Guga Lucian

GENERAL MANAGEMENT

2007

Edituversitatii Transilvania din Brasov

ISBN (10) 973-635-852-6; ISBN(13) 978-973-635-852-4

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 CONTENTS
1. Introduction to management
3
1.1. The definition of management.
3
1.1.1. The four management functions
4
1.1.2. Management types
11
1.1.3. Management skills
14
1.2. Scientific management
22
1.3. The organizational environment
37
1.3.1. The international environment
37
1.3.2. The external environment
39
1.3.3. Internal environment
40
1.4. Managerial ethics
45
1.4.1. Managerial culture influence
45
1.4.2. Ethic codes
46
1.4.3. Managerial responsibility
47
1.4.4. Rules of managerial ethics
50

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 1.4.5. Types of companies according to managerial ethics
51
2. Managerial goals setting and planning
53
2.1. Overview of goals and plans
53
2.2. Goal characteristics
58
2.3. Develop a career plan
64
2.4. Managerial decision making
67
2.4.1. Management problem
67
2.4.2. Types of decisions and problems
69
2.4.3. Decisions making models
73
3. Organizing
85
3.1. Fundamentals of organizing
85
3.2. Achive strategic objectives
90
3.3. Departmentalization
98
3.4. Innovation and change
108
3.5. The management of investments
120

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 4. Leadership in organizations
134
4.1. Leading
134
4.1.1. The nature of leadership

134
4.1.2. Concepts of leadership

136
4.1.3. Principles of leadership
137
4.2. How to create leaders
159
4.2.1. Leadership defined
159
4.2.2. Orienting new members
168
4.2.3. Team organization
172
4.3. Motivation
187
4.3.1. The will to work
187
4.3.2. Payment by results, productivity bargaining
and profit sharing

189
4.3.3. The struggle for independence and a good life
196

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 4.3.4. People work willingly for what they need and want
198
4.3.5. Payout policy in the 21st century
202
4.4. Communication in organization
213
4.4.1. Communication and the manager’s job
213
4.4.2. The communication process
214
4.4.3. Communicating among people
216
4.4.4. Communications channels
217
4.4.5. Organizational communication
219
4.4.6. Formal communication channels
219
4.4.7. Downward communication
220
4.4.8. Upward communication.
222
4.4.9. Horizontal communication.
223
Home work I
226
Home work II
227
Bibliography
233

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 1. Introduction to management

1.2. The definition of management.

Management mines the attainment of organizational goals in an

effective and efficient manner through planning, organizing, leading,
and controlling organizational resources.

The definition of management

What do managers like Lee Iacocca. General Creech, and Kelly
Johnson have in common? They get things done through their organizations.
One early management scholar, Mary Parker Follett, described management
as "the art of getting things done through people." Peter Drucker, a noted
management theorist, says that managers give direction to their
organizations, provide leadership, and decide how to use organizational
resources to accomplish goals. Getting things done through people and other
resources and providing direction and leadership are what managers do.
These activities apply not only to top executives such as Lee Iacocca or
General Creech, but also to a new lieutenant in charge of a TAG
maintenance squadron, a supervisor in the Ontario plant that makes
Plymouth minivans, and ReBecca Roloff as manager of Pillsbury's
distribution department. Moreover, management often is considered
universal because it uses organizational resources to accomplish goals and
attain high performance in all types of profit and not-for-profit
organizations. Thus, our definition of management is as follows:

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 Management is the attainment of organizational goals in an
effective and efficient manner through planning, organizing, leading,
and controlling organizational resources.

There are two important ideas in this definition: (1) the four functions
of planning, organizing, leading, and controlling and (2) the attainment of
organizational goals in an effective and efficient manner. The management
process of using resources to attain goals is illustrated in Exhibit 1.1.
Although some management theorists identify additional management
functions, such as staffing, communicating, or decision making, those
additional functions will be discussed as Subsets of the four primary
functions in Exhibit 1. Chapters of the book are devoted to the multiple
activities and skills associated with each function, as well as to the
environment, global competitiveness, and ethics, which influence how
managers perform these functions. The next section begins with a brief
overview of the four functions.

Exhibit 1.1. The Process of Management.

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 1.1.1. The four management functions
Planning
Planning is the management function concerned with defining
goals for future organizational performance and deciding on the tasks
and resource use needed to attain them.
Planning defines where the organization wants to be in the future and
how to get there. Planning means defining goals for future organizational
performance and deciding on the tasks and use of resources needed to attain
them. Senior managers at Bausch & Lomb defined a specific plan: to capture
at least 50 percent of every segment of the contact lens market even if prices
had to be cut and profits reduced to maintain market share. Senior managers
at Chase Manhattan Bank decided to make it the number one service-quality
bank in the world and, through extensive planning, to develop a worldwide
network of branch banks, implement a sophisticated foreign exchange
system, and offer a state-of-the-art electronic funds transfer system. General
Creech successfully turned around the Tactical Air Command because he
had a specific plan including targets for improved sortie rates and techniques
for achieving the new rates.
A lack of planning—or poor planning—can hurt an organization's per-
formance. For example, Tom Clausen was accused of poor planning when
he insisted that BankAmerica increase loans 10 percent a year and that
profits increase as well. To get new loans, BankAmerica’s offices gradually
reduced loan quality. To keep boosting profit, Clausen delayed investing in
computers, scrimped on bank control systems, failed to modernize the
branches, and kept salaries low. The absence of a detailed plan for achieving
growth and efficiency in several areas led to loan failures and huge losses in

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subsequent years.

Organizing
Organizing is the management function concerned with assigning
tasks, grouping tasks into departments, and allocating resources to
departments.

Organizing typically follows planning and reflects how the

organization tries to accomplish the plan. Organizing involves the
assignment of tasks, the grouping of tasks into departments, and the
allocation of resources to departments. For example, Hewlett-Packard,
Sears, Roebuck, Xerox, and Digital Equipment have all undergone recent
structural reorganizations to accommodate their changing plans. General
Creech accomplished his plan for TAG'S improved sortie rate largely
through decentralization and the development of small, independent
maintenance units — a drastic departure from the traditional structure that
had encouraged centralization and consolidation of Air Force resources.
Kelly Johnson of Lockheed used organizing wizardry to reduce the number
of subcontractor inspectors from 1,271 to 35 and still achieve the objective
of improved launch effectiveness. Indeed, his organizing was so good that
the Air Force insisted that a competitor be allowed to visit Johnson's team.
The competitor used 3,750 people to perform a similar task and was years
behind and way over budget. Johnson's organization was on schedule and
under budget — and with only 126 people. Honeywell managers reorganized
new product development into "tiger teams" consisting of marketing, design,
and engineering employees. The new structural design reduced the time to
produce a new thermostat from 4 years to 12 months.

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 Likewise, weak organizing facilitated the destruction of Braniff
Airlines under Harding Lawrence. Braniff did not have enough departments
and offices to handle passengers and airplanes for the new national and
international routes Lawrence grabbed during deregulation of the airline
industry. Braniff needed an enormous amount of money to set up a structure
to fit its strategy. Even before its expansion Braniff lacked a strong internal
structure with clearly defined roles for accomplishing tasks. The structure
produced a group of "yes men" who deferred to Lawrence's every decision.

Leading
Leading is the management function that involves the use of
influence to motivate employees to achieve the organization's goals.
The third management function is to provide leadership for
employees. Leading is the use of influence to motivate employees to achieve
organizational goals. Leading means communicating goals to employees
throughout the organization and infusing them with the desire to perform at
a high level. Leading involves motivating entire departments and divisions
as well as those individuals working immediately with the manager.
Managers such as Lee Iacocca are exceptional leaders. They are able
to communicate their vision throughout the organization and energize
employees into action. General Creech was a leader when he improved the
motivation of aircraft maintenance technicians in hundreds of maintenance
squadrons. Maintenance people previously had been neglected in favor of
pilots. Creech set up highly visible bulletin boards displaying pictures of the
maintenance crew chiefs, improved their living quarters, and established
decent maintenance facilities, complete with paintings and wall murals. He
introduced competition among the newly independent maintenance

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squadrons. He created trophy rooms to hold plaques and other prizes won in
maintenance competitions. This prominent display of concern for
maintenance specialists greatly increased their motivation to keep the planes
flying.
When William Schaefer was mayor of Baltimore, he used a number of
techniques to motivate city employees. He sent them action memos that
were blunt and direct: "Get the trash off East Lombard Street," "Broken
pavement at 1700 Carey," "Abandoned car at 2900 Remington." One action
memo said, “There is an abandoned car . . . but I'm not telling you where it
is." City crews ran around for a week and towed several hundred cars.
Leadership has a negative side, too. Again consider Harding
Lawrence. His leadership of Braniff was said to contribute to employees’
demotivations. Lawrence won notoriety on Braniff Flight 6, which he took
weekly to visit his wife, who worked in New York City:

His tantrums on Flight 6 are legend. On one flight a stewardess served

him an entire selection of condiments with his meal instead of asking him
which one he preferred. He slammed his fist into the plate, splattering food
on the surrounding seats of the first-class cabin. "Don't you ever assume
what I want!" he screamed
"On several occasions flight attendants came to me in tears, fearful of
losing their jobs," says Ed Clements, former director of flight attendant
services at Braniff. "I was sickened by what he was doing to the employees."
Lawrence's appearance on an aircraft was likely to arouse two
emotions in the crew: fear and hatred.
Inevitably, dissatisfied employees led to get dissatisfied customers.
Marketing surveys indicated that Braniff was unpopular with many of its

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passengers. Without a loyal customer base, successful expansion and high
performance proved impossible. The Manager's Shoptalk box highlights
several leadership problems and possible solutions.

Controlling
Controlling is the management function concerned with monitoring
employees’ activities, keeping the organization on track toward its goals,
and making corrections as needed.
Controlling is the fourth function in the management process.
Controlling means to manager to monitoring employees' activities,
determining whether the organization is on target toward its goals, and
making corrections as necessary. Managers must ensure that the
organization is moving toward its goals. Controlling often involves using an
information system to advise managers on performance and a reward system
for recognizing employees who make progress toward goals. For example, at
Domino’s Pizza Distribution Company over 1,200 franchises are measured
weekly. A phone survey of customers determines the quality of service at
each franchise, which is reported to management. Compensation for all
employees is based on the results. Expected performance levels are reviewed
every six months and set slightly higher for the next six months. The control
system then monitors whether employees achieve the higher targets.
One reason for organization failure is that managers are not serious
about control or lack control information. Robert Fomon, longtime
autocratic chief executive of E. F. Hutton, refused to set up control systems
because he wanted to personally supervise senior management. At one time
he reviewed the salaries and bonuses of more than 1,000 employees, but
eventually Hutton grew too big for his personal supervision. To achieve

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profit goals managers got involved in an undetected check-kiting scheme
and the firm pleaded guilty to 2,000 counts of mail and wire fraud. Other
undetected behaviors were the $900,000 in travel and entertainment
expenses for one executive in one year and the listing of party girls from
escort services as temporary secretarial help. The lack of control led to
Fomon's demise, E. F. Hutton has never fully recovered.

Organizational performance
Organization is a social entity that is goal directed and
deliberately structured.
The other part of our definition of management is the attainment of
organizational goals in an efficient and effective manner. One reason
management is sc important is that organizations are so important. In an
industrialized society where complex technologies dominate, organizations
bring together knowledge, people, and raw materials to perform tasks no
individual could do alone Without organizations how could 15,000 flights a
day be accomplished without an accident, electricity produced from large
dams or nuclear power generators, millions of automobiles manufactured, or
hundreds of films, videos, and records made available for our entertainment?
Organizations pervade our society. Most college students will work in an
organization—perhaps Hospital Corporation of America, Federated
Department Stores, Boise Cascade, or Standard Oil. College students already
are members of several organizations, such as a university, junior college,
YMCA, church, fraternity, or sorority. College students also deal with
organizations every day: to renew a driver's license, be treated in a hospital
emergency room, buy food from a supermarket, eat in a restaurant, or buy
new clothes. Managers are responsible for these organizations and for seeing

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that resources are used wisely to attain organizational goals.
Our formal definition of an organization is a social entity that is goal
directed and deliberately structured. Social entity means being made up of
two or more people. Coal directed means designed to achieve some
outcome, such as make a profit (Boeing, Mack Trucks), win pay increases
for members (AFL-CIO), meet spiritual needs (Methodist church), or
provide social satisfaction (college sorority). Deliberately structured means
that tasks are divided and responsibility for their performance assigned to
organization members. This definition applies to all organizations, including
both profit and not-for-profit. Vickery Stoughton runs Toronto General
Hospital and manages a $200 million budget. He endures intense public
scrutiny, heavy government regulation, and daily crises of life and death.
Hamilton Jordan, formerly President Carter's chief of staff, created a new
organization called the Association of Tennis Professionals that will take
control of the professional tennis circuit. John and Marie Bouchard launched
a small business called Wild Things that sells goods for outdoor activities.
Small, offbeat, and not-for-profit organizations are more numerous than
large, visible corporations — and just as important to society.
Based on our definition of management, the manager's responsibility
is to coordinate resources in an effective and efficient manner to accomplish
the organization's goals. Organizational effectiveness is the degree to which
the organization achieves a stated objective. It means that the organization
succeeds in accomplishing what it tries to do. Organizational effectiveness
means providing a product or services that customer’s value. Organizational
efficiency refers to the amount of resources used to achieve an
organizational goal. It is based on how much raw materials, money, and
people are necessary for producing a given volume of output. Efficiency can

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be calculated as the amount of resources used to produce a product or
service.
Efficiency and effectiveness can both be high in the same
organization. Consider the impact of Dick Dauch, vice-president of
manufacturing at Chrysler. His leadership has allowed a startling increase in
efficiency. Chrysler now ion build 8,000 cars and trucks a day compared
with 4,500 a few years ago. The number of worker-hours per vehicle has
shrunk from 175 to 102. Resources are more efficiently: Worker
absenteeism is down sharply. New technology has transformed the assembly
line. The manufacturing improvements have also boosted effectiveness.
Chrysler cars are now first quality, rated nearer the top in reliability,
durability, and fit-and-finish.
Managers in other organizations, especially service firms, are
improving efficiency, too. Labor shortages in the Midwest and northeastern
United States have prompted managers to find labor-saving tricks. Burger
King and Kentucky Fried Chicken restaurants let customers serve
themselves drinks. Sleep Inn hotels have a washer and dryer installed behind
the desk so that clerks can launder sheets and towels while waiting on
customers. McDonald's is experimenting with a grill that cooks hamburgers
on both sides at once, eliminating the need for an employee to flip them.
The ultimate responsibility of managers, then, is to achieve high
performance, which is the attainment of organizational goals by using
resources in an efficient and effective manner. Whether managers are
responsible for the organization as a whole, such as Robert Stempel at
General Motors, or for a single department, such as ReBecca Roloff at
Pillsbury, their ultimate responsibility is performance. Harold Geneen, a
legendary manager who transformed ITT into one of the world's largest and

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best-run corporations, explained it this way: “I think it is an immutable law in
business…..”

1.1.2. Management types

“I think it is an immutable law in business that words are words,

explanations are explanations, promises are promises—but only performance is
reality. Performance alone is the best measure of your confidence, competence,
and courage. Only performance gives you the freedom to grow as yourself. Just
remember that: performance is your reality. Forget everything else. That is why
my definition of a manager is what it is: one who turns in the performance. No
alibis to others or to one's self will change that. And when you have performed
well, the world will remember it, when everything else is forgotten. And most
importantly, so will you.”

The four management functions must be performed in all

organizations. B' not all managers' jobs are the same. Managers are
responsible for different departments, work at different levels in the
hierarchy, and meet different requirements for achieving high performance.
For example, Gary Smith, age 21 runs a team of 13 assemblers at Honda's
Marysville, Ohio, plant. Charles Strang is chief executive officer for
Outboard Marine, a manufacturer of outboard motors. Both are managers,
and both must contribute to planning, organizing, leading, and controlling
their organizations — but in different amounts and ways.

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 Exhibit 2. Management Levels in the Organizational Hierarchy.

Vertical differences
Top manager is a manager who is at the top of the organizational
hierarchy and responsible for the entire organization.
An important determinant of the manager's job is hierarchical level.
Three levels in the hierarchy are illustrated in Exhibit 2. Top managers are
at the top of the hierarchy and are responsible for the entire organization.
They have such titles as president, chairperson, executive director, chief
executive officer (CEO), and executive vice-president. Top managers are
responsible for setting organizational goals, defining strategies for achieving
them, monitoring and interpreting the external environment, and making

17
decisions that affect the entire organization. They look to the long-term
future and concern themselves with general environmental trends and the
organization’s overall success. They also influence internal corporate
culture.

Middle manager is a manager who works at the middle levels of the

organization and is responsible for major departments.

Middle managers work at middle levels of the organization and are

responsible for business units and major departments. Examples of middle
managers are department head, division head, manager of quality control,
and director of the research lab. Middle managers typically have two or
more management levels beneath them. They are responsible for
implementing the overall strategies and policies defined by top managers.
Middle managers are concerned with the near future, are expected to
establish good relationships with peers around the organization, encourage
teamwork, and resolve conflicts.
Recent trends in corporate restructuring and downsizing have made
the middle manager's job difficult. Companies that become lean and efficient
often do so by lying off middle managers, both line and staff. New electronic
technologies have reduced the need for middle level supervision. Middle
managers have been cut by 17 percent at Mobil, 15 percent at DuPont, and
35 percent in the Medical Systems Group at General Electric. One estimate
is that over one million middle management positions have been removed in
the last few years. These cutbacks make organizations efficient, but a recent
survey found middle managers restless and dissatisfied.

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 Exhibit 3. The time spent functional activities by organizational level.

They seem to be at the mercy of top management, and their loyalty to

the organization is not always reciprocated. One disgruntled middle manager
proclaimed, "The way things are going my company will consist of the CEO
at the top, a computer in the middle, and a bunch of workers at the bottom."
First-line manager is a manager who is at the first or second
management level and directly responsible for the production of goods and
services.
First-line managers are directly responsible for the production of
goods and services. They are the first or second level of management and
have such titles as supervisor, line manager, section chief, and office
manager. They are responsible for groups of no management employees.
Their primary concern is the application of rules and procedures to achieve
efficient production, provide technical assistance, and motivate subordinates.
The time horizon at this level is short, with the emphasis on accomplishing
day-to-day objectives.

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 1.1.3. Management skills
A manager's job is diverse and complex and, as we shall see
throughout this book, requires a range of skills. Although some management
theorists propose a long list of skills, the necessary skills for planning,
organizing, leading, and controlling can be summarized in three categories
that are especially important: conceptual, human, and technical.21 As
illustrated in Exhibit 1.4, all managers need each skill, but the amounts
differ by hierarchical level.

Exhibit 4. The relationship of conceptual, human and technical skills.

Conceptual skills
Conceptual skill is the cognitive ability to see the organization as a
whole and the relationship among its parts.
Conceptual skill is the cognitive ability to see the organization as a
whole and the relationship among its parts. Conceptual skill involves the
manager's thinking and planning abilities. It involves knowing where one's
department fits into the total organization and how the organization fits into
the industry and the community. It means the ability to think
"strategically"—to take the broad, long-term view.
Conceptual skills are needed by all managers, but are especially
important for managers at the top. They must perceive significant elements

20
in a situation and broad, conceptual patterns. For example, Robert Lutz, a
senior operating executive at Chrysler, is spearheading development of the
Dodge Viper, a sports car with neck-snapping acceleration. He has to
conceptualize development of a car that can be produced quickly with costs
low enough to make a profit on fewer than 10,000 cars a year sold at less
than $30,000 apiece. Lutz helps conceptualize design, supply, and
manufacturing problems because he understands how these significant
elements fit together.
As managers move up the hierarchy, they must develop conceptual
skills or their promotion ability will be limited. A senior engineering
manager who is mired in technical matters rather than thinking strategically
will not perform well at the top of the organization. Many of the
responsibilities of top managers, such as decision making, resource
allocation, and innovation, require a broad view.

Human skills
The human skills are the ability to work with and through other
people and to work effectively as a group member.
Human skill is the manager's ability to work with and through other
people and to work effectively as a group member. This skill is
demonstrated in the way a manager relates to other people, including the
ability to motivate, facilitate, coordinate, lead, communicate, and resolve
conflicts. A manager with human skills allows subordinates to express
themselves without fear of ridicule and encourages participation. A manager
with human skills likes other people and is liked by them. Barry Merkin,
chairman of Dresher Inc., the largest U.S. manufacturer of brass beds, is a

21
cheerleader for his employees. He visits the plant floor and uses humor and
hoopla to motivate them. Employees may have buckets of fried chicken
served to them by supervisors wearing chef's hats.
Managers who lack human skills often are abrupt, critical, and
unsympathetic toward others. Harding Lawrence of Braniff, described
earlier, did not excel in human skills. Another example is the executive who
walked into a subordinate's office and insisted on talking to him. When the
subordinate tried to explain that he was occupied, the manager snarled, "I
don't give a damn. I said I wanted to see you now."23 Managers without
human skills are insensitive and arrogant. They often make other people feel
stupid and resentful.
In recent years, the awareness of human skills has increased. Books
such as In Search of Excellence and A Passion for Excellence stress the need
for managers to take care of the human side of the organization. Excellent
companies and excellent managers do not take people for granted. When
Robert Carlson took over United Technologies, he used human skills to
induce teamwork among senior executives. His willingness to listen to
problems and suggestions and to inspire cooperation helped United
Technologies rebound after the stewardship of Harry Gray, who did not use
people skills as a part of his management style. Effective managers are
cheerleaders, facilitators, coaches, and nurturers. They build through people.
Effective human skills enable managers to unleash subordinates' energy and
help them grow as future managers.

Technical skills

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 Technical skill mines the understanding of and proficiency in the
performance of specific tasks.
Technical skill is the understanding of and proficiency in the
performance of specific tasks. Technical skill includes mastery of the
methods, techniques, and equipment involved in specific functions such as
engineering, manufacturing, or finance. Technical skill also includes
specialized knowledge, analytical ability and the competent use of tools and
techniques to solve problems in that specific discipline. One reason ReBecca
Roloff, described at the beginning of his chapter, was promoted to
department manager at Pillsbury was her technical understanding of freight
and distribution.
Technical skills are most important at lower organizational levels.
Many managers get promoted into their first management jobs by having
excellent technical skills. However, technical skills are less important than
human and conceptual skills as managers’ move up the hierarchy.

Making the transition

As illustrated in Exhibit 4, the major difference between
nonmanagers and managers is the shift from reliance on technical skills to
focus on human skills. This is a difficult transition, because high
achievement in the technical area may have been the basis for promotion to a
supervisory position. New manages often mistakenly continue to rely on
technical skills rather than concentrate on working with others, motivating
employees, and building a team. Indeed, some people fail to become
managers at all because they let technical skills take precedence over human
skills.

23
 Consider Pete Martin, who has a bachelor's degree and has worked for
five years as a computer programmer for an oil company. In four short years,
he has more new software programs to his credit than anyone else in the
department. He is highly creative and widely respected. However, Pete is
impulsive and has little tolerance for those whose work is less creative. Pete
does not offer to help coworkers, and they are reluctant to ask because he
often "puts them down." Pete is also slow to cooperate with other
departments in meeting their needs, because he works primarily to enhance
his own software writing ability. He spends evenings and weekends working
on his programs. Pete is a hardworking technical employee, but he sees little
need to worry about other people.
Pete received high merit raises but was passed over for promotion and
does not understand why. His lack of interpersonal skills, inconsideration for
coworkers, and failure to cooperate with other departments severely limit his
potential as a supervisor. Pete has great technical skills, but his human skills
simply are inadequate for making the transition from worker to supervisor.
Until Pete is ready to work on human skills, he has little chance of being
promoted.

What is it like to be a manager?

So far we have described how managers perform four basic functions
that help ensure that organizational resources are used to attain high levels of
performance. These tasks require conceptual, human, and technical skills.
Unless someone has actually performed managerial work, it is hard to under
exactly what managers do on an hour-by-hour, day-by-day basis. The
manager’s job is so diverse that a number of studies have been undertaken in

24
an attempt to describe exactly what happens. The question of what managers
actually don plan, organize, lead, and control was answered by Henry
Mintzberg, who followed managers around and recorded all of their
activities. He developed description of managerial work that included three
general characteristics and ten roles. These characteristics and roles have
been supported in subsequent research.
Category Role Activity
Interpersonal Figurehead Perform ceremonial and
symbolic duties such as
greeting visitors, signing
legal documents.
Leader
Direct and motivate
subordinates; training,
Liaison counseling, and
communicating with
subordinates.
Maintain information links
both inside and outside
organization; use mail,
phone calls, meeting.
Informational Monitor Seek and receive
information, scan
periodicals and reports,
Disseminator
maintain personal contacts.
Forward information to
other organization members;
Spokesperson send memos and reports,
make phone calls.
Transmit information to
outsiders through speeches,
reports, memos.
Decisional Entrepreneur Initiate improvement
projects; identify new ideas,
delegate idea responsibility
to others.
Disturbance handler
Take corrective action
during disputes or crises;
resolve conflicts among
Resource allocator subordinates, adapt to
environmental crises.

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 Decide who gets resources;
Negotiator scheduling, budgeting,
setting priorities.
Represent department
during negotiation of union
contracts, sales, purchases,
budget* represent
departmental interests.
Exhibit 5. Ten Manager Roles.

Manager roles
Role mines a set of expectations for one's behavior.
Mintzberg's observations and subsequent research indicate that
diverse manager activities can be organized into ten roles. A role is a set of
expectations for a manager's behavior. The ten roles are divided into three
categories: interpersonal, informational, and decisional. Each role represents
activities that managers undertake to ultimately accomplish the functions of
planning, organizing, leading, and controlling. The ten roles and brief
examples are provided in Exhibit 5.

Interpersonal roles
Interpersonal roles pertain to relationships with others and are related
to the human skills described earlier. The figurehead role involves handling
ceremonial and symbolic activities for the department organization. The
manager represents the organization in his or her formal managerial capacity
as the head of the unit. The presentation of employ awards by a division
manager at Taco Bell is an example of the figurehead role. The leader role
encompasses relationships with subordinates, including motivation,
communication, and influence. The liaison role pertains to the development
of information sources both inside and outside the organization. An example

26
is a face-to-face discussion between a controller and plant supervisor to
resolve a misunderstanding about the budget.

Informational ROLES

Informational roles describe the activities used to maintain and

develop an information network. The monitor role involves seeking current
information from many sources. The manager acquires information from
others and scans written materials to stay well informed. The disseminator is
just the opposite: The manager transmits current information to others, both
inside and outside the organization, who can use it. Managers do not hoard
information; they pass it around to others. The spokesperson role pertains to
official statements to people outside the organization about company
polices, actions, or plans. For example, Robert Krandall, CEO of American
Airlines, recently testified before Congress three times; delivered keynote
speeches to groups in Washington, D.C., Dallas, and Chicago; and appeared
on television’s "Meet the Press" to champion changes in the airline system.

Decisional ROLES
Decisional roles pertain to those events about which manager must
make a choice. These roles often require conceptual as well as human skills.
The entrepreneur role involves the initiation of change. Manager become
aware of problems and search for improvement projects that will correct
them. One manager studied by Mintzberg had 50 improvement projects
going simultaneously. The disturbance handler role involves resolving
conflicts among subordinates or between the manager's department and
other departments. For example, the division manager for a large furniture
manufacturer got involved in a personal dispute between two section heads.

27
One section head was let go because he did not fit the team. The resource
allocator role pertains to decisions about how to allocate people, time,
equipment, budget, and other resources to attain desired outcomes.
The manager must decide which projects receive budget allocations,
which of several customer complaints receive priority, and even how to
spend his or her own time. The negotiator role involves formal negotiations
and bargaining to attain outcomes for the manager's unit of responsibility.
For example, the manager meets and formally negotiates with others — a
supplier about a late delivery, the controller about the need for additional
budget resources, or the union about a worker grievance during the normal
workday.

Small business
One interesting finding is that managers in small businesses tend to
emphasize different roles than managers in large corporations. In small
firms, the most important role is spokesperson, because managers must
promote the small growing company to the outside world. The entrepreneur
role is also very important in small businesses, because managers must be
creative and help their organizations develop new ideas to be competitive.
Small-business managers tend to rate lower on the leader role and on
information processing roles compared with counterparts in large
corporations. In large firms, the most important role is resource allocator and
the least important is entrepreneur.

1.2. Scientific management

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 Classical perspective
A management perspective that emerged during the nineteenth and
early twentieth centuries, which emphasized a rational, scientific approach to
the study of management and sought to make organizations efficient
operating machines.

Scientific management
A subfield of the classical management perspective that emphasized
scientifically determined changes in management practices as the solution to
improving labor productivity.
Organizations' somewhat limited success in achieving improvements
in labor productivity led a young engineer to suggest that the problem lay
more in poor management practices than in labor. Frederick Winslow Taylor
(1856-1915) insisted that management itself would have to change and,
further, that the manner of change could be determined only by scientific
study; hence, the label scientific management emerged.
Taylor suggested that decisions based on rules of thumb and tradition
be replaced with precise procedures developed after careful study of
individual situations.
While working at the Midvale Steel Company in Philadelphia, Taylor
began experimenting with management methods, procedures, and practices.
Taylor wrote frequently, had others write under his name, and consulted
with businesses to encourage utilization of his ideas. However; it was after
the Eastern Railroad Rate Case hearings before the House of Representatives
that his work really caught on. The attorney for the shippers, Louis D.
Brandeis, used the term scientific management and successfully argued the

29
shippers' side of the issue for using these techniques. The popular press
picked up the term, and Taylor and his ideas became heralded as the way to
prosperity for the United States.
Taylor's approach is illustrated by the unloading of iron from rail cars
and reloading finished steel for the Bethlehem Steel plant in 1898. Taylor
calculated that with correct movements, tools, and sequencing, each man
was capable of loading 47.5 tons per day instead of the typical 12.5 tons. He
also worked out an incentive system that paid each man $1.85 a day for
meeting the new standard, an increase from the previous rate of $1.15.
Productivity at Bethlehem Steel shot up overnight.
Although known as the "father of scientific management," Taylor was
not alone in this area.
General Approach
• Developed standard method for performing each job.
• Selected workers with appropriate abilities for each job.
• Trained workers in standard method.
• Supported workers by planning their work and eliminating interruptions.
• Provided wage incentives to workers for increased output.

Contributions
• Demonstrated the importance of compensation for performance.
• Initiated the careful study of tasks and jobs.
• Demonstrated the importance of personnel selection and training.

Criticisms
• Did not appreciate the social context of work and higher needs of workers.
• Did not acknowledge variance among individuals.

30
• Tended to regard workers as uninformed and ignored their ideas and
suggestions.
Exhibit 2.1. The characteristics of Scientific Management.

Two other important pioneers in this area were the husband-and-wife

team of Frank B. and Lillian M. Gilbreth. Frank B. Gilbreth (1868-1924)
pioneered time and motion study and arrived at many of his management
techniques independently of Taylor. He stressed efficiency and was known
for his quest for the "one best way" to do work.
Although he is known for his early work with bricklayers, his work
had great impact on medical surgery by drastically reducing the time patients
spent on the operating table. Surgeons were able to save countless lives
through the application of time and motion study. Lillian M. Gilbreth (1878-
1972) was more interested in the human aspect of work.
When her husband died at the age of 46, she had 12 children ages 2 to
19. The undaunted "first lady of management" went right on with her work.
She presented a paper in place of her late husband, continued their seminars
and consulting, lectured, and eventually became a professor at Purdue
University. She pioneered in the field of industrial psychology and made
substantial contributions to personnel management.
The basic ideas of scientific management are shown in Exhibit 2.1. To
use this approach, managers should develop standard methods for doing
each job, select workers with the appropriate abilities, train workers in the
standard methods, support the workers, and provide wage incentives.
Although scientific management improved productivity, its failure to
deal with the social context and workers' needs led to increased conflict
between managers and employees. Under this system, workers often felt

31
exploited. This was in sharp contrast to the harmony and cooperation that
Taylor and his followers had envisioned.
In his work, General and Industrial Management, Fayol discussed 14
general principles of management, several of which are part of management
philosophy today. For example:
• Unity of command. Each subordinate receives orders from one —
and only one — superior.
• Division of work. Managerial and technical works are amenable to
specialization to produce more and better work with the same amount
of effort.
• Unity of direction. Similar activities in an organization should be
grouped together under one manager.
• Scalar chain. A chain of authority extends from the top to the
bottom of the organization and should include every employee.
Fayol felt that these principles could be applied in any organizational
setting. He also identified five basic functions or elements of management:
planning, organizing, commanding, coordinating, and controlling.
This lunch underlie much of the general approach to today's
management theory. Mary Parker Follett (1868-1933) was trained in
philosophy and political science at what today is Radcliffe College. She
applied herself in many fields, including social psychology and
management. She wrote of the importance of common superordinate goals
for reducing conflict in organizations. Her \v was popular with
businesspeople of her day but was often overlooked by management
scholars.
Chester I. Barnard (1886—1961) studied economics at Harvard but
failfl to receive a degree because he lacked a course in laboratory science.

32
He went to work in the statistical department of AT&T and in 1927 became
president « New Jersey Bell. One of Barnard's significant contributions was
the concept of the informal organization. The informal organization occurs
in all formal organizations and includes cliques and naturally occurring
social groupings. Barnard argued that organizations are not machines and
informal relationships are powerful forces that can help the organization if
properly managed. Another significant contribution was the acceptance
theory of authority, which states that people have free will and can choose
whether to follow management orders. People typically follow orders
because they perceive positive benefit to themselves, but they do have a
choice, and their acceptance of authority may be critical to organization
success in important situations.

Bureaucratic Organizations
The final subfield within the classical perspective is that of
bureaucratic organizations. Max Weber (1864-1920), a German theorist,
introduced most of the concepts on bureaucratic organizations.
During the late 1800s, many European organizations were managed
on a “personal," family-like basis. Employees were loyal to a single
individual rather than to the organization or its mission. The dysfunctional
consequence of this management practice was that resources were used to
realize individual desires rather than organizational goals. Employees in
effect owned the organization and used resources for their own gain rather
than to serve clients. Weber envisioned organization that would be managed
on an impersonal, rations basis. This form of organization was called a

33
bureaucracy. Exhibit 2.2 summarizes the six characteristics of bureaucracy
as specified by Weber.

Elements of Bureaucracy:
1, Labor is divided with clear definitions of authority and responsibility that are
legitimized as official duties.
2. Positions are organized in a hierarchy of authority, with each position under the
authority of a higher one.
3. All personnel are selected and promoted based on technical qualifications, which
are assessed by examination or according to training and experience.
4. Administrative acts and decisions are recorded in writing. Recordkeeping provides
organizational memory and continuity over time.
5. Management is separate from the ownership of the organization.
6. Managers are subject to rules and procedures that will insure reliable, predictable
behavior. Rules are impersonal and uniformly applied to all employees.
Exhibit 2.2. The characteristics of Weberian Bureaucracy.

