symptoms of underlying problems. (See Table 1 for some examples of symptoms.) These symptoms all indicate that something is wrong with an organization, but they don't identify root causes. A successful manager doesn't just attack symptoms; he works to uncover the factors that cause these symptoms.
Identify limiting factors
All managers want to make the best decisions. To do so, managers need to have the ideal resources — information, time, personnel, equipment, and supplies — and identify any limiting factors. Realistically, managers operate in an environment that normally doesn't provide ideal resources. For example, they may lack the proper budget or may not have the most accurate information or any extra time. So, they must choose to satisfice — to make the best decision possible with the information, resources, and time available.
Develop potential alternatives : Time pressures frequently cause a manager to move forward after considering only the first or most obvious answers. However, successful problem solving requires thorough examination of the challenge, and a quick answer may not result in a permanent solution. Thus, a manager should think through and investigate several alternative solutions to a single problem before making a quick decision.
One of the best known methods for developing alternatives is through brainstorming, where a group works together to generate ideas and alternative solutions. The assumption behind brainstorming is that the group dynamic stimulates thinking — one person's ideas, no matter how outrageous, can generate ideas from the others in the group. Ideally, this spawning of ideas is contagious, and before long, lots of suggestions and ideas flow. Brainstorming usually requires 30 minutes to an hour.
The following specific rules should be followed during brainstorming sessions:
• Concentrate on the problem at hand. This rule keeps the discussion very specific and avoids the group's tendency to address the events leading up to the current problem.
• Entertain all ideas. In fact, the more ideas that come up, the better. In other words, there are no bad ideas. Encouragement of the group to freely offer all thoughts on the subject is important. Participants should be encouraged to present ideas no matter how ridiculous they seem, because such ideas may spark a creative thought on the part of someone else.
• Refrain from allowing members to evaluate others' ideas on the spot. All judgments should be deferred until all thoughts are presented, and the group concurs on the best ideas.
Although brainstorming is the most common technique to develop alternative solutions, managers can use several other ways to help develop solutions. Here are some examples:
• Nominal group technique. This method involves the use of a highly structured meeting, complete with an agenda, and restricts discussion or interpersonal communication during the decision-making process. This technique is useful because it ensures that every group member has equal input in the decision-making process. It also avoids some of the pitfalls, such as pressure to conform, group dominance, hostility, and conflict, that can plague a more interactive, spontaneous, unstructured forum such as brainstorming.
• Delphi technique. With this technique, participants never meet, but a group leader uses written questionnaires to conduct the decision making.
No matter what technique is used, group decision making has clear advantages and disadvantages when compared with individual decision making. The following are among the advantages:
• Groups provide a broader perspective.
• Employees are more likely to be satisfied and to support the final decision.
• Opportunities for discussion help to answer questions and reduce uncertainties for the decision makers.
These points are among the disadvantages:
• This method can be more time-consuming than one individual making the decision on his own.
• The decision reached could be a compromise rather than the optimal solution.
• Individuals become guilty of groupthink — the tendency of members of a group to conform to the prevailing opinions of the group.
• Groups may have difficulty performing tasks because the group, rather than a single individual, makes the decision, resulting in confusion when it comes time to implement and evaluate the decision.
The results of dozens of individual-versus-group performance studies indicate that groups not only tend to make better decisions than a person acting alone, but also that groups tend to inspire star performers to even higher levels of productivity.
So, are two (or more) heads better than one? The answer depends on several factors, such as the nature of the task, the abilities of the group members, and the form of interaction. Because a manager often has a choice between making a decision independently or including others in the decision making, she needs to understand the advantages and disadvantages of group decision making.
Analyze the alternatives
The purpose of this step is to decide the relative merits of each idea. Managers must identify the advantages and disadvantages of each alternative solution before making a final decision.
Evaluating the alternatives can be done in numerous ways. Here are a few possibilities:
• Determine the pros and cons of each alternative.
• Perform a cost-benefit analysis for each alternative.
• Weight each factor important in the decision, ranking each alternative relative to its ability to meet each factor, and then multiply by a probability factor to provide a final value for each alternative.
Regardless of the method used, a manager needs to evaluate each alternative in terms of its
• Feasibility — Can it be done?
• Effectiveness — How well does it resolve the problem situation?
• Consequences — What will be its costs (financial and nonfinancial) to the organization?
Select the best alternative
After a manager has analyzed all the alternatives, she must decide on the best one. The best alternative is the one that produces the most advantages and the fewest serious disadvantages. Sometimes, the selection process can be fairly straightforward, such as the alternative with the most pros and fewest cons. Other times, the optimal solution is a combination of several alternatives.
