15.1: Pricing Methods

15.1.1: Cost-Based Pricing

Learning Objective

Analyze the use of cost-plus pricing as a pricing method

Key Points

• Cost based pricing is the easiest way to calculate what a product should be priced at. This appears in two forms: full cost pricing and direct-cost pricing. Full cost pricing takes into consideration both variable, fixed costs and a % markup. Direct-cost pricing is variable costs plus a % markup.
• Cost-plus pricing is a pricing method used by companies to maximize their profits. The firms accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve.
• Cost-plus pricing is used primarily because it is easy to calculate and requires little information.

Key Terms

rate of return

Rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.

markups

Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit.

variable cost

the amount of resources used that changes with the change in volume of activity of an organization

Examples

• Cost-plus pricing is the simplest pricing method used by companies. It is primarily used because it is easy to calculate, requires little information, and allows them to maximize their profits. They first calculate the cost of the product, and then add a percentage mark-up. This approach sets prices that cover the cost of production and provide enough profit-margin to the firm to earn its target rate of return. This method, although simple, has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
• Information on demand and costs is not easily available, and managers have limited knowledge as far as demand and costs are concerned. This additional information is necessary to generate accurate estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, cost-plus pricing is often considered the most rational approach in maximizing profits because it relies on arbitrary costs and arbitrary markups.

Cost-plus pricing is the simplest pricing method. A firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This appears in two forms: the first, full cost pricing, takes into consideration both variable and fixed costs and adds a % markup. The other is direct cost pricing, which is variable costs plus a % markup. The latter is only used in periods of high competition as this method usually leads to a loss in the long run.This method, although simple, does not take demand into account, and there is no way of determining if potential customers will purchase the product at the calculated price.

Cost-plus pricing is a method used by companies to maximize their profits. There are several varieties, but the common thread is that one first calculates the cost of the product, then adds a proportion of it as markup. Basically, this approach sets prices that cover the cost of production and provide enough profit margin to the firm to earn its target rate of return. It is a way for companies to calculate how much profit they will make.

Cost-plus pricing is used primarily because it is easy to calculate and requires little information, therefore it is useful when information on demand and costs is not easily available. This additional information is necessary to generate accurate estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, cost-plus pricing is often considered the most rational approach in maximizing profits. This approach relies on arbitrary costs and arbitrary markups.

Cost-based Pricing

Cost-based pricing model

15.1.2: Demand-Based Pricing

Learning Objective

Compare various methods of price-setting

Key Points

• Demand-based pricing uses consumer demand (and therefore perceived value) to set a price of a good or service.
• Methods of demand-based pricing can include price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing.
• Pricing factors include manufacturing cost, market location, competition, market condition, and the quality of the product.

Key Terms

yield management

The method of analyzing information to forecast market conditions and implications for the firm

Price skimming

Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management.

Examples

• Price skimming is a pricing strategy where initially a product price is set very high, but lowered over time. By using this pricing method, the firm can recover its sunk costs quickly (before competition lowers the market price). Price skimming is sometimes referred to as “riding down the demand curve.” By using this strategy, a company is able to capture consumer surplus. If done successfully, then in theory no customer will pay less for the product than the maximum they are willing to pay. In practice, it is almost impossible for a firm to capture the entire consumer surplus.
• Value based pricing (aka value optimized pricing) sets prices primarily on the perceived or estimated value to the customer (rather than on the cost of the product, the market price, competitors’ prices, or historical prices). The goal of value-based pricing is to align the price with the value of the product. Value-based pricing is based on the idea that a customer receiving high levels of value will pay a higher price compared to a customer receiving lower levels of value for the same product/service.
• Yield management is the process of understanding, anticipating and influencing consumer behavior. The purpose of it is to maximize profits from a fixed, perishable resource. Examples include airline seats or hotel rooms. This process involves strategic control of inventory in order to sell items to the correct customer at the correct time. Yield management can result in price discrimination. Yield management is a large revenue generator for several major industries (including airlines and hotels). The former Chairman and CEO of American Airlines, Robert Crandall, named this process “Yield Management” and said that it was “the single most important technical development in transportation management since we entered deregulation. “
• Psychological pricing (aka price ending) is a marketing practice based on the idea that certain price have a psychological impact. For example, items are typically priced at a point a little less than a round number ($2.99). The theory is that this causes demand to be greater than it would be if consumers were perfectly rational. In other words, because they see the 2 at the front of the price, they ignore that it is only 1 penny away from $3.
• Product bundling is a very common marketing strategy which involves offering several products for sale as a combined unit. It is common in the software business (Microsoft Office package), cable TV (basic cable, internet, phone), and food as well (burger, fries and a soda).
• When a company sets an initially low entry price (lower than the eventual market equilibrium price) to attract customers, they are engaging in penetration pricing. This strategy operates under the expectation that customers will switch to the new item because of its low price. Penetration pricing is used when the marketing objective is to increase market share/sales volume. It is not used to make short-term profit.
• Value based pricing (aka value optimized pricing) sets prices primarily on the perceived or estimated value to the customer (rather than on the cost of the product, the market price, competitors’ prices, or historical prices). The goal of value-based pricing is to align the price with the value of the product. Value-based pricing is based on the idea that a customer receiving high levels of value will pay a higher price compared to a customer receiving lower levels of value for the same product/service.