Weber believed that an organization based on rational authority would

be more efficient and adaptable to change because continuity is related to
formal structure and positions rather than to a particular person, who may
leave or die To Weber, rationality in organizations meant employee selection
and advancement based on competence rather than on "whom you know."
The organization relies on rules and written records for continuity. The
manager depends not on his or her personality for successfully giving orders
but on the legal power invested in the managerial position.
The term bureaucracy has taken on a negative meaning in today's
organizations and is associated with endless rules and red tape. We have all
been frustrated by waiting in long lines or following seemingly silly
procedures. On the other hand, rules and other bureaucratic procedures
provide a standard way of dealing with employees. Everyone gets equal
treatment and everyone knows what the rules are. This has enabled many

34
organizations to become extremely efficient. Consider United Parcel
Service, also called the "Brown Giant for the color of the packages it
delivers.

Behavioral sciences approach

A subfield of the human resource management perspective that
applied social science in an organizational context, drawing from economics,
psychology, sociology, and other disciplines.
The word science is the keyword in the behavioral sciences approach
(see Exhibit 2.4). Systematic research is the basis for theory development
and testing, and its results form the basis for practical applications. The
behavioral sciences approach can be seen in practically every organization.
When General Electric conducts research to determine the best set of tests,
interviews, and employee profiles to use when selecting new employees, it is
employing behavioral science techniques. Emery Air Freight has utilized
reinforcement theory to improve the incentives given to workers and
increase the performance of many of its operations. When Westinghouse
trains new managers in the techniques of empoyee motivation, most of the
theories and findings are rooted in behavioral science research.
In the behavioral sciences, economics and sociology have
significantly influenced the way today’s managers approach organizational
strategy and structure. Psychology has influenced management approaches
to motivation, communication, leadership, and the overall field of personnel
management. The conclusions from the tremendous body of behavioral
science research are much like those derived from the natural sciences.
Although we understand more, that understanding is not simple. Scholars

35
have learned much about the behavior of people at work, but they have also
learned that organizational processes are astonishingly complex.

General Approach
• Social science applied in an organizational context.
• Drew from an interdisciplinary" research base, including anthropology,
economics, psychology, and sociology.
Contributions
• Improved our understanding of and practical applications for
organizational processes such as motivation, communication, leadership,
and group processes.
• Regards members of organizations as full human beings, not as tools.
Criticisms
• Because findings are increasingly complex, practical applications often
are tried incorrectly or not at all.
• some concepts run counter to common sense, thus inviting managers'
rejection.

Exhibit 2.3. The Behavioral Science Approach.

Management science perspective

A management perspective that emerged after World War II and applied
mathematics, statistics, and other quantitative techniques to managerial
problems.

World War II caused many management changes. The massive and

complicated problems associated with modem global warfare presented

36
managerial decision makers with the need for more sophisticated tools than
ever before. The management science perspective emerged to treat those
problems. This view is distinguished for its application of mathematics,
statistics, and other quantitative techniques to management decision making
and problem solving. During World War II groups of mathematicians,
physicists, and other scientists were formed to solve military problems.
Because those problems frequently involved moving massive amounts of
materials and large numbers of people quickly and efficiently, the techniques
had obvious applications to large-scale business firms.
Management information systems, a subfield of management science,
uses computers to assist managerial and technical decision making.
WestMarc Communications, Inc., a subsidiary of Tele-Communications,
Inc., the nation's largest cable company, serves communities in the Midwest
and eastern United States. Here Marv Altman uses an in-house computer-
aided design technology to precisely calculate each facet of cable
installation. The computer illustrates community layout and can calculate
relevant variables to predict the actual signal level that will enter each home,
thereby providing the most efficient cable layout while minimizing signal
leakage.
Operations research grew directly out of the World War II groups
(called operational research teams in Great Britain and operations research
teams in the United States). It consists of mathematical model building and
other applications of quantitative techniques to managerial problems.
Operations management refers to the field of management that
specializes in the physical production of goods or services. Operations
management specialists use quantitative techniques to solve manufacturing
problems. Some of the commonly used methods are forecasting, inventory

37
modeling, linear and nonlinear programming, queuing theory, scheduling,
simulation, and breakeven analysis.
Management information systems (MIS) is the most recent subfield of
the management science perspective. These systems are designed to provide
relevant information to managers in a timely and cost-efficient manner. The
advent of the high-speed digital computer opened up the full potential of this
area for management.
Many of today's organizations have departments of management
science specialists to help solve quantitatively based problems. When Sears
used computer models to minimize its inventory costs, it was applying a
quantitative approach to management. When AT&T performed network
analysis to speed up and control the construction of new facilities and
switching systems, it was employing another management science tool.
One specific technique used in many organizations is queuing theory.
Queuing theory uses mathematics to calculate how to provide services that
will minimize the waiting time of customers. Queuing theory has been used
to analyze the traffic flow through the Lincoln Tunnel and to determine the
number of toll booths and traffic officers for a toll road. Queuing theory was
used to develop the single waiting line for tellers used in many banks.
Wesley Long Community Hospital in Greensboro, North Carolina, used
queuing theory to analyze the telemetry system used in wireless cardiac
monitors. The analysis helped the hospital acquire the precise number of
telemetry units needed to safely monitor all patients without overspending
scarce resources.

Contemporary Extensions

38
 Each of the three major management perspectives is still in use today.
The most prevalent is the human resource perspective, but even it has been
undergoing change in recent years. Two major contemporary extensions of
this perspective are systems theory' and the contingency view. Examination
of each will allow a fuller appreciation of the state of management thinking
today.
Systems Theory
System: A set of interrelated parts that function as a whole to achieve a
common purpose.
Systems Theory: An extension of the human resources perspective
that describes organizations as open systems that are characterized by
entropy, synergy, and subsystem interdependence.
A system is a set of interrelated parts that function as a whole to
achieve a common purpose. A system functions by acquiring inputs from the
external environment, transforming them in some way, and discharging
outputs back to the environment. Exhibit 2.5 shows the basic systems theory
of organizations.

39
 Exhibit 2.5 The System View of Organization.

Here there are five components: inputs, a transformation process,

outputs, feedback, and the environment. Inputs are the material, human,
financial, or information resources used to produce goods or services.
The transformation process is management's use of production
technology to change the inputs into outputs. Outputs include the
organization's products and services. Feedback is knowledge of the results
that influence the selection of inputs during the next cycle of the process.
The environment surrounding the organization includes the social, political,
and economic forces noted earlier in this chapter.
Some ideas in systems theory have had substantial impact on
management thinking. These include open and closed systems, entropy,
synergy, and subsystem interdependencies .
Open systems must interact with the environment to survive; closed
systems need not. In the classical and management science perspectives,
organizations were frequently thought of as closed systems. In the
management science perspective, closed system assumptions — the absence
of external disturbances—are sometimes used to simplify problems. In
reality, however, all organizations are open systems and the cost of ignoring
the environment may be failure. A prison tries to seal itself off from its
environment, yet it must receive prisoners from the environment, obtain
supplies from the environment, recruit employees from the environment, and
ultimately release prisoners back to the environment.
Entropy is a universal property of systems and refers to their
tendency to run down and die. If a system does not receive fresh inputs and
energy from its environment, it will eventually cease to exist. Organizations

40
must monitor their environments, adjust to changes, and continuously bring
in new inputs in order to survive and prosper. Managers try to design the
organization/environment interfaces to reduce entropy.
Synergy means that the whole is greater than the sum of its parts.
When in organization is formed, something new comes into the world.
Management, coordination, and production that did not exist before are now
present. Organizational units working together can accomplish more than
those same units working alone. The sales department depends on
production, and vice versa.
Subsystems are parts of a system that depend on one another.
Changes in one part of the organization affect other parts. The organization
must be managed as a coordinated whole. Managers who understand
subsystem interdependence are reluctant to make changes that do not
recognize subsystem impact on the organization as a whole. Consider the
management decision to remove time clocks from the Alcan Plant in
Canada.

Open system: A system that interacts with the external environment.

Closed system: A system that does not interacts with the external
environment.
Entropy: The tendency for a system to run down and die.
Synergy: The concept that the whole is greater than the sum of its parts.
Subsystems: Parts of a system that depend on one another for their
functioning.

Contingency View

41
 Contingency view: An extension of the human resource perspective
in which the successful resolution of organizational problems is thought to
depend on managers' identification of key variables in the situation at hand.
The second contemporary extension to management thinking is the
contingency view. The classical perspective assumed a universals view.
Management concepts were thought to be universal, that is, whatever
worked — leader style, bureaucratic structure — in one organization would
work in another. It proposed the discovery of "one-best-way" management
principles that applied the same techniques to every organization. In
business education, however, an alternative view exists. This is the case
view, in which each situation is believed to be unique.

Exhibit 2.6. The Contingency of Management.

There are no universal principles to be found and one learns about

management by experiencing a large number of case problem situations.
Managers face the task of determining what will work in every new
situation.
To integrate these views the contingency view has emerged, as
illustrated in Exhibit 2.6.[30]. Here neither of the above views is seen as
entirely correct. Instead, certain contingencies, or variables, exist for helping
management identify and understand situations. The contingency view

42
means that a manager's response depends on identifying key contingencies
in an organizational situation. For example, a consultant may mistakenly
recommend the same management-by-objectives (MBO) system for a
manufacturing firm that was successful in a school system. A central
government agency may impose the same rules on a welfare agency that it
did in a worker's compensation office. A large corporation may take over a
chain of restaurants and impose the same organizational charts and financial
systems that are used in a banking division. The contingency view tells us
that what works in one setting may not work in another. Management's job is
to search for important contingencies. When managers learn to identify
important patterns and characteristics of their organizations, they can then fit
solutions to those characteristics.
Industry is one important contingency. Management practice in a
rapidly changing industry will be very different from that in a stable one.
Other important contingencies that managers must understand are
manufacturing technology and international cultures. For example, Citicorp
and Manufacturers Hanover Corporation both misunderstood the nature of
making loans to developing countries. As these big banks raised loan-loss
reserves to cope with the prospect of bad international loans, their balance
sheet was weakened to the extent that they had to stop expansion into new
regions and new business activities. Having been through this experience,
managers in the future will know how to handle this contingency in the
international financial environment.
Recent Historical Trends
The historical forces that influence management perspectives continue
to change and influence the practice of management. The most striking
change now affecting management is international competition. This

43
important trend has social, political, and economic consequences for
organizations.
Industrial Globalization
The domain of business now covers the entire planet, where Reebok's,
stock markets, fax machines, television, and T-shirts intermingle across
national boundaries. The world of commerce is becoming wired like an
integrated circuit, with no nation left out of the loop.
The impact on firms in the United States and Canada has been severe.
International competition has raised the standard of performance in quality,
cost, productivity, and response times. As a result; the United States and
Canada have seen a decline in worldwide market share in traditional
products. Moreover, as recently as 1975, the U.S. balance of payments was
close to zero. In recent years it has been hundreds of billions of dollars in the
red. On the horizon is Europe 1992, when the common market will drop
internal economic boundaries to become one large market. This means a
new set of opportunities and upheavals for companies that strive to meet
global competitive standards.
Globalization causes the need for innovation and new levels of
customer service. Companies must shorten the time for developing new
products, and new products must account for a larger percentage of total
income because international competitors are relentless innovators.34
Winning companies in the 1990s must provide extraordinary service. The
CEO of one home electronics retailer is gearing up to provide international
service through computerized files. If someone has a problem, he or she just
calls the company and a computer screen shows the products serial number,
warranty information, whether parts are in stock, and when it can be
repaired.

44
 Although managers have tried many techniques and ideas in recent
years, two management trends that seem significant in response to
international competition are the adoption of Japanese management practices
and the renewed efforts to achieve excellence in product and service quality.
Japanese Management Practices
In recent years Japanese management practices have been thought to
create more efficient and more effective companies. Japanese products—
whether motorcycles, automobiles, or VCRs — have been low priced and of
high quality. The problem was dramatized by the reaction of executives of
General Motors' Buick division who had visited Japan and a Buick car
dealership:
The operation appeared to be a massive repair facility, so they
asked how he had built up such a large service business. He explained
with some embarrassment that this was not a repair facility at all but
rather a reassembly operation where newly delivered cars were
disassembled and rebuilt to Japanese standards. While many Japanese
admire the American automobile, they would never accept the low
quality with which they are put together.

45
 Exhibit 2.7 Differences in the management approaches used in America and Japan.

How was American management expected to compete with NEC,

Nissan, Sanyo, Sony, Toyota, and Kawasaki? Answers have been suggested
in William Ouchi’s Theory Z and Richard Pascale and Anthony Athos' The
Art of Japanese Management.
The success of Japanese firms is often attributed to their group
orientation. The Japanese culture focuses on trust and intimacy within the
group and family. In North America, in contrast, the basic cultural
orientation is toward individual rights and achievements. These differences
in the two societies are reflected in how companies are managed.
Exhibit 2.7 illustrates differences in the management approaches used
in America and Japan. American organizations are called Type A and
Japanese organizations Type J. However, it is impractical to take a

46
management approach based on the culture of one country and apply it
directly to that of another country.
Theory Z proposes a hybrid form of management that incorporates
techniques from both Japanese and North American management practices.
Type Z is a blend of American and Japanese characteristics that can be used
to revitalize and strengthen corporate cultures in North America.
As illustrated in Exhibit 2.7, the Type Z organization uses the
Japanese characteristic of long-term employment, which means that
employees become familiar with the organization and are committed to and
fully integrated into it. The Theory Z hybrid also adopts the Japanese
approach of slow evaluation and promotion for employees. Likewise, the
highly specialized American convention of a narrow career path is modified
to reflect career training in multiple departments and functions.
In the Theory Z approach, control over employees combines the
preference for explicit and precise performance measures and the Japanese
approach to control based on social values.

1.3. The organizational environment

1.3. 1. The international environment

The most startling environmental change affecting American managers is
the intrusion of global competition. The world of business is changing
dramatically because suddenly national boundaries are meaningless
constraints. One study identified 136 E.U. industries that have to compete on
a global basis or disappear. The industries include automobiles, accounting
services, entertainment, publishing, pharmaceuticals, travel services,
consumer electronics, banking, and washing machines. Even the largest

47
companies in the biggest countries cannot survive on domestic markets
alone. For example, developing a drug costs about 250 million Eu and only
a world market can generate enough sales to earn a profit.3 Small companies
also must expand their niche globally because foreign competitors will try to
best them in E.U. markets.
On another front, foreign firms are spending over $300 billion a year
to purchase U.S. companies, many of which are rejuvenated under foreign
ownership. Japan alone purchased 174 American firms in 1989. When
Japan's Kao Corporation acquired Andrew Jergens Company, maker of
soaps and hand lotions, it immediately increased the marketing and research
budgets and added new facilities. Those investments have made Jergens
more competitive, but the foreign owner gets the profits. The leverage of
foreign companies spills over into government affairs. Japan alone spends
$50 million dollars lobbying in Washington and another $45 million on
public relations and image making. Lawmakers at the state level have been
persuaded to change many laws in the hope of obtaining Japanese
investment.
TOYO TOKI* Toyo Toki (translated as Orient Ceramic) is Japan's
leading maker of toilets and bathtubs. Toto as the company is often called,
also produces modular kitchens, prefab bathrooms, and microcomputer-
controlled hot water heaters.
Having won 95 percent of the Japanese market, Toto is searching for
global opportunities for growth. It already has joint ventures in Indonesia,
Korea, Thailand, Taiwan, France, and West Germany. Now Toto has
targeted the U.S. market, aiming first at the Japanese communities on the
West Coast.

48
 Toto plans to offer products not produced by American
manufacturers. The Washlet is an electronically controlled toilet and bidet
combined into one unit.
Another product is a low-flow toilet that uses 1.6 gallons of water
compared to the American standard of 3.5 gallons and is in demand in U.S.
cities with water shortages. Even more competitive is a line of battery-
powered hands-free toilet fixtures designed for public lavatories. These
products save water, are more sanitary than American-made fixtures, and
use cheap infrared sensors instead of the electric wiring used in U.S.
products.

1.3.2. The External Environment

The environment is important to managers because it creates

uncertainty. Uncertainty will be discussed in detail, but for our purposes
uncertainty means that managers lack accurate information about external
events and thus cannot predict environment changes that will affect
attainment of organizational goals. When uncertainty is low, managers know
what to expect. Disruptions in the environment make it difficult for
managers to achieve the goals of growth and profitability.

Organizational Environment
Organizational Environment means all elements existing outside the
organization's boundaries that have the potential to affect the organization.
The organizational environment includes all elements existing
outside the boundary of the organization that have the potential to affect the
organization. The environment includes competitors, resources, technology,
and economic conditions that influence the organization. It does not include

49
those events so far removed from the organization that their impact is not
perceived.
The organizational environment can be further conceptualized as
having two layers: task and general environments.

Task Environment
It is the layer of the external environment that directly influences the
organization's operations and performance.
The task environment is closer to the organization and includes the
sectors that conduct day-to-day transactions with the organization and
directly influence its basic operations and performance. It is generally
considered to include competitors, suppliers, and customers.

General Environment
It is the layer of the external environment that affects the organization
indirectly.
The general environment is the outer layer that is more widely
dispersed and affects organizations indirectly. It includes social,
demographic, and economic factors that influence all organizations about
equally. Increases in the inflation rate or the percentage of dual-career
couples in the work force are part of the organization's general environment.
These events do not directly change day-to-day operations, but they do
affect all organizations eventually.

1.3.3. Internal Environment

It is the environment within the organization's boundaries.

50
 Exhibit 3.1. Location of the General, Task and Internal Environments.

The organization also has an internal environment, which includes

the elements within the organization's boundaries. The internal environment
is composed of current employees, production technology, organization
structure, physical facilities, and especially corporate culture.

EXHIBIT 3.1 ILLUSTRATES THE RELATIONSHIP AMONG THE TASK, GENERAL, AND
INTERNAL ENVIRONMENTS. AS AN OPEN SYSTEM, THE ORGANIZATION DRAWS
RESOURCES FROM THE EXTERNAL ENVIRONMENT AND RELEASES GOODS AND SERVICE
BACK TO IT. OTHER ASPECTS OF THE INTERNAL ENVIRONMENT SUCH AS EMPLOYEES,
STRUCTURE, AND TECHNOLOGY WILL BE COVERED IN PARTS 3 AND 4 OF THIS BOOK.

CUSTOMERS
Those people and organizations in the environment that acquire goods
or services from the organization are customers. As a recipient of the
organization’s output, customers are important because they determine the
organization's success. Patients are the customers of hospitals, students the
customers of schools, and travelers the customers of airlines. Companies,

51
such as AT&T, General Foods, and Beecham Products, have all designed
special programs and advertising campaigns to court their older customers,
who are becoming a larger percentage of their market.
Overbuilding in the hotel industry forced companies such as Hyatt and
Marriott to spend additional money on advertising, direct mail, giveaways,
and expansion into new markets to improve customer demand.

COMPETITORS
Other organizations in the same industry or type of business that
provide goods or services to the same set of customers are referred to as
competitors. Specific competitive issues characterize each industry. The
recording industry differs from the steel industry and the pharmaceutical
industry. Competition in the steel industry, especially from international pro-
ducers, has caused some companies to go bankrupt. Companies in the
pharmaceutical industry are highly profitable because it is difficult for new
firms to enter it. Apple, IBM, and Compaq are locked in a titanic power
struggle in the personal computer industry. Sometimes industry actions can
stir up hot competition in a sleepy industry, such as disposable diapers. The
aggressive campaign of Kimberly-Clark increased market share for its
Huggies brand disposable diapers but drew a strong response from Procter &
Gamble's Pampers. The resulting price war drove Johnson & Johnson and
Scott Paper Company out of the business and reduced profits for both P&G
and Kimberly-Clark.

SUPPLIERS
Suppliers provide the raw materials the organization uses to produce
its output. A steel mill requires iron ore, machines, and financial resources.

52
A small, private university may utilize hundreds of suppliers for paper,
pencils, cafeteria food, computers, trucks, fuel, electricity, and textbooks.
Large companies such as General Motors, Westinghouse, and Exxon depend
on as many as 5,000 suppliers. The Big Three automakers have decided to
acquire a larger share of parts from fewer suppliers by the early 1990s. They
are trying to build a good relationship with these suppliers so that they will
receive high-quality parts as well as low prices. Organizations also depend
on banks for capital with which to finance new equipment and buildings.

LABOR SUPPLY
The labor supply represents the people who can be hired to work for
the organization. Every organization needs a supply of trained, qualified
personnel. Unions, employee associations, and the availability of certain
classes of employees can influence the organization's labor supply. Mary
Kay Cosmetics stopped growing when fewer homemakers became available
for selling cosmetics door to door due to their entry into the work force as
full-time employees. Two current labor supply trends having an impact on
organizations are first, the increasing shortage of workers, especially skilled
workers, and second, the desire by unionized employees to have larger wage
settlements than in the past. The strong economy in North America has
outstripped the supply of labor. More jobs require education and technical
skills, and there are not sufficient people to handle unskilled jobs either. The
strength of the economy during the 1980s has prompted union members to
want bigger pay increases, and more strikes may occur in the next few years.

53
 General Environment
The general environment represents the outer layer of the
environment. These dimensions influence the organization over time but
often are not involved in day-to-day transactions with it. The dimensions of
the general environment include technological, sociocultural, economic,
legal-political, and international.

Technological
The technological dimension includes scientific and technological
advancements in a specific industry as well as in society at large. In recent
years, the most striking advances have been in the computer industry.
Supercomputers have astonishing power, and many companies are in-
corporating computerized systems such as automated offices, robotics, and
computer-controlled machines. High-definition television promises to
revolutionize the worldwide electronics industry. Smart composite materials
that think for them may revolutionize the aircraft and defense industries.
Fiber-optic sensors can be imbedded in aircraft surface materials that can
feel the weight of ice or the "touch" of enemy radar. A technological
development that may affect companies associated with beverage
consumption is the self-chilling can. Opening the can releases a carbon
dioxide capsule, and the beverage is chilled to 30°F within 90 seconds.
These and other technological advances can change the rules of the game;
thus, every organization must be ready to respond.

SOCIOCULTURAL
The sociocultural dimension of the general environment represents
the demographic characteristics as well as the norms, customs, and values of

54
the general population. Important sociocultural characteristics are
geographical distribution and population density, age, and educational
levels. Also important are the society's norms and values.
Other recent sociocultural trends that are affecting many companies
include the trend toward no smoking, the anti-cholesterol fever, the greater
purchasing power of young children, and the increased diversity of
consumers, with specialized markets for groups such as Hispanics and
women over 30.

ECONOMIC
The economic dimension represents the general economic health of
the country or region in which the organization operates. Consumer
purchasing power, unemployment rate, and interest rates are part of an
organization's economic environment. Not-for-profit organizations such as
the Red Cross and the Salvation Army find a greater demand for their
services during economic decline but receive smaller contributions. They
must adapt to these changes in economic conditions. The most significant
recent trend in the economic environment is the frequency of mergers and
acquisitions. The corporate landscape is being altered and the impact on
employees is enormous. In the media industry alone, Sony purchased CBS
Records to guarantee control over a supply of music for its Walkman
customers. News Corporation acquired other corporations like TV,
newspapers and publisher of TV guides, creating uncertainty about future
job security. The deal is just the beginning of employee uncertainty, because
about half of the acquired companies are resold.

55
 LEGAL-POLITICAL
The legal-political dimension includes government regulations at the
local, state, and federal levels as well as political activities designed to
influence company behavior. The U.S. political system encourages
capitalism, and the government tries not to over regulate business. However,
government laws do specify rules of the game. The government influences
organizations through the Occupational Safety, Health Administration and
Environmental Protection Agency, fair trade practices, libel statutes
allowing lawsuits against business, consumer protection legislation, product
safety requirements, import and export restrictions, and information and
labeling requirements. Many additional regulations will be proposed and
many of them will be adopted.

INTERNATIONAL
The international dimension of the external environment represents
events originating in foreign countries as well as opportunities for American
companies in other countries. The high quality, low-priced automobiles from
Japan and Korea have created a permanent change in the European
automobile industry. In addition, many companies have adopted the strategy
of having parts manufactured and assembled in other countries (called
outsourcing), such as Romania, because of the low price of labor. Changes
in the foreign exchange rate can increase or decrease the value of products
overseas as well as the competitiveness of foreign products within the U.E.
states. The international dimension has become so important to the
management companies. IBM has a complex environment that includes
international as well as the other sectors discussed above.

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 1.4. Managerial ethics
1.4.1. Managerial Culture Influence

We intend to highlight some important aspects of the managerial

ethics with the strategic approach and to present the specific of this
relationship in the economy of the industrial companies in Romania.

The strategic, tactic and operative behavior of the managers of a

company is strongly influenced by their knowledge and culture they have in
the field of business.
The idea according to which managerial culture represents an
efficiency element is shared by more and more experts, allowing the
company to integrate as well as it can in the world of business, but also a
stability factor as a system of values shared by the managers of the
organization managerial culture is a product having a special complexity, it
is not only the result of the strategic approach of the industrial unit,
coherently developed in time, but it also has its source in the history of the
industrial unit and in its organizational culture.

Edgar Schein, the American researcher, includes in the organizational

culture the following: the rules of inter-human behavior; the inner rules of
the team; the system of values shared by the organization; the philosophy
inspiring the political behavior of the organization concerning the employees
and customers; rules governing an efficient work of the industrial unit; the
spirit and environment of the unit, mainly expressed in the manner of
contacting customers in the world of business.

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 Each company has a typical culture, this granting its identity. This
identity corresponds to the characteristics of the company i.e. stability and
coherence.
Managerial culture inspired by organizational culture is the
philosophical expression of directing business, of the working style adopted
by a manager, of the managerial policy and strategies. They also include the
traditions in management and the managers attitudes, managerial events and
last, but not least the standards of the managerial ethics.
The system of values is a reference factor, influencing the manager’s
conception regarding the ethics they promote in relationship with their
employees, their customers, their suppliers, the shareholders, the trade-
unions, the foreign investor, the business community.

1.4.2. Ethic Codes

The close relation between the system of values and the ethic
standards, which have to be the basis of the organizational behavior in
general, and the managerial one in special, lead to a growing interest of the
companies for ethic codes.
An ethic code (aiming at the company's businesses or the managerial
behavior) contains the rules and principles defining the proper, moral
conduct in business, in relationship with the inner or outer environment of
the company. Usually it is very difficult to establish what is right, what is
wrong, what is moral, immoral or amoral in the conduct of the company or
in that of the managers. This difficulty is much amplified today by the
turbulence of the business, environment, by the fast rhythm of the changes
within companies, due to either new technologies, new financial politics,

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new steam-lining, latest information, or, frequent crisis the company has to
face.
The companies and their managerial teams have to operate in a
context highly influences by competition and instability, in a permanent
change. As a consequence, more than in past, managers have to acquire and
integrate these new data in their conduct, in their decision-making, and to
direct in the long run the development of their companies, paying attention
to the strategic approach based on the ethic code.

1.4.3. Managerial Responsibility

For a manager, the strategic decision is therefore much more flexible,

more delicate and more risky. Making such a decision implies the
responsibility of the decision-maker, in as much as it can affect the survival
of the firm, the future of the employees, jeopardizing at the same time his
credibility as manger for the shareholders. A manager should expect to be
"judged" form the quality of his strategic decisions, for the way in which he
uses his capacities, for how he hands them over and make them accepted by
his subordinates in the company, and also for the degree of his intellectual
honesty in the case of a failure, which he is expected to have the courage to
admit.
Evaluation of strategic behavior of a manager gives rise to a real
dilemma in the sense that it implies a choice between two alternatives, both
being equally unacceptable considering the manager's decisions only on
purely economic and financial criteria, to the prejudice of the ones belonging
to managerial ethics and vice-versa, passing judgments on the managerial

59
activity considering the morality and correctness criteria only, ignoring the
economic-financial evaluation.
Facing such a dilemma brings about difficulties from the manager in
the sense that he’s often in the situation when he has to opt between the
standards of ethics or turning into account some opportunities that may bring
some profit.
Some examples to illustrate the above mentioned situation could be quoted
such as:
• the option of turning into unemployed some of the employees so as to
increase the profit of the company or the gradual politics of reducing
the number of the unskilled employees, or the retirement of those who
have a considerable length of service;
• the option between using in the production process of some noxious
materials, dangerous for the health of the workers, but which included
in the finished product would bring fabulous profits and the use of
some resources which are not a danger for the employees, but the use
of which is not profitable enough for the company,
• the option between adopting a strategy which could jeopardize the
competitive position of the company, but would ensure an adequate
protection of the environment, and a strategy which would mainly
ensure the rapid growth of profit and a better position in the market to
the prejudice of quality of the environment.
`More examples could be given. Ethically a rapid reorganizing of the
company should be promoted, with the unpredictable consequences on its
personnel, under the circumstances of a void in the Romanian legislation in
the field of social protection and then some radical structural changes in the
company? Is it fair that an employee gets a key-position by means of tribe,

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or only because he is very shy in business, or is it to be preferred a legal
contest (examination) to be organized for that position?
The above mentioned cases and similar ones highlight the
confrontation of the managers (of companies) with unattractive situation
(under economic aspect), but are unacceptable from the moral point of view
and vice-versa. These problems imply the managerial responsibility as for
the priorities, the economic-financial criteria or the moral ones in decision-
making.
The incompatibility between the economic-financial criteria and the
moral ones used in the decision-making process is only apparently. The
more highlighted this appearance, the longer the time interval implied by the
managerial decision. Why? Because the managerial team has in view the log
lasting performance and their objectives are profitable businesses in the log
run and do not steadily consider any opportunity to be profitable at any cost,
regardless the ethic code of business.
What we considered so far bring us to a definite conclusion: the
economic-financial considerations and the moral ones, to the extent to which
they are correctly interpreted, are not contradictory by al means. During a
longer time interval, conditions for them to converge could be created. In the
decision-making process, a manager with a responsible conduct cannot
avoid the moral code, the economic-financial aspects cannot be ignored
either in as much as the economic issues have an impact on the developing
strategy of the company in the log run. The strategic approach of the
company must be admitted as legitimate by the environment in which the
company develops. However, H.I. Ans even suggests a legitimating the aim
of which is to evaluate the economic strategy of the company; to implement
the social responsibility strategies, and to influence the evaluation

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development of the company by correlating the managers desires to the
society needs.
This view in business and the managerial conduct has a very firm
foundation and an economic viability, generating competitive advantage in
the log run.
In other words the company managers should learn to lose in the short
run if they want to gain in the log run by obeying the moral code of business
and being responsible for the decisions made.
These successes in business of the sound enterprises, who guide their
conduct according to moral standards, deny the idea according to which
moral is implied, profit is diminished.

1.4.4. Rules of managerial Ethics:

Managerial ethics and, generally the ethics of business according to

their deontological values have a growing importance in the field strategic
management of the companies seeking for long-lasting performance. Moral
conduct within these companies is more and more promoted in
implementing and controlling the cost strategies, the relationship with the
shareholders, customers suppliers and last, but not least with the trade
unions and the local community.
The managerial teams of the moneymaking companies realize more
and more that ethics is the art ensuring success in the long run, implying
respect for the employees, and the whole business community.
A study on successful companies (during the recent 5 years) doing
business with West European companies, we could identify some moral

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standards taken into account and they guided the managerial conduct in the
long run:
• rules of general ethics: honesty, loyalty, reliability, tolerance, rigor,
mutual respect;
• rules of professional ethics of managers: prompt delivery and
respect for customers, consideration for workers and employees,
obedience for inner rules and law, promotion of loyal relationship,
developing the team spirit, increased "transparence';
• rules of morals of the companies - hierarchies based on
acknowledged competence, fair pay of the employees, adequate
motivation, transparency of the 'rules of game', avoidance of:
nepotism, breach of trust, any kind of discrimination;
• norms of ethics in the strategic approach; establishing and
implementing competitive strategies in the log run, based on the right
perception of the inner and outer environment of the company, on
taking into account of the risk implied, on promoting the new and
optimum communication, avoidance of strategies based on abusive
marketing, on getting an as big profit as possible by all means, on
"underground" arrangements and coalitions;
• rules of market ethics: correct information, regulation of free
markets, removing violence of the market, of intimidation, fraud,
corruption, anti-social behavior.
A lot of managers are tempted to ignore ethic conduct and their social
responsibility under difficult circumstances or profound crises. In Romania,
during the recent 7 years, most companies were affected by global crises,
and they often ignored the existent laws and the moral standards in business.

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 1.4.5. Types of Companies According to Managerial Ethics:

On the basis of our researches in time, we reached the conclusion we

can establish (according to the existence or non-existence or a moral code of
business and the respect for legislation) the following types of companies
units:
• Amoral Companies. Generally they are small-size companies set up
after 1989 which permanently ignore legislation and its owner has no
idea of morality. He secures a great deal of his necessary resources
from the "underground network" and does not realize the
responsibility he has to take for his acts. The number of this type of
companies is rapid decreasing because of the new legislation and the
strict control of their activity by the legal authorities.
• Immoral Companies. This type of company exists mainly because of
the immorality of the managerial team who ignores the standards of
legal conduct and those of general ethics; the only reason inspiring
their conduct is profit at al costs. Their managerial culture is
undeveloped and, accordingly the ethics of business is non-existent.
• Illegal Companies. These types of companies are not exactly
companies specifically, since they do not have a legal status and are
not recorded in "The Register of Commerce". They operate illegally
and belong to the "underground" economy. For the legal authorities
their existence, in most cases, is not motivated. Most of these
company Managerial Ethics - Strategic Issues 47 are illegal "exchange
offices" in the street, the trade with smuggled goods.
• Legal Companies. Most companies belong to this type. They were
set up according to the existing legislation and at the same time,

64
 managerial culture is based upon consideration of law in business.
The companies belonging to this type operate according to the
principle: "What is not forbidden by law is permitted". In business
activities and their managerial conduct pay little respect for the moral
code and for the social responsibility.
• Ethic Companies. Managerial culture incorporates the values of
ethics. Accordingly, the managerial conduct is guided by the existing
ethic-legal standards. One can notice the balance between legality and
moral standards in decision-making process and business
environments.