Sometimes, though, the best alternative may not be obvious. That's when a manager must decide which alternative is the most feasible and effective, coupled with which carries the lowest costs to the organization. (See the preceding section.) Probability estimates, where analysis of each alternative's chances of success takes place, often come into play at this point in the decision-making process. In those cases, a manager simply selects the alternative with the highest probability of success.
Implement the decision
Managers are paid to make decisions, but they are also paid to get results from these decisions. Positive results must follow decisions. Everyone involved with the decision must know his or her role in ensuring a successful outcome. To make certain that employees understand their roles, managers must thoughtfully devise programs, procedures, rules, or policies to help aid them in the problem-solving process.
Establish a control and evaluation system
Ongoing actions need to be monitored. An evaluation system should provide feedback on how well the decision is being implemented, what the results are, and what adjustments are necessary to get the results that were intended when the solution was chosen.
In order for a manager to evaluate his decision, he needs to gather information to determine its effectiveness. Was the original problem resolved? If not, is he closer to the desired situation than he was at the beginning of the decision-making process?
If a manager's plan hasn't resolved the problem, he needs to figure out what went wrong. A manager may accomplish this by asking the following questions:
• Was the wrong alternative selected? If so, one of the other alternatives generated in the decision-making process may be a wiser choice.
• Was the correct alternative selected, but implemented improperly? If so, a manager should focus attention solely on the implementation step to ensure that the chosen alternative is implemented successfully.
• Was the original problem identified incorrectly? If so, the decision-making process needs to begin again, starting with a revised identification step.
• Has the implemented alternative been given enough time to be successful? If not, a manager should give the process more time and re-evaluate at a later date.
Conditions that Influence Decison Making
Managers make problem-solving decisions under three different conditions: certainty, risk, and uncertainty. All managers make decisions under each condition, but risk and uncertainty are common to the more complex and unstructured problems faced by top managers.
Certainty :Decisions are made under the condition of certainty when the manager has perfect knowledge of all the information needed to make a decision. This condition is ideal for problem solving. The challenge is simply to study the alternatives and choose the best solution.
When problems tend to arise on a regular basis, a manager may address them through standard or prepared responses called programmed decisions. These solutions are already available from past experiences and are appropriate for the problem at hand. A good example is the decision to reorder inventory automatically when stock falls below a determined level. Today, an increasing number of programmed decisions are being assisted or handled by computers using decision-support software.
Structured problems are familiar, straightforward, and clear with respect to the information needed to resolve them. A manager can often anticipate these problems and plan to prevent or solve them. For example, personnel problems are common in regard to pay raises, promotions, vacation requests, and committee assignments, as examples. Proactive managers can plan processes for handling these complaints effectively before they even occur.
Risk
In a risk environment, the manager lacks complete information. This condition is more difficult. A manager may understand the problem and the alternatives, but has no guarantee how each solution will work. Risk is a fairly common decision condition for managers.
When new and unfamiliar problems arise, nonprogrammed decisions are specifically tailored to the situations at hand. The information requirements for defining and resolving nonroutine problems are typically high. Although computer support may assist in information processing, the decision will most likely involve human judgment. Most problems faced by higher-level managers demand nonprogrammed decisions. This fact explains why the demands on a manager's conceptual skills increase as he or she moves into higher levels of managerial responsibility.
A crisis problem is an unexpected problem that can lead to disaster if it's not resolved quickly and appropriately. No organization can avoid crises, and the public is well aware of the immensity of corporate crises in the modern world. The Chernobyl nuclear plant explosion in the former Soviet Union and the Exxon Valdez spill of years past are a couple of sensational examples. Managers in more progressive organizations now anticipate that crises, unfortunately, will occur. These managers are installing early-warning crisis information systems and developing crisis management plans to deal with these situations in the best possible ways.
Uncertainty
When information is so poor that managers can't even assign probabilities to the likely outcomes of alternatives, the manager is making a decision in an uncertain environment. This condition is the most difficult for a manager. Decision making under conditions of uncertainty is like being a pioneer entering unexplored territory. Uncertainty forces managers to rely heavily on creativity in solving problems: It requires unique and often totally innovative alternatives to existing processes. Groups are frequently used for problem solving in such situations. In all cases, the responses to uncertainty depend greatly on intuition, educated guesses, and hunches — all of which leave considerable room for error.
