Principles of Management - Lecture 2

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Principles of Management
Lecture 2
Management Theory,
Management Environment,
Managerial Decision Making
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LECTURES’s Agenda
 Evolution of Management Theory
 Types of External Environment
 Mega Environment
 Task Environment
 Decision making process
 Four ways managers make decision
 Classify decision and decision making
conditions
 Decision making styles
 Decision making errors and biases
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The Evolution of Management
Theory
(Comprehensive Analysis of Management)
Systems Theory
Contingency Approach

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Early Management Ideas
 Identified the importance of working and social
conditions for employees.
 Ideas on work specialisation, production
efficiency, incentive and profit-sharing plans.
 Assessing the early contributions:
 Uncoordinated efforts.
 Contributions tended to relate to specific problems.
 Did not see ‘management’ as a separate field or skill.

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Classical Theorists
 This viewpoint emphasises managing work and
organizations more efficiently.
 It comprises three different management
approaches:
 Scientific management
F. W. Taylor, F. & L. Gilbreth, H. Gantt
 Bureaucratic management
M. Weber
 Administrative management
H. Fayol

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Scientific Management
‘Scientific management is an approach
within classical management theory
emphasising the scientific study of work
methods to improve worker efficiency.’

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Scientific Management
Frederick W. Taylor
Four principles of ‘scientific management’:
 Select & train the best.
 Determine the most efficient work
methods.
 Co-operate with workers to ensure best
method is used.
 Divide work/responsibility between workers
& managers.

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Bureaucratic Management
‘Approach emphasising the need for
organizations to operate in a rational
manner rather than relying on owner’s
and manager’s arbitrary whims.’

1010
Administrative management
‘Approach focusing on principles used by
managers to co-ordinate the
organization’s internal activities.’

1111
Administrative management
 Division of work
 Line of Authority
 Discipline
 Unity of
command/direction
 Primacy of general
interest
 Remuneration
 Centralization
 Scalar chain
 Order
 Equity
 Low turnover
 Initiative
 Esprit de corps
Fayol’s 14 Principles of Administrative Management

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Fayol’s Principles of Management
 Division of Labor: allows for job specialization
 Specialization increases output by making employees
more efficient.
 Authority
 Managers must be able to give orders, and authority
gives them this right.
 Unity of Command
 Employees should have only one boss.
 Line of Authority
 A clear chain of command from top to bottom of the
firm.

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Fayol’s Principles of
Management
 Centralization
 The degree to which authority rests at the top of the
organization.
 Unity of Direction
 A single plan of action to guide the organization.
 Equity
 The provision of justice and fair treatment of all
employees.
 Initiative
 The fostering of creativity and innovation by
encouraging employees to act on their own.

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Fayol’s Principles of
Management
 Order
 The arrangement of employees where they will be
of the most value to the organization and to provide
career opportunities.
 Discipline
 Employees must obey and respect the rules that
govern the organization.
 Remuneration of Personnel
 Workers must be paid a fair wage for their services.

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Fayol’s Principles of Management
 Stability of Tenure of Personnel
 Long-term employment is important for the
development of skills that improve the
organization’s performance.
 Subordination of Individual Interest to the
Common Interest
 The interest of the organization takes precedence
over that of the individual employee.
 Esprit de corps
 Promoting team spirit will bring harmony and unity
in organization.

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Behavioural theorists
‘Perspective on management emphasising
the importance of attempting to understand
various factors affecting human behaviour
in organisations.’

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Early theorists:
 Hugo Munsterberg
Creating optimal psychological conditions, behaviour
shaping
 Mary Parker Follett
Importance of group functioning
 Hawthorne studies
Importance of supervisory style

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Human relations movement
 Abraham Maslow
Employee Motivation (Hierarchy of Needs)
 Douglas McGregor
Leadership Style (Theory X & Y)

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Maslow’s Hierarchy of Needs
Physiological
Safety
Social
Esteem
Self-actualization

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McGregor’s Theory X and Theory
Y
 Leaders and managers who hold Theory X
assumptions believe that employees are
inherently lazy and lack ambition.
 A negative perspective on human behavior.
 Leaders and managers who hold Theory Y
assumptions believe that most employees do not
dislike work and want to make useful
contributions to the organization.
 A positive perspective on human behavior.