2. Managerial Goals Setting and Planning

2.1. Overview of goals and plans
Most corporate planning is like a ritual rain dance: it has no effect on
the weather that follows, but it makes those who engage in it feel that they
are in control. Most discussions of the role of models in planning are
directed at improving the dancing, not the weather.
We are going to explore the process of planning and weather it can
help bring needed rain.
Special attention is given to goals and goal setting, for that is where
planning starts.
Goals and plans have become general concepts in our society. A goal
is a desired future state that the organization attempts to realize. Goals are
important because organizations exist for a purpose and goals define and
state that purpose. A plan is a blueprint for goal achievement and specifies
the necessary resource allocations, schedules, tasks, and other actions. Goals

65
specify future ends; plans specify today’s means. The term planning usually
incorporates both ideas; it means determining the organization’s goals and
defining the means for achieving them. Consider PPG (formerly Pittsburgh
Plate and Glass Company). In 1984, PPG’s return on equity was 15.7
percent. Chairman Vincent A. Sarni and his senior executives established
goals for 1994 of a return on equity of 18 percent, combined with annual
sales of 10 $billion. Their plane for achieving these goals was to obtain two-
thirds of the company’s sales from high profit products. Low-profit
operations were put on the sales block. Another part of the plan was to raise
R&D spending from 3.5 percent of sales to 4.8 percent. The ten-year goals
are ambitious, designed to make PPG one of the most profitable corporations
in America, but senior management has a plan it believes will succeed.
The planning process starts with a formal mission that defines the
basic purpose of the organization. Then companywide strategic goals are
determined and form the basis for the organization’s lower-level objectives.
The term objective is often used interchangeably with goal but usually refers
to specific short-term targets for which measurable results can be obtained.
The organization’s goals and plans exist at 3 levels: the strategic (company)
level, the tactical (divisional) level, and the operational (department) level.
Strategic goals influence the tactical objectives, which in turn influence
operational objectives because goals and objectives must support one
another.

66
 Exhibit 2.1. Relationship between Goals and Plans in the Planning Process.

Developing explicit goals and plans provide several important benefits

for on organization.
Source of motivation and commitment.
A goal statement describes the purpose of the organization or subunit to
employees. A goal provides the ‘why’ of an organization’s or subunit’s
existence. A plan tells employees what actions to undertake. A plan tells
‘how’ to achieve the goal. Goals and plans facilitate employees’
identification with the organization and help motivate them by reducing
uncertainty and clarifying what they should accomplish.
Guides to action.
Goals and plans provide a sense of direction. They focus attention on
specific targets and direct employee efforts toward important outcomes.
Rationale for decisions.
Through goal setting and planning, managers learn what the
organization is trying to accomplish. They can make decisions to ensure that

67
internal policies, roles, performance, structure, products, and expenditures
will be made in accordance with desired outcomes. Decisions throughout the
organization will be in alignment with the plan.
Standard of performance.
Before goals define desired outcomes for the organization, they also
serve as performance criteria. They provide a standard of assessment. If an
organization wishes to grow by 15 percent, and actual growth in 17 percent,
managers will have exceeded their prescribed standard.
The overall planning process prevents managers from thinking merely
in terms of day-to-day activities. When organizations drift away from goals
and plans, they typically get into trouble.
Setting goals starts with top managers. The overall planning process
begins with a mission statement and strategic goals for the organization as a
whole.
Organizational mission
Mission: the organization’s reason for existence.
Mission statement: a broadly state definition of the organization’s basic
business scope and operations that distinguish it from similar types of
organizations.
The mission describes the organization’s values, aspirations, and
reason for being. The formal mission statement is broadly stated definition
of basic business scope and operations that distinguish the organization from
others of a similar type. The content of a mission statement often focuses on
the market and customers and identifies desired fields of endeavor. Some
mission statements describe company characteristics such as corporate
values, product quality, location of facilities and attitude toward employees.
Mission statements often reveal the company’s as well as purpose.

68
 Types of goals

Within the organization there are three levels of goals:

-strategic goals;
-tactical objectives;
-operational objectives;
Strategic goals
Broad statements of were the organization wants to be in the future
are called strategic goals. They pertain to the organization as a whole rather
than to specific divisions or departments. Strategic goals sometimes are
called official goals, because they are the stated intentions of what the
organization wants to achieve.
What do strategic goals cover? Peter Drucker suggests that business
organizations’ goals should encompass more than profits, because profits
alone lead to short-term thinking. He suggests that organizations focus on
eight content areas: market standing: innovation: productivity: physical and
financial resources; profitability; managerial performance and development;
worker performance and attitude; and public responsibility.
Drucker’s first five goal areas relate to the tangible, measurable aspect
of the organization and its operations. The last three are most subjective and
personal. Most organizations have explicit strategic goals in some but not in
all of these areas. For example, Columbia Gas System set the following four
strategic goals for 1986 to 1990 period to fit the mission described earlier:
1. Meet stockholders’ expectations as to total return.
2. Have access to reasonable amounts of capital at reasonable costs at
all times;

69
 3. Provide for efficient management of and planned growth in
stockholders’ equity;
4. Insure the orderly succession of System officers, and enhance
employee performance;
These goals pertain to profitability and stockholders’ return, efficient
management, the acquisition of financial resources, and manager/employee
performance and development.
Tactical objectives
The results that major divisions and departments within the
organization intend to achieve are defined as tactical objectives. These
objectives apply to middle management and describe what major subunits
must do in order for the organization to achieve its overall goals. For
example, one tactical objective for Columbia Gas was to “regain a long-term
debt rating by the end of 1988.” This tactical objective pertains to strategic
goal 2 regarding access to reasonable amounts of capital. Achieving this
objective will increase the organizations’ ability to borrow money at a
reasonable rate. The Winning Moves box tells how Timex used strategic
goals and tactical objectives to reassert itself in the wristwatch market.

Operational objectives
The specific result expected from departments, work groups, and
individuals are the operational objectives. They are precise and measurable.
“Process 150 sales applications each week”, “reduce overtime by 10 percent
next month”, and “develop two new elective courses in accounting” are
examples of operational objectives.

70
 Effectively designed organizational goals and objectives fit into a
hierarchy; that is, the achievement of objectives at lower levels permits the
attainment of higher-level goals. This is called a means-ends chain because
lower-level objectives lead to accomplishment of higher-level goals.
Operational objectives lead to achievement of tactical objectives, which in
turn lead to the attainment of strategic goals. Strategic goals typically are the
responsibility of top management, tactical objectives that of middle
management, and operational objectives that of first-line supervisors and
workers.

Exhibit 2.2. Hierarchy of Objectives for a Manufacturing Organization

2.2. Goal characteristics

71
 The following characteristics pertain to organizational goals at the
strategic, tactical, and operational levels.
Specific and measurable.
When possible, goals should be expressed in quantitative terms, such as
increasing profits by 2 percent, decreasing scrap by 1 percent, or increasing
average teacher ratings from 3.5 to 3.7. Not all goals can be expressed in
numerical terms, but vague goals and objectives have little motivating power
for employees. At the top of the organization, goals are often qualitative as
well as quantitative. John Reed, CEO of Citicorp, has defined both
qualitative and quantitative goals for his organization, including:
• Trim work force from 20,000 to 17,000.
• Clean up loan portfolio, reduce write-offs.
• Wire 90 trading rooms around the globe.
• Build a merger and acquisition finance group.
Each goal is precisely defined and allows for measurable progress.
Conflict often occurs during goal setting because key managers disagree
over objectives. Yet for goals to be effective, commitment is essential. Two
techniques for achieving commitment to goals are coalition building and
participation.
Coalition Building.
An informal alliance among managers who support a specific goal is
called a coalition.
Coalition building is the process of forming alliances among
managers. In othcr words, a manager who snpports a specific goal, such as
increasiug tlie corporation's growth by acquiring anolher com- pany, talks
informaily to othcr executives and tries to persuado them to snpport the

72
goal. Coalition building involves negotiation and bargaining. Without a
coalition, a powerful individual or group conld derail the goal-setting
process. Coalition building gives managers nn opportunily to contribute to
the goal-setting process, cnhancing their commitment to the goals that are
finally adopted.

Coalition building occurs most often at the uppcr levels of the

organization, where uncertainty îs high. For example, Compaq Computer
Corporation, described as a Theory Y coinpany in Chapter 2, spccîalizes in
coalition build ing. Compaq was slow to dcvelop a laptop computer,
bccause designs were tumed down three times because one or more
managers did not agrec with the prototype. But whcn the 286-SLT laptop
was finally acceptcd by consensus, it was perfect for the niarket and was an
immediate smash, Robcrt Forsberg, president of Mupac Coiporation,
facilitates coalition building throngh ever- widening circles of managers. Hc
slarts with senior managers who set strategic goals and llicn hroadens the
circle of participatiun to include clepartment man agers. Moreover, thc cntirc
management team participatcs in brainstorming sessions to plan how to
achieve the targets in Mupac's five-year plan. The final action plans are
adopted by consensus.

Participation.
At lower levels of the organization, managers and supervi- sors try to adopt
objectives that arc consistent with strategic goals. However, if operaţional
objectives are prescribed in a onc-way top-down fashion, supervi- sors and
employccs may not adopt the goals as their own. A more effectivc process
is to encourage subordinates to participate in the goal-setting process.

73
Managers can describe the organization's goals and act as connselors by
helping subordinates sort out various goal options, discussing whether the
objectives are realistic and specific, and determining whether objectives are
congruent with organizational goals. Goal discussions between superior and
subordinate take into consideration the subordinate's interests and abilities.

Developing Plans for Attaining Goals.

Defîning organization al goals and objectives is the first step in the

planning process. Thc second step — which is equally important — is to
define plans for meeting objectives. Targets mean little if managers do not
map ont the path ways to them. Managers often fînd the development of
plans difficult. One study found that seven out of ten companies did not
21
carry stvategy formulation much beyond general statements of objectives.
Managers found it difficult to specîfy how to reach future targets. Yet
detailed planning is an important com ponent of future performance.
In developing plans for attaining goals, ma nagers have several types
of plans at their disposal, including strategic plans, tactical plans,
operaţional plans, single-use plans, standing plans, and contingency plans.

Strategic Plans
Strategic plans define the aetion steps by which a company intends to
attain strategic goals. The strategic plan is the blueprint that defines the
organizational activities and resource allocations — in the form of cash,
personnel, space, and facilities — required for meeting those targets.
Strategic planning tends to be long term and may define
organizational action steps from two to five years into the future. The

74
purpose of the strategic plan is to turn organizational goals into realities
ovcr that time period. For example, Bob Wright, new CEO of NBC,
adopted a goal of expansion in an industry where costs have been cut to
the bone and growth is slow. The plan NBC's executives adopted involves
three parts: buy stations, such as WTVJ-TV in Miami, and perhaps two
UHF outlets; expand the audience trough cable TV, such as offering sports
or entertainment cable channels; and have NBC produce more of the
programs it airs, thereby profiting from the production of hit shows.
As another example, a small company wanted to improve its market
share from 15 to 20 percent over the next three years. This objective was
pursued through the following strategic plans: (1) allocate resources for the
development of new, competitive products with high growth potenţial; (2)
improve produetion methods to achieve higher output at lower costs; and (3)
conduct research to develop alternative uses for current products and
services.

Tactical Plans
Tactical plans are designed to help execute major strategic plans and
to accomplish a specific part of the company's strategy. Tactical plans
typically have a shorter time horizon than strategic plans — over the next year
or so. The term tactical derives from the militaiy. For example, strategic
weapon systems, such as Intercontinental Ballistic Missiles or the B1
bomber, are designed to deliver major blows to the enemy, Strategic weapon
systems reflect the country's overall strategic plans. Tactical weapon
systems, such as fighter airplanes, are used to achieve just one part of the
overall strategic plan.

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 Tactical plans defîne what the major departments and organizational
subunits will do to implement the overall strategic plan. Normally it is the
middle manager's job to take the broad strategic plan and identify specific
tactical actions. For example, Jolt Cola, introduced in 1986, had a strategic
plan that called for high levels of sugar and caffeine to appeal to a specific
niche in tlie marketplace for soft drinks. Packaging the product to
accommodate this market segment was an important part of the tactical plan.
The package had a yellow lightning bolt flashing through a red and white
logo. The labei looked like something out of a comic book, but its chief
tactical prpose was to convey the product's image — a jolt — and this it did.

Operational Plans
Operational plans are developed at the lower levels of the
organization to specify action stcps toward achieving operaţional goals and
to support tactical plans. Tlie operaţional plan is the department manager's
tool for daily and weekly operations. Objectives are stated in quantitative
terms, and the department plan describes how objectives will be achieved.
Operaţional planning specifies plans for supervisors, department
managers, and individual employ ees. For example, Du Pont has a
program called Individual Career Manage ment that involves a series of
discussions that defîne what each manager's new goals should be and
whether last year's operaţional goals were met. At Du Pont the goals are
set as high as possible to stretch the employee to insure continued
improvement. These year-end discussions also provide the basis for
rewards to those who have excelled.

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 Schedules are an important component of operaţional planning.
Schedules define precise time frames for the completion of each objective
required for the organization's tactical and strategic goals. Operaţ ional
planning also must be coordinated with the budget, because resources
must be allocated for de sired activilies. For example, Apogee Enterprises,
a window and glass fabrica tor with 150 small divisions, is fanatical about
operaţional planning and budget-ing. Committees are set up that require
inter- as wcll as intra-divisional review and challenge of budgets, profit
plans, and proposed capital expeditures. Assigning the dollars makes the
operaţional plan work for everything from hiring new salespeople to
increasing travel expenses.

Single-Use Plans
Single-use plans are developed to achieve a set of objectives that are
not likely to be repeated in the future. Single-use plans typically include
both programs and projects.
Pprogram
A program is a complex set of objectives and plans for attaining an
important, one-time organmitional goal. The program is designed to carry
out a major course of action for the organization. An example of such a pro-
gram is the Pershing missile program at Martin Marietta. Others include the
development of the space shuttle for NASA, the Boeing 767 aircraft, and the
System 360 computer by IBM, Programs are major undertakings, may take
scveral years to complete, and often reqnire the creation of a separate
organization. Programs are large in scope and may be associatcd with
several projects.
Pproject

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 A project is also a set of objectives and plans designed to achieve a
one-time goal but generally is smaller in scope and complexity than a
program, it normally has a shorter time horizon and rcquires fewer resources.
A projeet is often one part of a program. Thus, when NASA works to
complete its space station program, it will have one project for a rocket
booster, one for the environment inside the space station, and one for the
station's external shell. A specific project is defîned for each major
component of the overall program. Within business corporations, projects
often are undertaken to perform a specific activity that is not part of the
normal production process.
For example, the name change from U.S. Steel to USX Corporation
was a project. Hundreds of worker-hours and millions of dollars were spent
researching a name that would characterize the corporation’s new mission.
Another project at USX evolved from the decision to close some of its steel
plants. A project team was created to study the steel plants and decide which
ones to close.

2.3. Develop a career plan

(First homework)

Welcome to the guided tour of Planning a Career. On this tour, you

can find out how to choose a career and how to reach your career goal. You
can also pick up useful tips on job hunting, resume writing, and job
interviewing techniques. Feel free to leave the tour at any time to find out
more about a subject just by clicking on the highlighted text.

Ten Steps to Planning Your Career:

1. Develop a career plan. Think about what you want to do and find out
more about the kind of training, education, and skills you will need to
achieve your career goal.

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 2. Assess your skills and interests. Think hard about what you enjoy, what
you are good at, what kind of personality you are, and the values you hold.

3. Research occupations. Find out more about the nature of the jobs that
interest you, such as educational requirements, salary, working conditions,
future outlook, and anything else that can help you narrow your focus.

4. Compare your skills and interests with the occupations you've selected.
The career that matches your skills, interests, and personality the closest
may be the career for you.

5. Choose your career goal. Once you've decided what occupation matches
up best with you, then you can begin developing a plan to reach your career
goal.

6. Select a school that offers a college degree or training program that best
meets your career goal and financial needs.

7. Find out about financial aid to help support you in obtaining your career
goal. If you haven't already done so, begin saving for college.

8. Learn about job hunting tips as you prepare to graduate or move into the
job market.

9. Prepare your resume, and practice job interviewing techniques.

10. Go to your career guidance center (at your middle school, high school,
or college) or local library for additional information and help on career
planning, or check out our Other Internet Resources.

Career Plan
What do you want to be?

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 With all career possibilities available, how do you make a decision?
Once you know what career path you want to follow, how do you get there?
One way to answer questions about your future career is to develop a
career plan. A career plan outlines the steps you need to take to reach your
career goal.
Steps to Developing a Career Plan
1. Develop a career plan to determine your interests and skills.
Thinking about your skills and interests can help you find a satisfying
career.
To determine your interests, think about what you like to do. Think
about experiences you have enjoyed. Evaluate what you liked, what you
found challenging, and what you may have learned from those experiences.
Make a list of activities you have enjoyed during the past few years.
2. Make a list of skills you have. Your skills may include training
you have gained through part-time or full-time jobs. Even if you haven't
been employed before, you do have some skills which will help you find a
job. For example, you may have skills you learned through volunteer work
or through social activities.
Evaluate those skills and interests you have listed. Are there similar
activities on the two lists? Are there any experiences that could turn into a
career? For instance, if you volunteered at a hospital and enjoyed the
experience, you may want to consider a medical career.
3. Find out about the types of careers available to you. If you don't
research careers, you may not know about the best occupations to fit your
interests and skills.
It's also important to decide if the career you are considering is really
what you expect and whether it offers the salary and benefits you want. One
good way to learn about a career is to intern in the position. (Internships are
also a great way to gain experience in your selected career field). Another
good way to find out about a job is to network -- talk to someone who is in
the career now.
4. Once you have determined what career path you want to follow,
assess what you need to do to prepare for that career. Do you need special
training? If so, research the schools that offer the kind of training you need.
What kinds of experience will you need to be successful in the career?
Consider an internship as a way to get work experience in the career field.
By developing a career plan, you can focus on what you want to do
and how to get there. And when you are ready to write your resume for your
job search, you will have a better understanding of your skills and
experiences to discuss with potential employers.

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 Sample Career Plan
A career plan is developed after you have analyzed your skills and
interests and researched possible occupations. Match your skills and
interests to an occupation, decide on a career goal and plan how you will
reach that goal.
Career Plan
Career goal:
To become a civil engineer, to design, plan, and supervise the
construction of buildings, highways, and rapid transit systems.
Requirements:
• Bachelor's degree in engineering.
• Ability to work as part of a team.
• Creativity.
• Analytical mind.
• Capacity for detail.
• Presentation skills.
• Writing skills.
• Knowledge of physical sciences and mathematics.
• Accreditation by Licensing Board.

2.4. Managerial Decision Making

2.4.1. Management Problem

Decision making involves the ability to collect, organize, and

synthesize information into a useful form for identifying and evaluating
alternate options. It takes knowledge and puts it into action; it applies and
uses knowledge. Another element of decision making is risk taking. For
example, a decision without some risk is usually easy to make. A decision
with risk requires the use of our judgment and good judgment is learned
through practice and experience.

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 What if you owned a retail business that does most of its business in
four hours each day, but must remain open 24 hours. What decision do you
make about the dead time? This problem is real for Tony Andrade, who
owns six Dunkin’ Donuts franchises. The business is terrific between 6
o’clock and 10 o’clock in the morning when over 50 percent of the coffee
and doughnuts are sold. But doughnuts must be replaced every five hours,
causing lots of waste the rest of the day. Even worse, the fast-food
franchises - Burger King, Wendy’s practically everyone - and supermarket
bakeries are throwing themselves into the break-fast competition. Andrade’s
franchises are still profitable, but between dead time and competition, things
are bound to get worse.
If you were Tony Andrade, would you make a decision about dead
time? What alternatives would you consider, and what course of action
would you select?
The Dunkin’ Donuts franchises are not in trouble yet, but Tony
Andrade and other franchises owners may need to use their decision-making
skills to make important decisions that will affect the future of their
businesses. Organizations grow, prosper, or fail as result of decisions by
their managers. Managers often are referred to as decision makers. Although
many of their important decisions are strategic, managers also make
decisions about every other aspect of an organization, including structure,
control systems, responses to the environment, and human resources.
Managers scout for problems, make decisions for solving them, and monitor
the consequences to see whether further decisions are required. Good
decision making is a vital part of good management because decisions
determine how the organization solves its problems, allocates resources, and
accomplishes its objective.

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 Decision making is not easy. It must be done amid ever-changing
factors, unclear information, and conflicting points of view. For example,
when Chairman Patrick Hayes of Waterford Glass tried to cut costs by
offering early retirement to the highly paid work force that makes Waterford
crystal, too many experienced glassblowers opted for retirement. The
remaining workers have not been able to achieve enough output, hence
crystal operations have lost money for two years straight. John Sculley,
chairman of Apple Computer, bet on a shortage of memory chips, the
personal computer’s most common component. Pale acquired a big
inventory of high-priced chips, and when the shortage alleviated a few
months later, Apple was forced to lower the price of its expensive Apple
products. Kay Koplovitz worked her way up to president of USA Network
and is now betting the company’s future to finance 24 original movies and
other television programming over the next two years. This is a nail-biting
gamble, but she prefers risk taking to playing it safe, despite the incredible
consequences if she bets wrong.
As a manager, you can defer decision making, refuse to make a
decision, make a decision quickly, and reverse a decision. Your motive
should be to do everything to help your team to get the job done effectively
and efficiently.

2.4.2. Types of Decisions and Problems

A decision is a choice made from available alternatives. For

example, an accounting manager’s selection among Bill, Nancy, and Joan

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for the position of junior auditor is a decision. Many people assume that
making a choice is the major part of decision making, but it is only a part.
Decision making is the process of identifying problems and
opportunities and then resolving them. Decision making involves effort both
prior to and after the actual choice. Thus, the decision as whether to select
Bill, Nancy, or Joan requires the accounting manager to ascertain whether a
new junior auditor is needed, determine the availability of potential job
candidates, interview candidates to acquire necessary information, select one
candidate, and follow up with the socialization of the new employee into the
organization to insure the decisions’ success.
Programmed and Non-programmed Decisions
Management decisions typically fall into one of two categories:
programmed and nonprogrammed.
Programmed decisions involve situations that have occurred often
enough to enable decision rules to be developed and applied in the future.
Programmed decisions are made in response to recurring organizational
problems. The decision to reorder paper and other office supplies when
inventories drop to a certain level is a programmed decision. Other
programmed decisions concern the types of skills required to fill certain
jobs, the reorder point for manufacturing inventory, exception reporting for
expenditures 10 percent or more over budget, and selection of freight routes
for product deliveries. Once managers formulate decision rules, subordinates
and others can make the decision, freeing managers for other tasks.
Programmed decisions recur and are predictable. Well-defined
procedure is used to make these decisions, such as production scheduling,
assigning shifts, following standard operating procedures, and inventory
maintenance. Computers are very helpful with these types of decisions.

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 Shorty, another explanation that could be given:
 programmed decisions - decisions that have been encountered
and made in the past
 have objectively correct answers
 are solvable by using simple rules, policies, or numerical
computations
Nonprogrammed decisions are made in response to situations that
are unique, are poorly defined and largely unstructured, and have important
consequences for the organization. Nonprogrammed decisions often involve
strategic planning, because uncertainty is great and decisions are complex.
Nonprogrammed decisions would include decisions to build a new factory,
develop a new product or service, enter a new geographical market, or
relocate head-parters to a new city. The decision facing Dunkin’ Donuts
franchisees described at the beginning of this chapter is an example of a
nonprogrammed decision. Routine decision rules or techniques for solving
this problem do not exist. Tony Andrade will spend long hours analyzing the
problems, developing alternatives, and making a choice.
Some short attributes of nonprogrammed decisions are:
1. Unique
2. Poorly defined
3. Largely unstructured
4. Likely to have important consequences
5. Uncertainty is great
6. Decisions are complex
7. Routine decision rules for solving the problem do not exist.

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 In a perfect world, managers would have all the information necessary
for making decisions. In reality, however, some things are unknowable; thus,
some decisions will fail to solve the problem or attain the desired outcome.
Managers try to obtain information about decision alternatives that will
reduce decision sucertainty. Every decision situation can be organized on a
scale according to the availability of information and the possibility of
failure. The four positions on the scale are certainty, risk, uncertainty, and
ambiguity.

CERTAINTY. Certainty means that all the information the decision

maker needs is fully available. Managers have information on operating
conditions, resource costs or constraints, and each course of action and
possible outcome. For example, if a company considers a $10,000
investment in new equipment that it knows for certain will yield $4,000 in
cost savings per year over the next five years, managers can calculate a
before-tax rate of return of about 40 percent. If managers compare this
investment with one that will yield only $3,000 per year in cost savings, they
can confidently select the 40 percent return. However, few decisions are
certain in the real world. Most contain risk or uncertainty.

RISK. Risk means that a decision has clear-cut objectives and good
information is available but the future outcomes associated with each
alternative are subject to chance. However, enough information is available
to allow the probability of a successful outcome for each alternative to be
estimated. Statistical analysis might be used to calculate the probabilities of
success or failure. The measure of risk captures the possibility that future
events will render the alternative unsuccessful. For example, a petroleum

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executive may bid to sell 10,000 barrels of a petroleum distillate, knowing
that there is an 80 percent chance of success with a $5 per barrel price and a
50 percent chance with a $4.20 price. When Sears introduced its “everyday
low pricing” strategy, managers felt that they had better than a 80 percent
chance of succeeding. Using probabilities, managers can determine which
alternative is most desirable for their company.

UNCERTAINTY. Uncertainty means that managers know which

objective they wish to achieve but information about alternatives and future
events is incomplete. Managers do not have enough information to be clear
about alternatives or to estimate their risk. Factors that may affect a decision,
such as price, production costs, volume, or future interest rates, are difficult
to analyze and predict. Managers may have to make assumptions from
which to forge the decision even though the decision will be wrong if the
assumptions are incorrect. Managers may have to come up with creative
approaches to alternatives and use personal judgment to determine which
alternative is best.
For example, Time Inc.’s decision to launch a new magazine
called TV-Cable Week was made under uncertainty. Time was unable to get
good data on critical variables; thus, it assumed that the magazine would
capture a 60 percent market penetration among cable subscribers and that
Time would reach distribution agreements with 250 cable systems. These
assumptions turned out to be wildly unrealistic, and the magazine launch
was a failure. Many decisions made under uncertainty do not work out as
desired, but sometimes managers must be risk takers. Risk taking is
especially important when starting a new business, as illustrated in the Focus
on Entrepreneurship box.

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 AMBIGUITY. Ambiguity is by far the most difficult decision
situation. Ambiguity means that the objectives to be achieved or the problem
to be solved are unclear, alternatives are difficult to define, and information
about outcomes is unavailable. Ambiguity is what students would feel if an
instructor created student groups, told each group to write a paper, but gave
the groups no topic, direction, or guidelines whatsoever. Ambiguity has been
called a “wicked” decision problem. Managers have a difficult time coming
to grips with the issues. Wicked problems are associated with manager
conflicts over objectives and decision alternatives, rapidly changing
circumstances, fuzzy information, and nuclear linkages among decision
elements. Fortunately, most decisions are not characterized by ambiguity.
But when they are, managers must conjure up objectives and develop
reasonable scenarios for decision alternatives in the absence of information.
One example of an ambiguous decision was the marketing department
assignment to develop an advertising campaign for a birth control device.
Managers were unclear about advertising norms, to whom the ad should be
targeted (men, women, marrieds, singles), ad content, or media. The entire
approach had to be worked out without precedent.
Another example is the movie industry - one of the most difficult in
which to make decisions, because so many new movies are flops. Studio
decision makers, however, are seeking new ways to reduce risk and
uncertainty,

2.4.3. Decisions Making Models

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 The approach managers use to make decisions usually falls into one
of two types - the classical model or the administrative model. The choice of
model depends on the manager’s personal preference, whether the decision
is programmed or nonprogrammed, and the extent to which the decision is
characterized by risk, uncertainty, or ambiguity.

Classical Model

The classical model of decision making is based on economic

assumptions. This model has arisen within the management literature
because managers are expected to make decisions that are economically
sensible and in the organization’s best economic interests. The assumption
underlying this model is as follows:
1. The decision maker operates to accomplish objectives that are
known and agreed upon. Problems are precisely formulated and defined.
2. The decision maker strives for conditions of certainty, gathering
complete information. All alternatives and the potential results of each are
calculated.
3. Criteria for evaluating alternatives are known. The decision
maker selects the alternative that will maximize the economic return to the
organization.
4. The decision maker is rational and uses logic to assign values,
order preferences, evaluate alternatives, and make the decision that will
maximize the attainment of organizational objectives.

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 The classical model of decision making is considered to be
normative, which means it defines how a decision maker should make
decisions. It does not describe how managers actually make decisions so
much as it provides guidelines on how to reach an ideal outcome for the
organization. The value of the classical model has been its ability to help
decision makers be more rational. For example, many senior managers rely
solely on intuition and personal preferences for making decisions. In recent
years, the classical approach has been given wider applications because of
the growth of quantitative decision techniques that use computers.
Quantitative techniques include such things as decision trees, pay-off
matrices, breakers analysis, linear programming, forecasting, and operations
research models. The use of computerized information system and data
bases has increased the power of the classical approach.
In many respects, the classical model represents an “ideal” model of
decision making that is often unattainable by real people in real
organizations. It is most valuable when applied to programmed decisions
and to decisions characterized by certainty or risk, because relevant
information is available and probabilities can be calculated. One example of
the classical approach is the decision model developed by Weyerhauser
Company for converting a timbers harvest into end products. It starts with
the description of a tree - size and shape - and evaluates such factors as
harvesting costs, hauling, mill location facility operations, expected end
products (plywood, dried trim, and fiber, lumber) and customer demand. The
model help managers evaluate hundreds of possibilities for moving lumber
through the production process to the consumer and choose the most
economically efficient alternatives.

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 Administrative Model

The administrative model of decision making describes how

managers actually make decisions in difficult situations, such as those
characterized by nonprogrammed decisions, uncertainty, and ambiguity.
Many management decisions are not sufficiently programmable to lend
themselves to any degree of quantification. Managers are unable to make
economically rational decisions even if they want to.

BOUNDED RATIONALITY AND SATISFICING. The administrative

model of decision making is based on the work of Herbert A. Simon. Simon
proposed two concepts that were instrumental in shaping the administrative
model bounded rationality and satisfying. Bounded rationality means that
people have limits, or boundaries, on how rational they can be. The
organization is incredibly complex, and managers have the time and ability
to process only a limited amount of information with which to make
decisions. Because managers do not have the time or cognitive ability to
process complete information about complex decisions, they must satisfied.
Satisfying means that decision makers choose the first solution alternative
that satisfies minimal decision criteria. Rather than pursuing all alternatives
to identify the single solution that will maximize economic returns,
managers will opt for the first solution that appears to solve the problem,
even if better solutions are presumed to exist. The decision maker cannot
justify the time and expense of obtaining complete information.
An example of both bounded rationality and satisfying occurs when a
junior executive on a business trip stains her blouse just prior to an
important meeting. She will run to a nearby clothing store and buy the first

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satisfactory replacement she finds. Having neither the time nor the
opportunity to explore all the blouses in town, she satisfies by choosing a
blouse that will solve the immediate problem. In a similar fashion, managers
generate alternatives for complex problems only until they find one they
believe will work. For example, a few years ago, Disney chairman Ray
Watson and chief operating officer Ron Miler attempted to thwart takeover
attempts, but they had limited options. The acquisition of these companies
had the potential to solve the problem at hand; thus, they looked no further
for possibly better alternative.
The administrative model relies on assumptions different from those
of the classical model and focuses on organizational factors that influence
individual decisions. It is more realistic than the classical model for
complex, nonprogrammed decisions. According to the administrative model:
1. Decision objectives often are vague, conflicting, and lack
consensus among managers. Managers often are unaware of problems or
opportunities that exist in the organization.
2. Rational procedures are not always used, and when they are,
they are confined to a simplistic view of the problem that does not capture
the complexity of real organizational events.
3. Manager’s search for alternatives is limited because of human,
information, and resource constraints.
4. Most managers settle for a satisfying rather than a maximizing
solution. This is partly because they have limited information and partly
because they have only vague criteria for what constitutes a maximizing
solution.
The administrative model is considered to be descriptive, meaning
that it describes how managers actually make decisions in complex

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situations rather than dictating how they should make decisions according to
a theoretical ideal. The administrative model recognizes the human and
environmental limitations that affect the degree to which managers can
pursue a rational decision-making process.

INTUITION. Another aspect of administrative decision making is

intuition. Intuition represents a quick apprehension of a decision situation
based on past experience but without conscious thought. Intuitive decision
making is not arbitrary or irrational, because it is based on years of practice
and hands-on experience that enable managers to quickly identify solutions
without going though painstaking computations. Managers rely on intuition
to determine when a problem exists and to synthesize isolated bits of data
and experience into an integrated picture. They also use their intuitive
understanding to check the results of rational analysis. It the rational analysis
does not agree with their intuition, managers may dig further before
accepting a proposed alternative.
Intuition helps managers understand situations characterized by
uncertainty and ambiguity that have proven impervious to rational analysis.
For example, virtually every major studio in Hollywood turned down the
Star Wars concept except 20th Century Fox. George Lucas, the creator of
Star Wars, had attempted to sell the concept to 12 major studios before
going to Fox. In each case, the concept had been rejected. All 13 studios saw
the same numbers, but only Alan Ladd and his associates at Fox had the
right “feel” for the decision. Their intuition told them that Star Wars would
be a success. In addition, George Lucas was told by many experts that the
title Star Wars would turn away crowds at the box office. His intuition said
the title would work. The rest is history.

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 The key dimensions of the classical and administrative models are
listed in the table bellow. Recent research into decision-making procedures
has found rational, classical procedures to be associated with high
performance for organizations in stable environments. However,
administrative decision-making procedures and intuition have been
associated with high performance in unstable environments, in which
decisions must be made rapidly and under more difficult conditions.
Whether a decision is programmed or nonprogrammer
and regardless of manager’s choice of the classical or
administrative model of decision making, six steps typically
are associated with effective decision processes. These are
depicted in the following diagram.

A. RECOGNITION OF DECISION REQUIREMENT

Managers confront a decision requirement in the form

of either a problem or an opportunity. A problem occurs
when organizational accomplishment is less than
established objectives. Some aspect of performance is
unsatisfactory. An opportunity exists when managers see
potential accomplishment that exceeds specified current
objectives. Managers see the possibility of enhancing
performance beyond current levels.

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 Awareness of a problem or opportunity is the first
step in the decision sequence and requires surveillance of
the internal and external environment for issues that merit
executive attention. This resembles the military concept of
gathering intelligence. Managers scan the world around
them to determine whether the organisation is satisfactory
progressing toward its goals. For example, managers at Well
Fargo & Company in San Francisco survey employees to
detect potential human resources problems. The survey
covers effectiveness of company advertising, product quality,
and responsibility to the community, as well as employee
satisfaction and organizational climate.
Some information comes from periodic accounting reports, MIS
reports, and other sources that are designed to discover problems before they
become too serious. Managers also take advantage of informal sources. They
talk to other managers, gather opinions on how things are going, and seek
advice on which problems should be tackled or which opportunities
embraced.
Recognizing decision requirements is difficult, because it often means
integrating bits and pieces of information in novel ways. For example,
Worlds of Wonder, Inc., developed the first animated talking toy, called
Teddy Ruxpin, and Lazer Tag. The astonishing success of these products
was due to the pulse taking of customers. Worlds of Wonder works regularly
with 1,000 families chosen at random to learn about problems and
opportunities in the marketplace for toys. This early recognition contributed

95
directly to the success of Lazer Tag, a toy geared for the young-adult
market.

