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Diploma of Business & Enterprise

WDB 1007


6th Edition
July 2013

These learning resources were developed by Victoria University, Melbourne Australia.
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Fifth Edition:

WDB 1007
July 2013

Copyright 2013 by Victoria University

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Contents i

Introduction i
What This Subject Is About
Symbols Used in This Publication
Subject Learning Objectives



Chapter 1 What is Management? ii

Chapter 2 Internal and External Environments
Chapter 3 Social Responsibility and Ethics in Management
Chapter 4 Managerial Decision Making iv
Chapter 5 Organisational Goals, Plans and Strategies
Chapter 6 Organisation Design and Structure
Chapter 7 Groups and Teams
Chapter 8 Motivation
Chapter 9 Leadership
Chapter 10 Controlling the Organisation vii
Chapter 11 Managing Organisations through Change and Conflict viii
Chapter 12 International Management

Chapter 1 What is Management? 1

Why study Management?
Purpose of Management 1

For-Profit Organisations (Businesses)

Not-For-Profit Organisations (Institutions) 1
Adding Value
Management Performance 2

Functions of Management
Management Roles

Management Skills
Emotional Intelligence (EI) 7

Management Competence
Good Managers


Management Jobs9
Vertical Dimension 9
Horizontal Dimension

The Evolution of Management Theories

Pre-Classical Management Movement
Classical Management Movement 13
Scientific Management Theorists 13
General Administrative Management Theorists
Human Relations Movement
Behavioural Science Theorists
Quantitative Management 27
Contingency Management 28

Contemporary Management



Systems Approach28

Total Quality Management (TQM)

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Contents ii
TQM Principles
The Learning Organization 31
The Karpin Report 31

Is management practice the same in every country of the world?

Global Management Systems 33
The Art of Management 34


Chapter 2 Internal and External Environments 36

Business Environments 36
External Environment
The Mega Environment
The Task Environment
Internal Environment


Understanding the Business Environment

Population Ecology Model 40
Resource Dependence Modal



Analysing the Business Environment 43

Environmental Uncertainty
Environmental Complexity 45
Environmental Stability

Managing Environmental Uncertainty 45

Adapting to Environmental Elements
Making the Environment Favourable

Organizational Culture



Power Culture
Role Culture
Task Culture
Person Culture
Forward Looking Cultures 51
Backward Looking Cultures


Entrepreneurial Culture 51
Promoting Innovation Through Cultural Change

Management Cultures
Changing Organisational Culture



Chapter 3 Social Responsibility and Ethics

Ethics and Morals 57
Business Ethics 57
Social Responsibility
Three Perspectives of Social Responsibility



The Invisible Hand 59

The Hand-of-Government 59
The Hand-of-Management 60

Management Social Responsibility


Economic and Legal Responsibilities

Ethical and Discretionary Responsibilities 61

Social Stakeholders


Employees-Managing diversity
Local Community 63
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International Community


Does Social Responsibility Pay?

Promoting Innovation: The Leading Businesses
Organisational Social Responsiveness 65
Monitoring Social Demands and Expectations 65
Social Forecasting 66
Opinion Surveys 66
Social Audits
Issues Management
Social Scanning 67



Internal Social Response Mechanisms 67

Individual Executives
Temporary task forces
Permanent committees
Permanent departments
Combination approaches


Being an Ethical Manager

Types of Managerial Ethics
Immoral Management
Amoral Management
Moral Management



Ethical Guidelines for Managers69

Obey the Law
Tell the Truth
Show Respect for Other People
Stick to the Golden Rule 70
Do Not Harm Others
Practise Participation, Not Paternalism
Always Act When You Have Responsibility 71

Managing an Ethical Organisation

Factors Affecting Corporate Social Responsibility and Managers' Ethical
Behaviour 71
Stages of Moral Development 72
Moral Intensity of Ethical Issues


Individual Values 75
Situational Factors Influencing Ethical Behaviour
Mechanisms for Ethical Management 77


Increasing Awareness of Diversity 77

Top-management commitment 78
Codes of Ethics 78
Ethics Committees78
Ethics audits
Ethics Hot Lines 79
Ethics training

Chapter 4 Managerial Decision Making 81

The Nature of Managerial Decision Making
Types of Problems Decision Makers Face
Non-crisis 82

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Differences in Decision-Making Situations
Programmed Decisions
Non-programmed Decisions


Managers as Decision Makers


The Rational Model

Non-rational Models
Satisfying model 85
Incremental model 86
Rubbish-bin Model87
Intuitive Model



Steps in an Effective Decision-Making Process

Identifying the Problem
Scanning Stage 89
Categorisation Stage
Diagnosis Stage 89
Generating Alternative Solutions 89
Evaluating and Choosing an Alternative
Feasibility 91



Implementing and Monitoring the Chosen Solution


Implementing the Solution 92

Monitoring the Solution
Overcoming Barriers to Effective Decision Making 92
Accepting the Problem Challenge 93
Defensive Avoidance
Deciding to Decide94
Searching for Sufficient Alternatives
Recognising Common Decision-Making Biases
Avoiding the Decision-Escalation Phenomenon

Managing Diversity: Group Decision Making 98

Advantages and Disadvantages of Group Decision Making 98
Enhancing Group Decision-making 99
Techniques for Improving Group Decision Making 99

Promoting Innovation: The Creativity Factor in Decision Making


Basic Ingredients 101

Domain-Relevant Skills
Creativity-Relevant Skills 102
Task Motivation
Stages of Creativity
Techniques for Enhancing Group Creativity 103

Chapter 5 Organisational Goals, Plans and Strategies106

The Overall Planning Process


Main Components of Planning

Organisational Mission
Purpose of a Mission Statement 106
Components of a Mission Statement:


The Nature of Organisational Goals


Benefits of goals
Levels of Goals
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How Goals Help or Facilitate Performance
Attainable 109
Specific and Measurable
Relevant 109



Factors Influencing Goal Commitment 110

Supervisory Authority
Peer and Group Pressure 110
Public Display
Expectations of Success 110
Incentives and Rewards 110
Steps in setting goals
Work Behaviour 112
Direction 112
Planning 112
Other process components
Potential problems with goals


Linking Goals and Plans 113

Levels of Plans
Plans According to Extent of Recurring Use114
Time Horizons of Goals and Plans 115
Promoting Innovation: The Role of the Planning Process
Potential Obstacles to Planning
Overcoming Obstacles to Planning 116

Management by Objectives (MBO)


Steps in the MBO Process 117

Strengths and Weaknesses of MBO
Assessing MBO 118



The Concept of Strategic Management 118

The Strategic Management Process
Importance of Strategic Management
Levels of Strategy 119


Formulating a Functional-Level Strategy

Strategy implementation 122
Carrying out Strategic Plans


Maintaining Strategic Control



Chapter 6 Organisation Design and Structure 125

Organisational structure 125
Organisational design
The organisation chart 125
Job Design127
Work Specialisation
Job analysis
Approaches to job design 128
Job simplification 128
Job rotation
Job enlargement 129
Job enrichment
Job characteristics Model 131

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Managing diversity: Alternative work schedules.
Flexitime 133
Job sharing



Types of Departmentalisation
Functional structure
Common functions
Divisional structure
Forms of divisional structure
Product Divisions 136
Geographic divisions
Customer/Market Divisions136
Hybrid structure 138
Matrix structure



Methods of Vertical Coordination

Span of management: The trend to downsizing
Factors influencing span of management
Levels in the hierarchy



Centralisation versus decentralisation 148
Why do companies decentralise their organisation? 149

Delegation 149
Line and staff positions 150
Methods of Horizontal Coordination
Slack resources 152
Information systems
Lateral relations 152
Direct contact
Liaison roles
Task forces and teams 153
Managerial integrators 154
Organisational Communication Channels
Vertical communication
Downward communication 155
Upward communication
Horizontal communication 157
Informal communication: The grapevine



Weighing Contingency Factors in Organisational Design

Strategy 160
Technological complexity 161
Technological interdependence
Mechanistic an organic characteristics
Differentiation and integration



Promoting Innovation Using Structural Means to Enhance Prospects

Vital roles 168
Differentiation Paradox
Transfer process 169

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Contents vii
Chapter 7 Groups and Teams


Foundations of Work Groups


What is a Group? 171

Types of Work Groups
How Informal Groups Develop
How Work Groups Operate
Work-Group Inputs
Attraction to the group
Member roles
Group Size
Size and group interactions
Size and performance

Work-group Processes




Group norms
Group cohesiveness
Consequences of group cohesiveness
Determinants of group cohesiveness
Group development
Communication 186
Basic components of the communication process 187
Influence on Individual Communication and Interpersonal Processes
Perceptual processes
Attribution processes
Semantics 190

Communication Skills



Interpersonal communication skills 191

Group communication networks
Communication Skills
Task forces
Entrepreneurial teams
Self-managing teams
Virtual teams

Chapter 8 Motivation
What is Motivation?
Need Theories


Hierarchy-of needs theory 198

Two-factor theory 199
ERG theory
Assessing need theories 201

Cognitive Theories


Expectancy theory 202

Effort-performance expectancy
Performance-outcome expectancy 202
Valence 203
Combining the elements 203
Implications for managers 204

Equity theory


Implications for managers 204

Goal-setting theory
Reinforcement Theory


Types of reinforcement


Schedules of reinforcement
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Fixed interval
Fixed ratio 209
Variable interval
Variable ratio


Using reinforcement theory

Social Learning Theory 209
Major components 209
Symbolic processes
Vicarious learning 210
Using social learning theory



Motivation and Strategic Human Resource Management

The Human Resource Management Framework
Establishing the employment relationship
Maintaining the employment relationship
HRIS, internet, intranets and extranets
The future of work 214
Terminating the employment relationship
Corporate responsibility

Chapter 9 Leadership




How Leaders Influence Others 217

Sources of leader power 217
Effective use of leader power


Searching for Leadership Traits 219

Identifying Leadership Behaviours
The Leadership Grid



Developing Situational Theories223

Fiedlers contingency model


Matching leadership style and situation

Normative leadership model


Situational leadership theory

Path-goal theory 230


Leader behaviours 231

Situational factors 231
Choosing leader behaviours



Promoting Innovation: Transformational Leadership 233

Are Leaders Necessary? 234
Substitutes for leadership 234
Leadership and the organisational life-cycle
Using Communication to Enhance Leadership
How managers communicate
Managerial communication preferences
Using electronic media to facilitate communication 238

Chapter 10 Controlling the Organisation

Control as a Management Function



Significance of the control process 241

Role of controls 242
Coping with uncertainty
Detecting irregularities
Identifying opportunities 243
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Contents ix
Handling complex situations
Decentralising authority
Levels of control 244


The Control Process

Deciding what to control: A closer look250
Four conditions to control
Alternatives to control 252
Types of Controls 252
Major control types by timing
Feed forward control
Concurrent control 253
Feedback control 254
Multiple controls 254
Cybernetic and non-cybernetic control


Managerial Approaches to Implementing Controls


Bureaucratic control
Clan control
Market control
Promoting innovation: Controlling while nurturing innovation258
Four levers for strategic control: A balancing act
Incrementalist approach 259

Accessing Control Systems


Potential dysfunctional aspects of control systems 260

Behavioural displacement 260
Game playing
Operating delays 260
Negative attitudes 261
Overcontrol versus undercontrol 261

Characteristics of an effective control system 261

Future oriented
Multidimensional 261
Accurate 262
Realistic 262
Acceptable to organisation members
Flexible 262


Chapter 11 Managing Organisations through Change and Conflict 264

The Nature of Change in Innovation


What is Change? 264

What is Innovation?
Forces for change and innovation 265

The Change Management and Innovation Process

Reactive and planned change

Organisational Development




What are change agents responsible for? 268

Diagnosis 268

Managing Change 270

Diagnosing the need for change
The change cycle 272


Managing Resistance to Change

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Why individuals resist change
Overcoming resistance to change 273
Force-field analysis

Managing Conflict277
Conflicts between individuals and organisations
Causes of conflict 279
Benefits of Positive conflict and Consequences of Negative conflict 279
Consequences of Negative Conflict
Skills to resolve conflict
Five Interpersonal conflict handling Methods
Managing intergroup conflict through resolution
Intergroup training 287

The Relationship Between Change and Conflict


Types of intergroup conflict288

Types of changes in groups in dysfunctional conflict289
Changing views on conflict 289
Stimulating conflict290

Chapter 12 International Management 292

The Nature of International Management
Organisations involved in international management 292
Orientations to international management
Assessing the International Environment
Environmental areas
The Economic Environment
Political/Legal Factors:
Social/Cultural/Demographic Factors:
Technological factors:

International Strategic Issues


Methods of International Entry



Multinational corporation strategies

Organising International Business
Adapting to Cultural Differences-Managing diversity 301
Managing international human resources
Assignment policies
Selection and training


Adjusting leadership styles

Culture and management303
Traditional management practices
Social responsibility and Ethical Issues
International social responsibility
Questionable payments


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Preface i

Interesting stuff in here about the subject and the development of the theory and
application of these theories into the current Business Environment including
Globalisation and the need for organisations to be immediately reactive to market,
global, environmental and technological forces.

What This Subject Is About

The purpose of this Subject is to provide the student with the knowledge and skills to
apply theoretical techniques to a variety of business applications and decisions,
including practical knowledge of all aspects of Organisational Management.
These materials are to be used, in a classroom environment, both off-shore and onshore, as a workbook and study guide to assist participants in gaining the skills and
knowledge necessary to demonstrate their competence in Management.

Symbols Used in This Publication

The following Symbols are used in this publication

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Group Activity

Multi-media Activity

Key Point


Web Based Activity

Workbook Activity

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Subject Learning Objectives ii

The following Learning Objectives are applicable for each of the Chapters in this
Student Manual

Chapter 1 What is Management?

Learning Objectives:
After studying this chapter, you should be able to:
Explain four functions of management and other major elements in the
management process.
Describe three common work methods managers use and their 10
major roles.

Delineate three major managerial skill types.

Distinguish between effectiveness and efficiency in regard to

organisational performance.
Explain how managers at different hierarchical levels can use the
entrepreneurial role to foster innovation.
Describe how management education and experience prepare
Identify several early innovative management practices and explain
the evolution of basic management theory.

Trace preclassical contributions to the field of management.

Explain major approaches within the classical viewpoint of

Describe major developments contributing to establishing the
behavioural viewpoint.
Explain major approaches within the quantitative management
Discuss the relevance of systems theory and contingency theory to
the field of management.
Explain how management in Japan influenced the Theory Z
management viewpoint.

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Identify three significant twenty-first century management trends

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Subject Learning Objectives iii

Chapter 2 Internal and External Environments

Learning Objectives:
After studying this chapter, you should be able to:
Explain the concept of mega-environment and outline its major
Distinguish between the concepts of task environment and megaenvironment and describe major task-environment elements.
Contrast population ecology and resource dependence views of the
organisation-environment interface.

Environmental uncertainty and bounty impact on organisations.

Describe the major methods organisations use to manage their

Explain the nature of organisational culture and its major
Contrast entrepreneurial and administrative cultures as means of
promoting innovation.

Explain how organisational cultures can be changed

Chapter 3 Social Responsibility and Ethics in Management

Learning Objectives:
After studying this chapter, you should be able to:
Explain three major perspectives on corporate social responsibility and
identify major stakeholder groups often mentioned in conjunction with
social responsibility.

Assess the extent to which organisational social responsibility pays.

Explain the characteristics of vanguard companies.

Outline approaches used to monitor social demands and expectations.

Describe internal social response mechanisms available to


Contrast three major types of managerial ethics.

Outline ethical guidelines for managers and explain actions they can
take to handle ethical situations and avoid ethical conflicts.
Describe situational factors influencing ethical behaviour and outline
mechanisms for ethical management.

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Subject Learning Objectives iv

Chapter 4 Managerial Decision Making

Learning Objectives:
After studying this chapter, you should be able to:
Describe variations between programmed and non-programmed
Contrast rational and non-rational models of managers as decision

Describe the steps in an effective decision-making process.

Explain how to overcome b barriers associated with accepting a

problem challenge and searching for sufficient alternatives.
Describe how to recognise common decision-making biases and avoid
the decision-escalation phenomenon.

Assess the advantages and disadvantages of group decision making.

Explain three basic ingredients and four stages of creativity.

Describe major techniques for enhancing group creativity.

Specify four factors needed to link innovation and competitive

Describe common characteristics of entrepreneurs and factors that
induce them to pursue new ideas in established organisations

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Subject Learning Objectives v

Chapter 5 Organisational Goals, Plans and Strategies

Learning Objectives:
After studying this chapter, you should be able to:

Describe the major components in the overall planning process.

Explain the concept of organisational mission and the purposes of a

mission statement.
Outline the major benefits of goals and explain how they differ
according to organisational level.
Explain how plans differ by organisational level and extent of recurring
Explain the concept of strategic management and identify three main
levels of strategy.

Describe Porters competitive strategies for the business level.

Explain the role of strategies at the functional level.

Outline the process of strategy implementation

Chapter 6 Organisation Design and Structure

Learning Objectives:
After studying this chapter, you should be able to:

Describe the four elements making up organisation structure.

Explain the importance of organisation charts and the chain-ofcommand concept.

Outline the main approaches to job design, including the principal
alternatives to traditional work schedules.
Explain the functional divisional, hybrid, matrix and emerging types of
departmentalisation, list the advantages and disadvantages of each type
of departmentalisation and discuss the circumstances in which each is
likely to be effective.
Explain the five major methods of vertical coordination, including
formalisation, span of management, and centralisation versus
decentralisation, delegation, and line and staff positions.
Explain how slack resources, information systems and lateral relations
can be used to coordinate horizontally.
Distinguish between organisation communication channels and
explain their role in managing effectively.
Assess how contingency factors, such as strategy, technology, size
and environment, impact on organisation structure.

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Indicate how structure can enhance innovation

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Subject Learning Objectives vi

Chapter 7 Groups and Teams

Learning Objectives:
After studying this chapter, you should be able to:
Differentiate between different workplace group types and explain how
informal groups develop.
Use a systems approach to describe factors influencing the way
groups operate.
Describe major work-group inputs, including group composition,
member roles and group size, and explain how they affect teamwork.
Explain the significance of group process factors, such as group
norms, group cohesiveness and group development.
Describe the basic components of the communication process and
their importance for group relations.
Explain how perceptual and attribution processes, semantics, cultural
context and communication skills influence interpersonal communication.
Discuss how task forces and teams can be used to promote

Chapter 8 Motivation
Learning Objectives:
After studying this chapter, you should be able to:

Define motivation and outline the motivation process.

Compare and contrast major need theories of motivation.

Describe three major cognitive theories of motivation and explain how

they facilitate the motivation process.
Explain reinforcement theory of motivation and discuss how it can help

Discuss the social learning theory of motivation.

Describe the business framework within which human resource

management is conducted.
Explain the three phases of the employment relationship (acquisition,
maintenance and termination) and their importance in achieving
organisation objectives
Explain the linkages between socially responsible organisations and
human resource policies and practices

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Subject Learning Objectives vii

Chapter 9 Leadership
Learning Objectives:
After studying this chapter, you should be able to:
Outline the major sources of leader power and explain how leaders
can use power to encourage subordinate commitment.

Describe the general status of efforts to identify leadership traits.

Explain the different findings of lowa, Michigan and Ohio State studies
of leader behaviours and discuss their implications.

Describe the Leadership Grid approach to leadership.

Delineate Fiedlers contingency theory of leadership.

Contrast the following situational approaches to leadership: normative

leadership model, situational leadership theory and path-goal theory.

Describe transformational leadership and explain its link to innovation.

Evaluate the extent to which leaders are needed in organisations.

Explore the major types of managerial communication and discuss

managerial communication preferences.

Outline the basic components of the communication process

Discuss the growing potential of electronics with regard to

organisational communication channels

Chapter 10 Controlling the Organisation

Learning Objectives:
After studying this chapter, you should be able to:

Explain the major control roles in organisations.

Describe how control responsibilities change with management levels.

Outline the general process applicable to most control situations.

Delineate the principal conditions managers need to consider in

deciding what to control.
Explain the major control types based on timing and the use of
multiple controls.

Differentiate between cybernetic and non-cybernetic control.

Describe basic managerial approaches to implementing controls.

Outline the potential dysfunctional aspects of control systems and

explain the implications of over control and under control

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Delineate the major characteristics of effective control systems

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Subject Learning Objectives viii

Chapter 11 Managing Organisations through Change and

Learning Objectives:
After studying this chapter, you should be able to:

Explain the relationship between change and innovation.

Identify internal and external factors leading to a need for change or

Explain the meaning of organisational development and techniques
used in interventions.
Indicate why employees resist change and explain how to overcome
resistance to change, including the use of force-field analysis.
Explain the causes of conflict and how to reduce, resolve and
stimulate conflict.
Discriminate between different styles of conflict management and
describe circumstances where each may be appropriate
Explain how both functional and dysfunctional conflict impact on group

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Subject Learning Objectives ix

Chapter 12 International Management

Learning Objectives:
After studying this chapter, you should be able to:
Explain the concept of a multinational corporation and describe four
major orientations to international \management.
Delineate several elements important in assessing the international
Explain the concept of competitive advantage of nations and its link to

Outline the major methods of entry into international business.

Contrast four major strategies for multinational businesses.

Enumerate the main structural alternatives for conducting international

Explain the principal issues related to assignment policies and
recruitment, selection, training and repatriation of managerial personnel.
Describe adjustments in leadership style entailed by cultural
Delineate the major social responsibility and ethics issues related to
international management

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Chapter 1


School of Business Services

Faculty of Workforce Development


Why study Management?
Today, more students are studying Management in diploma and degree courses
than in the past. This trend reflects an increasing interest in management as a
profession and the need for managerial competencies (knowledge, skills and
values) to cope with the changing nature of work and people throughout the
Most of us will spend our working lives in organizations where we will be
managed by others or we will manage others. In all, understanding management
is relevant to everyone and studying management is a way of increasing our
preparedness for employment as well as for life.

What is Management?
1.1. Purpose of Management
The purpose of organisations (businesses and institutions) is to create wealth.
If the basic purpose of the business or institution is to create wealth, then the
primary role of the manager is to add value to this wealth-creating process.

1.1.1 For-Profit Organisations (Businesses)

Since businesses tend to develop their employees (human assets) in the pursuit
of financial goals (profit), they benefit society by creating both material and
human wealth.
Material wealth is usually in the form of financial profit and human wealth through
the professional development of their employees.

1.1.2 Not-For-Profit Organisations (Institutions)

Not-for-profit businesses create both material and human wealth, but profits are
used for charitable purposes. Typically, institutions such as charities, provide
physical and emotional support for the disadvantaged and less fortunate
members of society, by helping them manage their problems, creating learning
opportunities, helping children grow and develop, healing the sick, providing
stability and a sense of belonging. (refer to slide 8 Little Red Scarf)

1.1.3 Adding Value

Managers may add value to the wealth-creating process of the business or
institution by:

Changing a part of the companys strategy,

Finding a more effective way of marketing a product,

Initiating the redesign of a manufacturing process,



Developing and implementing a more effective approach to
customer service,
Implementing a new organisation structure for the organisation
and leading employees through the change process,
Selecting and developing the most competent employees as part
of a succession planning strategy, and so forth.
Ideally, effective managers should add value to every activity that they engage in
i.e. through every conversation they have, day-to-day decisions and activities.
Ineffective managers add cost rather than value.
Managers are usually not neutral, they either add value or they add cost to the
wealth-creating process of the business or institution.

1.2. Management Performance

Management is the process of getting things done by coordinating the activities
of people throughout an organisation.
The objective of management practice is to get things done efficiency and

Figure 1.1 - The Objective of Management Practice

Efficiently (in the least time and at the least cost usually
measured as output divided by inputs; both inputs and output may be
measured in units of quantity, money or time).
Effectively (doing the right things to a required standard of
The competent manager evaluates any completed or planned course of
management action by asking the following questions:

Has it or will it increased efficiency and effectiveness?

Has it or will it added value?

Ultimately, the quality of management is reflected in measurable (quantitative)

terms such as:



Well-managed, for-profit organisations improve or maintain their
share price,
Well-managed, not-for-profit organisations improve or maintain
their membership,

Well-managed governments are re-elected by voters,

Well-managed countries experience improved living standards.

However, it needs to be noted that an improvement in either efficiency or

effectiveness does not automatically lead to an improvement in the other.
For example a car repair shop might reduce the time spent on repairing items but
if the repairs are not done properly and the repairer gets a reputation for poor
quality, the shop may quickly lose customers.
Similarly, a car manufacturer may be producing cars efficiently (at the right price),
however if rising petrol prices cause consumers to want different types of cars,
efficiency alone may not be enough for the manufacturer to remain profitable if its
products (cars) are no longer seen to be effective in the eyes of consumers.
Activity 1.1
Think about how you have been managed by your mother and father. How have
your parents added value to you and the household in this process? How have
you been managed efficiently and effectively?



2.0. Functions of Management

Figure 1.2 - Management Functions

There are four main management functions that managers perform - planning,
organizing, leading and controlling all are crucial to the success of any
manager. Managers do the same types of tasks in all businesses whether they
manage a hair salon or a factory. Planning, organizing, leading and controlling
are interrelated serving an important part in achieving managements vision.

2.1. Planning
Planning involves defining the organizations goals, setting objectives for the goal
and deciding on plans, actions and strategies to achieve these goals are two
critical components of the planning function. For example, a manager of a new
local restaurant will need to have a marketing plan, a hiring plan and a sales

2.2. Organizing
Organizing involves allocating and arranging resources, both human and nonhuman so plans can be successfully implemented. Organising allows managers
to determine tasks to be done, how to combine them into specific jobs and how
jobs can be grouped into units to form the organisations structure. The manager
of the new restaurant must know how many employees are needed for particular
shifts. Provide the necessary resources to complete their jobs group employees
into kitchen staff and front-end staff to provide an organisational structure to
serve customers arriving to dine in the restaurant.

2.3. Leading
A manager manages employees making sure that tasks are completed on time
and policies are followed. Leading involves outlining a vision of what can be
achieved, focusing on interpersonal relations by communicating with each



employee, and motivating and inspiring people to perform better. By creating a
positive working environment a leader can effectively help improve the
employees job performance and hence their morale and achieve required levels
of change and innovation. For example, if the company has a goal of increasing
sales by 5% over the next two months, the manager may check the progress
toward the goal at the end of month one. An effective manager will share this
information with his or her employees. This builds trust and a feeling of
involvement for the employees.

2.4. Controlling
Controlling involves regulating organisational activities to ensure that actual
performance conforms to the standards and goals expected. To regulate,
managers monitor ongoing activities, establish standards, compare results with
established standards or progress towards goals and take necessary corrective
action to change work processes and practises.
For example customer service standards require evaluating employees job
performance and product standards involve evaluating product freshness,
processing and presentation. The restaurants performance can be assessed by
monitoring costs versus profitability of the restaurant. Sometimes the strategies
and plans that were developed and implemented may not work out as initially
planned due to certain external factors e.g. competition. Controlling and
evaluating helps a restaurant manager recognize these failures and quickly
implement corrective measures to bring the staff back on track.
Being a manager of a new restaurant involves many different tasks. Planning,
organizing, leading and controlling are four of the main functions that must be
considered in any management position. Management is a balancing act of many
different components and a good manager will be able to maintain the balance
and keep employees motivated. Managers at all levels in an organisation may be
involved in all four management functions but the balance of activities varies at
different levels in an organisation.
Often incompetent managers concentrate on the organising and controlling
functions and forget the other two functions planning and leading. Effective
managers are likely to use all four functions in a systematic way.
Managers cannot be successful without being good leaders. Competence in
personal, interpersonal and group skills is critical for success in management.
Successful managers must be able to work effectively with people.



Activity 1.2 - Refer to the document above Four functions of management
Briefly describe how the management at KFC apply the four management
functions to create its products and services efficiently and effectively.







What do Managers Do?

3.0. The Management Process
Figure 1.3 - Management Process








Achieve goals
Feedback from
the environment
i.e. customers &

The four main management functions (the transformation process), together with
the resources (inputs) and performance outcomes (outputs) are inter-related and
work together as a process with the business environment.
For a business:
1. Inputs include raw materials, human resources, capital, technology and
2. The transformation process turns these inputs into finished products or
services through employees' work activities, management activities, and
the organisation's technology and operations methods.
3. Outputs include products and services, financial results (profits, breakeven or losses) information, and human results such as employees' levels
of job satisfaction and productivity.
4. In addition, the system's ultimate success depends on effective
interactions with its environment: those groups or institutions upon which
it depends. These might include suppliers, labour unions, financial
institutions, government agencies and customers. For a business
organisation, the sale of products and services generates revenue that
can be used to pay wages and taxes, buy more inputs, repay loans and
generate profits for the owners. If revenues are not enough to satisfy
various environmental demands, the organisation downsizes or dies.
Think, for example, of a day-shift manager at a local McDonald's restaurant who
every day must coordinate the work of individuals taking and filling customer
orders at the front counter and the drive-through windows, direct the delivery and
unloading of food supplies, and address any customer concerns that arise. The
manager 'manages' all the parts of this restaurant so that the restaurant's daily
sales goals are met.
Managers at all levels in an organisation may be involved in managing the
organisation but the balance of activities varies at different levels in an



Activity 1.3
Using the case study for Management Roles below show how Terri Patsos
Stanley navigates her way through the management process i.e. inputs,
transformation, outputs and feedback, to achieve Boston Rentals goals and

4.0. Management Jobs

Management jobs are divided into two different dimensions.
Vertical Dimension This dimension is comprised of three levels of
management jobs: front-line, middle and top management.
Horizontal Dimension This dimension is comprised of three main
managerial job types: functional, general and project managers.

4.1. Vertical Dimension

Front-line managers hold positions like office manager, shift
supervisor or department manager. They are the only managers who
dont supervise other managers. They are closest to operational
employees as they have daily contact with them and deal with
customers on a day-to-day basis.
Front line managers encourage, monitor and reward the performance
of their workers and teach entry-level employees how to do their jobs.
Front-line managers also make detailed schedules and operating
plans based on middle managements intermediate-range plans (six to
18 months) but that produce results within two weeks. Front-line
managers tend to be more involved with leading and controlling.
Middle managers hold positions like factory manager, regional
manager or divisional manager. They are responsible for setting
objectives consistent with top managements goals and for planning



and implementing subunit strategies for achieving these objectives
within a six to eighteen month time frame.
They coordinate and link groups, departments and divisions within the
company and monitor an mange performance of subunits and
individual managers that report to them. Finally middle level managers
are responsible for implementing changes and strategies designed by
top managers. Middle managers tend to spend more time on leading
and organising.
Top managers hold positions like chief executive officer (CEO),
Chief Financial officer (CFO), and are responsible for the planning the
overall direction of the company with two to five year time frame. They
are responsible for creating a context for change. Once the vision and
mission is set top managers are responsible for getting employee
commitment and agreement to implement the change. Top managers
are also responsible for creating a positive organisational through
communication and action both inside and outside the company.
Finally top managers monitor their business environments, customer
needs, competitors strategies and long term business, economic and
social trends. Top managers tend to spend more time on planning and
Activity 1.4
Think about the managers in the university you are enrolled in. What are the
managers in front line, middle level and top level responsible for? (Discuss with
your teacher who is familiar with these managers)
Front-line managers
Middle managers
Top managers




4.2. Horizontal Dimension

Functional Managers are responsible for supervising a specific
(functional) part of an organisation. Typical functional areas include;
manufacturing, marketing, accounting, quality, engineering, HR, etc.
General Managers are responsible for a whole or part of an
Project managers coordinate the work of people or teams
engaged in a project.
Activity 1.5
Think about the managers in the university you are enrolled in. What do the
managers do? (Your teacher can help you with this activity)
Functional managers
General managers
Project managers

5.0. Management Roles

Management Roles are broader than functions and refer to more general
categories to describe a managers behaviour in an organisation. Henry



Mintzberg (1973) published a now-classic book called The Nature of Managerial
Work. At the time it was assumed that a manager sat in his comfortable office
thinking about the company's future direction and giving instructions to managers
and employees.
Mintzberg's data, based on time diaries of male executives, revealed that this
picture was not real. The executives actually spent very little time on planning or
long-range strategy instead they answered calls, solved problems, reacted to
crises, responded to people, and dealt with constant interruptions.
Mintzberg said that managerial work was characterized by "brevity, variety, and
fragmentation." Any attempt by managers to stick to a task usually failed because
of constant interruptions. Today, managerial work has, if anything, become even
more busy and stressful and more like a life manager's never ending day. The
pace of action, around-the-clock economy, the constant juggling of projects,
demands from different masters, rapid changes in technology, and frequent
career reinventions all challenge managers.
Professor Henry Mintzberg, categorised managers activities into ten roles they
perform over the course of a managerial day.

Figure 1.4 - Management Roles



Performs symbolic duties of a legal or social nature.


Builds relationships with subordinates and communicates with,

motivates and coaches them.


Maintains networks of contacts outside the work unit who

provide help and information.



Seeks internal and external information about issues affecting

the organisation.




Transmits information internally, obtained from either internal or

external sources.


Transmits information about the organisation to outsiders.



Acts as an initiator, designer and encourager of change and


Disturbance handler

Takes corrective action when organisation faces important,

unexpected difficulties.

Resource allocator

Distributes resources of all types including time, funds,

equipment and human resources.


Represents the organisation in major negotiations affecting the

managers area of responsibility.

Case Study Boston Short-Term Rentals
Nancy Kelleher, (1995), Short-Term Rentals Is all Booked Up, Boston Herald, January 17, Pg.26.

The Manager and Her Company

Terri Patsos Stanley, the manager of a small short-term rental business, has used
IT to help her better perform many of these roles. Patsos Stanley pioneered the
concept of providing business travellers with high-quality apartments as an
alternative to staying in more expensive and often less convenient hotels in the
Boston area. Her company, Boston Short-Term Rentals, grew rapidly because of
her drive to keep costs down and customers happy. To achieve these goals,
Patsos Stanley had to learn all the different managerial roles (Ruderman,
Decisional Roles
As the president of a rapidly growing company, Patsos Stanley is continually
required to make decisions. In the role of entrepreneur, she searched for
opportunities to increase revenues by increasing the number of apartments that
she manages. One solution she adopted was to use the Internet and develop a
strong presence on the World Wide Web to attract customers. As a disturbance
handler, she deals with unexpected problems such as plumbing breakdowns in
the middle of the night; therefore, all staff members are connected by electronic



paging and personal messaging devices to speed response to customer
As a resource allocator, she decides how much money to spend to refurbish and
upgrade the apartments to maintain their luxury appeal. She maintains close
contact with the apartment owners through the Internet-she sends digital images
of the apartments over the Web, for example. As a negotiator, she contracts with
other organizations such as cleaning or painting services to obtain the most
economical services her business requires-once again, the information available
through the Internet makes this more efficient.
Informational Roles
With more than 200 apartments to oversee, Boston Short-Term Rentals'
information management is a vital activity, and Patsos Stanley's role as monitor is
important. The sophisticated computer system she developed allows her to
evaluate the performance of her business by occupancy rates, customer
complaints, and other indicators of the quality of her service. The system
facilitates her ability to respond quickly to problems as they arise. In her ongoing
role as disseminator, she uses IT to update her staff with information about
changes in visitor arrivals and departures, but as a spokesperson she is always
on the phone to persuade visitors who may be somewhat hesitant about staying
in an apartment that they know nothing about as opposed to staying with a hotel
chain that has a well-recognized name.
Interpersonal Roles
In fact, Patsos Stanley learned the importance of an extremely hands-on
approach to managing her company. She and her employees personally greet
the new arrivals and perform the activities that porters, the concierge, and front
desk staff do in the typical hotel. In interpersonal terms, Patsos Stanley is the
figurehead who provides the personal touch her guests expect; she is the person
they can contact if problems arise. With her small staff of carpenters, electricians,
interior decorators, and maintenance workers, she acts as a leader, energizing
them to provide the quick service that guests expect. She is also a liaison, able to
link her guests to organizations that provide services they may need, such as dry
cleaning, catering, or hairdressing.
Patsos Stanley enjoys the variety of her work and relishes the pleasure of
meeting the senior managers, actors, and overseas visitors who stay in the
Activity 1.6
For each of the roles below provide examples from the case study Boston


Performs symbolic duties of a legal or social nature.


Builds relationships with subordinates and communicates with,



motivates and coaches them.


Maintains networks of contacts outside the work unit who

provide help and information.



Seeks internal and external information about issues affecting

the organisation.


Transmits information internally, obtained from either internal or

external sources.


Transmits information about the organisation to outsiders.



Acts as an initiator, designer and encourager of change and


Disturbance handler

Takes corrective action when organisation faces important,

unexpected difficulties.

Resource allocator

Distributes resources of all types including time, funds,

equipment and human resources.


Represents the organisation in major negotiations affecting the

managers area of responsibility.



What do Companies look for in Managers?


Management Skills

Companies looking for employees who could be good managers focus on

individuals who have technical skills, human skills, conceptual skills and the
motivation to manage (Katz, 1974). The ability to adopt a specific set of
behaviours that lead to a desired outcome is called a skill. Managers need the
following key skills to carry out their jobs effectively.
To perform management functions and assume multiple roles, managers must be
skilled. Robert Katz (1973) identified three managerial skills essential to
successful management: technical, human, and conceptual. Technical skill deals
with things, human skill concerns people, and conceptual skill has to do with

6.1. Technical skills

Technical skill involves process or technique knowledge and proficiency
necessary to carry out a specific task. Managers use the processes, techniques
and tools of a specific area e.g. a heart surgeon, a pilot, an engineer, a builder,
writing computer programs, completing accounting statements, analysing
marketing statistics, writing legal documents, or drafting a design for wings and
body on an aeroplane.
Technical skills are usually obtained through training programs that an
organization may offer its managers or employees or may be obtained by
way of a college degree.

6.2. Human Skills

Human skills involve the ability to work with, motivate, and direct individuals or
groups in the organization whether they are subordinates, peers, or superiors.
Human skills, therefore, relate to the individual's expertise in interacting with
others in a way that will enhance the successful completion of the task at hand.



Some human skills that are often necessary for managers to display are effective
communication (writing and speaking), creation of a positive attitude
toward others and the work setting, development of cooperation among
group members, and motivation of subordinates.

6.3. Conceptual skills

Conceptual skills involve the ability to see the organisation as a whole,
understand how the different parts affect each other and recognize how the
company fits into or is affected by its environment. Conceptual skill involves the
understanding of abstract relationships, and reducing complexity in order to
develop ideas, and solve problems creatively.
Conceptual Skills allows managers to take action using technology more
creatively using the organisations people and assets to establish a
competitive advantage. Examples of situations that require conceptual
skills include responding to a competitor's change in marketing strategy,
or releasing a new product that is difficult to imitate.

6.4. Technical, Human and conceptual Skills at different

Levels of management
A manager's level in the organization determines the relative importance of
possessing technical, human, and conceptual skills.

Top level managers need conceptual skills that let them view the
organization as a whole, and recognize how the company is affected by
the community, customers and the competition.
Supervisors and team leaders need technical skills to manage employees
who make products and serve customers, train employees and help
employees solve problems.
All levels of management need human skills so they can interact and
communicate with other people successfully.

Activity 1.7
Referring to the Case study Creativity Overflowing explain management use of
the technical, human and conceptual skills using examples from the case:
Technical Skills



Human Skills
Conceptual Skills

CASE STUDY- Creativity Overflowing

Michael Arndt, Bloomberg Businessweek, May 8,2006.

Web links:

(This case study can be used in the essay on the management process)

Slide Show >>

After its initial efforts stumbled, Whirlpool is reaping big dividends from its
push to jump-start innovation

David R. Whitwam had run out of tricks. The chairman and chief executive of
Whirlpool Corp. (WHR ) had built the company into the world's No. 1 of
appliances. The company's problem was not hard to diagnose: Its machines were
the same as their competitors products. Prices for its most important products
were actually falling each year. Whitwam remembers those days like this: "I go
into an appliance store. Now, I have pretty good eyes. I stand 40 feet away from
a line of washers, and I can't pick ours out. They all look alike. They all have
decent quality. They all have the same price point. It's a sea of white."
Nor was the solution a mystery: Whirlpool had to come up with exciting new
products that could command premium prices. But the appliance maker had



never paid much attention to innovation. During most of its 95-year history, it
excelled at manufacturing washers and dryers that were solid and long-lasting.
From time to time, research and engineering (R&E) technicians would tweak
Whirlpool's Kenmore, KitchenAid, and namesake appliances to lower costs or
boost performance -- by better insulating a freezer, say, or adding another
washing cycle. But that's about as exciting as product development ever got.
It was clear that Whirlpool needed to reinvent its corporate culture. To do so, it
had to figure out the answers to basic questions that managers everywhere
struggle with: How do you define innovation? How do you measure success?
How do you teach people to be creative? "We knew from a strategic point of view
what we needed to do, but from a practical point of view we didn't know how to
do it at all," confesses Jeff M. Fettig, 49, a 25-year veteran who succeeded
Whitwam as chairman and CEO in mid-2004. But despite strong demand, the
prices of Whirlpool appliances were falling at an average rate of 3.4% a year,
forcing yet another job-eliminating restructuring.
So Whitwam put out a broad call for help. Believing that brilliant ideas were
buried in the corporate hierarchy, he invited each of the company's 61,000
employees to unleash their creativity: Everybody everywhere, he said, Go out
and innovate!
Off in the Italian Alps, a crew of workers got right at it. Handpicked by managers
from across the company's European staff, the 25 employees were freed from
their regular jobs and packed off to Whirlpool's office in Comerio, Italy, with a
single purpose: to dream up products or services that would truly differentiate
Whirlpool from rivals. A year later, they came back with their big brainstorm: an
Internet business that would enable people to race one another over the Web on
stationary bikes. So much for that experiment. It was obvious that Net bike
racing, which didn't draw on any of Whirlpool's strengths, was a nonstarter.
Whirlpool learned the hard way that real innovation requires a lot more than
simply urging thousands of employees around the world to tap into their inner
designer and then waiting for the great ideas to roll in. It requires hard work,
structure, and discipline. After its poor start, the company retreated from the allout effort to democratize innovation and moved to a more traditional centralized
model of product development. That did the trick. Since 2001, revenues from
products that fit the company's definition of innovative have zoomed up from $10
million to $760 million in 2005, or 5% of the Benton Harbor (Mich.) company's
record $14.3 billion in total revenue. Whirlpool's shares, at $92.64 on Apr. 25,
have almost doubled in price over the past five years. Now, following its $2.6
billion Maytag Corp. takeover, Whirlpool will bring innovation to its onetime
So Whitwam, now 64, called in Nancy T. Snyder, an organizational behaviorist
who had joined the company in 1986, and gave her a new title: director of
strategic process. He also gave her a new assignment: turn everyone at
Whirlpool into innovators. That was important to Whitwam, because he believed
he could change corporate culture only by calling on each one of Whirlpool's
employees to take up the cause.



In early 2000, management enlisted a group of 75 employees to be trained in
innovation. Their teachers were 10 consultants from Strategos, a management
consultancy founded by Gary Hamel in Menlo Park, Calif., in 1995. The students
represented almost every job classification, from corporate vice-president to
engineer to factory hand. They were assembled by region in groups of 25 in
company facilities in Benton Harbor, Brazil, and Italy. For up to a year, as others
took over their previous jobs, these employees were trained like pupils at a
specialized graduate school.
The consultants spent weeks teaching them how to "ideate" by re-examining old
ways of developing new products that were blinding employees to opportunities.
"There are no barriers," Whitwam told students. "I don't care if we get one
innovative idea out of the process."
He liberated the students to such a great extent, however, that most of their ideas
turned out to be useless, impractical, and poorly suited to Whirlpool's strengths.
In addition to Internet bike racing, employees proposed the Unattended Box -- a
doorstep appliance to keep food deliveries hot or cold until owners came home
from work. It was ignored. So was their plan to create a membership club for
people who wanted home repair services.
The next step for Whirlpool was getting the rest of its global workforce involved.
Snyder set up an intranet site that offered a do-it-yourself course in innovation
and listed every project in the pipeline. Employees were invited to post ideas or
to network informally with others and get their expertise. The company hosted
innovation fairs to salute inventors and elicit more ideas. For one show, Whirlpool
filled the concourse of Orchards Mall, outside Benton Harbor, with 54 exhibits of
new products shown off by proud employees, including a quartet of engineers
from Whirlpool's oven factory in Oxford, Miss. The four had invented a
combination gas grill/refrigerator/oven/boom box for tailgate parties (outdoors
using the tailgate of a pick-up van as a table) ( . It's a promising idea now being redesigned to work out safety
Whitwam, meanwhile, continued to encourage workers to go to their bosses with
proposals or to come to him directly if the managers wouldn't listen. And he put
his money where his mouth was, setting aside $45 million from the capital budget
for innovation in 2000 and doubling that amount in 2001. Although they didn't
receive money for their ideas, ordinary employees were thrilled to be treated as
peers and asked for advice. In 2001 and '02, Whirlpool's "knowledge
management" site recorded up to 300,000 hits per month. "I had never seen a
strategy that was so energizing to so many people," Whitwam says.
Management, however, wouldn't buy it. Midlevel executives were annoyed that
their workers were off doing side projects when they still had real work to do. And
upper-level managers could shrug off the initiative, because Whitwam hadn't
given them any concrete goals or tied their performance to any innovation
So Whitwam and his managers were forced to be innovative themselves. While
not completely abandoning their come-one, come-all approach, they realized in
2002 that they had to bring more order to the innovation process. They decided
that new ideas would have to improve the company's existing brands or products.



Top management would evaluate and fund all new proposals at monthly
innovation-board meetings. These groups, in turn, reported to Whirlpool's ninemember executive committee. Green-lighted projects would be assigned to pros
-- representatives from the design, market research, R&E, and manufacturing
departments -- to see them through. In addition, Whitwam began setting annual
revenue and pipeline targets in 2002 and conducting employee surveys to gauge
workers' involvement in innovation. Senior executives would have to hit all of
these numbers or lose 30% of their annual bonus.
To make certain that only high-potential ideas reached the I-board, Snyder and
her innovation specialists came up with something called the I-box, a two-step
graphing tool. The goal: to make it easier to design products that reflected
consumers' needs and desires.
1. Opportunities developed to create new customers and business
The first step required innovators to demonstrate that their proposals were
something that real people would buy. That could entail months of market
research, quizzing thousands of consumers. Their ideas were then graded by
innovation consultants on a scale of 1 to 10, from dud to sure thing. Only ideas
with a grade of at least 6.5 could proceed.
2. Completely new products created for consumers unmet needs
Step two involved analysing whether the new product would command aboveaverage prices, again through market research. On this test, also, ideas that
scored less than a 6.5 got weeded out. The tool altered the company's
development process. "Instead of a guy in the lab inventing something he thinks
is cool, innovation is coming from the consumer through research," says Pamela
Rogers, global director of customer excellence and innovation.
The company has also become much more flexible and adaptable. In
collaboration with Best Buy Co. (BBY an appliance retailer), Whirlpool designed
a modern fridge for dormitory rooms and Gen Y apartment dwellers. The 32inch-tall cube comes with a removable front panel and accessories such as a
clock and radio so consumers can customize its look. Its carefully measured
capacity: exactly enough to hold a large pizza and two six-packs of drinks. At the
last moment, however, Best Buy backed out -- an unexpected development that
probably would have killed the product back in the old days. But this time the
company didn't give up. Last year, Whirlpool marketed its hip appliance in Brazil,
where it was being built by its Brastemp unit. Called Pla, it has become a hit.
3. Creating new products by adding Unique and innovative features added
to existing products
Whirlpool's innovators are also learning how to save products and services that
failed the first time. Executives like to point out that they never kill ideas; instead,
they shelve them so that other employees can take a look at them later. So far,
717 ideas have been put in this inactive status. Among them was the Personal
Valet, an armoire-like appliance that steamed out wrinkles and odours from dryclean-only clothes. Consumers liked the idea but did not like the $1,199 price.
Introduced in 2002, it was discontinued in 2004. Now it's back. But this time the
device, rolled out in 2005 as the Fabric Freshener, comes in a collapsible plastic



design made under contract in Mexico and sells for $199.
Although the company has modified Whitwam's original vision, it has succeeded
in achieving his top goals. Since 2003, innovation revenue has quadrupled
annually, easily surpassing goals. Fettig attributes 3 points of Whirlpool's sales
growth rate, which has averaged 9% since 2003, to creative new products.
Moreover, Whirlpool is no longer caught in a price war, forcing rivals to innovate
as well or fade away, as Maytag did with its aging product line.
For the past three years, the average price of Whirlpool appliances has risen 5%
annually. The company has 24 I-consultants and 580 I-mentors in its workforce
and 568 innovation projects in development today, including 195 being scaled up
for commercial launch. Whirlpool calculates that these new appliances, once
they're on the market, could produce $3 billion in annual sales, up from
projections of $2 billion in 2004 and $1.3 billion in 2003.
Whirlpool has also succeeded in disproving the myth that consumers are driven
almost entirely by price. Three years ago, the company introduced a new
Kitchen-Aid waffle maker to replace the $99 model. Rather than just alter its
design and stick with the same price point, management came up with a "design
icon," recalls Charles L. "Chuck" Jones, Whirlpool's vice-president of global
product design. That meant fancier touches and better materials -- and a $399
retail price. Nonetheless, the company is selling the upscale version as fast as its
factory can churn it out. "There is a rational component to purchasing appliances,
but far outweighing that is an emotional component," says Jones. "What the eye
admires, the heart desires."

7.0. Why Management Matters Competitive advantage through people

In his books Competitive Advantage through People and The Human Equation:
Building Profits by Putting People First, Stanford University business professor
Jeffrey Pfeffer contends that what separates top performing companies from their
competitors is the way they treat their work forces i.e. their management.
Pfeffer found that managers in top-performing companies used ideas like
employment security, selective hiring, self-managed teams and decentralisation,
high pay contingent on company performance, extensive training, reduced status
distinctions (between managers and employees) and extensive sharing of
financial information to achieve financial performance that, on average, was 40
per cent higher than that of other companies.
Organisations thus develop workforces that are smarter, better trained, more
motivated and more committed than their competitors' workforces. Also, as
indicated by the phenomenal growth and return on investment earned by these
companies, smarter, better trained and more committed workforces provide
superior products and service to customers, who keep buying and, by telling
others about their positive experiences, bring in new customers.