These unstructured problems involve ambiguities and information deficiencies and often occur as new or unexpected situations. These problems are most often unanticipated and are addressed reactively as they occur. Unstructured problems require novel solutions. Proactive managers are sometimes able to get a jump on unstructured problems by realizing that a situation is susceptible to problems and then making contingency plans. For example, at the Vanguard Group, executives are tireless in their preparations for a variety of events that could disrupt their mutual fund business. Their biggest fear is an investor panic that overloads their customer service system during a major plunge in the bond or stock markets. In anticipation of this occurrence, the firm has trained accountants, lawyers, and fund managers to staff the telephones if needed.
Decision Making with Quantitative Tools
Quantitative techniques help a manager improve the overall quality of decision making. These techniques are most commonly used in the rational/logical decision model, but they can apply in any of the other models as well. Among the most common techniques are decision trees, payback analysis, and simulations.
Decision trees : A decision tree shows a complete picture of a potential decision and allows a manager to graph alternative decision paths. Decision trees are a useful way to analyze hiring, marketing, investments, equipment purchases, pricing, and similar decisions that involve a progression of smaller decisions. Generally, decision trees are used to evaluate decisions under conditions of risk.
The term decision tree comes from the graphic appearance of the technique that starts with the initial decision shown as the base. The various alternatives, based upon possible future environmental conditions, and the payoffs associated with each of the decisions branch from the trunk.
Decision trees force a manager to be explicit in analyzing conditions associated with future decisions and in determining the outcome of different alternatives. The decision tree is a flexible method. It can be used for many situations in which emphasis can be placed on sequential decisions, the probability of various conditions, or the highlighting of alternatives.
Payback analysis : Payback analysis comes in handy if a manager needs to decide whether to purchase a piece of equipment. Say, for example, that a manager is purchasing cars for a rental car company. Although a less-expensive car may take less time to pay off, some clients may want more luxurious models. To decide which cars to purchase, a manager should consider some factors, such as the expected useful life of the car, its warranty and repair record, its cost of insurance, and, of course, the rental demand for the car. Based on the information gathered, a manager can then rank alternatives based on the cost of each car. A higher-priced car may be more appropriate because of its longer life and customer rental demand. The strategy, of course, is for the manager to choose the alternative that has the quickest payback of the initial cost.
Many individuals use payback analysis when they decide whether they should continue their education. They determine how much courses will cost, how much salary they will earn as a result of each course completed and perhaps, degree earned, and how long it will take to recoup the investment. If the benefits outweigh the costs, the payback is worthwhile.
Simulations : Simulation is a broad term indicating any type of activity that attempts to imitate an existing system or situation in a simplified manner. Simulation is basically model building, in which the simulator is trying to gain understanding by replicating something and then manipulating it by adjusting the variables used to build the model.
Simulations have great potential in decision making. In the basic decision-making steps, Step 4 is the evaluation of alternatives. If a manager could simulate alternatives and predict their outcomes at this point in the decision process, he or she would eliminate much of the guesswork from decision making.
Thursday, July 16, 2009
PLANNING
According to Peter Drucker:
Planning is continuous process of making present entrepreneurial decision (risk taking) systematically and with best possible knowledge of their futurity, organizing systematically the efforts needed to carry out these decisions and measuring the result of these decisions against the expectation through an organized systematic feedback.
According to Koontz o’ Donnell:
Planning is an intellectual process, the conscious determination of course of action, the basing of decisions on purpose, facts and considered estimates.
According to David Ewing:
Planning is to a large extent the job of making things happen that would not otherwise occur.
Features of planning :
Planning is an intellectual activity
Planning is an primary function of management
Planning involves futurism
Planning involves decision – making
Planning is goal – oriented process
Planning is continuous process
Plan is all Pervasive
Need for planning :
The increasing time span between present decisions and future results.
Increasing organizational complexity
Increased external change
Planning and other management functions
Importance of planning :
Planning determines the future destination of an organization
Planning makes activities of employees meaningful
Planning economizes operations
Planning helps in reducing the risk of uncertainties
Planning leads to discovery of new ideas and opportunities
Planning facilitates co-ordination
Types of plans :
Purposes or missions
Objectives or goals
Strategies
Policies
Procedures
Rules
Programs
Budgets
Steps in planning :
1. Being aware of opportunities
2. Setting objectives and goals
3. Considering planning premises
4.Identifying alternatives
5.Comparing alternatives in light goals of sought
6.Choosing an alternative
7.Formulating supporting plans
8.Number zing plans by making budgets
Advantages of planning :
Competitive spirit
Conducive to systematic and Methodical work
Minimizes irrelevant wastes
Better and more constructive use of facilities
Provides an overall picture of the operation of an enterprise
Ensures co – ordination
Limitations of planning :
Limitation of information
Time limit
Administrative limitation
Action delay limit
Psychological barrier
Planning is continuous process of making present entrepreneurial decision (risk taking) systematically and with best possible knowledge of their futurity, organizing systematically the efforts needed to carry out these decisions and measuring the result of these decisions against the expectation through an organized systematic feedback.