B. DIAGNOSIS AND ANALYSIS OF CAUSES

Once a problem or opportunity has come to a manager’s attention, the

understanding of the situation should be refined. Diagnosis is the step in the
decision-making process in which managers analyze underlying causal
factors associated with the decision situation. Managers make a mistake here
if they jump right into generating alternatives without first exploring the
cause of the problem more deeply.
Kepner and Tregoe, who have conducted extensive studies of manager
decision making, recommned that managers ask a series of questions to
specify underlying causes, including:
• What is the state of disequilibrium affecting us?
• When did it occur?
• Where did it occur?
• How did it occur?
• To whom did it occur?
• What is the urgency of the problem?
• What is the interconnectedness of events?
• What result came from which activity?

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 Such questions help specify what actually happened and why. Toyota
asked questions like these when diagnosing the need for a new luxury car.

TOYOTA
Toyota’s most popular car in North America is the inexpensive
Camry, the car targeted at the lower end of the market. Based on informal
information from sales records and competitor sales, Toyota executives,
especially Chairman Toyoda, perceived a need to move into the luxury car
market. The people who for years bought Camrys were moving up in life
and wanting more expensive cars, such as the BMW, Mercedes, Porsche,
and Cadillac.
To fully define the decision requirements, Toyota dispatched 20
designers to the United States to study what customers wanted. They visited
dealers, buttonholed car buyers, and organized focus groups. They learned
that the need was for a luxury car that would suit younger buyers who
wanted to buy European cars but could not yet afford them. Because the
United States was the major market, a small team stayed in California
designing clay models. In the meantime, the U.S. subsidiary, Toyota Motor
Sales USA Inc., staged expensive comsumer research and discoveredthat the
average sales prospect was a 43-year-old male with a household income of
$100,000. A separate dealer network to handle the luxury car was also
recommended.
After all this information was pulled together, the Lexus was
born. Now Toyota and the rest of the automobile industry is waiting to see
whether the problem was properly diagnosed and whether the new
automobile will provide the conspicuous consumption that affluen
Americans love.

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 C. DEVELOPMENT OF ALTERNATIVES

Once the problem or opportunity has been recognized and analyzed,

decisions makers begin to consider taking action. The next stage is to
generate possible alternative solutions that will respond to the needs of the
situation and correct the underlying causes.
For a programmed decision, feasible alternatives are easy to
identify and in fact usually are already available within the organization’s
rules and procedures. Nonprogrammed decisions, however, require
developing new courses of action that will meet the company’s needs. For
decisions made under conditions of high uncertainty, managers may develop
one or two custom solutions that will satisfice for handling the problem.
Decision alternatives can be thought of as the tools for reducing
the difference between the organization’s current and desired performance.
Consider how Chrysler Corporation handled a problem of too little
production capacity.

CHRYSLER CORPORATION
After the turnaround led by Lee Iacocca, Chrysler found itself with
greater demand for cars in both American and European markets than it
could provide. Chrysler executives considered three alternatives, including
building new plants, having employees work nights and weekends in existing
plants, and renting additional production capacity on a temporary basis. If
Chrysler built new plants, it might get stuck with high overhead and excess
capacity, and because current plants were working full tilt, additional labor
hours would not produce many additional cars. The third alternative

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represented a creative solution. Chrysler executives rented an American
Motor plant in Kenosha, Wisconsin, to build Chrysler automobiles. The
AMC workers avoided a layoff, and Chrysler fulfilled its requirements of
greater short-run production capacity. Developing decision alternatives led
to a creative idea that helped Chrysler stay efficient and at the same time
sell more cars.

D. SELECTION OF DESIRED ALTERNATIVE

Once feasible alternatives have been developed, one must be

selected. The decision choice is the selection of the most promising of
several altenative courses of action. Managers’ goal is to make the choice
with the least amount of risk and uncertainty. Because some risk is inherent
for most nonprogrammed decisions, managers try to gauge prospects for
success. Under conditions of uncertainty, they may have to rely on their
intuition and experience to estimate whether a given course of action is
likely to succeed.
Making choices depends on the manager’s personality factors
and willingness to accept risk and uncertainty. For example, risk propensity
is the willingness to undertake risk with the opportunity of gaining an
increased payoff. The level of risk a manager is willing to accept will
influence the analysis of cost and benefits to be derived from any decision.

E. IMPLEMENTATION OF CHOSEN ALTERNATIVE

The implementation stage involves the use of managerial,

administrative, and persuasive abilities to ensure that the chosen alternative

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is carried out. The ultimate success of the chosen alternative depends on
whether it can be translated into action. Sometimes an alternative never
becomes reality because managers lack the resources or energy needed to
make things happen. Implementation may require discussion with people
affected by the decision. Communication, motivation, and leadership skills
must be used to see that the decision is carried out.
One reason Lee Iacocco succeded in turning Chrysler around
was his ability to implement decisions. Iococca personally hired people from
ford to develop new auto models. He hired people who shared his vision and
were eager to carry put his decisions.
By contrast, Tandy Corporation’s decision to become a major supplier
to businesses by setting up 386 computer centers to support a new direct sale
force floundered. Tandy has a great success selling to consumers through its
radio Shack stores, but simply did not know how to sell computers to
businesses. The results were dissapointing, and many of the computer
centers had to be closed. Tandy lacked the ability to implement the decision
to go after business customers.

F. EVALUATION AND FEEDBACK

In the evaluation stage of the decision process, decisions

makers gather information that tells them how well the decision was
implemented and whether is was effective in achieving its objectives. For
example, Tandy executives’ evaluation of and feedback on the decision to
open computer centers revealed poor sales performance. Feedback indicated
that implementation was unsuccessful, so computer centers were closed and
another approach was tried.

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 Feedback is important because decision making is a continuous,
neverending process. Decision making is not completed when an executive
or board of directors votes yes or no. Feedback provides decision makers
with information that can precipitate a new decision cycle. The decision may
fail, thus generating a new analysis of the problem, evaluation of
alternatives, and selection of a new alternative. Many big problems are
solved by trying several alternatives in sequence, each providing modest
improvements. Feedback is the part of monitoring that assesses whether a
new decision needs to be made.
3. ORGANIZING

3.1. FUNDAMENTALS OF ORGANIZING

• Reasons for Organizing

• Structure and Formal Organization
• Division of Labor and Specialization
• Departmentalization
• Committees
• Boards of Directors
Organizing is the process of dividing an overall task into parts that
individuals, groups or units can perform, then coordinating their efforts with
each other and with financial and technical resources so that the overall
goals are ultimately achieved.

• Reasons for Organizing

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 One of the primary reasons for organizing is to establish lines of
authority. Secondly, organizing improves the efficiency and quality of work
through synergism. Synergism occurs when individual or separate units
work together to produce a whole greater than the sum o the parts. A final
reason for organizing is to improve communication.

• Structure and Formal Organization

Organization structure is the defined set of relationships among

divisions, departments and managers in the organization, including the
responsibilities of each unit. According to John Child in his book
“Organization”, there are four major components to the definition of
structure:
1. It describes the assignment of tasks and responsibilities to
individuals and departments in the organization.
2. It designates formal reporting relationships, including the number
of levels in the management hierarchy and the span of control of each.
3. It identifies the grouping of individuals into departments and
departments into organization.
4. It incorporates the design of system to ensure effective
communication, coordination and integration of efforts among departments
and across levels of the organization.
The organization chart identifies many characteristics of the formal
organization:
• Division of labor: how the total work of the organization is
divided among its members or groups of members.

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 • Reporting relationships: the network linking all participants in
the task of goal achievement; it indicates the path along which directives
flow from the source to the parties responsible for carrying them out and the
path along which information concerning results is fed back to the source.
• Level of management: successive layers of reporting
relationships.

• Division of Labor and Specialization

Division of labor and specialization represent the first half of the

organizing function. Once plans have specified what work must be
accomplished, the work must be divided into segments individuals or units
can actually accomplish. The people doing each task then tend to become
experts, or specialists doing it.

Division of labor is the process of breaking a large task into

components an individual or group can accomplish and designing them so
that organizations goals can be achieved. Restaurants provide a simple
illustration of how organizations must vary their division of labor according
to their goals. Each restaurant has a number of tasks that must be performed:
greeting patrons, taking drink and food orders, transferring food orders to the
cooks, delivering food and drinks to patron, cleaning the tables, calculating a
bill, delivering a bill, collecting money and preparing the tables for the next
patron. How these tasks are grouped, how employers are assigned to them
and know their work is coordinated is determined by the type of service that
the restaurant wants to provide.

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 Specialization refers to the designing of work so that each individual
undertakes a limited set of activities. As labor is divided, people can focus
on their particular jobs

• Departmentalization

Is the grouping of activities and responsibilities by subunits of the

organization? These subunits are called departments. The methods of
departmentalization are referred to as departmentalization by function and
departmentalization by purpose.
Departmentalization by function is a method of organizing work by
grouping together people who perform similar or closely related tasks.
One of the main advantages of departmentalizing by function is the
development of localized expertise, or unit specialization. Each person
within a functional unit gains knowledge and experience from working on
one task for a long period of time. Over time, many become skilled at
producing highly accurate loss ratios and can therefore determine premium
rate schedules that will ensure healthy profits for the insurance company.
Departmentalization by purpose is a method of organizing work by
grouping together people who are responsible for achieving a single purpose.
The employees in a given department are not necessarily doing the same
tasks, but all of their work focuses on a common objective. Such
departments are usually set up (1) to cater to a particular geographic region;
(2) to produce, market and sell one particular product from a broaden family
of products; (3) to serve one particular client or group of clients.

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 A disadvantage of departmentalization by purpose is that because
each department is somewhat self-contained, stuff is often duplicated. This
is an added cost.
Matrix organization is a departmentalization by two dimensions such
as function and purpose, simultaneously.
Matrix organizations are found in all types of settings. Originally
developed in aerospace companies, the idea of the matrix spread rapidly to
such diverse companies as General Electric, Dow Chemical, Citibank, and
Shell Oil and is used in government agencies as well. One of its most
prevalent uses has been in universities, where academic departments such as
accounting, marketing and finance often form a “matrix” with
undergraduate, masters, doctoral or executive programs. Faculty members in
such a university are responsible to both the department chair and the
program director or administrator.
Matrix organizations are not limited to the combination of function
and purpose. Any two dimensions could be combined. The primary
advantage of the matrix organization is that it takes advantage of the best
aspects of the other methods of departmentalization. The matrix organization
is not without problems. Because each employee reports to two supervisors,
he or she may receive conflicting directives. Because of this, many managers
prefer the one-boss reporting relationships in simpler organization structures.

• Committees

Committee is an organization structure in which a group of people are

formally appointed, organized and superimposed on their line or line and
stuff structure to consider or decide certain matters.

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 Advantages:
• The formation of a committee places emphasis on the problem.
• Expertise can be drawn from many areas of the organization;
thus, better solutions often result.
• Group decisions are better than individual decisions.
• Committee members are often motivated by being involved.
• Better coordination and communication often result because all
affected parties can be represented.
• Consolidation of authority from several areas of organization
exists to make decisions.
Disadvantages:
• They can be excessively time consuming and costly.
• They tend to compromise when agreement is not easily
reached. Such compromise decisions are often mediocre in quality.
• They can result in divided responsibility with no one feeling
personally responsible.
• They can result in a tyranny of the minority. For example, one
very strong-minded and vocal member can often control the entire
committee.
• Boards of directors

A board of directors is, in reality, a type of committee that is

responsible for reviewing the major policy and strategy decisions proposed
by top management. Boards are used strictly as figureheads in some
organizations, contributing little to the organization. Directors do not

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necessarily need to own stock; they should be chosen primarily for what
they can and will contribute to the organization.

3.2. Achive Strategic Objectives

This review describes several important concepts of strategic

management.

Strategic management begins with an evaluation of the organization’s

mission, goals, and strategy. This is followed by situation analysis
(sometimes called SWOT analysis) which examines opportunities and
threats in the external environment as well as strengths and weaknesses
within the organization. Situation analysis leads to the formulation of
explicit strategic plans, which then must be implemented.
Strategic management is considered one specific type of planning.
This planning usually takes place in for-profit business organizations
and pertains to competitive actions in the marketplace. Although some
companies hire strategic planning experts, the responsibility for strategic
planning rests with line managers. Seniors executives at companies such as
General Electric, Westinghouse and Delta want middle and lower-level line
managers to think strategically. Strategic thinking means to take the long-
term view and to see the big picture, including the organization and the
competitive environment and how they fit to together. Understanding the
strategy concept, the levels of strategy, and strategy formulations versus
implementation is an important start toward strategic thinking.

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 What is strategic management?

Strategic management is the set of decisions and actions used to

formulate and implement strategies that will provide a competitively
superior fit between the organization and its environment so as to achieve
organizational objectives. Strategic management is a process used to help
managers answer strategic questions such as “Where is the organization
now? Where wants the organization to be? What changes and trends are
occurring in the competitive environment? What courses of action will help
us achieve our goals?”
Trough the process of strategic management executives defines an
explicit strategy, which is the plan of action that describes resource
allocation and activities for dealing with the environment and attaining the
organization’s goals.
A strategy has four components: scope, resource deployments,
distinctive competence and synergy.

SCOPE: The number of businesses, products or services that defines

the size of the domain within which the organization deals with the
environment is considered its scope.
The trend of mergers, acquisitions, and divestments in North America
and now spreading also into Europe, is an exercise in redefining business
scope.

RESOURCE DEPLOYMENT: The level and pattern of the

organization’s distribution of physical, financial, and human resources for
achieving its strategic goals is its resource deployment. For example, some

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480 of the 970 research employees were let go to fit the new strategy of
short-term profits instead of developing products for ten years in the future.

DISTINCTIVE COMPETENCE: An organization’s distinctive

competence is the unique position it develops vis-à-vis its competitors
through its decisions concerning resource deployments or scope. For
example, Briggs & Stratton enjoys a distinctive competence because it has
concentrated on keeping costs lower than the Japanese and thus is producing
more small motors than anyone else.

SYNERGY: When organizational parts interact to produce a joint

effect that is greater than the sum of the parts acting alone, synergy occurs.
The organization may attain a special advantage with respect to cost, market
power, and technology or management skill. Bob Guccione, the
controversial publisher of Penthouse, is trying to achieve synergy through
the acquisition of Saturday Review and other magazines. The synergy comes
from arranging package deals with advertisers for space in several
magazines. Management skills and new technology can be shared among
magazines, thereby increasing productivity for all magazines beyond what
they could do alone.
LEVELS OF STRATEGY
Strategy formulation takes place at three levels: corporate, business
and functional.
Corporate grand strategies include growth, stability and retrenchment.
Frameworks for accomplishing them include the BCG matrix and the GE
business screen.

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 Business-level strategies include Miles and Snow’s strategy topology,
Porter’s competitive strategies, and the product-life cycle. Once business
strategies have been formulated, functional strategies for supporting them
can be developed (exhibit 3.1.).

Corporation

Business Unit B Business Unit B

Business Unit A

Finance R& D Manufacturing Marketing

Exhibit 3.1.Three level of strategy in Organizations

Even the most creative strategies have no value if they cannot be

translated into action.

Corporate- level strategy

The questions which concerns corporate- level strategy is <What

business are we in?>
This pertains to the organization as whole and the combination of
business units and product lines that make up the corporate entity. Strategic
actions at this level usually relate to the acquisition of new businesses;

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additions or divestments of businesses units, plants, or product lines; and
joint ventures with other corporation in new areas.

Business- level strategy

The question: <How do we compete?> concerns business- level
strategy. Pertains to each business unit completes within its industry for
customers. Strategic decisions at this level concern amount of advertising,
direction and extent of research and development, product changes, new-
product development, equipment and facilities, and expansion or contraction
of products line. For example, Jostens, Inc., a Minneapolis producer of high
school rings, has a business-level strategy of competing through product
innovation. Although students has become less interested in buying class
rigs over the years, Jostens now offers 23 different stones and 16,000 ring
permutations to fit every student’s need. Salespeople visit high schools
personally to beat competitors to the student’s door.

Functional- level strategy

The question: How we support the business-level strategy? concerns
functional-level strategy. It pertains to the major functional departments
within the business unit. Functional strategies involve all the major
functions, including finance, research and development, marketing,
manufacturing, and finance. For Hershey to compete on the basis of new-
product innovation, its research department adopted a functional; strategy
for developing new products.
Many large corporations engage in acquisitions or divestments as part
of a strategic plan. Philip Morris Inc. purchased General Food Corporation
for 85.7 billion. Going in the other direction, National Distillers and

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Chemical Corporation sold off its liquor division, including Old Grand add
Bourbon and Gilbey’s gin and used the money to expand plastics and
propane gas.
All corporations are finding ways to respond to competitors, cope
with difficult environmental changes, and effectively use available
resources.

The Strategic Management process

As illustrated in the foregoing diagram, the strategic management
process begins when executives evaluate their current position with respect
to mission, goals and strategies. They than scan the organization’s internal
and external environments and identify strategic factors that may require
change. Internal and external events may indicate a need to redefine the
mission or goals or to formulate a new strategy at the corporate, business,
or functional level. Once a new strategy is selected, it is implemented
through changes in leadership, structure, human resources, or information
and control systems.

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 Identify strategic
factors:
Scan External - Opportunities
Environment - Threats

Implement Strategy via

Changes in:
Evaluate Current Formulate Strategy: -Leadership/culture
Define New:
- Missions - Corporate -Human resources
- Missions
- Goals - Business -Information and control
- Goals
- Strategies - Functional systems

Identify Strategic
Factors:
Scan Internal -Strengths
Environment -Weaknesses

Exhibit 3.2. Strategy implementation

SITUATION ANALYSIS
Situation analysis typically includes a search for SWOT – strengths,
weaknesses, opportunities-, and threats that affect organizational
performance. External information about opportunities and threats may be
obtained from a variety of resources, including customers, government
reports, and professional journals, suppliers, bankers, friends in other
organizations, consultants, or associating meetings. Many firms hire special
scanning organizations to provide them with newspaper clippings and
analyses of relevant trends. Some firms use more subtle techniques to learn
about competitors, such as asking potential recruits about their visits to other
companies, hiring people away from competitors, debriefing former
employees of competitors or customers, taking plant tours posing as
“innocent” visitors.

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 Executives acquire information about internal strengths and
weaknesses from a variety of reports, including budges, financial rations,
profit and loss statements, and surveys of employee attitudes and
satisfaction. Managers spend 80 percent of their time giving and receiving
information from others. Trough frequent face-to-face discussions and
meetings with people at all levels of hierarchy, executives build an
understanding of the company’s internal strengths and weaknesses.

EXTERNAL OPPORTUNITIES AND THREATS

Threats are characteristics of the external environment that may
prevent the organization from achieving its strategic goals. Opportunities
are characteristics of the external environment that have the potential to help
the organization archive or exceed its strategic goals. The task environment
sectors are the most relevant to strategic behavior and include the behavior
of competitors, customers, suppliers, and the labor supply. The general
environment contains those sectors that have an indirect influence on the
organization but nevertheless most be understood and incorporated into
strategic behavior. The general environment includes technological
developments, the economy, legal-political and international events, and
socio- cultural changes.
Additional areas that might reveal opportunities or threats include
pressure groups, interest groups, creditors, natural resources, and potentially
competitive industries.

INTERNAL STRENGHTS AND WEAKNESSES

Strengths are positive internal characteristics that the organization can
exploit to achieve its strategic performance goals. Weaknesses are internal

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characteristics that may inhibit or restrict the organization’s performance.
Some examples of what executives evaluate to interpret strengths and
weaknesses are given bellow. The information sought typically pertains to
specific functions such as marketing, finance, production, and R & D.
Internal analysis also examines overall organization structure,
management competence, and quality and human resource characteristics.
Based on their understanding of these areas, managers can determine their
strengths or weaknesses vis-à-vis other companies.

STRATEGY FORMULATION VERSUS IMPLEMENTATION

The final aspect of strategic management is the stage of formulation

and implementation.

Strategy formulation includes the planning and decision making that

lead to the establishment of the firm’s goals and the development as a
specific strategic plan. Strategy formulation may include assessing the
external environment and internal problems and integrating the results into
goals and strategy. This is a contrast to strategy implementation (exhibi
3.2.), which is the use of managerial and organizational tools to direct
resources toward accomplishing strategic results. Strategy implementation is
the administration and execution of the strategic plan. Manager may use
persuasion, new equipment, changes in organization structures, or a reward
system to ensure that employees and resources are used to make formulated
strategy a reality.

3.3. DEPARTMENTALIZATION

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 Another fundamental characteristic of organization structure is
departmentalization which is bases for grouping positions into departments
and departments into the total organization. Managers make choices about
how to use the chain of command to group people together to perform their
work. There are five approaches to structural design that reflect different
uses of the chain of command in departmentalization. The functional,
divisional and matrix are traditional approaches that rely on the chain of
command to define groupings and reporting relationships. Two
contemporary approaches are the use of teams and networks. These newer
approaches have engaged to meet organizational needs in a highly
competitive global environment. Brief illustrations of the five structural
alternatives are in Exhibit 3.3.
1. Functional approach. People are grouped together in departments
by common skill and work activities, such s in an engineering department
and accounting department.
2. Divisional approach. Departments are grouped together into
separate, self-contained divisions based in a common product, program or
geographical region. Diverse skills rather than similar skills are the basics of
departmentalization.
3. Matrix approach. Functional and divisional chains of command are
implemented simultaneously and overly one another in the same department.
Two chains of command exist and some employee report to two bosses.
4. Team approach. The organization creates a series of teams or task
forces to accomplish specific tasks and coordinate major departments.
Teams can exist from the office of the president all the way down to the
shop floor.

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 5. Network approach. The organization becomes a small central
broker electronically connected to other organizations that perform vital
functions. Departments are independent contacting services to the broker for
a profit. Departments can be located anywhere in the world.

3.3. Five approaches to structural designs

Each approach to structure serves a distinct purpose for the

organization and each has advantages and disadvantages. The basic
differences among structures in the way in which employee are
departmentalized and to whom they report. The differences in structure
illustrated in exhibit 3.3 have major consequences for employee goals and
motivation. The ability of managers to known when and how to use each
form and structure allows them to solve problems such as we saw in Albany
Ladder Company describes at the beginning of this chapter. Let us now turn
to each of the five structural designs and examine their implication for
managers.

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 FUNCTIONAL APPROACH

Functional approach is the grouping of positions into departments

based on similar skills expertise and resource use (exhibit 3.4). A functional
structure can be thought of as departmentalization by organizational
resources, because each type of functional activity – personnel, engineering,
and manufacturing – represents specific resources for performing the
organization’s task.

Exhibit 3.4. Grouping of positions into departments.

People and facilities representing a common organizational resource

are grouped together into a single department.

An example of a functional structure for America Airlines is presented

in Exhibit 9.5 the major departments under Chairman Crandall are grouping

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of similar expertise and resources, such as employee’s relations, government
affairs, operation, information systems and marketing. Each of the functional
departments at American Airlines is concerned with employees in all areas,
and one marketing department is responsible for all sales and marketing.

ADVANTAGES AND DIADVANTAGES

Grouping employees into departments based on similar skills has

many advantages for an organization. Employees who perform a common
task are grouped together so as to permit economies of scale and efficient
resource use at American Airlines as illustrated in exhibit 3.5 all information
systems people work in the same department. They have to expertise for
handling almost any problem within a single large department.

Exhibit 3.5. Functional structure for Americans airlines.

The large functional departments enhance the development of in-

depth skills because people work on a variety of problems and are associated
with other experts. Career progress is based on functional expertise thus

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employees are motivated to develop their skills. Managers and employees
are compatible because of similar training and expertise.
The functional structure also offers a way to centralize decision
making and provide unified direction from the top because the chain of
command converges at the top of organization. Sometimes the functional
structure is also associates with wider spans of control because of large
departments and common expertise. Communication and coordination
among the employees within each department are excellent. Finally
functional structure promotes high-quality technical problem solving. The
pool of well-trained experts motivated toward functional expertise, gives the
company an important resource especially those that work with sophisticated
technology.
The disadvantages of functional structure reflect the barriers that exist
across departments and show response to environmental changes. Because
people are separated into distinct departments, communication and
coordination across functions are often poor. Poor coordination means a
slow response to environmental changes, because innovation and change
require involvement of several departments. Because the chain of command
are separated beneath the top of the organization, decision involving more
than one department may pile up at the top of the organization and be
delayed. The functional structure also stress work specialization and division
of labor, which may produce routine, no motivating employee tasks.
The functional structure also creates management problems such as
difficulty in pinpointing problems within departments. In case of an
insurance company, for example each function works on all products only a
part of the task for any product line.

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 Advantages and disadvantages of functional structure
ADVANTAGE DISADVANTAGE
o Efficient use of o Poor communication
resources, economies of scale; across functional departments
o In-depth skill o Slow response to
specialization and development; external changes, lagging innovation;
o Career progress within o Decision concentrated at
functional departments; top of hierarchy creating delay;
o Top manager direction o Responsibility for
and control; problems difficult to pinpoint
o Excellent coordination o Limited view of
within function; organizational goals by employees;
o High quality technical o Limited general
problem solving. management training for employees.
Exhibit 3.6. Advantages and disadvantages of functional structure

Hence, in one life insurance product is not performing well, there is

no specific department or group that bears responsibility. In addition,
employees tend to focus on the attainment of departmental goals. They see
only their respective tasks and not the big picture. Because of this narrow
task specialization employees are trained to become experts in their fields
and not to manage and coordinate diverse departments, thus, they fail to
become groomed for top management and general management position.

DIVISION APPROACH

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 In contrast to the functional approach, in which people are grouped by
common skills and resources, the divisional structure occurs when
departments are grouped together based on organizational outputs. The
difference between functional and divisional structure are illustrated in
exhibit 3.7.

Exhibit 3.7. Functional versus Divisional Structure

In the divisional structure divisions are crested as self-contained units

for producing a single product. Each functional department resource needed
to produce the product is assigned to one division. For example, in a
functional structure all engineers are grouped together and work on all
products. In a divisional structure separate engineering departments are
established within each division. Each department is smaller and focuses on
a single product line. Departments are duplicated across product lines.

The divisional structure is sometimes called a product structure,

program structure or self-contained unit structure. Each of these terms

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means essentially the same thing: diverse departments are brought together
to produce a single organizational output, whether it is a product, a program
or a service to single customer.
In very large companies, a divisional structure is essential. Most large
corporation has separate business division that performs different tasks,
serve different clients or use different technologies. When a huge
organization produces products for different markets, the divisional structure
works because each division is an autonomous business. For example Pepsi
Co. uses a divisional structure, Fritto-lay, Pizza Hut, Taco Bell, North
American Van Lines and Wilson’s Sporting Goods are stand-alone division.
A major difference between divisional and functional structure is that
the chain of command from each function converges lower in the hierarchy.
In the Exhibit 9.7 differences of opinion among R&D marketing,
manufacturing and finance would be resolved at the divisional level rather
than by the president. Thus the divisional structure encourages
decentralization. Decision marking is pushed down at least one level in the
hierarchy, freeing up the president and other top managers for strategic
planning.

GEOGRAPHICALLY AND CUSTOMER-BASED

DIVISION

Two variations of the divisional structure are the organization of

division by geography and by customer. Departmentalization by customer
simply means that all skills needed to service a specific customer are
grouped in a single division.

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 A company may have a very large customer – say U.S. government –
for a certain line of products. It can create a separate division to serve that
customer full time. An example is a supplier that manufactures part for both
General Motors and Bowing aircrafts. It may create two divisions, one for
each major customer. A divisional status provides a common employee
focus on the customer needs.
Geographical divisions are created when an organization serves a
national or international area and functional skills need to be located in each
geographical region.

ADVANTAGES AND DISADVANTAGES

For medium-size companies, the choice between functional and

divisional structure is difficult because each represents different strengths
and weakness. By dividing employees and resources along divisional lines,
the organization will be flexible and responsive to chance because each unit
is small.
Advantages and disadvantages of Divisional Structure
ADVANTAGE DISADVANTAGE
o Fast response, flexibility o Duplication of resources
in an unstable environment; across divisions;
o Fosters concern for o Less technical depth and
customer needs specialization in divisions;
o Excellent coordination o Poor coordinating
across functional departments; across division
o Easy pinpointing of o Less top management
responsibility for product problem control
o Emphasis on overall o Competition for
product and division goals; corporate resource
o Development of general
management skills

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 Exhibit 3.8. Advantages and disadvantages of Divisional Structure

Because top management control is somewhat weaker under

divisional structure, top managers must assert themselves in order to get
divisions to work together.
Many companies must carefully decide whether the divisional or
functional structure better suits their needs. It is now uncommon for a
company to try one structure and then switch to another as its needs change.

Exhibit 3.10. Key position in a matrix structure

The functional boss is responsible for the technical and personnel

issues, such as quality standards, providing technical training and assigning
technical personnel projects.
The divisional boss is responsible for program wide issues, such as
overall design decision, schedule deadlines, and coordinating technical
specialists from several functions.

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 The senior engineer is called a two-boss employee because he or she
reports to two supervisors simultaneously. Two-boss employees must
resolve conflicting demands from the matrix bosses joint decisions. They
need excellent human relations skills with which to confront managers and
resolve conflicts.
The matrix boss is the product or functional boss, who in exhibit 3.10
is the engineering director and the medical products vice-president. The
matrix boss is responsible for one side of matrix. The top leader is
responsible for entire matrix. The top leader oversees both the product and
functional chains of command. His or her responsibility is to maintain a
power balance between the two sides of the matrix. If the disputes arise
between them, the problem will be kicked upstairs to the top leader.
Matrix bosses and two-boss employees often find it difficult to adapt
to the matrix. The matrix boss has only half of each employee. Without
complete control over employees, bosses must consult with their
counterparts on the problems.

3.4. Innovation and Change

Every organization experiences stress and difficulty coping with

change. Innovation from within is widely recognized as one of the critical
problems facing business today in the United States and Canada. To be
successful, organizations must embrace many types of changes. Business
must develop improved production technologies, create new products
desired in the marketplace, implement new administrative systems, and
upgrade employee’s skills. Companies such as Westinghouse, Intel, Black &
Decker, Herman Miller and Merck implement all of these changes and more.

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 How important is organizational change? Consider this: The parents
of today’s college students grew up without cable television, crease-resistant
clothing, personal computers, detergents, VCRs, electronic games, compact
disks, frozen entrees, video stores, or laser checkout systems in
supermarkets.
Companies that produce the new products have prospered, while
many of those caught in transition with outdated products and technologies
have failed. Organizations that change and innovate successfully, such as
IBM, Hewlett-Packard, Raychem, 3M, Citicorp, and Frito-Lay, are both
profitable and admired.

Figure 3.11. Model of Change Sequence of Events:

Organizational change

Organizational change is defined as the adaptation of a new idea or

behavior by an organization.
In this chapter, we will look at how organizations can be designed to
respond to the environment through internal innovation and change. First we
will examine the basic forces for organizational change. Then we will look
closely at how managers facilitate two change requirements: initiation and
implementation. Finally, we will discuss the four major types of change –

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technology, new product, structure, and culture/people – and how the
organization can be designed to facilitate each.

Managing Organizational Change

Change can be managed. By observing external trends, patterns, and

needs, managers use planned change to help the organization adapt to
external problems and opportunities. When organizations are caught flat-
footed, failing to anticipate or respond to new needs, management is at fault.
An overall model for planned change is presented in Figure1. Four
events make up the change sequence:
(1) Internal and external forces for change exist;

(2) Organization managers monitor these forces and become aware of a need
for change;

(3) The perceived need triggers the initiation of change, which

(4) is then implemented. How each of these activities is handled depends on

the organization and managers styles.

We now turn to a brief discussion of the specific activities

associated with the first two events – forces for change and the perceived
need for the organization to respond.

Forces for Change

Forces for organizational change exist both in the external

environment and within the organization.

Environmental Forces

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 External forces originate in all environmental sectors, including
customers, competitors, technology, economic, and international. For
example, many North American companies have been blindsided by global
competition. Consider General Electric, which built a new factory to
produce microwave ovens. As plans were being made, Yun Soo Chu was
working 80 hours per week for Samsung in Korea perfecting a microwave
oven. About the time the GE plant came on stream, Samsung started
exporting thousands of microwaves to the United States at one-third the cost
of General Electric’s microwaves. Today, Samsung has 25 percent of the
U.S. market, and GE is one of the best customers. GE closed its microwave
plants, preferring to buy cheaper Samsung ovens to sell under the GE label.
As another example, McDonald experienced an external force from the
customer sector. Customers were tired of eating hamburgers in their cars, to
which top managers responded by incorporating sit-down facilities in
McDonald’s restaurants. The Manager’s Shoptalk box describes how
Johnson Wax stays abreast of and responds to external forces from around
the globe.

Internal Forces

Internal forces for change arise from internal activities and decisions.
If top managers select a goal of rapid company growth, internal actions will
have to be changed to meet the growth. New departments or technologies
will be created. General Motor’s senior management, frustrated by poor
internal efficiency, designed the Saturn manufacturing plant to solve the

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internal need. Demands, by employees, labor unions, and production
inefficiencies can all generate a force to which management must respond
with change.

Need for Change

As indicated in Figure 1, external or internal forces translate into a

perceived need for change within the organization. Managers sense a need
for change when there is a performance gap – a disparity between existing
desired performance levels. The performance gap may occur because current
procedures are not up to standard or because a new idea or technology could
improve current performance.

The management’s responsibility is to monitor threats and

opportunities in the external environment as well as strengths and
weaknesses within the organization to determine whether a need for change
exists.

One striking need for change occurred when executives at General

Electric’s Louisville refrigerator plant realized that the Japanese, Brazilians,
and Italians were building cheaper compressors of better quality than theirs.
GE could not compete because of high wages.

Thanks to visionary engineers and managers, GE chose to innovate

with a rotary compressor manufactured in a new automated plant.

Managers must detect problems and opportunities, because the

perceived need for change is what sets the stage for subsequent actions that
create a new product or technology. Big problems are easy to spot. Sensitive

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monitoring systems are needed to detect gradual changes that can fool
managers into thinking their company is doing fine. An organization may be
in greater danger when the environment changes slowly, because managers
may fail to trigger an organizational response. Failing to use planned change
to meet small needs can place the organization in hot water, as illustrated in
the following passage:

“When frogs are placed in a boiling pail of water, they jump out –
they don’t want to boil to death.

However, when frogs are placed in a cold pail of water and the pail is
placed on a stove with the heat turned very low, over time the frogs will boil
to death.”

Initiating Change

After perceiving the need for change, the next part of the change
process is initiating change, a truly critical aspect of change management.
This is where the ideas that solve perceived needs are developed. Responses
an organization can make are to search for or to create a change to adopt.