Pfeffer also argues that companies that invest in their people will create longlasting competitive advantages that are difficult for other companies to duplicate.
Indeed, other studies clearly demonstrate that good management practices can
produce big advantages in four critical areas of organisational performance: sales
revenues, profits, stock market returns and customer satisfaction. In terms of
sales revenues and profits, a study of nearly 1000 US firms found that companies
that use just some of the ideas shown in Table 1 had US$27, 044 more sales per
employee and US$3814 more product per employee than companies that didn't.
For a 1000-person company, these differences amount to US$27 million more in
sales and US$4 million in annual profit.
Another study investigating the effect of investing in people on company sales
found that poorly performing companies that adopted management techniques as
simple as setting performance expectations and coaching, reviewing and
rewarding employee performance were able to improve their average return on
investment from 5.1 per cent to 19.7 per cent and increase sales by $134,400 per
employee. So, in addition to significantly improving the profitability of healthy
companies, sound management practices can turn around failing companies.
To determine the effect of investing in people on stock market performance,
researchers matched companies on Fortune magazine's list of '100 Best
Companies to Work for in America with companies that were similar in industry,
size and - this is the key - operating performance. In other words, both sets of
companies were equally good performers; the key difference was how well they
treated their employees. For both sets of companies, the researchers found that
employee attitudes such as job satisfaction changed little from year to year.
The people who worked for the '100 Best' companies were consistently more
satisfied with their jobs and employers year after year than were employees in
the matched companies. More importantly, those stable differences in employee
attitudes were strongly related to differences in stock market performance. Over a
three-year period,an investment in the '100 Best Companies to Work for' would
have result in an 82 per cent cumulative stock return compared to just 37 per
cent for the matched companies.63 This difference is remarkable given that both
sets of companies were equally good performers at the beginning of the period.
Finally, research also indicated that managers have an important effect on
customer satisfaction.
Many people find this surprising. They don't understand how managers, who are
largely responsible for what goes on inside the company, can affect what goes on
outside the company. They wonder how managers, who often interact with
customers in negative situations (when customers are angry or dissatisfied), can
actually improve customer satisfaction. It turns out that managers influence
customer satisfaction through employee satisfaction. When employees are
satisfied with their jobs their bosses and the companies they work for they
provide much better service to customers.
Table1.Factors influencing competitive advantage
1 Employment security

Employment security is the ultimate form of

commitment that companies can make to their



workers. Employees can innovate and increase
company productivity without fearing the loss of
their jobs.
2 Selective hiring

If employees are the basis for a company's

competitive advantage, and those employees
have employment security, then the company
needs to aggressively recruit and selectively
screen applicants in order to hire the most
talented employees available.

3. Self-managed teams and


Self-managed teams are responsible for their

own hiring, purchasing, job assignments and
production. Self-managed teams can often
produce enormous increases in productivity
through increased employee commitment and
creativity. Decentralisation allows employees
who are closest to (and most knowledgeable
about) problems, production and customers to
make timely decisions. Decentralisation
increases employee satisfaction and

4. High wages contingent on

organisational performance

High wages are needed to attract and retain

talented workers and to indicate that the
organisation values its workers. Employees,
like company founders, shareholders, and
managers, need to share in the financial
rewards when the company is successful.
Why? Because employees who have a
financial stake in their companies are more
likely to take a long-run view of the business
and think like business owners.

5. Training and skill


Like a high-tech company that spends millions

of dollars to upgrade computers or research
and development labs, a company whose
competitive advantage is based on its people
must invest in the training and skill
development of its people.

6. Reduction of status

The company treats everyone, no matter what

the job, as equal. There are no reserved
parking spaces. Everyone eats in the same
cafeteria and has similar benefits.
The result: Much improved communication as
employees focus on problems and solutions
rather than on how they are less valued than

7. Sharing information

If employees are to make decisions that are

good for the long-run health and success of the
company, they need to be given information



about costs, finances, productivity,
development times and strategies that was
previously known only by company managers
Activity - 1.8.
How did Whirlpool use the following methods to bring the best out in their
employees and turn a loss making company into a profitable company with a
strong competitive advantage? Use examples from the case study
1 Employment security

2 Selective hiring

3. Self-managed teams and


4. High wages contingent on

organisational performance

5. Training and skill


6. Reduction of status



7. Sharing information

Management Competence
Developing highly competent managers is much more complicated than
developing trade or work skills.
First, management skills are behavioural, they are not personality
characteristics. Managers are not born they learn on the job so their
behaviour can undergo change from the time they start as they
progress and climb the corporate ladder
Second, people can develop and improve their management skills
through practice. Managers learn on the job and the wider the
experience the more skilled the manager gets handling operational,
human and technical matters.
Third, management skills are interrelated and overlapping in
other words they need combinations of skills. This chapter looked at
essential management functions, roles and skills all of which a
manager needs to be efficient and effective.
Fourth, some of these management skills may be conflicting, for
example effective managers may be required to be both participative
i.e. assisting employees and directive i.e. telling inexperienced or
unwilling employees what to do and flexible i.e. allowing for variation
in interpretation and performance, yet controlled i.e. sticking by the
rules, depending on circumstances.

Closing Case Study

Jane and Peter were both employed by the one organisation where both had
displayed management potential. However, the two had distinctly different
Peter had a degree in psychology and was a manager in the human resources
department. Jane had an engineering background and was currently a manager
in one of the organisations manufacturing plants.
At an interview for a middle-management position, both were asked, What are
the qualities of a good manager?
Peter summed up his position by saying: Its obvious to me that a good manager
can communicate effectively, knows about motivating people and providing
leadership. Im convinced that a good manager understands human behaviour.
Jane said that good managers need to be strong technically. They have to know
how to allocate resources well, be knowledgeable about job design and workflow,
and know how to monitor output, costs and so on.



Which one would be the better choice for the middle-management position?
In fact, they were both partly right, because a good manager needs to
communicate effectively, know about motivating people, providing leadership and
understand human behaviour.
In addition, a good manager also needs to have strong technical skills, know how
to allocate resources well, be knowledgeable about job design and workflow, and
know how to monitor output, costs and so on.
Bartol, Kathryn, Tein Margaret, Matthews Graham, Sharma Bishnu, Scott-Ladd
Brenda, (2011), Management Foundations, A Pacific Rim Focus 3rd edition,
McGraw-Hill, Sydney.
Hill Linda, Becoming a Manager: Master of a New Identity, Harvard Business
Jones, Gareth R. and George, Jennifer, M., (2006), Essentials of Contemporary
Management 2nd Edition, Pgs., 22-23, McGraw Hill, Sydney
Katz, Robert L. (1974), "Skills of an Effective Administrator." Harvard Business
Review. Boston: Sep-Oct, Vol. 52, No. 5; p. 90
Pfeffer, Jeffrey, (1994), Competitive Advantage through People, Harvard
Business School Press.
Pfefer, Jeffrey, (1998), The Human Equation: Building Profits by Putting People
First, Harvard Business School Press.
Robbins Stephen R., Bergman Rolf, Stagg Ian, Coulter Mary, (20003),
Management 3rd edition, Pearson, Sydney
Ruderman, Marian, N., Patricia J. Ohlott, Kate Panzer, Sara N. King, (Apr.,2002),
Benefits of Multiple Roles for Managerial Women, The Academy of Management
Journal, Vol. 45, No. 2 , pp. 369-386



Chapter 1
Part 2
History of



The Evolution of Management Theories

1.0. A brief history of management

Each day, managers are asked to solve challenging problems and are given only
a limited amount of time, people or resources. Yet it's still their responsibility to
get things done on time and within budget. Tell today's managers to 'reward
workers for improved production or performance', 'set specific goals to increase
motivation', or 'innovate to create and sustain a competitive advantage', and
they'll respond, 'Of course! Who doesn't know that?'
A mere 125 years ago, however, business ideas and practices were so different
that today's widely accepted management ideas would have been as 'selfevident' as space travel, cell phones and the Internet. In fact, 125 years ago,
management wasn't yet a field of study and there were no management jobs and
no management careers. So, if there were no managers 125 years ago, but you
can't walk down the hall today without bumping into one, where did management
come from?

1.1. Management ideas and practice throughout history

The Qin dynasty in China developed a nationwide bureaucracy with public
examnations open to all and nine levels of public service. He divided his empire
into 36 provinces. Each province was divided into districts. He put two
government officials in charge of each province. It was their job to put strong
people in charge of each district. Workers were well trained and paid. They
reported to supervisors. People at each level supervised those below them. He
introduced one system of weights, measures, money, written language, and laws.
Nobody argued with him. He introduced a new law code that applied to
everybody. He created a huge law enforcement group, whose job was to enforce
the laws.
He built roads, canals, and bridges. His public works projects probably saved
millions of lives that would have been lost to floods and famine. His greatest
achievement the Great Wall, to protect China from the nomadic Huns who raped,
pillaged and burnt cities around China. The wall was 35,000 km long a length that
would take it twice around the earth.
Sumerian priests developed a formal system of writing (scripts) that allowed them
to record and keep track of the goods, flocks and herds of animals, coins, land
and buildings that were contributed to their temples. Furthermore, to encourage
honesty in such dealings, the Sumerians instituted managerial controls that
required all priests to submit written accounts of the transactions, donations and
payments they handled to the chief priest. Just like clay or stone tablets and
animal-skin documents, these scripts were first used to manage the business of
Sumerian temples.



Case Study - The Pyramids of Giza to the Sydney Opera House
Examples of management thought and practice can be found throughout history.
For example, the Egyptians recognised the need for planning, organising and
controlling; for submitting written requests; and for consulting staff for advice
before making decisions. The practical problems they encountered while building
the great pyramids no doubt led to the development of these management ideas.
The enormity of the task they faced is evident in the pyramid of King Cheops,
which contains 2.3 million blocks of stone. Each block had to be quarried, cut to
the precise size and shape, cured (hardened in the sun), transported by boat for
two to three days, moved onto the construction site, numbered to identify where it
would be placed and then shaped and smoothed so that it would fit perfectly into
place. It took 20000 workers 23 years to complete this pyramid; more than 8000
people were needed just to quarry the stones and transport them.
A typical 'quarry expedition' might include 100 army officers, 50 government and
religious officials, 200 members of the king's court to lead the expedition, 130
stone masons to cut the stones, 5000 soldiers, 800 barbarians and 2000 bond
servants to transport the stones on and off the ships.

The Sydney Opera House

Formal construction of the Opera House began in March 1959. The project was
built in three stages. Stage I (19591963) consisted of building the upper podium.
Stage II (19631967) saw the construction of the outer shells. Stage III (1967
1973) consisted of the interior design and construction.
The Sydney Opera House is a modern expressionist design, with a series of
large precast concrete shells each composed of sections of a sphere of 75.2
metres (246 ft 8.6 in) radius] forming the roofs of the structure, set on a large
The building covers 1.8 hectares (4.4 acres) of land and is 183 m (600 ft) long
and 120 m (394 ft) wide at its widest point. It is supported on 588 concrete piers
sunk as much as 25 m (82 ft) below sea level. The shells were constructed by
Hornibrook Group Pty Ltd, Hornibrook manufactured the 2400 precast ribs and
4000 roof panels in an on-site factory and also developed the construction
processes.The achievement of this solution avoided the need for expensive
formwork construction by allowing the use of precast units (it also allowed the
roof tiles to be prefabricated in sheets on the ground, instead of being stuck on
individually at height). Ove Arup and Partners' site engineer supervised the
construction of the shells, which used an innovative adjustable steel-trussed
"erection arch" to support the different roofs before completion.
The Opera House was formally completed in 1973, having cost $102 million. H.R.
"Sam" Hoare, the Hornibrook director in charge of the project, provided the
following approximations in 1973: Stage I: podium Civil & Civic Pty Ltd
approximately $5.5m. Stage II: roof shells M.R. Hornibrook (NSW) Pty Ltd
approximately $12.5m. Stage III: completion The Hornibrook Group $56.5m.
Separate contracts: stage equipment, stage lighting and organ $9.0m. Fees and
other costs $16.5m.



The original cost estimate in 1957 was 3,500,000 ($7 million). The original
completion date set by the government was 26 January 1963 Thus, the project
was completed ten years late and over-budget by more than fourteen times.

Activity 1.9.
Read: The Pyramids of Giza to the Sydney Opera house. What are the
similarities and differences between the project management of each?
Reflect on the functions, roles, skills that managers require for this
The Pyramids of Egypt
The Sydney Opera house




1.2. Management Today

Working from 8am to 5pm coffee breaks, lunch hours, crushing peak hour traffic
and punching a time clock are things we associate with todays working world.
But for most of humankinds history people did not commute to work. Work
usually occurred in homes or farms. As recently as 1900 the majority of
Australians earned their living from agriculture. Even most of those who didn't
earn their living from agriculture didn't commute to work. Blacksmiths, furniture
makers, leather-goods makers and other skilled tradesmen or craftsmen, who
formed trade guilds (the historical predecessors of labour unions) in England as
early as 1093, typically worked out of shops in or next to their homes.
Likewise, until the late 1800s, cottage workers worked with each other out of
small homes that were often built in a semicircle. A family in each cottage would
complete a different production step, with work passed from one cottage to the
next until production was complete. With small, self-organised work groups and
no commuting, no bosses and no common building, there wasn't a strong need
for management.
During the Industrial Revolution (1750-1900), however, jobs and organisations
changed dramatically. First, thanks to the availability of power (steam engines
and later electricity), low-paid, unskilled labourers running machines began to
replace high paid skilled artisans who made entire products by themselves, by
hand. This new mass production system was based on a division of labour: each
worker, interacting with machines, performed separate, highly specialised tasks
that were but a small part of all the steps required to make manufactured goods.
While workers focused on their singular tasks, managers were needed to
effectively coordinate the different parts of the production system and optimise its
overall performance. Productivity skyrocketed at companies that understood this.
For example, at Ford Motor Company, the time required to assemble a car
dropped from 12.5 man hours to just 93 minutes. Second, instead of being
performed in fields, homes or small shops, jobs occurred in large, formal
organisations where hundreds, if not thousands, of people worked under one
In 1849, for example, with just 123 workers, Chicago Harvester (the predecessor
of International Harvester) ran the largest factory in the United States. Yet, by
1913, Henry Ford employed 12 000 employees in his Highland Park, Michigan,
factory alone. With individual factories employing so many workers under one
roof, companies now had a strong need for disciplinary rules (to impose order
and structure). For the first time, they needed managers who knew how to
organise large groups, work with employees and make good decisions.

2.0. Scientific Management

The goal of Fredric Taylors (1901) scientific management was to use systematic
study to find the 'one best way' of doing each task. To do that, managers must
follow the four principles:



First, 'develop a science' for each element of work. Study it. Analyse it.
Determine the 'one best way' to do the work. For example, one of Taylor's
controversial proposals at the time was to give rest breaks to factory
workers doing physical labour. Today, we take breaks for granted, but in
Taylor's day, factory workers were expected to work without stopping.
Through systematic experiments, Taylor showed that frequent rest
breaks greatly increased daily output.

Second, scientifically select, train, teach and develop workers to help

them reach their full potential. Before Taylor, supervisors often hired on
the basis of favouritism and nepotism. Who you knew was often more
important than what you could do. By contrast, Taylor instructed
supervisors to hire 'first class' workers on the basis of their aptitude to do
a job well. For similar reasons, Taylor also recommended that companies
train and develop their workers - a rare practice at the time.

Third, cooperate with employees to ensure implementation of the

scientific principles. As Taylor knew from personal experience, more often
than not workers and management viewed each other as enemies. Taylor
said, 'The majority of these men believe that the fundamental interests of
employees and employers are necessarily antagonistic. Scientific
management, on the contrary, has at its very foundation the firm
conviction that the true interests of the two are one and the same; that
prosperity for the employer cannot exist for many years unless it is
accompanied by prosperity for the employee and vice versa; and that it is
possible to give the worker what is most wanted - high wages - and the
employer what he wants - a low labour cost - for the product'.

The fourth principle of scientific management was to divide the work and
the responsibility equally between management and workers. Prior to
Taylor, workers alone were held responsible for productivity and
performance. But, said Taylor, 'Almost every act of the workman should
be preceded by one or more preparatory acts of the management which
enable him to do his work better and quicker than he otherwise could'.

Above all, Taylor felt these principles could be used to determine a 'fair day's
work', for a Fair days pay for management and employees so that what was
good for employees was also good for management. One of the best ways,
according to Taylor, to align management and employees was to use incentives
to motivate workers e.g. payment for each product produced.

Fries and Coke with that The Mcdonalds way

Don't think scientific management has much to do with today's work Iife? Think
again: about the last time you were in a shop and the sales person said, "Have a
nice day. Service providers - particularly at restaurants -use scripts to ensure that
employees are following the 'one best way' of interacting with the customers.
McDonald's uses a speech-only script (workers must say, 'May I help you?
instead of 'Can I help someone?'). At one chain of restaurants workers must greet
the table within 30 seconds of arrival; take the drink order within three minutes;



suggest five items while taking the order; and check back with the table three
minutes after the food arrives.

Activity 1.10. - Scientific Management at McDonalds

Explain how the manager at your local McDonalds store applies the scientific
management principles below to run an efficient restaurant. Refer to the
principles outlined above.
1. Develops a scientific approach to work which would save time and effort.
2. Scientifically selects, trains, and develops workers with appropriate
abilities for the job.
3. Creates the right working conditions so the task can be done properly and
offer the right incentives to obtain workers cooperation to do the task.
4. Divides work and responsibility between management and workers. Managers
and workers take responsibility and are allocated work they are best suited to.




2.1. Henry Gantt (1861-1919)

Henry Gantt developed planning and control techniques using a simple graphic
bar chart, the Gantt Chart, to display relationships between planned and
completed work on one axis and elapsed time on the other. A Gantt Chart is a
graphical chart that shows a sequence of tasks that must be completed at
specific times in order to complete a project or task.
A Gantt chart shows time in various units on the x-axis and tasks on the y-axis,
visually showing which tasks must be completed at which times in order to
complete a project. For example Slide 10 shows the nine tasks and dates
preparations for filming an advertisement for a new model car.
Gantt charts were revolutionary in the era of 'seat-of-the-pants' management
because of the detailed planning information they provided to managers. Gantt
said, 'Such sheets show at a glance where the delays occur, and indicate what
must have our attention in order to keep up the proper output Today, the use of
Gantt charts is so widespread that nearly all project management software and
computer spreadsheets have the capability to create charts that track and
visually display the progress being made on a project.
Gantt, along with Taylor, was one of the first to strongly recommend that
companies train and develop their workers
Investigate in detail each aspect of the job, work out the best method and
the shortest time in which the job can be done.
A teacher capable of teaching the best method and the shortest time.
Reward for both trainer and employee upon successful completion of the
Gantts incentive system provided bonuses for workers who completed their jobs
in less time than the allowed standard. He also initiated a bonus plan for
Activity 1.11 Gantt and Project Management
How could using a Gantt chart have assisted the project manager when your
university was being built?



2.3. Frank and Lillian Gilbreth - Time and Motion Studies

Frank and Lillian Gilbreth are best known for their use of motion studies to
simplify work, but they also made significant contributions to industrial
psychology. Frank Gilbreth (1868-1924) began his career as an apprentice
bricklayer. While learning the trade, he noticed the bricklayers using three
different sets of motions - one to teach others how to lay bricks, a second to work
at a slow pace and a third to work at a fast pace.
As a result of his experience with bricklaying Gilbreth and his wife Lillian
developed a long-term interest in using motion study to simplify work, improve
productivity and reduce the level of effort required to safely perform a job. Indeed,
Frank Gilbreth said, 'The greatest waste in the world comes from needless, illdirected and ineffective motions'. Fredrick Taylor had developed time study to
determine what could be considered a fair day's work.
Time study worked by timing how long it took a 'first-class man' to
complete each part of his job. After allowing for rest periods, a standard
time was established and a worker's pay would increase or decrease
depending on whether the worker exceeded or fell below that standard.
Motion study broke each task or job into separate motions and then
eliminated those that were unnecessary or repetitive. Because many
motions were completed very quickly, the Gilbreths used motion-picture
films, then a relatively new technology, to analyse jobs. Motion study
typically yielded production increases of 25 to 300 per cent
Lillian Gilbreth (1878-1972) was an important contributor to management as well.
She was the first woman to receive a PhD in management, as well as the first



woman to become a member of the Society of industrial Engineers and the
American Society of Mechanical Engineers Lillian, who was concerned with the
human side of work, was one of the first contributors to industrial psychology,
originating ways to improve office communication, incentive programs, job
satisfaction and management training. Her work also convinced the government
to enact laws regarding workplace safety, ergonomics and child labour.

Activity 1.12
Refer to Reading 2.3 Frank and Lillian Gilbreth Time and Motion Studies
Time and motion studies are now applied in a variety of industries including fastfood, in supermarkets, call centres, hospitals and public transport.
Explain how time and motion studies have changed the way people work in one
of these industries.



3.0. Max Weber and Henri Fayol Bureaucracies and

Max Weber (1864-1920) proposed the idea of bureaucratic organisations at a
time when promotion to prominent positions of authority was based on who you
knew (politics), who you were (heredity) or traditions. Bureaucracy is the exercise
of control on the basis of knowledge, expertise, or experience. Fairness as
opposed to favouritism recorded in writing and professional managers rather than
company owners should manage or supervise the organisation. The principles
outlined below would guide the management of the organisation.
Workers these days often complain of punishment for non-compliance rather than
reward for compliance. The other criticism is that once bureaucracies are created
they are difficult to dismantle.
Qualification-based hiring:
Merit-based promotion:
Chain of command:

Division of labour:
Impartial application of rules
and procedures:
Recorded in writing:
Managers separate from

Employees are hired on the basis of their

technical training or educational background.
Promotion is based on experience or
achievement. Managers, not organisational
owners, decide who is promoted.
Each job occurs within a structure in which
each position reports and is accountable to a
higher position. A complaints procedure and
a right to appeal protect people in lower
Tasks, responsibilities and authority are
clearly divided and defined.
Rules and procedures apply to all members
of the organisation and will be applied in an
impartial manner, regardless of one's position
or status.
All administrative decisions, acts, rules or
procedure will be recorded in writing.
The owners of an organisation should not
manage or supervise the organisation.

Activity - 1.13
You apply for a job in a large family owned company. You do so because the
company is managed using the principles above? What are the advantages and
disadvantages working in this company?



Whereas scientific management focused on employees as individuals and their
tasks, general administrative management theory dealt with management of the
wholel organization. General management theory was an attempt to develop a
much broader theory concerned with administrative management functions and is
considered the forerunner of modern organization theory.
Henri Fayols (1841-1925) ideas, which were shaped by his experience as
managing director (CEO), of the Comambault Steel company in France





reengineering companies from the top to the bottom. He did this to better
manage a steel company that was losing money and would have been shut
down. Fayol is best known for developing five functions of managers (planning,
organising, leading, coordinating and controlling explored in Part 1 above) and
the 14 principles of management.
1. Division of work:

Increase production by dividing work so

that each worker completes smaller
tasks or job elements.

2. Authority and responsibility:

A manager's authority, which is the

'right to give orders,' should be
equivalent with the manager's
responsibility. However, organisations
should enact controls to prevent
managers from abusing their authority.

3. Discipline:

Clearly defined rules and procedures

are needed at all organisational levels
to ensure order and proper behaviour.

4. Unity of command:

To avoid confusion and conflict, each

employee should report to and receive
orders from just one boss.

5. Unity of direction:

One person and one plan should be

used in deciding the activities to be
used to accomplish each organisational

6. Subordination of individual

Employees must put the organisation's

interests and goals before their own.

7. Remuneration:

Compensation should be fair and

satjsfactory to both the employees and
the organisation; that is, don't overpay
or underpay employees.

8. Centralisation:

Avoid too much centralisation or

decentralisation. Strike a balance
depending on the circumstances and
employees involved.

9.Scalar chain:

From the top to the bottom of an

organisation, each position is part of a
vertical chain of authority in which each
worker reports to just one boss. For the
sake of simplicity, communication
outside normal work groups or



departments should follow the vertical
chain of authority.

To avoid conflicts and confusion, order

can be obtained by having a place for
everyone and having everyone in their
place; in other words, there should be
no overlapping responsibilities.


Kind, fair, and just treatment for all will

develop devotion and loyalty. This does
not exclude discipline, if warranted, and
consideration of the broader general
interest of the organisation.

12. Stability of tenure of personnel:

Low turnover, meaning a stable work

force with high tenure, benefits an
organisation by improving performance,
lowering costs and giving employees,
especially managers, time to learn their

13. Initiative:

Because it is a 'great source of strength

for business,' managers should
encourage the development of
initiative, the ability to develop and
implement a plan, with others.

14. Esprit de corps:

Develop a strong sense of morale and

unity among workers that encourages
coordination of efforts.

Activity 2.4 Fayol and Weber Corporations and

What are some of the similarities and differences between Apple and
VicRoads both are corporations and both have layers of managers and
employees at different levels. Refer to the document attached to the link






Activity 2.4 Fayol and Weber Corporations and

What are some of the similarities and differences between Apple and
VicRoads both are corporations and both have layers of managers and
employees at different levels. Refer to the document attached to the link






Taylor, Fredrick Winslow,(1911), The Principles of Scientific Management, Harper
and Row, New York.
Williams Chuck and McWilliams Alan, (2010), MGMT, Cengage Learning
Australia, South Melbourne, pgs.28-29.
Fayol H, (1949) General and Industrial MAangement, Pittman and Sons, London.
Fells M., Fayol Stands the test or Time, Journal of Management History 6(2000):
Rodriguez C, Fayols 14 Principles of Management Then and Now: A Framework
for Managing Todays Organisations Effectively, Management Decision 39(2001):






2584-2561 BC



605-562 BC



435 BC



Temple of Artemis at Ephesus

c. 550 BC

Lydians, Persians,


Mausoleum of Halicarnassus

351 BC

Carians, Persians,


292-280 BC



c. 280 BC



Great Pyramid of Giza

Hanging Gardens of Babylon
Statue of Zeus at Olympia

Colossus of Rhodes
Lighthouse of Alexandria

Figure 1.6 - The Evolution of Management Theories



Historians claim that to understand the present, we have to understand the past.
If there was one best way to manage, then becoming a good manager would
simply mean learning the principles and practices of good management which
could then be applied universally.
History shows that it is not that simple.
Just as the theory we study today has evolved over time, in the future, when our
children and grandchildren study management, they are likely to study still newer,
revised theories than we are studying today.
The emergence of management as a field of specialised knowledge was driven
by the Industrial Revolution. The Industrial Revolution was a period from the 18th
to the 19th century where major changes in agriculture, manufacturing, mining,
and transport had a major impact on the socioeconomic and cultural conditions in
the United Kingdom, Europe, North America, and eventually the world. The
concentration of work in factories gave rise to a need to coordinate people and as
a result management theories and principles emerged.

Pre-Classical Management Movement

During the preclassical period of the middle and late 1800s, management
theories and principles were developed by people such as; Robert Owen,
Charles Babbage and Henry Towne.
Robert Owen (1771 1858)
Frequently referred to as the father of modern personnel
management. He experimented with improving working
conditions in the factories and raising the minimum age for
working children.
He successfully used his experiments to get national
legislation passed, limiting the abuse of child labour. He
provided meals at the factories for on-duty employees and
set up company stores to sell necessities at cost, and
sought to improve the community by building houses and
streets and making the community and factory attractive.
During his time period, the realisation had dawned on
employers in the new large industries, that if their
employees were better treated, educated and happier with
their lot then, they would work harder as a result. Robert
Owen of New Lanark, Scotland, took a keen interest in
discovering how the mining companies at Wanlockhead
and Leadhills, looked after their miners and families and
some of what he learned here, was applied to his mills in
the Clyde Valley.

Charles Babbage (1792 1871)

Best remembered for his book, On the Economy of



Machinery and Manufacturers, where he contended that
mutual interests could exist between workers and owners
of factories.
Babbage strongly argued for a profit-sharing system
whereby workers could profit from their productivity.
He showed that reducing the tasks of manufacturing to
their simplest activities increases the numbers of people
who can do them and, thus, reduces the average wage
which needs to be paid. This is one of the earliest
examples of operations research and it lays the theoretical
groundwork for Taylorism and Henry Ford's assembly
Babbage also designed the Difference Engine, a powerful
automatic mechanical calculator with its own formatting
printer; and the Analytical Engine, an automatic,
programmable calculator.

Henry Towne (1844 - 1924)

Towne was a mechanical engineer who became the
president of Yale and Towne Manufacturing. In 1886, he
delivered a paper titled The Engineer as an Economist in
which he outlined the importance of management as a
science and called for the development of management
His paper also encouraged engineers to take an interest in
solving business problems.



Classical Management Movement

The classical management movement consists of two different viewpoints; the
Scientific Management and General Administrative Management movements.
The Scientific Management which is mostly concerned in improving the
performance of individual workers (efficiency). This movement grew out of the
labour shortage during the industrial revolution at the beginning of the twentieth
The General Administrative Management which tries to focus on managing the
organization as a whole instead of managing the individuals.
The classical management movement undoubtedly laid the foundation for later
management developments. Its other contributions include advancing the
concept of the basic management functions, classifying management processes,
and focusing attention towards management as a legitimate topic worthy of
scientific inquiry.
The major limitations of the classical management movement are that it assumes
that each worker is an economic man and will, therefore, work harder in order to
make more money; employees are usually regarded as tools to be used to
achieve organizational goals rather than as valuable resources; it prescribed
universal procedures that are not appropriate in some settings; and it misses out
on the relationship between an organization and its environment.

Scientific Management Theorists

Adam Smith (1776)
In his book, The Wealth of Nations, classical theorist
Adam Smith first proposed the division of labour
breaking jobs down into repetitive tasks to save time and
to improve the efficiency of machinery.



James Watt (1736 1819) & Matthew
Boulton (1728 1809)
The Soho Engineering Foundry in Great
Britain was founded in 1796 by the inventors
and developers of the steam engine, James
Watt and Matthew Boulton.
The management of the foundry was turned over to the sons, James Watt Jr. and
Matthew Boulton, who systematically implemented several management
techniques including market research and forecasting; planned machine layout
and work-flow requirements; planned site location; production planning;
production process standards; and standardization of product components.
In accounting and cost analysis, Watt and Boulton, developed and maintained
detailed statistical records and advanced control systems with which they were
able to calculate cost and profits for each machine manufactured for each
department. For their personnel, they formed worker and executive training and
development programmes, work-study programmes leading to payment by
results based on work studies, and certain welfare programmes such as a
sickness benefit programme executed by a committee of elected employees.*
Henry Varnum Poor (1812 1904)
Editor of the American Railroad Journal, concluded that
what the railroads needed was effective management.
Poor developed a managerial system with a clearly
established organizational structure so that individuals
could be held accountable.
The system would also incorporate a top down report communications system
throughout the organization.
Frederick Taylor (1856 1915)
The beginning of the twentieth century brought new
concerns about productivity. Businesses were expanding
and money was available. However, labour was in short
supply. Management began looking at methods to improve
Frederick Taylor of the Midvale Steel Company recognized, in the early 1880s,
the need for labour and management cooperation, cost controlling and work
methods analysis.



He understood the principle of greater output achieved through worker
participation which he called systematic soldiering. Essentially, he enlisted the
management at Midvale to study what constituted a good days work. His
differential piecework plan followed the conclusions of his time studies and called
for high wage rates for performance deemed above standard and low rates for
work which fell below the mark as established by the company. There was
absolutely no promise of basic wage rates or, as we now know it, minimum
wages, until Taylors later programs.
Taylors entire theory was based on the assumption that the primary interest of
management and the worker was one and the same. If managements goal was
lower labour costs, then the workers goal of higher wages could be easily met
because their work was considered measurable.
It was also Taylors assumption that, once the workers understood the great
advantages of scientific management, they would immediately develop a better
mental attitude towards management and one another, thus eliminating the need
for constructive criticism and complaints.
Known as the father of scientific management, Taylor focussed on the tasks to be
performed, motivation through pay, management as a discipline that could be
studied, and how theories could be developed and applied in practical ways to
achieve an effective organization.
He advised managers to:
Develop a scientific approach to work which would save time and
Scientifically select, train, and develop workers with appropriate
abilities for the job.
Create the right working conditions so the task can be done
properly and offer the right incentives to obtain workers cooperation to
do the task.

Divide work and responsibility between management and workers.

Managers take over all work for which it is better suited than the
The introduction of assembly line manufacturing by the Ford Motor Company at
this time is the most widely-used example for understanding and explaining
scientific management in practice.

Henry Gantt (1861 1919)

Another colleague of Taylors at Bethlehem Steel Works,
Henry Gantt implemented a wage incentive program
considered far superior to Taylors.
Gantts incentive system provided bonuses for workers who completed their jobs
in less time than the allowed standard. He also initiated a bonus plan for



Though he made many contributions to the field of management, Gantt is best
known for an offshoot of his task and bonus system. The main thrust of his
system was cantered on the completion of a given amount of work in a given
time. He developed planning and control techniques using a simple graphic bar
chart, the Gantt Chart, to display relationships between planned and completed
work on one axis and elapsed time on the other.

Figure 1.7 - Gantt Chart

Frank (1868 1924) and Lillian

Gilbreth (1878 1972)
Frank and Lillian Gilbreth, also followers of Taylor,
are known for contributions in production and
operation management. They are best known for
their time and motion studies.
From these studies, the Gilbreths developed the laws of motion economy,
which involved 22 principles dealing with: the use of the human body; the
workplace arrangement; and tools and equipment design.
Frank Gilbreth's early work in motion study consisted of re-organizing the typical
work flow for bricklaying, and focused on eliminating unneeded movements.
His solutions were simple but revolutionary to a trade that had changed little over
4,000 years; he brought the bricks closer to the mason, helped reduce the
amount of bending and lifting required to lay and brick, and used a moveable
scaffold to allow steady progress on the construction of brick buildings. Most



manufacturers were interested in increasing profits while also keeping their
workers happy, and the Gilbreths' system was designed to do both things.

General Administrative Management Theorists

Whereas scientific management focused on employees as individuals and their
tasks, general administrative management theory dealt with total management
organization. General management theory was an attempt to develop a much
broader theory concerned with administrative management functions and is
considered the forerunner of modern organization theory. As with scientific
management, there were many contributors to general management theory.

Henri Fayol (1841 1925)

Around the turn of the century, a Frenchman named Henri
Fayol introduced the management world to systematic
management theory. An executive and mining engineer,
Fayol played an important role in the field of management
from 1888 until the time of his death in 1925.
In Industrial and General Administration, he presented his 14 principles of
management and the 5 functions all managers perform. The 14 principles
1. Division of work: Specialisation increases output by making
employees more efficient.
2. Authority: Managers must be able to give orders wherever authority
is exercised, responsibility also arises.
3. Discipline: Employees must obey and respect rules that govern the
4. Unity of command: Every worker should receive orders from only
one superior.
5. Unity of direction: Each group of organisational activities that have
the same objective should be directed by one manager using one
6. Subordination of individual interests to the general interest. The
interests of workers should not take precedence over the interests of
the organisation.
7. Remuneration (pay): Workers must be paid a fair wage for their
8. Centralization: Centralization refers to the degree to which workers
are involved in decision making. The task is to find the optimum
degree of centralisation (to management) or decentralisation (to
9. Scalar chain: The line of authority from top management to the
lowest ranks represents the scalar chain. Communications should
follow this chain. Order.



10. Place and Time: People and materials should be in the right place at
the right time.
11. Equity: Managers should be kind and fair to their subordinates.
12. Stability of tenure of personnel: High employee turnover is
inefficient. Management should provide orderly personnel planning
and ensure that replacements are available to fill vacancies.
13. Initiative: Employees who are allowed to originate and carry out plans
will exert high levels of effort.
14. Esprit de corps: Team spirit will build harmony within the
The Five Functions of Management was the most important of Fayol's six
industrial activities (technical, commercial, financial, security, accounting,
managerial) and included.
1. Planning - examining the future and drawing up plans of actions
2. Organizing - building up the structure (labour and material) of the
3. Commanding - maintaining activity among the personnel
4. Coordinating - unifying and harmonizing activities and efforts
5. Controlling - seeing that everything occurs in conformity with policies
and practices
Fayol carried the management process beyond the basic hierarchical model
developed by Taylor. Under Fayols system, the command function continued to
operate efficiently and effectively through a series of co-ordination and control
methods. He recommended regular meetings of department heads and liaison
officers to improve co-ordination of organizational operations. He presented his
thinking in his work to serve as a model for the educational program he
espoused. His work was largely ignored in the U.S. until it was republished in

Max Weber (1864 1920)

Max Weber, the father of bureaucratic management, developed a
system in which the individual was granted a series of primary
occupations and responsibilities within an office. Each lower
office was accountable to the next higher one following a
systematic division of labour which pursued organizational goals
and objectives. People working in each office were chosen for their position
based on their qualifications. Their sole responsibilities were the primary
occupations or classifications assigned to them when they were hired.
Promotions were designed to reward seniority, achievement or both.
According to Webers plan, promotions were not affected by political
manoeuvring. Workers were also expected to separate personal business from
official responsibilities.



He published The Protestant Ethic and the Spirit of Capitalism. Weber stood Karl
Marx on his head by arguing that it was not underlying economic forces that
created cultural products like religion and ideology but rather culture that
produced certain forms of economic behaviour.
Bureaucratic management was a system characterised by division of labour, a
clearly defined hierarchy, detailed rules and regulations, and impersonal
Division of labour. Jobs are broken down into simple, routine and
well-defined tasks.
Authority hierarchy. Offices or positions are organised in a
hierarchy, each lower one being controlled and supervised by a higher
Formal selection. All organisational members are to be selected
on the basis of technical qualifications demonstrated by training or
Formal rules and regulations. To ensure uniformity and to
regulate the actions of employees, managers must depend heavily on
formal organisational rules.
Impersonality. Rules and controls are applied uniformly, avoiding
involvement with personalities and personal preferences of
Career orientation. Managers are professional officials rather
than owners of the units they manage. They work for fixed salaries
and pursue their careers within the organisation.

Lyndall Urwick (1891 1983)

Urwick was a British army officer turned theorist and consultant
whose work integrated the ideas of scientific management with
the ideas of classical organization theory.

Luther Gulick (1892-1970)

Gulick served on President Franklin D. Roosevelt's Committee
on Administrative Management during the 1930s, and his major
interests were political science and public service.
Urwick and Gulick edited a 1937 publication titled Papers on
the Science of Administration, which included articles on
organization theory and public administration.
Gulick defined the responsibilities of the chief executive officer using the acronym
POSDCORB, which stands for:










One of his main points was that well-managed, self-contained organizations or

departments are nearly always headed by a single top manager such as a CEO.
Urwick believed that the activities necessary to achieve organizational goals
should be grouped and assigned to individuals in an impersonal way, similar to
Max Weber's bureaucracy.
Urwick also wrote about the problems of managing large numbers of employees,
identified multiple levels of supervisory management, and used a formula to
determine the minimum and maximum number of subordinates a manager can
effectively supervise. His work was an important step in combining the principles
of scientific management with the thinking of Weber and Fayol.
He wanted to revise administrative practices by the establishment of general
He agreed with Frederick Taylor in that he believed that certain characteristics of
organizations provided administrators with the means to manage effectively. He
was in accord with Max Weber in that organizations were hierarchical. Gulick
added the concept of span of control, which addressed the factors limiting the
number of people a manager could supervise. He also recommended unity of
command because he felt that people should know to whom they were
responsible. His work centred on the fact that an organization should not
combine dissimilar activities in one department. This was the basis of Gulicks
major contribution in the area of departmentalization.

Chester Barnard (1886 1961)

He was a former President of New Jersey Bell Telephone and
the Rockefeller Foundation who, although not an 'academic',
did write a few books including The Functions of the
He is considered an important transitional figure who attempted
to connect scientific management and human relations. Barnard defined an
organization as a system of discerning co-ordinated individual activities or forces.
Barnard introduced a theory concerning the acceptance of authority based on
free will and outside forces. The acceptance theory of authority maintained that
employees considered the validity of a superiors orders and then decided
consciously whether to accept them or not. A directive was accepted by the
employee if he understood it, was able to follow it, and he believed it appropriate
as it related to his understanding of organizational goals.
Along with any formal organization, an informal organization always appeared.
An informal organization dealt with communication and relationships that the
formal structure was not equipped to handle. Informal groups were considered
essential because they established attitudes, customs and standards. According
to Barnard, the characteristics of the informal contacts or interactions were that
they occurred repeatedly without any specific unified purpose. This is a distinct



difference from modern theory, which maintains that a major function of informal
organizations is to achieve intergroup goals which are not met by formal

Blake & Moulton

In 1964, Robert Blake and Jane Mouton developed a management model that
conceptualises management styles and relations.
Their Grid uses two axes:

Concern for people which is plotted using the vertical axis, and

Concern for task is plotted along the horizontal axis.

The notion that just two dimensions can describe a managerial behaviour has the
attraction of simplicity.
This grid identifies five different types of leaderships styles. The grids show if
managers are concerned with people or production.
Country Club

Team Leader

Concern for People



Middle of
the Road


Produce or Perish

Concern for Production


Figure 1.8 Blake Mouton Grid

Concern for people means how leaders meet the needs of their employees and
takes into account their interests and how best they can complete a task.
Concern for production is where the manager concentrates on productivity,
objectives and efficiency.



Country Club Manager (Social Manager)pays thoughtful attention to the needs
of people to create satisfying relationships. This leads to a comfortable and
friendly organization atmosphere and work tempo.

If staff are happy the results will reflect that

There is no conflict with employees

The manager would rather have employees happy

Team Manager creates committed people who accomplish work goals through
inter-dependence and a common commitment to the success of the organization.
This leads to relationships of trust and respect.

Production and concern are seen as equal

Employees understand organisational purpose

People are motivated by themselves

Teamwork, valuing others and positive responses are used

Impoverished Manager exerts minimum effort to get the required work done and
sustain organization membership.

Is an ineffective leader

Wants to just get the job completed

Lack any type of commitment

The Authoritative Manager (Produce or Perish) believes that operational

efficiency can be achieved by arranging conditions of work in such a way that
people interfere to a minimum degree.

The job gets done

Employees are directed and controlled

Employees are judged on results

Autocratic leadership style

The Middle of the Road Manager believes that adequate organization

performance is possible through balancing the necessity to get out work while
maintaining morale of people at a satisfactory level.

Comprises are taken into account

Average performance

Resort to rule book



Blake and Mouton believe that the team manager is the best type of managerial
style. The main reason is that production and employees are equally important to
the business.

Human Relations Movement

Human relations thinking emphasizes the interpersonal and social needs of
individuals and marks a clean break from earlier points of view. Mary Parker
Follett, Elton Mayo & Chester Barnard first founded it in the 1920s & 30s. They
examined the employee-manager relationship in an entirely new way. Their work
provided the foundation for the human relations approach and became the
precursor of contemporary thinking about management and leadership.

Chris Argyris (1923)

According to Argyris (who wrote On Organizational Learning &
Personality and Organization), the principles of formal
organization, such as hierarchy and task specialization, are
incongruent with the developmental needs of healthy adults.
Research that applies human relations thinking to the
relationship between management and organizational effectiveness has been
inconclusive and disappointing. Its underlying ideology has been interpreted as
an unacceptable willingness to trade profitability for employee well-being.



Douglas McGregor (1906 - 1964)

He was part of the Human Relations Movement and is best
known for his formulation of two sets of assumptions theory X
and theory Y about human nature.
Theory X assumes that people have little ambition, dislike work,
want to avoid responsibility, and need to be closely watched to work effectively.
Theory Y offers a positive view and assumes that people can exercise selfdirection, accept responsibility and consider work as natural as work and play. He
believed that theory Y assumptions best described the attitudes of workers and
should guide management practice.

Abraham Maslow (1908 - 1970)

Maslow was an American psychologist. He is noted for his
conceptualization of a "hierarchy of human needs", and is considered
the founder of humanistic psychology.

Figure 1.9 Maslows Hierarchy of Human Needs

The Hierarchy of Needs is a pyramid depicting the levels of human needs,

psychological and physical.



When a human being ascends the steps of the pyramid he reaches self
At the bottom of the pyramid are the Basic needs or Physiological needs of a
human being, food and water and sex.
The next level is Safety Needs: Security, Order, and Stability. These two steps
are important to the physical survival of the person. Once individuals have basic
nutrition, shelter and safety, they attempt to accomplish more.
The third level of need is Love and Belonging, which are psychological needs;
when individuals have taken care of themselves physically, they are ready to
share themselves with others.
The fourth level is achieved when individuals feel comfortable with what they
have accomplished. This is the Esteem level, the level of success and status
(from self and others).
The top of the pyramid, Need for Self-actualization, occurs when individuals
reach a state of harmony and understanding.

Rensis Likert (1903 1981)

In the 1960s Likert developed four systems of management
which described the relationship, involvement, and roles
between management and subordinates in industrial

Exploitive authoritative system

In this type of management system the job of employees/subordinates is to obey
the decisions made by managers and those with a higher status than them in the
organisation. The subordinates do not participate in the decision making. The
organisation is concerned simply about completing the work. The organisation
will use fear and threats to make sure employees complete the work set. There is
no teamwork involved.

Benevolent authoritative system

Just as in an exploitive authoritative system, decisions are made by those at the
top of the organisation and management. However employees are motivated
through rewards (for their contribution) rather than fear and threats. Information
may flow from subordinates to managers but it is restricted to what management
want to hear.

Consultative system
In this type of management system, subordinates are motivated by rewards and
a degree of involvement in the decision making process. Management will
constructively use their subordinates ideas and opinions. However involvement is
incomplete and major decisions are still made by senior management. There is a



greater flow of information (than in a benevolent authoritative system) from
subordinates to management. Although the information from subordinate to
management may be incomplete or vague.

Participative (group) system

Management has complete confidence in their subordinates/employees. There is
lots of communication and subordinates are fully involved in the decision making
process. Subordinates comfortably express opinions and there is lots of
teamwork. Teams are linked together by people, who are members of more than
one team. Likert calls people in more than one group linking pins. Employees
throughout the organisation feel responsible for achieving the organisations
objectives. This responsibility is motivational especially as subordinates are
offered economic rewards for achieving organisational goals which they have
participated in setting.

Behavioural Science Theorists

The behavioural viewpoint focused on the need to understand how different
factors affect human behaviour in organizations. Whereas, the classical theorists
viewed people as production mechanisms and tried to identify ways of making
them more efficient. The behavioural school of management thought developed,
in part, because of perceived weaknesses in the assumptions of the classical
school. The classical school emphasized efficiency, process, and principles.
Some felt that this emphasis disregarded important aspects of organizational life,
particularly as it related to human behaviour. Thus, the behavioural school
focused on trying to understand the factors that affect human behaviour at work.

Hugo Munsterberg (1913)

He was a leader in developing industrial psychology - the
scientific study of individuals at work in order to maximise their
productivity and adjustment.
He suggested the use of psychological tests to improve the value
of learning theory in the development of training methods,
employee selection, and the study of human behaviour in order to understand
what techniques were most effective for motivating workers.
Like the scientific managers, he sought greater efficiency through better
alignment of individual skills and abilities with the demands of various jobs.

Mary Parker Follett (1868-1933)

Follett was another early advocate of the behavioural approach to management.
Follett worked during the scientific management era, but quickly came to
recognize the human element in the workplace. Indeed, her work clearly
anticipated the behavioural management perspective, and she appreciated the
need to understand the role of behaviour in organizations.



Elton May (1880 1949)
Mayo discovered that workers were not just concerned with pay
but were also motivated by having social needs met at work.
Mayo conducted a study on worker productivity at Western
Electric, at the time one of the most advanced manufacturing
facilities employing 29,000 workers producing equipment for
He started out by trying to identify the relationship between productivity and
working conditions. Mayo played around with lighting in the work place to see if
changing the lighting conditions impacted productivity. To his surprise, both more
and less light created higher productivity levels. Mayo realized that the workers
chosen for the experimented were accorded higher status by their co-workers.
The increased performance was due to their increased motivation. Productivity
was related to social effects, not the level of lightning. Mayo called such social
behaviour the Hawthorne Effect.
Mayo concluded that the workplace was above all, a social system of
interdependent actors in which workers are influenced more by the social
demands of the work place, by their need for recognition, security and a sense of
belonging, than by their physical working environment. It was starting to become
clear that motivation was a complex topic with no simple solutions that employers
could use to keep their employees constantly motivated.
Mayo also concluded that:

Job satisfaction leads to higher job productivity

Pay alone is a relatively low motivator

Management is only one factor affecting behaviour

The informal group exerts a strong influence on motivation

Quantitative Management
Quantitative management focuses on improving decision making via the
application of quantitative techniques. Its roots can be traced back to scientific
This approach focused on mathematics, statistics and information to support
management decision making and organizational effectiveness.
Three branches have emerged from this approach:

Management science

Operations management

Management information systems

Management science uses mathematical modelling and statistical methods to

increase the effectiveness of decisions.
Operations management focuses on production and delivery. It includes;
inventory management, work scheduling, production planning, facilities design,
and quality assurance.



Management information systems focus on the design and implementation of
computer-based management information systems.

Contingency Management
The contingency approach to management (sometimes called the situational
approach) emerged in the 1960s from the increased diversity and environmental
uncertainty which characterises management in todays world.
Contingency management recognizes that as every situation is unique, there are
no universal rules which managers can apply in every situation, and that the style
of leadership and management required in an organisation will depend on a
range of variables confronting the organisation at the time.
Contingencies can be unforseen events which cant be anticipated, eg.
September 11, Hurricane Katrina etc.
Presently, governments, hospitals and a host of other organisations in many
countries are developing contingency plans (what- if plans) in the case of a
Common contingency variables that influence what approach will be effective in a
given situation include:
Environmental uncertainty. What is effective in a stable,
predictable environment may be inappropriate in an environment
characterised by change and unpredictability.
Organisation size. The type of organisational size and structure
suitable for an organisation of 50 workers is unlikely to be suitable for
an organisation of 5000 workers.
Routineness of tasks. Routine technologies used in mass
production require different management systems and structures than
for non-routine technologies producing customised products.
Individual differences. Taking account of individual differences is
important for management of people as not all people react to
situations in the same way.

Contemporary Management
Management research and practice continues to evolve and new approaches to
the study of management continue to be advanced. This section briefly reviews
contemporary approaches: systems theory, total quality management (TQM) and
the learning organization.
While none of these management approaches offers a complete theory of
management, they do offer additional insights into the management field.

Systems Approach
The systems approach defines a system as a set of interrelated and
interdependent parts arranged in a manner that produces a unified whole.
There are two types of systems, closed systems and open systems. A closed
system does not interact with and is not influenced by the environment in which it
operates. An open system approach recognises the dynamic interaction with the
environment - suppliers, labour unions, financial institutions, government



agencies, and

Figure 1.10 - The Systems Approach















Human development





The job of the management is to coordinate all parts of the system in order to
meet organisational goals and this done through setting up feedback
The systems approach has several advantages, the main one being that it shows
how changes in one part of an organisation can affect the rest of the
organisation. This awareness ensures that activities are more likely to be properly
coordinated throughout the organisation.

Total Quality Management

TQM is based on quality concepts
developed by W. Edwards Deming in the
1930s, and by Joseph Juran in the 1970s
and 1980s.
TQM is a concept whereby everyone is expected to contribute to the overall
improvement of quality the engineer who eliminates design errors, the
production worker who spots defects, the sales representative who presents the
product to customers, and the clerical worker who avoids typing mistakes.



TQM, which encompasses all the functions within an organisation, was
popularised by the Japanese. Japanese companies often give the responsibility
for quality consistency to the workers who actually make the product or provide
the service.
The earlier in the cycle a problem is eliminated, the less it costs for the company
to eliminate it.

TQM Principles
Intense focus on the customer.
The customer includes not only outsiders who buy the organisations products or
services, but also internal customers - staff who interact with others in the

A concern for continual improvement.

TQM is a commitment to never being satisfied. Very good is not good enough.
Quality can always be improved.
Improvement in the quality of everything the organisation does.
It relates not only to the final product but to how the organisation handles
deliveries, how rapidly it responds to complaints, how the phones are answered,
and the like.

Accurate measurement.
TQM uses statistical techniques to measure every critical variable in the
organisations operations.