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McGregor’s Theory X & Y
Theory X
Work is naturalWork is natural
Capable of self-directionCapable of self-direction
Seek responsibilitySeek responsibility
Can make good decisionsCan make good decisions
Work avoidingWork avoiding
Need to controlNeed to control
Avoid responsibilityAvoid responsibility
Workers seek securityWorkers seek security
Theory Y

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Quantitative management
viewpoint
‘Focuses on mathematics, statistics and
information aids to support managerial
decision making and organisational
effectiveness.’

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Quantitative management
viewpoint
 Management science
‘Approach aimed at increasing decision effectiveness
through use of sophisticated mathematical models &
statistical methods.’
 Operations management
‘Function or field of expertise primarily responsible for
managing production & delivery of an organisation’s
products and services.’
 Management information systems
‘Field of management focused on designing &
implementing computer-based information systems for use
by management.’

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Contemporary viewpoints
 Systems theory
‘Approach based on the idea that organisations can be
viewed as systems.’
 Closed systems:
 not influenced by and do not interact with the environment.
 Open systems
 influenced by and do interact with the environment
 Contingency theory
‘Viewpoint arguing that appropriate managerial action
depends on the particular parameters of the situation.’

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ORGANIZATION’S
EXTERNAL
ENVIRONMENT
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Organization as Open System

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Organizational Environment
 External environment
 The major forces outside the organization that
have the potential to influence the
organization’s performance.
 Internal environment
 The general conditions that exist within an
organization
 Member of organization
 Nature of their interaction
 Physical setting within which
they operate
Organizational
culture

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Customers
and
Consumers
suppliers
The
organization
Labor
supply
competitors
Government
agencies
International
element
Legal-political-
security element
Sociocultural/
religious
element
Technological
element
Economic/
Financial
element
External Environment
Mega Environment
Task
Environment

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Mega-Environment
 The broad conditions and trends in the
societies in which an organization
operates
 Technological Element
 Economic Element
 Legal/Political Element
 Sociocultural Element
 International Element
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Technological Element
 Current state of knowledge regarding the
production of products and services.
 Impact of technological advances
 Results in new opportunities or threats to
managers.
 Often makes products obsolete very quickly.
 Can change how managers manage.
 Relationship with customers.
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Economic Element
 The system of producing, distributing
and consuming wealth.
 Influenced by:
 Inflation
 Interest rates
 Recessions
 Unemployment rate, etc
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Legal-Political Element
 The legal and governmental systems
within which an organization operates.
 Important aspects
 Government regulations
 Legislation
 Politics
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Sociocultural Element
 The attitudes, values, norms, beliefs,
behaviors and associated demographic
trends that are characteristic of a given
geographic area.
 Sociocultural aspects result in important
shifts in the demand of certain types of
products.
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International Element
 The developments in countries outside
an organization's home country that
have the potential to influence the
organization.
 Provides new customers, suppliers and
competitors.
 Affect ability of organization to conduct
business abroad.
 E.g. fluctuation of currency against foreign
currencies
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Task Environment
 The specific outside elements with which
an organization interfaces in the course
of conducting its business.
 Customers
 Individuals and groups that buy goods and
services that an organization produces.
 Organizations make efforts to stay close to
customers and look for niches where they
can serve customers better.
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Task Environment
 Competitors
 Other organization that either offer or have
a potential of offering rival products and
services.
 Organizations need to be concerned with
known and potential competitors and their
activities.
 Strong competitive rivalry results in price
competition.
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Task Environment
 Suppliers
 Those organizations and individuals that
supply the resources an organization needs
to conduct its operations.
 Many companies are now using fewer
suppliers while trying to build better
relationships with them.
 Labor supply
 Those individuals who are potentially
employable by an organization.
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Task Environment
 Government agencies
 Provide services and monitor compliance
with laws and regulations at local, state or
regional and national levels.
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Characteristics of the Environment
 Environmental uncertainty
 Conditions in which future environmental
circumstances affecting an organization
cannot be accurately assessed or predicted.
 Complexity
 Dynamism
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External Environment and Uncertainty