Search

Search is the process of learning about current developments inside or

outside the organization that can be used to meet the perceived need for
change. Search typically uncovers existing knowledge that can be applied or

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adopted within the organization. Managers talk to friends and colleagues,
need professional reports, or hire consultants to learn about ideas used
elsewhere. For example, an internal consulting program was developed for
the Office of Employee Relations for New York State, creating teams of 10
to 20 managers from a cross-section of agencies to provide information to
managers experiencing problems. The consulting team provided a quick way
for managers to search out new ideas used in other departments.

Many needs, however, cannot be resolved through existing knowledge

but require that the organization develop a new response. Initiating a new
response means that managers must design the organization so as to
facilitate creativity of both individuals and departments, encourage
innovative people to initiate new ideas, or create new-venture departments.

These techniques have been adopted by such corporations as IBM and

Apple with great success.

Creativity

Creativity is the development of novel solutions to perceived

problems. Creative individuals develop ideas that can be adopted by the
organization.

The Creative Individual The Creative Organization or Department

1. Conceptual fluency 1. Open channels of communication

Open-mindedness Contact with outside sources
Overlapping territories
Suggestion systems, brainstorming, nominal group
techniques

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2. Originality 2. Assign non-specialists to problems
Allow eccentricity
Uses teams
3. Less authoritarian 3. Decentralized; loosely defined positions; loose
Independent control
Mistake okay
Risk-taking norms
4. Playfulness 4. Allow freedom to choose and pursue problems
Undisciplined exploration Not run as a tight ship; playful culture
Curiosity Freedom to discuss ideas; long time horizon
5. Persistent 5. Resources allocated to creative personnel and
Committed projects without immediate payoff
Reward system encourages innovation
Highly focused
Absolved of peripheral responsibilities
Figure 3.12 Characteristics of highly creative people

People noted for their creativity include Edwin Land, who invented
the Polaroid camera; Frederick Smith, who came up with the idea for
Federal Express’s overnight delivery service during an undergraduate class
at Yale; an Swiss engineer George de Mestral, who created the Velero after
noticing the tiny hooks on the burrs caught on his wool socks. Each of these
people saw unique and creative opportunities in a familiar situation.

One test of creativity is to imagine a block of ice sitting on your desk.

What use could you make of it? A creative person might see that it could be
used to quench someone’s thirst, reduce a patient’s fever, crack a victim’s
skull, or produce steam by boiling. Or consider the person interviewing
college graduates for job openings. “Show me a new use for this stapler,” the
interviewer said. Calmly picking up the scissors on the desk, one creative
woman cut the interviewers tie in half and than stapled it back together.

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Smiling, she asked, “Now that I’ve demonstrated my instant mender, how
many will you take?”

Each of us has the capacity to be creative. Characteristics of highly

creative people are illustrated in the left-hand column of figure 3.12.

Creative people often are know for originality, curiosity, open-

mindedness, a focused approach to problem solving, persistence, a relaxed
and playful attitude, and receptiveness to new ideas.

Creativity can also be designed into organizations. Companies or

departments within companies can be organized to be creative and initiate
changes. The characteristics of creative organizations correspond to those of
individuals, as illustrated in the right-hand column of Figure 2. Creative
organizations are loosely structured. People find themselves in a situation of
ambiguity, assignments are vague, territories overlap, tasks are poorly
defined, and much work is done through teams. Creative organizations have
an internal culture of playfulness, freedom, challenge, and grass roots
participation. They harness all potential sources of new ideas from within.

Many participative management programs are born out of desire to

enhance creativity for initiating changes. People are not stuck in the rhythm
of routine jobs. Managers in an insurance company that had been tightly
controlled from the top remarked on the changes that enabled them to be
more creative:

• We used to run by the book and now I don’t even know where
the book is.
• Yesterday’s procedures are outdated today.

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 • If you don’t like the organizational chart, just wait until next
week, we’ll have a new one.
The most creative companies encourage employees to make mistakes.
Jim Read, president of the Road Corporation, says, “When my employees
make mistakes trying to improve something, I give them a round of
applause. No mistakes mean any new products. If they ever become afraid to
make one, my company is doomed.” Ross Perot, founder of EDS, believed
creative managers could not keep their noses clean: “We teach people that
mistakes are like skinned knees for little children…. My people are covered
with the scars of their mistakes. By the time they get to the top, their noses
are pretty well broken.”

Open channels of communication, overlapping jobs, discretionary

resources, decentralization, and employee’s freedom to choose problems and
make mistakes can generate unexpected benefits for companies. Creative
organizational conditions such as those described in Figure 2 enable more
than 200 new products a year to bubble up from 3M’s research labs. The
same conditions enabled brand manager Cal Blodgett at General Mills to
propose a change for the 6-by-300-foot sheets of granola rolling out of the
oven to be crumbled into cereal bits. “Let’s cut that into bars,” he thought,
and Nature Valley Granola Bars were born. In another General Mills
department, Craig Nalen responded to the frustration of developing a new
snack food with the idea of turning the food into a product. “Why not peddle
the snack food as a toy?” With that idea, Lickety Sticks were born and
General Mills entered the toy market.

Idea Champion

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 If creative conditions are successful, new ideas will be generated that
must be carried forward for acceptance and implementation. This is where
idea champions come in. The formal definition of an idea champion is a
person who sees the need for and champion’s productive change within the
organization. For example, Linda Clemens of Federal Express championed
the idea of developing an internal hot line for employees to complain about
red tape and excess paperwork, thereby cutting back corporate bureaucracy.
Wendy Black of Best Western International championed the idea of
coordinating the corporate mailings to the company’s 2800 hoteliers into a
single packet every two weeks. Some hotels were receiving three special
mailings a day from different departments. Her idea has saved $600,000 a
year for five years in postage alone. Remember: Change does not occur by
itself. Personal energy and effort are required to successfully promote a new
idea. Often management rejects a new idea. Champions are passionately
committed to a new product or idea despite rejection by others.

Championing an idea successfully requires roles in

organization, as illustrated in Figure 3.13.

Sometimes a single person may play two or more of these roles, but
successful innovation in most companies involves interplay of different
people, each adopting one role. The inventor develops a new idea and
understands its technical value but has neither the ability nor the interest to
promote it for acceptance within the organization.

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 Figure 3.13. Four Roles in Organizational Change

The champion believes in the idea, confronts the organizational

realities of costs and benefits, and gains the political and financial support
needed to bring it to reality. The sponsor is a high-level manager who
approves the idea, projects it, and removes major organizational barriers to
acceptance. The critic counterbalances the zeal of the champion by
challenging the concept and providing a reality test against hard-nosed
criteria. The critic prevents people in the other roles from adopting a bad
idea.

Al Marzocchi was both an inventor and a champion at Owens-

Corning Fiberglass. He invented ways to strengthen fiberglass, developed
the fiberglass belted tire in conjunction with Armstrong Tire, and pioneered
new ways of using asphalt. One reason Marzocchi thrived was that Owens-
Corning’s president, Harold Boeschenstein, sponsored his activities and held
critics at bay. Once Marzocchi violated company rules by going directly to
an outside firm, but the president protected him and his idea.

Managers can directly influence whether champions will flourish.

When Texas Instruments studied 50 of its new-product introductions, a
surprising fact emerged: Without exception, every new product that had
failed had lacked a zealous champion. In contrast, most of the new products

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that succeeded had a champion. Texas Instruments managers made an
immediate decision: No new product would be approved unless someone
championed it.

New-Venture Teams

A recent idea for facilitating corporate innovations is called a new-

venture team. A new-venture team is a unit separate from the rest of the
organization and is responsible for developing and initiating a major
innovation. New-venture teams give free reign to members’ creativity
because their separate facilities and location free them from the
organizational rules and procedures. These teams typically are small, loosely
structured, and organic, reflecting the characteristics of creative
organizations described in the table regarding the characteristics of creative
people and organizations. Peter Drucker advises organizations that wish to
innovate to use a separate team or department:

“For the existing business to be capable of innovation, it has to

create a structure that allows people to be entrepreneurial… This
means, first, that the entrepreneurial, the news, has to be organized
separately from the old and the existing. Whenever we have tried to
make an existing unit the carrier of the entrepreneurial project, we
failed.”

New-venture team: a unit separate from the mainstream of the

organization that is responsible for developing and initiating innovations.

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 President

New-Venture Teams

Research Accounting Manufacturing Marketing

Fig.3.14. Location of New-Venture Team in an Organization

For a giant corporation such as IBM, new-venture teams free people

from the constraints of the large organization. IBM was one of the first
companies to use the new-venture team successfully, and its genius was to
suspend normal product development practices. IBM has started 14 new-
venture units. Each is tiny company-within-the-company that explores areas
of customized software, robots and electrocardiographs. IBM’s biggest
success – the personal computer – was built by a new-venture group. The PC
new-venture team was so appealing that 5,000 employees applied for the
initial 50 positions. Other companies that have created new-venture units are
Monsanto, Levi Strauss, Exxon, Du Pont, Dow, and Motorola.
One variation of venture teams used by some companies is called
skunkworks. Skunkworks are small, informal, and sometimes unauthorized
groups that create innovations. Companies such as Kollmorgen, IBM,
Merck, Philip Morris, and Macy encourage employees to form informal
groups, often working nights and weekends, to develop a new idea. If the

139
new venture is successful, group members are rewarded and encouraged to
run the new business.
Skunkworks: small, informal, and sometimes unauthorized groups
that create innovations.
Another variation of new-venture teams is the new-venture fund,
which provides resources from which individuals and groups can draw to
develop new ideas, products, or businesses. For example, Teleflex, a
producer of many technical and consumer products, allocates one-half of one
percent of sales to a new-venture fund. More than $1 million dollars was
allocated to employees in 1988 to explore new ideas.
New-venture fund: a fund providing resources from which
individuals and groups draw to develop new ideas, products, or businesses.

3.5. THE MANAGEMENT OF INVESTMENTS

Objectives:
--the investment and economic efficiency of investment
concepts definition;
--financial resources for investment projects;
--the main indicators for economic efficiency of investments
analysis;
--the time factor influence upon economic efficiency of
investments;
--the indicators for economic efficiency of investments used by
EBRD (European Bank for Reconstruction and Development).

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 The investment and economic efficiency of investment concepts
definition

Investment - concept
In general, investment represents any capital expenses which are made
for the purpose to obtain future profit. Particularly it is used the concept of:
• Capital investment
• Financial investment
Capital investment refers to funds invested in fixed assets, tangible or
intangible or both.
Financial investment are any funds allocated for capital stock or other
businesses, bounds, public and private, real estate held for rental income and
also for the prospect of capital gains.
The investments vary in degree of liquidity. Some can be turned into
cash in a reasonable time, but others are difficult to convert even though
they are profitable sources of revenue. For example, the capital investments
are lack in fluidity and flexibility and they are more rigid because they are
expected to be held until their services to the business have expired.

The economic efficiency of investments concept

In general, the economic efficiency of investments expresses
the way that the expected purposes are achieved.
Concrete, the economic efficiency of investments refers to the
link between the resources (the quantity and structure of the investment
efforts) and the results (those which are obtain after the investment process
is finished).

141
 In other words, the concept expresses the mutual connection
between investment efforts and effects.
This link can be express in two ways:
• Maximizing the effects
E
e= → max ,
ε
where:
e − economic efficiency of investments
E − effects (results)
ε − efforts (resources)
• Minimizing the efforts

e " ε
= → min
E

1. Financial resources for investment projects

There are two main kinds of investment resources:
• Internal resources:
- the primary investors capital
- profit
- capital depreciation
- funds from bounds and stocks

• external resources:
- loans
- funds from the budgets of local public
administration authorities

142
 - grants
- subventions

The main indicators for economic efficiency of investments

analysis

In order to choose the right option for evaluation the investment

project it is used a number of indicators which are shown the economic
efficiency of investments.
• Total investment value - express the whole
resources which are used to realize the investment objective (capital costs);
• Specific capital - express the investment
payment for each output unit (physical or valuable)
Ii
si =
Qi (CAi )

s − specific capital
I −total investment value
Q −productive capacity
CA − turnover
i − project option
• Rate of profit - express the profit earning
capacity of an economic unit
Pi
rpi =
Ci
rp −rate of profit
P − annual profit
C −annual costs

143
 • Payoff period – express the recoup investment
period
Ii
Ti =
Pi

T − payoff period
Measurement unit is always evaluating in years. The indicator
needs to be smaller than the standard payoff period:
Ti ≤ Tn

• Output factor – express the annual profit

obtained for each investment unit
Pi
ei =
Ii

e − output factor
The indicator is inverse proportion of payoff period.
• Speed of investment recoup – express how
many times investment can be recovered during the investment object
standard service period
Dei
Vri =
Ti

Vr −speed of investment recoup

De −standard time
• Equivalent costs – express total costs with investment and
operating costs during the standard payoff period
K i = I i + Ci ⋅ Tn

K − equivalent costs
• Operating efficiency

144
 Pni
Ri =
Ii
Pn −profit which remains at the firm disposal after the payoff period.
For the project analyses general trend of the indicators should
be as follows:

Indicators Trend

Total investment
value

Specific capital

Rate of profit

Payoff period

Output factor

Speed of investment
recoup

Equivalent costs

Operating efficiency

2. The time factor influence ( updating technique)

145
 - it is used to bring all investment information to a single moment
named reference moment;
- depending on that moment we can use one of the two following
factors:
• Compound interest factor – represents the amount that it will be
obtain after ,,n” years from one value unit:
y = (1 + a ) n

• Present value factor (discounting factor) – represents what

means now a value unit obtain after ,,n” years:
1
x=
(1 + a ) n

g d

m n p u v
time
In both cases ,,a” represents updating ratio, a minimum efficiency
level which has to fulfill the next condition:
a > ri + rd + rr

where:
ri −inflation ratio
rd −interest rate for borrowed funds
rr −risk investment rate
The moments are:
m − investment decision making moment

146
 n − investment beginning moment
p − start-up running the investment objective
u − start-up loan repayment
v − end the investment period of service
The periods are:
g −projection period

d −investment carrying out period

D − investment objective period of service
Updating technique is very important and necessary taking into
consideration that it is a difference between the investment periods of time:
carrying out period and service period.
Thus we ensure the information comparability.

3. The indicators for economic efficiency of investments used by

EBRD (European Bank for Reconstruction and Development).

The EBRD methodology take into consideration three main indicators,

using updating technique for investment efforts and effects at the investment
beginning moment (,,n” moment from the previous diagram).
• Net present value added (NPV) – represents the updating cash-
flow during the entire period (d+D)
d +D Vh d Ih d +D Ch
NPV = ∑ − ∑ − ∑
h = d +1 (1 + a ) h =1 (1 + a ) h = d +1 (1 + a )
h h h

NPV − net present value added

Vh −annual returns
I h −annual investment costs
Ch −annual manufacturing costs

147
 a − updating ratio
1
−present value factor (discounting factor)
(1 +a )

The decision rule would be: accept all investments with positive
or zero net value (as they produce a return either equal to or greater than
their cost), and reject all those with a negative net value.
• Costs – returns ratio
d +D Vh
∑
h = d +1 (1 + a )
h
RV / C = d Ih d +D Ch
∑ + ∑
h =1 (1 + a ) h = d +1 (1 + a )
h h

An investment project is usually accepted if the indicator is

equal or greater than 1.
• Internal rate of return
The internal rate of return of a project can be defined as the rate of
discount which, when applied to the project's cash flows, produces a zero net
present value:

Example:

Considering an investment project for a firm, as it follows:

Indicators Values
Total investment value 5 million €
(I)
Investment carrying out period 2 years
(d)
Investment time table – first 2,5 million
year €
Investment time table – second 2,5 million
year €
Annual manufacturing costs 0,5 million

148
 ( Ch ) €
Annual returns 3 million €
( Vh )
Investment objective period of 5 years
service ( D )

Remainder value 0,1 million

€
NPVa min
IRR = amin + (amax − amin ) ⋅
( NPVa min − NPVa max )

amin −minimum updating ratio for which NPVa min > 0

amax − maximum updating ratio for which NPVamax < 0

NPV − net present value for amin and amax
The decision rule is that only projects with a IRR greater than
or equal to some predetermined ,,cut-off” rate should be accepted. This ,,cut-
off” rate is usually the market rate of interest or inflation ratio.
All other investment project opportunities should be rejected.
Minimum updating ratio begins from a = 10 % and the
maximum is a = 20 %

V5
V4
V3
V2
V1
v d= Dn
2 t =5 s
c
5 5 5 5 5 5 5
I1

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 I2

A. The static economic efficiency indicators are:

1. Total investment value:
I = 5 million €
2. Annual profit:
Ph = 3 – 0,5 = 2,5 million €
Totally profits for all the 5 years is 2,5 x 5 = 12,5 million €, and
if we add the remainder value than the totally net returns value will be 12,5
+ 0,1 = 12,6 million €.
3. The cash-flow will be 12,6 – 5 = 7,6 million € , so the
investment project appears to be efficient.
4. Payoff period
5
T = =2 years
2,5

5. Output factor
2,5
e= = 0,5 annual profit / 1 € investment
5

4. Operating efficiency
12 ,5 − 5
R= = 1,5 after investment payoff period / 1 € of investment
5

B. The efficiency indicators updating to the ,,n” moment for a = 10 %

y Efforts Ef C Disc Updating
ear - mil € - fects ash- ounted information
- flow factor
mil € - 1
Ann A 1 +0.1 i C R
ual nnual nvest osts eturns
investments costs ments
C an Van

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 I an
1 2.5 - 0.90 2
2.5 909090 .27
2 2.5 - 0.82 2
2.5 644628 .07
3 0 3 2 0.75 0 2.
.5 .5 131480 .38 25
4 0 3 2 0.68 0 2.
.5 .5 301345 .34 05
5 0 3 2 0.62 0 1.
.5 .5 092132 .31 86
6 0 3 2 0.56 0 1.
.5 .5 447393 .28 69
7 0 3. 2 0.51 0 1.
.5 1 .6 315811 .26 59
T 5 2 15 + -- 4 1 9.
otal .5 .1 7.6 .34 .57 44

1) Net present value added for a=10%:

NPV = 9.44 −1.57 − 4.34 = 3.53 mil €, so NPV > 0
2) Costs – returns ratio is:
9,44
RV / C = = 1,6 so, RV / C > 1
1,57 + 4,34

⇒ for a = 10%, the investment project is efficient.

For an updating ratio a=35%, we shall have:
y Efforts Ef C Disc Updating
ear - mil € - fects ash- ounted information
Ann A - flow factor i C R
ual nnual mil € - 1 nvest osts eturns
investments costs 1 + 0.35
ments
I an C an Van
1 2.5 - 0.74 1
2.5 074074 .85
2 2.5 - 0.54 1
2.5 869684 .37
3 0 3 2 0.40 0 1.
.5 .5 644210 .20 22
4 0 3 2 0.30 0 0.
.5 .5 106822 .15 9
5 0 3 2 0.22 0 0.

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 .5 .5 301350 .11 67
6 0 3 2 0.16 0 0.
.5 .5 519518 .08 5
7 0 3. 2 0.12 0 0.
.5 1 .6 236680 .06 38
T 5 2 15 + -- 3 0 3.
otal .5 .1 7.6 .22 .6 67

3) Net present value added for a = 35%:

NPV = 3.67 − 3.22 − 0.6 = −0.15 mil €, so NPV < 0
4) Costs – returns ratio is:
3.67
RV / C = = 0.96 so, RV / C < 1
3.22 + 0.6
⇒ for an updating ratio a = 35%, the project is no longer
efficient.

In that case we shall determine the internal rate of return ( IRR):

3.53
IRR = 0.10 + (0.35 − 0.10 ) ⋅ = 33 .98 %
3.53 − (−0.15 )

In conclusion, the investment project can sustain an updating

ratio at the most 33,98%.
4. Leadership in organizations

4.1. Leading

4.1.1. The nature of leadership

The phrase "the art of leadership" is certainly well worn. But

consciously recognizing the practice of leadership as artistry has received
little attention. For now, I simply suggest that art, artist, and artistry be given
a more prominent place within the lexicon of leadership theory and practice.

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 The image of artist, cast as a metaphor for those who provide acts of
leadership, immediately evokes two primary responses—affirmation and
resistance. Those who think of themselves as artists in the conventional
sense of the word for example, painters, sculptors, musicians, writers,
architects, photographers, and some athletes and gardeners may pick up the
metaphor with ready enthusiasm, recognizing that incorporating their artist-
self into their practice of leadership opens into a horizon of powerful
possibilities. But those who suffered through their last required art project in
school, or who hold the stereotype of an artist as no rational, asocial,
marginal, or soft may cast a more jaundiced eye upon this metaphor.
It is highly likely, however, that the jaundiced eye belongs to someone
who in some aspect of his or her professional or personal life exemplifies the
power and qualities of an artist: the ability to work on an edge, in an
interdependent relationship with the medium, with a capacity for creative
improvisation. (Entrepreneurs and some politicians, physicians, and
educators, for example, are akin to artists, seeking to bring into being what
has not yet taken form.)
Within any profession or sector, one of the primary
characteristics of the artistry of leadership is the willingness to work on an
edge the edge between the familiar and the emergent.
That acts of leadership require the ability to walk the razor's edge
without getting your feet too cut up working that edge place between known
problems and unknown solutions, between popularity and anxious hostility.
Artistic leadership is able to remain curious and creative in the complexity
and chaos of swamp issues, often against the odds. As we have seen, those
who practice adaptive leadership must confront, disappoint, and dismantle
and at the same time energize, inspire, and empower. The creativity that

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emerges from working on this paradoxical edge is integral to adaptive work,
building out of what has come before, yet stirring into being something new
and unprecedented the character of leadership that is needed at this threshold
time in human history.
Artists work within a set of relationships that they cannot fully
control. In regard to the practice of leadership, one of the most potent
features of thinking like an artist is that the artist necessarily works in a
profoundly interdependent relationship with the medium paint, stone, clay, a
musical instrument, an orchestra, a tennis court, a slalom run, or food.
Artists learn "everything they can about the medium(s) with which they
work . . . what they can expect from it and where it will fall short." A potter,
for example, must learn that clay has its own life, its own potential and
limits, its own integrity. The potter develops a relationship with clay,
spending time with it, learning to know its properties, how it will interact
with water, discovering that if you work it too hard, it will collapse, and if
you work with it, it will teach you its strength, your limits, and the
possibilities of co-creation. "Even in drawing," notes an architect, "though
we think of the artist as imposing something arbitrary on the page, when you
draw even a single line on the page, it begins to speak back to you. The kind
of pencil you use and the tooth of the paper will affect the message. The
design emerges in the dynamic interaction of the relationships among
architect, pencil, paper, client, site, building materials, budget, and
contractor."
The practice of adaptive leadership requires the same awareness of
working within a dynamic field of relationships in which the effect of any
single action is not entirely controllable because in a systemic,
interdependent reality, every action affects the whole. On the other hand, if

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one learns to understand the nature of the system that needs to be mobilized
(the underlying structure and patterns of motion), he or she can become
artfully adept at intervening in ways that are more rather than less likely to
have a positive affect in helping the group to move to a new place, creating a
new reality.

4.1.2. Concepts of leadership

Good leaders are made not born. If you have the desire and
willpower, you can become an effective leader. Good leaders develop
through a never ending process of self-study, education, training, and
experience. This guide will help you through that process.
To inspire your workers into higher levels of teamwork, there are
certain things you must be, know, and do. These do not come naturally, but
are acquired through continual work and study. Good leaders are continually
working and studying to improve their leadership skills;
DEFINITION:
Leadership is a process by which a person influences others to
accomplish an objective and directs the organization in a way that makes it
more coherent.
When a person is deciding if she respects you as a leader, she does
not think about your attributes, rather, she observes what you do so that she
can know who you really are. She uses this observation to tell if you are a
honorable and trusted leader or a self serving person who misuses authority
to look good and get promoted. Self-serving leaders are not as effective
because their employees only obey them, not follow them. They succeed in

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many areas because they present a good image to their seniors at the expense
of their workers.
The basis of good leadership is honorable character and selfless
service to your organization. In your employees' eyes, your leadership is
everything you do that effects the organization's objectives and their well
being. Respected leaders concentrate on what they are [be] (such as beliefs
and character), what they know (such as job, tasks, and human nature), and
what they do (such as implementing, motivating, and provide direction).
What makes a person want to follow a leader? People want to be
guided by those they respect and who have a clear sense of direction. To
gain respect, they must be ethical. A sense of direction is achieved by
conveying a strong vision of the future.
The Two Most Important Keys to Effective Leadership
Hay’s study examined over 75 key components of employee
satisfaction. They found that:
1. Effective communication by leadership in three critical areas was the
key to winning organizational trust and confidence:
2. Helping employees understand the company's overall business
strategy.
3. Helping employees understand how they contribute to achieving key
business objectives.
4. Sharing information with employees on both how the company is

doing and how an employee's own division is doing - relative to

strategic business objectives.

4.1.3. Principles of Leadership

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 To help you be, known, and do; (U.S. Army, 1973) follow these
eleven principles of leadership (later chapters in this guide expand on these
and provide tools for implementing them):
Be technically proficient - As a leader, you must know your job and
have a solid familiarity with your employees' tasks.
1. Seek responsibility and take responsibility for your actions -
Search for ways to guide your organization to new heights. And when things
go wrong, they always do sooner or later -- do not blame others. Analyze the
situation, take corrective action, and move on to the next challenge.
2. Make sound and timely decisions, meaning: Use good
problem solving, decision making, and planning tools.
3. Set the example - Be a good role model for your employees.
They must not only hear what they are expected to do, but also see. We must
become the change we want to see - Mahatma Gandhi
4. Know your people and look out for their well-being - Know
human nature and the importance of sincerely caring for your workers.
5. Keep your workers informed - Know how to communicate
with not only them, but also seniors and other key people.
6. Develop a sense of responsibility in your workers - Help to
develop good character traits that will help them carry out their professional
responsibilities.
7. Ensure that tasks are understood, supervised, and
accomplished - Communication is the key to this responsibility.
8. Train as a team - Although many so called leaders call their
organization, department, section, etc. a team; they are not really
teams...they are just a group of people doing their jobs.

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 9. Use the full capabilities of your organization - By developing
a team spirit, you will be able to employ your organization, department,
section, etc. to its fullest capabilities.
Factors of leadership
There are four major factors in leadership:
Follower
Different people require different styles of leadership. For example, a new
hire requires more supervision than an experienced employee. A person who
lacks motivation requires a different approach than one with a high degree of
motivation. You must know your people! The fundamental starting point is
having a good understanding of human nature, such as needs, emotions, and
motivation. You must become to know your employees' be, know, and do
attributes.
Leader
You must have a honest understanding of who you are, what you
know, and what you can do. Also, note that it is the followers, not the leader
who determines if a leader is successful. If they do not trust or lack
confidence in their leader, then they will be uninspired. To be successful you
have to convince your followers, not yourself or your superiors, that you are
worthy of being followed.
Communication
You lead through two-way communication. Much of it is nonverbal.
For instance, when you "set the example," that communicates to your people
that you would not ask them to perform anything that you would not be
willing to do. What and how you communicate either builds or harms the
relationship between you and your employees.
Situation

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 All are different. What you do in one situation will not always work in
another. You must use your judgment to decide the best course of action and
the leadership style needed for each situation. For example, you may need to
confront an employee for inappropriate behavior, but if the confrontation is
too late or too early, too harsh or too weak, then the results may prove
ineffective.
If you are a leader who can be trusted, then those around you will
grow to respect you. To be such a leader, there is a Leadership Framework
to guide you:
 BE KNOW DO
 BE a professional. Examples: Be loyal to the organization,take

personal responsibility.
 BE a professional who possess good character traits. Examples:

Honesty, competence, candor, commitment, integrity, courage,

straightforwardness, imagination.
 KNOW the four factors of leadership - follower, leader,

communication, and situation.

 KNOW yourself. Examples: strengths and weakness of your

character, knowledge, and skills.

 KNOW human nature. Examples: Human needs, emotions, and

how people respond to stress.

 KNOW your job. Examples: be proficient and be able to train

others in their tasks.

 KNOW your organization. Examples: where to go for help, its

climate and culture, who the unofficial leaders are.

 DO provide direction. Examples: goal setting, problem solving,

decision making, planning.

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  DO implement. Examples: communicating, coordinating,
supervising, evaluating.
 DO motivate. Examples: develop moral and esprit in the

organization, train, coach, counsel.

Environment
Every organization has a particular work environment, which dictates
to a considerable degree how its leaders respond to problems and
opportunities. This is brought about by its heritage of past leaders and its
present leaders.
Goals, Values, and Concepts
Leaders exert influence on the environment via three types of actions:
1. The goals and performance standards they establish.
2. The values they establish for the organization.
3. The business and people concepts they establish.
Successful organizations have leaders who set high standards and
goals across the entire spectrum, such as strategies, market leadership, plans,
meetings and presentations, productivity, quality, and reliability.
Values reflect the concern the organization has for its employees,
customers, investors, vendors, and surrounding community. These values
define the manner in how business will be conducted.
Concepts define what products or services the organization will offer
and the methods and processes for conducting business.
These goals, values, and concepts make up the organization's
"personality" or how the organization is observed by both outsiders and
insiders. This personality defines the roles, relationships, rewards, and rites
that take place.

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 There are two distinct forces that dictate how to act within an
organization: culture and climate.
Each organization has its own distinctive culture. It is a combination
of the founders, past leadership, current leadership, crises, events, history,
and size.
The climate is the feel of the organization, the individual and shared
perceptions and attitudes of the organization's members. While the culture is
the deeply rooted nature of the organization that is a result of long-held
formal and informal systems, rules, traditions, and customs; climate is a
short-term phenomenon created by the current leadership. Climate represents
the beliefs about the "feel of the organization" by its members. This
individual perception of the "feel of the organization" comes from what the
people believe about the activities that occur in the organization. These
activities influence both individual and team motivation and satisfaction,
such as:
• How well does the leader clarify the priorities and goals of the
organization? What is expected of us?
• What is the system of recognition, rewards, and punishments in
the organization?
• How competent are the leaders?
• Are leaders free to make decision?
• What will happen if I make a mistake?
Organizational climate is directly related to the leadership and
management style of the leader, based on the values, attributes, skills, and
actions, as well as the priorities of the leader. Compare this to "ethical
climate" -- the "feel of the organization" about the activities that have ethical

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content or those aspects of the work environment that constitute ethical
behavior. The ethical climate is the feel about whether we do things right; or
the feel of whether we behave the way we ought to behave. The behavior
(character) of the leader is the most important factor that impacts the
climate.
On the other hand, culture is a long-term, complex phenomenon.
Culture represents the shared expectations and self-image of the
organization. The mature values that create "tradition" or the "way we do
things here." Things are done differently in every organization. The
collective vision and common folklore that define the institution are a
reflection of culture. Individual leaders cannot easily create or change
culture because culture is a part of the organization. Culture influences the
characteristics of the climate by its effect on the actions and thought
processes of the leader. But, everything you do as a leader will effect the
climate of the organization.
Leadership Models
Leadership models help us to understand what makes leaders act the
way they do. The ideal is not to lock yourself in to a type of behavior
discussed in the model, but to realize that every situation calls for a different
approach or behavior to be taken. Two models will be discussed, the Four
Framework Approach and the Managerial Grid.
Four Framework Approach.
Structural Framework. In an effective leadership situation, the leader
is a social architect whose leadership style is analysis and design. While in
an ineffective leadership situation, the leader is a petty tyrant whose
leadership style is details. Structural Leaders focus on structure, strategy,
environment, implementation, experimentation, and adaptation.

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 Human Resource Framework. Human Resource Leaders believe in
people and communicate that belief; they are visible and accessible; they
empower, increase participation, support, share information, and move
decision making down into the organization.
Political Framework. Political leaders clarify what they want and what
they can get; they assess the distribution of power and interests; they build
linkages to other stakeholders, use persuasion first, then use negotiation and
coercion only if necessary.
Symbolic Framework. In an effective leadership situation, the leader
is a prophet, whose leadership style is inspiration. While in an ineffective
leadership situation, the leader is a fanatic or fool, whose leadership style is
smoke and mirrors.
Symbolic leaders view organizations as a stage or theater to play
certain roles and give impressions; these leaders use symbols to capture
attention; they try to frame experience by providing plausible interpretations
of experiences; they discover and communicate a vision.
Managerial Grid
The Blake and Mouton Managerial Grid use two axes:
1. "Concern for people" is plotted using the vertical axis
2. "Concern for task" is along the horizontal axis.
Most people fall somewhere near the middle of the two axes. But, by
going to the extremes, we come up with four types of leaders:
• Authoritarian (9 on task, 1 on people)
• Team Leader (9 on task, 9 on people)
• Country Club (1 on task, 9 on people)
• Impoverished (1 on task, 1 on people).

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 Authoritarian Leader. (high task, low relationship). People who get
this rating are very much task oriented and are hard on their workers
(autocratic). There is little or no allowance for cooperation or collaboration.
Heavily task oriented people display these characteristics: they are very
strong on schedules; they expect people to do what they are told without
question or debate; when something goes wrong they tend to focus on who
is to blame rather than concentrate on exactly what is wrong and how to
prevent it; they are intolerant of what they see as dissent (it may just be
someone's creativity), so it is difficult for their subordinates to contribute or
develop.
Team Leader. (high task, high relationship). This type of person leads
by positive example and endeavors to foster a team environment in which all
team members can reach their highest potential, both as team members and
as people. They encourage the team to reach team goals as effectively as
possible, while also working tirelessly to strengthen the bonds among the
various members. They normally form and lead some of the most productive
teams.
Country Club Leader. (low task, high relationship). This person uses
predominantly reward power to maintain discipline and to encourage the
team to accomplish its goals. Conversely, they are almost incapable of
employing the more punitive coercive and legitimate powers. This inability
results from fear that using such powers could jeopardize relationships with
the other team members.
Impoverished Leader. (low task, low relationship). A leader who uses
a "delegate and disappear" management style. Since they are not committed
to either task accomplishment or maintenance; they essentially allow their

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team to do whatever it wishes and prefer to detach themselves from the team
process by allowing the team to suffer from a series of power struggles.
The most desirable place for a leader is the Team Leader. However,
do not entirely dismiss the other three. Certain situations might call for one
of the other three to be used at times.
The Process of Great Leadership
The road to great leadership (Kouzes & Posner, 1987) that is common
to successful leaders:
• Challenge the process - First, find a process that you believe
needs to be improved the most.
• Inspire a shared vision - Next, share you vision in words that
can be understood by your followers.
• Enable others to act - Give them the tools and methods to
solve the problem.
• Model the way - When the process gets tough, get your hands
dirty. A boss tells others what to do...a leader shows that it can be done.
• Encourages the heart - Share the glory with your followers'
heart, while keeping the pains within your own.