Demand-based pricing is any pricing method that uses consumer demand, based on perceived value, as the central element. These include: price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product.

Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus. If this is done successfully, then theoretically no customer will pay less for the product than the maximum they are willing to pay. In practice, it is almost impossible for a firm to capture all of this surplus.

Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider.

Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource, such as airline seats or hotel room reservations. As a specific, inventory-focused means of revenue management, yield management involves strategic control of inventory to sell it to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it “the single most important technical development in transportation management since we entered deregulation. “

Price points are prices at which demand for a given product is supposed to stay relatively high .

Demand-based Pricing

Illustration of price points, or concave-downward cusps on a demand curve (P is price; Q is quantity demanded; A, B, and C are the price points)

Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as “odd prices”: a little less than a round number, e.g. $19.99 or £2.98. The theory is this drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.

Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (e.g., bundle a word processor, a spreadsheet, and a database into a single office suite), in the cable television industry (e.g., basic cable in the United States generally offers many channels at one price), and in the fast food industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.

Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers. The strategy works on the expectation that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term.

Value-based pricing, or value-optimized pricing is a business strategy. It sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product, the market price, competitors’ prices, or historical prices. The goal of value-based pricing is to align a price with the value delivered. It is based on the notion that a customer receiving high levels of value will pay a higher price than a customer receiving lower levels of value for the same product or service.

Geo (also called marketing geography or geomarketing) is a discipline within marketing analysis which uses geolocation (geographic information) in the process of planning and implementation of marketing activities. It can be used in any aspect of the marketing mix: the product, price, promotion, or place (geo targeting).

15.1.3: Competition-Based Pricing

Learning Objective

Explain the competitive-based pricing model

Key Points

• If competitors are pricing their products at a lower price, then it’s up to the company to either price their goods at a higher or lower price, all depending on what they want to achieve.
• One advantage of competitive-based pricing is that it avoids price competition that can damage the company.
• Potential disadvantages include that businesses may need to engage in other tactics to engage customers (if the price is not enough of an incentive).
• Another concern for companies is that this pricing method may barely cover production costs, resulting in low profits.
• Another concern for companies is that this pricing method may only cover production costs, resulting in low profits.

Key Term

competitive-based pricing

Competitive-based pricing occurs when a company sets a price for its good based on what competitors are selling a similar product for.

Example

• Walmart is selling a face wash for $3.99. NuMart, who is looking to sell this product in the same area, also prices their product at $3.99 in order to capture market share. They will not receive higher profits per unit than Walmart with this pricing strategy, and will have to engage in marketing tactics to engage customers, since the price itself is not an incentive.

In economics, competition is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. Merriam-Webster defines competition in business as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. ” It was described by Adam Smith in The Wealth of Nations (1776) and later economists as allocating productive resources to their most highly-valued uses and encouraging efficiency. Smith and other classical economists before Cournot were referring to price and non-price rivalry among producers to sell their goods on best terms by the bidding of buyers, and not necessarily to a large number of sellers or to a market in final equilibrium.