Empowerment of employees.
TQM involves the people on the line in the improvement process.
Teams are widely used in TQM programs as empowerment vehicles for finding
and solving problems.



The Learning Organization

Peter Senge (1947)
1990 saw Peter Senge develop the notion of the Learning
In his book "The Fifth Discipline: The Art and Practice of the
Learning Organisation, he describes the organisation as an
organism with the capacity to enhance its capabilities and shape
its own future.
A learning organization is any organization (e.g. school, business, government
agency) that understands itself as a complex, organic system that has a vision
and purpose.
It uses feedback systems and alignment mechanisms to achieve its goals.
It values teams and leadership throughout the ranks.
The learning organisation uses information, looks for opportunities, revues
outcomes, benchmarks other organisations and shares learning among its

Tom Peters &Bob Waterman

Tom Peters and Bob Waterman published In Search Of Excellence
(1982) that summarized winning practices of a few American
As a result of this book, Tom Peters became the first management
One remarkable fact about In Search of Excellence remains the list of companies
has held up quite well over time.
The book focuses on 43 "excellent" companies.
And, while it contains a few embarrassing picks, such as Atari and
Wang Labs, the companies Peters and Waterman called excellent have
easily outperformed the market averages
Since October 1982, when the book was published, the companies on the
authors' list earned an average total return of 14.1% annually.

The Karpin Report

The Australian Industry Task Force on Leadership and Management Skills, 1995,
chaired by Professor David Karpin, found that Australian management suffered
from a lack of vision and its viewpoint was often short-term.
Other problems were poor people skills, lack of strategic perspective, inflexibility
and poor teamwork.



Inadequate education and training, focus on current skills, and an over-reliance
on short courses were some of the reasons for these problems in management
and leadership.
The report identified a number of management skills and categorised as
strengths and weaknesses in management style. These were:

Management strengths:

Management weaknesses:


Short-term view

Flexible and adaptable

Lack of strategic skills


Inflexible approach to training and learning

Technically sound

Poor at teamwork

Independent thinking

Inability to deal with diversity

Egalitarian (fairness to all)

Poor people skills

Open, genuine, direct

Complacent (rather than proactive)

Open, genuine, direct

Lack of self confidence

Figure 1.11 Management Strengths and Weaknesses

The Karpin Report concluded that Australian business needed to develop a more
positive enterprise culture through education and training.
The report saw 1995 - 2010 as a developmental period for improving Australian
business practices at leader and manager level.
The report went on to note that the critical importance of education, training and
ongoing professional development to ensure managers had the knowledge and
skills they needed to perform effectively in the workplace
Lifelong learning was recommended as a key ingredient in skilling workers and
managers for evolving work environments.
The report recommended that more emphasis should be placed on the important,
non-technical domains of management and on the soft skills of managers:
leading and managing people, communicating, negotiating, resolving conflict,
fostering creativity and innovation, and on managing change.
Australian businesses were also encouraged to focus on globalization, to
encourage and to value diversity in the workforce, and to implement best
practice management procedures.

Is management practice the same in every country

of the world?
In western countries which have similar languages and traditions, management
practices may be similar, although even amongst these countries some
differences can still occur.
Organisations exist within a wider environmental framework of systems and
structures. Economics, legal systems, political structure, culture and
infrastructure shape management practices throughout the world.



For example, western management theory reflects the democratic, common law,
free-market culture of the western world.
It would be incorrect to think that western management theory can be applied, or
should be applied, in countries with different backgrounds and traditions, systems
and structure.
Organisations do not have the same meaning in different cultures.
The meaning that people give to an organisation is culturally defined.
Culture is a shared set of meanings which dictate what we pay attention to, how
we act and what we value.
Each of us carries within us the ways our culture has taught us to about
organizing our experience to mean something

Global Management Systems

So, a fellow worker from a different culture may have a different way of seeing
the meaning of organisation from our own, just as students from different cultures
may have different views of the meaning of education.
Traditional theories of organisations have been based on the physical, verifiable
characteristics of organisations which have been assumed to have a common
meaning for all people, in all times and all parts of the world.
Instead of this approach we should look for the common ways in which different
cultural groups structure the perceptions of what they experience.
Research shows that in some cultures, an organisation is seen as a system
designed to perform functions but in other cultures an organisation is seen as a
group of people working together to perform functions.
Each of these perceptions of an organisation calls for different approaches to
Management theorists like Taylor, Fayol and others have one thing in common:
they all gave the impression that there was one best way of managing and
organising. If you search for sameness, you will usually find it and if you stick to
examining common objects and processes like refining oil, then pipes will be
found to have the same function all over the world.
It may be perfectly natural to attempt to view management this way but
unfortunately it leads to poor management practice and management problems in
different cultural contexts.
Studies in the 1970s showed that the effectiveness of management methods
depends on the environment in which we operate.
Organisations do not simply react to their environment as a ship might to waves;
culture means that we select, interpret and create our own environments.
More recently, contingency management studies have shown how
organisational structures vary according to major variables in the environment.
For example, in studies of US organisations in simple, stable environments,
steep hierarchical structures survive, but in complex, turbulent environments,
flatter management hierarchies are more profitable.



Meanwhile, Japanese organisations have been able to operate profitably in
turbulent environments with steep hierarchical structures.
Rather than there being one best way of organising there are several ways,
some more culturally appropriate and effective than others, but all of them giving
managers additional strategies to apply in different settings.

The Art of Management

The art of management is not simply restricted to the organization of processes
and operations.
Neither is management restricted to problem solving and decision making.
Management is an all-encompassing discipline, which requires a broad range of
skills and abilities; about which millions of words have been written and millions
more will be written.
Every year several hundred management manuals are produced, expounding
new theories of management, as consultants and theorists compete to become
the new leaders in management thought.
Management has been a discipline and a fact of life for centuries, but it is only in
recent years that it has been described as both a profession and a science.
The development of management theory can be traced back over hundreds of
years and has been influenced by key thinkers such as Karl Marx, Max Weber,
Henri Fayol, Frederick Winslow Taylor, Elton Mayo, Dale Carnegie, lgor Ansoff
and Henry Mintzberg, to name but a few.
Successive waves of theorists have dissected the nature of management, the
environment in which it operates, the inter-relationships between managers and
employees, the nature of change, communication, teams and groups.
Theorists have examined the differences between leadership and management,
coming to many radically different conclusions about their nature and their
dependence upon one another.
Other theorists have focused on motivation, or the management of conflict, and,
in latter years, attention has been drawn to performance management.
No study of management or leadership can ever be complete; neither can it hope
to be the last word on the subject.
The discipline continues to develop, spawning new sub-disciplines. Whilst skilled
workers, with defined tasks, duties and roles, may have a blueprint to work from,
there is no such blueprint for management; there are no precise plans, there is
no ideal way in which to manage.
Management depends upon circumstance, personal style, the environment, the
organizational structure and its processes.


Chapter 2


School of Business Services

Faculty of Workforce Development



Business Environments
Organisations interact with two types of environments, the external and internal

External Environment
The external environment comprises of two environments, the Mega and Task
environments. The Mega environment is the general external environment in which the
organisation functions. The Task environment comprises more specific elements that
act directly on the organisation.

The Mega Environment

The Mega environment is the general external environment in which organisations
operate and exerts pressure on the organisations ability to achieve its Vision, Mission
and Goals.

Figure 2.1The Mega Environment



The Mega environment has five elements:
The technological element
This is the current technology available to produce the organisations products and
services. The forces which can exert pressure on the organisation can include; the
need to keep equipment up to date with that of competitors, the need to maintain
modern communications and computing systems.
The economic element
This is the commercial environment in which the organisation functions. The forces
which can exert pressure on the organisation can include; the need to create wealth,
changes in inflation, interest rates, unemployment levels.
The political element
This is the legal environment in which the organisation functions. The forces which can
exert pressure on the organisation can include; local, state or federal laws and changes
in government.
The cultural element
This is the sociological environment in which the organisation functions. The forces
which exert pressure on the organisation can include; values, client expectations, work
ethics, and multi-culturalism.
The international element
This is the global economic environment in which the organisation functions. The
forces which exert pressure on the organisation can include; the political stability in
trading nations, changes in import/export tariffs, changes in currency exchange rates.
These elements exert pressure on the organisation to change. Although generally
considered to be of a negative nature (stopping us from achieving our goals), these
forces can also act in a positive way, by providing opportunities for early expansion,
increased profitability and product improvement.



The Task Environment

The Task Environment is also comprised of elements from the external environment
which can directly affect the operations of the organisation. But, unlike the megaenvironment, managers often do have the ability to control these elements.

Figure 2.2 - The Task Environment

The task environment represents more specific elements that act directly on the
organisation and is mainly concerned with products, services and the location of the
The Task environment has five elements:
1. The Customer element
This is the environment which is concerned with satisfying customer needs
and expectations. The forces which exert pressure on the organisation can
include; customer expectations of product and service quality and value for
2. The Competitor element
This is the environment which is concerned with competition. The forces
which exert pressure on the organisation can include; competitive pricing,
product innovation, service quality.
3. The Supplier element
This is the environment which is concerned with stability and continuity. The
forces which exert pressure on the organisation can include; working
relationships, costs, scheduling, and product and service quality.
4. The Government element



This is the environment which is concerned with ethics. The forces which
exert pressure on the organisation can include; legal compliance with health
and safety, industrial relations, consumer protection and taxation laws.
5. The Labour element
This is the environment which is concerned with the supply of labour. The
forces which exert pressure on the organisation can include; education
levels, unemployment rates, work ethics, and multi culturalism.

Internal Environment
The Internal environment refers to the environment inside the organization. , , are
those forces acting on the organisation from within and take a similar form to those
discussed under External Forces.
The Internal environment has four elements:
1. The Economic element
This is the environment which is concerned with efficiency. The forces which
exert pressure on the organisation can include; cost recovery and
reductions in capital expenditure.
2. The Human element
This is the environment which is concerned with employee competence
productivity. The forces which exert pressure on the organisation can
include; the knowledge, skills and values of employees, employee
motivation, satisfaction and absenteeism.
3. The Resource element
This is the environment which is concerned with the allocation of physical,
human and financial resources. The forces which exert pressure on the
organisation can include; financial constraints, employee availability,
adequate facilities.
4. The Technology element
This is the environment which is concerned with existing technological
capability of the organization. The forces which exert pressure on the
organisation can include; the skill levels of staff and the currency of existing
technologies to deliver efficient and effective outcomes.



Understanding the Business Environment

Research has shown that the environment has varying degrees of influence on
organizations. However, researchers hold different views on the relationship between
organizations and their environments.
The two main approaches to understanding the business environment are based on
the Population Ecology and Resource Dependence models. In this section we will
examine the main characteristics of these two models.

Population Ecology Model

Population ecology is the branch of ecology that studies the structure and dynamics of
a population in a given area.

Figure 2.3 - Ecological disciplines

The population ecology model argues that organisations with the right characteristics
will survive regardless of the environmental factors.
This view is also known as the natural selection model.
Therefore, some organisations will always continue to prosper while others are
destined to fail at some point in time.



The population ecology model suggests that the main reason for business failures is
incompetent management. These are managers who lack the foresight or vision or
technical expertise to recognize that their markets are continually changing and that
their products or services need to change as well to satisfy the expectations of their
customers and the innovations being developed by their competitors.
The following definitions apply to the disciplines shown in Figure 4:
Population ecology is the branch of ecology that studies the structure
and dynamics of populations
Physiology studies individual characteristics and individual processes.
These are use as a basis for prediction of processes at the population level.
Community ecology studies the structure and dynamics of animal and
plant communities. Population ecology provides modelling tools that can be
used for predicting community structure and dynamics.
Population genetics studies gene frequencies and microevolution in
populations. Selective advantages depend on the success of organisms in
their survival, reproduction and competition. And these processes are
studied in population ecology. Population ecology and population genetics
are often considered together and called "population biology". Evolutionary
ecology is one of the major topics in population biology.
Systems ecology is a relatively new ecological discipline which studies
interaction of human population with environment. One of the major
concepts is optimization of ecosystem exploitation and sustainable
ecosystem management.
Landscape ecology is also a relatively new area in ecology. It studies
regional large-scale ecosystems with the aid of computer-based geographic
information systems. Population dynamics can be studied at the landscape
level, and this is the link between landscape- and population ecology.

Resource Dependence Modal

Resource Dependence Theory (RDT) is the study of how the external resources of
organizations affect the behaviour of the organization. The procurement of external
resources is an important principle of both the strategic and tactical management of
any company.
The Resource Dependence model argues that organisations cannot generate all of
their resources needed to function effectively. Therefore they have to rely on suppliers
to satisfy many of their resource requirements. This poses varying degrees of risk
which organisations have to manage and manipulate, to reduce their dependence on
the suppliers of their resources.
It surmises that organisations can, and should adapt, to enhance their chances of



The Resource Dependence model suggests that:

Organizations should have control over their own fate,

Managers must try to acquire resources without creating dependencies,

All organizations have to exchange resources with the environment in
order to survive.
This theory tries to explain the behaviours of organisations in terms of the resources
required to survive and function by focusing on the following:

Resources: The flow of resources between organisations.

Constraints: The effect that the dependencies have on the ability of the
organisation to function and survive.
Management: The effect of the action of the organisation to manage the
Dependencies: The dependencies created as a result of the unequal
exchange of resources.

Figure 2.4 - Resource Dependence Modal

This theory is a political-economic model, with the emphasis on resource exchange

between organisations. The theory covers both organisational and inter-organisational
The theory provides a means of thinking about power differences across organisations
and the use of adaptive strategies as a political tool.



The basic argument of Resource Dependence Theory can be summarized as follows:

Organizations are dependent on resources.

These resources originate from the environment of organizations.

The environment includes other organizations.

The resources one organization needs are thus often in the hands of
other organizations.

Resources are a basis of power.

Legally independent organizations can therefore be dependent on each

Power and resource dependence are directly linked:
Organization A's power over organization B is equal to organization B's
dependence on organization A's resources.

Power is thus relational, situational and potentially mutual.

Both, the Population Ecology model and the Resource Dependence

model provide organisations with useful insights into managing risks.
The Population Ecology model suggests that organisations have little
control over environmental forces and so at times their success or failure
may be due to luck.
The Resource Dependence model suggests that organisations can
influence environmental forces if they monitor, understand and influence the
environment elements.

Analysing the Business Environment

It is important to study the environment that an organisation operates in for three main
Most organisations compete against other organisations, so it is
essential that managers review the nature of the competition that they face
so they can develop strategies that will ensure the long-term success of the
All organisations face both threats and opportunities-again for an
organisation to be successful it must overcome threats and take
opportunities as they arise. To do so managers must be aware of them,
such opportunities and threats come from many sources not just other
competitors, such as government, changes in technology and social
There may be opportunities for co-operation and alliances between



Environmental analysis is difficult because of the many unknown or unpredictable
factors involved. How do you plan for natural disasters, terrorist actions or a global
financial collapse?
The size and nature of the environmental influences means that everything depends on
everything else.
Therefore, in order to develop an effective organisation strategy we need to first identify
the key influences that can support or prevent an organization from achieving success.
To do this we must use a range of environmental scanning tools.
The main purpose of the environmental analysis is to understand what external
conditions may affect the organisation in the future.
The environment analysis can be used on three levels:

General changes in the environment as a whole i.e. the economy;

Change within the industry;

Known activities of competitors and other specific events.

Environmental Uncertainty
Environmental uncertainty occurs in the absence of full information about the
There are 2 dimensions of environmental uncertainty:
Environmental complexity whether the environment is simple or complex. The
number and dissimilarity of external elements relevant to the organization's operations.
Environmental stability whether the environment is stable or unstable. The extent to
which the environment is changing rapidly and unpredictably



Figure 2.5 - Environmental Uncertainty

Organizations utilize a number of strategies to adapt to environmental uncertainty.

As environmental uncertainty increases, organisations must monitor, assess and act to
reduce the level of uncertainty to manage any risks to their business.

Environmental Complexity
Environmental complexity is to do with the number of elements in an organisations
environment and their degree of similarity.
When there are only a few similar elements, the environment is said to be
homogeneous (all the same).
But when there are many dissimilar elements, the environment is said to be
heterogeneous (very different). Managers find heterogeneous environments very
challenging because of the many variables that need to be considered.

Environmental Stability
Environmental stability is to do with the rate and predictability of change in the
elements in an organisations environment.
When changes take place slowly and in a predictable manner, the environment is said
to be stable.
But when changes take place in a fast and unpredictable manner, the environment is
said to be unstable. Managers find unstable environments very challenging because of
the many variables that need to be considered.



Managing Environmental Uncertainty

Managing environmental uncertainty is not easy. But managers do have three options
for managing environmental factors:

Adapt to the environmental elements.

Make the environment more favourable.

Move operations to a more favourable location.

Adapting to Environmental Elements

Adapting to the environment involves changing the organization in some way to suit the
environmental elements that interact with the organization. To do this organizations will
usually use one or more of the following five methods:

Figure 2.6 - Adapting to Environmental Elements

This is a risk management strategy which is designed to guard against unforeseen
environment variables. It involves holding additional stock of inputs and outputs from a
manufacturing or service processes.
However, this strategy is not appropriate when the stock is high value or perishable. It
is also not feasible to stockpile services.

Another strategy involves sourcing supply of resources from two or more organisations.
This has the advantage of reducing the risk of running out of inputs or outputs due to
fluctuations in the supply of materials or the demands of customers.

Smoothing is a strategy which is designed to reduce the impact of fluctuating market
demands. An example of this strategy is to reduce prices to increase sales during low
demand periods.

Another way that organisations can manage risks is by forecasting (predicting) future
environmental fluctuations or changes. However, the higher the degree of uncertainty,
the less accurate the forecasts will be.



Rationing is a technique used to control the demand for scarce products or services by
restricting access to them. For example, when product such as oil is in short supply,
governments often limit the amount of petrol that the public may buy on any day.

Making the Environment Favourable

Organisations may choose to make the environment more favourable by changing
some environmental elements.

Figure 2.7 - Changing Environmental Elements

Advertising and Promoting

Organisations can influence the environment by advertising or promoting their products
or services. Eg. Offering cheap prices for a limited time to reduce stock of slow moving

Boundary Spanning
Boundary spanning involves influencing environmental elements through the actions of
people in specific roles, both inside and outside of the organization.
Within the organization it could involve the collection, processing, filtering and
distribution of information to specific people for actioning. E.g. real-estate agency may
provide their salespeople with a list of likely customers such as newlywed couples.
Outside the organization it could involve the distribution of selected information to
specific interest groups. Eg. a health food company may provide advertising materials
and free samples of their products, to fitness clubs, in order to reach their target
market, the club members.



The environment can also be influenced by recruiting new employees with experience
and strengths in a particular environmental element. Eg. having industry knowledge or
industry connections.

When negotiating contracts with customers or suppliers, terms and conditions could be
included, that lead to more favourable outcomes for the organization. Eg. Specifying
minimum order quantities.

Large public organizations employ high profile people to serve as directors on their
boards. Eg. These directors are usually drawn from key environmental elements and
can provide important insights into how the organization should manage specific
environmental elements.

Strategic Alliances
Organisations often enter into strategic alliances when they have complementary skills
or resources. Eg. A civil engineering business and a road surfacing business may form
a joint venture company to bid for road construction projects.

Industry Associations
Similar or related organisations may join an industry association to promote themselves
as members of a credible and respected industry body.

Political Lobbying
Organisations can try to influence governments to provide assistance or favourable
conditions for doing business. Eg. company directors, who usually have large networks
of influential contacts, can use their resources to lobby government decision-makers.

Domain Change
Domain change can involve changes to products, service or locations. Eg. Changing
the product mix or relocating to another city or region.



Organizational Culture
When we walk into an organisation and get a certain 'feel' for it, whether it is fast
moving and responsive, or whether it feels old and backward looking, this 'feeling' is
referred to 'organisational culture'.
How the organisation organises itself, its rules, procedures and beliefs make up the
culture of the company.
Culture is about a shared system of values, assumptions, beliefs and standards.
Organizational culture describes the psychology, attitudes, experiences, beliefs and
values (personal and cultural values) of an organization. It has been defined as "the
specific collection of values and norms that are shared by people and groups in an
organization and that control the way they interact with each other and with stakeholder
outside the organization."
Organizational values are the beliefs and ideas about what kinds of goals members of
an organization should pursue and ideas about the appropriate kinds or standards of
behaviour organizational members should use to achieve these goals. Organizational
values guide management in the development of organizational norms, guidelines and
expectations. These values also guide the appropriate kinds of behaviour by
employees in particular situations and control the behaviour of organizational members
towards one another.
Organizations include for-profit businesses, religious institutions, not-for-profit groups,
and government agencies. Organizational culture is the total sum of the values,
customs, traditions, and meanings that make an organisation unique. The values of an
organisation influence the ethical standards within an organisation, as well as
managerial behaviour.
Management may try to create a corporate culture by imposing corporate values and
standards of behaviour that specifically reflect the objectives of the organization. To do
this they will often have to change an existing internal culture within the workforce.
Work-groups within organizations often have their own behavioural values which can
affect the whole system. Sometimes organizational culture can be imported. For
example, computer technicians will have expertise, language and behaviours gained
from their industry that are independent of the organizations culture. This can influence
the culture of the organization as a whole.
The impact of an organisations culture can be analysed and measured across three
main areas.

Figure 2.8 - Cultural Impact



Support- how much the organisations culture supports the corporate strategic
Coverage- how widespread the cultural values extend across the organisation.
Acceptance how much staff have accepted the organisations values, assumptions,
beliefs and standards.
In this section we are going to briefly look at six types of organisational cultures.

Figure 2.9 - Types of Organisational Cultures

Power Culture
Within a power culture, control is the key element. Power cultures are usually found
within a small or medium size organisation.
Decisions in an organisation that display a power culture are centralised around one
key individual. That person likes control and the power behind it.
As group work is not evident in a power culture, the organisation can react quickly to
dangers around it as no consultation is involved.
However this culture has its problems, lack of consultation can lead to staff feeling
undervalued and de-motivated, which can also lead to high staff turnover.

Role Culture
Common in most organisations today is a role culture. In a role culture, organisations
are split into various functions and each individual within the function is assigned a
particular role.
The role culture has the benefit of specialisation.
Employees focus on their particular role as assigned to them by their job description
and this should increase productivity for the company.
This culture is quite logical to organise in a large organisation.

Task Culture
A task culture refers to a team based approach to complete a particular task.



They are popular in today's modern business society where the organisation may
establish a project team to complete a particular task.
A task culture clearly offers some benefits.
Staff feels motivated because they are empowered to make decisions within their team.
They will also feel valued because they may have been selected within that team and
given the responsibility to bring the task to a successful end.

Person Culture
Person cultures are commonly found in charities or non profit organisations.
The focus of the organisation is the individual or a particular aim.
However, high profile and dynamic leaders like Richard Branson, the CEO of Virgin
Airlines, has also created a person culture based on him.

Forward Looking Cultures

Organisations that have an entrepreneurial spirit always embrace change and listen to
staff and customers are said to be forward looking.
Forward looking organizations are risk takers and do well because of it.

Backward Looking Cultures

A backward looking culture does not embrace change and is led by systems and
They do not take risk and are slow to change. Because of it they are usually left with a
business not doing so well.

Entrepreneurial Culture
Culture is about how the organisation organises itself, its rules, procedures and beliefs
make up the culture of the company.
Whenever two or more people come together with a shared purpose, they form a
culture with its own written and unwritten rules for behaviour.
Our families, workplaces and communities all have cultures.
These cultures have a tremendous, though rarely recognized, impact upon our
behaviour as individuals.
Each cultural environment provides a unique set of standards to which we must adapt.
Our behavioural patterns change dramatically from cultural context to cultural context.
For example, on the job we are expected to behave in accordance with certain social
Expectations about behaviours at work usually differ from what is expected of us in our
kitchens and in our bedrooms.
We may choose not to behave in accordance with our cultures, but if we choose not to
go along, we must be prepared for ongoing consequences.



When we select goals for ourselves that violate the culture, we must either change the
culture or endure a never-ending struggle.
Changes initiated in unsupportive cultural environments tend to last less than one year.
In contrast, changes that are supported by the culture are likely to stick.
In addition, both the desire to attempt change and the likelihood of long-term success
are positively related to cultural support.
In order to achieve sustained results, goals must be linked with the creation of more
supportive cultural contexts.
This is true whether our goal is to exercise regularly, to increase organizational
productivity, or to reduce drunk driving.
The culture influences our choices and determines the effectiveness of our individual
Almost invariably, the long-term individual solution must also be a cultural solution.
This fundamental understanding is expressed in a simple equation:

Figure 2.10 - Lasting Change

Individual initiative is a necessary ingredient to successful change.

In order to achieve sustained results, some of this individual initiative must be
channelled into building more supportive cultural environments.
To achieve long-term success, the good ideas and hard work of individuals must be
linked to cultural norms, values and support systems.

Promoting Innovation Through Cultural Change

Organisations with unhealthy cultures often have hostile environments that resist
change. This may be due to an over reliance on their past successes or a lack of
confidence in management to make good decisions.
Whereas, innovative organisations that have an adaptive and entrepreneurial culture,
welcome change and continually look for improvements, are prepared to take
calculated risks and are not satisfied with past achievements.
The Organisation Opportunity Matrix shown in Figure 11 shows four basic kinds of
organisational cultures.



Adaptive/entrepreneurial organisational cultures tend to welcome
growth and change, and believe that they can influence the competitive
environment in which they operate.
Complacent organisational cultures are slow to change and may not
survive in a fast paced business environment.
Reactive planner organisational cultures generally express a desire
for change but usually fail to take any actions. Management are more
inclined to react to change.
Bureaucratic/administrative organisational cultures are considered
cautious, lethargic and conservative. They do not believe that they can
influence the environment and employees are not encouraged to show any

Figure 2.11 Organisation Opportunity Matrix



The following table displays the characteristics of the two cultural extremes, the
adaptive/entrepreneurial culture and the bureaucratic/administrative culture.

Adaptive/Entrepreneurial Culture

Administrative Culture


Seeking out opportunities for change

Focus on controlling resources

Approach to

Implements revolutionary change in a

short time period

Waits for change to evolve over a long

time period

of resources

Resources are allocated to support

incremental (small step)
improvements, with minimal
exposure at each stage

Significant resources are provided for

large (single step) improvements, with
complete commitment based on one

Control of

Resources are hired or rented on an

as needs basis

Resources are purchased or acquired

and owned by the organisation


Few reporting levels with emphasis

on informal communication patterns

Many levels with emphasis on

communication through formal

Figure 2.12 Adaptive/entrepreneurial v Bureaucratic/administrative cultures

Management Cultures
There are three different approaches that define Management Culture. They are,
Operator Culture, Engineering Culture and Executive Culture. Each of these cultures
having their own value sets.
Operator Culture focuses on the value of people and assumes that
organisational success or failure is ultimately due to the actions of people.
Engineering Culture focuses on systems and procedures and solutions
that dont involve people.
Executive Culture focuses on the need to maintain an organisations
profitability and is preoccupied with board meetings, investors and capital
Organisational failure occurs when cultures are unaligned. Typically, operator and
engineering cultures dont align with executive culture.

Changing Organisational Culture

Organisational cultures involve relatively stable values, assumptions, beliefs and
norms. Implementing organisational change can be hard because it challenges the
existing values, etc. and creates uncertainty and stress in the workforce.
One approach that can be employed, to bring about cultural change, involves five



Figure 2.13 Changing Organisational Culture

Surfacing actual norms Employees are asked to list the norms

(organisational behaviours) that influence their current attitudes and actions.
Articulating new directions Employees discuss what behaviours are
needed to meet the future needs of the organisation.
Establishing new norms Employees develop a list of new norms to
support the future needs of the organisation.
Identifying cultural gaps Areas are identified where differences exist
(cultural gaps) between the current norms and those that are needed to
positively support organisational effectiveness.
Closing cultural gaps New norms are agreed on and ways of
reinforcing them are developed, i.e. employee recognition/reward schemes
to reinforce new or desired behaviours and cultural norms/values.


Chapter 3
and Ethics


School of Business Services

Faculty of Workforce Development



Ethics and Morals
The following two statements provide a simple way of understanding the
differences between ethics and morals.
Ethical behaviour can be defined as obeying the laws of the country you live in.
Moral behaviour can be defined as obeying the rules or accepted values of the
society you live in.
When the rules of a society are supported by the laws of a country, there is no
tension or conflict between what behaviours that people consider to be right or
However, when the laws of a country do not support the rules of a society, there
will always be a tension or conflict between what behaviours people consider to
be right or wrong and those that are prescribed as right or wrong in the laws.

Business Ethics
Simply put, ethics involves learning what is right or wrong, and then doing the
right thing but "the right thing" is not nearly as straightforward as conveyed in a
great deal of business ethics literature. Most ethical dilemmas in the workplace
are not simply a matter of "Should Bob steal from?" or "Should Jack lie to his
boss?" (Many ethicists assert there's always a right thing to do based on moral
principle, and others believe the right thing to do depends on the situation
ultimately it's up to the individual.)
Many philosophers consider ethics to be the "science of conduct." They explain
that ethics includes the fundamental ground rules by which we live our lives.
Philosophers have been discussing ethics for at least 2500 years, since the time
of Socrates and Plato. Many ethicists consider emerging ethical beliefs to be
"state of the art" legal matters, i.e., what becomes an ethical guideline today is
often translated to a law, regulation or rule tomorrow.
Values which guide how we ought to behave are considered moral values, e.g.,
values such as respect, honesty, fairness, responsibility, etc. Statements around
how these values are applied are sometimes called moral or ethical principles.
The concept of business ethics has come to mean doing whats right in the
workplace. i.e. doing what's right in regard to the stakeholders (customers,
employees, shareholders and suppliers) of the business.
Today, ethics in the workplace can be managed through use of codes of ethics,
codes of conduct, ethics committees, policies and procedures, to resolve ethical
dilemmas, ethics training, etc.



Social Responsibility
Social responsibility refers to an organisations commitment to support and
improve societys wellbeing and its own interests. Social responsibility is called
often called corporate responsibility when it is applied to a business.
Opinions differ in terms of how much social responsibility an organisation should
The level of corporate social responsibility undertaken by organizations is
influenced by the approach that management wants to take:

Figure 3.1 Management approach to Ethics

Economic approach considers the organisations responsibility to

produce the good and services society wants while at the same time
maximizing the organisations profit.
Legal approach focuses on the organization meeting its legal
requirements while at the same time maximizing the organisations
Discretionary approach is completely voluntary and relies on
random decisions made by management to contribute to the
betterment of society.
Philanthropic approach is displayed by organizations that make
generous contributions to the betterment of society, expecting no
return from their contributions to social activities.



Three Perspectives of Social Responsibility

Concern for organisational social responsibility is fairly recent, In America, for
example, the issue of social responsibility emerged in the late 1800s when
organisations grew larger. Anti-competitive activities (e.g. kickbacks and pricefixing) led to pressure from government and labour. Concern grew through the
start of the twentieth century until, after the stock market crash of 1929 and
during the Great Depression that followed, many business regulations were
established. In 1936, the CEO of Sears, argued for managerial, not just
governmental, actions on social concerns. Social movements (e.g. civil rights,
women's liberation and environmentalism) during the 1960s increased attention
on organisational social responsibilities.
Recent corporate misbehaviour domestically, regionally and globally, have
refocused attention on social responsibility.
These historical forces led to three contrasting views of corporate social

Figure 3.2Three Perspectives of Social Responsibility

The Invisible Hand

Milton Friedman is the chief supporter for the invisible hand, or classical,
perspective of corporate invisible hand social responsibility, but it can be traced to
Adam Smith in the eighteenth century. The invisible hand view suggests that the
corporation's social responsibility may be seen as 'make profits and obey the law.
Each corporation therefore works to increase legal profits. In this way, the
invisible hand of free-market forces guides corporate responsibility, allocating
resources for societys betterment.

The Hand-of-Government
Under the hand-at-government perspective, the role of businesses is to be
profitable within the law. However, this view argues that society's interests are
best served by having the regulatory hands of the regulatory hands of law and
political process, rather than the invisible hand, guide businesses' work.



The hand of government controls the possible negative actions businesses
regarding employees (minimum wage, safety and equal employment opportunity
legislation),customers (product safety and advertising control) and the larger
community (hazardous chemical and pollution control). Neither the endeavours
invisible hand nor the hand-of-government approach allows corporate leaders
latitude on social issues.

The Hand-of-Management
The hand-of-management perspective says businesses and managers must act
to protect and improve society's welfare while advancing corporate economic
Typically, three arguments are used to support organisational social
The anti-freeloader argument holds that businesses benefit from a better
society, and should bear some costs of improvement by working towards
solutions to social problems.
The capacity argument states that the private sector must compensate for
government cuts to social programs.
The enlightened self-interest argument holds that businesses exist at society's
pleasure and, for their own legitimacy and survival; they must meet public
expectations of social responsibility or suffer financially. This relates to the iron
law of responsibility, which states that 'in the long run, those who do not use
power in a manner that society considers responsible will tend to lose it.
Generally, society's expectations of the social responsibilities of business are
growing. Consequently, the hand-of-management approach is increasingly

Management Social Responsibility

Greater interdependencies have built ties of common interest between
businesses and their communities. Thus, a broad view of management's social
responsibility involves economic, legal, ethical and discretionary issues, as
shown in Figure 16.
Proportions in the figure suggest the size of each responsibility for corporate



Figure 3.3 Management Social Responsibilities

Economic and Legal Responsibilities

Management's economic and legal responsibilities are recognised by all three
corporate responsibility perspectives (invisible hand, hand of government and
hand of management). These responsibilities involve making a profit and obeying
the law.

Ethical and Discretionary Responsibilities

The hand-of-government perspective recognises ethical and discretionary
responsibilities, as well as the economic and Legal responsibilities dictated by the
invisible-hand and hand-of-government views.
Ethical responsibilities include the behaviours and activities society expects of
Ethical responsibilities are ill defined, often controversial and changeable. This is
why business leaders can find them hard to Identify.
On the other hand, discretionary responsibilities include voluntary activities not
necessarily expected of business by society. While businesses would not be seen
as unethical if they did not take part, some segments of society may see the
activities as desirable.

Social Stakeholders
If businesses and managers are to be socially responsible, it is important to
identify where this responsibility lies. Six overlapping groups are identified:
shareholders, employees, customers, the local community, general society
(regional and national) and the international community.



They are social stakeholders, as businesses activities can affect them for better
or worse.

Despite a perception that the business has obligations to several constituencies,
it is still agreed that the main management role of public businesses is to earn
profits and distribute them as shareholder dividends. Shareholders provide
capital for companies to survive and grow.
Managers see themselves as responsible for the businesses survival, for
developing and expanding it, balancing stakeholders' demands so that multiple
demands do not result in a failure to achieve company goals. Different
shareholder and management perspectives may produce conflict, particularly
over dividend levels (versus reinvestment allocations) or executive benefits such
as stock options and club memberships.
Shareholders may pressure management to change their social stance.
Currently, shareholders are concerned about CEOs being paid millions while their
companies perform poorly. Top managers rarely disclose their full compensation.

Employees-Managing diversity
Organisations must at least honour specific employee agreements and obey
relevant employee-employer relationship laws. Laws and regulations specify
employer responsibilities on equal employment opportunity, pensions and
benefits, and health and safety. Recognition of workforce diversity and public
feelings about employer abuses has led to increased regulation.
Top managers frequently refer to employees as 'family', but employee treatment
is quite variable.

Although the motto of many businesses was once caveat emptor ('let the buyer
beware'), consumers now expect more. Two current areas of social concern for
consumers are health and safety, and quality issues.
Product liability law suits are increasing, which negatively affect business
prospects. Increasing liability cases mean many businesses find liability
insurance harder to find. As business's social responsibilities have been
questioned, the pendulum may have swung too far to the consumer. It is argued
that a manufacturer should be liable for the safety of a product only if it 'knew, or
should have known, about its dangers'. However, this is risky, as it can be l hard
to determine what research a manufacturer needs to do to ensure all safety
contingencies are considered. A 100 per cent standard may mean products
would take years to reach the market, if at all, and be expensive. Thus
businesses that are concerned for consumers compromise by trying to be 99 per
cent certain a product is safe, buying large insurance policies and hoping.
The importance of quality as a consumer issue has grown. Keeping up with the
competition is important, and some have linked quality to social responsibility.
The Australian Competition and Consumer Commission (ACCC) has taken a
stance against misleading 'country of origin' labelling.
Greater focus on customer relationship management shows that many
organisations realise the need to focus on the customers needs.



Local Community
In regard to social responsibility, the organisation's community is its local
business influence area. While communities often want business aid, businesses
need various forms of community support.
Support includes:

Adequate transport

Fair taxes

Sufficient schools

Recreational facilities

Public services


Fire services





Through these needs, businesses and communities are interrelated and may
function more effectively with mutual support.

Social responsibility at a societal level involves regional and national issues. For
example, many business leaders are involved in educational reform to prepare
future labour pool members.
When the links between corporate social expenditures and business-related
results are weak, supporters of the invisible-hand view of social responsibility will
object. Conversely, the hand-of-government view favours government regulation
of social expenditures, and higher taxes to allow governmental funding.

International Community
International issues can impact social responsibilities. The Union of International
Associations in Brussels listed 10,000 global problems, in categories such as
international tensions, scarce resources and growing pollution. Many businesses
responded by changing their practices.



Does Social Responsibility Pay?

Researchers have explored links between corporate social responsibility and
corporate financial performance, without reaching a consensus. They reviewed
51 studies completed between 1970 and 1995; of these, 33 showed a positive
link, nine no link or were inconclusive and nine a negative link. While no definite
conclusion has been reached on relationships between levels of social
responsibility and financial success, most studies suggest a positive link
Research suggests that a businesss financial performance is a good predictor of
its social responsibility, not a result of it. Successful organisations are more likely
to take on socially responsible activities. Businesses also engage in social
responsibility to build stable stakeholder relationships and help reduce chances
of legal action and government fines.
Research has found that announcements of illegal corporate action lower a
businesss stock price, while needs, long-term impacts are unclear. Ironically,
research suggests generous support through charitable donations may help
perceptions of companies as socially responsible, even if they are behaving
illegally. Corporate contributions for charitable and social responsibility purposes
are called corporate philanthropy.
In deciding how to balance the conflicting expectations of stakeholders, support
socially responsible or concentrate on profit, many organisations choose to focus
on socially responsible activities.

Promoting Innovation: The Leading Businesses

Though there may not be a direct relationship between social responsibility and
financial performance, several businesses score highly on both social
responsibility and success. Businesses such as John Deere, Honeywell, Levi
Strauss and Motorola are considered leaders in achieving a balance between
social responsibility and financial performance. These industry leaders share four
common characteristics:

Figure 3.4 Shared Characteristics of Industry Leaders



They try to satisfy all their stakeholders. The basic idea is that
shareholders' interests are best served in the long term when
businesses work to satisfy the legitimate concerns of all stakeholders.
These businesses work hard to resolve conflicts and find ways to
serve all constituencies at once.
They are committed to a higher purpose. These businesses
see their role as giving society needed goods and services,
employment and wealth creation in profits, to increase the general
standard of living and quality of life. In this sense, profit is the means,
not the end, of corporate efforts.
They value continuous learning. These businesses see
flexibility, change and responsiveness as vital to organisational
survival. As a result, they monitor environmental changes, assessing
the organisational social applicability of their own strategies and
They aim high. They are dedicated to being best in all they do. As
a result, they emphasise innovation to help them reach high goals.
Through commitment to these principles, leading businesses have managed
high-level social responsibility and been financially successful too.

Organisational Social Responsiveness

Managers may hold a view of their organisation's social responsibilities, but these
views become more real when managers actually respond to social
responsibilities. Organisational social responsiveness refers to the development
of organisational decision processes where managers anticipate, respond to and
manage areas of social responsibility. Organisational social responsiveness is
also called corporate responsiveness, as it is often applied to business
organisations. However, other organisations find social responsiveness to be
important too. For example, not-for-profit schools and hospitals must monitor the
changing expectations of various stakeholders and respond to them.
Two processes are basic to the development of organisational social
responsiveness. First, methods must be set up to monitor the social demands
and expectations of the external environment. Second, resources, internal social
response mechanisms need to be developed.

Monitoring Social Demands and Expectations

The means to assess social demands and expectations related to organisations
include social forecasting, opinion surveys, social audits, issues management
and social scanning.



Figure 3.5 Means to Assess Social Demands and Expectations related to


Social Forecasting
Social forecasting is the systematic identification of social trends, evaluation of
the organisational importance of those trends, and their integration into an
organisations forecasting program. One approach is using futurists; that is,
individuals who track important environmental trends and try to predict their
organisational impact, usually ten or more years ahead.
Others use consultants and research institutes that specialise in social

Opinion Surveys
Associations and business publications conduct surveys on social issues. These
often identify different groups views of social responsibility. One poll, for
example, showed that only 31 per cent of people saw business executives as
having good moral and ethical standards.

Social Audits
A social audit is the systematic study and evaluation of social, rather than
economic, organisation performance. It includes assessment of the social impact
of a businesss activities, evaluation of programs with social goals, and
identification of areas for action. Social audits are difficult because disagreements
can arise about what to include, results can be intangible and or difficult to
measure, and opinions may vary about what makes adequate or good social
performance. Nevertheless, organisations increasingly assess their performance
by social audits.



Issues Management
As applied to social responsiveness, issues management is the identification of a
small number of emerging social issues relevant to the organisation. Usually 10to
15 issues are identified, depending on organisational events. Issues
management seeks to reduce 'surprises' from environmental forces and facilitate
a proactive approach to environmental change.

Social Scanning
Social scanning is the general surveillance of task-environment elements to find
evidence of impending changes that will affect organisational social
responsibilities. Unlike issues management, social scanning is more informal and
unsystematic. Executives use their own experience of issues likely to affect the
organisation, but may rely on systematic assessments.

Internal Social Response Mechanisms

An organisation's internal social response mechanisms include departments,
committees and human resources, all of which affect its responsiveness to social
environment changes. The common social responses of an organisation include
individual executives, temporary task forces, permanent committees or
departments or combinations of these.

Figure 3.6 Common Social Responses of an Organisation

Individual Executives
Using individual executives as a social response mechanism means either
appointing or allowing individuals to handle critical social issues as they happen.
This is more common in smaller rather than larger businesses.

Temporary task forces

This involves forming a committee of several people for a short time to deal with
a critical social issue. After acting, the committee or task force disbands.



Temporary task forces are most effective when an important social issue needs
rapid input from various parts of the organisation.

Permanent committees
There are many types of permanent committees, Almost 100 of the Fortune 500
companies have special committees on the board of directors to deal with social
issues. These may be called public policy, public issues, social responsibility and
corporate responsibility committees.

Permanent departments
Businesses may have a permanent department to co-ordinate social
responsibilities, and identify and recommend policies for new social issues. This
is often called the public affairs department. It may co-ordinate government
and/or community relations with other external activities.

Combination approaches
In practice, organisations use a combination of mechanisms to build social
performance. For example, division-level committees or a public affairs
department may make recommendations to an executive-level committee or to
certain key executives.

Being an Ethical Manager

Media articles about ethical problems in business are common. In study using
simulated business situations, 47 per cent of top executives, 41 per cent of
controllers and 76 per cent of graduate-level business students surveyed were
ready to commit fraud by understating write-offs, reducing the value of some
The write-offs would lower soon-to-be-reported profit levels. Faced with these
problems, many businesses are clarifying ethical standards. To help employees
internalise company standards.
In Australia, the Australian Stock Exchange has established corporate
governance guidelines for publicly listed companies.
One issue is growing white-collar crime (fraud or embezzlement by a business
person, government or not-for-profit organisations, or a professional. By US
estimates, street crime costs $4 billion a year, and white-collar crime about $40
billion. The rise comes from the current emphasis on materialism and competitive
pressures. Women, who were rarely involved in white-collar crime in the past, are
increasingly taking it up.
Business ethics problems raise three significant issues about being an ethical
manager: the types of managerial ethics, the ethical guidelines a manager might
adopt and ethical career issues one may face.

Types of Managerial Ethics

The standards of behaviour that make up managerial ethics come from society's
general norms and values; an individual's experiences in family, religious,
educational and other institutions and interpersonal interactions. Thus,



managerial ethics differ between people. There are said to be three major levels
of moral, or ethical, judgment that characterise managers: immoral management,
amoral management and moral management.

Figure 3.7 Three Major Levels of Moral, or Ethical, Judgment that Characterise

Immoral Management
In business, 'immoral' and 'unethical' may be synonymous. Thus, immoral
management lacks ethical principles, actively opposing ethical behaviour.
Concern is exclusively with profit and success at any cost, readiness to treat
others unfairly, seeing laws as obstacles, and an inclination to 'cut corners'.

Amoral Management
Amoral management is neither immoral nor moral but ignores or is oblivious to
ethical issues. Intentionally amoral managers exclude ethical concerns from
decisions and actions, as they think general ethical standards are inapplicable.
Unintentionally amoral managers are inattentive or insensitive to the moral
implications of their decisions and actions, and ignore ethical issues. Overall,
amoral managers are well-meaning, but give little attention to the impact of their
behaviour as they pursue profitability. They allow other managers to behave as
they wish unless the behaviour generates notoriety or pressure.

Moral Management
In contrast to both immoral and amoral management, moral management follows
ethical principles and precepts. While moral managers want to succeed, they do
so only within ethical standards and ideals of fairness, justice and due process.
As a result, moral managers pursue the twin business objectives of profit making
and engaging in legal and ethical behaviours.
They follow both the letter of the law and the spirit of the law, realising that moral
management means working above legally mandated levels.

Ethical Guidelines for Managers

Ethical standards vary. For example, 43% of respondents to a survey saw paying
suppliers within 60 days as acceptable, while expecting accounts receivables to



be paid in 30 days. Of respondents, 16% saw it as acceptable to make dealers
take more product than needed. As situations vary, it is hard to write hard-andfast rules for all options. Ambiguities abound with many grey areas.
Despite problems in setting specific ethical standards, guidelines can be useful to
understand the ethical implications of managerial decisions and behaviours.
The guidelines below fit the principle of enlightened self-interest.

Figure 3.8Principle of Enlightened Self-Interest

Obey the Law

A basic tenet of social responsibility and managerial ethics is obedience to the
law, preferably in both the letter and the spirit of the law.

Tell the Truth

Telling the truth is vital to build stakeholders trust.

Show Respect for Other People

Treating people with respect has deep roots in the study of ethics. Respect for
individuals is a central aspect in the move to valuing diversity.

Stick to the Golden Rule

The Golden Rule, 'Do unto others as you would have others do unto you,' is a
standard for measuring the ethical dimensions of business decisions.
In business terms, it means treat people fairly, as managers would want the firm
treated if it were a person.



Do Not Harm Others
Above all, do no harm (Primum non nocere). Some writers consider this principle,
the first rule of medical ethics, to be the bottom-line ethical concern and easily
adopted by business.

Practise Participation, Not Paternalism

This principle is aimed at finding stakeholders' needs, rather than deciding what
is best for them.

Always Act When You Have Responsibility

Managers have a responsibility to act when they have capacity or resources.
Managerial action is vital if someone is in need and a manager is the only one
who can help.

Managing an Ethical Organisation

Although others can be blamed, people are responsible for their own actions. An
important challenge for managers is to operate an organisation where business is
done ethically. To do this, managers must know the external and internal
conditions that make unethical behaviour likely. They can also use mechanisms
to aid ethical behaviour.

Factors Affecting Corporate Social Responsibility and

Managers' Ethical Behaviour
Six factors have been identified that might influence corporate social

Internal pressures on managers

Pressures from competitors (competitive dynamics)

Institution investors


Pressures from government (regulations)

Pressures from NGOs (non-government organisations)



Figure 3.9 Six Factors that Might Influence Corporate Social Responsibility

Ethical decision-making is also a function of various individual and situational

factors. Relevant factors include stages of moral development, organisational
culture, moral intensity of ethical issues and individual values.

Stages of Moral Development

In Europe, a lady was dying because she was sick. There was one drug the
doctors said might save her. This medicine was discovered by a man living in the
same town. It cost him $200 to make it, but he charged $2000 for just a little of it.
The sick ladys husband; Heinz, tried to borrow enough money to buy the drug.
He went to everyone he knew to borrow the money. But he could borrow only half
of what he needed. He told the man who made the drug his wife was dying and
asked him to sell the medicine cheaper or let him pay later. But the man said 'No,
I made the drug and I am going to make money from it. So Heinz broke into the
store and stole the drug.
By analysing responses to questions such as 'Should Heinz have done that? Was
it actually wrong or right/Why?' to a series of these stories, Kohlberg (1969)
identified six stages of moral development, which he categorised into three broad
In the pre-conventional level, individuals judge right or wrong based on their
concern for personal loss minimisation and gains maximisation.
Moral judgment in the conventional level is based on whether the behaviour
would be acceptable to their immediate family and social organisations.
In the post-conventional level, however, individuals look beyond their immediate
social organisations and focus on moral duty to the larger society.





Level 1: Pre-conventional morality

Stage 1: Punishment orientation

Obeys rules to avoid punishment.

Stage 2: Reward orientation

Conforms to obtain reward or to have favours


Level 2: Conventional morality

Stage 3: Good boy/girl orientation

Conforms to avoid disapproval of others.

Stage 4: Authority orientation

Upholds laws and social rules to avoid censure

of authorities and feelings of guilt about not
doing ones duty.

Level 3: Post-conventional morality

Stage 5: Social-contract orientation

Actions guided by principles commonly agreed

on as essential to the public welfare, principles
upheld to retain respect of peers and thus selfrespect.

Stage 6: Ethical principle orientation

Actions guided by self-chosen ethical principles

which usually value justice, dignity and equality,
principles upheld to avoid self-condemnation.

Figure 3.10 Stages of Moral Development

Kohlberg concluded many people are limited to 'conventional morality' and very
few over the age of 16 display the ethically principled orientation implied by stage
6. The following response, from a 16-year-old, to Heinz's ethical dilemma is an
example of this ethically principled orientation:
By the law of society he was wrong but by the law of nature or of God the
druggist was wrong and the husband was justified. Human life is above financial
gain. Regardless of who was dying, if it was a total stranger, man has a duty to
save him from dying.
Relationships between stages of moral development and styles of conflict
management have also been explored.

The 2005 documentary of Enron's collapse, Enron: The Smartest Guys in the
Room, demonstrates how organisational culture can corrupt its members. 'Since
unethical behaviour can be learnt at work, so too can ethical behaviour'. It is not
enough, however, for management to simply sign-off on ethical codes it must
actively implement and support the codes. To support this, the company values
should underpin an organisations systems, including recruitment, performance
management and reward and recognition systems. Ethics are then embedded
into every organisational aspect, and become viable and ingrained in
management language and processes.



Moral Intensity of Ethical Issues

The moral intensity of an ethical issue is critical to the decision making process
that defines a decision-maker's ethical behaviour. An issue's moral intensity
influences the identification of an issue as an ethical problem. This then
influences the decision maker to make a moral judgment, establish moral intent
and, finally, engage in moral behaviour.
The process begins with the social, cultural and economic environment. Factors
including group dynamics, authority factors and socialisation also affect the
ethical decision-making process. Moral intensity is also relevant, although it
varies between issues. The characteristics of moral intensity are the magnitude of
consequences from the act, social consensus about the act, probability of effect
from the act, temporal immediacy, proximity to victim(s) and concentration of
effect of the act to the victim(s).