Classical leadership

Many of the images associated with leadership have their

roots in conflict. It is the stuff of generals who outwit their opponents,
politicians who convince and channel groups into action, and people who

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take control of a crisis. We are directed to special individuals like Gandhi or
Joan of Arc; Napoleon or Hitler. The stories around such people seem to
show that there are moments of crisis or decision where the actions of one
person are pivotal. They have a vision of what can, and should be, done and
can communicate this to others. When these are absent there can be trouble.
Quality of leadership is, arguably, central to the survival and success of
groups and organizations. As The Art of War, the oldest known military text
(circa 400 BC), puts it, 'the leader of armies is the arbiter of the people's fate,
the man on whom it depends whether the nation shall be in peace or in peril'
(Waging war).
But what is leadership? It seems to be one of those qualities
that you know when you see it, but is difficult to describe. There are almost
as many definitions as there are commentators. Many associate leadership
with one person leading. Four things stand out in this respect. First, to lead
involves influencing others. Second, where there are leaders there are
followers. Third, leaders seem to come to the fore when there is a crisis or
special problem. In other words, they often become visible when an
innovative response is needed. Fourth, leaders are people who have a clear
idea of what they want to achieve and why. Thus, leaders are people who are
able to think and act creatively in non-routine situations – and who set out to
influence the actions, beliefs and feelings of others. In this sense being a
‘leader’ is personal. It flows from an individual’s qualities and actions.
However, it is also often linked to some other role such as manager or
expert. Here there can be a lot of confusion. Not all managers, for example,
are leaders; and not all leaders are managers.
In the recent literature of leadership (that is over the last 80 years or
so) there have been four main ‘generations’ of theory:

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  Trait theories.
 Behavioral theories.
 Contingency theories.
 Transformational theories.

It is important, as John van Maurik (2001) has pointed out, to

recognize that none of the four ‘generations’ is mutually exclusive or totally
time-bound.
Although it is true that the progression of thinking tends to follow a
sequential path, it is quite possible for elements of one generation to crop up
much later in the writings of someone who would not normally think of
himself or herself as being of that school. Consequently, it is fair to say that
each generation has added something to the overall debate on leadership and
that the debate continues. (van Maurik 2001)
This fourfold division of ‘modern’ (management) leadership can go
under different titles (e.g. we might discuss charismatic rather than
transformational leadership), and there are other possible candidates e.g.
skill based approaches and self-management or shared leadership (discussed
elsewhere on these pages). However, these four formations can be seen as
sharing some common qualities and we can approach them as variations of
the ‘classical’ model of leadership.

Traits
Leaders are people, who are able to express themselves fully, says
Warren Bennis. 'They also know what they want', he continues, 'why they
want it, and how to communicate what they want to others, in order to gain

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their co-operation and support.’ Lastly, ‘they know how to achieve their
goals'. But what is it that makes someone exceptional in this respect? As
soon as we study the lives of people who have been labeled as great or
effective leaders, it becomes clear that they have very different qualities. We
only have to think of political figures like Nelson Mandela, Margaret
Thatcher and Mao Zedong to confirm this.
Instead of starting with exceptional individuals many turned to setting
out the general qualities or traits they believed should be present. Surveys of
early trait research by Stogdill (1948) and Mann (1959) reported that many
studies identified personality characteristics that appear to differentiate
leaders from followers. However, as Peter Wright has commented, ‘others
found no differences between leaders and followers with respect to these
characteristics, or even found people who possessed them were less likely to
become leaders’. Yet pick up almost any of the popular books on the subject
today and you will still find a list of traits that are thought to be central to
effective leadership. The basic idea remains that if a person possesses these
she or he will be able to take the lead in very different situations. At first
glance, the lists seem to be helpful (see, for example, Exhibit 1). But spend
any time around them and they can leave a lot to be desired.

Exhibit 1: Gardner’s leadership attributes

John Gardner studied a large number of North American
organizations and leaders and came to the conclusion that there were some
qualities or attributes that did appear to mean that a leader in one situation
could lead in another. These included:
 Physical vitality and stamina
 Intelligence and action-oriented judgment

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  Eagerness to accept responsibility
 Task competence
 Understanding of followers and their needs
 Skill in dealing with people
 Need for achievement
 Capacity to motivate people
 Courage and resolution
 Trustworthiness
 Decisiveness
 Self-confidence
 Assertiveness
 Adaptability/flexibility

The first problem is that the early searchers after traits often
assumed that there was a definite set of characteristics that made a leader -
whatever the situation. In other words, they thought the same traits would
work on a battlefield and in the staff room of a school. They minimized the
impact of the situation (Sadler 1997). They, and later writers, also tended to
mix some very different qualities. Some of Gardner’s qualities, for example,
are aspects of a person's behavior, some are skills, and others are to do with
temperament and intellectual ability. Like other lists of this nature it is quite
long - so what happens when someone has some but not all of the qualities?
On the other hand, the list is not exhaustive and it is possible that someone
might have other ‘leadership qualities’. What of these?
More recently people have tried looking at what combinations of traits
might be good for a particular situation. There is some mileage in this. It
appears possible to link clusters of personality traits to success in different

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situations, as Stogdill has subsequently suggested. However, it remains an
inexact science!
One of the questions we hear most often around such lists concerns
their apparent ‘maleness’ (e.g. Rosener 1997). When men and women are
asked about each other’s characteristics and leadership qualities, some
significant patterns emerge. Both tend to have difficulties in seeing women
as leaders. The attributes associated with leadership on these lists are often
viewed as male. However, whether the characteristics of leaders can be
gendered is questionable. If it is next to impossible to make a list of
leadership traits that stands up to questioning, then the same certainly
applies to lists of gender specific leadership traits!

Behaviors
As the early researchers ran out of steam in their search for traits, they
turned to what leaders did - how they behaved (especially towards
followers). They moved from leaders to leadership - and this became the
dominant way of approaching leadership within organizations in the 1950s
and early 1960s. Different patterns of behaviors were grouped together and
labeled as styles. This became a very popular activity within management
training – perhaps the best known being Blake and Mouton’s Managerial
Grid (1964; 1978). Various schemes appeared, designed to diagnose and
develop people’s style of working. Despite different names, the basic ideas
were very similar. The four main styles that appear are:
 Concern for task. Here leaders emphasize the achievement of
concrete objectives. They look for high levels of productivity, and ways to
organize people and activities in order to meet those objectives.

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  Concern for people. In this style, leaders look upon their
followers as people - their needs, interests, problems, development and so
on. They are not simply units of production or means to an end.
 Directive leadership. This style is characterized by leaders
taking decisions for others - and expecting followers or subordinates to
follow instructions.
 Participative leadership. Here leaders try to share decision-
making with others.(Wright 1996)
Many of the early writers that looked to participative and people-
centered leadership argued that it brought about greater satisfaction amongst
followers (subordinates). However, as Sadler (1997) reports, when
researchers really got to work on this it didn’t seem to stand up. There were
lots of differences and inconsistencies between studies. It was difficult to say
style of leadership was significant in enabling one group to work better than
another. Perhaps the main problem, though, was one shared with those who
looked for traits (Wright 1996). The researchers did not look properly at the
context or setting in which the style was used. Is it possible that the same
style would work as well in a gang or group of friends, and in a hospital
emergency room? The styles that leaders can adopt are far more affected by
those they are working with, and the environment they are operating within,
than had been originally thought.

Situations
Researchers began to turn to the contexts in which leadership is
exercised - and the idea that what is needed changes from situation to
situation. Some looked to the processes by which leaders emerge in different
circumstances - for example at moments of great crisis or where there is a

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vacuum. Others turned to the ways in which leaders and followers viewed
each other in various contexts - for example in the army, political parties and
in companies. The most extreme view was that just about everything was
determined by the context. But most writers did not take this route. They
brought the idea of style with them, believing that the style needed would
change with the situation. Another way of putting this is that particular
contexts would demand particular forms of leadership. This placed a
premium on people who were able to develop an ability to work in different
ways, and could change their style to suit the situation.
What began to develop was a contingency approach. The central idea
was that effective leadership was dependent on a mix of factors. For
example, Fred E. Fiedler argued that effectiveness depends on two
interacting factors: leadership style and the degree to which the situation
gives the leader control and influence. Three things are important here:
 The relationship between the leaders and followers. If
leaders are liked and respected they are more likely to have the support of
others.
 The structure of the task. If the task is clearly spelled out as
to goals, methods and standards of performance then it are more likely that
leaders will be able to exert influence.
 Position power. If an organization or group confers powers on
the leader for the purpose of getting the job done, then this may well
increase the influence of the leader. (Fiedler and Garcia 1987)
Models like this can help us to think about what we are doing in
different situations. For example, we may be more directives where a quick
response is needed, and where people are used to being told what to do,
rather than having to work at it themselves. They also found their way into

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various management training aids – such as the development of Mouton and
Blake’s managerial grid by Reddin (1970; 1987) that looked to the
interaction of the characteristics of the leader, the characteristics of the
followers and the situation; and Hersey and Blanchard’s (1977) very
influential discussion of choosing the appropriate style for the particular
situation.
Exhibit 2: Hersey and Blanchard (1977) on leadership style and
situation
Hersey and Blanchard identified four different leadership styles that
could be drawn upon to deal with contrasting situations:
Telling (high task/low relationship behavior). This style or approach
is characterized by giving a great deal of direction to subordinates and by
giving considerable attention to defining roles and goals. The style was
recommended for dealing with new staff, or where the work was menial or
repetitive, or where things had to be completed within a short time span.
Subordinates are viewed as being unable and unwilling to ‘do a good job’.
Selling (high task/high relationship behavior). Here, while most of the
direction is given by the leader, there is an attempt at encouraging people to
‘buy into’ the task. Sometimes characterized as a ‘coaching’ approach, it is
to be used when people are willing and motivated but lack the required
‘maturity’ or ‘ability’.
Participating (high relationship/low task behavior). Here decision-
making is shared between leaders and followers – the main role of the leader
being to facilitate and communicate. It entails high support and low direction
and is used when people are able, but are perhaps unwilling or insecure (they
are of ‘moderate to high maturity’ (Hersey 1984).

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 Delegating (low relationship/low task behavior). The leader still
identifies the problem or issue, but the responsibility for carrying out the
response is given to followers. It entails having a high degree of
competence and maturity (people know what to do, and are motivated to do
it).

Aside from their very general nature, there are some issues with such
models. First, much that has been written has a North American bias. There
is a lot of evidence to suggest cultural factors influence the way that people
carry out, and respond to, different leadership styles. For example, some
cultures are more individualistic, or value family as against bureaucratic
models, or have very different expectations about how people address and
talk with each other. All this impacts on the choice of style and approach.
Second, as we saw earlier, there may be different patterns of
leadership linked with men and women. Some have argued that women may
have leadership styles that are more nurturing, caring and sensitive. They
look more to relationships. Men are said to look to task. However, there is a
lot of debate about this. We can find plenty of examples of nurturing men
and task-oriented women. Any contrasts between the style of men and
women may be down to the situation. In management, for example, women
are more likely to be in positions of authority in people-oriented sectors – so
this aspect of style is likely to be emphasized.
Third, as Bolman and Deal (1997) comment, like Blake and Mouton
before them, writers like Hersey and Blanchard focuses mainly on the
relationship between managers and immediate subordinates, and say little
about issues of structure, politics or symbols.
Transformations

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 Burns (1977) argued that it was possible to distinguish between
transactional and transforming leaders. The former, ‘approach their
followers with an eye to trading one thing for another (1977), while the latter
are visionary leaders who seek to appeal to their followers ‘better nature and
move them toward higher and more universal needs and purposes’ (Bolman
and Deal 1997). In other words, the leader is seen as a change agent.

Transactional
The transactional leader:
Recognizes what it is that we want to get from work and tries to
ensure that we get it if our performance merits it.
Exchanges rewards and promises for our effort.
Is responsive to our immediate self interests if they can be met by
getting the work done.

Transformational

The transformational leader:

Raises our level of awareness, our level of consciousness about the
significance and value of designated outcomes, and ways of reaching them.
Gets us transcend our own self-interest for the sake of the team,
organization or larger polity.
Alters our need level (after Maslow) and expands our range of wants
and needs.
Bass (1985) was concerned that Burns (1977) set transactional and
transforming leaders as polar opposites. Instead, he suggests we should be

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looking at the way in which transactional forms can be drawn upon and
transformed. The resulting transformational leadership is said to be
necessary because of the more sophisticated demands made of leaders. Mr.
van Maurik (2001) argues that such demands ‘centre around the high levels
of uncertainty experienced by leaders, their staff and, indeed, the whole
organization… today’. He goes on to identify three broad bodies of writers
in this orientation. Those concerned with:
 Team leadership e.g. Meredith Belbin.
 The leader as a catalyst of change e.g. Warren Bennis, James
Kouzes and Barry Posner, and Stephen R. Covey.
 The leader as strategic visionary e.g. Peter Senge
The dividing lines between these are a matter for some debate; the
sophistication of the analysis offered by different writers’ variable; and some
of the writers may not recognize their placement – but there would appear to
be a body of material that can be labeled transformational. There is strong
emphasis in the contemporary literature of management leadership on
charismatic and related forms of leadership. However, whether there is a
solid body of evidence to support its effectiveness is an open question.
Indeed, Wright (1996) concludes ‘it is impossible to say how effective
transformational leadership is with any degree of certainty. We will return to
some questions around charisma later – but first we need to briefly examine
the nature of authority in organizations (and the relationship to leadership).

Authority
Frequently we confuse leadership with authority. To explore this we
can turn to Heifetz’s (1994) important discussion of the matter. Authority is
often seen as the possession of powers based on formal role. In

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organizations, for example, we tend to focus on the manager or officer. They
are seen as people who have the right to direct us. We obey them because we
see their exercise of power as legitimate. It may also be that we fear the
consequences of not following their orders or ‘requests’. The possibility of
them sacking, demoting or disadvantaging us may well secure our
compliance. We may also follow them because they show leadership. As we
have seen, the latter is generally something more informal - the ability to
make sense of, and act in, situations that are out of the ordinary. In this way,
leaders don’t simply influence; they have to show that crises or unexpected
events and experiences do not faze them. Leaders may have formal
authority, but they rely in large part on informal authority. This flows from
their personal qualities and actions. They may be trusted, respected for their
expertise, or followed because of their ability to persuade.
Leaders have authority as part of an exchange: if they fail to deliver
the goods, to meet people’s expectations, they run the risk of authority being
removed and given to another. Those who have formal authority over them
may take this action. However, we also need to consider the other side.
Followers, knowingly or unknowingly, accept the right of the person to lead
– and he or she is dependent on this. The leader also relies on ‘followers’ for
feedback and contributions. Without these they will not have the information
and resources to do their job. Leaders and followers are interdependent.
People who do not have formal positions of power can also enjoy
informal authority. In a football team, for example, the manager may not be
the most influential person. It could be an established player who can read
the game and energize that colleagues turn to. In politics a classic example is
Gandhi – who for much of the time held no relevant formal position – but
through his example and his thinking became an inspiration for others.

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 Having formal authority is both a resource and a constraint. On the
one hand it can bring access to systems and resources. Handled well it can
help people feel safe. On the other hand, formal authority carries a set of
expectations – and these can be quite unrealistic in times of crisis. As
Heifetz puts it, ‘raise hard questions and one risks getting cut down, even if
the questions are important for moving forward on the problem’ (1994).
Being outside the formal power structure, but within an organization, can be
an advantage. You can have more freedom of movement, the chance of
focusing on what you see as the issue (rather than the organization’s focus),
and there is a stronger chance of being in touch with what people are feeling
‘at the frontline’.

Charisma
Before moving on it is important to look at the question of charisma.
It is so much a part of how we look at leadership but is such a difficult
quality to tie down. Charisma is, literally, a gift of grace or of God (Wright
1996). Max Weber, more than anyone, brought this idea into the realm of
leadership. He used ‘charisma’ to talk about self-appointed leaders who are
followed by those in distress. Such leaders gain influence because they are
seen as having special talents or gifts that can help people escape the pain
they are in (Gerth and Mills 1991).
When thinking about charisma we often look to the qualities of
particular individuals - their skills, personality and presence. But this is only
one side of things. We need to explore the situations in which charisma
arises. When strong feelings of distress are around there does seem to be a
tendency to turn to figures that seem to have answers. To make our lives
easier we may want to put the burden of finding and making solutions on

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someone else. In this way we help to make the role for ‘charismatic leaders’
to step into. They in turn will seek to convince us of their special gifts and of
their solution to the crisis or problem. When these things come together
something very powerful can happen. It doesn’t necessarily mean that the
problem is dealt with - but we can come to believe it is. Regarding such
leaders with awe, perhaps being inspired in different ways by them, we can
begin to feel safer and directed. This can be a great resource. Someone like
Martin Luther King used the belief that people had in him to take forward
civil rights in the United States. He was able to contain a lot of the stress his
supporters felt and give hope of renewal. He articulated a vision of what was
possible and worked with people to develop strategies. But there are also
considerable dangers.
Charisma involves dependency. It can mean giving up our
responsibilities. Sadly, it is all too easy to let others who seem to know what
they are doing get on with difficult matters. By placing people on a pedestal
the distance between ‘us’ and ‘them’ widens. They seem so much more able
or in control. Rather than facing up to situations, and making our own
solutions, we remain followers (and are often encouraged to do so). There
may well come a point when the lie implicit in this confronts us. Just as we
turned to charismatic leaders, we can turn against them. It could be we
recognize that the ‘solution’ we signed up to has not made things better. It
might be that some scandal or incident reveals the leader in what we see as a
bad light. Whatever, we can end up blaming, and even destroying, the
leader. Unfortunately, we may simply turn to another rather than looking to
our own capacities.

4.2. HOW TO CREATE LEADERS

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 4.2.1. Leadership Defined
Basically, leadership is getting people to follow you. The moral and
ethical considerations of leading are beyond the scope of this article, but
their importance cannot be overstated. Unfortunately, much leadership is
designed around a control/authority model. Many leaders, even the brightest,
figure out what has to happen with things in the company, tell people what is
needed for the desired results and then expect things to happen-a gross
simplification of the process. You would be surprised how many leaders
lead this way. In light of the psychological reality that people only do what
they want to do, the current approach means that people follow and work
only as hard as is necessary to avoid the consequences of disobedience.
However, leadership can be a whole lot more than charting out a business
strategy that others happen to follow.
The most skilled leaders ask themselves, "What can I say or do to get
my followers to cause them to do what I need them to do?" The best leaders
cause maximum follower ship. The art of causing follower ship is founded
on a few deceptively simple principles. One of the most important of these is
that people do what their minds and emotions tell them to do, not necessarily
what the leader says to do. A second principle is that the follower provides
the motivation. No leader can motivate others. They can only cause
followers to motivate themselves. While this may seem like semantics, it is a
subtle but profound shift in understanding true leadership. In short, the
accomplished leader becomes adept at reading and feeding their followers'
needs in a way that optimizes the organization's success.
Since leading is basically a psychological process and skill, leaders
who learn and practice the latest in leadership technology will be much more
effective.
And leadership skills, like management skills, can be learned and
improved. However, learning the subtle technology of leadership requires
dissatisfaction with the status quo, a belief that one's leadership could be

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better. Learning leadership means facing the inevitable discomfort of
hearing negative feedback, the discipline of trying new approaches and the
awkwardness of new behaviors. Yet, the rewards far outweigh the costs.
Releasing the energy and motivation of your followers opens new
opportunities and inevitably results in bottom line improvements. I've
consistently seen productivity improve over 30 percent where an
organization's leaders focused on improving their leadership and its impact
on the human system.

Managing Leadership
If leadership can be taught (and it can), it can also be managed. The
most progressive and successful companies are managing leaders and
leadership systematically as a strategic weapon. Of course, what constitutes
good leadership is context - and company – s sensitive. However, there are
certain principles and models that will help you develop a robust leadership
system. At Farr Associates, we develop leadership systems for clients at five
levels: the individual, small group relationships, teams, company-wide and
intra-company. Different leadership technology is called for at each level.
Some companies will not necessarily have to manage leadership at all levels
to get a significant impact in their bottom-line. I encourage you to go out
and investigate what make the best sense for your organization.
The best leaders will also manage their own leadership by
incorporating the three basic types of leadership-directional, implementation
and interpersonal-into their thinking process. Directional leadership is
strategic leadership. It is all about determining where the organization
should go. Implementation leadership involves determining how the
organization will make it to wherever it is headed. Interpersonal leadership

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involves the process of getting human resources behind organizational goals
and objectives. You should integrate these three types of leadership
successfully and holistically in a way that best serves followers and the
organization.
Three Leadership Rules to Remember
Rule 1: You must have or develop the skill, and take the time to find
out what is in the follower's mind concerning his situation and how he
perceives you.
In particular, you must know what he perceives as negative. Since
sensible followers are reluctant to say negative things to anyone who has
power over their work lives, mapping out negative perceptions takes a good
deal of leader skill. A leader can break down any reluctance to give feedback
by supporting the efforts of followers to work in a way that satisfies both
themselves and their company. A good leader knows and consistently uses
some of the many techniques for learning follower's needs and assessing
how they experience their environment. Leaders need to create and manage
a system of feedback loops that keep them in permanent touch with follower
mindset so they lead professionally with maximum impact.
Rule 2: To be a powerful leader, you must present your "leaderself" to
others, rather than your natural self. Good leaders do not always do what
comes as a natural expression of their personalities. Instead, they come from
a leaderself that is designed and created to do exactly the leadership
behavior called for by the situation. They fit the leader role rather than make
the role fit them. It is amazing how much poor leadership occurs because
leaders do what comes naturally from their personalities rather than what is
needed to be effective.

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 Rule 3: To create an effective leaderself, you must operate from self-
awareness rather than from an automatic mind. For many leaders, this is
unbelievably difficult, because they are unaware of much of what they do
and of the perceptions they create in others. They act on automatic, focusing
attention on what they want to cause in their business, with little or no
thought on what they want the follower to cause them selves to do. They
lead with too much focus on what they want done, rather than from an
awareness of followers' mindset. Often, the personality traits that make for
effective managers can make them terrible leaders, especially once their role
expands beyond leadership based on their personal charisma and
implementation skills.

Principles of Leadership
To help you be, know, and do, (2) follow these eleven principles of
leadership (later sections will expand on gaining an insight into these
principles and providing tools to perform them):
• Know yourself and seek self-improvement. In order to know
yourself, you have to understand your be, know, and do, attributes. Seeking
self-improvement means continually strengthening your attributes. This can
be accomplished through reading, self-study, classes, etc.
• Be technically proficient. As a leader, you must know your job
and have a solid familiarity with your employees' jobs.
• Seek responsibility and take responsibility for your actions.
Search for ways to guide your organization to new heights. And when things
go wrong, they will sooner or later, do not blame others. Analyze the
situation, take corrective action, and move on to the next challenge.

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 Make sound and timely decisions. Use good problem solving,
decision making, and planning tools.
Set the example. Be a good role model for your employees. They
must not only hear what they are expected to do, but also see.
Know your people and look out for their well-being. Know human
nature and the importance of sincerely caring for your workers.
Keep your people informed. Know how to communicate with your
people, seniors, and other key people within the organization.
Develop a sense of responsibility in your people. Develop good
character traits within your people that will help them carry out their
professional responsibilities.
Ensure that tasks are understood, supervised, and accomplished.
Communication is the key to this responsibility.
Train your people as a team. Although many so called leaders call
their organization, department, section, etc. a team; they are not really
teams...they are just a group of people doing their jobs.
Use the full capabilities of your organization. By developing a team
spirit, you will be able to employ your organization, department, section, etc.
to its fullest capabilities

Factors of leadership
The four major factors of leadership are the:
Follower - Different people require different styles of leadership. For
example, a new hire requires more supervision than an experienced
employee. A person with a poor attitude requires a different approach than
one with a high degree of motivation. You must know your people! The
fundamental starting point is having a good understanding of human nature:

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needs, emotions, and motivation. You must know your employees' be,
known, and do attributes.
Leader - You must have a honest understanding of who you are, what
you know, and what you can do. Also, note that it is the followers, not the
leader who determines if a leader is successful. If a follower does not trust or
lacks confidence in her leader, then she will be uninspired. To be successful
you have to convince your followers, not yourself or your superiors, that you
are worthy of being followed.
Communication - You lead through two-way communication. Much
of it is nonverbal. For instance, when you "set the example," that
communicates to your people that you would not ask them to perform
anything that you would not be willing to do. What and how you
communicate either builds or harms the relationship between you and your
employees.
Situation - All situations are different. What you do in one leadership
situation will not always work in another situation. You must use your
judgment to decide the best course of action and the leadership style needed
for each situation. For example, you may need to confront a employee for
inappropriate behavior, but if the confrontation is too late or too early, too
harsh or too weak, then the results may prove ineffective.
Attributes:
If you are a leader that can be trusted, then the people around you will
learn to respect you. To be a good leader, there are things that you must be,
know, and do. These fall under the Leadership Framework:
BE a professional. Examples: Be loyal to the organization, perform
selfless service, and take personal responsibility.

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 BE a professional who possess good character traits. Examples:
Honesty, competence, candor, commitment, integrity, courage,
straightforward, imagination
KNOW the four factors of leadership - follower, leader,
communication, and situation.
KNOW yourself. Examples: strengths and weakness of your
character, knowledge, and skills.
KNOW human nature. Examples: Human needs and emotions, and
how people respond to stress.
KNOW your job. Examples: be proficient and be able to train others
in their tasks.
KNOW your organization. Examples: where to go for help, its
climate and culture, who the unofficial leaders are
DO provide direction. Examples: goal setting, problem solving,
decision making, planning
DO implement. Examples: communicating, coordinating, supervising,
evaluating.
DO motivate. Examples: develop moral and esprit in the organization,
train, coach, counsel.
Leadership Practices
James Kouzes and Barry Posner (1987, 1988) have identified specific
attitudes and behaviors that outstanding leaders have in common. Exemplary
leaders share the following five behavioral practices and ten
commitments:
1. Exemplary leaders challenge the process. They are pioneers; they
seek out new opportunities and are willing to change the status quo. They
innovate, experiment, and explore ways to improve their organizations. Such

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leaders view mistakes as learning experiences and are prepared to meet any
challenges that confront them. Challenging the process requires two leader
commitments: (a) to search for opportunities and (b) to experiment and take
risks.
2. Exemplary leaders inspire a shared vision. They look toward and
beyond the horizon. They envision the future with a positive and hopeful
outlook. Exemplary leaders are expressive; their genuine natures and
communication skills attract followers. They show others how mutual
interests can be met through commitment to a common purpose. Inspiring a
shared vision requires leaders to commit to (a) envisioning the future and to
(b) enlisting the support of others.
3. Exemplary leaders enable others to act. They instill followers with
spirit-nurturing relationships based on mutual trust. Exemplary leaders stress
collaborative goals. They actively involve others in planning and permit
others to make their own decisions. These leaders make sure that their
followers feel strong and capable. Enabling others to act requires two leader
commitments: (a) to fostering collaboration and (b) strengthening others.
4. Exemplary leaders model the way. They are clear about their
values and beliefs. Exemplary leaders keep people and projects on course by
consistently behaving according to these values and by modeling the
behaviors that they expect from others. They plan thoroughly and divide
projects into achievable steps, thus creating opportunities for small wins.
Through their focus on key priorities, such leaders make it easier for others
to achieve goals. To model the way requires leaders to commit to (a) setting
an example and (b) planning small wins.
5. Exemplary leaders encourage the heart. They encourage people to
persist in their efforts by recognizing accomplishments and contributions to

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the organization's vision. They let others know that their efforts are
appreciated and they express pride in their team's accomplishments.
Exemplary leaders find ways to celebrate achievements. They nurture team
spirit, which enables people to sustain continued efforts. Encouraging the
heart requires leaders to be committed to: (a) recognizing contributions and
(b) celebrating accomplishments.

Leader skils

• Listen
Speaking out and taking stand is one thing, but keeping an open ear is
essential. Don't assume what students want. Go out and ask all types of
students for feedback, not just friends or fellow organization members.
• Enthusiastic
If you are passionate about the job issues, the enthusiasm will radiate
to the rest of the community. A positive attitude and optimism will also go a
long way to make the task both fun and effective.
• Action
Goals are important, but providing a comprehensive plan of action
that explains how to reach those goals is even more so. Parking, campus
housing and the lack of school spirit and the popular issues, but they are
mentioned year after year during the campaigns. Be creative and take risks
in order to find new ways of accomplishing those goals.
• Dependability

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 Students should be able to trust a leader to operate ethically and with
their best interests at heart. Fulfilling campaign promises and goals in vital
in maintaining student loyalty and confidence.
• Educated
You should have a good understanding of the dynamics of student
government, how the university operates and as much about different student
organizations as possible. A leader should also lead by example in the
classroom. If you are too busy with student government and neglected your
studies, how can you be a representative of the students, who are here to
work toward a degree?
• Results
The motivation to hold office should not be for an impressive resume
or to satisfy the urge for attention - it should be about getting something
positive done. There are true leaders, and then there are people who grab a
leadership position as a stepping stone in their career.

4.2.2. Orienting New Members

Developing and conducting an organizational recruitment campaign is
very important. Yet, as we all know, retaining these new members is another
matter entirely. All too frequently groups skip any form of orientation and
place their new recruits directly on committees or organizational projects.
Although involvement is crucial to the longevity of the group, understanding
the organization's goals, objectives, structures, norms and taboos is equally
as important. By taking the time to orient new members to the privileges and

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responsibilities of membership you create a more educated membership -
people who can and will make significant contributions to the organization.
A Successful Organization Orientation Program Should Include:
• The rights and responsibilities of members
• Organizational governance, operating policies and procedures
• Organizational history, traditions and programs
• Assimilation of new members into the organization
• An overview of campus services, activities and programs for
student organizations
• Information about any support groups or affiliations the group
may have
The purpose of any new member orientation program is to acquaint
your recruits to the organization and to each other. Knowing the ins and outs
of the group is only one part of being in an organization. It is important to
note that people join groups for many reasons: they want to get involved,
learn new skills, make friends and have a good time. For this reason it is
important to structure time for the members to get to know each other and to
develop personal relationships and commitments.
• Inform
This section of the orientation process should cover the organization's
history, purpose and structure. If there are written records, give everyone a
copy. Be sure to include organizational charts, officer job descriptions, and a
membership list. Have the new members included on this list.
• Motivate
Get your members, returning and newly recruited, excited about the
group. Provide time for them to meet each other to share ideas and
expectations. Below is a good exercise designed to accomplish that goal.

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 Have the group break into groups of experienced and new members to
discuss the following:
a) Experienced Members
• If you had last year to do over again how would you do it
differently?
• What advice would you offer to the new members?
• What accomplishment(s) are you most proud of?
b) New Members
• What would you like this organization to mean to you one year
from now?
• What would you like to ask the experienced members of the
organization?
• What goals would you like to accomplish this year?
• What problems do you anticipate and how would you solve
them?
Spend at least fifteen minutes in your group discussing these
questions. When time is up gather together as one group and report what you
discussed. It is usually most effective to have the experienced members
report first, followed by the new members.
It is also very important to find out what the new members'
interests are and what skills they bring to the group. Using this
information, try to give them tasks which will successfully use their talents
and give them a reason to be committed. Whenever possible, recognize
members' accomplishments both publicly and privately.
By including the above suggestions in your new member orientation
program you will discover that you have built group cohesion. By following
these tips you will ensure:

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 • Members know the organization and are able to articulate its
purpose.
• Members understand their rights and responsibilities to self and
organization.
• Members have leadership and discipline.
An article in the November 2003 issue of Association Management,
published by the American Society of Association Executives, identifies 10
communication tips that make for effective leadership, especially in hard
times.
• Think before speaking. In tough times people will not only
hold onto every word a leader says, but they will also expend energy to sort
out precisely what leaders are not saying. Leaders need to tailor the message
so that a clear picture of the issues is presented to the audience in a
meaningful and controlled way.
• Stay focused by combining the short- and long-term
pictures. Leaders need to be effective at sorting through the real issues. By
pointing out past challenges and using specific examples to underscore their
message, leaders remind others that they will pull through this time as well
as in the past.
• Handle emotions effectively. Leaders need to be fluid. Leaders
cannot leave or display how angry or frustrated they are. If they do, they
become part of the problem.
• Be hopeful, instill hope, and do something. Leaders need to
link their messages to the broader mission or vision of the organization.
Leaders need to present a clear plan of how they can achieve desired end
results. Leaders need to offer a positive approach for dealing with bad news.

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 • Recognize that quality gossip is good. When bad news needs
to be delivered, people appreciate an informal heads-up in advance of a more
formal gathering. This provides an opportunity for people to talk among
themselves and to console each other and maybe even come up with some
effective tactics.
• Be transparent when answering questions. Use simple
language, address issues upfront and be willing to admit unfamiliarity or
ignorance of certain questions.
• Point out successes in a timely manner. Leaders need to not
only announce any successes, but link the success to the goal or vision of the
organization.
• Follow through on commitments. One essential way to build
and foster trust is to follow through on commitments, particularly as they
relate to the vision and mission of the organization.
• Listen well. Listen for more than what’s being said; pay
attention to what’s not being said and try to spot unspoken expectations that
are not clearly communicated verbally or in writing. It’s about picking up on
what people are thinking, how they are acting and what they are not
necessarily verbalizing.
• Avoid surprises. Keep everyone informed and up to date on
issues and address questions before they become problems.
The most important issue in being a success leader is being a person
that others want to follow. Every action you take during your career in an
organization helps determine whether people will one day want to follow
you.

4.2.3. Team Organization

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 Over the years, Perry has seen the symptoms of poor team
organization. Some projects have too many leaders, leaving only a few
people to do the work and making coordination difficult. Other projects have
too many layers of management, impeding effective communication; team
members become frustrated, waiting for all the leaders to reach agreement or
gain approvals. To augment frustration levels, tasks frequently are unclear,
lacking definitions of roles and responsibilities. Good organization makes
sense; yet project managers often give too little attention to organizing their
group.
Frequently, teams are an assembly of people and nothing more. Some
project managers fear alienating people by setting up a project organization.
Others lack an appreciation for its contribution to project success. Still
others have a preference for an unofficial organizational structure.
Through the function of organization, Perry can realize many
advantages. His team can operate more efficiently, since responsibilities and
reporting relationships will be clearly defined. It can operate more
effectively, because each person will know what is expected of him or her.
The team has higher morale, because roles and reporting relationships will
be clear which in turn reduces the opportunities for conflict.

Ten Prerequisites for Effective Organization

Perry must satisfy some preliminary requirements to build a formal

organization, especially one that handles medium to large projects like his:
1. He must know the project goals. This knowledge will help to
determine how to best arrange his resources.