Competitive-based pricing, or market-oriented pricing, involves setting a price based upon analysis and research compiled from the target market . With competition pricing, a firm will base what they charge on what other firms are charging. This means that marketers will set prices depending on the results from their research. For instance, if the competitors are pricing their products at a lower price, then it’s up to them to either price their goods at a higher or lower price, all depending on what the company wants to achieve.

Competitive Market Pricing

Status-quo pricing, also known as competition pricing, involves maintaining existing prices or basing prices on what other firms are charging.

One advantage of competitive-based pricing is that it avoids price competition that can damage the company. Disadvantages include that businesses have to attract customers in other ways, since the price will not grab the customer’s interest. The price may also barely cover production costs, resulting in low profits.

15.1.4: Break-Even Analysis

Learning Objective

Explain the break-even point (BEP)

Key Points

• At this point there is no loss or gain to the company. On a graph, it appears as the point where the cost and revenue curves intersect.
• In an instance when costs are linear, the break-even point is equal to the fixed costs divided by the contribution margin per unit.
• The break-even point is one of the simplest yet least used analytical tools in management. It helps to provide a dynamic view of the relationships between sales, costs and profits.

Key Terms

price

The price is the amount a customer pays for the product.

expense

A spending or consuming. Often specifically an act of disbursing or spending funds.

Example

• If a business sells less than 200 units each month, it will record a loss. In the event it sells more, it will show a profit. Based off of this information, the business owners will need to determine if they can make and sell at least 200 tables a month. If they are not able to currently, adjusting other variables may help them reach this goal. For instance, reducing fixed costs (finding a building with cheaper rent), reducing variable costs (finding a cheaper supplier for table-making goods), and/or increasing the price of their tables. By performing any of these actions, the break-even point would be reduced, meaning that the owners do not need to sell as many tables in order to pay off fixed costs.

In Business Economics, specifically cost accounting, the break-even point (BEP) is the point at which cost (or expenses) and revenue are equal—there is no net loss or gain, i.e., one can “break even. ” No profit is achieved nor loss incurred, although opportunity costs are reconciled, and capital receives the risk-adjusted, expected return. Shown graphically, it is seen at the point where the total revenue and total cost curves meet. In the linear model, the break-even point is equal to the fixed costs divided by the contribution margin per unit .

Break-Even Analysis

This graphs depicts an example of a break-even point based on sales and total costs.

Example: Suppose that if a business sells fewer than 200 tables each month it will incur a loss, and if it sells more it will turn a profit. Given this scenario, the company’s business managers will need to compile information to determine if they can reasonably manufacture and sell 200 tables per month.

If they think they cannot sell that many, to ensure continued viability they might:

• Try reducing their fixed costs (e.g., by renegotiating rent, or by better controlling utility telephone bills or other costs)
• Try reducing their variable costs (the price paid for the tables by finding a new supplier)
• Consider increasing the selling price of their tables

Any of these would reduce the break-even point, meaning the business would not need to sell so many tables to ensure it could pay its fixed costs.

By inserting different prices into the formula, you will obtain a number of break-even points, one for each possible price point. If in the above example the firm changes the selling price for its product, say from $2 to $2.30, then it would have to sell only 589 units (1000/(2.3 – 0.6) = 589) to break even rather than 715.

Graphing these results can make them more clear. To do this, draw the total cost curve (TC in the diagram), showing total cost associated with each possible level of output; the fixed cost curve (FC), showing costs that do not vary with output level; and finally, the various total revenue lines (R1, R2, and R3), showing the total amount of revenue received at each output level given the chosen price point.

The break-even point is one of the simplest yet least used analytical tools in management. It helps provide a dynamic view of the relationships between sales, costs and profits. For an even clearer understanding, break-even sales can be expressed as a percentage of actual sales. By linking the percent to a point (during the week or month) that the percent of sales might occur, managers can glean when they might expect to break even.

15.2: Pricing Objectives

15.2.1: Profit Optimization

Firms utilize strategies such as price and promotional reduction to minimize cost, maximize revenue, and thereby optimize profits.