Figure 3.11 Moral Intensity of Ethical Issues

The magnitude of consequences is the sum of harms or benefits done to

victims or beneficiaries of the moral act. For example, an act causing the death of
a human being is of greater magnitude of consequence than an act causing a
minor injury.
The social consensus is the degree of social agreement that an act is good or
evil. For example, the proposition that bribery is evil has greater social consensus
in Australia than in many other countries.
The probability of effect of the act is a joint function of the probability the act will
actually take place and will actually cause the harm or benefit predicted. For
example, selling a gun to a known armed robber has greater probability of harm
than selling a gun to a law-abiding citizen.
The Temporal Immediacy of the Moral Issue is the length of time before the
consequences of the act in question occur.



A shorter period implies greater immediacy. For example, a drug resulting in
acute nervous reactions in 1 per cent of those who take it, soon after they take, it
has greater temporal immediacy than a drug which causes 1 per cent of those
who take it to develop nervous disorders after 20 years.
The Proximity of the Moral Issue is the feeling of nearness (social, cultural,
psychological or physical) the moral agent has for victims of the wrong act. For
example, to inhabitants of one country, the sale of dangerous pesticides in their
domestic markets has greater moral proximity than does the sale of such
pesticides on another continent.
The Concentration of Effect of the act is inversely related to the number people
affected by an act of given magnitude. For example, cheating an individual or
small group of individuals out of a given sum of money has a more concentrated
effect than cheating an institutional entity.

Individual Values
Individual value systems play a vital role in ethical decision-making. Ethical
decision-makers positive value systems. A value is a concept that defines what a
decision-maker considers as acceptable and can be viewed in four modes;
practical, moral, gratifying and economic.

Figure 3.12 Individual Values

Managers use one or more of these modes that they consider compatible with
their set of values.
The Practical Mode deals with a drive to stay with what has worked in the past.
The idea is to reduce risk and increase the probability of success.
The Moral Mode makes strong judgments with regard to right and wrong of a
decision or act. This of value system usually rests on religious beliefs. A manager
in this mode will view decisions in a clear-cut manner.



The Gratifying Mode is driven by an overwhelming quest to feel good about a
decision. This mode should lower individual stress levels.
The Economic Mode has a value system that is focused on organisational
resources. In order to survive in the current competitive environment, this mode
is important for managers to exercise proper control over resources.

Situational Factors Influencing Ethical Behaviour

Research on ethical versus unethical behaviour in the organisational environment
encourage illegal, unethical behaviour. Of course, managers' values also
influence whether people actually act unethically, though some situations make it
more likely.
External Factors

Internal Factors

Environmental Competitiveness

Pressure for high performance

Environmental Munificence

Labour dissatisfaction

Extreme Dependency

Encouragement of innovation

Figure 3.13 Situational Factors Influencing Ethical Behaviour

For example, environmental competitiveness encourages unethical behaviour.

Industries in which price fixing is common, including the motor industry, paper
cartons, plumbing fixtures and heavy electrical equipment, have strong
competition, similar products, frequent price changes and negotiations.
Competition in not-for-profit organisations can foster unethical behaviour too. This
includes making illegal political contributions, and spending too high a proportion
of charitable contributions on administration instead of the needy.
Low and high environmental bounty may also encourage unethical behaviour. If
low, opportunities for success are limited. Struggling for financial success in this
environment may result in businesses behaving unethically.
High bounty may lead to unethical activities, as businesses try to grow quickly
and gain from a favourable situation. For example, the South Australian Olive
Corporation and Inglewood Olive Processors, who misrepresented the origins of
their extra virgin olive oil The oil was advertised as being made in Australia, when
in reality as much as 50 per cent was from overseas sources.
A, third external factor influencing unethical reduce behaviour is extreme
dependency of one organisation on another. These dependencies create
pressures for bribes and payoffs.
Internal organisational factors can also make unethical behaviour more likely.
Pressure for higher performance and output pushes people to take 'shortcuts',
including price fixing, secretly speeding up an assembly line or releasing unsafe
Labour dissatisfaction may also lead to unethical behaviour as anger replaces
logical, rational behaviour.
Ironically, delegation of authority and encouragement of innovation gives greater
latitude and creativity and may increase unethical behaviour. For example, at



Opel AG the General Motors' German subsidiary, three senior board members
and several employees resigned after being accused of accepting free work on
their homes, or engaged in a kickback scheme involving contract awarding.
The Opel chairman said that in becoming leaner, the company may have cut too
many financial checks and balances.
As external factors and internal pressures increase the incidence of unethical
activity, managers must monitor with care. Under these conditions, managers
must work harder to convey the importance of ethical behaviour to staff.
A study suggests that middle and lower-level managers may feel greater ethical
pressure than upper-level managers. This means upper-level managers may be
unaware that middle- and lower-level managers experience these pressures, and
do not act to counter them.

Mechanisms for Ethical Management

An Important question is how can managers foster ethical organisational
behaviour. Behaviour is not easy to influence. However, managers can generate
an ethical climate. Mechanisms include the following.

Increasing Awareness of Diversity

Normally, you view others from your own viewpoint, using your own attitudes,
feelings, thoughts and experiences to guide interactions. Diversity, however,
demands awareness of attitudes and experiences of others. Diversity-awareness
programs seek to raise participants' awareness of:

Figure 3.14 Diversity Effectiveness Programs



The common goals of these programs include the following:

Providing participants with accurate information on diversity

Uncovering stereotypes and personal biases

Assessing personal beliefs, attitudes and values

Overturning inaccurate stereotypes and beliefs

Developing an atmosphere where people can share perspectives

and viewpoints

Improving understanding of those who are different.

Top-management commitment
Managers can show their commitment through several mechanisms set out
below and the positive examples of their own.

Codes of Ethics
It is estimated 90 per cent of major businesses have a written code of ethics. A
code of ethics is a document organisations prepare to guide members in
encountering ethical dilemmas. While almost all businesses with a code say it
helps maintain staff's ethical behaviour, a study showed only 36 per cent issue
their code to all staff and only 20 per cent display it widely. Only about 40 per
cent of businesses in a comparative study in Britain, France and West Germany
(prior to unification) had codes of ethics, and with great variation between
countries based on political, legal and socio-cultural variations.

Ethics Committees
According to an Ethics Resource Centre survey, about a third of Fortune 1000
companies have ethics committees. An ethics committee is a group that helps set
up policies and resolve major ethical questions facing company members at
work. The committee may oversee ethics training programs. Often, the committee
has members from top management and/or the board of directors.

Ethics audits
Some businesses conduct ethics audits-systematic efforts to assess conformity
to organisational ethical policies, aid understanding of these policies and identify
serious breaches needing remediation. Even so, ethical problems can be hard to



Ethics Hot Lines

An ethical hot line is a special telephone line set up to allow employees to bypass
the normal chain of command, report grievances and serious ethical issues. The
line is normally managed by an executive assigned to investigate and work to
resolve reported issues. A hot line aids internal problem handling and reduces the
incidence of whistle-blowing employees. A whistle-blower is an employee who
reports a real or perceived wrongdoing under the control of their employer to
those able to take needed action.
When a whistle-blower goes outside the organisation, bad publicity, investigation
and lawsuits are common.

Ethics training
Many organisations use ethics training to encourage ethical behaviour. Training
can focus just on ethical issues or be integrated into training on many other
issues. Clarifying expectations and ethical standards helps reduce unethical
behaviour. Better understanding company standards leads to more appropriate
decisions by members of the organisation.



Chapter 4


School of Business Services

Faculty of Workforce Development



In this chapter we explore the nature of managerial decision making. We evaluate
managers as decision makers and consider steps in an effective decision-making
process. We examine how to overcome barriers to effective decision making, and
weigh the advantages and disadvantages group decision making. Finally, we show how
managers can promote innovation by using creativity in decision-making processes.

The Nature of Managerial Decision Making

Management is about making decisions about strategy, organisation structure, human
resources, product/service quality, productivity improvement, performance appraisal,
responses to environmental turbulence etc. While lower-level managers might not
decide to change an established product's formula, many smaller lower-level decisions
have a cumulative effect on company effectiveness. Good decision-making processes
are vital at all organizational levels.
Although the number of decision-making steps identified varies between four and eight,
they usually reduce to four steps. The terms 'decision making' and 'problem solving' are
often used interchangeably. We analyse the four steps in more detail later. First,
though, it helps to look at major managerial problem types and consider differences in
decision-making situations.

Figure 4.1 Decision making/Problem Solving Steps



Types of Problems Decision Makers Face

Managerial decision making centres on three problem types: crisis, non-crisis and

Figure 4.2 Problem Types

A crisis problem is a difficulty serious enough to need immediate action. An example of
a crisis is a discovery of a severe cash-flow deficiency, potentially a serious loss.

A non-crisis problem is an issue that needs resolution but does not have the
importance and immediacy of a crisis. Many managerial decisions involve non-crisis
problems. Non-crisis problems are significant, but do not immediately threaten
organisational viability. For example, a factory that needs to meet new anti-pollution
standards over the next three years, or a staff member often late for work.

An opportunity problem is a situation with potential organisational gain if the right
actions are taken. Typically, these problems involve new ideas and directions, and are
major opportunities for innovation. Opportunities involve ideas for use, not problems for
resolution. In a study of 78 managerial decision-making situations, 13 per cent of
problems were crises problems, 62 per cent were non-crisis and 25 per cent were
opportunity taking. As well as these three problem types, managers face different
decision-making situations.

Differences in Decision-Making Situations

Decision making can overwhelm managers if they view every problem as a totally new
situation. Fortunately, it is not so. Decision situations fall into two categories:
programmed and non-programmed.


Decision type





Managerial level
Figure 4.3 Decision Situations
Organisation Type

Programmed Decision

Non-Programmed Decision


Determine supplies to be reordered

Identify location for new franchise


Assess student competence

Choose new academic programs


Determine work rates

Select new car design

Figure 4.4 Decision Situations

Programmed Decisions
Programmed decisions are for routine, repetitive, well-structured situations using
predetermined decision rules. These can result from habit, computational techniques or
policies and procedures. Such rules usually use prior experience or technical
knowledge about what works. For example, most organisations have policies and
procedures for occupational, health and safety practices.
Programmed decisions fit routine, well-structured situations, but may be very complex.
Computers have made sophisticated, programmed decision making easier, by
collecting and analysing vast amounts of data. For example, when someone uses a
credit card, a computer will make a programmed decision authorising the purchase.
However, if the amount is unusually large or over the account limit then the purchase
will not be authorised routinely. Instead, a human will make a programmed decision
based on policies and procedures.
Most first-line managers' decisions and many middle managers' decisions are
programmed. Top-level managers face few programmed decisions.



Non-programmed Decisions
Non-programmed decisions occur when predetermined decision rules are impractical
due to novel and/or relatively unstructured situations. Most major management
decisions are non-programmed. Non-programmed decisions, therefore, usually mean
considerable uncertainty, where the decision maker selects a course of action without
being completely sure what the effects will be.
Decisions made under uncertainty involve risk. The chance an action chosen could
yield losses rather than the desired results. Uncertainty has many sources, so
unpredictable or uncontrolled environmental elements can affect a decision's success.
Cost and time constraints limit information collection. Social and political issues, such
as poor inter-unit communication, make collecting needed information hard. Situations
change rapidly, so current information becomes obsolete. For example, Woolworths is
shown over 25000 new lines annually but takes up only 2000.
The frequency of managers non-programmed decisions grows by organisational level.
As these decisions need effective decision-making skills and, often, creativity, they are
the most challenging managerial decision-making type. This chapter focuses mainly on
non-programmed decisions.

Managers as Decision Makers

Managers' decision-making processes have been widely studied. In this section, we
describe two major models of how managers make decisions: rational and non-rational.

Figure 4.5 Major Decision Making Models

The Rational Model

The rational model of managerial decision making, popular early in the twentieth
century, is based on the economic theory of the business. Economists almost uniformly
treat human behaviour as rational, and in developing this theory the basic assumption
was made that managers would make decisions in their businesses best economic
Initially, many management theorists accepted this. The rational model argues that
managers use totally rational decision processes, make optimal decisions and have
and understand all needed information when making decisions (including all possible
alternatives, potential outcomes and ramifications).



There are some serious flaws in the rational model of managerial decision making.
Decisions are often made in the absence of all the information needed to make an
optimal decision and the decision-makers biases, beliefs, experiences, values and
mental model also have a big influence. This makes it hard to take a consistently
rational approach in decision making. Management literature contains much criticism of
this model. Nevertheless, it provides a reference point for assessing actual managerial
decision-making patterns.

Non-rational Models
In contrast to the rational view, non-rational models of managerial decision making
suggest that limitations on information-gathering and processing make optimal
decisions hard. Within the non-rational framework, researchers have identified three
major decision-making models:

Figure 4.6 Non-rational Management Decision Making Models

Another non-ration approach is the intuitive model.

Satisficing model
In the 1950s, Herbert Simon studied the behaviour of managerial decision makers and
developed the bounded rationality concept as a framework for understanding actual
managerial decision making.
Bounded rationality means managers' ability to be perfectly rational in decision making
is limited by factors such as cognitive capacity and time constraints.
The concept suggests some common factors limit the ability of managers to make
perfectly rational decisions:
Decision makers may have inadequate information about the nature of
the issue to be decided and also about possible alternatives and their
strengths and limitations.
Time and cost factors often limit information gathering for a particular
Decision makers' perceptions about the relative importance of various
pieces of data may cause them to overlook or ignore critical information.
The part of human memory used in decision making holds only a
relatively small amount of information at once.



Calculating capacities associated with intelligence limit how much
decision makers can determine optimal decisions, even assuming perfect
information has been gathered.
Rather than optimising decisions, managers follow the satisficing model, which
suggests managers seek options only until they find one that looks satisfactory.
Satisficing is best when the cost of delaying a decision or searching for a better
alternative outweighs the likely payoff. Another difficulty comes when decision makers
see information that supports their preferences. For example, driving on an unfamiliar
road with little fuel, it might be better to choose the petrol station you see first than wait
for your preferred brand. On the other hand, managers may habitually use a simplistic,
satisficing approach, even when the cost of searching further for decision alternatives
is justified by the possible gain.

Incremental model
Another decision-making approach is the incremental model, which holds that
managers make the smallest possible response to reduce a problem to a tolerable
level. This approach is geared to short-run problem fixes rather than to long-term goal
achievement. Like the satisfying model, the incremental model frees managers from
information processing. Incremental sing can be likened to a situation where a home
owner uses various multi-outlet adaptors rather than have more electrical power
sockets installed. Eventually, the incremental decisions fail, as extra appliances
overload electrical circuits and may blow fuses.



Rubbish-bin Model
The rubbish-bin model of decision making says managers act randomly in nonprogrammed decision making, In other words, outcomes occur by chance, depending
on those involved, the problems they are concerned with, opportunities they stumble
across and favoured solutions available. The rubbish-bin strategy is most likely when
managers have no goal preferences, unclear means of achieving goals and/or the
participants in the decision-making process are rapidly changing. Desirable outcomes,
such as capitalisation of unexpected opportunities, can be reached with this strategy,
but there can be serious problems.

Intuitive Model
The intuitive model also depicts a non-rational decision-making process. Intuition is the
gut feel for a complex situation or an 'instinct' for quickly grasping key issues based on
experience and subconscious mental processing, The ability to quickly recognise
whether an investment is likely to produce the result desired, whether a new product
will succeed or whether a potential hire is good or bad are all examples of intuitive
decision making. Intuition may be considered a viable and valuable managerial
decision-making method, because rational decision making is imperfect, intuition
becomes as important as rational analysis in many decisions. Rational and intuitive
models are parallel decision-making systems rather than substitutes. According to the
CEO of a major energy corporation, 'Ignoring intuition has led to some bad decisions,
when you have gathered enough data to be 99,9 per cent certain that the decision you
are about to make is the correct one, that decision has become obsolete'.
Research suggests executives use intuition in strategy and planning, marketing, human
resource development, research and development, investment and acquisition, merger
and alliance decisions. It is also suggested that the proportion of executives with an
intuitive preference increases with seniority.

Steps in an Effective Decision-Making Process

The managerial decision-making models outlined above are called descriptive
decision-making models as they try to explain how managers make decisions. In
contrast, Figure 4.7 outlines a normative decision-making model, one that specifies
how managers should make decisions. While the steps in Figure 4.7 do not guarantee
all decisions will give desired outcomes, they make success more likely. In this section,
we discuss the four-step decision-making process more fully.



Identify the problem

Scan the environment for changing circumstances
Categorise the situation as a problem or non-problem
Diagnose the problems nature and causes

Generate alternative

Restrict criticism of alternatives

Freewheel to stimulate thinking
Offer as many ideas as possible
Combine and improve on ideas

Evaluate and choose an


Evaluate feasibility
Evaluate quality
Evaluate acceptability
Evaluate costs
Evaluate reversibility
Evaluate ethics

Implement and monitor the

chosen solution

Plan implementation of the solution

Be sensitive to the decisions effects on others
Develop follow-up mechanisms

Figure 4.7 Steps in an Effective Decision-making Process



Identifying the Problem

The first step in decision making is problem identification. Part of problem identification,
of course, is realising there is one. Organisational problems are discrepancies between
a current state or condition and that desired. This step has three general stages:

Figure 4.8 Steps in Identifying a Problem

Scanning Stage
The scanning stage involves monitoring the work situation for changing circumstances
signalling an emerging problem. At this point, a manager may only be vaguely aware
an environmental change could lead to or that a present situation is a problem. For
example, in the 1970s, Swiss watchmakers saw inexpensive watches emerge from
Japan and Hong Kong.

Categorisation Stage
The categorisation stage entails trying to understand and verify any discrepancy
between the current state and the desired state. Here the manager has to categorise
the situation as a problem or a non-problem, though it may be hard to specify the
nature of the situation exactly. For example, a discrepancy would have occurred in the
1970s when sales of the relatively expensive Swiss watches fell.

Diagnosis Stage
The diagnosis stage involves collecting further information and specifying the nature of
the problem and its causes. Without diagnosis, success in the remainder of the process
is difficult. The problem is to be stated in terms of the gap between current conditions
and those desired, and causes of the discrepancy must be specified. Watchmakers first
thought cheaper watches were only a fad. By 1983, however, conditions worsened, and
Switzerland's two largest watchmakers, SSIH and Asuag, were deep in debt. The two
firms controlled many of the world's best-known watch brands-Omega, Longines,
Tissot and Rado. Clearly, cheaper watches from Japan and Hong Kong were a serious
threat. The banks for SSIH and Asuag called in Zurich-based management consultant
to help find a solution.

Generating Alternative Solutions

The second step in decision making is alternative solution development. This leads to
better quality solutions, particularly when creative and innovative ones are needed.
Alternative development can be aided by brainstorming, a creativity-enhancing



technique that encourages group members to generate as many novel ideas as
possible on a topic without evaluation.
Four principles are involved:
1. Dont criticise ideas when generating possible solutions. Criticism during the
idea-generation stage inhibits thinking. Also, as discussion tends to get
bogged down when early ideas are criticised, only a few are generated.
2. Freewheel. Offer even seemingly wild and outrageous ideas. Though they
may never be used, they may trigger usable ideas from others.
3. Offer as many ideas as possible. Pushing for a high volume of ideas
increases chances some will be effective.
4. Combine and improve on ideas already offered. Often the best ideas come
from combinations on-problem, of others.
Although brainstorming is normally a group activity, individuals can use the principles
too. For example, the manager jots down several possible solutions, including farfetched ones, works to generate a large number of ideas, and combines or builds on
them. Brainstorming and other idea-generating methods will be further considered
when we discuss creativity later.
It is important many options are generated during the decision-making phase. For
example, the heads of the watch companies combined with their bankers and the
consultant to develop several options, including liquidation, diversification and mergers,
to mount an offensive against the overseas threat.

Evaluating and Choosing an Alternative

This step involves carefully considering each option's advantages and disadvantages
before selecting one. Each is to be systematically evaluated by six general criteria:

Figure 4.9 Six Criteria to Systematically Evaluate Ideas

All may not be equally important. Therefore, to make the evaluation process more
precise, weights should be allocated to each criterion.



The feasibility criterion refers to the extent to which an option can be achieved within
organisational limitations, such as time, budgets, technology and policies. Options that
do not meet the feasibility criterion should be cut. The watch companies, for instance,
at first did not see fighting the overseas threat as feasible.

The quality criterion refers to how effectively an option solves the problem. Options that
partly solve the problem or are questionable are cut now.

This criterion refers to how much decision makers and others affected by
implementation of an option will support it. Acceptability is seen as an important
criterion to assess decisions.

The costs criterion refers to both needed resource levels and the extent to which
options may have negative side effects. Thus 'costs' are not only direct financial issues
but also intangible issues, such as competitor retaliation.

Overconfident managers may assume their decisions are good and are not going to
fail. They may also unconsciously ignore possible negative outcomes of decisions.
Managers should be prepared and take a proactive role to overcome such biases. In a
highly uncertain and fluid environment, managers must recognise when commitments
for resources or even the decision itself should be halted or reversed.
Options must be carefully considered. For example, if the watchmakers had been
liquidated, reversing this would have been hard. Instead, the group merged the two
firms, forming the Swiss Corporation for Microelectronics and Watchmaking (or SMH),
with the consultant as chairperson. SMH then launched an inexpensive, innovative
plastic Swatch watch, assembled on a fully automated, low-cost assembly line. By
1995, over 150 million Swatch timepieces had been sold, competing with Seiko of
Japan to be the world's number-one watchmaker. Unlike the Japanese firms, SMH also
makes both medium-priced and luxury watches.

The ethics criterion refers to how well an option fits with the firm's social responsibilities
and managers' ethical standards. For example, the Swiss consultant is considered a
Swiss hero for saving the watchmaking industry and many jobs.

Implementing and Monitoring the Chosen Solution

For decision-making success, managers must think deeply about implementing and
monitoring the chosen option. A 'good' decision may follow the first three steps and still
fail, due to problems at the final step.



Figure 4.10 Implementing and Monitoring the Chosen Solution

Implementing the Solution

Successful implementation depends on two main factors: careful planning and
sensitivity to those involved in the process and/or affected by it.
Minor changes may need only a little planning, but major changes may need greater
planning including written plans, coordination of internal and external units and special
funding arrangements. In general, the harder to reverse, the more planning is needed
for effective implementation of solutions.
Implementation is also smoother when decision makers consider the reactions of those
affected by a decision.

Monitoring the Solution

Managers must monitor the implementation of a decision, to ensure progress goes as
planned and problems triggered by the process are resolved. The need for follow-up
increases as the importance of the problem grows.

Overcoming Barriers to Effective Decision Making

As non-rational managerial decision-making suggest, managers rarely follow the fourstep process. Despite support for this general approach, managers may be unaware of
it. As well, there are barriers to effective decision making. In this section, we discuss
overcoming four key decision-making barriers:



Figure 4.11 Four Key Decision-making Barriers

Accepting the Problem Challenge

Researchers have found four basic patterns in people's behaviour when facing a
problem in the form of a difficulty or an opportunity. The first three, complacency,
defensive avoidance and panic, are effective decision-making barriers. The fourth,
deciding to decide, is a more effective approach for decision makers.



Complacency occurs when people either do not see or ignore danger or opportunity
signs. With complacency, failing to detect signs usually flows from poor environmental
scanning. Ignoring signs is the 'ostrich' effect of sticking your head in the sand and
hoping the danger or opportunity will go away or fix itself.
Complacency can occur even if there is a response. For example, someone may
quickly accept a seemingly good job offer, without taking the time or effort to assess it

Defensive Avoidance
With defensive avoidance, individuals deny the importance of a danger or an
opportunity, or deny responsibility for action. Defensive avoidance has three forms:

Figure 4.12 Forms of Defence Avoidance

When Barings Bank in Londons officials ignored signs that their Singapore based
derivatives trader, Leeson, was taking unwarranted risks that eventually led to a loss of
more than $1billion and the bank's collapse, all three forms occurred.
Investigation showed bank officers had 'failed to follow up on a number of warning
signals over a prolonged period', Among them were:

With panic or panic-like reactions, people get upset, seeking frantically for a way to
solve a problem. They seize a quickly formulated option without seeing its severe
problems and considering other, possibly better, options. Panic is more common with
crisis problems.

Deciding to Decide
With a deciding-to-decide response, decision makers accept the challenge of deciding
what to do about a problem and following effective decision-making processes.
Deciding to decide is important in a legitimate problem situation. Of course, managers
cannot check all potential problems that appear, no matter how minor and remote.
The following guidelines can be useful in deciding what to decide.
Appraise credibility of

Is the source in a position to know the truth?




If so, is the source likely to be honest?

Is there any evidence and how good is it?

Ascertain importance of
threat or opportunity

How likely is a real danger or opportunity?

If a threat, how severe might losses be?
If an opportunity, how great might gains be?

Determine the need for


Is the threat or opportunity likely to occur soon?

Will it develop gradually or is sudden change likely?
If some action is urgent, can part be done now and the rest later?

Figure 4.13 Guidelines for Deciding what to Decide

Searching for Sufficient Alternatives

For many decision situations, especially non-programmed ones, decision makers
cannot identify all potential options or assess all possible pros and cons. Information
collection takes time and money, which is limited. There are costs, even if the
information gathered is just checking with others or holding a meeting. Decision makers
must decide how much time, effort and money to invest in gathering information to help
their decisions. However, decision makers should not rush to judgement, use failureprone practices or allocate time and money unwisely without developing sufficient
alternatives. Three approaches for expanding the search for alternatives include the

Figure 4.14 Three Approaches for Expanding the Search for Alternatives



Recognising Common Decision-Making Biases

Several typical information-processing biases have been identified that are relevant to
decision making.

Figure 4.15 Typical Information Processing Biases

This is the tendency to make different decisions depending on how a problem is

This is the tendency to be overly influenced by stereotypes in making judgements
about the likelihood of occurrences.

This is the tendency to judge the likelihood of an occurrence on the basis of the extent
to which other like instances or occurrences can easily be recalled.

Anchoring and Adjustment

This is the tendency to be influenced by an initial figure, even when the information is
largely irrelevant.

A related issue is the tendency of decision makers to be over-confident. These biases
affect decision makers' evaluation of alternatives, but also influence the identification of
problems and alternatives.

Prospect Theory
This theory suggests that decision makers find the prospect of an actual loss more
painful than giving up the possibility of a gain.



Some businesses apply the prospect theory by offering cash discounts rather than
charging surcharges for credit card use in making a purchase. Prospect theory
suggests customers may be less happy with a charge for credit card use (an actual
loss) than missing out on a cash discount (a potential gain). Even so, credit card
customers complain about the system.
Managers can avoid some information-processing biases by considering how their
judgements can be affected. Becoming well versed on associated issues by gathering
enough information on major decisions helps.
Decision makers should also think why their judgements might be wrong or off target.
Contradictions and inaccuracies can be found through such thinking. Decision making
is also influenced by factors such as emotions, habits and motivation.

Avoiding the Decision-Escalation Phenomenon

When a manager makes a decision, it is often only one of a series. Further decisions
will be based on earlier results. For example, you hire a new employee and expect
them to perform. However, several months later their performance is still unacceptable.
Should you fire them? Of course, you have put time and money into training them, and
they may still be learning the job. So you give more time and more training. Even with
these extra inputs, two months later their performance is still unacceptable. What do
you do now? There is more reason to 'cut your losses', however, you also have
invested even more to make them productive. When do you stop your 'investment'?
Managers face a dilemma in decision situations where there have been major costs,
and later actions can either reverse the situation or compound initial losses. These are
escalation situations, as they signal a strong possibility of commitment escalation and
greater losses.
Studies show that when costs are incurred for an initial decision, managers may then
put more resources into e situation even when prospects of improvement are dim. This
pattern of behaviour leads to non-rational escalation situations. Non-rational escalation,
or the escalation phenomenon, is the tendency to increase commitment to a previously
selected course of action beyond the level expected if an effective decision-making
process was followed. As economists and accountants warn, costs previously incurred
(e.g. time and money) are sunk costs. Incurred costs are not recoverable and must be
excluded from later actions. Yet decision makers often allow prior costs to influence
them if they made the early decisions.
One reason for the escalation phenomenon is that decision makers are loss-averse
and reluctant to write off sunk costs. This may relate to prospect theory. Decision
makers may also fear that altering a course of action will allow others to see the
original decision as a mistake or even a failure. Avoiding non-rational escalation
requires setting advance limits on how far to extend commitment, challenging further
commitment, reviewing costs and monitoring escalation situations to avoid commitment



Managing Diversity: Group Decision Making

Major organisation decisions are generally made by groups to gain from diverse
outlooks. For instance, GenCorp Automotive set up its new reinforced plastics plant to
run with just three levels: plant manager, team leaders and 25 teams of five to 15
production workers. Rather than being run by managers who do not work at an
operational level, each team makes most decisions about its work area. In this section,
we consider the advantages and disadvantages of group decision making, as well as
the enhancement of group decision-making processes.

Advantages and Disadvantages of Group Decision Making

Group decision making has many advantages over individual decision making.
A study of over 200 project teams in management education courses showed groups
outperformed their best member in 97 per cent of cases. In a group, many different
viewpoints are used.
Despite its advantages, group decision making has potential disadvantages in contrast
to individual groupthink, decision making.
Groupthink describes the tendency of cohesive groups to seek agreement about an
issue before assessing the situation realistically. According to groupthink theory,
members avoid causing disagreements or giving information that might unsettle
discussion because they do not want to disturb the cohesion of the group, National
Aeronautics and Space Administration (NASA) officials and others blamed groupthink
for the Challenger tragedy. Officials at NASA and at Morton Thiokol, the maker of the
solid fuel rocket boosters, continued with the mission, ignoring information from Morton
Thiokols engineers and others, about possible problems due to very cold weather.
Sadly, all seven crew died in the explosion shortly after lift-off.
Groupthink has eight characteristics:



Figure 4.16 Eight Characteristics of Groupthink

Illusions of invulnerability. Excessive optimism that encourages extreme risks.

Collective rationalisation. Members discount warnings or do not reconsider their
Belief in inherent morality. Members believe in the rightness of their cause and
therefore ignore the moral or ethical consequences of their decisions.
Stereotyped views of out groups. Members view the 'enemy' (competitors, for
example) negatively, making effective responses seem unnecessary.
Direct pressure on dissenters. Members feel under pressure not to present
arguments against the group's views.
Self-censorship. Doubts and deviations from the group consensus are not expressed.
Illusions of unanimity. The majority's view and judgement are assumed to be
Self appointed 'mind-guards'. Mind-guards protect the group, and its leader, from
problematic information or information that is likely to disturb the group's cohesiveness,
viewpoint or decisions.
Cohesive groups, often made up of homogeneous members, are thought to be most
vulnerable to groupthink. For this reason, member diversity is often cited as a useful
defence against groupthink. However, some research suggests groupthink even occurs
in groups where cohesiveness is lacking, if the leader states their own preference.
Other researchers think the groupthink concept is faulty, arguing group decision making
is more complex than groupthink suggests.

Enhancing Group Decision-making

Managers can take steps to help avoid the major pitfalls of group decision making and
gain the benefits. One step is to involve the group in decisions when their information



and knowledge are important to decision quality. That way, the time taken by group
decision making can be justified.
Group design or composition is another element in enhancing group decision making.
For example, diverse members' perspectives and experiences appear to improve
group performance. In one study, culturally homogeneous groups (members all with the
same national and ethnic background) performed better initially than culturally
heterogeneous ones (members with different national and ethnic backgrounds).
Eventually, heterogeneous groups caught up with, then surpassed, the performance of
homogeneous groups. Data showed heterogeneous groups at first could not interact
effectively, but gradually learned to use their diverse group perspectives. With growing
workforce diversity and globalisation, managers must be able to handle group
dynamics to gain diversity's benefits.
Another way to aid group decision-making involves other aspects of group composition.
For example, including members likely to focus on major company goals can help
overcome the tendency to self-interest. Having someone skilled at encouraging others'
ideas can minimise the effect of dominant members.

Techniques for Improving Group Decision Making

While the preceding discussed decision-making processes, this section turns to
techniques that can improve decision making. Major techniques include the following:

Figure 4.17 Techniques for Improving Decision making

Devils advocacy and dialectical inquiry

Another way to facilitate group decision making is to set up mechanisms to avoid
groupthink. For one, managers may appoint one or more devil's advocates, individuals
who are unafraid to speak up and, by raising concerns, ask probing questions of
underlying assumptions, ensuring negative aspects of attractive decision alternatives
are considered. With this approach, alternative solutions can be analysed more
completely from many perspectives. Managers can also encourage a group to use
dialectical inquiry, where a decision situation is approached from two opposite points of

Computer-Assisted Group Decision Making

With advanced information technology, several simulation techniques have been
developed and applied in decision making. Information technology has also been



successfully used in group decision making. Teleconferencing, or simultaneous
communication among groups by telephone or computer with special software, is one
way. Such software is groupware, designed to support group members' collaborative
efforts, such as scheduling or holding meetings, project collaboration and document
sharing. Group decision making can be aided by specialised computer- based
information or group decision-support systems, which help members work together on
poorly structured problems. Groupware helps member communication, where group
decision-support systems focus more on the group making the decision.
Computer assistance for decision making has not been well researched. It has been
suggested that computer-assisted groups interact and exchange less than face-to-face
groups, and are slower to complete their tasks. The impact seems to depend on the
task. Computer assistance seems to lead to better ideas. Face-to-face groups, by
contrast, seem to be better at solving difficult problems and resolving major conflicts.
Analysis of 13 computer-aided group decision-making studies suggests consensus
decreases, as does process satisfaction. Face-to-face meetings may be better with
major differences of opinion among group members and where their commitment is
critical to successful implementation of results, This could change with improvements in
groupware and group decision-support systems, and studies assessing computer



Computer assistance seems to aid the generation of creative ideas, helping in
decision-making phases where creativity is needed. Creativity is basic to decision
making, as it generates new options leading to innovation, fostering novel perspectives
on the nature of problems. Next, we discuss encouraging individual and group

Promoting Innovation: The Creativity Factor in Decision

Creativity is the cognitive process of developing an idea, concept, commodity or
discovery viewed as novel by its creator or a target audience. Creativity is identified by
results. In fact, it is argued that 'Creativity is not a quality of a person; it is a quality
ideas, of behaviours, or products. Creativity is crucial to problem solving which yields
organisational innovations. Increasing global competition emphasises creativity. Japan
is working to overcome a copycat reputation through greater creativity.
Typically, people will choose one of two ways to solve a problem.

Figure 4.18 Two Approaches to Solving Problems

The convergent thinking approach involves trying to solve a problem by beginning

with a problem and attempting to move logically to a solution. Convergent thinking can
be thought of as digging an even bigger and deeper hole to search for oil.
The divergent thinking approach involves trying to solve a problem by generating new
ways of viewing a problem and seeking novel alternatives. Rather than digging in the
same hole, a divergent thinker will dig in various places to generate new perspective.

Basic Ingredients
Creativity needs the following three basic ingredients:

Figure 4.19 Basic Ingredients for Creativity



Domain-Relevant Skills
These skills result from expertise in a relevant field. They include related technical skills
or artistic ability, talent in the area and factual knowledge.

Creativity-Relevant Skills
These skills include a cognitive style, or method, of thinking that involves exploring new
directions, awareness of ways to generate novel ideas, and a work style helpful to
developing creative ideas. A creative work style includes the ability to focus attention
and effort for long periods of time, the ability to abandon unproductive avenues,
persistence and high energy levels.

Task Motivation
The individual must be truly interested in a task for itself, not just for any available
external reward, such as money. A primary concern for external rewards can inhibit
creativity. For example, the creativity of a researcher developing a new drug to obtain a
bonus or prize will probably be lower than someone who is focused on uncovering a
promising new idea.

Stages of Creativity
The creativity process has several stages. One commonly used creativity model has
four stages, as shown below.

Figure 4.20 Four Stages of the Creative Process

This stage involves gathering initial information, defining the problem or task needing
creativity, generating alternatives, and seeking and carefully analysing related data. At
this stage, the person is immersed in every aspect of the problem. For complex
technical problems, this may take months or years.

This stage of creativity involves subconscious mental activity and divergent thinking to
explore unusual alternatives. In this stage, the person generally does not focus on the
problem consciously, letting their subconscious work on a solution.



At this stage, a new insight is gained, often with a sudden breakthrough in 'eureka'

This stage has ideas tested to check the insight's validity. Here, convergent, logical
thinking evaluates the solution. If it is not feasible, cycling back through some or all of
the earlier stages may be needed.

Techniques for Enhancing Group Creativity

While the preceding discussed individual creative efforts, this section turns to group
creativity. Three major techniques are shown below:

Figure 4.21 Techniques for Enhancing Group Creativity

The brainstorming technique has group members generate as many novel ideas as
they can on a topic, without evaluation. The technique has four basic rules:

Figure 4.21 Four Rules of Brainstorming

Research suggests computer- assisted brainstorming is better than face-to-face for

idea generation. This seems to be because more time is available for idea production
as members can offer ideas together rather than listening to others or wait for them to
stop speaking before offering an idea.

Nominal Group Technique

The nominal group technique (NGT) enhances creativity and decision making by
integrating individual work and group interaction within ground rules. The technique



fosters both individual and group creativity and overcomes the criticism of offered
The ground rules, or steps, in NGT are as follows:
1. Individual members independently prepare lists of their ideas on a problem.
2. Each member presents their ideas in a round-robin session (one at a time in
turn) without discussion. Ideas are recorded so all can see them. If one idea
triggers another, the new idea is added to a member's list to offer on a
future turn.
3. When all individual ideas are put on the group list, members discuss them
to clarify and evaluate.
4. Members silently and independently vote on the ideas, by rank-ordering or
rating. The final result comes from pooling individual votes.
Evidence generally shows NGT is effective in developing many options while
maintaining group satisfaction. This technique may be more effective than
brainstorming for idea generation in face-to-face groups, but less so than computerassisted brainstorming.

The Delphi Method

The Delphi method involves gaining expert judgements on a specific issue. A unique
aspect of the Delphi method is that experts are not brought together to talk. They are
kept apart so that initial judgements will be uninfluenced by others. Many organisations
have used the Delphi method. Participants can come from inside or outside of the
organisation. However, organisations that wish to control results prefer to use internal
experts. The Delphi method looks for creative solutions, and is often used to forecast
technological change.
The Delphi method has three basic steps:
1. Anonymously, an expert panel identifies scientific breakthroughs in an area
over a specified long-term period (say the next 50 years). They estimate
when, within the period, breakthroughs can be expected. On the basis of
this information, a list of possible breakthroughs is drawn up, including an
estimated time frame for each.
2. The list is returned to the panel, to estimate (often on a 50-50 basis)
whether each will come before the average estimated time frame. They may
specify they do not believe the breakthrough will occur during the time
period (50 years).
3. Experts are provided with a new list of information gathered in step 2. If
there is general agreement, those who disagree must explain. If participants
differ widely in their views, they may be asked to justify them. They can alter
their estimates at this point. If substantial divergence still exists, step 3 is
repeated to reassess previous explanations.
The Delphi method follows these basic steps; however, companies may make minor
alterations to suit their circumstances.

Chapter 5
Goals, Plans


School of Business Services

Faculty of Workforce Development



The management function of planning, setting goals and deciding how to achieve them
is vital for survival of the organisation.
Strategic goals and plans are vital to the planning function of management as they give
overall company direction.

The Overall Planning Process

Main Components of Planning

A goal is a future target or end result an organisation wishes to achieve.

When a goal is an end result a firm wants to achieve, a plan is the

means for trying to reach the goal.
Planning is the management function of setting goals and deciding how
best to achieve them.
Goal setting and plan development lead to goal attainment and
eventually to organisational efficiency and effectiveness




Goal Attainment
efficiency and

Figure 5.1 The Overall Planning Process

Organisational Mission
An organisations mission is its purpose or fundamental reason for existence. It is a
broad statement distinguishing the organisation from others of its type. It can be a
written document or it may be implicit.

Purpose of a Mission Statement

A mission statement is a benchmark for managers to evaluate success.

For employees it defines common purpose, fosters loyalty, builds a

sense of community.
For outside parties, like investors, the government and the public, it
gives insight into values and future direction of the organisation.



Components of a Mission Statement:

Who are the customers?

What are the products or services?

Where does the organisation compete?

What is the basic technology?

The firms commitment to economic objectives.

Basic beliefs, values and aspirations of the firm.

Major strengths and competitive advantages.

Public responsibilities and desired image.

Attitude towards employees.

The Nature of Organisational Goals

Benefits of goals
When using goals, performance can increase across employee groups.
Goals help clarify expectations and provide direction.
Goals aid control by giving benchmarks to assess progress so corrective action can be
taken if needed.
Goals help enhance motivation. Meeting goals gives a feeling of a sense of
achievement and gaining recognition.

Levels of Goals
Strategic Goals
These are defined targets or future results set by top management. They address
whole organisational issues and are stated in general terms.



Top Management
Organisation-wide perspective



Middle Management
Department perspective



Figure 5.2 Levels of Goals and Plans

First-Line Management
Inut/Individual perspective



Tactical Goals
These are targets or future results usually set by middle management for specific
departments. These are more measurable than strategic goals.

Operational Goals
These are targets or future results set by lower management that address specific
measurable outcomes required from the lower management.

Hierarchy of goals
These goals can be seen as hierarchy. Goals at each level must be synchronized in
order to focus on achieving the organisations major goals. Operational goals (means)
must be achieved to reach tactical level goals (ends)



Figure 5.3 Hierarchy of Goals for a Department Store

How Goals Help or Facilitate Performance

To use goals effectively, managers must understand how performance can be
facilitated by goals.

Within some limits, challenging, difficult goals result in better performance. People
tend to try harder when they face a challenge.

Goals work best when attainable. Setting impossible tasks hinders performance.



Specific and Measurable
People must understand expectations and know when a goal is achieved. Quantitative
goals are easily understood, but qualitative goals using subjective judgment about the
achievement of goals can also be used.

There should be a set time period within which to goal is to be achieved. Goals may be
set annually but may be reviewed quarterly.

Goals will be supported when they are clearly relevant to the major work of the
Job knowledge
and ability




Supervisory authority
Peer and group pressures
Public display
Expectations of success
Incentives and rewards

Knowledge of
results or


(tools, materials
and equipment)

Figure 5.4 How Goals Facilitate Performance

Factors Influencing Goal Commitment

Effective use of goals requires getting individuals and or work groups to be committed
to goals they must carry out. It is ones attachment to, or determination to reach a goal.

Supervisory Authority
Goals may be assigned by a supervisor who explains the reasons for the goal to the
staff and gives needed instructions. A supportive supervisor will be more effective than
an authoritative one. A supervisor must encourage and offer opportunities.

Peer and Group Pressure

This builds goal commitment by focussing everyones efforts. Successful individuals act
as role models but if goals are seen as unfair, peer and group pressure can cut goal



Public Display
Commitment may be greater too difficult goals with public commitment rather than

Expectations of Success
If individuals have high expectations of success then they might be more committed. If
they think they cannot accomplish the tasks, commitment to the goal is less likely.

Incentives and Rewards

During goal setting, incentives may be offered. Some are tangible like money and
others are intangible such as job challenge and recognition of goal achievement.
Positive outcomes may foster commitment but negative ones may inhibit commitment.

Where the individual participates in goal setting commitment will be stronger.
Participation aids in plan development for goal implementation. Managers should
include subordinates in goal setting and then in planning how to achieve those goals.



Steps in setting goals

1. Specify the goal to be reached or tasks to be done
2. Specify how the performance will be measured
3. Specify the standard or target to be reached
4. Specify the time span involved
5. Prioritise goals
6. Determine coordination requirements.

Work Behaviour
Goal content and commitment affects a persons work behaviour through four factors.

When people are committed to specific goals, this helps improve choices of activities to

Individuals try harder for difficult goals than for easier ones.

Direction and effort are maintained in reaching a goal.

Those committed to difficult goals will develop plans or methods to attain those goals.
Easy goals may need little planning.

Other process components

Job knowledge and ability affect an individuals work behaviour and
prospects of achieving goals.
Complexity of the task affects the influence of goal directed work
behaviour on job performance.
Proper tools, materials and equipment are needed to achieve difficult
Knowledge of results or feedback on progress toward goals helps
effectiveness in achieving goals.



Potential problems with goals

Possible Problem

Possible Solution

Executive risk taking

Analyse risk, avoid careless or foolish risks

Increased stress

Eliminate unnecessary stress by adjusting goal difficulty,

adding staff and offering training in required skills

Undermined self-confidence

Treat failure as a problem to be solved rather than a

signal to punish due to failure

Ignored non-goal areas

Make sure goals encompass key areas

Short-term thinking

Include some long-term goals

Dishonesty and cheating

Be honest, avoid using goals punitively, offer help in

overcoming difficulties, give feedback, and be open to

Figure 5.5 Potential Goal-setting Problems and Possible Solutions

Linking Goals and Plans

Goals and plans are closely related. Goals are meaningless unless the actual process
is considered. Goals are the desired end but plans are the means to achieve them.
There are many ways to reach any goal. Plans differ by organisational level and by
extent of recurring use.

Levels of Plans
Strategic Plans
These are detailed action steps laid out to achieve strategic goals. These have a time
horizon of 3 to 5 years. These plans often include their mission and goals as these are
the basis for action steps. These plans address issues such as response to changed
conditions , resource allocation and efforts required to achieve strategic goals.

Tactical Plans
These focus on intermediate time frames, usually one to three years. They are more
specific and concrete than strategic plans and they outline the major steps towards
tactical goals. Middle managers consult with lower level managers in developing them,
before making commitments to top-level managers.

Operational Plans
These support tactical-plan implementation and operational-goal achievement. These
plans involve time frames of up to a year, such as months, weeks or even days. Lower
level managers consult with middle managers to develop these plans. Unless
operational goals are achieved, tactical and strategic plans will fail and goals at those
levels will not be achieved.



Plans According to Extent of Recurring Use
Single use plans
These aim to achieve a one off specific goal. The main types are programs and

A Program
This is a comprehensive plan coordinating a set of activities for a major non-recurring
goal. These programs often have a budget. There may be six basic steps:
1. Dividing tasks into parts or projects
2. Determining relationships between parts and developing a sequence.
3. Deciding who will be responsible for each part
4. Determining how each part will be completed and the resources needed.
5. Estimating the time required for each part to be completed.
6. Developing a schedule for implementing each step.

A Project
This is a plan coordinating a set of limited activities not needing to be divided into parts.
Several projects may comprise a program.

Standing Plans
These guide the performance of recurring activities. Three types are:
1. A Policy
A general guide specifying the broad parameters for the activities of
organisation members pursuing organisational goals. Boundaries are given
for general action.
2. A Procedure
This is a set of steps to be taken in certain recurring circumstances. These
give detailed step by step instructions. They do not allow flexibility or
changes to be made.
3. A Rule
These dictate exact action to be taken or not taken without flexibility or
ability to make changes.










Figure 5.6 Plans According to Extent of Recurring Use

Time Horizons of Goals and Plans

Different levels of goals and plans relate to different time horizons. Strategic goals and
plans address long-range issues over five years or more. The time frame depends on
the industry. It can vary from less than five years to up to twenty years. Operational
goals and plans involve short-range issues over one year or less.

Figure 5.7 Time Horizons for Goals and Plans



Promoting Innovation: The Role of the Planning Process

An organisations view of innovation may come from the highest levels. The CEO sees
a future based on innovation and will communicate this to organisation members. This
can be reflected in the mission statement.
Goals can encourage innovation by having new ideas incorporated into the goals.
Actual plans may involve the introduction of new products and services.
Plans can also achieve goals by using innovative means in order to achieve stated

Potential Obstacles to Planning

A rapidly changing environment may make planning harder.

Some managers may not believe in planning at all.

The managers daily work schedule pressures may distract from


Some managers have poor planning knowledge and skills.

There may be low managerial involvement which may reduce effective


Overcoming Obstacles to Planning

Have top management show strong support for the planning process.

Have lower level managers engage in and support planning.

Have planning staff help top management develop planning process

components such as monitoring the external and internal environments to
generate data to help in decision making.

Increase training of staff in how to develop plans.

Managers should review plans often.

Managers should develop contingency plans which arte alternative

plans for use if the environment changes making original plans unsuitable.



Management by Objectives (MBO)

Specific goals are set collaboratively for the whole organisation and every unit and
individual within it. These goals are then used for planning, organisational activities.
This uses high levels of managerial and subordinate participation is setting goals.

Figure 5.8 MBO Process Steps

Steps in the MBO Process

1. Develop overall organisational goals. These are strategic goals set by top
2. Establish specific goals for various departments , subunits and individuals.
This is each goal helps achieve the overall goals set in step 1. Goal setting
can be top down or from the bottom up.
3. Formulate action plans. Once goals are set, action plans are developed
focussed on what is to done, how, when, where and by whom in order to
achieve a goal. This helps in working out what resources might be needed
and to develop efficient ways to reach objectives. These are usually carried
out by subordinates and their supervisors.
4. Implement and maintain self-control. Once the above are carried out then
individuals should be given some latitude in their activities. A supervisor will
be less involved as the individual should know what is needed. Supervisors
should be told about progress and unexpected problems. They should
coach and support subordinates if they have difficulties.
5. Review progress periodically. This is to make sure plans are carried out as
expected and that goals will be met. Checking performance to date, to
identify and remove obstacles, solve problems and alter action plans if
needed are part of the review process. These reviews can be on quarterly.
6. Appraise performance. This is where a manager will meet with each
subordinate to appraise performance. It focuses on how much goals were



met, shortfalls, their causes and actions to improve things in the future.
Goals and plans for the future may be discussed.

Strengths and Weaknesses of MBO



Aids coordination of goals and

plans from top management

Tends to falter without strong continual commitment

Helps clarify priorities and


Necessitates considerable training of managers

Facilitates vertical and

horizontal communication

Can be misused as a punitive device

Fosters employee motivations

May cause overemphasis of quantitative goals

Figure 5.9 Strengths and Weaknesses of MBO

Assessing MBO
MBO system failures stem from a lack of top-management support and poor goal
setting and communication skills among managers who must carry out the system.
How mangers implement MBO impacts on its effectiveness.

The Concept of Strategic Management

This involves managers developing and implementing strategies to achieve strategic
goals under present conditions. It is oriented to achieving long-term goals, considering
internal and external environments.

The Strategic Management Process

Strategy Formulation
This needs mission and strategic goal identification, competitive analysis and specific
strategy development.

Strategy Implementation
This is carrying out strategic plans and controlling their operation. Any strategic plan
will fail if it is not carried lout effectively.



Strategic Formulation

Strategic Implementation


Competitive Analysis

Identify current
Strategic Goals

Specific Strengths

Carry out
Strategic Plans

Strategic Control


Figure 5.10 The Strategic Management Process

Importance of Strategic Management

This process helps organisations identify and develop a competitive advantage over
other businesses. It directs organisation members in where to put their efforts.
Strategic management can also show a need for innovation and involve managers at
various levels in planning making for more understanding and commitment by

Levels of Strategy





Business 1

Business 2

Business 3






Figure 5.11 Levels of Strategy

Corporate Level Strategy

This addresses what businesses the organisation will operate, how strategies of these
businesses will be coordinated to strengthen the organisations competitive position
and how resources will be allocated among businesses.