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 2. He must know all the players. This knowledge will help him to
determine who will support him directly and who will provide ad hoc
support.
3. He must understand the political climate. Although the team may
be temporary, the project may be around for a long time.
4. He must receive preliminary concurrence on the project
organization from all the major players
5. He must determine the appropriate span of control. This means
determining how many people he can effectively manage before establishing
an additional layer of management (e.g., appointing team leaders).
6. He must publish the organization chart as early as possible. This
action will clarify roles early and reduce the opportunity for conflict. It will
also make assigning responsibilities easier.
7. He must consider how much autonomy to grant people on the
project. This will depend on how much control he wants to maintain. If he
wants tight control, he will limit the autonomy he grants to project
participants.
8. He must consider issues of authority, responsibility, and
accountability. How much authority will he have and how much can he
grant? How much responsibility can he relinquish and still be accountable
for the results?
9. He must consider how to group the functions of the project team.
Should he mix them or segregate them? If the latter, how will he encourage
information sharing, communication, and teaming?
10. He must identify the line and staff functions. The goal of the
project will help determine the positions. Line functions contribute directly
to the results; these are typically people on the core team. Staff functions do

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not contribute directly to the results and ordinarily they are not part of the
core team.

Types of Organizational Structure

There are two basic types of organizational structures for a project:

task force and matrix. The task force structure is shown in Exhibit 1.
The task force is a group of people assembled to complete a specific
goal. The team is completely focused on that goal and, consequently,
devotes its entire energies to its accomplishment. By its very nature, task
forces are temporary; the team is disassembled once the goal is
accomplished. It also usually operates autonomously, with its own budget
and authority.

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 Exhibit 4.1. Task force structure.

The task force has the advantage of giving visibility to a project. It

isolates team members from organizational myopia and frees them from
daily administration. It enables creativity and experimentation within the
confines of the goal and scope of the project.
Despite these advantages, Perry does not like the task force structure,
at least for the Smythe Project. Since a task force would last for only a fixed
duration, there’s a danger that few people would have loyalty to the project
and stay the course. As the project experiences difficulties, some people
might depart early, leaving it vulnerable to schedule slippages and lapses in
quality.

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 As the project grows, too, it can become too independent, “stealing”
people from other projects. Other organizations and projects are robbed of
badly needed expertise. As a project ends, the task force may experience
severe morale problems, as people scramble for new jobs before completing
their responsibilities.
It is not uncommon for a project to experience lapses in quality as a
result.
Keeping these shortcomings in mind, Perry agrees with his boss that a
matrix structure is best for the Smythe Project. A matrix structure obtains
resources from functional organizations and also shares those people with
other projects. For command and control purposes, people report to their
functional managers but support one or more project managers. A generic
matrix structure is shown in Exhibit 4.1 and the one for the Smythe wedding
is shown in Exhibit 4.2.
The matrix structure offers several advantages. It allows for sharing
people with heavy expertise among several projects. People don’t need to
look for a new job as the project concludes. The project manager can acquire
people with the right skills at the right time, thereby reducing the need to
keep people on when they are not needed; this helps keep the cost lower.
The matrix structure also gives senior management flexibility in changing
the scope or stopping the project owing to different market conditions.
Perry realizes, though, that a matrix structure presents challenges. It
makes planning difficult, especially if projects are sharing resources. Often,
he must negotiate with functional and other managers to obtain people’s
help.

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 Exhibit 4.2. Matrix structure.

A matrix structure can wreak havoc on morale, too. Team members

on multiple projects may be forced to determine which project to give
attention to. Sometimes the competition is so keen that individuals become
pawns in a power struggle among functional and project managers. That
struggle can last a long time, adding to team angst. Finally, the matrix
structure often violates the unity-of-command principle (a single superior to
who subordinates report).
To tackle these challenges, Perry recognizes the stress a matrix
structure places on team members. He will coordinate closely with
functional and other project managers to facilitate availability and try to
integrate his project with other projects. He will encourage greater
communication, information sharing, and bonding.
Finally, he will stress flexibility; change is a way of life in the matrix
environment, since priorities and resource availabilities constantly change.

Virtual Teams

Recent advances in information systems have brought unparalleled

changes to business, not just technically but also in managing projects.

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These changes include e-mail, the Internet, groupware, and client-server
technology. Technologies such as these have enabled team members to work
autonomously at remote locations during all time periods (e.g., mornings,
evenings). But a project team may never meet face-to-face with some people
and will only interact electronically. That is the nature of virtual teams.
There are many advantages to a virtual team. It reduces the need for
expensive facilities. Team members feel greater freedom, working with less
supervision. A side benefit is a flatter organization chart, too.
While sounding like a dream come true, reality may provide a
different picture. Virtual teams can pose tough challenges. The first is how
to provide support for these virtual team members. There are issues
concerning hardware and software, plus administrative matters such as
accessibility to the project library and ways of collecting information
nonelectronically.
Second is how to overcome the purported loneliness that affects some
virtual team members. Many work alone, in remote geographical locations.
Their opportunities for social interaction and camaraderie are limited.
Third is the challenge of coordinating the activities of team members.
With members geographically dispersed and in different time zones,
coordination can be a nightmare. Since oversight is difficult, project
managers cannot closely monitor work. Similarly, communication usually
involves more than e-mail. There must be a way to discuss major project
activities.
Some ways to handle these challenges include:
• Conducting frequent face-to-face meetings and holding social
gatherings

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 • Developing objective ways to measure performance and completion
criteria
• Empowering people to assume responsibility and accountability for
results
• Establishing time commitments for team members to respond to
each other
• Providing a standard suite of hardware and software tools

SWAT Teams

Special Weapons and Tactics (SWAT) teams are a growing presence

in project management. These are small groups of individuals who are
experts not just in project management but also in other subjects. In the
sense that their objective is to move quickly to complete their mission and
pull out, these groups are like the police SWAT teams from which they get
their name. Specifically, a project SWAT team must quickly set up the
appropriate project management and technical disciplines at the beginning of
a project. Once the disciplines have been established, the team relinquishes
control to a project manager and his group, who are responsible for
completing the project.
SWAT team work is intense. By the time its work is completed, it will
have developed and implemented a complete project plan, from estimates to
schedules.
Although hard skills (e.g., expertise with software and hardware) are
important, soft skills are important, too.
For example, SWAT team members must solicit buy-in for their work.
Active listening, facilitation, communication, and teaming skills are

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extremely important. Also important is the ability to keep calm under
pressure and a willingness to share equipment, expertise, or information.

To use SWAT teams effectively:

1. Obtain support for the work of a SWAT team by follow-on
teleconferencing sessions; otherwise, the team’s effort will be wasted.
2. Be aware that working on a SWAT team can cause burnout. Morale
and energy levels can plummet.
3. Provide constant training for SWAT team members. They must
keep abreast of technologies in order to provide state-of-the-art expertise.
Cross-training can help, but only so far.
4. Select people for the SWAT team who can handle ambiguity.
Members must be willing to tackle projects when goals and deliverables are
ill defined.

Self-Directed Work Teams

In recent years, a different approach to building teams has emerged,

called a Self-Directed Work Team (SDWT). SDWT’s are teams that have
considerable autonomy while building a product or delivering a service. It is
a group of professionals sharing responsibility for results.
These teams are cross-functional, meaning that people with different
disciplines and backgrounds work together to achieve a common goal. The
team decides everything, from setting priorities to allocating resources.
Other actions include selecting people, evaluating performance, and
improving processes. The key characteristic is the autonomy to make
decisions without supervisory approval.

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 Several trends are pushing toward the SDWT concept because these
teams:
• Create flatter organizations
• Empower employees
• Encourage greater teaming
• Encourage people to have a more general background
• Enlarge spans of control
SDWT’s are excellent candidates for applying project management
ideas. Since the entire team is responsible for the results, all members must
help lead, define, plan, organize, control, and close the project. The tools and
techniques of project management enable teams to do that.

Team Building

A team is more than just a group of people doing work. It is an

assembly of individuals with diverse backgrounds who interact for a specific
purpose. The idea is to capture and direct the synergy generated by the group
to efficiently and effectively achieve a goal. Throughout the years, Perry has
witnessed many signs of ineffective teams.

Characteristics of Poor Teams

• No processes for gaining consensus or resolving conflicts. Team

squabbles and overt and covert discussions are ongoing occurrences, making
cooperation difficult, even impossible.
• Team members who lack commitment to the goal. No one has an
emotional attachment to the goal.

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 • No camaraderie or esprit de corps. The players do not feel that they
are part of a team. Instead, everyone acts in his or her own interests.
• Lack of openness and trust. Everyone is guarded, protective of his or
her own interests. Openness and truthfulness are perceived as yielding to
someone, giving a competitive advantage, or exposing vulnerabilities.
• Vague role definitions. The reporting structures and responsibilities
are unclear, causing conflicts. Territorial disputes and power struggles occur
often.
• No commonality or cohesiveness. The team is an unorganized
grouping of people. No one feels a sense of community or brotherhood. No
common ground exists other than to meet periodically to work. This results
in lost synergy.
• Conformity and mind protection. Insecurity permeates people for
fear of being different or ostracized. People do not speak or share
information unless it reinforces behavior or thoughts.
• Low tolerance for diversity. The pressure to conform is so intense
that anyone different in thinking or work style is ostracized or not taken
seriously. Whistle-blowers and creative types, for instance, may be viewed
with suspicion. Under such circumstances no opportunity is available to
capitalize on people’s strengths and address their weaknesses.
• Insufficient resources. Whether its people, equipment, supplies,
facilities, time, or money, insufficient resources make teams ineffective. The
situation can also lead to squabbling, dissention, even revolts. If resources
are not distributed in an objective, meaningful manner, then differences can
magnify into severe conflicts. Members of the team can quickly become
polarized.

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 • Lack of management support. If team members perceive—whether
justifiably or not—that management is not supportive of the project, then
motivation can plummet. People will feel that the work is not valuable, at
least to the organization.
• Listless team members. The goals are vague or nonexistent. Even if
the goals are defined, no one, including the project manager, seems to focus
on them. Instead, everyone is aimless.
• Discontinuity between individual expectations and group
expectations. There is a misalignment between the two, with the latter not
valuing the former. A symbiotic relationship between the two just does not
exist.
An ineffective team is conflict ridden, filled with distrust, unfocused,
and reeking of negative competition.
These conditions manifest themselves in high turnover and
absenteeism, considerable frustration levels, poor communication, no esprit
de corps, and intolerance.
Perry wants, of course, a project team with desirable characteristics:

Characteristics of Effective Teams

• Acceptance of new ideas and objective evaluation of them

• Sustained common norms, values, and beliefs without excessive
conformity
• Synergy through mutual support
• Loyalty and commitment to the project
• Focus on end results
• A trusting, open attitude

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 • Ability to gain consensus and resolve conflicts
• High morale and esprit de corps
• Information and resources sharing
Perry knows all too well that a team with these characteristics is
difficult to achieve. Yet he also knows that such characteristics will not arise
unless he takes action. There are seven actions that he takes to engender
such characteristics:
1. He sets the example. He not only espouses certain values and
beliefs but also exercises them. He wants people to be trustful and open, so
he is trustful and open. He expects people to be committed, so he is
committed. In other words, he “walks the talk.”
2. He encourages communication—oral, written, and electronic. He
knows that communication is more than writing memos, standing in front of
a team, or setting up a Web site. It requires sharing information in an open
and trusting manner, holding frequent meetings (status reviews and staff),
publishing a project manual, defining acronyms and jargon, employing
technology as a communications tool, and encouraging task
interdependence.
3. He has the team focus on results. They direct all their energies
toward achieving the vision. Whether he or the team makes a decision, it is
made in the context of achieving the vision. Perry constantly communicates
the vision and establishes change control and problem-solving processes.
4. He engenders high morale and esprit de corps by developing and
maintaining the energy that comes from teaming. He knows, however, that
he must continually nurture that energy to keep it flowing. So he empowers
team members, encourages consensus building and win-win solutions,

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increases task interdependence, matches the right person with the right task,
and teams people with complementary work styles.
5. He builds commitment to the vision and the project. Throughout the
project cycle, team commitment can rise or fall. Ideally, Perry wants to
achieve the former. Ways to do that include matching people’s interests with
tasks, encouraging participative decision making, empowering people,
seeking input and feedback, assigning people with responsibility for
completing deliverables, and keeping the project in the forefront of
everyone’s mind.
6. He lays the groundwork for synergy. A team is more than the sum
of its members. But synergy requires cooperation. Ways to obtain
cooperation include providing cross-training so that people understand each
other’s roles and responsibilities, clearly defining roles and responsibilities,
determining each team member’s strengths and weaknesses and making
assignments that capitalize on the former, and having groups within the team
be accountable for a complete work unit (e.g., subproduct or deliverable).
7. He encourages greater diversity in thinking, work style, and
behavior. Always mindful of the danger of groupthink, Perry encourages
different thoughts and perspectives. He is especially aware of the
multicultural environment of the Smythe Project. The project culminates in
Italy and, therefore, requires working with people from another country. The
Smythe family also has many friends around the world who will attend the
wedding. To ensure receptivity to diversity, Perry uses cross-training and job
rotation to broaden people’s understanding of each other, encourages
experimentation and brainstorming to develop new ideas and keep an open
mind, seeks task interdependence to encourage communication, and nurtures
a continuous learning environment.

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 Team Diversity

With globalization of the economy in general and the Smythe Project

in particular, Perry recognizes that the challenge of leading a diversified
team has never been greater. The team members have a variety of
backgrounds, including race, ethnicity, and religion. Leading a team in such
an environment requires heightened sensitivity to different values, beliefs,
norms, and lifestyles.
Perry understands that people vary in their concept of time, ways of
doing business, styles of management and leadership, and views of how the
world functions. He also understands that differences exist in the meaning of
words (semantics), interpretation of expressions (body language), perception
of priorities, and definition of team building. Needless to say, all this
diversity adds complexity to the planning, coordination, and control of the
project. He knows, however, that he can deal with diversity in several ways.
1. He sets the example by embracing diversity. Through research,
background reviews, interviews, and the like, Perry learns about the diverse
backgrounds of the people and encourages everyone to do the same.
2. He is patient when dealing with people of a different background.
He remains conscious of different values and beliefs, for example, and
accounts for them when leading the project.
3. He overcomes the temptation to stereotype. That is, he avoids
generalizing about people based on one characteristic. He also tackles
stereotyping by team members. An effective approach is to have people with
different backgrounds work together. He can also have the team, with
himself, attend diversity training to understand and respect differences.

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 4. He has empathy for other people’s experiences. The word is
empathy, not sympathy, since the latter connotes patronization and
condescension. He attempts to appreciate, for example, the difficulties in
reconciling different perceptions of time.
5. He encourages feedback. He is especially mindful to obtain
feedback from people whose cultural background is dramatically different
from his own or from the rest of the team. This lessens the tendency for the
team to split into subgroups.
What Is Your Team-Building Style?
Decide-X, a Bellevue, Washington, company, provides a scientific
tool—also called Decide-X—to measure how much information a person
needs before reaching a decision.
According to Decide-X, people deal with team-building situations in
ways that reflect their needs and desires, as well as their preferences in
dealing with direction, change, details, and other characteristics of a work
situation. There are four primary styles:
• Reactive Stimulators thrive on action and the immediate. They prefer
situations or projects that are fast-moving and have lots of pressure.
• Logical Processors thrive on logical detail while maintaining focus.
They prefer situations and projects with organizational structure.
• Hypothetical Analyzers like to solve problems using decomposition
to unravel complexity. They prefer situations and projects that provide a
relatively slow pace to perform analysis.
• Relational Innovators deal in ideas from a big-picture perspective
and find relationships or patterns. They prefer situations and projects that
involve blue-skying and move at a pace that allows them to do that.

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 From a project management perspective, the Decide-X tool is very
useful. Different combinations of styles on a project team can influence the
level of detail that goes into making a decision and how quickly it is done.
For example, if you put a Reactive Stimulator and a Relational Innovator on
a task, the questions will arise:
(1) Will decisions be made quickly with little attention to detail (as
may be needed), or will they be made much more slowly, to allow for
exploration of detail?
(2) Will the Reactive Stimulator and Relational Innovator
cooperate, or will they conflict?
Decide-X differs from other approaches, which focus only on the
individual, because it looks at the interactions of people.

4.3. Motivation

4.3.1. The Will to Work

What one would like to do is to create a working environment in

which people like working and in which people work well, a working
environment, which helps to enrich the life of those who work. One would
like to satisfy the requirements of those who work and of those who employ
as well as the requirements of the community as a whole.
It could be that 'motivating' seems such a complicated subject because
it deals with people and people are all different. But when people are all
different then the one thing they have in common is that they are all different

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and that is a good starting point. A simple model of motivation is illustrated
in exhibit 4.3.1.
Much has been written about motivation. When determining the
motivation of those who direct in the United Kingdom it seemed to take as
long to read up on the background of what is commonly called 'motivation'
and summaries it in a few short paragraphs as it took to carry out the rest of
the investigation.

Exhibit 4.3.1. A simple model of motivation.

'Motivation' views the commitment of the individual to work and to

his workplace from the point of view of factors originating within him, from
the point of view of individual needs, likes and preferences.
But one cannot talk about 'motivation' or 'motivating' as such without
clearly stating what one is attempting to persuade people to do (exhibit
4.3.2). The salesman is not just 'motivating' but aims to persuade his
prospective customers to make the purchase. Management is not just
'motivating' but is aiming to persuade its employees to increase output
and/or to reduce costs so as to improve profitability.

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 Exhibit 4.3.2. Hierarchy of Needs.

We see that 'motivation' is closely concerned with the center of

controversy, with the sharing out of income and wealth between those who
work and those who employ. There is at present considerable danger of the
whole subject coming into disrepute as some employers attempt to use it to
persuade employees to increase profits without corresponding gains for the
employees themselves.
But there are other ways of looking at the will to work, namely from
the point of view of the individual and from that of the community. Consider
the point of view of the individual. Some time ago I wrote about some of the
incentives necessary to motivate professional employees to higher
productivity. I then said that frustration arises from the work they are asked
to do, from the way in which it is organized, from the lack of incentive to do
well. What was needed was to utilize the potential of those who are not
working at full capacity and ability, and to provide corresponding incentive
payments for professional experience and excellence, in other words for
knowledge, skill and experience.
So what we are looking at is the reaction of those who are employed
to the impact of the style of management at work, that is to the way in which

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they are being treated at work, to the responsibility which they carry, to the
extent to which work is imposed on them, to the extent and way in which
they are rewarded for the work they do.

4.3.2. Payment by Results, Productivity Bargaining and Profit

Sharing

Employees are paid with money and can be seen to be working for
money. Hence pay can be related to output, the so-called payment- by-
results system. Management provides incentives, management rewards
effort.
In any kind of payment-by-results system, the fundamental
considerations are how the workers' pay depends on the output achieved and
on the extent to which he shares in the increased value he produces.
It seems that in the Unites States roughly 10% of employees respond
to incentive schemes. The other 90% hold back, restricting output in
response to the style of management, perhaps because increased rate of
output with resulting increased earnings in the past soon resulted in the rates
being cut back so that workers had to work at the higher rate but gained less,
or because inflation eroded the value of their earnings.
However, there is little point in paying according to increased
production when the rate of production is determined by the speed of the
assembly belt or by the process, since these are not under the direct control
of the worker. This is happening more frequently in highly industrialized
societies, say when considering automated production lines or when
introducing robotics computer-controlled processes.

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 Where payment by results cannot be applied because the process is
already highly controlled or operating at fixed speed then productivity
bargaining is used which aims to introduce economies by different methods
of working, sharing the gains with the work force in some negotiated
proportion.
Increasing productivity means more than increasing output, means
that capital equipment and men are more fully utilized, that goods are being
produced more cheaply because overheads are lower in addition to the lower
capital cost per unit produced.
But the argument again is about the extent to which the additional
profits are shared between management and employees.
However, the reward of company directors:
1. 'Should relate to work done and to responsibility carried.
Remuneration should depend on results, based on profit, through profit-
sharing. The aim should be to motivate towards better performance.' and
2. 'Directors consider they could share in the capital growth of the
company, through share ownership and by way of share purchase and option
schemes. Share ownership is regarded as assisting direct involvement while
providing incentive through dividends and capital gain.'
The result aimed at is profit and the incentive is a share of the results
obtained. Those who run organizations themselves would like to have a
share in the enterprise, feel that common ownership assists involvement.
Job Satisfaction
Sisk looks in some detail at whether there is a relationship between
'job satisfaction' and productivity. Herzberg considers that 'feelings of self-
improvement, achievement, and the desire for the acceptance of greater
responsibility' are more important than money for persuading people to

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increase productivity. He interviewed American engineers and accountants
and on the whole they appear to have been quite frustrated. Sisk says that
'job satisfaction is but one of several factors making up the complex of needs
... and, as yet, there is no demonstrable relationship between job satisfaction
and productivity'.
This means that there are other additional factors, which need to be
considered.
Remuneration, Job Satisfaction and Motivation
An investigation into the motivation of company directors isolated
motivating factors from those, which were dissatisfying. All the factors are
money factors; consist of material rewards. Directors first and foremost
work for remuneration and want a greater share of the benefits of ownership.
Interesting is that the question of job satisfaction just did not arise to
any significant extent. On the whole the directors were satisfied with the
work they were doing. Generally in position of considerable responsibility,
they are aware that success or failure of the enterprise they direct depends on
the decisions they make and that others are aware of this. Hence they may
well be working for the greater power and luxury which wealth brings.
Herzberg considered job satisfaction was motivating but that money is
not. But we have just seen that at least as far as directors are concerned,
money is motivating and job satisfaction is not.
Directors have all the job satisfaction they need or want. They carry
considerable responsibility and success often depends on individual effort.
They have nicely and often luxuriously furnished offices, dine in the
directors' dining room, have the benefit of a company car and last but not
least work with pleasant colleagues in a pleasant way. It is because they
have all the job satisfaction they want that money is important to them.

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 The American accountants and engineers investigated by Herzberg
were, like other American professional employees and managers,
considerably frustrated with the style of management and hence the
importance of self-improvement, achievement, and the desire for greater
responsibility as motivating factors. Money is of secondary importance to
those who are frustrated but the need for job satisfaction is felt according to
the degree of their frustration.
One wants that which one does not have, one works to achieve that
which one needs and this could be either job satisfaction or money. The
devout minister may leave his congregation and work in industry or teach
because his pay as a minister is too low; the nurse will go on strike for the
same reason. In both cases we see that job satisfaction in itself is not enough
if one is paid too little. The teacher will go on strike for extra pay although
teaching also can be very satisfying work. On the other hand the engineer
may be so frustrated with the work he is doing, with the way the company's
work is organized and with the way people work together at his place of
work, that he will find another job even if this means a drop in income.
If one assumes that the worker is only working for the money he
earns, then payment by results on its own would seem logical. But if money
is important only up to the point where basic needs are satisfied then job
satisfaction becomes more important. Both job satisfaction and money are
needs dependent on which one of these one is deprived of or is looking for.
Hence the following definition of 'motivation', of what people will
work to achieve:
'Motivation towards better performance depends on the satisfaction of
needs for responsibility, achievement, recognition and growth.

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 Needs are felt, and their intensity varies from one person to another
and from time to time, and so does the extent to which they are motivating.
Behavior is learned, earned reward encourages even better
performance, thus reinforcing desired behavior.'
It is what one does not have that one wants, one works to achieve that
which one needs. Hence if we know what people need and want then we
know what they will work for, and like working for, and so work well to
achieve.
Attaining goals leads to feelings of self-respect, strength and
confidence.
Few people are able to continue a pattern of achievement and success
without the added encouragement provided by others recognizing their
achievements.
Continued failure and frustration and defeat can result in feelings of
inadequacy and a withdrawal from competitive situations.
Persistent lack of rewards leads to a view of society as being hostile
and unrewarding.
It is what one does not have that one wants, one works to achieve that
which one needs.
Needs and Wants People Strive to Achieve
We have seen that the professional employee's pay increases with age.
It does so because he absorbs and applies experience, because he then has
the opportunity to use his enlarged knowledge and experience by working at
a higher level, being paid more correspondingly. The rate at which his pay
increases depends not only on his ability but also on the work and positions
open to him, on the scope and opportunity provided by his employer or by
the work he can find.

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 Hence what the individual wants and expects from the job, from the
management, is to be given challenging work, to be backed by management
and colleagues in carrying it out, and then to be rewarded by being given the
chance to utilize the experience gained by being given the opportunity to
work at a higher level with correspondingly higher pay.
The individual will generally progress according to a specific
remuneration 'grade line' of his own. Remuneration grade lines give the
norm for individuals of a particular trade or profession at their own level of
ability and success. When an individual's level of working and income drop
below his line then he is falling behind colleagues of his own age doing
similar work elsewhere and feels this and becomes frustrated. Frustration on
the part of an individual, and his finally leaving the work unit, are both
detrimental to the performance of the work unit.
Progress according to these remuneration grade lines is the norm, is
the way in which others doing similar work at the same age are in fact
progressing.
The individual becomes aware of and assesses any changes away from
his remuneration grade line. Moving up and moving down are felt to be
promotion and demotion, respectively, relative to colleagues of same age
working in the same profession at the same level. Those progressing
according to their remuneration grade line are fulfilling their expectation,
those improving their position feel that they are doing well; both generally
feel satisfied with their own progress relative to their colleagues.
People are aware of their own position in the community, of the
pecking order and of their place in it. Changes are noticed and felt. Indeed
people are often intensely concerned about the threat of increasing

218
differentials and about whether they are moving up or down, gaining or
losing.
In other words, people strive to maintain their position, in this way
striving to receive their share of the increasing national income and wealth.
In addition people are both aware of and concerned about the large
differences in the standard of living, which exist between different countries.
Their commitment to their own community depends on the style of
management and on the success of the community, depends on the extent to
which the community serves them and satisfies their needs. In other words,
people will strive for the community to the extent to which they see it as
satisfying their needs or as a means for satisfying their needs.
Hence we can now look at the range of needs and wants people strive
to achieve.
First there are certain basic needs which have to be satisfied if people
are to exist and survive, such as:
• Shelter and food, clothing and warmth,
• Affection and esteem,
• Friendly and trustful co-operation and companionship,
• Security from external threats (i.e. protection from attack).

Then other needs make themselves felt, such as:

• Independence from domination by others (e.g. because of
need).
• Security from internal threats.
• Housing, education, good health.
• Help when in need.

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 • Constructive leisure activities.
To which we can add the ones we have just discussed, namely:
• Challenging work, which means scope to work at increasing
levels of skill and usefulness and thus of pay, to the maximum
of one's ability.
• Maintaining and the chance for improving, one's position
relative to colleagues.
• Recognition of success by others (leads to feeling of self-
respect, strength and confidence).
• Fair share of the national income and wealth.
• Fair share of the international income and wealth.
These then are the needs and wants people strive to achieve, indeed
struggle to achieve. People will co-operate with each other, will work hard
and well to satisfy these needs and gain much satisfaction from doing so.

4.3.3. The Struggle for Independence and a Good Life

Now if you look again at the list of needs and wants then the one thing
which stands out is that they are not special. This is what people need and
want, this is what people are striving to achieve and nowadays this people
could have. And yet all around we see people struggling at the different
stages to achieve the next step.
That progress arises only as the result of struggle is expressed in many
different ways. Consider it from the point of view of the workplace. No
matter how paternal the company, the employees know that whatever they
are getting arises from the self-interest of the employer and is likely to be the

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result of confrontation and of a balance between negotiating strengths. And
yet commitment to the objectives of the owners and directors, for example a
company's objectives, comes from the extent to which the company serves
its employees, comes from the extent to which it helps them to achieve their
needs and wants.
We saw again and again, in the reports on the style of management
and on work and pay, that there is no real conflict of interest between those
who lead and those who work. What we saw was that what is good for the
employees is good for the owners, that what is good for the people is good
for the leadership, that what benefits the people also benefits the leadership.
When co-operation pays so handsomely, how come that we see so
much confrontation and struggle, how come that all around us we see
progress being achieved only as the result of struggle.
What stands out is that the confrontation is not between employers
and employees, between management and labor, between state and citizens
since there are companies, enterprises and administrations which have the
backing and co-operation of those who work with and for them. The
confrontation and struggle appear to be against those who wish to run
enterprises and wish to organize society on authoritarian lines, appears to be
a struggle against authoritarian minds.
There is a point of balance within each organization or administration
and in the democracies this ranges from 'authoritarian' to the fully
participative common ownership enterprise. However, to understand the
causes of the confrontation and struggle, let us look at the confrontation
between fully authoritarian owners or rulers and their employees or people;
let us look at what people do to achieve their needs and wants by seeing
what it is that people struggle for.

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 Authoritarian owners and rulers (no matter whether 'left' or 'right')
wish to dominate and control employees and people for the sake of personal
income, wealth and power. Employees and people counter this by behaving
in ways, which encourage trustful co-operation and co-operate with each
other.
The 'community' includes all and in this context people organize their
affairs and administration on participative lines to safeguard their
independence and to achieve their individual and common aims.
It is this, which underlies democracy, and authoritarian minds
(examples being owners as well as rulers) confront and struggle with
communal institutions so as to take them over and make them serve
themselves instead of the people, instead of serving the policy-making body.
This means that the two sides confront each other not just at the place
of work but in all communal institutions. It is because of this that people's
needs and wants are achieved only as the result of struggle.

4.3.4. People Work Willingly for What They Need and Want

In the previous two sections we saw just what people need and want
and strive to achieve and that their needs are only satisfied and that their
wants are only achieved as the result of struggle, as the result of struggle for
independence and a good life.
We also saw that the struggle takes place in all aspects of life and
while the confrontation in, and the struggle for control of, communal
institutions is discussed in more detail in appendix 1, we can now fit the
parts together to form the complete picture.

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 The whole struggle is described and illustrated by figure 3 'Peoples'
Needs and Wants, Achievements and Objectives: The Struggle for
Independence and Good Life'. It lists the aims and methods of the
authoritarian mind, of those who wish to oppress so as to exploit. It also lists
what individuals are striving to achieve, that is their needs and wants. What
we have seen is that people have to struggle all the way and the illustration
also shows what has already been achieved in democratic countries and what
remains to be achieved.
What I have described here is a list of needs and wants and thus policy
aims, the successive achievement of which gives a sequence and a measure
of noted and felt progress which should give a feeling of forward movement,
growth and satisfaction.
However, one's resources are generally limited and one needs to
decide how to allocate funds between main areas such as (a) economic
growth, (b) national security, (c) an internal rising standard of living
combined with (d) a liberalization from authority, towards greater freedom
both in government and in the work place, combined with (e) ever greater
participation in policy setting in government as well as in the work place.
The knowledge, methods, techniques and measures described in this
set of reports enable one to obtain a favorable balance between the
requirements of those who lead and those who work.
Independence for some may mean self-employment with guaranteed
independence but for others may mean the right to work (employment) and
pay.
People strive for satisfying work, for social security and for
independence; want to be masters of their own destiny through self-
employment. They would like the community to back the individual in this,

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the individual in turn contributing to the community so that it can help
others and protect all.
One needs to be concerned about the value placed on different kinds
of work, for example about the extent to which those who are well paid
serve the rulers or owners instead of the community, about internal
differentials and about the extent to which the style of management at the
place of work and countrywide is authoritarian, not forgetting that in an
emergency an authoritarian organization can work well but that precautions
need to be taken at all times against the authoritarian mind taking over
participative institutions and organizations.
One has to go beyond this and consider not only one's own position
within one's own community but that of one's own community within the
world at large, consider the extent to which some countries are exploiting
others. We are not just concerned about an unequal division of land, of the
means of production (i.e. capital) but need to include profiteering from raw
materials. And this means that there have to be certain limits beyond which
differentials may not be allowed to increase. This applies equally well
between countries as it does within a country between different levels or
occupations.
There are at present some important and crucial areas in which the
community is under attack from within and where the community needs to
defend itself to ensure its safety and to regain its strength. Some of these are
discussed in the report, which deals with the question of social
responsibility.
Motivation views the commitment of the individuals (we have to take
into account that all the people are different) to work and to this workplace

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from the point of view of the factors originating within himself, from the
point of view of individual needs, likes and preferences.
There are certain basic needs which have to be satisfied if people are
to exist and to survive:
• -shelter and food, clothing and warmth;
• -affection and esteem;
• -friendly and trustful co-operation and companionship;
• -security from external threats (i.e. protection from attack).
Then other needs make themselves felt, such as:
• -independence from domination by others (e.g. because of
need);
• -security from internal threats;
• -housing, education, good health;
• -help when in need;
• -constructive leisure activities.
To which we can add the followings:
-challenging work, which means scope to work at increasing levels of
skill and usefulness and thus of pay, to the maximum of one's ability;
• -maintaining, and the chance for improving, one's position
relative to colleagues;
• -recognition of success by others (leads to feeling of self-
respect, strength and confidence);
• -fair share of the national income and wealth;
• -fair share of the international income and wealth.
After achieving one step of the needs, people will try to achieve more.
This is the human nature. But this is a different matter because the people

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are different from one another and their needs are different. But for example
if a worker is satisfied with the payment he receives after his work, maybe
he will try to achieve (look) satisfaction in work.
We can try giving a definition of motivation, and try to understand
what people will work for to achieve:
• Motivation towards better performance depends on the
satisfaction of needs for responsibility, achievement,
recognition and growth.
• Needs are felt, and their intensity varies from one person to
another and from time to time, and so does the extent to which
they are motivating.
• Behavior is learned, earned reward encourages even better
performance, thus reinforcing desired behavior.
• It is what one does not have that one wants, one works to
achieve that which one needs. Hence if we know what people
need and want then we know what they will work for, and like
working for, and so work well to achieve.
• Attaining goals leads to feelings of self-respect, strength and
confidence.
• Few people are able to continue a pattern of achievement and
success without the added encouragement provided by others
recognizing their achievements.
• Continued failure and frustration and defeat can result in
feelings of inadequacy and a withdrawal from competitive
situations.

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 • Persistent lack of rewards leads to a view of society as being
hostile and unrewarding.
• It is what one does not have that one wants, one works to
achieve that which one needs

4.3.5. Payout policy in the 21st century

The world has changed since the 1950s, and dividend policy is no
exception. In this paper, we survey and interview financial executives to
better understand how payout policies are determined almost 50 years after
Lintner’s study. Given the nature of the changes and the development in the
field, we expand our analysis beyond dividends and investigate repurchases
as well. Moreover, unlike Lintner, we have 40 years of theoretical work to
guide our analysis, so our paper is able to shed some light on managers’
motives to pay out as well as on payout theories.
Despite extensive empirical work on payout policy and dividend
policy in particular, the motives behind what is reported in many studies are
still not well understood. For example, despite the growing popularity of
repurchases (Grullon and Michaely, 2002) and the fact that dividends are
being paid by fewer firms, some companies still pay substantial dividends.
Why do some firms substitute repurchases for dividends and others do not?
And at the same time, why have many public companies never paid
dividends, and will they ever start? At the present time, academia does not
fully understand total payout, let alone the recent shifts in the form of
payout. In light of this, it is not surprising that Brealey and Myers (2002) list
the “dividend controversy” as one of the ten most important unsolved d
problems in finance.