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Managing the environment
Three approaches to managing the
environment:
 Adaptation
Involves changing internal operations & activities to make
the organisation and its environment more compatible.
 Favourability influence
Involves trying to alter environmental elements to make
them more compatible with the organisation’s needs.
 Domain shifting
Changing product/service mix to create favourable
interface.

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Adaptation
 Buffering
Stockpiling either inputs into or outputs from a production
or service process to cope with environmental fluctuations.
 Smoothing
Taking actions aimed at reducing the impact of fluctuations,
given the market.
 Forecasting
Predicting changing conditions & future events that
significantly affect an organisation’s business.
 Rationing
Providing limited access to a product or service in high
demand.

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Favourability influence
 Advertising & public relations
 Boundary spanning
 Recruiting
 Negotiating contracts
 Co-opting
 Strategic alliances
 Trade associations
 Political activity

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Domain shifting
 Move out of a current product, service or
geographic area into a more favourable
domain
 Expand current domains through
diversification or expansion of
products/services offered

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Internal environment
Nature of organisational culture:
 ‘A system of shared values, assumption, beliefs and
norms uniting organisational members’
 ‘The way we do things around here.’
 The ‘glue’ binding the disparate parts (or the oil that keeps
them moving).
 The interpretive part of organisational behaviour: It
explains, gives direction, sustains energy, commitment,
and cohesion.

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Manifestations of culture
 Symbols
Object, act, event or quality serving as a vehicle for
conveying meaning.
 Stories
Narrative based on true events, which may be
embellished to highlight intended value.
 Rites
Relatively elaborate, dramatic, planned set of activities
intended to convey cultural values to participants and,
usually, an audience.
 Ceremonies
System of rites performed in conjunction with a single
occasion or event.

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MANAGERIAL
DECISION MAKING
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Decision Making
 Decision
 Making a choice from two or more alternatives.
 Problem
 An obstacle that makes it difficult to achieve
the desired goals and objectives.
 The Decision-Making Process
 The process by which managers identify
organizational problems and attempt to resolve
them.

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Decision Making Process
1. Identification of problem
2. Identification of Decision Criteria
3. Allocation of weights to criteria
4. Development of alternatives
5. Analysis of alternatives
6. Decide on an alternative
7. Implementation of decision
8. Evaluation of decision

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Step 1: Identify the Problem
Problem
 A discrepancy between an existing and desired
state of affairs.
Characteristics of Problems
 A problem becomes a problem when a manager
becomes aware of it.
 There is pressure to solve the problem.
 The manager must have the authority, information,
or resources needed to solve the problem.

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Step 2: Identifying Decision Criteria
Decision criteria are factors that are important
(relevant) to resolving the problem.
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the Criteria
Decision criteria are not of equal importance:Decision criteria are not of equal importance:
 Assigning a weight to each item places the items inAssigning a weight to each item places the items in
the correct priority order of their importance in thethe correct priority order of their importance in the
decision making process.decision making process.
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Criteria and Weights for Computer
Replacement Decision
Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3

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Step 4: Developing Alternatives
Identifying viable alternatives
 Alternatives are listed (without evaluation) that can
resolve the problem.
Step 5: Analyzing Alternatives
Appraising each alternative’s strengths and
weaknesses
 An alternative’s appraisal is based on its ability to
resolve the issues identified in step 2 and 3.

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Assessed Values of Laptop
Computers Using Decision
Criteria

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Step 6: selecting an alternative
Choosing the best alternative
 The alternative with the highest total weight is
chosen.
Step 7: implementing the alternative
Putting the chosen alternative into action
 Conveying the decision to and gaining commitment
from those who will carry out the decision.