Business Level Strategy
A strategic business unit is a business with its own set of competitors, which can be
managed relatively independently of other businesses within the organisation.
Business level strategy concentrates on the best means of competing within a
particular business while also supporting corporate level strategy.

Functional Level Strategy

This strategy focuses on action plans for managing a particular functional area within a
business in a way that supports business-level strategy. These look at addressing the
main directions for each major functional business area such as manufacturing,
marketing, finance, human resources, research and development among other areas.

Coordinating Strategy Levels

Business level strategy needs functional level strategies to support it. All three levels
must be coordinated as part of strategic management.

Competitive Analysis and Strategy Formation

Managers need to analyse a firms competitive position if a strategy for getting a
competitive edge can be developed. SWOT analysis involves assessing organisational
strengths(S), weaknesses (W), external opportunities (O) and external threats (T).
Each of these can affect the competiveness of the firm.

Environmental Assessment
Achieving strategic goals may be influenced by technological factors, the legal-political
environment, socio cultural and international environments. Managers must also
understand the influences of customers, competitors and suppliers on their goals and

Porters Five Competitive Forces Model

This is a model which analyses the nature of competition in terms of five major forces.
These reasons may lower profit potential.

Competitive Forces

Reasons for Lower Profit Potential


Various competitive tactics among rivals lower prices

that can be changed or raise costs of doing business

Bargaining power of

Customers force price reductions or negotiate

increases in product quality and service at the same

Bargaining power of

Suppliers threaten price increases and/or reductions in

quality of goods or services

Threat of new entrants

New entrants bid prices down or cause incumbents to

increase costs to maintain market position

Threat of substitute
products or services

Availability of substitutes limits the prices that can be


Figure 5.12 Porters Five Competitive Forces Model



Organisational Assessment
Organisational resources and capabilities include financial, physical, human and other
assets for production of goods and services.
To assess the competitive implications of resources and capabilities relative to other
environments, organisations must question four major factors. These are critical to
organisational ability to build competitive advantage using internal resources and
1. Value. A resource adds value to the extent that it can capitalise on
opportunities or nullify a competitor with better products or services.
2. Rareness. A resource is rare to the extent that it is uncommon among
competitors. A knowledge of local conditions and access to these resources
gives a company a competitive advantage over a company without this
knowledge and access.
3. Degree of limitability. A resource or capability that is hard for competitors to
duplicate or substitute has low limitability. If you are the first with innovative
products then you can maintain your competitive advantage such as what
Apple Corp have been doing over the years.
4. Organisation. A firm must maximise the usefulness of its resources and
capabilities in order to keep a competitive advantage.
5. Sustaining competitive advantage needs valuable, rare and difficult to
imitate resources and capabilities. This is called a distinctive competence.



Formulating a Functional-Level Strategy

These spell out how functional areas can improve business-level strategies. For
example research and development may lead to new product which can be supported
by marketing, use of latest technology or subcontracting out work as well as many
other functional areas.

Strategy implementation
This is important but needs effective implementation. This involves management
activities to put the strategy in place, set up strategic goals to monitor progress and
ultimately achieve organisational goals.

Carrying out Strategic Plans

Strategic Implementation
Carry out Strategic Plan

Human Resources
Reward Systems
Decision Processes

Maintain Strategic Control

Strategic Control Systems
Adjustments as required

Figure 5.13 The Strategy Implementation Phase of the Strategic Management Process

This organisational knowledge, tools, equipment and work techniques used to deliver
product or service. If the strategy is low cost then technology changes may help cut

Human resources
Having people with necessary skills in appropriate positions is essential for effective
strategy implementation. Matching human resources to strategies can provide a
competitive advantage. A skilled workforce can reduce costs or produce new products
or services better than less experienced staff.

Reward Systems
These include bonuses, awards or promotions as well as intangible rewards such as
personal achievement and challenge. These can be a source of motivation supporting
a given strategy.



Decision Processes
This involves means of resolving questions and problems in organisations. More
resources devoted in this area will lead to more efficient decision making.

This is the formal interaction and coordination pattern that management designs to link
individual and group tasks to achieve organisational goals. When structure supports
strategic direction there is more likelihood of success in achieving goals.

Maintaining Strategic Control

Managers need to monitor strategic plans. This involves designing information
systems providing feedback on how strategic plans are carried out as well as their
effects. These systems let managers adjust strategic-plan implementation as needed.

Chapter 6
Design &


School of Business Services

Faculty of Workforce Development



Organising is defined as the process of creating an organisations structure. The
challenge for managers is to design an organisational structure that allows
employees to effectively and efficiently do their work while accomplishing
organisational goals and objectives (Robbins, 2003).

Organisational structure
Child (1984) describes this structure where job tasks are split into smaller tasks,
put into departmental teams and coordinated by managers. Organisational
structure has four elements
1. Job descriptions for employees and managers in units and
2. Grouping employees into units and departments to form an
Organisation top to bottom (vertical)
3. Creating a system to give employees the power to talk to their
manager and the managers the power to make decisions
4. Giving units and departments the power to invite employees from
different areas of the organisation to communicate with other units
and departments (horizontal).

Organisational design
Organisational design is the process used to develop the structure of an
organisation. The organisation chart is used to allow employees and managers to
create a visual structure.

The organisation chart

Organisational charts show:

Positions and departments grouped into specific units,

Reporting relationships from lower to higher levels, and

The organisation's structure and official communication channels

Position titles, as well as the names of the managers who hold the



A visual map of the chain of command - Every person in an,
organisation should be able to identify their manager and trace the
line of authority through the organisation to the top.
The chain of command must be kept to a minimum in order to use
resources effectively and efficiently and the organisation must have
the fewest possible levels

Managing director and
chief executive officer
Secretarys office








region one



Health unit


Region 2




Real estate



(Bateman & Snell 2004; Duncan 1989; Jones et al. 2000).

Figure6.1. Acacia Mutual Life Insurance Company, based in Washington DC



Job Design
Different job types can involve very different activities. A buyer's job for a
department store chain, may involve supplier contact for products e.g. shoes,
new product range previews, brand development and consumer taste trend
studies. By contrast, a salesperson's job includes learning a department's new
items, tidying displays, assisting customers and recording sales.

Work Specialisation
Work specialisation is the degree to which work is divided into different jobs e.g.
buyer and salesperson referred to above. Specialisation is important in
organisations as no one person can have every skill required to run an effective
Job design involves specifying task activities associated with a particular job.
Job design is important to organising for two reasons:
1. The logical grouping of task activities to enable employees to function
2. Job design influences employee motivation. When designing jobs
managers must consider efficiency and motivational issues to achieve
effective performance.

Job analysis
Job analysis is the systematic process of collecting information on a job's task
functions and identifying employee specifications for job success (see Fig. 6.2).
Two outcomes of job analysis are:
Job description, which sets out an employees duties and responsibilities
A Job specification, which details the skills, abilities, education and previous
work experience required to do a job.
Job analysis can improve all of the following:
Recruitment and selection- Job descriptions allow an organisation
to accurately describe the job to the applicants and job specifications
give important decision criteria in candidate selection for the job
Performance appraisal Clearly defined tasks and specifications
to establish performance baselines against which an individuals
performance is measured
Remuneration - Accurate job descriptions and specifications allow
organisations to value the job relative to the market and to other
employees in the organisation.
Training and development - Job analysis outcomes allow planning
of initial and consequent training requirements and for later
development opportunities.



Identification of job

work behaviours
work conditions

Identification of person


Position description

Figure 6.2 Job analysis process

Approaches to job design

There are four major job-design approaches: job simplification, job rotation, job
enlargement, and job enrichment (Milkovich and Gluek,1985)

Job simplification
Job simplification is the designing of jobs with only a narrow range of activities
(see Fig. 6.3).
Adam Smith, almost a century ago, identified the benefits of work specialisation
using an example involving pins, noted that a lone worker could make 20 pins a
day, while 10 who specialised could make 48,000 pins a day (McShane &
Travaglione, 2003).
The clearest job simplification example is an assembly line e.g. an assembly line
worker tightening just one nut on the wheel of a car.
Task variety does not reduce boredom as employees quickly learn new simple
jobs and get bored again (Kinicki & Williams 2003).
The negative effects of such jobs include boredom, low job satisfaction,
absenteeism, high turnover, sabotage and inflexible customer service (Hackman
& Oldham 1980).

Job rotation
Job rotation is the short-term movement of workers through a set of jobs in
Rotation cross-trains workers (training them on tasks in several
jobs), allowing more flexible job assignments.
Job rotation has more value in employee development, allowing
employees to increase their capabilities and job assignment flexibility,
by building their grasp of many organisational aspects as they rotate
through more challenging jobs (Waterman 1988).



Job enlargement
Job enlargement is the allocation of a wider range of similar tasks to a job to
increase challenge (Killbridge, 1960). Enlargement increases

The number of different tasks an employee performs in a job.

Employee motivation is limited as added similar tasks do not raise

challenge and stimulation sufficiently
For example Subway food servers jobs have a wider task range than a job at
Mcdonalds but boredom may not be lowered or motivation raised (Jones et. al.
Over done job enlargement cuts job satisfaction and efficiency and
causes mental overload, increased errors and reduced satisfaction
(Campion and McClelland, 1993).



(a)Job simplification







Job rotation








Job enlargement


1, 2,3



1, 2, 3

1, 2, 3,

Figure 6.3 Major approaches to job design



Job enrichment
Job enrichment is the upgrading of the job-task mix to increase potential for
growth, achievement, responsibility and recognition. Herzberg(1966) pioneered
enrichment by showing the value of job content as a major motivator. Job
enrichment increases job depth - the extent to which individuals plan and control
their work.

Job characteristics Model

Richard Hackman and Greg Oldham (1980) developed the job characteristics
model (Figure 6.4). The model has three main elements: core job characteristics,
critical psychological states, and outcomes. There are five core job
1. Skill variety is the extent to which a job entails a number of activities
needing different skills
2. Task identity is the degree to which a job allows completion of a major
identifiable piece of work, rather than just a fragment
3. Task significance is the extent to which the worker sees job output as
having an important impact on others.
4. Autonomy is the amount of discretion allowed in determining
schedules and work methods for achieving required output.
5. Feedback is the degree to which the job provides for clear, timely
information about performance results.
The more these core characteristics are reflected in jobs, the more motivating
they are likely to be.
These characteristics motivational value comes from workers experiencing three
critical psychological states:

feeling work is meaningful,

knowing they are responsible for outcomes and

finding out about results.

According to the model, these lead to outcomes (listed in Fig. 6.4) that include:

increased work motivation,

growth-need satisfaction,

job satisfaction and

work effectiveness. Raised work effectiveness usually comes from

increased work quality, although quantity may increase, owing to
improved work flow.



Workers react differently to changes in core Job characteristic (see moderators In
Fig. 6.4).
People will be more motivated by job changes if they have
knowledge and skills to succeed in redesigned jobs,
If they have high growth-need strength (how much they need
personal growth and development on the job), and
If other job context aspects satisfy (such as supervision, pay, coworkers, job security) (Loher, Noe, Moller & Fltzgerald 1985; Griffin,
1991). .
Checking Job content is one way to organise work to meet company and worker
needs, another is the use of alternate work schedules.

1.knowledge and skills
2.growth-need strength
3.context satisfactions

Figure 6.4 Job characteristics model (adapted from Hackman & Oldham 1980)



Managing diversity: Alternative work schedules.

Related to job design is setting alternative work schedules, based on adjusting
work schedules instead of content or activities. The approach increases job
motivation by setting schedules favouring workforce flexibility and helping to
balance work and personal life. Alternative work schedules help workers juggle
work and family responsibilities, and give other benefits too. flexitime,
compressed work-week, and job sharing are the three alternative work

Flexitime specifies core hours when people must be on the job, with flexible
starting and finishing times as long as required total hours are worked. For
example, core hours may be 10 am to 3 pm (with an hour for lunch). Workers
then choose a schedule, such as 7am to 4 pm or 10 am to 7pm, making eight
hours of work a day including core hours. The most popular core tends to be
school hours, freeing parents and caregivers for pre- and post-school hours
activities (Jones & George 2004).
Table 6.1 Advantages and disadvantages of flexitime
Advantages of Flexitime

improved employee morale, working

parents' needs being content or
activities accommodated reduced
lateness and traffic congestion as
some workers avoid peak times.
Absenteeism and turnover are often
lower too.

Disadvantages of flexitime

a lack of supervision at times,

unavailability of key people,

understaffing and,

if employees' outputs are inputs for

others, coordination challenges.

tracking several schedules can

increase administration.

Generally, flexitime has been successful, and it is increasingly common.

Compressed work week
The compressed work-week is a schedule with four 10-hour days or a similar
combination, rather than the normal five eight-hour days. Some firms close three
days a week. This allows many savings, including energy reductions from no
heating and cooling during days off (Business Week 1989).
The basic idea of a compressed workweek, or 4/40 workweek, is to enhance job
attractiveness with three (typically consecutive) days a week off. Downsides
include fatigue, productivity losses and accidents, as well as difficulty with
traditionally scheduled organisations.
Many firms like a 9/80 schedule. Here employees work a nine-hour day Monday
to Thursday and an eight-hour day on alternate Fridays, so they can have the



other Friday off. Employees then get a free Friday in each two-week period
(Genasci 1995).

Job sharing
Job sharing is where two or more people share one or sometimes more than one
position. In job sharing, one person may work in the morning, the other in the
afternoon, or they can work alternate days or develop some other schedule. Job
sharers may be parents sharing work and family responsibilities, or mothers
combining home and work activities (Thomas 1987; Cohn 1995). Job sharing is
convenient option for both employer and employee.

Types of Departmentalisation
How individual jobs are arranged is an important dimension of organisation
structure. Another is departmentalisation.
Departmentalisation is grouping individuals into units, and units into departments
and larger units to achieve organisational goals. Different patterns of
departmentalisation are called organisation designs. Functional, divisional, hybrid
and matrix are four common departmentalisation patterns (Duncan 1979; Daft
1998). Two emerging structure types are process structure and networked
structure, or the virtual corporation (Galbraith 1995).

Functional structure
Functional structure is a type of departmentalisation where positions are grouped
into functional (or specialisation) areas. In other words, positions are combined
on the basis of similarity of expertise, skill and work activity(Refer to Figure 6.5).

Common functions
Functional structures have several common features: (Miles & Snow 1992). For
production, or operations, combine activities for product
manufacture or service delivery.

Marketing promotes and sells products and services.

Human resources attracts, retains and enhances organisational

members' effectiveness.

Finance obtains and manages financial resources.

Research and development produces unique ideas and methods

leading to new and/or improved products and services.
Accounting and financial reporting meet internal and external
source needs.



The legal function handles legal matters.



In organisation structure, the meaning of the term 'function' (specialised area of
expertise) is not the same as in the context of management's major functions
(that is, planning, organising, leading and controlling). The functional structure of
the Denver-based herbal tea company Celestial Seasonings is shown in Figure

Figure 6.5 The functional structure of Celestial Seasonings



In-depth expertise development

Clear career path within function

Efficient use of resources

Slow response to multifunction

Decision backlog at top of hierarchy

Possible economies of scale

Bottlenecks due to sequential tasks

Ease of coordination within

Potential technical advantage
over competitors

Inexact measures of performance

Narrow training of future managers

Table 6.2: Advantages and disadvantages of a Functional structure

Divisional structure
Divisional structure is a type of departmentalisation, with positions grouped by
product, service or market similarity. Figure 6.6 shows how functional and
divisional structures differ. A divisional structure has each division with major
functional resources to pursue its positions without depending on other divisions.
Divisional structures are called self-contained structures with each division
containing all major functions (Patrick 2003).



Forms of divisional structure
There are three major divisional structure forms: product, geographic and
customer/market. A simplified example of each is shown in Figure 6.6 . The form
used depends on the reasons for creating each division formation.

Product Divisions
Product divisions focus on a single product or service or a relatively
homogeneous product or service set. This structure is used when large
differences in product or service lines make coordination in a functional design
slow and inefficient. With a divisional structure, departments have their own
functional specialists such as marketing, manufacturing and personnel working
with their specific division's product only.

Geographic divisions
Geographic divisions serve different geographic areas. This departmentalisation
type is often used where products and services must be tailored to different
regions' needs. So the Bell Atlantic telephone divisions in Figure 6.7 are
organised by geography.

Customer/Market Divisions
Customer divisions service particular client or customer types. This design is best
where there are major differences among customer types, making adequate
coordination of the customers' various needs within a standard functional
structure difficult. With customer divisions each department has individuals
performing functions necessary for a specific type of customer (Albert 1985).



Figure 6.6 Product, Geographic, Customer/Market Divisional Structures

Product, Geographic and Market Divisional Structures





Fast response to environmental


Resource duplication in each division

Reduction of in-depth expertise

Simplified coordination across


Competition amongst divisions

Simultaneous emphasis on
organisational goals

Limited sharing of expertise between


Strong customer orientation

Innovation restricted to each division

Accurate measurement of

Neglect of overall goals

Broad training in management skills

Table 6.3 Advantages and disadvantages of a Divisional Structure

Uses of divisional structure

A divisional structure is likely in larger organisations with major differences in
products, services, geographic areas or customers served. Sometimes setting up
self-contained units is impossible if the firm needs common resource sharing,
such as expensive manufacturing plant.

Hybrid structure
A Hybrid structure is a form of departmentalisation with both functional and
divisional structure elements at the same management level (Daft 1998). It
combines advantages of both functional and divisional structures. Many large
firms have both functional and divisional departments.
Table6.4 comparing functional and divisional structures


Efficiencies in:

Focus on:

Resource usage


Economies of scale


In-depth expertise




Board of Directors

Management committee
(A) Chair of the Board
(B) President
Two senior vice-presidents
Functional departments

Law and &


Science &


-Systems &

-Real estate &
-Secretary &
-Strategy &
Business develop.

-Marketing &
-Information &



Geographic divisions

vice-president &
general manager
IBM United States

Vice-president &
Group executive,
IBM World Trade
Americas Group

Vice-president &
Group executive,
IBM world TradeAmericas Group

Figure 6.7 - IBMs hybrid structure

Note: Reporting relationships are indicated by letters A. B, C, and D
IBM's hybrid structure is shown in Figure 6.7.

vice-president &
IBM World Trade
Europe Middle East
Africa Corporation



At IBM, functional units handle communications, finance, human
resources and research-where in-depth expertise is needed and
resources are more effectively used in a functional setup.
There are four major product divisions focused on product
development in areas needing different expertise and dealing with
rapidly evolving technology.
IBM has centralised sales and service functions into one division
that was geographically organised.
In a hybrid design functional departments are known as corporate
departments as they generally have staff authority relative to divisional
departments and authority from the organisation's corporate level.
Table 6.5 Advantages and disadvantages of the Hybrid structure


Alignment of corporate and

divisional goals

Conflicts between corporate

departments and divisions

Functional expertise and/or


Excessive administration overhead

Adaptability and flexibility in


Slow response to exceptional


Uses of hybrid structure

A hybrid structure is used when there is much environmental uncertainty best met
by a divisional structure but needing functional expertise and/or efficiency.
Typically, the approach is kept for medium-to-large firms with resources to justify
divisions and some functional departmentalisation.

Matrix structure
A matrix structure is both functional and divisional at once. There are two chains
of command, one vertical and one horizontal. A basic matrix structure is shown in
Figure 6.8.
Vice presidents of operations, marketing, finance, engineering,
and research and development represent functional departments,
making up the vertical hierarchy.
Managers of businesses A, B and C represent divisional units
operating horizontally at the same time.
Functional and divisional department heads forming the matrix
(e.g. vice presidents and business managers are called matrix



One major characteristic of the matrix structure is that staff in the
matrix report to two matrix bosses. For example, as Figure 6.8 shows,
a marketing researcher might report up the vertical chain to the vicepresident of marketing, and across the horizontal chain to business As
This dual authority system challenges the classical unity of
command principle (an individual should have only one boss at any
time), making a matrix structure complex.

Figure 6.8 Matrix organisation structure



Matrix stages
Organisations adopting a matrix structure go through several structural stages
(Davis & Lawrence 1977; Bateman & Snell 2004):
Stage 1 is a traditional structure, usually functional, following the
unity-of-command principle.
Stage 2 is a temporary overlay, where managerial integrator
positions are created to manage specific projects (e.g. project
managers), oversee product launches (e.g. product managers), or
handle matters of urgency needing coordination across the functional
departments. These managers often lead or work with temporary
interdepartmental teams set up to manage a specific project/problem.
Stage 3 is a permanent overlay, where managerial integrators
operate permanently (e.g. a brand manager coordinates issues
related to a brand on an ongoing basis), often through permanent
interdepartmental teams.
Stage 4 is a mature matrix, in which matrix bosses have equal


Decentralised decision-making

High administrative costs

Strong product coordination

Improved environmental monitoring

Confusion over authority and

responsibility (potential)

Flexible use of human resources

Excessive focus on internal relations

Efficient use of support systems

Fast response to change

Overemphasis on group decisionmaking

Slow response to change (possible)

Table 6.6 Advantages and disadvantages of the Matrix Structure

When to consider a matrix structure

Matrix designs are usually valuable under three conditions (Davis How &
Lawrence 1977):
1. Pressure from the business environment requires a bigger focus on
both functional and divisional dimensions. For example, multiple
products may need a product orientation, but complex engineering
technology may require a functional orientation.
2. Demands on the organisation are changing and unpredictable,
requiring large information-processing capacity and rapid coordination
of activities. For example, in the microchip industry, foreign
competitors often make technological improvements and lower prices
at the same time.



3. There is pressure for shared resources. For example, in competitive
markets organisations may need flexibility in the use of functional
resources across projects products.
Many firms do not need a mature matrix structure; however, temporary and
permanent overlay stages are more common, particularly as temporary and
permanent cross-functional teams.

Methods of Vertical Coordination

Vertical coordination is linking activities at the top of the organisation to those at
the middle and lower levels to achieve organisational goals. Without coordination,
organisation parts cannot work together. Five major methods for effective vertical
coordination are formalisation, span of management, centralisation versus
decentralisation, delegation, and line and staff positions (Daft 1998; Child 1984).

Formalisation is a common way to achieve vertical coordination. Formalisation is
the written policies, rules, procedures, job descriptions and other documents
specifying actions to take, or not to take, in a set of circumstances (Hall 1996;
Child 1984). Vertical coordination is helped by formalisation specifying
appropriate behaviours (Moutkheiber 1995). For example, policies give members
general guidelines for activities; procedures spell out actions for recurring events
and rules specify what should or should not be done in a situation (refer to Figure

Span of management: The trend to downsizing

Span of management, or span of control, is the number of subordinates
reporting to a specific manager. Span of management affects vertical
coordination because it defines how managers interact with, and supervise,
subordinates. With too many subordinates, overloaded managers find
coordination difficult, and cannot control their work unit's activities. On the other
hand, managers with too few subordinates tend to over supervise, allowing little
discretion (Child 1984; Bateman & Snell 2004).

Factors influencing span of management

Generally spans of management can be wider under the following conditions
(Dewar & Simet 1981; Van Fleet 1983; Barkdull 1963; Child 1984):
Low interaction requirements Managers can supervise more
people when work is such that subordinates can operate without
frequent interaction with each other and/or their superiors.



High competence levels Managers can handle more
subordinates when this is made possible by advanced job-related
skills and abilities of managers and/or subordinates.
Work similarity Managers find it easier to give adequate
supervision when employees in a given unit do similar work than when
their work varies widely.
Low problem frequency and seriousness When problems,
especially serious ones, are infrequent, managerial attention is
needed less.
Physical proximity When subordinates are located close to each
other, managers can more easily coordinate activities.
Few non-supervisory duties for manager Managers can handle
more subordinates when they have few non-supervisory duties to
perform, such as doing part of the work themselves.
Considerable available assistance Managers can supervise
more subordinates when they have considerable additional help, such
as assistants and secretarial support.
High motivational work possibilities When work offers a
significant challenge subordinates are more likely to increase
performance levels in response to opportunities to exercise discretion,
making continual management involvement less necessary.



Figure 6.9 - Hierarchy of authority and span of control at Mcdonalds




Levels in the hierarchy
Spans of management for various managerial positions directly influence
organisation hierarchy levels. A tall structure has many levels and narrow spans
of control. In contrast, a flat structure has few levels and wide spans of control. To
understand span of control's links to the number of levels, compare the two
hypothetical organisations in Figure 6.10. Organisation A has seven levels, while
organisation B has five. Assuming a span of control of four in organisation A,
manager numbers (from the top) would be 1,4, 16, 64,256 and 1024, for a total of
1365 (levels 1 to 6). At the seventh (bottom) level, there would be 4096 nonmanagerial employees. Assuming organisation B has a span of control of eight,
manager numbers (from the top) would be 1, 8, 64 and 512, for a total of 585;
(levels 1 to 4). Organisation B also has 4096 employees in its bottom level, which
is level 5. Thus organisation A needs 811 more managers than organisation B
(Robbins 1990).

Figure 6.10 Contrasting spans of control(Robbins 1990)

If you wanted to cut the number of hierarchical levels in organisation A without

reducing the employees at the bottom, you would increase spans of control. Of
course, in a real organisation, spans of control vary across the organisation, as in
Figure 6.11. With narrow average spans of control, the organisation is tall. Very
tall organisations raise administrative costs (more managers employed, needing
office space, etc.); result in slow communication and decision making (owing to
the many levels); make it harder to track responsibility for various tasks; and
make for dull, routine jobs.



Figure 6.11 Tall organisational structure with seven (7) levels

Owing to the problems that arise with tall structures, and influenced by the need
to cut staffing costs, many firms have downsized. Downsizing is the significant
cutting of middle management layers, growing spans of control, and shrinking
workforce size for greater organisational efficiency and effectiveness (Smallwood
& Jacobsen 1987; BaIley & Szerdy, 1988; Freeman & Cameron 1993).
'Downsizing' is the same 'restructuring'. Restructuring is a major change in
organisation structure brought about by reducing management levels and
possibly changing some major organisational structures.

Company keeps cost down

Speeds up decision-making
Gives employees more challenging
Reduces redundancies
Increases innovation


Valuable employees lost

Survivors are demoralised
Drop in productivity
Destroys employee loyalty and
Company becomes uncompetitive

Table 6.7 Advantages and disadvantages of downsizing



Figure 6.12 Flat organisation with three(3) levels

Centralisation versus decentralisation

To improve vertical coordination, managers must consider the appropriate level
Centralisation, or the extent to which power and authority will be
kept at upper levels.
Decentralisation, or the extent to which power and authority are
delegated to lower levels.
Centralisation and decentralisation are a continuum, with degrees of
delegation. The extent of centralisation affects vertical coordination by
affecting decision making at upper and lower levels (Galbraith 1995;
Carlisle 1974).


Top level Managers

coordinate activities of units and
individuals more easily
stop duplication of work and waste
have more experience and make
better decisions than lower level
have a broader view so better
service the whole organisation
strong leadership as the power stays
at the top

Lower level managers

gives executives time to focus on
major issues
are challenged by making
significant decisions affecting their
faster decision making
closer to the problem and better
placed to make decisions
allow the establishment of
independent units, such as
divisions, whose output is easier to
measure than functional units.

Table 6.8 Comparing and contrasting centralisation and decentralisation



Why do companies decentralise their organisation?

Four main factors tip the scales from centralisation's end of the continuum
towards decentralisation (Child 1984; Jones 1998):
Large size Top-level managers of large organisations rarely have
the time or knowledge to make all major decisions.
Geographic dispersion It can be impossible for top executives to
keep up with operational details at various locations.
Technological complexity Upper management can find it difficult to
keep up technologically.
Environmental uncertainty Top management's ability to assess
situations quickly is complicated by rapid change.

Delegation means that decision-making authority and responsibility moves from
one organisational level to the next lower level. Delegators (Senior Managers)
remain responsible for results and from duties or expected accountable to their
own managers.
Advantages of Delegation

Delegation aids vertical coordination

as it allows the results hierarchy to
have work done at the lowest level
possible to increase efficiency and
effectiveness (Duncan 1989).

Delegation also develops

subordinates for future managerial
positions, delegation ensuring
adequate vertical coordination.

Generally, delegation is more

common in Assignment of part of a
decentralised structures than
centralised ones, although even
within centralised structures top
manager's do some delegating. They
cannot do everything themselves.

Why managers avoid Delegation

Managers fear they will be blamed if

subordinates fail,

Others avoid delegating because they

enjoy doing tasks subordinates could

Feel threatened by competent

subordinates and fear they may make
the manager look less competent by

They simply want to ensure the work is

properly don

Table 6.9 advantages of delegation and reasons why managers avoid


The result of not delegating can be middle managers who are untrained for upper
level positions, overloaded managers and demotivated junior staff (Bateman &
Snell 2004).



Not delegating can harm managerial careers. For example, a Centre for Creative
Leadership study showed that over managing, or an inability to delegate and
build a team, was one 'fatal flaw' derailing fast-track executives (McCall &
Lombardo 1983}.

Line and staff positions

Another issue related to vertical coordination is configuration of line and staff
positions. A line position has authority and is responsible for reaching an
organisation's major goals. A staff position's primary purpose is giving line
positions specialised expertise and assistance. Sometimes the term 'staff' refers
to those assisting a particular position as needed (e.g. an administrative assistant
to a division head).

Figure 6.13 Line and staff departments of a bank

Positions and departments seen as line or staff vary between organisations. For
example, in a grocery chain, line departments might be store operations,
pharmacy, and food (directly linked to major organisational goals); staff



departments might be human resources and consumer affairs (indirectly related
to major goals).
For a manufacturer, production and sales are often line departments, and
purchasing and accounting staff departments. In many firms, staff departments
include human resources, legal, research and development, and purchasing.
Line positions

Line departments have line

authority, or authority following the
chain of command set by the formal

In Figure 6.12, the banks line

departments chain command
leading to the managing director

Staff positions

Staff departments have functional

authority relating directly to their own

In figure 6.12 Staff departments help

vertical coordination with needed
expertise, not through a strict chain of

Table 6.10 Comparing line and staff positions

Conflict can arise when staff departments grow, and begin overseeing
departments they should be assisting. Conflict is not inevitable though if
responsibility areas are clear and line and staff personnel operate as a team that
is jointly accountable for final results.

Methods of Horizontal Coordination

Organisations use horizontal coordination, to connect activities across
departments at similar levels. Horizontal coordination helps process information
across organisations . The more companies must process information to produce
their product or service, the more horizontal coordination is needed.
Horizontal coordination also encourages innovation (Kanter 1988). There are
three reasons for this:

First, new ideas are pr more likely when many views exist.

Second, problem and opportunity awareness sparks creative

Third, involving others in developing ideas often makes them more
willing to help implement them.
Horizontal coordination mechanisms augment the basic hierarchy and other
vertical coordination methods by aiding information exchange across units at
similar levels. Three major means to help promote horizontal coordination are
slack resources, information systems and lateral relations (see Fig. 6.14)



Figure 6.14 Horizontal coordination methods for increasing informationprocessing capacity

Slack resources
Slack resources, are resources that are not being used to assist the company to
adapt to internal and external pressures, as well as change management.
Organisations often use slack resources, such as extra people, time, equipment
and inventory, to reduce the need for constant inter-departmental coordination
and allow some flexibility in resource use.
Slack resources can help foster creativity and innovation (Bourgeois 1981). For
example, 3M researchers spend 15 per cent of their time on projects of their own
with long-term payoff potential (the company calls this 'bootlegging'). This
promotes slack resource use (time, equipment and materials to enhance chances
or innovation).

Information systems
A growing horizontal coordination method is information systems, largely
computerised ones, firm to coordinate company parts. For example, Mitsubishi
Motors Australia is moving to use suppliers already linked to its parent
companies' electronic systems in order to fully utilise gains from the larger
corporation's information systems.

Lateral relations
Lateral relations is the coordination of efforts by communicating and problemsolving with peers in other departments or units. Working together through
communicating produces innovative solutions and helps with creative responses
to events. Direct contact, liaison roles, task forces, teams and managerial
integrators are major lateral relations methods. (Galbraith 1977).



Direct contact
One lateral relations method is direct contact or communication between two or
more staff in different units at similar levels to coordinate tasks and solve
problems. Direct
contact systems means issues can be resolved at middle and lower levels
without involving upper-level managers. In fact, problems can often be handled
better by lower level managers as they are more familiar with the issues

Liaison roles
A liaison role is a role to which someone is appointed to facilitate communication
and issues resolution between two or more areas. Liaison roles are used where
continuous coordination between departments is needed for effective functioning.
An example is appointing an engineer to set up contact between engineering and
manufacturing departments (Reynolds &Johnson 1982).
The liaison person builds horizontal coordination by working with departments
and the customer to satisfy customer needs. A liaison person cuts the red tape,
dealing directly with departments and problems.

Task forces and teams

A task force is a temporary group formed using members of different departments
to work on a problem and make recommendations. Whoever set up the task
force can decide whether or not to follow the recommendations. Task forces
promote horizontal coordination by getting people from many areas of the
company to share ideas on issues and plan actions (Farnham 1994).
Teams, on the other hand, are groups, temporary or permanent, set up to solve
problems and apply solutions. Teams may be from different departments, but
may come from the same unit (Jones. 1998). If problems appear, the liaison
person is a 'resource team leader', helping resolve problems quickly. For
example, if a customer complains, the liaison person becomes an internal
resource team leader. They notify technical salespeople, quickly assembling a
team with the expertise and resources to solve the problem and offer innovative
solutions. The idea is to give top priority to that problem not in three days, but on
day one, with the first phone call from our customer. (Flint & Heuslein 1989).



Managerial integrators
A managerial integrator, another means of lateral relations, is a separate
manager who coordinates related work across several functional departments.
They have titles like 'project rep manager', 'product manager' or 'brand manager'
and do not belong to departments whose activities they help coordinate. Project
managers usually coordinate a project until it is finished e.g. a building project
which is technically complex, must finish on schedule and at the price contracted
(Supervisory Management 1995).
Product managers launch new products and services and may continue coordinating interdepartmental work on them.
Brand managers coordinate company work on brand name products, in soap,
food and toiletries industries. Brand managers devise and implement brand
strategies and plans, monitor results and correct problems.
Managerial integrators are horizontal coordinating agents (Child 1995b):
They allow a rapid response to environmental change and efficient
resource use as they move between projects; they can also sponsor
innovative ideas.
Managerial integrators typically have no line authority, so they
must work with functional managers, who control resources (Denton
They compete with others (e.g. managerial integrators for other
projects) who want functional departments to help make their projects,
products or brands successful too.
They can also aid in initial company development. Benjamin
(2003) explains the value of a Business Review Group (BRG) in
ensuring that the diverse factions involved in setup are melded into a
coherent group.



Figure 6.15- Methods of Horizontal Co-ordination

Organisational Communication Channels

Organisational communication patterns are called channels because they are
ways managers and other members can send and receive information. In this
section we consider two structurally related directions of communication flow:
vertical and horizontal. We also examine the 'grapevine', an informal
communication form.

Vertical communication
Vertical communication is message exchange between two or more
organisational levels (see vertical Fig. 6.14). So vertical communication can
involve a manager and a subordinate, or several communication hierarchical
layers. It can flow down or up. Managers are found to spend about two-thirds of
communication time on vertical communication (Porter & Roberts 1976; Rue &
Byars 2003).

Downward communication
When vertical communication flows from higher to lower levels, it is downward
communication. This has many forms, such as staff meetings, company policy
statements, newsletters, informational memos and face-to-face contact. Most of
the communication downward involves information in one of five categories:
1. job instructions on specific tasks,
2. job rationales explaining relationships between tasks,



3. organisation procedures and practices,
4. feedback on individual performance and
5. attempts to encourage a sense of mission and flowing from a higher
organisational goal dedication (Katz & Kahn 1978).
Downward communication across several levels can become distorted. A middle
manager survey shows quality of received information is poor (Harcourt,
Richerson & Wattier 1991). Distortion occurs for three main reasons.
The first is faulty message transmission owing to sender
carelessness, poor communication skills and difficulties encoding a
message for members at many levels.
Second, managers overuse one-way communication, such as
memos, newsletters and manuals, with little possible immediate
receiver feedback.
Third, some deliberately or accidentally filter communications by
withholding, screening or manipulating information. Deliberate filtering
occurs when a manager enhances personal power by tightly
controlling organisational information (Baskin & Aronoff 1980; Lewis
A way to increase effective downward communication is through multiple
channels and repetition (Ansberry 1991). Downward communication can likewise
be enhanced by encouraging feedback in the form of upward communication.

Upward communication
Upward communication is vertical communication flow from lower levels to one or
higher organisation levels. Upward communications includes one-to-one
meetings with immediate superior, staff meetings with superiors, memos and
reports, suggestion higher levels in the rand systems, grievance procedures and
employee attitude surveys. Information spread through upward communication
typically relates to:
1. current work project progress,
2. unsolved problems and situations where subordinates need help from
3. new developments within or affecting the work unit or organisation,
4. improvement and innovation suggestions, and
5. employee attitudes, morale and efficiency



Distortion typical of downward communication also affects upward
communication for two reasons:
First, information favourable to the sender will be sent upward,
while unfavourable information will be blocked, even when
organisationally important. Subordinates will be more likely to filter
information when they distrust their superiors, see them as having lots
of influence over their careers and strongly desire to move up (O'Reilly
& Roberts 1974).
Second, managers discourage upward communication (Aldrich
1986; Atkinson 1996; Roberts 2003c). Encouraging upward
communication can foster quality effectively.

Horizontal communication
Horizontal communication is lateral or diagonal message exchange within work
units involving peers reporting to the same supervisor, or across work-unit
boundaries, involving staff reporting to different supervisors (see Fig. 6.14).
Horizontal communication takes many message exchange either forms, including
meetings, reports, memos, telephone conversations and face-to-face within workunit discussions. Managers spend about a third of their communication time in
horizontal boundaries, involving communication (Porter & Roberts 1990) related
to one or more of the following:
1. (1) task coordination,
2. (2) problem solving,
3. (3) information sharing,
4. (4) conflict resolution, and

(5) peer support (Pace 1983).

Three major factors impede needed, work-related horizontal communication:

First, rivalry can mean employees hide information damaging to themselves or
aiding others.
Second, specialisation might mean people are more concerned about their own
unit's work and have scant regard for others' work and communication needs. For
example, R&D scientists focused on long-term projects might not want to
interrupt their work to help with customer problems identified by sales.
Third, motivation may be low when horizontal communication among
subordinates is discouraged or unrewarded. Committees, task forces and matrix
structures are ways managers encourage horizontal communication, mainly at
work-unit boundaries (Goldhaber 1986).



Informal communication: The grapevine

Vertical and horizontal communication patterns are formal patterns, or channels,
as communication follows the official hierarchical structure and task
requirements. You might see formal communication as associated with an
organisational position. In contrast, informal formal communication, or the
grapevine, occurs without reference to hierarchy or task requirements. Informal
communication relates to personal, not positional, issues (Pace 1983). For
example, vertical and horizontal personal relationships unrelated to
organisational positions exist among employees who ride to work in the same
car, attend the same church or have children in the same school. Grapevine
communications stem largely from relationships, which may overlap but may not
coincide with hierarchy and task communication requirements.
Grapevines are fast, carry large amounts of information, and yield
data that is between 50 and 90 per cent accurate. Although the
grapevine is seen as inaccurate, the problem comes mainly from
misrepresenting incomplete details (Pace 1983).
Although not officially set up or sanctioned, grapevines cannot be
abolished. They create problems when they carry gossip and false
rumours, but if managed properly they have many favourable aspects.
By dwelling on errors, grapevines can help communicate
organisational rules, values, morals, traditions and history.
Grapevines give employees time to consider potential changes
and can help organisational goal contributions (Marh &Stevon 1984;
Weic& Browning 1986; Mishra 1990). They also foster innovation by
building organisation communication.



Board of Directors







Figure 6.16 - Vertical (black arrows , up and down) and lateral (blue arrows)

Weighing Contingency Factors in Organisational

The best structure for an organisation depends on contingency factors, such as:






A company adopts four main strategies:
1. Niche differentiation - This strategy distinguishes one's products and
services from those of competitors for a narrow target market. An
example is the revival, by BMW; of the Mini (Howarth & Thomson

Cost leadership- This strategy emphasises organisational efficiency

so products and services can be offered at lower prices than those of
competitors For example, Australian-based airline, Virgin Blue, has
just begun flying the cross-Tasman route. The company has offered
fares that are much lower than the other low-cost competitors.

3. Innovative differentiation - This strategy distinguishes one's products

and services from, those of competitors by leading in complex product
or service innovations Examples of small innovative companies
include veterinary companies that provide a total 'at home' care
package when a loved pet dies. This includes a funeral service, home
burial, photograph and a commemorative plaque for the pet.
4. Market differentiation - This strategy distinguishes one's products and
services from those of competitors by advertising, prestige pricing and
market segmentation. Product and service designs may be no better
than those of competitors, but they will offer attractive packaging,
good service, location convenience and product or service reliability.
The Subway food outlet is an example of a fast-food sandwich maker
that offers a variety of different types of bread and fillings, quick
service and either 'eat in' or 'take away' food options.
The typical organisation with niche differentiation or focus strategy is small or
medium sized, with a relatively homogeneous customer and client set, where the
appropriate structure is functional. A functional structure supports a cost
leadership strategy, even in large firms, with small numbers of related products or
services. Similarly, market differentiation strategy may work with a functional
structure and a narrow product and service range and can be coordinated
effectively across functional units.
Divisional or hybrid structures generally suit market differentiation. A cost
leadership strategy can work with these structures while strategy is at division



A matrix structure fits with an innovative differentiation strategy. Matrix structures
focus on flexibility and collaboration between specialists, conditions useful in new
product development.
Type of departmentalisation



Niche differentiation


Cost leadership; possibly market differentiation

Divisional or hybrid

Market differentiation or cost leadership at divisional


Matrix, integrators

Innovative differentiation

Table 6.12 - Matching Structure and Strategy

Different organisations need different structures, partly owing to technology
-knowledge, tools, equipment and work techniques an organisation uses to
deliver a product or service. Technological complexity and interdependence are
two critical aspects (Fry 1982).

Technological complexity
Research on technology's importance was conducted in the 1950s by a team led
by Joan Woodward (1958; 1965). The team were interested in how much
classical theorists' management principles were practised by a group of 100
British manufacturing firms.
The researchers were surprised to find no connection between use of classical
principles in structuring firms and their success. Actual practices varied
considerably. Eventually, Woodward found three different technology types often
predicted structural firms' practices: produced to meet customer specifications or
1. In unit and small-batch production, products are custom-produced
to customer are made in small specifications or made in small
quantities largely by craft specialists. Examples are quantities
primarily by e diamond cutting in New York's diamond centre and
stretch limousine production.
2. In large-batch and mass production, products are made in large
quantities, often on Examples are most car production, chocolate
Easter eggs such as large-batch and mass those made by Cadbury's
chocolate factory ( and manufacture of production
microchips for computers and related products.
3. In continuous-process production, products are liquids, solids or
gases made through a continuous process. Examples are petroleum,
chemical and some food products.
The team noted technologies are increasingly complex to manage, with the least
complex being small-batch and unit production and the most complex



continuous-process production. Greater complexity comes from more elaborate
machinery and its greater work-process role. Technological complexity, in turn,
seemed to explain different structural practices production. (see Table 6.13).
For example, researchers found complexity increased as management levels
grew (a taller Type of structure), as there were more staff personnel per worker,
and wider spans of control at upper-management levels. Woodward's results also
revealed higher formalisation and centralisation in large-batch and massproduction technology firms, where many workers' efforts needed
standardisation. Formalisation and centralisation, in contrast, were low in
companies with unit and small-batch, as well as continuous-process,
technologies, where work decisions are made at lower levels.
At first-line supervisor level, spans were greatest with large-batch and massproduction technology, as one supervisor could handle many workers doing fairly
routine work. It was to b smallest for continuous-process where process
difficulties can cause major problems (Woodward 1965; Collins & Hull 1986).
Overall, Woodward's research showed structural characteristics of successful
firms were close to the median for their particular technology. Subsequent
research supports the influence of technological complexity on organisation
structure (Fry 1982; Hull & Collins 1986).

Structural characteristics

Small batch

Mass production


Levels of management

Executive span of control


Supervisory span of control




Industrial workers vs, staff













Table 6.13 Structural Characteristics and Technology



Technological interdependence
Another technology aspect affecting organising considerations is technological
interdependence, or how much different organisation parts need to exchange
information and materials to perform required activities (Fry 1982). There are
three major types of technological interdependence: pooled, sequential and
reciprocal (Thompson 1967).
Pooled interdependence - the type with least interdependence is,
where units operate independently but individual efforts impact on the
whole organisation's success (hence 'pooled'). For example, you go to
your bank's local branch and they will rarely need to contact another
branch to complete your transaction. If, however, the branch's
performance customers will leave, ultimately affecting the whole
bank's health.
Sequential interdependence - the task of one unit must be
finished before the next unit in the sequence can start. For example, a
strike at one General Motors Holden may mean workers at other
plants have to be temporarily stood down. This happens when the
sequential interdependent assembly means non-striking plants need
parts from the striking plant.
Reciprocal interdependence - where one unit's outputs are
inputs to another unit and vice versa. When a plane lands, the flight
crew hand the plane to the maintenance crew. After refuelling,
resupplying and other activities, maintenance releases the plane to
the flight crew so the aircraft can leave. Thus the flight crew's output is
maintenance's input, after which the process reverses. Clearly,
reciprocal interdependence calls for the most horizontal coordination.
In designing organisation structure, technological interdependence
and complexity must be considered.



Woodward's research also looked at how size and structural aspects were
related, but nothing definitive emerged. Research has since tried to determine
how size and structure relate, with some success. The issue is complicated
because size as well as environment and technology affect organisation
structure. In addition, size can be assessed in many ways, such as by gross
sales, profits or even employee numbers (most common).
Studies of size effects on structure have identified four trends:
1. As organisations grow, departments and levels are added, and
structures grow more complex. With functional forms, this drives a
change to divisional structure (Astley 1985; Cullen, Anderson &
Baker 1986).
2. Increasing size means the number of staff positions are increased to
help top management cope. When critical mass is reached this levels
off (Cullen et al. 1986), but leads to the third trend.
3. Organisational growth requires more rules and regulations. Guidelines
help with vertical coordination, but can lead to excessive formalisation
and lower efficiency (Goodling & Wagner 1985).
4. As organisations grow, decentralisation increases. This is probably
due to the rules and regulation guiding lower level decision making
(Robbins 1990).

Burns and Stalker (1961) studied the effects of environment on organisation
structure, Studying 20 British industrial firms, they found different structural
characteristics, depending on whether the environment was stable with little
change or unstable with rapid change and uncertainty.



Mechanistic an organic characteristics

In stable environments firms had fairly mechanistic characteristics, highly
centralised mechanistic decision making, many rules and regulations, with
hierarchical communication channels
Vertical coordination was emphasised, with little delegation between
management levels, Firms operated successfully as environmental change was
gradual, and upper management could stay on top of changes.
In highly unstable and uncertain environments by contrast firms had more
organic characteristics, decentralised decision making few rules and
regulations, with hierarchical and lateral communication channels. Horizontal
coordination was emphasised, with considerable delegation between levels,
Firms developed these characteristics as their rapidly changing environments
meant that people at many levels had to monitor the environment and decide on
a response. Mechanistic and organic organisation characteristics are shown In
Table 6.14.





Work is divided into narrow,

specialised tasks

Work is divided in terms of general tasks

Tasks are performed as specified

unless changed by managers in the

Tasks are continually adjusted as needed


Structure of control, authority and

communication is hierarchical

Structure of control, authority and

communication is a network

Decisions are made by the specified

hierarchical level

Decisions are made by individuals with relevant

knowledge and technical skills

Communication is mainly vertical,

between superior and subordinate

Communication is vertical and horizontal

among superiors subordinates and peers

Communication content is largely

instructions and decisions issued by

Communication content is largely information

and advice

Emphasis is on loyalty to the

organisation and obedience to

Emphasis is on commitment to organisational

goals and possession of need expertise

interaction with others involved in the task

Table 6.14 - Characteristics of Mechanistic and Organic Organisations



Differentiation and integration

Lawrence and Lorsch (1976) looked further into the idea of environment
influencing structure. They thought organisational environments might affect
various units. To test this, they studied three departments-manufacturing, sales,
and research and development -in three industries with varied environmentsplastics, food processing and containers. They focused on differentiation, how
organisational units differ in regard to members' behaviours, orientations and
formal structures.
As expected, differentiation was found. R&D departments focused on new
developments, worked fairly informally and looked for long-term success. Sales
departments meanwhile looked to immediate customer satisfaction, operated
more formally and were largely interested in short- term sales. Manufacturing
departments were in between, concerned largely with efficiency, operating less
formally than sales, but more formally than R&D departments, and in
intermediate-term time frame. Interestingly, departmental differentiation was
greatest for the plastics industry, which had the most unstable environment, and
least in the container industry, which had the most stable environment.
Differentiation was just one element. In effectiveness terms, the best firms
balanced differentiation with integration, how much departments must coordinate
efforts by collaboration. Greater departmental differentiation owing to
environmental instability was matched by greater efforts at integration in
successful firms. For example, successful container companies had a functional
hierarchy, rules and regulations, for integration. Successful plastics companies,
however, used several vertical and horizontal coordinating methods to integrate
in the face of high differentiation (Lawrence & Lorsch 1969). Horizontal
coordination methods discussed in this chapter (e.g. teams and managerial
integrators) were significant.

Promoting Innovation Using Structural Means to

Enhance Prospects
Structure's support of strategy can be reinforced to encourage innovation.
Innovation is crucial to differentiation strategies (especially an innovative
differentiation strategy). There are four means of using organisation structure to
facilitate innovation: vital roles for innovation, the need for innovative units or
reservations, the differentiation paradox and transfer process (Galbraith 1982).



Vital roles
Successful innovations are rarely just one individual's work. The innovative
process is more likely to occur if three vital entrepreneurial roles are filled: idea
champion, sponsor and orchestrator.
An idea champion generates a new idea or believes in a new
idea's value, supporting it against potential obstacles. These are often
entrepreneurs, inventors, creative individuals or risk takers. Generally
low in the hierarchy, they find it hard to get innovations accepted
without a sponsor.
A sponsor, usually a middle manager, sees an idea's significance
and helps get needed funding to continue an innovation's
development, helping the implementation of the new idea. However,
innovations also need an orchestrator's help (Kinicki & Williams 2003).
An orchestrator is a high-level manager, who articulates the need
for innovation, funds activities, creates middle-manager incentives for
sponsoring innovative ideas, and protects ideas people. Orchestrators
are vital as innovations upset the status quo and are resisted by those
who must adjust to the new ideas. These roles are significant and
their effectiveness can be enhanced by creating special units or

Reservations are organisational units devoted to the generation of innovative
ideas. The aim is to create relaxed atmospheres where new approaches can be
tried out. Steven Jobs and Steven Wozmak created the first Apple computer in a
garage, which was a reservation.
Kevin Roberts, the New Zealand director of the advertising company Saatchi
and Saatchi, has a similar philosophy. In a recent interview with CNN he said of
his employees, And all we need to do is give them an idea liberate them get the
hell out of their way. The reservations in his company are fun places with
comfortable lounge chairs, coffee tables and fruit in baskets to enjoy.
Reservations can be fairly permanent, such as research and development
departments. New venture units can be set up as separate divisions or specially
incorporated companies to develop new products or business ideas and
initiatives (Burgelman 1985; Bart 1988).
Reservations can be temporary task forces or teams of people relieved of normal
duties to develop a new process, product or program. These are new venture
teams. Though differentiation, particularly establishing reservations, effectively
encourages innovation, there is an associated paradox.