Learning Objective

Explain managerial methods of profit optimization

Key Points

• Firms can employ a number of methods to optimize profit including employing yield management and revenue optimization strategies.
• Yield optimization is the practice of using models to analyze data and information to forecast the best quantity of output a firm should produce to meet the total demand, thereby optimizing revenue.
• Optimization attempts to take information on a firm’s operating constraints, market demand, and factors influencing these to find the optimal selling prices and optimal production quantities for a firm’s goods.
• Revenue optimization is the mathematical process of finding the highest possible revenue a firm can make, using quadratic equations.

Key Terms

Revenue optimization

A method of finding the best possible combination of output and price level to give the most possible revenue.

revenue

the total income received from a given source

yield management

The analysis of qualitative and quantitative information on factors driving demand for a good in order to forecast the most profitable production decisions for a firm.

Example

• Hypothetically, a lemonade stand may engage in yield management. Reviewing historical sales records in the neighborhood, looking up the weather forecasts, noting the hours of highest traffic in the area and other factors that may affect sales can help determine how many ingredients to purchase and how much lemonade to make.

Traditional profit optimization includes methods for reduction of pricing, promotional, and markdown losses.

Yield management can help firms optimize profits. Firms that engage in yield management usually do so via computer yield management systems, and periodically review transactions for goods or services already supplied as well as those being supplied in the future. They may also review information (including statistics) about events (known future events such as holidays, or unexpected past events such as terrorist attacks), competitive information (including prices), seasonal patterns, and other pertinent factors affecting sales. The models use market segment and price point to forecast total demand for all products or services they provide. Since total demand normally exceeds what the particular firm can produce in that period, the models attempt to optimize the firm’s outputs to maximize revenue. This optimization seeks to address key questions, such as: “Given our operating constraints, what is the best mix of products and/or services for us to produce and sell in the period; and at what prices do we sell those products and/or services to generate the highest expected revenue? ” Optimization can help the firm adjust prices and allocate capacity among market segments to maximize expected revenues. This can be done at different levels:

• By goods (such as a seat on a flight or a seat at an opera production)
• By group of goods (such as the entire opera house or all seats on a flight)
• By market (such as sales from Seattle and Minneapolis for a flight via Seattle-Minneapolis-Boston)
• Overall (such as on all routes of an airline, or on all seats during an opera production season)

Revenue optimization is a method of determining ‘optimal’ profits or expenditures, and can be related to quadratics, as the vertex of a parabola can illustrate the point where the ‘maximum’ revenue can be attained. Revenue optimization requires finding the x-intercepts and vertex, which can be done utilizing the quadratic formula (x-intercepts), and completing the square (vertex/ maximum). By finding these, one can then determine the highest or lowest cost and where the costs and quantities must lie in accordance to the vertex. This method is effective for maximizing profits for companies and families, as it can ensure the highest profit for sales and the lowest amounts for expenditures.

Optimization

Optimization point at x1, x2.

15.2.2: Return on Investment

Return on investment (ROI) is one way of considering profits in relation to capital invested.

Learning Objective

Explain the effect of marketing on return on investment (ROI)

Key Points

• Marketing not only influences net profits but also can affect investment levels, too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions.
• The purpose of the “return on investment” metric is to measure per-period rates of return on dollars invested in an economic entity.
• Return on investment (%) = Net profit ($) / Investment ($) × 100; or: Return on investment = (gain from investment – cost of investment) / cost of investment.
• Interest on a second (or refinanced) loan may increase, and loan fees may be charged, both of which can reduce the ROI when the new numbers are used in the ROI equation.

Key Terms

profits

Collective form of profit.

return on investment

One way of considering profits in relation to capital invested.

Example

• Suppose a lemonade stand wanted to use a yield management method. They could look at historical pricing and sales performance of past lemonade stands in the neighborhood, and traffic patterns in the area. At what time of day are more people (possible customers) outside? And what about the weather (does lemonade sell better in sunny or rainy weather)? All this information can give the lemonade entrepreneurs a better idea of how much to make and how much to charge.

Return on Investment

Return on investment (ROI) is one way of considering profits in relation to capital invested. Return on assets (ROA), return on net assets (RONA), return on capital (ROC) and return on invested capital (ROIC) are similar measures with variations on how ‘investment’ is defined .