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Evaluation of Laptop Alternatives Against
Weighted Criteria

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Step 8: Evaluating the Decision’s
Effectiveness
The soundness of the decision is judged by its
outcomes.
 How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
 If the problem was not resolved, what went wrong?

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Making Decisions
 Rationality
 Managers make logical, consistent, value-
maximizing choices with specified
constraints.
 Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and
identified all viable alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes
outcomes in the organization’s interests rather
than in their personal interests.

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Rational
Decision
Making
Problem is
clear and
unambiguous
Single, well-
defined goal
is to be achieved
All alternatives
and consequences
are known
Preferences
are clear
Preferences
are constant
and stable
Final choice
will maximize
payoff

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Making Decisions
 Bounded Rationality
 Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
 Assumptions are that decision makers:
 Will not seek out or have knowledge of all alternatives
 Will satisfice—choose the first alternative encountered that
satisfactorily solves the problem—rather than maximize the
outcome of their decision by considering all alternatives and
choosing the best.
 Influence on decision making
 Escalation of commitment: an increased commitment to
a previous decision despite evidence that it may have been
wrong.

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 Intuitive decision making
 Making decisions on the basis of
experience, feelings, and accumulated
judgment.
 Five aspects of intuition
 Experience-based decision
 Affect-initiated decision
 Cognitive-based decision
 Subconscious mental processing
 Value or ethics based decision
Making Decisions

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Types of Problems and
Decisions
 Structured Problems
 Involve goals that are clear.
 Are familiar (have occurred before).
 Are easily and completely defined—
information about the problem is available
and complete.
 Programmed Decision
 A repetitive decision that can be handled by
a routine approach.

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Types of Programmed
Decisions
 Policy
 A general guideline for making a decision
about a structured problem.
 Example: Accept all customer-returned
merchandise.
 Procedure
 A series of interrelated steps that a manager
can use to respond (applying a policy) to a
structured problem.
 Example: Follow all steps for completing
merchandise return documentation.

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Rule
 An explicit statement that limits what a
manager or employee can or cannot do.
 Example: Managers must approve all
refunds over $50.00.
 Example: No credit purchases are refunded
for cash.
Types of Programmed Decisions

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Types of Problems and
Decisions
 Unstructured Problems
 Problems that are new or unusual and for
which information is ambiguous or
incomplete.
 Problems that will require custom-made
solutions.
 Nonprogrammed Decisions
 Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.

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Programmed versus Nonprogrammed Decisions

70 70
Programmed
Decisions
Nonprogrammed
Decisions Level in
Organization
Top
LowerWell-structured
Ill-structured
Type of
Problem
Types of Problems and Level in Organizations

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Decision-Making Conditions
 Certainty
 A situation in which a manager can make an
accurate decision because the outcome of
every alternative choice is known.
 Risk
 A situation in which the manager is able to
estimate the likelihood (probability) of
outcomes that result from the choice of
particular alternatives.

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Decision-Making Conditions
 Uncertainty
 Limited information prevents estimation of
outcome probabilities for alternatives
associated with the problem and may force
managers to rely on intuition, hunches, and
“gut feelings”.

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Organizational
Problem
Problem
Solution
Low HighPossibility of Failure
Certainty Risk Uncertainty Ambiguity
Programmed
Decisions
Nonprogrammed
Decisions
Conditions that Affect the Possibility of Decision Failure

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Overview of Managerial Decision
Making
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Decision-Making Styles
 Dimensions of Decision-Making Styles
 Ways of thinking
 Rational, logical, and analytical
 Intuitive, creative, and unique
 Source of information
 External data and facts
 Internal sources: feelings and intuition

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Decision-Making Styles
 Linear Thinking Style
 Decision style characterized by a person’s
preference for
 using external data and facts and
 processing this information through rational, logical
thinking.
 Nonlinear Thinking Style
 Decision style characterized by person’s
preference for
 Internal sources of information with
 Internal insights, feelings and intuition to guide
decisions and actions.

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Decision-Making Errors and Biases

Principles of Management - Lecture 2

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