Differentiation Paradox
The differentiation paradox occurs when innovative departments are separated
from the rest of the organisation. This separation increases the chances of the
department developing a radical idea which is never implemented. The reason is
that new ideas are often viewed as so radical they are threatening or even
rejected outright. The paradox is strongest when a radical innovation is
introduced to an organisations operating units. Under these circumstances, the
ideas may be rejected. For example, during the 1970s at Xerox's Palo Alto
Research Centre, scientists invented the first personal computer, mouse, pictureoriented layout based on icons, and word processing software displaying fonts as
they appear on the page. Sadly, the company did not appreciate the inventions'
value and Xerox never capitalised on them (Chakravarty 1994). Instead, Apple,
Microsoft and others did. The PARC situation at Xerox shows the differentiation
paradox and the need for concern about technological transfer.

Transfer process
As the differentiation paradox suggests, the more apart innovators are from the
company, the harder moving innovations into marketable products or services
becomes. For example, Bell Labs averages around a patent a day since being
founded in 1925 to give cutting-edge research the support to AT&T. Yet AT&T has
largely failed to translate Bell's research into products and services to fuel growth
(Schrage 1987).
The effective transfer, or transition, process entails several stages.
In the first stage, an idea generator, or champion, develops an
idea in a reservation. If initial results are positive but the idea needs
more work, organisation experts hone it.
Then, if results are still positive, the next stage tests the idea in an
operating division.
The final stage implements the innovation. Of course, this may
not happen smoothly and could be easier if the innovation involves
incremental change.
However, to develop and implement significant innovations, efforts must be
fostered and new ideas transferred from innovating units to the whole firm.
Organisations can set up separate new venture units and, when they are large
enough, bring them into the main structure as separate divisions, lessening
transfer problems.. (2000).

Chapter 7
Groups & Teams


School of Business Services

Faculty of Workforce Development




Foundations of Work Groups
What is a Group?
A group can be described as two or more individuals that are interdependent on
each other in collective pursuit of a common goal. This definition differentiates a
work group from a simple gathering of people. A collection of strangers leaving by
the same door at a theatre or awaiting the outcome of a house auction are not a
group. In neither case are the people interdependent, interacting and influencing
each other to collectively reach a shared goal.
Teamwork happens when groups work together efficiently to reach organisational
Increasingly, organisations are turning to groups and teamwork to improve
productivity, increase employee morale and commitment. Though groups have
always been central to organisations, they are being seen increasingly as
important assets. Organisations using groups and teamwork come in all sizes.



Types of Work Groups

There are different types of workplace groups: formal and informal.
These and some subcategories are shown in Figure 7.1

Command or

task groups
Task groups


task groups

Figure 7.1 Types of work groups

Formal Groups
A formal group is one that is created by an organisation for a specific purpose.
There are two types of formal groups: command and task
A command or functional group is a formal group and consists of a manager
and all the subordinates reporting to that manager. Each organisational work unit
(manager and subordinates) is a command group. For example, if you shopped
at Harvey Norman you would be served by a sales assistant who reports to a
sales manager. Along with other sales assistants reporting to the same sales
manager, they form a command group. The sales manager in turn reports to the
state sales manager who consequently reports to the national sales manager.
Each manager reports to a higher level manager, belonging to the higher level
command group. In this way, managers link lower level and higher level groups. A
linking pin is someone who coordinates different command-group levels by acting
in a supervisory role in a lower level group and a subordinate role in a higher
one. Organisations are thus made up of command, or functional groups in a
pyramid, with linking pins holding them together.



A task group is a formal group that is formed to supplement or replace work that
is normally undertaken by a command group. Task groups can be permanent or
temporary. A permanent task group or standing committee or team is generally
concerned with recurring issues within a narrow field over a lengthy time period.
A temporary task group deals with a specific issue in a specified time frame.
Temporary task groups or ad hoc committees may be called task forces, project
groups, or teams. Names can vary, so the length of time dictates whether a task
group is permanent or temporary.

Informal Groups
Whereas a formal group is created by an organisation, an informal group is set
up by the employees, to serve the groups interests or social needs. The group
may or may not support the organisational goals. An informal groups
membership may be the same as a formal group, for example when members of
a work group eat together. At other times, an informal group has members from
one or more formal groups (see Fig. 7.2).
There are two types of informal groups: interest and friendship
An interest group is an informal group set up to help employees with common
concerns. Interests can vary widely, from a group of engineers examining ways to
improve a troublesome new technology, to sport (e.g. basketball), or even a need
to have a company policy changed.
A friendship group differs from an interest group in that it exists to fulfil social
needs. They are based on mutual attraction arising from shared characteristics
such as similar work, language, background, values and beliefs. Informal groups
can be detrimental if the concerns of the group are put above the organisational
goals or there is a serious falling out with management. Managers must be aware
and understand informal groups because of their potential to negatively or
positively impact on organisational effectiveness.



Formal command group marketing

Formal task group new product team
Informal interest group members of golf club
Figure 7.2 Formal and informal groups in an organisation

How Informal Groups Develop

George Homans (1950) explained how informal group come from formal group
dynamics. When a formal group is set up, members have required behaviours
and sentiments (see Fig. 7.3).

Formal groups
required activities
required interactions
required sentiments
Given sentiments/values

Organisational outputs
(e.g. productivity, satisfaction)

Informal groups
emergent activities
emergent interactions
emergent sentiments



Figure 7.3 The informal-group emergence process

Required activities are behaviours needed to perform job tasks.

Required interactions are specified dealings with others as part of the


Required sentiments are views and attitudes needed to do the job.

Given sentiments, which are non-required attitudes and values brought

to the job.

Most organisations have a multitude of formal and informal groups. Because

formal groups have been created for a specific purpose, it is important that
managers ensure that they operate effectively. Therefore, this chapter focuses on
formal work groups.

How Work Groups Operate

Several factors affect teamwork and formal work groups effectiveness. Groups
can be viewed as systems using inputs, processes or transformations and
ultimately producing outcomes. Figure 7.4 lists several factors that assist in
understanding group interactions and outcomes. It is important to note that
outcomes are not just group performance measures such as quantity, quality and
costs, but also group satisfaction. In effective groups, teamwork increases
effectiveness and members readiness to work together again.

group composition
member roles
group size

group norms
group cohesiveness
group development

Figure 7.4 A general model of work-group behaviour

group performance
member need satisfaction
future work-group compatibility



Work-Group Inputs
For groups to operate effectively, variables such as group composition, members
roles and group size must be considered.

Managing diversity: Work-group composition

Work group composition affects the groups ultimate success; therefore
managers must consider carefully who will be part of a work group. Two crucial
selection factors are potential member characteristics and reasons for their
attraction to the group.

Member characteristics
Managers must consider three types of member characteristics in establishing
work groups. One is that member skills are task-relevant. Another is that
members interpersonal skills are appropriate. Finally, and most importantly for
challenging tasks, some diversity is required (e.g. personalities, gender, ethnicity,
attitudes, background or experience). Homogeneous groups may get along
together, but be unable to generate new ideas as they lack different perspectives.
However if the group is too heterogeneous, the benefits of different perspectives
are lost because of difficulties in coordinating diverse efforts. Studies show that
diverse groups are more creative and flexible around changing requirements and
make better decisions.
Managers need to be patient to benefit from group diversity. A study of culturally
homogeneous versus culturally diverse groups (various nationalities and ethnic
backgrounds), showed that diverse groups performed poorly initially, but over
time did better than homogeneous ones in assessing and solving business
situations. Managers can improve diversitys benefits by having members trained
to function well in groups. Diversity training helps members understand,
appreciate and effectively use individual differences.

Attraction to the group

Another selection factor is the reasons potential members are attracted to a
group. While people cannot generally choose their work groups, they may be
able to choose some task-group types, such as task forces and committees.
Why do people join or participate in groups? Some may be attracted to group
members whilst others want to may join a groups activities, or value a groups
goals or purposes. According to McClellands acquired-needs motivation theory,
people also join because of affiliation needs. Lastly, individuals may join a group
because it helps with a goal beyond the group (e.g. joining a committee to meet
people from a work unit one would like to get a job in).



Member roles
Why do we expect a chairperson to call a meeting to order, or someone from
finance to give relevant financial advice and the secretary to take notes? This is
because each has a role, a set of behaviours expected from someone in a group
position. In a work group, individuals can have many roles (Benne and Sheats
1948). For example, a person may be a technical expert, represent a command
group and be a workforce member interested in the outcome of some change.
In addition, the fact that someone is a member of a group brings with it other
roles. Common group roles fall into three categories: task, maintenance and selforiented roles.
Group-task roles help the group develop and reach goals. Among these are the
Initiator-contributor: Proposes goals, suggests or recommends
ways of approaching a problem or task
Information seeker: Asks for information, viewpoints and
suggestions about a problem or task
Information giver: Offers information, viewpoints and suggestions
about a problem or task
Coordinator: Clarifies and synthesises various ideas to tie together
members work
Orienter: Summarises, points to departures from goals and raises
questions about discussion direction
Energiser: Stimulates the group to superior work and higher
quality levels
Group-maintenance roles do not address the task directly but help foster group
unity, positive interpersonal relations among group members and the
development of members ability to work together effectively. Group maintenance
roles include:
Encourager: Expresses warmth and friendliness toward group
members, encouraging and acknowledging contributions
Harmoniser: Mediates disagreements between members and
attempts to reconcile differences
Gatekeeper: Tries to keep lines of communication open and
promotes participation of all members
Standard setter: Suggests standards for how the group will
operate and checks member satisfaction with group functioning
Group observer: Watches the groups internal operations, gives
feedback on performance and on how to function better



Follower: Goes along with the group and is friendly but relatively
Self-oriented roles relate to group members personal needs and may
negatively influence group effectiveness. These include the following:
Aggressor: Deflates others contributions by attacking ideas,
ridiculing feelings and displays excessive competitiveness
Blocker: Tends to be negative, stubborn and resistant to new
ideas, may force members to readdress issues already dealt with
Recognition seeker: Seeks attention, boasts about
accomplishments and capabilities and does not want an inferior
Dominator: Tries to assert control and manipulates the group or
members by flattery, giving orders or interrupting others
Group leaders may assume many task roles and use some maintenance role to
help group progress. However, a leader needs assistance from others in the
group. In leaderless groups (where no leader is appointed), individuals likely to
emerge as leaders (be perceived as leaders) are active participants who adopt
task roles.
Even with a formal leader, other informal leaders can emerge. An informal
leader is someone, other than the formal leader, who emerges from the group
with significant influence and is seen as a leader by members. Informal leaders
are most likely to emerge when a formal leader has trouble facilitating group
progress, although some members may try to claim leadership from the formal
leader. In addition to roles, another important factor is group size.



Group Size
Research on small groups shows how size affects interactions and performance.

Size and group interactions

The size of the group affects member interactions. With two-person groups, the
two will either be very polite, avoiding disagreements, or often disagreeing,
straining relations. Adding someone else rarely solves problems as the result is
two against one. Groups with four or six members often deadlock as they
consist of equal factions.
In contrast, groups of five or seven have some benefit by preventing deadlocks.
Also, these groups are large enough for different ideas to emerge but small
enough to allow participation.
As groups grow beyond seven, particularly above 11 or 12, active participation is
harder. Group interaction becomes centralised, with some having more active
roles than others. Disagreements increase and group satisfaction drops unless
members work at group maintenance roles. Interactions may also be drawn out
on complex issues.



Size and performance

Does size impact on group performance? Difficult question to answer as the size
effects depend partly on the tasks nature. For example, in a group where
members work independently (such as waiters in a restaurant) the effects are
different from those in a group where members closely coordinate efforts (such
as a rescue team). Generally, size effects on group performance form an inverted
U (see Fig. 7.5).
As more people join a group, performance improves; but a point is reached
whereby adding more workers causes performance to level off or even
Why does performance stabilise, or drop, as group size increases? One
explanation is social loafing or peoples tendency to use less effort working in
groups than alone. Effects snowball if other members detect social loafing and
reduce their own efforts accordingly. Individuals who participate in social loafing
are referred to as free riding, as they benefit from the groups efforts without
proportionally sharing in the work. Evidence shows those who tend to
individualism are more likely to free-ride as group size increases than those
leaning to collectivism. Individualism is where personal interests outweigh group
needs. Individualists are self-oriented and ignore group interests if they conflict
with their own. Collectivism occurs where group demands and interests are
given precedence over individual desires and needs. Collectivists make personal
sacrifices for the benefit of the group.
Managers can reduce the degree of social loafing by assigning just enough
people to do the work. Another way is by giving each person different tasks,
making individual work visible, giving individual feedback, having likely loafers
work with people they respect, setting a standard for group progress
measurement, and making rewards dependent on both individual and group

Group performance



Group size

Figure 7.5 Effects of group size on performance




Work-group Processes
Why are some groups high performers and achieve a great deal, whilst others
with similar resources achieve far less? The answer lies in group processes, the
dynamic, inner workings of the group. As group members go about achieving
tasks, some energy goes into group development and operations. This is
diverting from the task, and is known as process loss, as it is lost energy that
could have been devoted to the task. Process loss is inevitable, given group
members normal interdependence.
Tremendous gains can be achieved from combined group-member force, or
synergy. Positive synergy is when combined gains from group interactions (as
opposed to individuals alone) are greater than group process losses. When
synergy is positive, the whole (the groups total effect) is greater than the sum of
its parts (what tasks members could achieve alone). Negative synergy is when
group-process losses are greater than gains from combining members forces. If
you have been in a group so ineffective you could have done the job faster alone,
then you have seen negative synergy at work. Next we discuss three major
group-process factors affecting group synergy and effectiveness; norms,
cohesiveness and group development.

Group norms
Norms are behaviours that are expected by a group from group members. For
behaviour to be a norm, members must see it as expected for group
Work groups do not use norms to regulate all behaviour. Rather, they develop
and enforce norms related to central matters. For example, group norms develop
about production processes such as how the job is done and quality and quality
standards. Social arrangements are another area where norms are established.
For example, groups often set norms about where & when to have lunch and
what type of social function, if any, to have when someone leaves. Working to
assignment deadlines, swotting for exams and hanging out together at libraries
or pubs are norms for many university students. Finally, work groups norms also
involve resource allocation, such as materials, equipment, assigned work space
(e.g. window desk) and pay.
Norms typically develop by one of four mechanisms: explicit statements, critical
events, primacy and carryover behaviours.
1. Explicit statements from supervisors and co-workers can inform about
group members expectations. Supervisory statements are very
important as a new group is formed or a new person joins.
2. Critical events in a groups history set precedents for the future
3. Primacy as a source of norms is the tendency for the first behaviour
pattern a group displays to set group expectations
4. Carryover behaviours from other groups and organisations (such as
being on similar company committees) can help norms be set quickly,
otherwise, they may evolve more slowly.



Group cohesiveness
Another factor related to group process is group cohesiveness, or how much
members are attracted to the group, or motivated to stay in it and are influenced
by one another. We look at the consequences of group cohesiveness before
exploring its determinants.

Consequences of group cohesiveness

Strong group cohesiveness can assist communication and increase job
satisfaction. Members of cohesive groups communicate more often, are more
sensitive to each other and are generally better able to gauge the feelings of
other group members. Members of highly cohesive groups are more satisfied
with their jobs and team members than members of less cohesive groups. Group
cohesiveness leads to organisational citizenship behaviours which are
discretionary actions not required by the job but helping achieve organisational
goals (such as assisting a co-worker struggling with a task). Although some
negative effects are possible (i.e. too much communication among members),
improved communication and job satisfaction are organisationally valuable.
Group cohesiveness affects the hostility and aggression levels that one group
might show another. Whether this is an organisational asset or liability depends
on where the energy is channelled. For example, friendly competition among
groups doing the same type of work but are not dependent on each other to get
work done is a benefit. Aggressiveness from group cohesiveness can energise a
group against external competition. Alternatively, when groups depend on each
other to reach organisational goals, hostility or aggression reduces cooperation
and can lead to missed deadlines, raised costs and frustrated customers.
The impact of cohesiveness on actual performance levels, however, depends
both on the groups level of cohesiveness and existing performance norms.
Groups perform better when group cohesion and performance norms are high,
encouraging all members to perform at the same high level, as shown in Figure
7.6. By contrast, if group cohesion is high and performance norms are low,
performance suffers. Here, high group cohesion bolsters adherence to low
performance norms. The effects can be seen in the example of a former MBA
student who had a summer job in a highly cohesive lawn-care crew with low
performance norms. As he raked grass clippings vigorously on his first day, crew
members, even the crew leader, told him to slow down they would all get tired if
they worked at that rate. The crew leader showed him how to use a handkerchief
to mop his brow while leaning on the rake so it would look like he had just
stopped to wipe off the perspiration of hard work. This routine was used if one
was caught not working when the supervisor drove up on the periodic work-crew
Group cohesiveness can also affect a groups readiness to innovate and change.
Change is harder when opposed by a highly cohesive group, but much easier
with the strong backing of such a group.






Group performance norms

low to moderate





Figure 7.6 Effects of cohesiveness and performance norms on group performance

Determinants of group cohesiveness

Many factors have a positive influence on group cohesiveness. For example,
similar attitudes and values mean people can readily communicate, find common
ground and develop mutual understandings. External threats, such as fierce
external competition or survival challenges, may compel a group to act as a
cohesive unit. Major successes produce strong positive feelings and forge links
between members. The fact that a group is difficult to join on account of high
standards (medical or dental schools at a university), sacrifice (Australian
Volunteers Abroad) or difficult training (the Special Air Services) can forge a
common bond. Finally, cohesiveness is easier to achieve in small groups and
harder to maintain as groups grow.



Group development
New groups, such as work units, committees and task forces, are constantly
forming to meet organisational needs. Even established groups change as
members leave and new ones join. These changes affect groups processes.
It is believed that groups pass through fairly predictable development stages.
Understanding these stages helps managers effectively participate and assist
those they are responsible for. One approach to group development identifies five
major stages: forming, storming, norming, performing and adjourning (see Fig.
7.7) (Tuckman 1965; Tuckman & Jensen 1977).
New groups may progress through these phases, but if membership changes
they may briefly regress to earlier stages.

Stage 1: Forming
In the groups forming stage, members try to assess task and group interaction
ground rules. Members seek information about the task, evaluate how and if the
group will be able to achieve it, and begin to test how valued their input will be.
Members may test behavioural standards, such as making small talk, joking,
sarcasm or leaving to make phone calls. Because of the high level of uncertainty
at this stage, members may depend on a powerful person, if present, or on the
existing norms, if commonly known. Owing to the need to understand ground
rules, groups at this stage often need time to get to know the task and each other
before going on.

Stage 2: Storming
During the storming stage there is a high level of conflict as group members try
to resolve opinion difference on key issues. Issues might involve possible
resistance to task needs. Another common conflict area relates to interpersonal
relations; how members relate (do they get along). At this stage, members may
struggle for leadership if one has not been appointed. Listening and trying to
resolve major issues is important, otherwise the group will be ineffective or
perhaps even disband.

Stage 3: Norming
In the norming stage, group members start to build group cohesion, reaching
consensus about task performance and relationship norms. Member differences
are accepted, and people start to identify with the group. Member roles are
clearer and the group is willing to engage in mutual problem solving. If no leader
is appointed or the leader is weak, an informal leader may emerge. At this stage,
norm and role clarification, cohesiveness building and group problem solving are



Stage 4: Performing
The performing stage is when energy is channelled towards a task and norms
support teamwork. Solutions come from the previous stages problem solving.
Roles are clarified and become more effective as the group works to positive
synergy and group goals. Not all groups reach this stage. Those that do will be
effective as long as they work at the task, while maintaining good group

Stage 5: Adjourning
During the adjourning stage, group members prepare for the disbanding of the
group as goals near completion. Members may be pleased about finishing their
tasks, but regret impending group dispersal. This stage applies more often to
temporary task groups such as committees, task forces or limited-duration teams,
as adjournment in formal groups is less common. However, reorganisations,
take-overs and mergers can bring about adjournments.
Do all groups have these stages? The five group-development stages apply
mainly to new, unstructured groups. They are less likely where members work
together often or where operating methods or ground rules are well established.
So far we have identified some of the challenges group members encounter
when interacting with each other. An important mode of interaction is through
communication. Effective communication makes a vital contribution to all four
management functions (planning, organising, leading, and control).
Communication is the channel for interaction within and across groups and teams
and is also critical in the discharge of effective leadership. Prior to discussing the
role of communication in groups, we present a brief overview of what
communication is and how it occurs.



orientation to task
testing interpersonal behaviours
dependency on power person
discovering ground rules

resistance to task demands
interpersonal conflicts
exploring areas of disagreement
struggle for group leadership

building cohesiveness
developing consensus about norms
clarifying roles
informal leader may emerge

channelling energy to task
roles clear and functional
norms support teamwork
emerging problem solutions

goals accomplished
preparing for disengagement
dependency on power person
some regret at disbanding
termination of group

Figure 7.7 Stages of group development

Communication is the exchange of messages between people to reach common
meanings and can be verbal or non-verbal. Verbal communication uses words
to form oral or written communications, as in face-to-face conversation, meetings
and telephone conversations, or if written, letters, memoranda, reports, resumes
and written messages.
Non-verbal communication uses elements and behaviours not coded into
words. Studies estimate 65 to 93 per cent of what is communicated is non-verbal
(Birdwhistell 1972). Of course, verbal communication must be accompanied by
some non-verbal communication. Non-verbal communication has the following
major categories; kinesic behaviour, proxemics, paralanguage and object



Kinesic behaviour (or body language) is body movements such as gestures,
facial expressions, eye movements and posture. In assessing peoples feelings
on an issue, we draw conclusions not only from their words but also from nonverbal behaviour, such as facial expressions.
Proxemics is the impact of proximity and space on communication. For example,
managers may arrange their offices with an informal area where people can sit
without feeling the spatial distance and formality of a big desk. Another familiar
proxemics example is that it is more likely you will get to know students you sit
near in class than those elsewhere in the room.
Paralanguage is the vocal aspects of communication, or how something is said
rather than what is said. Voice quality and tone, laughing and yawning are in this
Object language is the use of material things, such as clothing, cosmetics,
furniture and architecture, to communicate. If you have written a job resume
lately, you probably thought about layout and paper type. These are object
language aspects; you are communicating information about yourself beyond the
words on the page. These non-verbal elements are important to managerial
Evidence shows that if verbal and non-verbal elements are contradictory,
receivers see non-verbal communication as accurate. Therefore, both non-verbal
and verbal message parts should be considered when messages are sent or

Basic components of the communication process

The communication processs components are shown in Figure 7.8.
The sender initiates the message, usually in response to an outside stimulus,
such as a question or problem. The sender encodes or translates meaning into
words and gestures. How effective this is depends on the senders encoding
skills, their assessment of the receivers ability to understand symbols,
judgements about the appropriateness of symbols, experience in similar
situations, job status, education and emotional state. Many problems can occur,
particularly if a participant is using a language other than their native language.
The encoding results in a message of verbal and non-verbal symbols designed
to convey meaning to the receiver. The medium is how the message is
conveyed, either verbally or non-verbally, and should be appropriate for the
receiver and message. For example, a telephone call may resolve a minor
conflict, but face-to-face meeting is better to negotiate a major change. The
receiver is the person with whom the message is exchanged and the receiver
needs to get the message for communication to occur. There may be one, two or
multiple receivers.
The receiver decodes or interprets the message by translating the symbols
used. The receiver needs to decode the message as intended if the
communication is to be effective for the sender and receiver to arrive at a
common meaning.
Noise is any factor in the process that interferes with the exchange and achieving
common meaning. Noise can be diverse, for example interruptions during
encoding, telephone line static and receiver fatigue.



Feedback is the receivers response once the message is interpreted. This
involves reversing the communication process so the receiver and sender swap
roles. Feedback gives preliminary information to the sender about the success of
the communication, making for two-way communication, as in Figure 7.8. This
allows the exchange of accurate common meaning (Chase 1998) and requires
careful focus on the process, especially if many layers are involved in
transmission. The more links there are, the greater the chance that the encoding
and decoding processes and/or noise will distort information. For example,
subordinates may be reluctant to give negative information to upper hierarchical
layers as they expect it to elicit criticism, so communication is distorted.

Organisational context

Person A








Organisational context

Figure 7.8 Basic components of the communication process

Communication that does not allow feedback is one-way communication

(memos, newsletters and announcements). A lack of immediate feedback
increases the risk of misunderstanding arising in the process.
All this suggests managers must work hard to achieve accurate information
transmission, even with two-way communication. In addition to normal
communication difficulties of encoding, decoding, noise and subordinates
reluctance to give negative information, situational stresses van also cause
communication breakdown.

Influence on Individual Communication and Interpersonal

Why do some people understand a particular communication and others do not?
There are a number of personal factors that can influence communication
breakdowns. These factors include perceptual issues, attribution processes,
semantics, the cultural context and communication skills.



Perceptual processes
Perception is how we acquire and make sense of information in our environment.
For example, we select information, organise it into a pattern we recognise, and
then interpret or give meaning to that information. This perceptual process is
influenced by our personal experiences, needs, personality, culture and
education. Therefore, our perceptions can distort communication and
interactions. Gordon (1996) and Luthans (1995) have identified perceptual biases
arising from:
stereotyping; attributing characteristics based on which group they
belong to
halo effect; using one or a few characteristics to judge other
projection; assuming that others share our characteristics,
thoughts and feelings
perceptual defence: blocking or distorting information that
challenges our beliefs

Attribution processes
Attribution theory suggests that people make judgements or attributions about
the causes of behaviour. These judgements form the basis for action later on.
The theory predicts we make either dispositional judgements (attributed to
internal causes such as personality traits or effort) or situational judgements
(attributed to external causes such as luck or equipment). For example, if a
student hands in an assignment late, do we attribute that to internal factors like
lack of effort or ability, or is there another issue to blame?
The fundamental attribution error is the tendency to underestimate situational
(internal) influences and to overestimate dispositional (external) influences. For
instance, it often thought that success comes from hard work and ability, whilst
failure comes from bad luck or work environment factors.



Semantics is the study of the meaning or the interpretation of a word or sentence.
Words are symbols and their meanings can differ. A semantic net is the network
of words and what those words mean, and every person has their own net which
will vary from others. Semantic blocks are communication difficulties arising
from word choices. Receivers decode words and sentences based on their own
semantic network, which may be different to that of the senders. See Table 7.1

What the manager said

What the manager meant

What the subordinate heard

Id like that report as soon

as you can finish it

I need that report within the


Forget everything else you

are working on and
complete that report today

Table 7.1 Example of semantic block in communication between manager and


Organisations or different functional units might use specific language that only
has meaning for them. Professional jargon can form a semantic block that
confuses newcomers, customers or visitors.



Communication Skills
Interpersonal communication skills
Effective communication relies on strong listening and feedback skills. Listening
skills help us decode and interpret the senders message. The best way of
assigning the intended meaning to a message is by actively listening. Active
listening is where the receiver participates actively in listening for content and
facts and takes into consideration the speakers feelings in order to grasp total
Giving and receiving effective feedback is another important interpersonal
communication skill. Effective feedback focuses on the relevant facts and specific
behaviours, not on generalities or the individual. When feedback includes
strategies of how the person can improve, the chances of success improve.
Giving positive feedback is easier than negative feedback, but both are
equally important. When receiving negative feedback, it helps to paraphrase what
is being said so there is no ambiguity.
Organisations have found that it pays to listen to customers and get their
feedback. Coca-Cola has shown that one in fifty customers complain the rest
switch brands. However, if the complaint is addressed, the individual is likely to
remain a customer.

Group communication networks

There are five types of communication networks as shown in Figure 7.9.
Three networks (Y, wheel and chain) are fairly centralised with most messages
passing through the central person. The circle and all-channel networks are
decentralised, as communication flows easily amongst all members.
For simple, routine tasks and when time is short, the centralised networks offer
more speed and accuracy, as the central person (X) coordinates and facilitates
task completion. When tasks become more complex, the decentralised networks
offer advantages in speed and accuracy as the free exchange of information
facilitates the process, encourages creativity and improved morale.



Centralised networks




Decentralised networks



Figure 7.9 Group communication networks

Communication Skills
Groups are increasingly being used by organisations to improve creativity and
innovation, and also to benefit from different ideas that individuals bring.
In this section we look more closely at special uses of teams.



Task forces
A task force is a temporary group that has been formed for a specific purpose.
They can be also called an ad hoc or temporary committee.
Because they generally deal with issues affecting several business units, task
forces will have members from all the functional units affected by the issue.
These functional unit members often provide expertise, information about their
units needs and assist with creative problem solving.

A team can be either a temporary or ongoing task group. There are two
characteristics that distinguish a team from a task force. Firstly, teams generally
identify problems in an area but do not take any action to deal with those
problems. Secondly, they reach consensus about what is required to be done.
Temporary teams deal with a specific project, whereas permanent teams have
ongoing responsibilities.
There are three types of teams; entrepreneurial, self-managing and virtual.

Entrepreneurial teams
An entrepreneurial team is a group formed by an organisation to exploit the
varied expertise, knowledge and background of individuals in order to develop
new products, services or to improve existing ones.

Self-managing teams
A self-managing team (also known as an autonomous work group) is
responsible for a specific task area, with the absence of supervision. The team
dictates group membership, behaviour and can even set pay and bonus levels.
High performing teams can display greater job satisfaction, better attitudes and
greater commitment to the organisation.
For self-managed teams to be successful they require training and support, and it
might take up to 18 months before productivity rises. To increase the chances of
forming a successful team there are four steps required:
1. before the team is formed, assess the value of the team and decide
on the tasks and degree of autonomy
2. decide who will be in the group and what resources will be allocated
3. provide training in effective teamwork and guidance in setting norms
4. managers need to remove obstacles to performance and assist the
group to learn



Virtual teams
Virtual teams comprise of members who rarely meet and occasionally never
meet. Members communicate through a variety of different media including
telephone, fax, email, computer networks and video conferencing. Virtual teams
allow organisations to form problem solving or innovative teams without the need
for everyone to be physically present in one location (very useful for global

Chapter 8


School of Business Services

Faculty of Workforce Development



What is Motivation?
Motivation can be defined as the internal energising force that gives direction to
behaviour. Motivation cannot be measured; instead we observe behaviour and
infer a level of motivation. For example, you might decide that a fellow student
who turns up for every class, completes all their assignments on time and spends
hours in the library has high motivation. Alternatively, you might conclude that a
student who rarely turns up to classes and spends little time reading is not
motivated to excel. Certainly individuals differ in motivational drive, but overall
motivation varies from situation to situation and even within individuals at different
How well people do at their jobs will depend both on their motivation, and on their
abilities to handle the task. Working conditions can impact on performance i.e.
interruptions, excessive workload, cramped offices will have a negative impact.
Therefore, actual performance is a function of ability, motivation and working
conditions, as shown in Figure 8.1.





Figure 8.1 The relationship between performance and ability, motivation and working

The challenge for managers is that they must hire suitable people that are
capable of doing what is required, and provide good working conditions to nurture
and support individual motivation towards company goals.
The main motivation process elements are shown in Figure 8.2. As the diagram
depicts, our needs and cognitions leads us to behave in certain ways. Assuming
these behaviours are suitable, they might lead to rewards. In turn, the rewards
reinforce the behaviours.
As motivation is a complex subject, major motivational theories attempt to
address various process elements (see Fig. 8.2).



hierarchy-of-needs theory
ERG theory
two-factor theory
acquired-needs theory

Cognitive activities
expectancy theory
equity theory
goal setting theory


reinforcement theory
social learning theory

Figure 8.2 The motivation process

Need Theories
Need theories assume that our behaviours are influenced by our attempt to fulfil
our internal needs. There are four needs theories: hierarchy-of-needs, ERG
theory, two-factor theory and acquired-needs theory.



Hierarchy-of needs theory

One of the best known theories of motivation is probably Abraham Maslows
hierarchy-of needs theory, popular in the 1960s. It postulates that within every
individual there exists a hierarchy of five needs (see Fig. 8.3).
1. Physiological needs: the focus is on food, water, shelter and other
bodily requirements.
2. Safety needs: concerned with security and protection from physical
and emotional harm.
3. Belongingness needs: require affection, acceptance and friendship.
4. Esteem needs: two pronged; our internal esteem factors such as selfrespect, autonomy and achievement, and external factors such as
status, and recognition.
5. Self-actualisation needs: developing our capabilities and achieving
ones potential and self-fulfilment. At this level needs are never
fulfilled, as we develop our capabilities our self-actualisation potential
and needs grow.

Potential means of fulfilment at work


Challenging projects, opportunities

for innovation and creativity,
Important projects, recognition,
prestigious office location

esteem needs

belongingness needs
safety needs

physiological needs

Good co-workers, peers, superiors,

Job security, benefits, safety
Basic pay, work space, heat, water,

Figure 8.3 Maslows hierarchy of needs

Maslow saw that as each need is largely satisfied (it does not have to be totally
fulfilled), the next need becomes dominant and the individual moves up the
hierarchy. A substantially fulfilled need no longer motivates and tension starts to


build to fulfil the next level of needs.
Maslow provided no empirical substantiation for his theory and subsequent
studies have failed to validate the theory. Consequently there are some flaws with
Maslows theory. Research shows that needs may cluster into two or three
categories, not five. Also, the hierarchy of needs may not be the same for all
people e.g. entrepreneurs chasing dreams for years despite their lower needs
being unmet.
In a global economy, managers will be dealing with staff from many countries
who may seek different needs to satisfy through work. For example, people from
Greece & Japan are motivated more by safety needs, whilst people from Sweden
& Norway are motivated more by belongingness needs.
Furthermore, people from third world countries would be motivated by
physiological & safety needs, whilst people from wealthy nations would seek
esteem and self-actualisation.

Two-factor theory
Building on the work done by Maslow, the psychologist Frederick Herzberg
proposed the two-factor theory. Herzberg investigated the question, What do
people want from their jobs. Interviewing accountants and engineers, he realised
that factors making people satisfied with their jobs were associated with job
content. These are called motivators and related to the individuals growth,
achievement, recognition and responsibility. Factors that made individuals
dissatisfied with their jobs were associated with job context; working conditions,
supervision, company policy. These were called hygiene factors (see Fig. 8.4).
Herzberg concluded that the provision of hygiene factors reduces worker
dissatisfaction, but motivators are required to increase motivation and lead to job

Hygiene factors


working conditions
company policies
fringe benefits
personal life
relationship with

work itself

Hygiene factors
Help to prevent


Motivators help to
promote satisfaction

Neutral point at which there

is no dissatisfaction, nor



Figure 8.4 Herzbergs two-factor theory

ERG theory
Clayton Alderfer developed ERG theory as an alternative to Maslows hierarchyof-needs theory. The name arises by combining the five need levels into three:
existence, relatedness and growth. Existence needs include the physiological
needs such as water, food and shelter and work-related needs such as pay,
benefits and working conditions. Relatedness needs centre around relationships
with significant others, such as family, friends, work and professional groups.
Growth needs are focused on creativity and the desire to have a productive
impact on our environment.
ERG theory differs from Maslows hierarchy in a number of ways. Firstly it
collapses Maslows five needs into three. Secondly, Alderfer argues that lower
level needs dont have to be completely satisfied before we look at satisfying the
higher level needs. People can be motivated by more than one need at a time.
Thirdly, ERG theory is more flexible in that it allows for needs to occur in a
different order to that of the ERG framework. Fourthly, ERG theory differs in that
it has a frustration-regression principle, which states that if we are frustrated in
fulfilling a higher level need, we may abandon that pursuit. We may instead focus
on achieving more attainable lower level needs. For example, if we cannot get
more interesting work, we may focus on building stronger inter-personal
relationships with co-workers.

David McClellands acquired-needs theory (also called learned needs theory)
argues that needs are gained or learned by experience.
McClelland studied three needs: achievement, affiliation and power. According to
the theory, people are motivated by a blend of all three, not one need being
absent and the others pronounced.
The need for achievement (nAch) is the desire to accomplish challenging goals
and achieve excellence in ones work. High achievers seek competitive
situations, set moderate goals (hard goals are too risky) and take calculated
risks. High nAch people generate creativity and innovative ideas.
High nAch individuals account for about 10% of the general population. For
managers seeking to motivate high achievers, they must set challenging yet
reachable goals and give immediate feedback on progress.
The need for affiliation (nAff) is the desire for close, accepting relationships
with others. People with high affiliation needs are more than likely to choose
professions where interaction with others is required i.e. nursing, teaching, sales
and counselling. Managers can motivate high nAff individuals by providing a
cooperative, supporting work environment where staff can meet performance
expectations and high affiliation needs by working with others.
The need for power (nPow) is the desire to influence others and control ones
environment. There are two forms of power, personal and institutional. Individuals
seeking personal power try to dominate others and expect followers to be loyal
to them before the organisation; hence corporate goals might not be achieved.
Those that seek institutional power will work with others to solve problems and


attain organisational goals. They want things done in an organised manner and
will sacrifice some of their personal goals for the good of the organisation.
McClelland studied the various needs in relation to what makes an effective
manager. The initial thought was that individuals with high achievement need
would make the best managers. However, his research showed that high nAch
individuals tend to focus on their own work and fail to notice the performance or
the development of others. Consequently, high nAch individuals make the best
entrepreneurs. Individuals with a high affiliation need seek strong interpersonal
relationships, not the attainment of goals; hence, they make weak managers.
According to McClelland, the best managers are those individuals with a high
need for institutional power, where their need is expressed in their coordination of
others efforts in the attainment of organisational goals.
The needs profile for an effective and successful manager in a competitive
environment includes:
1. moderate to high institutional power need
2. moderate achievement need
3. minimum affiliation need

Assessing need theories

Figure 8.5 shows a summary of the needs identified in the four theories. It is
generally agreed that satisfying higher level needs is important for motivating
people. The pace of change in the competitive environment means that
organisations constantly seek to innovate, improve quality and increase capacity,
thus fostering growth is crucial.

Maslow: hierarchyof-needs theory

Alderfer: ERG theory

Herzberg: two-factor

McLelland: acquired
needs theory


safety and security

need for affiliation





need for achievement;

need for power

Figure 8.5 Comparison of needs in four theories (adapted from Gordon, 1987)



Cognitive Theories
The need theories identify the internal desires that guide behaviour but fail to
explain the thought processes involved. This void is filled by the cognitive
theories (also known as process theories), that attempt to explain the thinking
processes used in deciding to act in a particular way. Cognitive theories
compliment need theories in that they look at motivation from a different
perspective. There are three major cognitive theories: expectancy, equity and

Expectancy theory
Expectancy theory was proposed by Victor H. Vroom, and says that people will
be motivated to the extent to which they believe that their efforts will lead to good
performance, that performance will be rewarded and the rewards will be
attractive. The theory argues that before we commit to perform at a certain level,
there are three main considerations. These are shown in Figure 8.6, which
depicts the main components of expectancy theory.

Effort-performance expectancy
When assessing the effort-performance (E P) expectancy, we determine the
probability that our efforts will lead to the required performance. If the expectancy
is high, then individuals believe that their hard work and efforts will result in good
performance, consequently they will work harder. Alternatively, if they perceive
the expectancy to be low, individuals believe that no matter how hard they work
they wont be able to successfully perform their jobs, hence they dont work as

Performance-outcome expectancy
When assessing the performance-outcome (P O) expectancy, we determine
the probability that successful performance will lead to specific rewards. When P
O expectancy is high, individuals believe that improved performance will lead
to better and more rewards; hence they will chose to work harder. Alternatively, if
they view the P O expectancy to be low, individuals dont believe that better
performance will result in more or better rewards, so they will chose to work less.
Many rewards can be linked to performance. Rewards that are given to us by
others are deemed to be extrinsic rewards and includes bonuses, promotions
and awards. Managers can also chose to use non-monetary rewards to improve
motivation. Rewards that are related to internal experiences of successful
performance, such as feelings of achievement, challenge and growth, are called
intrinsic rewards.




E P expectancy


What is the probability

that I can perform at
the required level if I

What is the probability

that my good
performance will lead
to desired outcomes?


What value do I place
on the potential

e.g. bonus, praise, feelings of

Figure 8.6 Basic components of expectancy theory

The valence component of the theory assesses the attractiveness or desirability
of various rewards and outcomes. One of the hardest things about motivating
people is that rewards that are attractive to some may be unattractive to others.
For example, a promotion may seem highly attractive to some, highly disliked by
others, and for some, may not make a difference one way or the other.

Combining the elements

Expectancy theory argues that for people to be highly motivated all three
elements: E P expectancy, P O expectancy and valence must be high.
Thus, expectancy theory can be represented by the following simple equation:
Motivation = (E P) x (P O) x valence
You are likely to be motivated by a project if: high E P expectancy x high P
O expectancy x high valence. If any element is assessed as zero, the equation
then equals zero and you will likely abandon the project.


Implications for managers
Managers can use expectancy theory to motivate workers by linking rewards to
individual performance in a way that is clear and understandable to all
employees. Take for example the following three scenarios with Phillip, Lisa &
Chris. In the first case, Phillip works hard, does well at his job and gets a bonus;
therefore Phillip concludes that high performance leads to valued rewards (high P
O expectancy). In the second case, Lisa does well also, but the boss does not
even say good job, let alone a bonus. So Lisa determines that for this
organisation high performance does not pay (low P O expectancy). In the third
scenario, Chris does little but receives a major annual bonus; therefore Chris will
view high performance as being unconnected with valued rewards (low P O
Managers must also foster high subordinate E P expectancy by: setting clear
performance criteria, establishing challenging yet attainable goals, ensuring
employees are adequately trained and have the required resources and being

Equity theory
J. Stacy Adams developed equity theory to explain how we identify and react to
events that we perceive as inequitable.
Equity theory states that people will be motivated at work if they perceive that
they are being treated equally. They compare the ratio of inputs to outcomes
between themselves and others and adjust effort accordingly. Equity is an
individuals perception of the situation and is relative (compared to another), not
absolute (compared to a standard). Inputs are the contributions employees make
to the organisation and can include education, skills, experience, training, hours
worked and results. Outcomes are the rewards employees receive in exchange
for their contributions to the organisation. Outcomes include pay, bonuses, job
titles, office size, parking space, furniture and work assignments.
The theory argues that two types of inequity produce tension: over-reward and
under-reward. Over-reward is when we perceive that the inputs:outcomes ratio is
higher than a comparison other. In this situation although the individual may feel
a level of guilt, they quickly adjust by deciding that their inputs are worth more
than they first thought. Under reward is when we perceive that the
inputs:outcomes ratio is lower than a comparison other. This situation generally
leads to frustration and anger and is more difficult to resolve.

Implications for managers

Even from a very young age we have a strong desire to be treated equitably,
hence equity is just as important in the workplace as it is in a childrens
playground. Managers should be vigilant in looking for and correcting major
inequities. Managers should also use two-way communication to understand their
subordinates perceptions of equity and ensure that in turn subordinates know the
organisations rules on how outcomes are allocated.
Motivation is achieved when most employees perceive that their treatment is
equitable, with a balance between their inputs and outcomes. The best
performers are motivated to continue to perform at the highest levels, whilst the
average performers see that they need to increase their inputs if they want better
or more outcomes.



Goal-setting theory
Goal-setting theory states that people will be motivated to the extent to which
they accept specific, challenging goals and receive feedback about their progress
towards the goal. The theorys success in motivating performance depends on
how well the goals have been set. The goals must be specific, measurable,
attainable, time bound and relevant to the organisation (realistic).
Goal acceptance and commitment is a vital element in goal setting, as accepted
goals are more motivating than unaccepted goals.
Expectancy theorys three components fit in well with goal-setting theory. In
determ9iningh acceptance or commitment to a goal the individual will consider:
effort-performance expectancy (is this goal achievable?), performance-outcome
expectancy (will I be rewarded for achieving this goal) and valence (do I value the



Reinforcement Theory
Reinforcement theory states that behaviour is a function of consequences and
not through some cognitive thought processes. The theory uses the law of
effect, which states that behaviours followed by pleasant or positive
consequences will occur more frequently, whilst behaviours followed by
unpleasant or negative consequences will occur less frequently.

Types of reinforcement
There are four types of reinforcements that influences behaviour modification:
positive and negative reinforcement, extinction and punishment. Behaviour will
occur more frequently by utilising positive and negative reinforcements and less
frequently by employing extinction and punishment (see Fig. 8.7).

Positive reinforcement
Positive reinforcement strengthens behaviours that are deemed to be
organisationally desirable by following behaviours with pleasant, rewarding
consequences. Rewarding consequences can include pay rise, time off, praise
and fringe benefits. As an individuals perceptions of what is rewarding and
pleasant differ, managers must check the effect of the consequence to see if the
desired behaviour increases.

Negative reinforcement
Similar to positive reinforcement, negative reinforcement strengthens
behaviours but in a different manner. Negative reinforcement (also called
avoidance learning) involves presenting unpleasant consequences when
employees perform a specific behaviour. For example, an organisation wants to
improve employee attendance, therefore institutes a policy in which good
attendance is a required for employees to receive their annual bonus.
Negative reinforcement can lead to negative feelings towards the provider of the
negative reinforcement (generally the manager). They may react by only doing
what is required and not put in any discretionary effort when required; they may
even leave the organisation. Consequently, whenever possible, positive
reinforcement should be used.

Extinction reinforcement occurs when a positive consequence is no longer
allowed to follow a previously reinforced behaviour. By removing the positive
consequence, extinction weakens the behaviour, making it less likely to occur.
For example, some organisations use positive reinforcement (bonuses) when the


company does well, but based on the idea of extinction, the bonuses should be
removed when the company doesnt do well.






Effect on behaviour



Effect on maturity

Figure 8.7 Types of reinforcement according to Skinner

Punishment makes behaviour less likely to happen by following behaviours with
negative or undesirable consequences. Examples of punishment can include oral
and written warnings, suspension without pay and withholding training. There are
two major differences between punishment and negative reinforcement. Firstly,
punishment aims at decreasing or discouraging undesired behaviour, whereas
negative reinforcement aims to increase or encourage desired behaviour.
Secondly, punishment is dished out after the undesired behaviour has occurred,
whereas negative reinforcement occurs before the desired behaviour is shown.
Whilst punishment can weaken behaviour, managers have to be careful to avoid
the backlash that sometimes occurs when employees are punished at work. If
punishment is required, it will be most effective if it is controlled by formal
company policies, if it occurs soon after the undesired behaviour is exhibited, if it
is not too severe and it is consistent.



Schedules of reinforcement
Positive reinforcements produce desired behaviour, but different reward patterns
affect the time it takes to learn a new behaviour and for how long that behaviour
will persist. These reward patterns, or schedules of reinforcement, specify
positive reinforcements basis and timing. There are two main rewards schedules:
continuous and partial. With continuous reinforcement, the desired behaviour is
rewarded as soon as it occurs i.e. when a manager praises a subordinate for
good work. With a partial schedule, the desired behaviour is rewarded on
occasions i.e. during initial learning behaviour is rewarded often to encourage
repetition, but less so later. There are four main partial reinforcement schedules:
fixed interval, fixed ratio, variable interval and variable ratio (see Fig. 8.8).

Fixed Interval

administered every
x minutes

Fixed Ratio
administered every
xth occurrence of

Spacing or timing of reinforcers

Variable Interval

Variable Ratio
of occurrences



Timing of reinforcers
varies randomly
around some average
time period
passage of time

of the behaviour
required to receive
reinforcer varies
randomly around
some average number

Number of times
behaviour occurs

Basis for determining frequency of reinforcement

Figure 8.8 Types of partial reinforcement schedules (adapted from Arnold &
Feldman 1986)

Fixed interval
With fixed-interval reinforcement schedules, consequences or rewards are
given using a fixed time schedule. For example, most people receive their pay on
a fixed interval (once or twice per month). As long as they work (behaviour)
during a specified time period (interval), they get their pay (consequence). Fixedinterval schedules yield uneven responses, with the desired behaviour peaking
just before the reward is due and then falling until the next schedule is due.


Fixed ratio
In a fixed-ratio reinforcement schedule, rewards are given after a specific
number of desired behaviours. For example, a car salesperson might receive a
bonus after every 10 sales. Fixed-ratio schedules yield high response rates, but
extinguish quickly if rewards stop.

Variable interval
With Variable-interval reinforcement schedules, rewards are given on a
random time schedule that varies around a specified average time. For example,
a manager might visit a plant to praise the employees on average five times a
week, but at varying times. Variable-interval schedules produce a high, steady
response rate, which slowly extinguishes.

Variable ratio
With Variable-ratio reinforcement schedules, rewards are given after a
different number of behaviours, sometimes more and sometimes less, that vary
around a specified number of behaviours. For example, a car salesperson might
receive a bonus after 7 car sales or even after 8, 9, 11 or 12 sales, but the
average number of cars needed to be sold before receiving the bonus would be
10 cars. Variable-ratio schedules give a high response rates and is the slowest of
the partial schedules to extinguish.

Using reinforcement theory

What practical things can managers do to use reinforcement theory to motivate
employees? Managers should use positive reinforcement to encourage desired
behaviours and should communicate exactly what behaviours will be rewarded.
Once the desired behaviours are learned, use variable-interval and variable-ratio
reinforcement schedules to maintain the desired behaviour. If punishment is
required make sure that it is done quickly, objectively, impersonally, consistently
and it should be moderately severe.

Social Learning Theory

Social learning theory builds on reinforcement theory by allowing for peoples
cognitive or thinking capacity. The theory argues that people learn by observing,
imitating and interacting with the social environment.

Major components
There are three cognitive related processes that help explain peoples behaviour:
symbolic processes, vicarious learning and self-control.


Symbolic processes
Social learning theory argues that we depend on symbolic processes (use of
verbal and imagined symbols), to process and ultimately store experiences
(words and images), which in turn guide future behaviour. We use imagined
symbols when we daydream, visualising a South Pacific holiday without ever
being there. These desirable future images allow us to set goals and take actions
in order to achieve them. Our symbolic processes have a cognitive component,
self-efficacy, which is a belief in ones abilities to achieve a particular goal. Selfefficacy is similar to expectancy theorys effort-performance expectancy element,
except that it is more focused on beliefs about our own capacity.

Vicarious learning
Vicarious learning is the process by which we learn by observing other people
doing a particular task or behaviour. In contrast to reinforcement theory, we do
not have to perform a behaviour to learn of its consequences. Observing and
copying other peoples behaviour is called modelling (see Fig. 8.9). In modelling,
you can learn to play tennis or football by watching and imitating another persons
behaviour, generally the coach or skilled friend. Modelling has four stages. In the
attention stage, we chose to observe an individual whom we believe is skilful
and/or successful. In the retention stage, we retain information about the
behaviour in words and images. During the reproductive stage, we attempt to
reproduce the observed behaviour, seeking feedback as to how well we are
reproducing it. For us to be motivated to adopt a new behaviour there must be
reinforcement. Reinforcement can occur through consequences, vicarious
learning or by self-control.