Assets

Return on assets (ROA), return on net assets (RONA), return on capital (ROC) and return on invested capital (ROIC) are similar measures with variations on how ‘investment’ is defined.

Marketing not only influences net profits but also can affect investment levels too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions.

In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the “return on investment” metric very useful.

Purpose

The purpose of the “return on investment” metric is to measure per-period rates of return on dollars invested in an economic entity. ROI and related metrics (ROA, ROC, RONA and ROIC) provide a snapshot of profitability adjusted for the size of the investment assets tied up in the enterprise. Marketing decisions have obvious potential connection to the numerator of ROI (profits), but these same decisions often influence asset usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected. ROI is often compared to expected (or required) rates of return on dollars invested.

Construction

For a single-period review, just divide the return (net profit) by the resources that were committed (investment):

Return on investment (%) = Net profit ($) / Investment ($) × 100

or

Return on investment = (gain from investment – cost of investment) / cost of investment

Problems in Calculating ROI

Complications in calculating ROI can occur when a real estate property is refinanced, or a second mortgage is taken out. For example, interest on a second (or refinanced) loan may increase or loan fees may be charged. Both of these factors can reduce the ROI when the new numbers are used in the ROI equation. There may also be an increase in maintenance costs and property taxes, or an increase in utility rates if the owner of a residential rental or commercial property pays these expenses.

Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan. (To know more about ARM, check out: Mortgages: Fixed-Rate Versus Adjustable-Rate. )

15.2.3: Market Share

Market share is an indicator of how well a firm is doing against its competitors and can often be influenced through pricing.

Learning Objective

Explain the importance of market share

Key Points

• Market share, usually measured as a percentage of a market’s total revenue captured by a single entity, is a key indicator of market competitiveness.
• Managers can use market share data to evaluate a firm’s overall performance, market demand, market growth, and customer preference trends.
• Market share is measured by looking at a firm’s sales revenue as a percentage of the total market revenue.

Key Term

Market Share

The percentage amount of a market captured by a single firm

Example

• For a very basic example, let’s look at the market for baubles. Suppose there are 1000 total baubles sold in the U.S. per year for $1 each. If company A sold 600 of those baubles, they have 60% of the market share.

Market share is the percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.

Market share is a key indicator of market competitiveness—that is, how well a firm is doing in terms of its competition. This metric, supplemented by changes in sales revenue, helps managers evaluate both primary and selective demand in their market. It enables them to judge not only total market growth or decline, but also trends in customers’ selections among competitors. Generally, sales growth resulting from primary demand (total market growth) is less costly and more profitable than that achieved by capturing share from competitors. Conversely, losses in market share can signal serious long-term problems that require strategic adjustments. Firms with market shares below a certain level may not be viable. Similarly, within a firm’s product line, market share trends for individual products are considered early indicators of future opportunities or problems.

Increasing market share is one of the most important objectives of business. The main advantage of using market share as a measure of business performance is that it is less dependent upon macroenvironmental variables, such as the state of the economy or changes in tax policy. However, increasing market share may be dangerous for makers of fungible hazardous products, particularly products sold into the United States market, where they may be subject to market share liability.

Although market share is likely the single most important marketing metric, there is no generally acknowledged best method for calculating it. This is unfortunate as different methods may yield not only different computations of market share at a given moment but also widely divergent trends over time. The reasons for these disparities include variations in the lenses through which share is viewed (units versus dollars), where in the channel the measurements are taken (shipments from manufacturers versus consumer purchases), market definition (scope of the competitive universe), and measurement error.

Market Share

Mobile phone market share in Q3 2008

15.2.4: Demanding a Premium

Firms can engage in premium pricing by keeping the price of their good artificially higher than the benchmark price.

Learning Objective

Explain why business owners sometimes price at a premium

Key Points

• Premium pricing is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market, or when the seller cannot save on costs by producing at a high volume.
• More expensive items are perceived to be of better quality or have a better reputation by virtue of their price.
• Luxury has a psychological association with price premium pricing.

Key Terms

prestige

The quality of how good the reputation of something or someone is.

Price premium

The percentage by which a product’s selling price exceeds a benchmark price.