According to Koontz o’ Donnell:
Planning is an intellectual process, the conscious determination of course of action, the basing of decisions on purpose, facts and considered estimates.
According to David Ewing:
Planning is to a large extent the job of making things happen that would not otherwise occur.
Features of planning :
Planning is an intellectual activity
Planning is an primary function of management
Planning involves futurism
Planning involves decision – making
Planning is goal – oriented process
Planning is continuous process
Plan is all Pervasive
Need for planning :
The increasing time span between present decisions and future results.
Increasing organizational complexity
Increased external change
Planning and other management functions
Importance of planning :
Planning determines the future destination of an organization
Planning makes activities of employees meaningful
Planning economizes operations
Planning helps in reducing the risk of uncertainties
Planning leads to discovery of new ideas and opportunities
Planning facilitates co-ordination
Types of plans :
Purposes or missions
Objectives or goals
Strategies
Policies
Procedures
Rules
Programs
Budgets
Steps in planning :
1. Being aware of opportunities
2. Setting objectives and goals
3. Considering planning premises
4.Identifying alternatives
5.Comparing alternatives in light goals of sought
6.Choosing an alternative
7.Formulating supporting plans
8.Number zing plans by making budgets
Advantages of planning :
Competitive spirit
Conducive to systematic and Methodical work
Minimizes irrelevant wastes
Better and more constructive use of facilities
Provides an overall picture of the operation of an enterprise
Ensures co – ordination
Limitations of planning :
Limitation of information
Time limit
Administrative limitation
Action delay limit
Psychological barrier
Thursday, July 9, 2009
TYPES OF BUSINESS ORGANISATION
TYPES OF BUSINESS ORGANIZATIONS
When organizing a new business, one of the most important decisions to be made is choosing the structure of a business.
Forms of Business Ownership
This decision will have long-term implications, so consult with an accountant and attorney to help you select the form of ownership that is right for you. Your choice will be based on:
1. Your vision regarding the size and nature of your business.
2. The level of control you wish to have.
3. The level of "structure" you are willing to deal with.
4. The business's vulnerability to lawsuits.
5. Tax implications of the different ownership structures.
6. Expected profit (or loss) of the business.
7. Whether or not you need to re-invest earnings into the business.
8. Your need for access to cash out of the business for yourself.
9. The risks of your personal assets from business liabilities.
10. Are their partners and/or investors that will be part of the business.
Sole Proprietorships
The vast majority of small business start out as sole proprietorships . . . very dangerous. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume "complete personal" responsibility for all of its liabilities or debts. In the eyes of the law, you are one in the same with the business.
Advantages of a Sole Proprietorship
1. Easiest and least expensive form of ownership to organize.
2. Sole proprietors are in complete control, within the law, to make all decisions.
3. Sole proprietors receive all income generated by the business to keep or reinvest.
4. Profits from the business flow-through directly to the owner's personal tax return.
5. The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
1. Unlimited liability and are legally responsible for all debts against the business.
2. Their business and personal assets are 100% at risk.
3. Have almost be ability to raise investment funds.
4. Are limited to using funds from personal savings or consumer loans.
5. Have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
6. Employee benefits such as owner's medical insurance premiums are not directly deductible from business income (partially deductible as an adjustment to income).
PARTERNERSHIP :
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. Yes, its hard to think about a "break-up" when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc.
Advantages of a Partnership
1. Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
2. With more than one owner, the ability to raise funds may be increased.
3. The profits from the business flow directly through to the partners' personal taxes.
4. Prospective employees may be attracted to the business if given the incentive to become a partner.
Disadvantages of a Partnership
1. Partners are jointly and individually liable for the actions of the other partners.
2. Profits must be shared with others.
3. Since decisions are shared, disagreements can occur.
4. Some employee benefits are not deductible from business income on tax returns.
5. The partnership have a limited life; it may end upon a partner withdrawal or death.
Types of Partnerships that should be considered:
General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
Limited Partnership and Partnership with limited liability
"Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
Corporations
A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique "entity", separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
1. Shareholders have limited liability for the corporation's debts or judgments against the corporations.
2. Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
3. Corporations can raise additional funds through the sale of stock.
4. A corporation may deduct the cost of benefits it provides to officers and employees.
5. Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation
1. The process of incorporation requires more time and money than other forms of organization.
2. Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
3. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice.
Subchapter S Corporations
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
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