With self-control, or self-regulation, we control our own behaviour by setting
standards and providing consequences (rewards and punishments) for our
actions. Self-control can assist in improving performance, only if we make the self
-rewards dependent on attaining a high level of performance. An example is
rewarding ourselves (buying an iPad) if we get a HD for a particular subject.

Using social learning theory

Social learning theory has two distinct managerial implications compared to other
motivational theories. First, using appropriate and positive role models helps
accelerate the learning of desired behaviours. Modelling is most appropriate
when training new employees. Second, through vicarious learning, employees
will quickly learn which behaviours are rewarded and which are punished, both
from their own experiences and those of others.







new behaviour

Figure 8.9 The modelling process

Motivation and Strategic Human Resource

Human resource managements the process by which the organisation attracts,
develops and keeps the right people to form a qualified workforce. The human
resource management systems of selection, appraisal, reward and development
need to be aligned to organisational strategic objectives. This needs to be
achieved in ways that improves and maintains motivation, by developing
employees, matching values and managing expectations.
Choices about human resource policy are influenced by factors from both within
the internal and the external environments of the organisation. These factors
include such things as workforce characteristics, business strategy, business
conditions, management philosophy, the labour market, technology and
legislation. Most of these factors will affect the level of employee motivation.
Organisations develop HR policies that cover the extent of employee influence
(e.g. participative vs. autocratic management), the flow of human resources
(retention, turnover, etc.), reward systems and work systems. These HR policies
in turn lead to employee outcomes such as commitment to work and to the
organisation, overall competence, the cost effectiveness of HR and to some
extent the degree of congruence between individual and organisational goals.

The Human Resource Management Framework

Human resource management provides a framework for managing the three
main phases of the employment relationship: attracting and acquiring human
resources, developing and keeping human resources and terminating the
relationship, as shown in Figure 8.10.

Establishing the employment relationship

The central aim of HRM is to attract the right number of people with the right
skills at the right time and place. The first step in this process is to clearly define
the important work-related aspects of a job by conducting a job analysis. This
facilitates a better fit between the employees skills, knowledge and abilities and
the job. The job analysis outcomes are the development of a written job
description (tasks, duties, responsibilities) and a written job specification
(qualifications, education, skills and work experience to do the specified job).


The next step in the process is recruitment, which aims to attract and find suitably
qualified job applicants to fill the job vacancies. The objectives of recruitment are
to develop a pool of qualified job applicants at minimal cost; ensure compliance
with any legislative requirements (e.g. EEO); and improve the selection process
by only attracting suitably qualified and skilled individuals.
The selection process consists of gathering information about the job applicants
and making a decision as to who will be offered the job. It is an attempt to predict
which of the applicants would be the most successful in the job, and as with all
predictions it is on occasions incorrect. In an attempt to minimise the risk of
getting it wrong, organisations seek reliability in measures and process so as to
consistently pick the same choice. Similarly, validity is important to ensure that
the process actually measures what it sets out to measure. In order to make the
right choice, multiple measures are generally used and these include: application
forms, reference checks, aptitude tests, personality tests, work sample tests, and
selection interviews.

Regulatory and environmental context

Organisational context
HRM functions
Identifying HR needs

Attracting human resources

Maintaining humanresources

Terminating the relationship

Figure 8.10 Human resource management framework

Maintaining the employment relationship

In order to build the employment relationship, the organisation must keep the
employees motivated to want to stay and work there. Remunerating employees
in the form of payments for work is one way of doing this. Other benefits such as
praise, skill development and recognition are also highly valued by employees.


Payment for work is usually associated with regulatory frameworks, in which
rates of pay are often determined after lengthy negotiations between employer
and employee representatives, either collectively or individually. For example
specific enterprise agreements and awards specify the minimum rates of pay and
working conditions. Individual contracts also contain similar employment
conditions and are legally binding. Organisations choose to pay at different rates,
some less and some more than the market rates. Those that offer less than the
average market rate, generally offer unique benefits that compensate i.e. better
training and development opportunities.
Organisations attempt to select employees who already possess the necessary
skills and competencies, or those with the ability to quickly acquire the necessary
skills and competencies, or a mixture of both. Training is routinely used by
organisations to improve the skills and competencies of employees, whilst
development is seen as the process of developing employees for any future
opportunities by acquiring new knowledge, skills and attitudes. Both assist
organisations in meeting long and short-term goals, whilst improving motivation,
commitment and retention through the provision of career paths, improving job
security and increasing job satisfaction.
Performance management can be described as a set of policies and procedures
which aim to improve the achievement of organisational goals through a focus on
individual performance. The performance management system has a broader
scope than the performance appraisal system, which is focused on whether the
business objectives are valid and aligned both internally and externally with
business units and markets.
As a component of performance management, performance appraisal is the
process of assessing how well employees are doing at their jobs. There are five
reasons for appraising performance:
1. To mould employees behaviour in order to comply with company
2. To improve consistency between employee actions and corporate
3. To improve the quality of human resource planning, especially training
and succession
4. To improve quality of salary reviews
5. To provide records in cases of dismissal, demotion, grievance or

HRIS, internet, intranets and extranets

These computerised systems assist human resource departments to operate
strategically by improving service, value-adding service and reducing costs.
Integrated systems can accommodate recruiting, payroll, employee data bases,
succession planning benefits calculation as well as provide evidence of legal


The future of work
In recent history there has been a trend by organisations to reduce the number of
core, permanent employees and increase the number of part-time, casual or
temporary employees, as well as move towards more flexible working
arrangements. For example, teleworkers can work from home through the use of
telecommunications. The work can range from relatively unskilled data entry to
skilled tasks done by professionals with the freedom to choose when and where
work is completed.
Temporary, short-term, regular part-time, on-call, and contract workers have been
used to dealing with workload fluctuations and absences, these factors are likely
to increase in the future. This trend towards flexibility will affect all types of
workers, from highly skilled groups such as engineers and architects to lower
skilled jobs in administration support and the service industries.
In todays rapidly changing environment, traditional jobs are often too rigid and
consequently job classifications and descriptions, pay structures and promotion
charts are disappearing from new-style organisations. As a result, new work
relationships will be established, ones based on flexibility around project
demands. These changes will have ramifications for both employees and
employers, in terms of motivating a transient workforce.

Terminating the employment relationship

The employment relationship is a legal contract between the employer and the
employee, however unlike other contracts it can be terminated by either party on
a voluntary or involuntary basis. Termination not only affects the individual that
has lost their job, but also the remaining workforce members by increasing either
increasing their workload/responsibilities or questioning job security, which in turn
affects motivation.
Voluntary termination generally involves the employee giving an agreed minimum
notice prior to leaving the company. It can also occur in the event that the
company is seeking to reduce the size of the workforce and offers inducements
i.e. severance pay, for employees to take voluntary redundancy.
Involuntary termination includes retrenchment, redundancy and dismissal.
Retrenchment is the forced termination of the employment contract, usually
because the employer is cutting costs to remain in business. Redundancy
occurs when specific functional positions are no longer required by the
organisation. Dismissal is when the employer decides to terminate the
employment contract and gives the employee the required notice. Generally,
dismissal is the consequence of disciplinary action over a period of time, or a
significant breach of the employment contract i.e. wilful damage to company
property, theft or violent behaviour towards other workers.
The termination phase of the employment relationship raises a number of
financial, legal or industrial relations issues for human resource managers. The
nature and extent of terminations needs to be monitored. Conducting exit
interviews can identify reasons that cause employees to leave. Counselling or
assistance in finding a new job can be offered as well as career counselling,
resume preparation and advice.


Corporate responsibility
Attaining the highest rating in workplace practices means that the organisation
needs to demonstrate a very high commitment to creating a workplace that offers
excellent value for employees and the organisation, through ongoing
development of its workforce, management systems, policies and strategies.
Organisations are rated on issues such as employee involvement, OHS, fair
wages, diversity, work/life balance, training and development and industrial
relations. There is a growing awareness that demonstrating corporate
responsibility can lead to greater shareholder returns.
The aim of human resource management has shifted from maximising the profit
from increased productivity from employees to achieving a balance of profit in
conjunction with socially responsible practices. Socially responsible organisations
can use this fact in their marketing when attempting to attract and retain skilled
Human resource management helps shape corporate behaviour and if combined
with the use of motivation theory, can improve motivation.

Chapter 9


School of Business Services

Faculty of Workforce Development



How Leaders Influence Others
Why do people accept a leaders influence? More often than not, they do so
because a leader has power and power has been defined as the capacity to
affect others (Mintzberg 1983).

Sources of leader power

There are six major sources of leader power, they are: legitimate, reward,
coercive, expert, information and referent power.
1. Legitimate power arises from an individuals position within the
organisational hierarchy and the subsequent authority that position
carries. When accepting a position, we know that we will be reporting
to an immediate supervisor and others in the hierarchy. Normally we
accept their directions as legitimate as these people hold positions of
2. Reward power is based on the ability of an individual to control and
provide valued rewards to others. Generally in most organisations
rewards are at the discretion of a manager, including pay rises, time
off, promotion, praise, better office etc.
3. Coercive power is dependent on ones ability to punish others if they
display the wrong behaviours. Forms of coercion or punishment
include criticism, reprimands, suspension, warnings (both written &
verbal), negative performance appraisals, demotions and
4. Expert power is derived from an individuals knowledge and expertise
that is valued by others. Normally, managers have the knowledge,
technical skills and experience that are crucial for subordinates to
5. Information power comes from ability to access and control the
dissemination of information relating to organisational operations and
future strategic plans. Mangers usually have more information about
the organisation than subordinates, and can therefore decide how
much should be known.
6. Referent power is derived from being admired, liked or personally
identified with. When we admire people, want to be like them, or feel
friendly towards them, we are more willing to follow their directions
and be loyal to them.



Effective use of leader power

Although all power types are influential, they end up motivating subordinates in
different ways. Subordinates may react with commitment, compliance or
resistance. When commitment is attained, employees are enthusiastic and work
hard towards achieving organisational goals. When there is compliance,
employees make effort to achieve average (not outstanding) performance. When
there is resistance, employees on the surface appear to comply, but do the
absolute minimum, perhaps even sabotaging efforts toward organisational goals.
The relationship between a leaders use of different power sources and the likely
response from subordinates is shown in Table 9.1. As the table depicts, the use
of expert and referent power generally leads to commitment, whilst the use of
legitimate, information and reward power leads to compliance. Subordinate
resistance often results from the use of coercive power, therefore managers
should seldom use this type.

Power source









Table 9.1 Major Sources of Leader Power and Likely Subordinate

In todays environment, many managers utilise an important aspect of power use
in their leadership styles, that of empowering their subordinates. Empowering
occurs when the manager abrogates some leadership responsibility and authority
to the subordinates. They can then make decisions previously made by
management and have the authority to enforce quality standards, check their
own work and schedule their activities.
Empowerment supports leadership in several ways:
Managers ability to get things done with the co-operation and
support from the subordinates.
Employee involvement, motivation, commitment and inclination to
work towards organisational goals is increased.
Opportunities for managers to concentrate on significant issues
and problems are increased and less time is spent on daily
Managers that do not use empowerment as part of their leadership style, try to
control the decision making process and force subordinates to comply and
consequently they are relatively ineffective in their jobs. The leadership style of


empowering managers allows subordinates to develop sound decision making
skills, as well as providing coaching, inspiration and guidance.
While power helps to explain how a leader influences, we must look at trait and
behaviour theories to fully understand leaders organisational influence.

Searching for Leadership Traits

USA army psychologists were the first to try to identify traits that differentiate
effective leaders from non-leaders. Traits are the individuals relatively stable
characteristics such as physical (e.g. height, appearance, energy), abilities (e.g.
intelligence, knowledge, technical competence), personality (e.g. extrovert,
dominant), and social factors (e.g. interpersonal skills, sociability).
Trait theory was also known as the great person theory, because earlier
versions stated that leaders were born, not made.
Researchers abandoned trait theory in the 1950s, as it was not proven that there
were trait differences between leaders and non-leaders or between effective and
ineffective leaders. However, more recent evidence shows that successful
leaders are indeed different from the rest of us. For example, a research study at
AT&T found that oral communication and human relations skills, advancement
need or motive, resistance to stress; uncertainty tolerance, energy and creativity
predicted managerial advancement. The jury however is still out on whether a set
of traits can predict leadership performance. Many believe that performance is
more a matter of what leaders do than their traits. So, recent leadership research
has focused on their behaviours.

Identifying Leadership Behaviours

Traits may be hard to change in an individual, but if we can identify universally
effective behaviours that result in successful leadership, most people could in
turn learn these behaviours. Researchers at the University of Michigan, Ohio
State University and the University of Iowa examined the specific behaviours that
leaders use to improve subordinate satisfaction and performance.

Iowa and Michigan studies

At the University of Iowa, Kurt Lewin and colleagues conducted researched to
identify leader behaviours. They considered three leadership styles: autocratic,
democratic and laissez-faire. Autocratic leaders make decisions by themselves,
dictate methods of work, limit worker knowledge of goals to that required only for
the next step and give punitive feedback. In contrast, democratic leaders involve
the group in decision making, allow the group to decide on work methods,
communicate all relevant goals and use feedback for coaching. Laissez-faire
leaders allow the group absolute freedom, provide all resources required,
participate only to answer questions and avoid giving feedback i.e. they do very


To determine the most effective leadership style, the researchers trained
individuals in the three different leadership styles, and then put them in charge of
groups of teenage boys clubs. The results indicated that the groups with laissezfaire leaders performed poorly when compared with both autocratic and
democratic leader groups. Work quantity was equal for both autocratic and
democratic leaders, while the quality of work and group satisfaction was higher in
the democratic groups. Thus it appeared that democratic leadership could result
in increases in both work quantity and work quality.
Unfortunately, further research was not able to replicate the results. There were
times when democratic leadership was shown to result in better performance
than autocratic leadership, but at other times it was the reverse. Results on
follower satisfaction were on other hand consistent, with satisfaction levels higher
in democratic leadership groups than autocratic ones.
These results created a managerial dilemma. Whilst democratic leadership
resulted in subordinates being more satisfied, performance was not always better
or even equal to performance under an autocratic leader. To help solve this
dilemma, Robert Tannenbaum and Warren Schmidt (1973) developed the leader
behaviour continuum as shown in Figure 9.1. The continuum has leadership style
ranging from autocratic (boss-centred), through to democratic (subordinatecentred).
According to Tannenbaum and Schmidt, when deciding on a leader behaviour
style, managers must consider forces within themselves (e.g. comfort level with
the various options), within subordinates (e.g. readiness to take responsibility),
and the situation (e.g. time pressures). In the short term, managers should be
flexible in adopting specific leader behaviour, depending on the circumstances. In
the long term, managers should adopt subordinate-centred leadership behaviour,
because this increases employee motivation, decision quality, teamwork, morale
and employee development. Other work by the researchers at the University of
Michigan confirmed the benefits of employee-centred leadership compared with a
more job-centred approach. With an employee centred approach, leaders build
effective teams dedicated to achieving high performance goals. With a jobcentred approach, leaders divide work into routine tasks, closely supervise
workers, ensure that specified work methods are adhered to and productivity
standards are met. However, results on output varied: at times an employeecentred approach gave low output and a job-centred approach gave high output.



Ohio State studies


The most comprehensive and replicated of the behavioural theoriescentred

resulted from
to identify significant leader behaviours. Beginning with over 1000 dimensions,
they eventually narrowed the list down to two dimensions that accounted for most
of the leadership behaviour described by subordinates: initiating structure and
use of authority
by the manager

area of freedom
for subordinates



ideas and

subject to


limits; asks
group to

to function
within limits
defined by

Figure 9.1 Continuum of leader behaviours (Tannenbaum & Schmidt 1973)

Initiating structure is the extent to which a leader defines and structures their
own role and those of subordinates, to attain organisational goals. It includes the
basic managerial functions of planning, organising and controlling and focuses on
task-related issues. For example, a leader who is characterised as high in
initiating structure assigns tasks to group members, expects group members to
maintain clearly defined standards of performance, and emphasises achievement
of deadlines. Initiating structure is similar to the job-centred behaviour, identified
in the Michigan studies, but with a wider range of managerial functions.
Consideration is the extent to which a leader has work relationships built around
mutual trust, respect for subordinates ideas and regard for their feelings. Leaders
who are high in consideration will be friendly and approachable, help
subordinates with personal problems, treat all subordinates equal and encourage
participative decision making. Consideration is similar to the employee-centred
leader behaviour identified in the Michigan studies.
The Iowa and Michigan studies saw leadership dimensions as falling at opposite
ends of a continuum, whilst Ohio State researchers saw initiating structure and
consideration as independent. This meant that the two behaviours occupied
separate continuum. A leader can be high-high on both, low-low on both and any
combination in between. The Ohio State two-dimensional model is shown in
Figure 9.2.






low initiating

high initiating

high consideration

high consideration

low initiating

high initiating

low consideration

low consideration


Initiating structure

Figure 9.2 Ohio State two-dimensional model of leader behaviours

Initial studies on the two-dimensional approach supported the idea that a highhigh leader (high in initiating structure and high in consideration) achieved higher
subordinate performance and satisfaction. However, in later studies enough
exceptions were found to indicate that situational factors, such as subordinate
expectations and nature of the task, needed to be integrated into the theory to
explain successful leadership behaviours.

The Leadership Grid

A two-dimensional model of leadership was developed by Blake and McCanse.
The Leadership Grid focused on leader attitudes; concern for people and concern
for production, rather than leader behaviours like the Ohio State and Michigan
studies. The grid is depicted in Figure 9.3. Although there are eighty-one possible
positions into which a leaders style may fall, Blake and McCanse identified five
key positions. They argued that the most desirable leadership style is 9,9; where
the leader displays a high concern for production and a high concern for people.
However, as with the Ohio State studies, a 9,9 style might not always be the best.




Team management
Work accomplishment is from
committed people; interdependence
through a common stake in
organisation purpose leads to
relationships of trust and respect

Country club management
Thoughtful attention to needs of people
for satisfying relationships leads to a
comfortable, friendly organisation
atmosphere and work tempo

Middle-of-the-road management
Adequate organisation performance is
possible through balancing the
necessity to get out the work with
maintaining morale of people at a
satisfactory level

Concern for people

Impoverished management
Exertion of minimum effort to get
required work done is appropriate to
sustain organisation membership

Efficiency in operations results from
arranging conditions of work in such a
way that human elements interfere to a
minimum degree




Concern for production

Figure 9.3 The Leadership Grid (reprinted from Blake & McCanse 1991)

Developing Situational Theories

It became increasingly clear to researchers in the leadership field, that predicting
leadership success involved more than just isolating a few traits or behaviours. A
specified leadership behaviour that worked in one situation might not be as
effective in another situation. As a result, emerging leadership theories involved
situational factors. They became known as situational theories or contingency
theories, because they argue that appropriate leader traits or behaviours are
contingent or dependent on situational factors. As there are many factors that
influence leader effectiveness, a number of different approaches have evolved.
They include Fiedlers contingency model, the normative leadership model,
Hersey and Blanchards situational theory and path-goal theory.



Fiedlers contingency model

The first comprehensive contingency model of leadership was developed by
Fred Fiedler (Fiedler 1967). The contingency model argues that leaders differ in
the degrees of orientation towards task versus people. This makes leaders
effective in some situations but not in others. The model identifies the different
situations where each orientation is likely to be the best.

LPC orientation
Fiedler developed the least-preferred co-worker (LPC) questionnaire which is
designed to measure an individuals basic leadership style. The LPC contains
eighteen pairs of contrasting adjectives. The leader is asked to describe the one
person they least enjoyed working with by rating them on a scale of 1 to 8 for
each of the eighteen sets of adjectives. Examples of sets are:
Pleasant :







: Unpleasant







: Inefficient







: Relaxed

Efficient :

If the least preferred co-worker is described in relatively negative terms on the

LPC scale, then the leader is more likely to be task-motivated, putting business
before pleasure. If on the other hand, if the least preferred co-worker is
described in relatively positive terms, then the leader is more relationship
oriented where close relationships with co-workers is seen as important to team
success. The basic notion of the model is that the leaders LPC orientation must
be a good match for situational factors favouring that type of leaders prospects
for success.



Assessing the situation

Once the individuals leadership style is assessed through the LPC, it is
necessary to evaluate the situation and match the leader with the situation.
Fiedler identified three contingency dimensions that determine leadership
effectiveness. These are: leader-member relations, task structure and position
1. Leader-member relations is the degree of confidence, trust and
respect subordinates have for their leader. In order to assess this
factor, the leader asks, Will the team do what I tell them, are they
reliable and do they support me?
2. Task structure is the degree to which the work assignments are
defined e.g. how well are the task goals, methods and performance
To determine this, the leader asks, Do I know what I am supposed to
do, how the job is to be done and how performance will be assessed?
3. Position power is the degree of influence a leader has over power
variables such as hiring, firing, discipline, wage increases, bonuses
and promotions. To evaluate this the leader asks, Do I have the
support and backing of upper management and the organisation in
dealing with subordinates?



Matching leadership style and situation

The next step in the Fiedler model is to match an individuals LPC and an
assessment of the three situational variables to achieve maximum leadership
effectiveness (see Fig.9.4). Altogether there are eight situations or octants in
which a leader can find themselves, representing different favourability, or
situational control. For example, a combination of good leader-member relations,
high task structure and strong position power (octant 1) is the most favourable.
The boxes below the octants show which leader type (high or low LPC) matches
the situation and will be most effective. The model predicts that when faced with
an octant 1, 2, 3 & 8 situation, task oriented leaders perform better. Relationship
oriented leaders, however, would perform better in octant 4, 5, 6 & 7 situations.
The model argues that when a situation is very unfavourable, the leader strongly
emphasises the need for task accomplishment to move the group toward its goal.
When the situation is very favourable, a task-oriented leader gets the groups
cooperation as they easily involve themselves.
Fiedler believes that an individuals leadership style is fixed; therefore there are
really only two ways to improve the leaders effectiveness. Either change the
leader to fit the situation or change the situation to fit the leader. Fiedler calls this
engineering the job to fit the manager.
There is considerable evidence to support Fiedlers model, but the studies have
also suggested that there are additional variables that need to be considered to
improve the model. Managers may need to rely on other situational theories,
such as the normative model.

Decreasing situational favourability/control

task structure

Elements of







position power


of leadership

relationshiporiented (high
(low LPC)

























Figure 9.4 Fiedlers contingency model of leadership (adapted from Jago 1982)


Normative leadership model
Initially developed by Vroom & Yetton (1973) and later revised by Vroom & Jago
(1988), the normative leadership model provided a sequential set of rules that
should be followed in determining the form and amount of participation in
decision making as determined by the different types of situations. The model
has five behaviours that that may be used in a given situation: Autocratic I (AI),
Autocratic II (AII), Consultative I (CI), Consultative II (CII), and Group II (GII).
These are described in Table 9.2.




You solve the problem or make a decision yourself using the information
available to you at that time.


You obtain the necessary information from subordinates and then decide on
the solution to the problem yourself. You may or may not tell subordinates what
the problem is in getting the information from them. The role played by your
subordinates in making the decision is clearly one of providing the necessary
information to you rather than generating or evaluating alternative solutions.
You share the problem with relevant subordinates individually, getting their
ideas and suggestions without bringing them together as a group. Then you
make the decision which may or may not reflect your subordinates influence.
You share the problem with your subordinates as a group, collectively
obtaining their ideas and suggestions. Then you make the decision which may
or may not reflect your subordinates influence.
You share the problem with your subordinates as a group. Together you
generate and evaluate alternatives and attempt to reach agreement
(consensus) on a solution. Your role is that of chairperson, coordinating the
discussion, keeping it focused on the problem and ensuring critical issues are
discussed. You can provide the group with information or ideas that you have,
but do not try to press them to adopt your solution, and are willing to accept
and implement any solution supported by the entire group.


Table 9.2 Normative Leadership Model Decision Styles

To assist the manager in choosing the best method, the model requires input into
eight different questions relating to the decision problem (see top of Fig. 9.5).
Question QR means how much the solution facilitates achieving better quality,
lower costs, longer life etc. Question ST relates to the structure issue in Fiedlers
contingency theory. With structured problems, tasks, methods and performance
standards are clearly defined. In unstructured problems, things are less clear,
goals and how to achieve them are not well understood.
The normative model confirms that leadership research should be directed at the
situation rather than at the person. The model assumes that the leader can adapt
their style to suit the different situations.




Quality requirement: how important is the

technical quality of this decision?



Commitment requirement: how important is

the subordinate commitment to this decision?



Leaders information: do you have sufficient

information to make a high quality decision?



Problem structure: is the problem wellstructured?


Commitment probability: if you were to make

the decision by yourself, is it reasonably certain
that your subordinate(s) would be committed to
the decision?
Goal congruence: do subordinates share the
organisational goals to be attained in solving this
Subordinate conflict: is conflict among
subordinates over preferred solutions likely?
Subordinate information: do subordinates
have sufficient information to make a highquality decision?









































































Figure 9.5 Decision trees for normative leadership model (reprinted from Vroom & Jago

Situational leadership theory

Developed by Hersey and Blanchard (1988), situational leadership theory
contends that leader behaviour must change to suit the level of follower
readiness or maturity. The premise is that in reality it is the followers who either
accept or reject the leader.
Situational leadership uses the same two dimensions that that Fiedler identified:
task and relationship behaviours.
Task behaviour is how well the leader defines roles and tells people what, how,
when and where to do the specified tasks.
Relationship behaviour is how much the leader uses communications to listen,
facilitate and support behaviours.
To determine the leadership style for a given situation using situational leadership
theory, a leader must first assess one important factor: follower readiness. The
term follower readiness was defined by Hersey and Blanchard as the ability and
willingness of followers to accomplish a task. Ability (job readiness) includes
ability, skills, knowledge and experience needed for a specific task. Willingness
(psychological readiness) consists of confidence, commitment and motivation to
complete a task. As shown at the bottom of Figure 9.6, the readiness continuum
has four levels: R4 (high), R3 (moderate to high), R2 (moderate) and R1 (low).
The bell shaped curve (see Fig. 9.6) runs through the four leadership quadrants
and specifies the leadership style most appropriate at a given readiness level.
Telling (high task-low relationship) is used in low-readiness situations, when the
followers are unable and unwilling to take responsibility for directing their own
behaviour. The leader defines the roles and tells people what to do and how to do
Selling (high task-high relationship) is used in low-moderate situations, when
followers are unable to take responsibility but are willing or feel confident in doing
so. The leader provides both specific directions and supports individual
willingness and enthusiasm.
Participating (low task-low relationship) is used for moderate-high readiness,
when followers can take responsibility but are unwilling or too insecure in doing
so. The leader uses two-way communication and provides a supportive,
participative environment.
Delegating (low task-low relationship) is used for high readiness, when followers
are both able and willing to take responsibility. The leader provides little direction
or support, instead they responsibility to the subordinates.
To apply situational leadership theory, the leader must decide the task areas they
want to influence assess the followers readiness level and then select the
relevant leadership style.




Share ideas
and facilitate
in decision


high rel.


low task

Relationship Behaviour
(Supportive behaviour)
high task
high rel.

low rel.
low task
Turn over
for decisions

high task
low rel.

and closely



Task Behaviour

Follower Readiness

Able and





Able but

Unable but

Unable and

Figure 9.6 Situational leadership theory (adapted from Hersey & Blanchard 1993)

Path-goal theory
Developed by House and Mitchell (1974), path-goal theory is a situational model
of leadership that explains how leader behaviour can influence subordinates
motivation and job satisfaction. The term path-goal is derived from the belief that
effective leaders clarify the path to help their followers achieve work goals and
make the journey along the path easier by removing roadblocks.
Path-goal theory extracts key elements from the expectancy theory of motivation:
effort-performance (probability that effort will lead to required performance level),
performance-outcome expectancy (probability that successful performance will
lead to certain outcomes or rewards), and valence (anticipated value of outcomes
or rewards). Path-goal theory seeks to find ways on how a leader can make work
goal achievement easier or more attractive.



Leader behaviours
Path-goal theory identifies four major leader behaviours:
Directive leader behaviour means letting subordinates know what is expected
of them, scheduling work to be done, providing guidance on how to accomplish
tasks, identifying work evaluation standards and showing the basis for outcomes
or rewards. This type of leadership behaviour is similar to task orientation.
Supportive leader behaviour means being friendly and approachable, showing
concern for the needs of subordinates, and doing things to make work more
pleasant. This type of leadership behaviour is similar to relationship-oriented or
Participative leader behaviour means consulting with subordinates and using
their ideas and suggestions before making a decision.
Achievement-oriented leader behaviour means that the leader sets
challenging goals and expects subordinates to perform at their highest level.
In contrast to Fiedlers view of a leaders behaviour, House assumes that leaders
are flexible and can display any or all of these leadership styles to suit the

Situational factors
In assessing how the four leadership behaviours enhance the subordinates pathgoal motivation and satisfaction, leaders need to consider two situational factor
types: subordinate and context characteristics.
Subordinate characteristics include personality traits, skills, abilities and needs.
For example, directive leadership will motivate subordinates when tasks are
ambiguous or stressful, while a supportive leader will improve performance and
satisfaction when subordinates are performing structured tasks.
Context characteristics fall into three categories: task, group and the
organisations formal authority system (levels of hierarchy, degree of decision
centralisation and nature of formal reward system). For example, supportive
leadership will motivate subordinates performing a boring task, while
achievement-oriented leadership is better for interesting tasks.



Choosing leader behaviours

In order to select the most appropriate leader behaviours with goal-path theory,
leaders must assess various situational factors effects on the three expectancy
theory elements (the path) and desired end results (the goals). This process
involves three steps. First, think in terms of the expectancy theory elements.
Second, to improve motivation, consider which situational factors need to be
changed to improve expectancy theory elements. Third, adopt appropriate leader
behaviours to change situational factors. See Figure 9.7 for path-goal theory
application examples.







specify link
and rewards


about job and

Encourage setting
challenging but
reachable goals
to boost

theory element

end result


increase the
intrinsic value
of work



Figure 9.7 Examples of path-goal theory (adapted from Yukl, G. 1998)



(intrinsic and



Promoting Innovation: Transformational Leadership

Are managers and leaders the same? Not necessarily, one view is that managers
do things right, preserve the status quo and focus on productivity and the shortterm, while leaders do the right things, challenge the status quo, encourage
creativity and risk-taking. In studying these differences, some researchers believe
that there are two types of leaders: transactional and transformational.
Transactional leaders guide or motivate subordinates to achieve established
goals to the expected standard by clarifying roles, tasks, goals, performance
levels, and rewards. All of the situational leadership theories discussed before
address transactional leaders.
Transformational leaders on the other hand motivate subordinates to perform
above expectation by using their charisma to provide individualised consideration
and intellectual stimulation.
Transactional leadership and transformational leadership should not be seen as
opposing approaches to getting things done. Transformational leadership is built
on top of transactional leadership and produces performance above expectation
(see Fig.9.8). The theory is that even the most successful transformational
leaders need transactional skills to effectively manage the day-to-day operations.



current state of

motivation to
outcome (extra


beyond normal

Figure 9.8 Add-on effect of transformational leadership (adapted from Bass 1985)


According to Bass (1985), there are three factors that are important to
transformational leadership: charisma, individualised consideration and
intellectual stimulation.
1. Charisma is seen as crucial, and is a measure of the leaders ability
to inspire, articulate a clear vision of the future, communicate high
performance expectations, and display confidence in followers
abilities to achieve the vision. Examples of charismatic leaders include
Mahatma Gandhi, Martin Luther King, and John F. Kennedy.
2. Individualised consideration means that transformational leaders
pay special attention to their followers needs, treat them with respect,
encourage two-way communication and be a good listener.
3. Intellectual stimulation means to encourage followers to be creative
and innovative, to question long held assumptions, and to look at
problems and situations in new ways.
Not everyone agrees that transformational leaders need to have charisma. It is
accepted though that such leaders must communicate a clear vision of a desired
future state, mobilise commitment and elicit changes to assist followers to attain
the vision.

Are Leaders Necessary?

Some argue that the importance of leaders has been overrated and in many
situations they contribute little to the organisations performance. We are now
going to explore leadership substitutes and consider the organisational life-cycle
approach to understanding the applicability of different leadership styles.

Substitutes for leadership

Path-goal theory argues that situational factors may render certain leader
behaviours ineffective and indeed unnecessary. However, path-goal theory does
not specify the conditions under which leader behaviour may be unnecessary.
The substitutes for leadership approach tries to specify situational factors that
are likely to make leader behaviours unnecessary or reduce their effectiveness.
This approach divides situational factors into two categories: neutralisers and
Neutralisers are situational factors that prevent a leader behaviour from
influencing either subordinate performance or satisfaction, or both. Examples of
neutralisers negating the effect of relationship-oriented and task-oriented leader
behaviours are subordinates high need for independence, low valence for
available rewards, and physical distance between leader and subordinate.
Managers must be vigilant about the presence of neutralisers and endeavour to
alter the situation so appropriate leader behaviours can be applied.
Substitutes are situational factors making leadership impact not only impossible,
but also unnecessary. Substitutes for relationship-oriented behaviour include
interesting, satisfying tasks and subordinates with a professional work ethic. For


task-oriented behaviour, the substitutes include skilled and experienced
subordinates, and routine work with specified procedures. The presence of
substitutes allows the leader to focus their attention on other areas.
In determining the leader behaviours required, managers must also take into
consideration the organisational life-cycle.

Leadership and the organisational life-cycle

Organisations move through predictable development stages, and this life-cycle
guides the appropriateness of transactional or transformational leadership (see
Table 9.3).

Organisational life-cycle stage

Most important leadership emphasis





Formalisation and control


Elaboration of structure


Table 9.3 Leadership and the Organisational Life-Cycle

At the beginning stage, transformational leadership helps create a vision and

engenders commitment as the organisation takes its first steps. By the collectivity
stage, more workers have joined the initial group and transactional leadership
allows the management of rapid growth. During the formalisation-and-control
stage, sustained growth needs transactional leadership to maintain direction and
control. By the elaboration-of-structure stage, high dependence on bureaucracy
and control can reduce innovation; hence transactional leadership is required
Managers must understand both transactional and transformational leadership
approaches in order to function effectively. An important aspect to these
approaches is the need for good communication skills.



Using Communication to Enhance Leadership

Effective communication is critical to all the major management functions, it is
especially important to the leading function as it is the means by which interaction
occurs and others are influenced. Studies have shown that managers can spend
between 50 and 90 per cent of their tome talking to people (Mintzberg 1980).
Without effective communication, strategy implementation fails and the workplace
is subject to more accidents and more potentially risky behaviours.

How managers communicate

Communication is used by managers to relay important information about the
Verbal communications, which includes written and oral communications, is the
most prevalent in organisations. One of the most common complaints against
managers is their lack of good writing skills. Written communication has several
advantages over oral communication. It provides a record of the message, can
be easily distributed to a wide audience and the sender can carefully consider
their intended message. There are also some disadvantages to written
communication, including preparation costs, impersonality, potential receiver
misunderstanding and lack of feedback.
Oral or spoken communication occurs in face-face conversation, meetings and
telephone discussions. Advantages of oral communication includes the fact that it
is fast, more personal than written communication and elicits rapid feedback from
those involved in the conversation. Disadvantages include being time-consuming,
hard to finish and lack of any documented record.
Managers invariably use both oral and written communication to exchange
Another important communication type that managers use is non-verbal
communication, which can account for between 65 to 93 per cent of what is
communicated. Non-verbal communication uses elements and behaviours not
coded into words, for example body language (gestures, facial expressions),
verbal intonation (tone of voice) and object language (clothing, furniture). Often
these non-verbal cues can offer a valuable insight into an organisations culture.



Managerial communication preferences

As noted before, managers spend considerable time communicating at all levels
of the organisation. Studies have shown that managers prefer oral to written
communication as oral communication is seen as more informal and immediate.
One study concluded that top managers spent 74 per cent of their time
communicating orally, through informal and formal meetings, telephone calls and
organisation tours (see Fig. 9.9).
Managers serve as communication centres throughout the organisations
communication network. If managers fail to communicate effectively, it impacts
negatively not only for their work group but for the whole organisation. Hence, the
substantial resources devoted by organisations to promote effective

Figure 9.9 Proportion of time top managers spent on various activities (based on
Kurke & Aldrich 1983)



Using electronic media to facilitate communication

Today managers rely on a number of sophisticated electronic media to convey a
message. There are four common media were are going to discuss; electronic
mail systems and the internet, voice mail, teleconferencing and
An electronic mail system (email) allows individuals to instantaneously transmit
and receive written messages on computers that are linked with appropriate
software. Initial studies found that email was a time saver through increasing the
decision making speed, eliminating unreturned phone calls and cutting down on
internal correspondence. However, later studies found the opposite, as time is
wasted replying to poorly written, ambiguous emails and those sent to the wrong
Electronic mail improves both vertical and horizontal communication and leads to
information exchange among managers who were not communicating by mail or
There are a number of disadvantages of electronic mail. One of them is that it
lacks the non-verbal cues (body language, tone of voice) that accompany faceface communication. Another is the perceived speed and temporary nature of
email may lead people to vent their anger in an email whereas they would never
have put it on paper. Avoid resolving conflict via email; always use face-face
communication. Still another disadvantage arises from the fact that email is easy
and simple to use, therefore people receive excessive amounts of irrelevant or
unsolicited mail.
The internet is another electronic medium that managers and organisations use
to communicate. The use of the internet is growing rapidly. Australia in 1998 had
16 per cent of the population using the internet regularly, by 2010 the penetration
had accelerated to 80 per cent.
There are many reasons for using the internet and they include communicating
with customers or potential customers, finding competitor information, interaction
between geographically remote offices, advertising for staff, and communicating
with suppliers, contractors and the public.
A major problem with internet communication is the concern about security of the
information. Another issue for managers is the amount of time employees surf the
Voice mail or voice messaging is a telephone answering system that enables
senders to leave a message. Unlike email, voice mail allows for verbal cues (tone
and quality). Because people can read six times faster than they can listen, voice
mail is best used for leaving short messages that dont need discussion.
Another form of electronic communication is teleconferencing, which enables
two or more users in different locations to see and talk to each other by telephone
or computer.
Videoconferencing allows two or more people in different locations to use video
cameras and closed circuit television to conduct meetings and share documents.

Chapter 10


School of Business Services

Faculty of Workforce Development



Along with planning, leading and organising, controlling is the fourth major
management function. Planning gives direction, leading enables action,
organising allocates resources and controlling ensures that an organisation
meets performance standards and achieves set goals. The controlling function is
the regulatory element, whereby managers use various methods to monitor
performance and take corrective action. Controls must be flexible, as too much
control stifles innovation.
In this chapter we discuss the various aspects of control and its significance as a
management process. We will examine the control process itself and how
managers decide what to control and how to implement controls. Also reviewed
will be the major control types and when they are appropriate, and how
managers can assess the effectiveness of the control systems implemented.
During the control process, managers use systems to increase the probability of
achieving organisational objectives. The major control systems are associated
with quality, finance, budget, inventory, operations and information systems.

Control as a Management Function

All managers face difficulties centred around the controlling function. Controlling
is the process by which managers monitor and regulate activities and
performance to ensure that organisational standards and goals are achieved. As
this suggests, managers develop standards, compare performance against those
standards, and initiate corrective action as required. The achievement of
organisational goals is dependent on human behaviour, as such, controlling
ensures that employees act in support of organisational goals by encouraging
needed behaviour and discouraging unwanted ones.



Significance of the control process

The controlling function relates to the other three major management functions:
planning, organising and leading. It complements the planning function by
allowing the manager to monitor performance and take any necessary steps to
correct any deviations from stated goals. Controlling ensures that resources are
used for organisational objectives supporting organising and leading functions
(see Fig. 10.1). For example, control feedback might reveal that in order for the
organisation to achieve its stated objectives, it might require better training, more
effective communication, greater leadership influence or even restructuring.
Part of the control process is setting up the control systems. A control system is
a formal goal setting, monitoring, evaluation and feedback system that enhance
the chances of reaching organisational standards and goals. Control systems
regulate many important organisational functions including, product quantity,
profit margins, operating budgets, quality of product or service, customer
satisfaction, delivery timeliness and resource use.



Role of controls
What would happen to an organisation that has inadequate control systems in
place? Consider what happened to Diawa Bank, Japans tenth-largest bank,
when it was forced to close its branches in the United States. One of the banks
bond traders in New York (Toshihide Iguchi), managed to lose $1.1 billion over an
11-year period without the bank knowing. The trader subsequently highlighted
that the New York office could not detect a $100 million discrteptancy and that
this indicated how dysfunctional controls were at Daiwa. A similar incident
occurred at Barings Bank, where another trader Tim Leeson accumulated similar
Adequate control systems can help managers avoid or minimise the risk of these
problems occurring. Specifically, controls assist managers with five challenges:
coping with uncertainty, detecting irregularities, identifying opportunities, handling
complex situations and decentralising authority.






Figure 10.1 Relationship of controls to the other functions of management



Coping with uncertainty

Uncertainty arises as organisational goals are formulated based on previous

experience and the best available knowledge, but things do not always go to
plan. Both internal and external environmental factors can result in changes to
consumer demand, technology and raw-material availability. In control-system
development, managers monitor specific activities and react to significant
environmental threats rapidly.

Detecting irregularities
Controls aid in the detection of irregularities such as poor quality, cost blow-outs,
or excessive staff turnover. Early detection saves time and money, by preventing
relatively minor problems from becoming major ones later on. For example, early
detection at Daiwa Bank, through better operational controls, might have avoided
the international embarrassment and business losses. Among the many
contributing factors, Daiwa did not follow standard financial practice of crosschecking daily trades against monthly summaries and balance statements.

Identifying opportunities
Controls can also assist in identifying situations where results are actually better
than predicted, thereby alerting management to potential opportunities. For
example, at May Department Stores, managers write monthly reports highlighting
best-selling items and money generated. These are then used in developing
merchandising strategies for all stores, including what to buy, from whom and
how to display the merchandise.

Handling complex situations

Controls aid coordination as the organisation grows and complexity increases.
They help managers tracking major elements to ensure synchronisation aimed at
achieving organisational objectives.

Decentralising authority
Another control function is giving managers more freedom by being able to
delegate decision making further down the organisational hierarchy, but still be in
a position to monitor results. Of course, control issues vary depending on the
managerial level.



Levels of control
Each level of the managerial hierarchy has different control responsibilities (see
Fig.10.2). The three control levels: strategic, tactical and operational, increase the
chances of achieving the different level plans.
Strategic control means monitoring and assessing critical environmental factors
to ensure that strategic plans are implemented, assessing the effects of strategic
action, and adjusting plans as required. Top-level managers have an
organisation-wide perspective, and therefore are responsible for strategic-level
control. The main aim for strategic control managers is to ensure that
organisational core competencies are developed and maintained, and
consequently deployed in achieving strategic goals. Strategic control managers
focus on long time frames, such as quarterly, semi-annual and annual reporting
cycles, and at times even longer. The time cycles may be shortened if the
organisation is faced with aggressive competition, or a turbulent external
While top-level managers are usually concerned with strategies issues, they may
at times use tactical and operational control to ensure that tactical and
operational plans are implemented as desired, by middle to lower management.
Tactical control is concerned with assessing department-level tactical plans,
monitoring results and taking corrective action as required. Middle managers
have tactical control responsibility, with the focus being on department-level
objectives, programs and budgets. The time frame is generally mid-term, using
weekly and monthly reporting cycles. Although concerned with tactical control,
middle managers get involved in strategic control by disseminating information to
top-level managers regarding strategic issues. They also take part in operational
control by checking critical aspects of the operating plan implementation.
Operational control is concerned with assessing operating-plan implementation,
monitoring daily results and making adjustments as required. Lower-level
managers are responsible for operational plans and their focus is on schedules,
budgets, rules and individuals specific outputs. Operating control gives speedy
feedback on what is being done toward achieving short and long-term
organisational goals.





Top Management
Organisation-wide perspective
Long timeframe



Middle Management
Department perspective
Periodic timeframe



First-Line Management
Inut/Individual perspective
Short timeframe

Figure 10.2 Levels of Controls

The Control Process

The elements of the control process are shown in Figure 10.3. The process has
six major steps.
1. Determine areas to control
The first step in the control process is that managers must decide
which areas to control. It is not economically possible to control all of
the organisational processes, therefore choices must be made. As
well as costs being prohibitive, employees resent management if there
is too much control. Generally, managers choose areas to control on
the basis that they support organisational goals and objectives. To a
great extent, what we measure determines what people in the
organisation will attempt to excel at.
2. Establish standards
The next step involves managers deciding on the standards of
performance, goals or targets that they will use in the future to
measure the performance of the organisation, function/division, or an
individual. The standards of performance that managers might select
to measure include efficiency, quality, responsiveness to customers,
innovation, absenteeism rates, operating costs, and dollar sales per
salesperson. There are some organisational activities that are difficult
to quantify and measure eg. How much value is a research chemist
adding to the organisation? In these situations qualitative measures
by peers are often used.



Performance standards assist employees behaviour in three ways. Firstly,
standards communicate what is expected of them and how their work will be
evaluated. This aids their effectiveness. Secondly, standards assist in highlighting
job problems that are related to peoples personal limits. These can be as a
consequence arising from lack of ability, training, experience, or any other jobrelated deficiency that impacts on performance. Finally, standards help to reduce
the negative effects of goal incongruence. Goal incongruence occurs when
there are major differences between an individuals goals and those of the
organisation. A common outcome of goal incongruence is employees theft.



areas to




met or

Standards not

take corrective
action as


Adjust standards and

measures as necessary

Figure 10.3 Steps in the control process

3. Measure performance
Once managers have decided which standards they will use to
evaluate performance, the next step is to measure actual
performance. One method of setting standards and measuring
performance is management by objectives (MBO).
How one measures performance is dependent on the standards
selected. Performance measures can include units produced, dollar
value of units, raw materials used, defect rate, scrap rate, return on
investment, or profit margin.
Once measurement methods are chosen, managers will then have to
decide on the frequency of measurement. There will be instances
where data is required on a daily, hourly or more frequent basis, whilst
in other cases weekly, monthly quarterly or yearly data might suffice.
The frequency of measurement is dependent on how critical the goal
is, any situational variations, and what are the consequences and
expense in correcting any problems. For example, given the
consequences of an accident, nuclear power plants have
sophisticated control systems that continuously give operational data.



4. Compare performance against standards
This step involves comparing actual performance as measured in step
3, against performance standards chosen in step 2. In this step,
managers usually rely on reports summarising actual vs. required
results. Such reports can be either oral, written or computer
Computer generated reports are best suited for management by
exception, where managers are only made aware of events that show
a major deviation from the expected result. This control system, whilst
effective, can lead to managers focusing only on problems and
ignoring employees positive results.
Managers often compare actual performance and standards by
walking around the workplace and observing behaviour and
procedures, a practice generally known as management by walking
around. Other organisations chose to use 360-degree feedback
systems, which give an individual performance ratings based on
feedback from peers, superiors and customers.
5. 5a Recognise positive performance
If and when performance is higher than expected i.e. exceeds
standards, managers must acknowledge that achievement.
Recognition can be a simple praise such as well done , for an
average outcome, or involve more valuable rewards such as a bonus,
or pay increase, for major successes. This fits in well with major
motivational theories like expectancy and reinforcement, which
propose using rewards for good performance to sustain and even
improve it.
5b Take corrective action as necessary
If performance is too low and standards have not been reached,
managers must decide whether to take corrective action. It is easy to
take corrective action when the reasons for poor performance can be
easily identified. However, there will be times when managers might
decide that the performance standards were set too high (unrealistic),
or that they are inappropriate as environmental conditions have
changed e.g. economic recession.



6. Adjust standards and measures as necessary
Control is seen as a dynamic process, therefore managers must
regularly check standards and related performance measures to
ensure that they are still relevant and applicable to the organisation. A
standard might be unrealistic, in which case it is the standard that
needs corrective action, not the performance. Alternatively, a standard
might no longer be relevant or appropriate, as conditions have
changed and the organisation requires new strategy and goals.
Performing better than the standard can lead to recognition of
unplanned opportunities and the potential to raise the standard and/or
requirement for variations to organisational goals. There may well be
occasions when managers view the attainment of standards as too
costly and decide to reduce the standard. Managers use control to
track performances, but there is a requirement to regularly review the
process to ensure that current organisational needs are met.



Deciding what to control: A closer look

The process of developing strategic plans and subsequent objectives and goals,
also leads to the need to determine which areas to control.
One process to assist managers in deciding what to control is the resource
dependence approach (Green & Welsh 1988). This stipulates that managers
need to consider controls in areas where they depend on others for resources
necessary to achieve organisational objectives. Resources in this context can be
materials, information, service, finance or any other resource required to achieve
stated objectives. However, proof of dependency does not automatically mean an
area must be controlled. There are four conditions that must be met before a final
decision is made. Areas meeting all four conditions are called strategic control
points, these and a related decision tree are shown in Figure 10.4.


resource flows






process costs






Do nothing
to control

Figure 10.4 Resource-dependence decision tree (Green & Welsh 1988)



Four conditions to control

The first two conditions assess the need for control, whilst the next two evaluate
whether controls are feasible and practicable.
The first condition for control is relatively high dependence on the resource. The
more critical the resource is and the less the availability is from other sources, the
higher the dependency on that resource. For example, a McDonalds outlet is
highly dependent on resources such as buns, hamburger meat, containers,
napkins, and cooking equipment. These resources are crucial for the efficient
operation of the store, hence stringent controls are required. Alternatively, if the
resource is relatively unimportant, can be sourced from a number of suppliers or
is easily substituted, then elaborate controls are not necessary.
The second condition for control is a high probability that expected resource flow
will be unacceptable. This is where the manager is unsure about a resource or
anticipates some problems. Anticipated problems can relate to any aspect of the
resource, but generally involves quantity, quality and timeliness. The more a
manager feels a resource will give problems, the more control is required. For
example, for a McDonalds outlet manager it is difficult to stockpile perishable
food items (buns, milk), yet unpredictable customer patterns affect usage, making
food inventory control critical. For other resources like water, supplies are
reliable, therefore stringent control systems are not required.
The third condition for control is control-process feasibility. There are occasions
when instituting control systems may not be feasible. This is often associated
with difficulties in specifying performance standards, measuring actual
performance or to do so in a timely manner.
Finally, an important factor influencing whether to introduce a control process is
cost acceptability. Managers must assess the costs and benefits of control, and if
the control system costs more than the potential organisational gains, then it will
not be instituted.



Alternatives to control
What happens when the first two conditions are met (questions on the left in Fig.
10.4), therefore indicating that controls are necessary, but the process is too
costly or not feasible? Then managers need to develop alternatives to controls.
One way is to change the dependence relationship and hence avoid the need for
control. As previously mentioned, if there are a number of differ rent suppliers
then controls are less needed. For example, because there are limited local
Saudi Arabian suppliers, the Saudi Big Mac consists of Mexican sesame seeds
and onions, Spanish beef patties and lettuce, American pickles and New Zealand
cheese. Managers can also work with a source of dependence to build increased
reliability, therefore reducing the reliance on control measures. McDonalds
achieved this when they assisted Thai farmers in growing Idaho russet potatoes,
the key ingredient in French fries.
Another way to limit the need for control is to change the nature of the
dependence, making it more feasible and/or cost-effective to control. For
example, by redesigning complex jobs to have narrower, simpler tasks, reduces
the dependence on well trained, experienced workers.
Another technique is to eliminate dependence altogether. This can arise from
vertical integration, whereby the organisation manufactures its own resources,
rather than outsourcing them. For example, McDonalds built its own plant in
Britain for the manufacture of hamburger-buns. Changing goals and objectives to
no longer depend on a particular source is another approach.