Example

• Brands like Pepsi or Coke can price their goods at a premium, charging more than a generic soda brand due to its brand name.

Pricing strategies for products or services encompass three main ways to improve profits. The business owner can cut costs or sell more, or find more profit with a better pricing strategy. When costs are already at their lowest and sales are hard to find, adopting a better pricing strategy is a key option to stay viable.

Premium Pricing

Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction . A premium pricing strategy involves setting the price of a product higher than similar products . This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market, or when the seller cannot save on costs by producing at a high volume. It is also called image pricing or prestige pricing.

Premium-Priced Good

Gold mined from different sources demand different premiums.

Mercedes Benz SLR McLaren

Mercedes Benz executes a premium pricing strategy.

Luxury has a psychological association with price premium pricing. The implication for marketing is that consumers are willing to pay more for certain goods and not for others. To the marketer, it means creating a brand equity or value for which the consumer is willing to pay extra. Marketers view luxury as the main factor differentiating a brand in a product category.

15.2.5: Status-Quo Pricing of Existing Products

Status quo pricing is the practice of maintaining current price levels that other firms are charging.

Learning Objective

Compare Nagle and Holden’s nine laws of price sensitivity with status-quo pricing

Key Points

• Pricing strategies for products or services encompass three main ways to improve profits. These are that the business owner can cut costs or sell more, or find more profit with a better pricing strategy.
• Merely raising prices is not always the answer, especially in a poor economy. One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs and behaviors of customers and clients.
• Status-quo pricing advantages: Avoids price competition that can damage the company. Disadvantages: Because the price may not grab the customer’s interest, businesses may have to attract customers in other ways. Also, these prices may barely cover production costs, resulting in low profits.

Key Term

status-quo pricing

The practice of pricing goods such that the current market price level is maintained.

Pricing strategies for products or services encompass three main methods of improving profits: the business owner can cut costs, sell more, or implement a better pricing strategy. When costs are already at their lowest and increasing sales becomes difficult, adopting a better pricing strategy may be a key option for staying viable.

However, merely raising prices is not always the best solution, particularly in poorer economies. Many businesses fold because as a result of pricing themselves out of the marketplace. On the other hand, many business and sales staff leave “money on the table”. One strategy does not fit all, so adopting a pricing strategy is a learning curve—studying the needs and behaviors of customers and clients is essential.

Nine Laws of Price Sensitivity and Consumer Psychology

In their book The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden outline nine “laws”—factors they say influence how a consumer perceives a given price, and how price-sensitive they may be with respect to different purchase decisions.

1. Reference Price Effect: Buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, occasion, or other factors.
2. Difficult Comparison Effect: Buyers are less sensitive to the price of a known or more reputable product when they have difficulty comparing it to potential alternatives.
3. Switching Costs Effect: The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
4. Price-Quality Effect: Buyers are less sensitive to price the more higher prices signal higher quality. Products for which this effect is particularly relevant include image products, exclusive products, and products with minimal cues for quality.
5. Expenditure Effect: Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget.
6. End-Benefit Effect: This effect refers to the relationship of a given purchase to a larger overall benefit, and is divided into two parts. The first, derived demand, referes to buying sensitivity relative to the price of the end benefit; the more sensitive they will be to the prices of those products that contribute to that benefit. The second, price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps produce the end benefit (e.g., CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component’s price.
7. Shared-cost Effect: The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.
8. Fairness Effect: Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.
9. The Framing Effect: Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.

Status-quo Pricing

Status-quo pricing, also known as competition pricing, involves maintaining existing prices (status quo) or basing prices on the prices of competitor firms .

Competitive Market Pricing

Status-quo pricing, also known as competition pricing, involves maintaining existing prices or basing prices on what other firms are charging.

Advantages: Avoids price competition that can damage the company.

Disadvantages: Because the price will not grab the customer’s interest, businesses must attract customers in other ways. Also, these prices may barley cover production costs, resulting in low profits.

15.3: Pricing Strategies

15.3.1: New Product

Penetration and skimming are two strategies employed in pricing new products.