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 We investigate these questions using a combination of field interviews
and traditional surveys. By using these methods, we are able to address
issues that traditional empirical work based on large archival data sources
cannot. Another unique aspect of our survey is that we ask many identical
questions about both dividends and repurchases, which allows us to compare
and contrast the important factors for each form of payout. Overall, our field
interviews and surveys provide a benchmark describing where academic
research and real-world dividend policy are consistent and where they differ.
Our analysis indicates that maintaining the dividend level is a priority
on par with investment decisions. Thus, along this dimension, our results
parallel Lintner’s in that managers express a strong desire to avoid dividends
cuts, except in extraordinary circumstances. For firms that currently pay
dividends, hesitancy to cut leads to dividends that are sticky, smoothed from
year to year, and linked to permanent changes in profitability. Beyond
maintaining the level of dividend per share, payout policy is a second-order
concern for modern corporations, and is considered after investment and
liquidity needs are met. In contrast to Lintner’s era, managers are more
reluctant to increase dividends in tandem with earnings increases and they
no longer view the target percentage of earnings paid out as dividends as the
primary decision variable. Also in contrast to Lintner’s time, repurchases are
now used extensively.
Managers view repurchase policy to be more flexible than dividend
policy and make repurchase decision after investment decisions have been
made. In addition to the desire for flexibility, there are several other factors
that stand out as influencing repurchase policy. Some executives believe that
they can time the market with their repurchase decisions, so they accelerate
repurchases when they believe their stock price is low. CFOs also are very

228
conscious of how repurchases affect earnings per share (consistent with the
findings of Bens, Nagar, and Skinner (2002)). Finally, companies are likely
to repurchase out of temporary earnings increases or when good investments
are hard to find.
We also learn about when, if ever, firms that do not currently pay
dividends or repurchase shares might begin to do so. Surprisingly, among
firms that do not currently pay out, 70 percent say they never plan to initiate
dividends, and more than half say they do not plan to repurchase shares.
Among those that say they w ill pay out eventually, the overwhelming
majority say they will use repurchases.
The most important factors influencing the decision to eventually pay
out are equity undervaluation and extra cash (repurchases) and sustainable
increases in earnings (dividends).
Executives also tell us that they believe that dividends and
repurchases convey information to investors. However, as we document
below, this information conveyance does not appear to be consciously
related to signaling in the academic sense. Managers strongly reject the
notion that they pay dividends as a costly signal to convey their firm’s true
worth. They also do not believe that their dividend policy can be used to
separate their firm from the competition. Overall, we find little support for
both the assumptions and resulting predictions of signaling theories that are
designed to explain payout policy, at least not in terms of the conscious
decisions executives make about payout.
While there is some evidence that repurchases are being used to
reduce excess cash holdings (consistent with Jensen’s (1986) free cash flow
hypothesis), there is no evidence that managers use payout policy to attract a
particular investor clientele that may monitor their actions (as in Allen,

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Bernardo and Welch, 2000). Executives believe that dividends are attractive
to individual investors but that dividends and repurchases are equally
attractive to institutions. In general, executives make no effort to use payout
policy as a tool to alter the proportion of institutional investors among their
investors. Thus, it is unlikely that dividend policy can be explained as a
means of attracting institutional investors.
We find that the role played by taxes in determining payout policy is
only of second-order importance. Managers are aware of the tax advantage
of repurchases relative to dividends, especially for individual investors. Yet,
they maintain that this is not an important factor in their decision about
whether to pay dividends, to increase dividends, or even in the decision
between payout in the form of repurchases or in dividends. A follow-up
survey conducted in February 2003, after the Bush administration proposed
to eliminate dividend taxation, reinforces the second order importance of
differential taxation on payout policy. More than two-thirds of the
executives on that survey say that elimination of dividend taxation would
definitely not or probably not affect their dividend decisions.

Method

Our main survey contains responses from 384 financial executives.

The survey analysis is based on a moderately large sample and a broad
cross-section of firms, which allows us to perform standard statistical tests.
At the same time, the survey accommodates very specific and qualitative
questions.
One advantage of the survey is that we can ask a large number of
questions. In total, we gather information on approximately 125 questions.

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 In addition to the survey, we separately conduct 23 one-on-one
interviews. The interviews complement the survey information along several
dimensions. Interviews allow us to ask open-ended questions, so the
respondent’s answers can dictate the direction of the interview (versus pre-
chosen questions in the survey). Interviews also allow for give-and-take and
clarifications, which are not possible with a traditional survey. Using the
combination of the surveys and interviews, we are able to ask many
questions, while at the same time gain a deep understanding of the factors
that are most important to payout policy from the perspective of corporate
financial managers.
The field study approach is not without potential problems. Surveys
and interviews measure beliefs and not necessarily actions. In addition, field
studies may face the objection that market participants do not have to
understand the reason they do things for economic models to be valid
(Friedman’s (1953) “as if” thesis). This may be particularly acute in our
study because we ask corporate managers about both the assumptions and
predictions of specific theories.
Friedman’s “as if” thesis basically says that it is unimportant whether
the assumptions of a particular economic model are valid, or whether
economic agents understand why they take certain actions, as long as the
theory can predict the agents’ actions.
That is, the “as if” approach cannot address issues of cause and effect.
One goal of our paper is to better understand why certain actions are taken,
and therefore part of our analysis scrutinizes the “realism of the
assumptions” that underpins many academic models.
Furthermore, the existing empirical evidence does not offer strong
support for the current dividend theories (see Allen and Michaely (2002) for

231
a survey of this literature). Hence, scrutiny of stated assumptions is
important to theorists for two reasons. First, following Friedman, our results
can potentially provide for an even wider range of assumptions than have
been used so far, some of which might lead to improved predictability.
Second, for those who favor more realistic assumptions, our ability to distill
which assumptions are deemed important by managers, and thus relevant to
their decisions, has the potential to lead to better explanatory models.

General information about the practice of payout policy

Logistics
Payout decisions are part of the finance function of corporations.
Typically, the CFO or Treasurer forms a dividend recommendation that is
passed along to the CEO for approval. The recommendation that emerges
from the CEO’s office is presented to the Board of Directors, usually for
quick approval.
To some extent this indicates minimal boar d involvement in dividend
decisions. This is reasonable because, as we describe below, corporations
rarely make the type of aggressive or surprising changes in payout policy
that would require board scrutiny.
Repurchases follow a similar approval process. One difference is that
the board typically gives annual or semi-annual approval for the maximum
amount of repurchases that can be made in the coming quarters or years.
(Occasionally, under unusual market conditions, the board will give quick
approval to raise this ceiling).

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 During the interviews, most managers indicate that their firms employ
a mechanical open market repurchase strategy combined with a certain
amount of judgment.
There are exceptions to this mechanical process, like when the
executive thinks the company’s stock price is particularly low or liquidity
dries up, in which case repurchases might be accelerated or delayed.

How important are payout decisions relative to investment and

financing decisions?
It is clear from the interviews that most aspects of payout decisions
are of second-order importance relative to the operating decisions of the
firm. Though they would not phrase it this way, the executives feel that
Modigliani and Miller (1958) and Miller and Modigliani (1961) were not far
off in emphasizing that firm value is largely driven by operating decisions.
Moreover, this viewpoint is apparently long-standing. On the survey, we
asked the executives whether payout was as important today to the valuation
of their companies, relative to 15 or 20 years ago. On a scale from –2 to +2,
their answers averaged almost exactly zero, indicating no change in
importance.
We also explicitly ask where payout decisions fit into the hierarchy of
the investment and capital structure planning process. Financial executives
view their chief objective as providing adequate capital and liquidity to
allow their companies to make opportune and strategic investments. To fund
these investments, they use a combination of profits and external capital.
After these investments and external financing decisions are made and
adequate cash is preserved to handle future contingencies, the companies
then return capital to investors via dividends or repurchases. This depiction

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implies that payout decisions are of second or third order importance.
However, there is one important exception.
The executives consider the continuation of the existing level of
dividends as (nearly) untouchable, considering the preservation of dividends
equal to, and in some cases more important than, investment decisions.

Are dividends and repurchases substitutes, complements, or neither?

In the interviews, executives indicate that they do not think in a direct
and conscious way about whether repurchases substitute for dividends. For
one thing, the possibility of cutting the level of dividends to increase
repurchases is not even contemplated. For another, as we indicate below,
dividends are thought of as primarily being paid from permanent cash flows,
while repurchases might also emanate from temporary excess cash flows. It
is also true, however, that many companies do not attempt to increase
dividends at the same rate earnings growth, and the money that could have
been dedicated to dividend increases is often instead used to repurchase
shares. Therefore, repurchases are substituted for forgone increases in
dividends, and in this sense the two forms of payout are substitutes.
This “repurchases in place of forgone dividends” substitution is to
some extent confirmed by survey evidence. On the survey we ask what firms
would do with the extra funds they would have if they cut dividends. The
most popular answer, chosen by approximately one-third of the respondents,
is that they would pay down debt. The second most popular answer was to
repurchase shares (followed by invest more and perform mergers and
acquisitions), which is consistent with the substitution of repurchases for
dividends. However, this is a “one-way substitution.” When we ask what
they would do with the extra funds from reducing repurchases, very few

234
firms would choose to pay dividends, so there is almost no evidence of
substitution away from repurchases towards dividends.
Finally, we ask firms what form of payout they would choose if they
were hypothetically paying out for the first time. In the interviews, it was
clear: once free of the tradition of paying dividends, most firms would
emphasize repurchasing shares. That is, once all constraints are removed,
they would substitute repurchases for dividends (i.e., many firms would
replace existing dividends with repurchases if they felt they could).

Factors affecting payout policy

Our study has one significant (and unfair) advantage over Lintner’s.
Namely, we can use the insights the profession has gained from 40 years of
related theory and empirical work. Since Miller and Modigliani (1961)
showed that corporate value is invariant to payout policy in perfect and
frictionless capital markets, numerous theories have been put forth that
demonstrate how payout policy can affect firm value if one or more of the
Miller and Modigliani assumptions is violated. In this section, we present
our findings within the context of these theories, to determine which are
most consistent with management views in the 21st century. Within each
theory, we discuss how various factors affect payout practice in general, and
highlight when the implications differ between dividends and repurchases.

Taxes
The relative tax disadvantage of dividends relative to repurchases is
often cited as an explanation for the recent growth in the share of payout
dedicated to repurchases (e.g., Grullon and Michaely, 2002). The executives

235
we interviewed frequently cite tax inefficiency as a factor that causes them
to favor repurchases over dividends. However, when we ask dividend-payers
why they do not reduce dividends (or increase them less) because of tax
inefficiency, it becomes clear that investor-level taxes are not a dominant
factor. Several executives mention that despite the tax-disadvantage of
dividends, for whatever reason, individual investors nonetheless prefer
dividends. In addition, certain situations can exist for which dividends are
not tax disadvantaged. In one case, the firm we interviewed was more than
80 percent owned by another public corporation, in which case dividends are
not tax disadvantaged thanks to the dividends received deduction. In other
cases, the primary investors in a company’s stock are taxed equally between
dividends and capital gains.

Information, signaling, and stock prices

Miller and Modigliani (1961) assume complete and perfect capital
markets and that all investors have the same knowledge. If insiders have
better information about the firm’s future cash flows, many researchers
suggest that dividends might convey information about the firm’s prospects.
The first possibility is that dividends may simply convey information not
previously known to the market; for example through the sources and uses
of funds identity (e.g., Miller and Rock (1985)). Managers do not necessarily
have an intention to signal – their action simply conveys information.
Alternatively, according to several models, dividends can also be used
explicitly and deliberately as a costly signal to change market perceptions
concerning future earnings prospects (e.g., Bhattacharya (1979), Miller and
Rock (1985), John and Williams (1985), Allen et. al. (2000)).

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 The questions we ask the survey participants address both types of
issues. We ask CFOs whether they think there is some association between
dividend changes (or repurchases) and information. We then further
investigate whether they use dividends (or repurchases) as a signaling
device.

Credit ratings and capital structure

An emerging trend identified from the interviews, but not documented
by Lintner (1956), is that many firms pay close attention to the rating
agencies and to their debt rating when they make payout decisions. Firms are
reluctant to increase dividends or repurchase shares if that would reduce
their debt ratings. In fact, some firms even consider cutting their dividend to
prevent a rating downgrade.
This is especially true for companies with a financial division because
a reduced rating might eliminate them from certain kinds of business or the
CP market, as well as substantially increase their cost of capital. This also
factors into why companies might not repurchase shares when the price is
low: At that very moment they hoard cash in part to convince rating agencies
that they can weather a negative spell.
One piece of survey evidence strongly supports the importance of
managing debt (which in turn affects credit ratings) with payout policy.
Figures 3A and 3B show that “pay down debt” is the most popular use of
funds that would otherwise be used to repurchase or pay dividends. However
managers do not claim to actively use repurchases or dividends to manage
debt ratios. Approximately 25 percent of respondents say that they use
dividends or repurchases as a tool to manage credit ratings. Notably,
however, high debt firms are significantly more likely to use payout to

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manage credit ratings. Similarly, only 30.3 percent of firms say that they use
repurchases to move their debt-to-equity ratio close to their desired ratio.
This response is relatively more popular among large, highly-levered firms.

4.4. Communication in organization

4.4.1. Communication and the Manager’s Job

How important is communication? Consider this: Managers spend at least 80

percent of every working day in direct communications with others. In other words, 48
minutes of every hour is spent in meetings, on the telephone, or talking informally while
waking around. The other 20 percent of a typical manager’s time is spent doing
deskwork, most of which is also communication in the form of reading and writing.

Communication permeates every management function described in Chapter 1.

For example, when managers perform the planning function, they gather information;
write letters, memos, and reports and then meet with other managers to explain the plan.
When managers lead, they communicate with subordinates to motivate them. When
managers organize, they gather information about the state of the organization and
communicate new structures to others. Communication skills are fundamental part of
every managerial activity.

What is communication?
Before going further, let’s determine what communication is.
A professor at Harvard once asked a class to define communication by
drawing pictures.
Most students drew a manager speaking or writing. Some placed
“speech balloons” next to their characters; others showed pages flying from
typewriter.

238
 “No”, the professor told the class, “none of you have captured the
essence of communication. He went on to explain that communications
means “to share” – not “to speak” or “to write”.
Communication thus can be defined as the process by which
information is exchanged and understood by to or more people, usually with
the intent to motivate or influence behavior.
Communication is not just sending information. This distinction
between sharing and proclaiming is crucial for successful management. A
manager who does not listen is like a used – car salesperson who claims, “I
sold a car – they just did not buy it.” Management communication is a two –
way street that includes listening and other form of feedback.
Effective communication, in the words of one expert, is as follows:
When two people interact, they put themselves into each other’s
shoes, try to perceive the world as the other person perceives it, try to predict
how the other will respond. Interaction involves reciprocal role taking, the
mutual employment of empathetic skills. The goal of interaction is the
merger of self and other, a complete ability to anticipate, predict, and behave
in accordance with joint needs of self and other. It is the desire to share
understanding that motivates executives to visit employees on the shop floor
or eat breakfast with them. The things managers learn from direct
communications with employees shape their understanding of the
corporation.

4.4.2. The Communication Process

Many people think that communication is simple because they

communicate whit out conscious thought or effort. However,

239
communication is usually complex, and the opportunities for sending or
receiving the wrong message are innumerable. How often have you heard
someone say, “But that’s not what I meant”? Have you ever received
directions you thought were clear and yet still go lost? How often have you
wasted time on misunderstood instructions?
To more fully understand the complexity of the communications
process, note the key elements outlined in Exhibit 4.4.1. Two common
elements in every communications situations are the senders and the
receiver.

Exhibit 4.4.1. A Model of the Comunication Process.

The sender is anyone who wishes to convey the idea or concept to the
others, to seek information, or to express a thought or emotion.
The receiver is the person to whom the message is sent. The sender
encodes the idea by selecting symbols with which compose a message. The
message is the tangible formulation of the idea that is sent to the receiver.
The message is sent through a channel, which is the communication carrier.
The channel can be a formal report, a telephone or a face to face meeting.
The receiver decodes the symbols to interpret meaning of the
message.
Encoding and decoding are potential sources for communications
errors, because knowledge, attitudes and background act as filters and create
“noise” when translating from symbol to meaning. Finally feedback occurs

240
when the receiver responds to the sender’s communication with a return
message. Without feedback, the communication is one – way, with
feedback, it is two – way (real communication – dialogue)
Feedback is a powerful aid to communication effectiveness, because it
enables the sender to determine whether the receiver correctly interpreted
the message.
Employers around the world watch the show and call in their
questions and comments. The television is the channel trough which Treybig
sends his encoded message. Employees decode and interpret the message
and encode their feedback, which is sent through the channel of the
telephone hookup.
The communication circuit is complete.
Similarly Tom Monaghan, president of Domino’s Pizza, maintains
communication channels with employees when he fields complaints for two
hours during a monthly “call in”. Monaghan also maintains toll free numbers
with which employees call him directly.

4.4.3. Communicating Among People

The communication model in Exhibit 4.4.1 illustrates the components

that must be mastered for effective communication. Communications can
break down if sender and receiver do not encode or decode language in the
same way. The selections of communication channels can determine
whether the message is distorted by noise and interference. The listening
skills of both parties can determine whether a message is truly shared. Thus,

241
for managers to be effective communicators, they must understand how
interpersonal factors interaction between people.
An important point for managers to understand is that perceptual
differences are natural but can distort messages and create noise and
interference for communications. Each person has a distinct personality and
perceptual style hence each interprets messages in a personal way.
Managers should remember that words can mean different things to
different people and should not assume they already know what the other
person or the communication is about.

4.4.4. Communications Channels

Managers have to choice of many channels through which to communicate to
other managers or employees.

A manager may discuss a problem face to face or use telephone, write a memo or
letter, or put an item in a newsletter, depending on the nature of the message.

Recent research has attempted to explain how managers select

communication channels to enhance communication effectiveness. The
research has found that channels differ in their capacity to convey
information. Just as a pipeline’s physical characteristic limit the kind and
amount of liquid that can be pumped through it, a communication channel’s
physical characteristics limit the kind and amount of information that can be
conveyed among managers. The channels available to managers can be
classified into a hierarchy based on information richness.

242
 Channel richness the amount of information that can be transmitted
during a communication episode. The hierarchy of channel richness is
illustrated in Exhibit 4.4.2.
The capacity of an information channel is influenced by three
characteristics:
(1) The ability to handle multiple cues simultaneously
(2) The ability to facilitate rapid, two – way feedback
(3) The ability to establish a personal focus for the communication.

Exhibit 4.4.2. Hierarchy of Channel Richness.

Face to face discussion is the richest medium because it permits direct

experience, multiple information cues, immediate feedback, and personal
focus. Face to face discussion facilitates the assimilation of board cues and
deep, emotional understanding of the situation.
You can look someone in the eyes and you can tell by the look in his
eyes or the inflection in his voice what the real problem or question or
answer is.
Telephone conversations and interactive electronic media, such as
video conferencing and electronic mail, lack the element of “being there.”
Eye contact, gaze, blush, posture, and body language cues are eliminated.
Written media are personalized, such as memos, notes, and letters can be

243
personally focused, but they convey only the cues written on paper and slow
to provide feedback.
Impersonal written data, including fliers, bulletins and standard
computer reports, are the lowest in richness. These channels are not focused
on a single receiver, use limited information cues and do not permit
feedback.
Channel selection depends on whether the message is routine or non-
routine.
Non-routine messages typically are ambiguous, concern novel events,
and impose great potential for misunderstanding. Non-routine messages
often are characterized by time pressure and surprise. Managers can
communicate non-routine messages effectively only by selecting rich
channels. On the other hand, routine communications are and
straightforward.
Routine messages convey data or statistics or simply put into words
what managers already agree on and understand.
Routine messages can be efficiently communicated through a channel
lower in richness.
Written communication also should be use when the audience is
dispersed or when communications is “official” and a permanent record is
required.

Keys Poor Listener Good Listener

Listens actively Passive, laid back Asks questions, paraphrases what is
said.
Finds areas of interest Tunes out dry subjects Looks for opportunities, new learning.
Resists distractions Easily distracted Fights or avoids distractions; Tolerates

244

Capitalized on the fact that
thought is faster than speech.
Is responsive
Judges content, not delivery
Holds one’s fire
Listens for ideas
Works at listening
Exercises one’s mind
Exhibit 4.4.3. Ten Keys to Effective Listening
bad habits; knows how to concentrate.
Tends to daydream with slow Challenges, anticipates, mentally
speakers. summarizes; weighs the evidence; Listens
between the lines to tone of voice
Little involvement Nods; shows interest, give and take,
positive feedback.
Tunes out if delivery is poor Judges content; skips over delivery errors.
Preconceptions, starts to argue Does not judge until comprehension
is complete.
Listens for facts Listens for central themes.
Shows no energy output; flaked Work hard, exhibits active body state,
attention eye contact.
Resist difficult material in favor Uses heavier material as exercise for the
of light, recreational material mind

4.4.5. Organizational Communication

ANOTHER ASPECT OF MANAGEMENT COMMUNICATION CONCERNS THE

ORGANIZATION AS A WHOLE.

Organization-wide communications typically flow in three directions: -

downward, upward and horizontally.

Managers are responsible for establishing and maintaining formal

channels of communication in these three directions. Managers also use
informal channels, which mean they get out of their offices and mingle with
employees.

4.4.6. Formal Communication Channels

Formal communication channel are those that flow within the chain of command
or task responsibly defined by the organization. The three formal channels and the types
of information conveyed in each are illustrated in Exhibit 4.4.4.

245
 Exhibit 4.4.4. Communication in Organizations.

4.4.7. Downward Communication

The most familiar and obvious flow of formal communication, downward

communication,
Downward communication is the messages and information sent from top
management to subordinates in a downward direction. The president of Tenneco, for
example, sends bulletins to his vice – presidents who in turn send memos to their
subordinates.

Ronald Del Mauro, CEO of Saint Barnabas Medical Center in Livingston, New
Jersey, launched a series of quarterly “state of the hospital” addresses to employees.
Using astonishing candor, Del Mauro and other executives attract a standing – room –
only audience to the Center’s 500 – seat auditorium. Managers can communicate
downward to employees through speeches, messages, in company publication,

246
information leaflets tucked into pay envelopes, material on bulletin boards, and policy
and procedure manuals.

Downward communications in an organization usually encompasses

the following topics:

• Implementation of goals, strategies and objectives. Communicating

new strategies and goals provides information about specific targets
and expected behaviors. It gives directions for lower levels of the
organization.
Job instructions and rationale. These are directives on how on to do a
specific task and how the job relates to other organizational
activities. Example: “Purchasing should other the bricks now so the
work crew can begin construction of the building in two weeks.”
• Procedure and practices. These are messages defining the
organization’s polic, rules, regulations, benefits and structural
arrangements.
• Example: “After your firs 90 days of employment, you are eligible to
enroll in our company – sponsored saving plan”.
• Performance feedback. These messages apprise how well individuals
and departments are doing their jobs. Example: “Joe, your work on
the computer network has greatly improved the efficiency of our
ordering process “.
• Indoctrination. These messages are designed to motivate employees
to adopt the company’s mission and cultural values and to participate
in special ceremonies such as picnics and United Way campaigns.
The major problem with downward communication is drop off the
distortion or loss of message content. Although formal downward

247
communication are a powerful way to reach all employees, much
information gets lost – 25 percent or so each time a message is passed from
one person to the next. In addition, the message can be distorted if it travels
a great distance from its originating source to the ultimate receiver.

4.4.8. Upward Communication.

Formal upward communication includes messages that flow from the lower to the
higher levels in the organization’s hierarchy. Most organizations take pains to build in
healthy channels for upward communication. Employees need to air grievances, report
progress and provide feedback on management initiatives. Coupling a healthy of upward
and downward communicating ensures that the communication circuit between managers
and employees is complete. Five types of information communicated upward are:

 Problems and exceptions. These messages describe

serious problems with and exceptions to routine
performance in order to make senior managers aware of
difficulties.
 Suggestions for improvement. These messages are ideas
for improving task – related procedures to increase
procedures to increase quality or efficiency.
 Performance reports. These messages include periodic
reports that inform management how individuals and
departments are performing.
 Grievances and disputes. These messages are employee
complaints and conflicts that travel up the hierarchy for a
hearing and possible resolution.

248
  Financial and according information. These messages
pertain to costs accounts receivable, sales volume,
anticipated profits, return on investment and other
matters of interest to senior managers. Example: “Costs
are 2 percent over budget, but sales are 10 percent ahead
of target, so the profit picture for the third quarter is
excellent”.
Many organizations make a great effort to facilitate upward
communication.
Mechanism includes suggestion boxes, employee surveys, open –
door polices management information system reports and face to face
conversations between workers and executives.
For example, Ronald Del Mauro of Saint Barnabas Medical Center
introduced a series of monthly breakfast meetings between himself and
employees. Long Island Company initiated a series of focus groups that
provide employees an opportunity to comfortably express their deepest
concerns about their jobs to upper managers. A group meets at every six
weeks and formless information directly to senior managers.
Despite these efforts, however, barriers to accurate upward
communication exist. Managers may resist hearing about employee
problems, or employees may not trust managers sufficiently to push
information upward.

4.4.9. Horizontal Communication.

249
 Horizontal communication is the lateral or diagonal exchange of
messages across peers or coworkers. It may occur within or across
departments. The purpose of horizontal communication is not only to
inform but also to request support and coordinate activities. Horizontal
communication falls into one of three categories:

Intradepartmental problem solving. These message take place

between members of the same department and concern task
accomplishment.
Example: “Betty can you help us figure out how to complete this medical expense
report form?”
1. Interdepartmental coordination. Interdepartmental messages facilitate the
accomplishment of joint projects or tasks.
Example: “Bob please contact marketing and production and arrange a meeting to
discuss the specifications for the new subassembly. It looks like we may not be able to
meet their requirements.”
3. Staff advice to line departments. These messages often go from specialists in
operation research, finance or computer service to line managers seeking help in these
areas.
Example: “Let’s go talk to the manufacturing supervisor about the problem he’s
having interpreting the computer reports.”
A manager spends at least 80% of its working time on a day in direct
communication with others.
Management communications is a two – way street that includes listening and
other form of feedback.
Communication is very complex and the massage transmitted could be wrong
understood by the receiver. In a any communication we have a sander and a receiver. The
sender transmit a information to the sender which can be a emotion, a thought which is
convert in a message, the receiver receive the message and try to understand the message,

250
by decoding the symbols and interpret the meaning of the message, and here can appear
errors.
The message is sent through a channel, which is the communication carrier.
The channel can be a formal report, a telephone or a face to face meeting.
Communication can break down if sender and receiver do not encode or decode
language in the same way.
Each person has a distinct personality and perceptual style hence each interprets
messages in a personal way.
Communication channel are diverse. Manager has to choice the adequate
communication channel to transmit information to the employers.
The capacity of an information channel is influenced by three characteristics:
1. The ability to handle multiple cues simultaneously
2. The ability to facilitate rapid, two – way feedback
3. The ability to establish a personal focus for the communication.
Organization – wide communications typically flow in three directions:
downward, upward and horizontally.
Downward communication refers at communication from managers to inferior
employers from decisional power point of view.
Horizontal communication means to communicate with other colleague,
employers with the same decisional power
Communication to a superior manager whit superior decisional power means
upward communication.
As messages used in downward communication can be a performance feedback,
or indoctrination.
In upward communication the following message are used:
- Problems and exceptions, suggestion for improvement, performance reports,
grievances and disputes, financial and according information.
In horizontal communication made between coworkers the following
messages appear:
- Intradepartamental problem solving
- Interdepartamental coordination

251
 - Staff advice to line departments
Communication is the key in understanding in any domain of
utilization, even in life. The real communication is “to shear” thought,
emotions, feelings, by languages which are nothing else than instruments of
communications.

Home Work I

CONTENTS:

Company (firm) - ½ page

• Name
• The object of activity (CAEN code)
• The center (the address)
• Used materials
• Delivery the merchandise
Layout- 1 page
• Sector
• Office
• Mark the place of labor
Job description- 3 pages
• Critical description of a certain position (according to our choice-
company/job)
Conclusions (leading, organizing, planning, motivation) - ½ page

252
 STATUTE

Limited company

CHAPTER I

Name, juridical form, localization, working time

Art.1
The limited company name is: …….. S.R.L

Art. 2
………… S.R.L company is the Romanian juridical person, having the juridical
form of limited responsibility concern. This one, progress the activity in conformity
with Romanian lows and with the present statute.

Art. 3
The company localization is fixed at the only one associate residence, Romania,
Brasov, street: ………. no. 15. The company localization can be changed only if the
associates …………………… are agree. In order to extend the activities, the
company can build, buy and rent other areas, by opening branches or subsidiaries
inside or outside the country.

Art. 4
The company working time is unlimited, starting with the date when the
company is subscribed in the Trade Register.

CHAPTER II

253
 The activity objective of the company

Art. 5
The activity objective of the company is: the “…………. S.R.L” company has
the main activity objective the repairing and reconditioning of the period cars.

CHAPTER III

Art. 6
The subscribed social capital verves at ……… bank, having the total sum of
30000 euro and the receipt no.134567 is divided in …. social parts, each one of 10000
euro.

Art. 7
The only one associate can increase the social capital.

CHAPTER IV

The company administration

Art. 8
The only one administrator represents the company,
………………………..

Art. 9
The company administrator has the following responsibilities:
-takes compulsory decisions concerning the company activity;
-represents the company in relations with the people, sign the papers, takes the
whole company responsibility;
-is looking for the well functioning of the company and those patrimony;
-employ wage workmen and assigns those salaries regarding the legal
dispositions, social insurance, work safety and so on;
-statute modification;
-depose the asked situations and responds of that exactness;

254
 CHAPTER V

Company activity
Art. 10
The financier-economical exercise starts when the company is created. The
company workers employ is done inside the organization scheme with individual
working agreements, which are recorded at Working Room.
The administrator of the company determines the garrison rights and
obligations.

Art. 11
The basic stock amortization is paid by applying the amortization norms to the
basic stock acquisition values and are included depends the case.
From the basic stock acquisition values understands the sum of buying and
other effectuated spends for running the basic stock.

Art. 12
The capital repair works will be effectuated on base of administrator decision.
The necessary basic stocks will be assured by including the respective spends,
depends on case.

Art. 13
The company, through the administrator, will allow the audit in lions and will
make annually the balance and the benefit and losses cost, seeing the methodological
norms elaborated by the Finance Department.

Art. 14
PROTELCO S.R.L company, can be modified or dissolved if the only one
associate wants.
Company dissolving is done in conditions and by taking care of procedures
shown by law 31/1990.

Art. 15
The administrator of the company will take care by creating of the constitutional
formalities, by the legal publication of the company foundation, by paying of whole
taxes and casually spends in conformity with company record, accounting in those
cont.

Art. 16
The company lawsuits with physical or juridical Romanian persons are of
competence of the Romanian tribunal.
The lawsuits appeared in contractual reports between the company and the
juridical persons can be resolved by arbitrate. In this case the only one associate can
chose the competence of the arbitrate commission from Industry and Trading Room
of Romania.

255
 The lawsuits of the personal employed by the company are resoled in
conformity with the own legislation from Romania.

Art. 17
This statute is filled with the legal dispositions referring at commercial
companies.

CHAPTER VI

6.1. Company staff:

- Total number of employs: …

- Administrative employs: …
- Service employs: ….

6.2. Placement sketch:

Pieces and
accesories
Warehous

6.3. The main dealers of reserve parts and machines

Name of the dealers (address) Raw material Ownership form

1. S.C. ISPAT SIDEX SA Metal sheet, pipes, bars Private
Galati
2. S.C.Policolor Bucuresti Paint Private
3. S.C. TECNA S.R.L Welding materials Private
4. S.C. Carbochim Cluj Sandpaper Private

Energy sources:

256
 The company is connected to the electrical power network, water and canalization
of Brasov town.

6.4. Market information

6.4.1. Local market

In this moment, in Brasov is no company with the activity object of reconditioning

the very old cars.

6.4.5. Main customers:

The ……….. Company S.R.L. has signed contracts with different clients which
collects old cars and with some companies from ``……`` domain.

Next are presented the present costumers and potentials clients, knowing that the
company purpose is to enlarge.

Present costumers

Client name The contract duration Domain

1. Nicolae Ioan 3 months Mercedes 1964
reconditioning
2. Vasile Monica 2 months Talbot 1940 reconditioning
3. SC Auto-Sport SRL 1 year Painting
4. Tudor Dumitru 2 months Crezsler 1958
reconditioning

Potentials clients

1. S.C. Panificate Postavarul SA

2. S.C. PRESCON S.A
3. Netoiu Gheorghe
4. Florin Calinescu

6.4.3. Competitors estimation

There are no competitors in Brasov country the domain of auto reconditioning and for
painting and tinner, the service is well done.

CHAPTER VII

257
 Services and products promotions

The services promotion will be done at the begining with all the ways that doesn’t
cost, and for those with costs, we assign a budget of 300 euro for the first year.

Accessories Cost

- Media advertising 300 euro

- Web site accomplishing free
- Services exhibition
- Handout conception, handled to
the specialized magazine free
- The capacity of the company
in founding new clients
- Challenging prices
- Stabile relations with the
present costumers

CHAPTER VIII

Investment evaluation and of the monthly expense

Monthly expenses achieved with company maintenance are:

Rent 200 euro
Maintenance 100 euro
Electricity 300 euro
Phone bill 200 euro
Materials 700 euro
Salary fond 2500 euro
Publicity
and advertising 300 euro
Oil 100 euro

Total spending 4125 euro/month

For this investition there were necessary the following:

ARO with it’s platform for car’s transport 7000 euro
Lathe 5000 euro
Air compresseur 3000 euro
Milling machine 4000 euro
Grinder machine 4000 euro
Paint pistole 100 euro
2 flexes 100 euro
Interior arrangement 350 euro

258
 Brakes testing tools 2000 euro
Noxe testing tools 500 euro
Engine diagnoses tools 200 euro
Devices used in pulling up the car 1000 euro
Tools and other accessories 1000 euro
Welding device 300 euro
2 computers 700 euro
Audio system 200 euro
Resources 550 euro

Total spending of 30.000 euro/month.

CHAPTER IX

Investition finance

To obtain the finance it needs to be done a bossow from the bank, for a period of 3
years and with an interest of 11 %.

D = C * (1+r)³ - C = 30000*(1+0.11)³ - 30000 = 11000 euro / 36 months

Month rate = 41000 / 36 months = 1139 euro / month

Month spending = 4125 euro + 1139 euro = 5264 euro / month
Month incomes > Month spending + Month spending * 10 %
Month incomes > 5264 + 5264 * 10 %
Month incomes > 5790 / month

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259
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260
31. Robert E. Kaplan, "Trade Routes: The Manager's Network of Rela-
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