Types of Controls
Aside from deciding which areas to control, managers must consider which
control types to use. In this section, we discuss the major control types based on
timing, consider multiple control use and compare cybernetic and non-cybernetic
control types.

Major control types by timing

Organisations can be viewed as a system, where inputs are transformed through
some process into outputs. Controls can be classified based on their timing, or
stage in the productive cycle, depending on whether the focus is on inputs,
transformation processes or outputs (see Fig. 10.5). There are three types of
controls based on timing; feed forward, concurrent and feedback.



Feed forward control

The most effective and desirable type of control; feed forward control prevents
anticipated problems from occurring later in the productive process. The name
feed forward control arises from the fact that it takes place before the actual
activity, it is future-directed. It is also called precontrol, preliminary, preventative
or steering control. Inputs that are amenable to feed forward control include raw
materials, people, finances, time and other organisational resources.
Although effective, these controls require timely and accurate information that is
often difficult to obtain, hence managers may use other types of controls.

Concurrent control
As the name implies, concurrent control takes place while an activity is in
progress. The emphasis is on identifying problems in production that could result
in defective output. With this type of control, decisions are made to either
continue progress, take corrective action or stop work altogether.



Feedback control
Feedback control is the most popular type and relies on feedback after the
activity has taken place. Also known as post-action to output control, this type of
control has a major drawback in that by the time the manager has the
information, the damage is already done. There are however a number of
advantages, including providing managers with meaningful information on how
effective the planning process has been. For example, if feedback on the number
of units sold matches or exceeds the standard, this is evidence that the planning
was on target. Feedback control is often used when other controls (feed forward
and concurrent) are not feasible or too costly to implement. Finally, feedback
control can enhance employees motivation by providing information on how well
they have performed.








control regulates
inputs to ensure
that they meet
necessary for

Concurrent control
regulates ongoing
activities to ensure that
they conform to
organisational standards

Feedback control
regulates product or
service after
completion to ensure
final output meets
standards and goals

Figure 10.5 Major control types by timing

Multiple controls
More often than not, organisations use multiple control systems, combining feed
forward, concurrent and feedback control processes with several strategic control
points. Strategic control points, as previously discussed, are performance areas
chosen for control as they are critical in achieving organisational goals.
Many controls have a degree of human discretion, and the level of needed
discretion is another way of classifying control system types.



Cybernetic and non-cybernetic control

Based on the degree of human discretion, a control system can be either
cybernetic or non-cybernetic. A cybernetic control system is a dynamic, selfregulating system that compares actual performance against a standard in order
to minimise or correct deviations from that standard. The simplest example of a
cybernetic control system is the thermostat in a home. By setting the thermostat,
you establish a standard of performance with which actual temperature is to be
compared. Without further intervention, the system maintains the set temperature
by taking corrective action every time there is a deviation. With some
computerised inventory systems, orders are placed when inventory reaches a
specified level, without any human intervention e.g. managerial approval.
A non-cybernetic control system uses human discretion as part of the process.
These systems are useful for areas where failure occurs unpredictably or the
process is complex, therefore requiring human discretion to select the corrective



Managerial Approaches to Implementing Controls

Managers not only chose which control type to use, they also have choices about
mechanisms to put controls in place. There are three managerial approaches to
implementing controls: bureaucratic, clan and market. Think of these approaches
in terms of how control is put into effect whether by bureaucratic rules, the clan
or the market.

Bureaucratic control
Bureaucratic control is control by means of a comprehensive system of rules,
policies, standard operating procedures, supervision, budgets, schedules and
other mechanisms to regulate the behaviour of employees. Results of heavy
bureaucratic control use are shown in Table 10.1. The emphasis is on having a
well-defined, narrow task set, top-down hierarchical control and control sources
being external to the individual.
With bureaucratic control, rules and policies develop in time to handle any
recurring conditions. When unexpected events do occur, managers must decide
on the corrective action required. Managers also monitor to see if employees are
following rules and standard operating procedures.
Bureaucratic control has a number of associated problems. Over reliance on
bureaucratic control can stifle innovation, inhibit change required in times of
rapidly changing environment, and result in employee compliance rather than
commitment. For these reasons, organisations are increasingly using clan

Clan control
Clan control is the control exerted on individuals and groups in an organisation
by shared values, norms, beliefs, standards of behaviour, and expectations.
Results of heavy clan control use are listed in Table 10.1. Compare with
bureaucratic control, clan control places more importance on internal motivation,
flexible and broad tasks, and influence based on relevant information and
expertise rather than hierarchical position.
With clan control, the emphasis is on teams, with responsibility and accountability
residing with that team. Clan control also builds commitment to organisational
objectives, with employees basing their decisions and actions on how to assist
the organisation perform well. For example, an R&D scientist working 80 hours a
week to help speed up a project.



Market control
Market control makes use of market mechanisms to set prices for organisational
resources (goods and services), thereby reducing management need for setting
up elaborate cost control systems. In order to use market control, there must be
competition in the relevant goods and services and organisational needs are
clearly defined. For example, purchasing departments often set specifications for
required goods, then initiate a competitive bidding process. Without specifications
and the tendering process, purchasing officers would have to decide if the offered
prices were reasonable. Controlling costs this way is expensive.
The use of market control is increasing due to outsourcing. Outsourcing is the
process of contracting out a business function that was normally performed inhouse. Areas in which outsourcing is common includes information technology
services, maintenance, and financial services.
Market control often regulates internal operations by setting up profit centres for
service units, such as quality assurance, HR, or IT, then charging other company
functional areas for the services. Generally, market control is ineffective when
precisely specified requirements cannot be set due to uncertain or fluid
circumstances (e.g. Customer needs) or when little or no competition exists on
which to base pricing (e.g. R&D projects).


Bureaucratic control

Clan control

Means of control

Rules, policies and


Shared goals, values and


Source of control

Mainly external

Mainly internal motivation

Job design

Narrow subtasks; doing

rather than thinking

Whole task; doing and


Definition of duties


Flexible; contingent on
changing conditions


Usually individual

Often team


Tall; top down controls

Flat; mutual influence

Power usage

Emphasis on legitimate

Emphasis on relevant
information and expertise


Performing individual jobs

Upgrading performance of
work unit and organisation

Reward emphasis




Less likely

More likely

Likely employee reactions



Table 10.1 Characteristics Associated With Bureaucratic and Clan



Promoting innovation: Controlling while nurturing innovation

A managerial challenge is to be able to control without stifling creativity and
innovation that is required by the organisation for growth and long-term survival.
In this section we consider managers balancing of four strategic control levers to
simultaneously encourage innovation and regulate organisational activities. We
also review

Four levers for strategic control: A balancing act

Mangers have four major levers which they can use for effective control. Together
the levers encourage accountability, enable empowerment and allow for changes
in strategic direction. The four levers are shown in Fig. 10.6, and are generally
associated with planning, but are in fact part of the controlling function of
monitoring strategic directions and taking corrective action as required.
1. Belief systems enable managers to communicate and reinforce an
organisations mission and values. Mission statements inspire
employees and give general direction toward achieving organisational
objectives. Use of belief systems is strongly linked to clan control.
2. Boundary systems define employees acceptable activity territory.
Through the use of policies, rules and procedures, organisations
attempt to reduce the risks that employees will waste time and energy
by setting boundaries to operations. Boundary systems are closely
aligned with bureaucratic control.
3. Performance management systems focus on ensuring that specific
goals are achieved. These systems enable managers to check
progress towards specific objectives and offer means to evaluate and
obtain feedback in relation to achieving set objectives. Performance
management systems are linked primarily with bureaucratic control.
4. Interactive monitoring systems encourage exploration and learning so
that the organisation can identify and take advantage of new
opportunities. Without a focused effort on identifying new opportunities
and developing new strategic competencies, organisations may
simply pursue earlier strategies that are now obsolete or suboptimal
due to changing environmental or competitive factors. To be
successful, these systems rely on all employees at each
organisational level to be continuously challenging and debating data,
assumptions and action plans.




Belief systems

Boundary systems

Core values

Risk avoidance
Policies, rules,

monitoring systems
Critical goals and
Evaluation and

monitoring systems
Opportunity focus
Continuous search
and learning

Figure 10.6 Four levers of strategic control

Incrementalist approach
Generally applicable to innovative project work, using the incrementalist
approach gives control over a process without stifling it. The approach relies on
using clan control but also involves a phased set of plans and accompanying
bureaucratic controls, beginning at a general level and becoming more specific
as the project progresses.
In the early stages of projects, managers set general goals, select key project
people, set critical limits (such as spending) and establish decision points to
check progress towards goals.
At middle stages of projects, technical aspects are generally better understood
and/or market needs are clearer, therefore managers set more critical
performance goals, limits and checkpoints. It is still up to project team members
to decide how to achieve goals, within the prescribed limits and checkpoints.
During the later more innovative stages, managers may set more concrete
controls to accompany more specific planning.
The incrementalist approach means managers must attempt to strike a balance
between control approaches to encourage innovation, otherwise innovation is
stifled, thereby inhibiting long-term organisational effectiveness.



Assessing Control Systems

Control systems are implemented to monitor performance, shape behaviour or
facilitate innovation, but managers need to assess the systems to ensure they
get expected results. In this section we consider the potential dysfunctional
aspects of control systems. If any of these are present, the control system
requires adjustment. We also review over control and under control, and examine
the checking characteristics of effective control systems.

Potential dysfunctional aspects of control systems

Not all control systems that are implemented result in positive outcomes. Poorly
designed and/or excessive controls may produce one or more major
dysfunctional side effects: behavioural displacement, game playing, operating
delays or negative attitudes.

Behavioural displacement
Behavioural displacement occurs when employees engage in behaviours that are
encouraged by control and reward systems, but these behaviours are not aligned
with organisational goals. Displacement has three basic causes: poor analysis of
relationship between controls and desired outcomes, overemphasis of control
measure quantification when qualitative aspects are important , and emphasising
activities rather than end results.

Game playing
Game playing occurs when managers improve their performance by manipulating
data and/or resource use, but do not actually achieve any performance
improvement. Manipulating data means falsifying performance data or influencing
performance results during data reporting. Manipulating resource usage means
obtaining more than required resources so that objectives are easily reached or

Operating delays
Operating delays may result from actions needed for feed forward and concurrent
controls. If these are excessive, goal attainment is stifled. For example, in a
diversified corporation, 74% of general managers reported getting expenditure
approvals after money had been spent.



Negative attitudes
Controls can lead to negative attitudes, especially if the controls are seen as
excessive or are poorly designed. Professionals in general will resist controls, in
particular they oppose bureaucratic controls that do not seem to help
organisational goal attainment.

Overcontrol versus undercontrol

Overcontrol is eliminating job autonomy to the point where it negatively impacts
on job performance. Managers must not over control, but conversely they should
not go too far the other way, resulting in undercontrol. Undercontrol is granting
an employee autonomy, to the extent that managers cannot direct their efforts to
achieve organisational objectives.

Characteristics of an effective control system

Effective control systems have a number of common characteristics. In order to
assess the effectiveness of existing or proposed control systems, these attributes
can be used as a checklist of essential features.

Future oriented
Well-designed control systems must focus on controlling future events, not fix
blame for past ones. Effective control systems give managers information
regarding progress toward objectives, highlighting where future corrective action
is required, and unearthing unexpected development opportunities.

Effective control systems must be multidimensional in order to capture major
performance issues. For example, most manufacturing companies would be in
trouble if the focus was only on quantity, and not taking into consideration quality,
scrap rate and overheads.

The costs of any effective control system are important, where the benefits must
outweigh the costs. For example, McDonalds company manual specifies the
cleaning frequency of the rest-rooms, and both the manager and company
inspection teams are responsible for checking this. McDonalds could control
cleanliness more if there was one dedicated person in each outlet, cleaning the
rest-room. However, in this case the costs of more control may be greater than
the benefits, as McDonalds reputation for cleanliness is already very good.



Accuracy is crucial for a control system, as the information is used for deciding
on future actions. In fact, inaccurate control data is worse than no data, as poor
management decisions may be the result from such data.

Effective control systems must be seen to have realistic expectations of what is
achievable, otherwise employees will be demotivated and can ignore it or even
sabotage it.

Control systems give information regarding production cycle or process data at a
specified time. For example, data may be in a monthly sales report, a daily
production report, or from a production lines daily quality inspections. In order
that managers and employees respond to and rectify problems promptly, control
systems must yield data in time for corrective action.

Control systems must be easy to monitor to ensure that performance is to
standard. One technique to check a control system is to introduce an
imperfection, such as a defective part, and see how long the control system takes
to detect and report to the correct person. Other techniques for monitoring control
systems includes various kinds of audits.

Acceptable to organisation members

Control system are more effective when they are accepted by the affected
employees, otherwise they may ignore and even undermine them. Employees
will be more accepting of control systems that focus on major issues compatible
with organisational goals, give an accurate assessment of employee
performance, and when data are used for improvement.

As organisations need to be flexible and adapt to an ever changing environment,
control systems must also be able to meet new or revised needs. Consequently,
effective control systems must be able to adapt quickly to measure and report
new information and track new activities.

Chapter 11
Change &


School of Business Services

Faculty of Workforce Development



The Nature of Change in Innovation
This chapter examines the concepts of innovation and change and the major
forces pushing change and innovation in organisations.

What is Change?
Change can be defined as the alteration in people, structure or technology.
Change usually involves minor changes to the production process, to improve
efficiency, or changes to the accounting system to save time and money.
Change can also involve big changes in the organisation including changing the
organisations structure, reducing costs and staff, reducing production time,
retraining the remaining workforce, and getting greater input from suppliers and

What is Innovation?
Innovation involves radical breakthroughs (mobile phones) and small
improvements (bluetooth).
Innovation includes:

Uncertainty progress and results hard to predict

Knowledge intensive- during the developmental stage

Controversial resources for innovation can be used in another

Cross boundaries and increase complexity development and
implementation involve more than one business unit
Organisations use change management to innovate and respond to global and
domestic pressures to achieve competitive advantage. The Apple Corporation
introduced a range of products that not only have captured large market share
but increased sales for existing products.



Forces for change and innovation

Forces for change can be exerted within the organisation e.g. Change of
management. As well as external factors e.g. changes in technology or consumer
lifestyles (Table 11.1).
External Forces

economic and financial exchange

rates, interest rates, inflation, oil prices

technological automation, cybernation

Internal Forces

strategy plant and machinery,

workforce, management practices,

political laws and

regulations(taxation, health and safety

structure bureaucratic, virtual,

boundary less, matrix

systems information, open, closed

social changes in consumer


people attitudes, rewards,

motivation. productivity

competitors changes in products,

prices, access to raw materials

tasks/jobs design, resources, training

technology automation,
computerisation, efficiency

Table 11.1 External and Internal forces affecting organisations



The Change Management and Innovation Process

Reactive and planned change
Reactive change when a business takes action after experiencing problems,
threats or opportunities.
Planned change- involves actions based on a plan to manage problems, threats
and opportunities in the future.
Managers will achieve change and innovation more effectively if they follow the
process outlined in Figure 11.2 (Kotter 1995; Zaltman et al. 1973; Maidique
1980). The process has eight basic steps.
1. Recognise an opportunity or a problem thinking about changes
and innovations begin when someone sees a problem situation or an
2. Line up powerful supporters powerful supporters push change
and innovation and influence others to form a change and innovation
3. Develop and communicate a vision - develop a vision of the future
that is communicated easily and is understood by supporters of
change and innovation (Ettorre 1995).
4. Give employees the power to act out the vision - managers must
encourage employees to create the vision by removing barriers that
can block the change.
5. Prepare to overcome resistance employees may not want change
so listen to their objections and give them positive reasons for the
6. Plan for and reward any progress- celebrate, recognise and reward
employees for making changes to achieve the vision (Fisher 1995).
7. Consolidate improvements and facilitate further change. It is easy
to stop after finding clear improvements; however, change needs to be
8. Monitor and institutionalise changes - Reward new behaviours and
connect them to company success so change and innovation become
the accepted culture of the company (Ettorre 1995). Innovative firms,
such as 3M and Hewlett-Packard, build innovation cultures as part of
their competitive advantage.



Gain recognition
Of the problem
or opportunity

Monitor and

Line up

Develop and
communicate a

and facilitate

Plan for and

reward visible

Give power
to employees
to act out the


Prepare to

Figure 11.2 The change management and innovative process

Organisational Development
Organisational development (OD) is an internal change effort directed at
improving organisational:
Interpersonal working relationships and organisational
effectiveness through strategies using a change agent who is well
versed in behavioural sciences (Beckhard 1969; Beer 1980; Kinicki &
Williams 2003).
The change agent, or consultant, and acts as a catalyst to help
people and groups approach old problems in new or innovative ways.
The agent may be an external consultant, a company OD
specialist, a new manager, or one able to look beyond the traditional.
OD is aimed at improving work relationships and, as such, OD efforts are
strategies used to manage people through change. OD has three major steps:
diagnosis, intervention and evaluation (see Fig. 11.2) (French & Bell 1978; Huse
& Cummings 1985; Mohrman, interventions Mohrman, Ledford, Cummings,
Lawler & Associates 1989).



What are change agents responsible for?

They are responsible for:
communicating the changes that have occurred and the
organisations response to them (unplanned change), and the
changes that need to occur if the organisations goals are to be
achieved ( planned change)
managing the activities that will lead to the necessary change as
a response or as a strategic move

-assessing values,
beliefs and norms
and data collection

physical setting
and people

-analysis and


Figure 11.2 The organisational development process

The first step, involves diagnosing, the beliefs, values and norms (rules)
members share that may affect the introduction of change. Change agents, and
the human resources department collect data using interviews, questionnaires,
employee-behaviour observation and internal documents and reports (Reibstein



What Can Change Agents Change?
Change agents can make changes in four areas:
1. Changing Structure
Changing structure involves making an alteration to one or more
structural components or even a major change to the structural design
of the organisation. An organisations structure is defined in terms of its
degree of complexity, formalisation, and centralisation. Change agents
can combine departmental responsibilities, spans of control can be
widened and new rules and procedures can be implemented. In
addition the structure can be changed from a simple design to a
matrix design, and jobs and job schedules can be redesigned.
2. Changing Technology
Changing technology encompasses modifications in the way work is
processed and the methods and equipment used. New equipment,
tools and operating methods, computerisation, and automation, could
be introduced to increase efficiency.
3. Changing the Physical Setting
The physical setting encompasses a redesign of the workplaces
physical environment in order to increase productivity. By eliminating
walls, and partitions and opening up an office design, making it easier
for employees to communicate with each other. As well interior design
changes to furniture, decorations and colour schemes can be made.
4. Changing People
People change refers to changes in employee attitudes, skills,
expectations, perceptions, and/or behaviour. These will have to be
done through communication, decision making and problem solving.
The consultant gives employees insight into what is happening around
or within and between them and other people. The consultant helps
employees to identify processes that need improvement, and then
provides guidance and assistance to help them solve their own

The ability to evaluate OD intervention effects depends on how well the diagnosis
identified areas for change -structure, technology, physical setting, people - and
specified results desired after the changes were implemented.



Managing Change
Having looked at the reasons why change and innovation are needed, and how
organisational development can facilitate change, this section will look at the real
challenge in effectively implementing change within the organisation and how to
manage the process of change.

Diagnosing the need for change

To manage change effectively, managers must be aware of a need for change. A
clever manager will collect information inside the company and outside the
company to understand what customers want. Many factors influence an
organisation's need for change and these can be internal and external (refer to
Fig. 11.3).



External change

internal change







Figure 11.3 - Internal and external factors influencing need for change in organisations



The change cycle

Effective organisational change starts with management realising that the
organisation is not performing. Having identified a performance gap, managers
identify a need for change. Then they act, building an environment that enables
the organisation to accurately diagnose the problem, develop alternatives for
resolution and select the best one of these. The change cycle then requires this
alternative to be implemented, followed by more measurement and evaluation to
see if the desired outcome has been reached This leads to further performance
evaluation and the cycle starts again (see Fig. 11.4). In fact, the cycle should be
continuous if the organisation is to be proactive, not reactive.

Figure 11.4 The change cycle



Identify a
desired future

Need for

Selection of




Managing Resistance to Change

Employees often resist changes to their working conditions. Employees need to
be motivated to accept change and managing resistance to change requires an
understanding of employees motivation. Employees will oppose change even
though they benefit from the change.

Why individuals resist change

Habit - changes in routine e.g. waking up 1 hour earlier, adjusting
to a new office layout, developing a new lunchtime routine.
Security - threat to the feeling of safety e.g. employees fear of
losing their jobs when change is announced
Economic Factors - fear of loss of pay, inability to perform new
Fear Of The Unknown - replacement of the known with ambiguity
and uncertainty e.g. introduction of new equipment,
Selective Information Processing - ignorance of information that
challenges the world they have created e.g. ignoring the benefits of
the new equipment, processes/procedures and focussing on the
negative aspects i.e. more paperwork, retraining, no extra pay for the
extra trouble.

Overcoming resistance to change

Three-Step Model
The three-step model of Planned change consists of unfreezing the company
culture to bring in a new culture, creating a new culture and refreezing the new
culture to make it permanent. (see Figure 11.5). In the 1950s Kurt Lewin offered
a model for change that consisted of three stages:
Unfreezing resistance to the planned change, which comes
about as the result of insecurity, lack of expertise and knowledge, and
alienation from the decision making process which will change their
lives/working lives.
Implementation Giving the workforce the training, knowledge,
skills and resources to overcome resistance and master the change.
Refreezing Once trust is established between management and
employees, and the employees know exactly what the changes will be
and the implications for them and their future in the company, and



evaluations have been made to ensure that the right decisions have
been made and the directions, strategies are the right ones or can be
changed in the future, then the refreezing process commences to
consolidate the changes.

Force-field analysis
To overcome resistance to change and help unfreeze, managers can use forcefield analysis. As part of the change approach developed by Kurt Lewin, this
involves analysing two types of forces, driving and restraining forces, that
influence proposed change, and assessing how to overcome resistance.
Driving forces are factors pressuring for a change, where
restraining forces are factors pressuring against a change.
The two forces push in opposite directions, so balancing each
other and providing a picture of current conditions, in the company.
To change these conditions, driving forces can be increased,
restraining forces decreased, or both.
Managers generally try to increase driving forces but Lewin feels
this will produce a balancing increase in resisting forces ,
A successful change is more likely if they work to reduce
restraining forces (Lewin 1951; to overcoming conflict between the
two forces.
Xerox faced serious overseas competition and worked to halve manufacturing
costs at its operations near Rochester, New York. Subcontracting wiring
harnesses was planned to lower costs and cut about 150 jobs. Union leaders
wanted to save jobs and as company-union relations had been good historically,
union leaders met managers to assess ways to keep the harness work in plant.
Figure 11.5 shows a force-field analysis of major driving and restraining forces
maintaining a status quo characterised by costs too high for Xerox to effectively
compete. The wider the arrow, the stronger the force. Union leaders suggested
relaxing rules so workers could make minor machine repairs rather than wait for
maintenance staff to fix them. Union leaders and management studied how to
save money, finally eliminating six paid days off, making medical insurance cuts
and developing ways to control absenteeism. In return, no layoffs for three years
was promised. By working on restraining forces, firm and union could agree on
changes leading to lower plant cost levels without contracting wiring harness
work out (Kirkpatrick 1986).



Driving forces for change

Restraining forces for change

Historically good

Poor company
Union relations

foreign competition
strict work rules
recent company
current employee
benefits costs
cheaper sources
available outside
current pay costs
union desire to
save jobs
employee absentee
company unwilling
to eliminate jobs
company desire for
flexibility in job cuts

Figure 11.5 Force-field analysis of the forces maintaining high cost level at Xerox plant

I n addition to the force field analysis managers can adopt other methods to
overcome resistance to unfreezing. Table 11.2 summarises these options and
situations in which an approach is commonly used and the advantages and
disadvantages of each





Commonly used in



Education and

Where there is a lack of

information or
inaccurate information
and analysis

Once persuaded
people will often help
with implementation of
the change

Can be very timeconsuming if lots of

people are involved

Participation and

Where the initiators do

not have all the
information they need
to design the change
and where others have
considerable power to

People who participate

will be committed to
implementing change
and any relevant
information they have
will be integrated into
the change plan

Can be very timeconsuming if

participators design an
inappropriate change

Facilitation and

Where people are

resisting because of
adjustment problems

No other approach
works as well with
adjustment problems

Can be time-consuming
and expensive and still

Negotiation and

Where someone or
some group will clearly
lose out in a change
and where that group
had considerable
power to resist

Sometimes it is a
relatively quick and
inexpensive solution to
resistance problems

Can lead to future

problems if people feel

Manipulation and

Where other tactics will

not work or are too

It can be a relatively
quick and inexpensive
solution to resistance

Can lead to future

problems if people feel

Explicit and implicit


Where speed is
essential and change
initiators possess
considerable power

It is speedy and can

overcome any kind of

Can be risky if it leaves

people angry with the

Table 11.2 Methods of Overcoming Resistance to Change



Managing Conflict
Organisational conflicts within and between groups are common. By conflict we
mean a perceived difference between two or more parties resulting in mutual
opposition. Conflict can involve three levels:

within the person (intrapersonal);

between a person and an organisation; and

between organisational groups.

Conflicts between individuals and organisations

In the interests of efficiency and effectiveness, organisations use scientific
management - task specialisation, unity of command and formalisation- to make
standardised products with people whose work is regulated. Many job structures
conflict with a healthy personality's basic growth needs. Several factors
determine the degree of conflict and when conflict occurs employee responses to
Degree of conflict

Employee responses to conflict

Conflict will be strongest with:

When conflict occurs, employees must

choose to:

very mature employees

highly structured organisations
formalised rules and procedures
fragmented and mechanised jobs.

leave the organisation or work to climb

into upper management; .
use defence mechanisms to defend
their self-concepts;
psychologically dissociate themselves
from the organisation (e.g. lose interest
in their work or cut their standards);
concentrate on the organisation's
material rewards
find allies among other workers and all
adapt by use of quota restrictions,
strikes and sabotage.

Table 11.3- Degree of conflict and employee responses to conflict



Conflict is generally seen as negative, its results can be either constructive or
Destructive conflict occurs when people or groups become angry,
withhold information and resources and block each other's efforts.
Projects can be delayed, costs rise and valued employees can be lost.
Constructive Conflict involves looking at problems and finding
solutions and promoting change. Resolving problems together raises
morale and cohesion, as members deal with concern and frustration.
Conflict can stimulate interest, creativity and innovation,
encouraging new ideas (Tjosvold 1984). This led to Harvey Norman
adopting strategies such as locating stores close to railway stations,
and allowing staff to give discounts to older Singaporean shoppers
who tend to shop with cash when they expanded into Singapore
(Roberts 2003c).

Conflict is useful, but too much can hurt organisational performance as energy is
wasted on negative behaviour (Fig. 11.6). Very low conflict levels may mean
problems are hidden and new ideas stifled. Therefore, managers must
understand the causes of conflict, how to reduce or resolve it and, as needed,
how to stimulate it positively.

Group performance

high optimal level of conflict


Figure 11.6 Effects of conflict on group performance




Causes of conflict
Many factors contribute to conflict (Walton & Dutton 1969; Robbins 1983).
Several are discussed below.
Poor communication - barriers such as prejudice, selective
hearing, and preconceived opinions as well as lack of empathy, an
inability to listen actively, poor summarising skills and lack of
Fear of what we might lose including (face) can cause us to take
an aggressive position and increase conflict
Differences in values for example coming to work, attending
meetings completing work on time can conflict with employees who
are often late for everything.
Disagreements over matters of content for example who said
what, over policies, plans and priorities.
Disagreements over perceptions for example who knows best,
who has authority, whos responsibility its is to complete a job.
Differences in goals, wants, needs expectations and clashes of
personality lead to conflict
Competition for limited resources or the allocation of greater
resources to a particular department can cause conflict.

Benefits of Positive conflict and Consequences of Negative

Benefits of positive conflict
Conflict that is dealt with in a positive and assertive manner can:

Clarify misunderstandings

Encourage open communication

Prevent future conflict

Increase job satisfaction



Open and
and ongoing
brings out
out true
true thoughts
thoughts and



Increased efficiency
efficiency and
Problems handled
handled creatively
creatively and

Respect for
for each
each others
others interests
High level
level of
of trust

Conflict identified
Win-win focus

Figure11.7 Benefits of positive conflict



Consequences of Negative Conflict

Makes the problem worse

Breeds mistrust

Stops communication

Decreases productivity

Only when
when necessary
Hidden agendas



Decreased efficiency
efficiency and
Priorities on
on urgent
urgent rather
rather than
important issues

Based on
on fear
fear and/or
and/or power

Emphasis is
is on
on self,
self, not
not on
on the
Can lead
lead to
to acute
acute physical
physical and
psychological illness

Figure 11.8 Consequences of negative conflict



Skills to resolve conflict





planning strategy to solve the conflict

analysis elements of the conflict
judgement the best way to approach the conflict
perception looking at the problem clearly
objectivity separating people from the conflict


persistence - focussing on the conflict

self-discipline - controlling emotions
result-orientation - controlling feelings
assertiveness - stating position but willing to negotiate
enthusiasm- optimistic about resolving the conflict


sensitivity-to needs of both parties in conflict

persuasiveness - ability to convince other party
communication fluency, humour, understanding


ability to:

motivate reward, keep promises, provide incentives

delegate trust, support, and encourage responsible
provide guidance advise, mentor, develop

Table 11.4 Skills required by managers to resolve conflict



Five Interpersonal conflict handling Methods

Managers can also use one or a combination the five major interpersonal
methods/styles to reduce or resolve conflict (Thomas 1977; Reitz 1987).


1. Avoidance

Ignoring a conflict and hoping it will go away or not

become too disruptive.

2. Accommodation

Allowing the person/group in the conflict to have their

way instead of resolving the conflict

3. Competition

Attempts to win a conflict at the other party's expense. In

other words, one party wins and one loses.

4. Compromise

all parties give up some desired outcomes to get others.

bargaining by parties offering all a chance to improve
their position or at least be no worse off after resolving
the conflict.
each wins some major issues and loses others.

5. Collaboration

resolves conflicts by devising solutions allowing all

parties to reach outcomes that let them win at least their
major issues.

Table 11.5 five Interpersonal conflict handling Styles

Though it is tempting to see some conflict-management styles as more effective

than others (for example, collaborating versus avoiding), there will be situations in
which each mode will work best. Table 11.6 summarises the situations in which
each conflict handling style applies as reported by 28 chief executives.



Conflict handling style

Appropriate Situation







When quick decisive action is vital; e.g. emergencies

On important issues where unpopular actions need
implementing; e.g. cost cutting, enforcing unpopular rules,
On issues vital to company welfare when you know you are right
Against people who take advantage of non-competitive
To find an integrative solution when both sets of concerns are too
important to be compromised
When your objective is to learn
To merge insights from people with different perspectives
To gain commitment by incorporating concerns into a consensus
To work through feelings which have interfered with a relationship


When goals are important but not worth the effort or potential
disruption of more assertive modes
When opponents with equal power are committed to mutually
exclusive goals (
To achieve temporary settlements to complex issues
To arrive at expedient solutions under time pressure
As a backup when collaboration or competition is unsuccessful



1 .When an issue is trivial, or more important issues are pressing

When you perceive no chance of satisfying your concerns
When potential disruption outweighs the benefits of
To let people cool down and regain perspective e
When gathering information supersedes immediate
When others can resolve the conflict more effectively I
When issues seem tangential or symptomatic of other



When you find you are wrong, to allow a better position to be

heard, to I learn, and to show your reasonableness
When issues are more important to others than to yourself, to
satisfy others and maintain cooperation
To build social credits for later issues
To minimise loss when you are outmatched and losing
When harmony and stability are especially important
To allow subordinates to develop by learning from mistakes



Source: Adapted from Thomas (1977)

Table 11.6 Chief Executives Advise - How To Use The Five Conflict Handling



Managing intergroup conflict through resolution

Organisations are made up of departments, divisions, strategic business units.
Often there is conflict within these groupings even though staff in each of these
groups are trying to achieve the same goals. As managers must live with
intergroup conflict, they must confront the management of these conflicts. (refer
to table 11.7)




Resolution process

Problem solving

Expansion of




Confrontation and

face-to-face meetings between parties to identify conflicts and

resolve them
groups openly debate issues and gather all relevant
information until a decision is reached
willing to work collaboratively to an integrative solution,
satisfying the needs of all concerned.
greatest obstacle is the win-lose mentality characteristic of
conflicting groups.
major cause of intergroup conflict is limited resources
resource e.g. a position, money, space
one group gets resources and other groups do not
focuses on common interests of conflicting groups and
ignores differences.
achieving goals by stressing common interests
smoothing (avoidance) is a short-term answer.
may lead to low- quality decisions
rules, regulations and formal authority are used to resolve or
suppress conflict
does not change attitudes and treats only the immediate
an effective short-term solution if agreement cannot be
encouraging some communication between departments in
conflict to stop the development of misperceptions.
when conflict is severe, controlled interaction helps resolution.
the technique is most effective when decision-making and
interaction rules are clear.
this method may not help with attitude change.
bringing conflicting parties together to solve their problems
the bargaining process during confrontation, allowing parties
to reach a solution.(negotiation)
if members can resolve conflict through face-to-face
discussions, they often find new respect for each other,
confrontation succeeds with a win-win strategy, if negotiations
develop into a win-lose strategy confrontation fails

Table 11. 7 Methods and suggested resolution process



Intergroup training
Another conflict-reduction strategy is intergroup training. For this, members
attend a workshop away from their normal work place. The technique is
expensive, but can bring attitude change.
Intergroup training involves the following steps:
1. Groups in conflict are invited to a big room with the stated goal of
exploring perceptions and relationships.
2. The groups then go into separate rooms and each discusses and lists
its perceptions of the other group.
3. Groups come together again and group representatives describe
perceptions while members listen. The objective is to report accurately
to the other group each groups private images.
4. Groups return to their separate rooms to consider the information;
they note a gap between self-image and the other group's report.
The next session seeks to analyse causes for these differences in the
groups' reports. Each group talks about its behaviour to the other
group and the possible consequences of that behaviour regardless of
5. Representatives of each group publicly share differences identified
and possible reasons for them, focusing on actual, observable
6. The two groups then try to identify reasons why they created wrong
impressions of each others behaviour
7. The groups then look at ways to manage future relations to minimise
conflict. After this process, understanding is improved and improved
working relationships result.



The Relationship Between Change and Conflict

Change is a process which has several sequential stages however we are often
unaware of the stages. Because we are not aware of these stages, we are
uncomfortable with change. How we feel about change depends largely on the
part we play in it (refer to figure 11.9). Change involves going from the known to
the unknown. This uncertainty makes us anxious and this anxiety leads to
Change (to us)



Change (by us)

joyexcitementfun pride in



the change
Figure 11.9 Personal responses to change

Types of intergroup conflict

Intergroup conflict can be both positive and negative. Management should only
stop conflict that prevents the organisation from achieving its goals. Some conflict
may be beneficial if used for change or innovation. The management of conflict
then is important. Conflict can be defined in terms of the effect it has on the
organisation - functional or dysfunctional.
Functional conflict

Dysfunctional conflict

Increases information and ideas

High conflict

Encourages innovative thinking

Tension, anxiety, stress

Unshackles different points of view

Drives out low conflict tolerant people

Reduces stagnation

Reduced trust

Poor decisions because of withheld or

distorted information

Excessive management focus on the


Low conflict

Few new ideas

Poor decisions from lack of innovation

and information


Business as usual



Types of changes in groups in dysfunctional conflict

Changes occurring during intergroup conflict are the following:
1. Group identification is strong when members share a common
mission or purpose. Members see their group as separate and distinct
from others. Pride develops and there are signs of the 'we feelings'
characterising an in-group.
2. The presence of another group invites comparison and members
prefer the in-group tithe out-group.
3. A group perceiving conflict with another group becomes more tightly
knit. Members present a solid front to defeat the other group. The
group tends to become more formal and accepting of a leader's
autocratic behaviour.
4. Members tend to see other groups as enemies, not neutral objects.
5. Members feel superior, overestimating their own strengths and
6. Intergroup communication decreases. If it does occur, it is
characterised by hostile negative statements, with group members not
listening or giving credibility to the other group.
7. Members lose cohesion when a group loses a conflict. Member
tension and conflict increases in the group and a scapegoat is sought
to blame for the failure.
8. Conflict, changes in perception and hostility are not abnormal. They
are natural, occurring when members are healthy and well adjusted.

Changing views on conflict

The image of conflict has changed. Up to the mid-1940s, conflict was seen as
harmful and unnecessary, distracting managers and using up energy and
resources. Conflict was also thought to come from poor management and
troublemakers who could be removed using effective management techniques.
Today, conflict is seen as necessary for high organisational performance. Conflict
can be harmful but some forms of conflict encourage the development of new
tactics and strategies, to give companies a competitive edge. The view today is
successful conflict management, not conflict elimination.
Successful conflict management involves maintaining a specific conflict level and
selecting a conflict-reduction strategy. Managers may also consciously create



Stimulating conflict
Constructive conflict can be generated in many ways (Robbins, 1983):

including people from diverse backgrounds or

inviting members to discuss the need for change by

communicating information.

encouraging internal competition

Management of change and conflict is an organisational coordination process.

Managers must promote cooperation among people and work groups of many
sizes using:
Self-control - the manager must be aware of personal involvement
in the issue and be objective
Perceptual objectivity - managers must be able to view an event from many
perspectives at once and distance themselves from emotional involvement.

Chapter 12


School of Business Services

Faculty of Workforce Development



The Nature of International Management
International business is profit related activities between different countries. This
includes supplies from other countries, products or services sold to customers
abroad and money transfers from one country to another.
International management is the process of planning, organising, leading and
controlling in organisations which are involved in international business.

Organisations involved in international management

These may vary in size and the extent to which they are engaged in international
A multinational corporation (MNC) is a firm engaged in production or service
activities through subsidiaries in other countries, controlling their policies and
managing form a global perspective. Managers allocate resources and
coordinate activities to achieve the best outcome for the business.
An increasing number of middle sized and smaller companies also conduct
international business.

Orientations to international management

A home country is where an organisations headquarters is located, while a host
country is a foreign country an organisation does business in.
Ethnocentric orientation (home country) is an approach to international
management where executives assume practices that work in the home country
must necessarily work elsewhere.
Polycentric orientation (host country) is an approach to international
management where executives believe the parts of the organisation located in a
given host country should be staffed as far as possible by local individuals.
Locals are seen to know their own culture, language, laws and markets best.
Subsidiaries are pretty independent but tied to the parent company by financial
Regiocentric orientation (regional) is an approach to international
management where executives believe geographic regions have things in
common that make a regional focus an advantage. Problems related to the
region are best solved within the region. There can be regional headquarters
dealing with issues in the region. The world headquarters will concentrate on
global strategy, research and development and long term financing.
Geocentric orientation (world) is an approach to international management
where a global view is taken regardless of host or home country origin. This view
should be used to solve company problems anywhere in the world.



Assessing the International Environment

The challenge of international business is to understand a broader set of
environmental factors than met in a strictly domestic business.

Environmental areas
Understanding the external environment helps us understand the nature of
international management.

The Economic Environment

Various countries economic systems and other economic factors influence a
companys ability to operate internationally. Countries fall into two main groups
based on the level of economic or industrial development
Developed countries- These have high levels of economic development.
Australia, Canada, USA, EU countries are some examples.
Less developed countries (LDC s)-These are relatively poor nations with low per
capita income, little industry and high birth rates
Newly industrialised countries (NICs)- As above but these countries are emerging
as major exporters of manufactured goods. Examples are Malaysia and Thailand.
Infrastructure-Deciding to conduct business in a given area depends on adequate
infrastructure such as roads, railways, airports, communication networks, housing
and many other economic and social amenities.
Balance of payments- This is the account of goods and services, capital loans
and other monies entering and leaving a country
Exchange rate- The exchange rate can affect export prices and import prices and
it needs to be considered as a vital part of international management strategy as
it can influence profits in a positive or negative way.
Some firms in particular are extremely vulnerable to changes in
the economy.
Consumers tend to put off buying a new car, going out to eat, or
building new homes in bad times. In contrast, in good times, firms
serving those needs may have difficulty keeping up with demand.
Disposable income is affected by wages, unemployment, interest
rates and dividend rates as well as taxation.
Availability of credit and wealth will also affect peoples ability to
Current economic conditions have a broad impact on the
marketing activities of an organization and understanding these forms
the basis of this subject Business Environment.

Competitors often threaten to take away markets from firms.

For example, Japanese auto manufacturers became a serious

threat to American car makers in the late 1970s and early 1980s.
While competition may be frustrating for the firm, it is generally
good for consumers.



Competition today is increasingly global in scope.

Political/Legal Factors:
Businesses are very vulnerable to changes in the political
Governments are involved in setting the guidelines within which
business will operate and will pass laws and regulations that business
must adhere to. Government for regulation and control may target
certain industries. eg alcohol, and tobacco.
Currently, the desire to avoid aiding the enemy may result in laws
that make it more difficult for firms to export goods to other countries.
Governments may impose restrictions on trade for political
reasons. eg USA and Cuba have no official trade for political reasons.
Firms are vulnerable to changing laws and changing
interpretations by the courts.
Firms are significantly limited in what they can do by various laws
some laws, for example, require that disclosures be made to
consumers on the effective interest rates they pay on products bought
on instalment.
A particularly interesting group of laws relate to antitrust. These
laws basically exist to promote fair competition among firms.
Collusion: Firms may not conspire to fix prices (agree that they
will not sell below an agreed upon price) or reduce services.
Market share: Firms which have an unacceptably large market
share may be broken up by court order so that many smaller firms
will be around to compete. (This is what happened to AT&T, and at
times, Microsoft has been worried about this prospect).
Laws and regulatory bodies in Australia such as the Trade
Practices Act and the Australian Competition and Consumer
Commission (ACCC) are used to regulate business and protect
consumers so the business needs to be aware of relevant laws in their
own country as well as internationally.



Social/Cultural/Demographic Factors:

Changes in customs or demographics greatly influence firms.

This includes attitudes, values, norms, beliefs, behaviours and

associated demographic trends characteristic of a geographic area.
Power distance is the degree to which individuals in a society
accept differences in power differences as normal.
Uncertainty avoidance is the extent to which members of a society
feel uncomfortable with and avoid situations they see as unstructured,
unclear or unpredictable.
Individualism/collectivism involves the degree to which individuals
concern themselves with their own interests and those of the
immediate family, as opposed to larger group interests.
Achievement-nurturing orientation is the extent to which a society
emphasises values such as assertiveness, competitiveness and
material success, rather than passivity, cooperation and feelings.
Long-term/short-term involves the degree to which members of a
society value thrift, and goal persistence rather than ling for the
present moment and maintaining personal stability and happiness.
Fewer babies today are being born, resulting in a decreased
demand for baby foods. More women work outside the home today,
so there is a greater demand for prepared foods. There are more
unmarried singles today.
This provides opportunities for some firms (e.g., fast food
restaurants) but creates problems for others (e.g., manufacturers of
high quality furniture that many people put off buying until marriage).
Today, there are more blended families that result as parents
remarry after divorce. These families are often short of money but
may require duplicate items for children at each parents residence.
Social , cultural and language need to be considered in
international trade.



Technological factors:
Changes in technology may significantly influence the demand for
a product.
For example, the arrival of the fax machine was bad news for
Federal Express (mail delivery/courier company). The Internet is a
major threat to travel agents.

New markets can be created with new technology.

Competition may require investments in technology to remain


International Strategic Issues

Many international firms engage in long term planning over a 3-7 year time
frame. However initial efforts operating in other countries may focus on narrower
goals rather than becoming a fully fledged multinational corporation.

Methods of International Entry

A business will decide on the best strategy for entering an
overseas market after a detailed assessment of the target market and
an honest analysis of the products competitive advantage.
There is no blueprint for entering an overseas market, but
businesses need to create a strategy to match their strengths and
needs, and their target markets strengths and needs. The lowest level
market entry strategy is reactive.
1. Direct Exporting
This is manufacturing in existing locations and transporting into new markets
Many manufacturing firms begin their global expansion as exporters and only
later switch to another mode for serving a foreign market. Direct sales is an
example where a business fills orders from individuals, for example, web sales
This entry strategy can be appropriate for micro and start-up businesses.
It may involve the use of an agent, export merchant or distributor.
1. Export agent
A foreign individual or company legally authorised to act for the
Australian business but does not purchase its goods outright
2. Export merchant
An Australian firm sells goods or services to the merchant based in
Australia who in turn sells these goods or services overseas.
3. Distributor



An individual or company that buys and keeps a firms products and
sells them directly to buyers in the foreign market.
2. Turnkey Projects
Setting up a new plant ready for operation The contractor agrees to
handle every detail of the project for a foreign client, At completion of
the contract, the foreign client is handed the "key" to a plant that is
ready for full operation--hence, the term turnkey.
4. Joint venture
A form of business partnership involving joint management with a
foreign partner with both sharing the risks, profits and costs. A
separate company is set up. This has been a common form of market
entry in China.
5. Licence
A firm licenses some or all of its intellectual property (patents,
trademarks, brand names, copyrights or trade secrets) to a foreign
firm for manufacture for royalty payment.
6. Franchise
The owner (franchiser) allows a foreign firm (franchisee) to develop a
business, use its brand names, logos and operating techniques for
royalty payments and provide on-going assistance, e.g. McDonalds,
7. Wholly Owned Subsidiaries
100% ownership in an operation in a country eg Ford Australia. The
firm can either set up a new operation in that country (Greenfield
investment) or it can acquire an established firm.
8. Strategic Alliances
The term strategic alliance refers to cooperative agreements between
potential or actual competitors. Eg Mazda and Ford share technology
to produce the same car but a different brand that will compete with
each other.



Multinational corporation strategies

As firms expand internationally, they must develop suitable strategies. They must
consider the need to make optimum global economic decisions and the need to
be responsive to host-country differences. There are five main strategies.
1. Worldwide integration
This strategy is aimed at developing relatively standardised products with global
appeal as well as rationalising operations around the world.
2. Rationalisation
This strategy involves assigning activities to parts of the organisation, regardless
of their location, that are best suited to produce desired results and then selling
finished products where they will provide the best products.
3. National responsiveness
This strategy allows subsidiaries to have greater freedom in adopting products
and services to suit the particular needs and political realities of countries they
operate in.
4. Regional responsiveness
This strategy allows regional offices considerable freedom to coordinate activities
of local subsidiaries and adopting products and services to suit the particular
needs and political realities of the region in which they operate.
5. Multifocal emphasis
This strategy is aimed at achieving the advantages of worldwide integration
where possible while still attempting to be responsive to important national



Organising International Business

Managers in international business must also choose an organisation structure
appropriate to the firms global pursuits. There a five basic structure types which
can be considered.
1. Worldwide functional divisions
The parent company has world-wide responsibility for all functions. A
foreign subsidiaries functional units report directly to head office. This
structure works best with a few related products sold in a fairly uniform
world market and with few foreign subsidiaries.

Figure 12.2 Worldwide functional divisions structure

2. Worldwide product divisions

Here top level executives manage product areas worldwide. The
parent company emphasises coordinating product-related decisions
but it lets foreign subsidiaries run other business aspects. This
structure is effective with products that are technologically complex,
highly diverse or subject to rapid change. It fits with a world-wide
strategy with several diverse products to consider.

Figure 12.3 Worldwide product divisions structure

3. International division



In this structure a division is created and all foreign subsidiaries report
to it. This allows representation of geographic and product interests at
the same level. However coordination between the international
division and the domestic product divisions may prove difficult.

Figure 12.4 International division structure

4. Geographical regions
The world is split into regional divisions, with subsidiaries reporting to
an appropriate one by location. This helps regional information flow
within regions but hinders information exchange across them. As a
result it caters to regional and national differences.

Figure 12.5 Geographic regions structure

5. Global matrix
In this structure, equal authority and responsibility are assigned at the
regional level and at the product or function. Middle level executives



report to two bosses sharing authority over decisions affecting a
region and a business product area.

Figure 12.6Global matrix structure

6. Networked structure
This structure is where functions are contracted to independent firms,
coordinated through IT networks to operate as if in one company. This
structure is possible for those wanting to engage in international
business who need great flexibility and to be able to contract out all
functions but still maintain control.

Adapting to Cultural Differences-Managing diversity

Another effective international management function is to be able to adapt to
different cultures. This involves understanding international human resource
management and leadership styles.

Managing international human resources

Firms operating internationally must emphasis human resource management for
a competitive edge.



Assignment policies
Managerial staff can be sourced from:
1. Local nationals
2. Parent company personnel
3. International personnel
4. Mixed sources

Competent people can be recruited for key overseas positions. Expatriates are
individuals who are not citizens of countries in which they are assigned to work.

Selection and training

Technical skills are needed but the ability to relate and communicate effectively
with host nationals is very important in choosing staff. This may include
developing language and cultural awareness. Training is very important but often
it is given a low priority.

This is the return to ones home country after a host country assignment. The
main reasons for return are:
1. The end of the agreed upon assignment period
2. Desire for children to be schooled in the home country
3. Unhappiness with the foreign assignment
4. Ineffectiveness in the foreign assignment
Adjustment problems during repatriation can be common. Authority and status
may be different and/or the original position may have changed or their technical
expertise is now obsolete.

Adjusting leadership styles

Managers overseas may have to adjust leadership styles due to cultural factors.
The power-distance relationship must be understood because it varies between
countries. This will affect decision making and acceptance by employees.



Culture and management

The behaviour of mangers is influenced by:
1. Technological developments
2. Characteristics of business
3. Attitudes and policies of government
4. Type and level of economic development in the country.
Culture also has a large impact on a managers behaviour.
There are three characteristics of culture
1. Something that is commonly shared by the group
2. Something that older group members pass on to younger members
3. Moral, laws and customs that shape behaviour and perceptions
Peoples culture influences the process of planning and organising of resources,
decision-making, leading and controlling the environment.

Traditional management practices

The principles of management may be universal but their application in any
organisation is influenced by the culture of the society in which they are
practiced. Management emphasis in some traditional societies will be somewhat
different to that of todays Western-style organisations.



Social responsibility and Ethical Issues

International social responsibility
Many social responsibility issues increase when a company has much
international business.
Concerns involve exhausting natural resources in the host country, diverting
wealth to the developed nations and manipulating governments. Unfair labour
practices and exploitation are also issues which may arise.

Questionable payments
The most common ethical issue concerns questionable payments which can
1. Political payments- supporting a party or a candidate
2. Bribes- money or gifts given to influence decision-making in your
3. Extortion-payments made to protect a business from threatened
4. Sales commissions-questionable if paid to a government official or
political figure
5. Expediting payments-money given to a lower official to ensure
cooperation and speedy transactions.
Many payments may be considered legal and acceptable in many parts of the
world, but in general are viewed as unethical and/or illegal. Managers need to be
acutely aware of these issues when developing their strategies, goals and plans.