Learning Objective

Compare penetration and skimming as two strategies for setting a price level

Key Points

• Penetration pricing in the introductory stage of a new product’s life cycle involves accepting a lower profit margin and pricing relatively low.
• Price skimming involves setting the price relatively high to generate a high profit margin.
• A premium product generally supports a skimming strategy.

Key Terms

pull strategy

communication not demanded by the buyer

Price skimming

This involves the top part of the demand curve. The price is set relatively high to generate a high profit margin, and sales are limited to those buyers willing to pay a premium to get the new product.

Penetration pricing

The introductory stage of a new product’s life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly.

push strategy

communication demanded by the buyer

With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product’s life cycle involves accepting a lower profit margin and pricing relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin, and sales are limited to those buyers willing to pay a premium to get the new product.

Price Skimming

Video game systems, such as the Sony PS3, usually employ the classic new product pricing strategy, known as skimming.

Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales. A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, “premium” doesn’t just denote high cost of production and materials, it also suggests that the product may be rare or that the demand is unusually high. An example would be a $500 ticket for the World Series or an $80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.

15.3.2: Differential

Differential pricing exists when sales of identical goods or services are transacted at different prices from the same provider.

Learning Objective

Analyze the situations in which price differentiation works

Key Points

• Product heterogeneity, market frictions, or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for differential pricing to different consumers, even in fully competitive retail or industrial markets.
• Price differentiation requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors.
• There are two conditions that must be met if a price differentiation scheme is to work. First, the firm must be able to identify market segments by their price elasticity of demand. Second, the firm must be able to enforce the scheme.

Key Term

arbitrage

Any market activity in which a commodity is bought and then sold quickly, for a profit which substantially exceeds the transaction cost

Price differentiation, or price discrimination, exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (re-selling) to prevent arbitrage, price differentials can only be a feature of monopolistic and oligopolistic markets, where market power can be exercised. However, product heterogeneity, market frictions, or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets.

Price differentiation requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale: keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate is referred to as a rate fence. Price differentiation is thus very common in services where resale is not possible, such as airlines and movie theaters.

Price differentiation can also be seen where the requirement that goods be identical is relaxed. For example, so-called “premium products” (including relatively simple products, such as cappuccino compared to regular coffee with cream) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay.

There are two conditions that must be met if a price differentiation scheme is to work. First, the firm must be able to identify market segments by their price elasticity of demand. Second, the firm must be able to enforce the scheme. For example, airlines routinely engage in price differentiation by charging high prices for customers with relatively inelastic demand (business travelers) and discount prices for tourists who have relatively elastic demand . The airlines enforce the scheme by making the tickets non-transferable, thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or minimum stay conditions that would be difficult for the average business traveler to meet.

Price Differentiation

The airline industry implements price differentiation schemes.

15.3.3: Psychological Pricing

Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.

Learning Objective

Apply the discipline of psychology to pricing

Key Points

• Psychology is an academic and applied discipline that involves the scientific study of mental functions and behaviors.
• While psychological knowledge is often applied to the assessment and treatment of mental health problems, it is also directed towards understanding and solving problems in many different spheres of human activity.
• Psychological pricing can be used to increase the perceived value of a product as well.

Key Term

psychological pricing

Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.

Psychological

Psychology is an academic and applied discipline that involves the scientific study of mental functions and behaviors. Psychology has the immediate goal of understanding individuals and groups by both establishing general principles and researching specific cases and, by many accounts, ultimately aims to benefit society. In this field, a professional practitioner or researcher is called a psychologist, and can be classified as a social, behavioral, or cognitive scientist. Psychologists attempt to understand the role of mental functions in individual and social behavior, while also exploring the physiological and neurobiological processes that underlie certain cognitive functions and behaviors.

While psychological knowledge is often applied to the assessment and treatment of mental health problems, it is also directed towards understanding and solving problems in many different spheres of human activity. The majority of psychologists are involved in some kind of therapeutic role, practicing in clinical, counseling, or school settings. Many do scientific research on a wide range of topics related to mental processes and behavior, and typically work in university psychology departments or teach in other academic settings (e.g., medical schools or hospitals). Some are employed in industrial and organizational settings, or in other areas such as human development and aging, sports, health, and the media, as well as in forensic investigation and other aspects of law.

Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as odd prices: a little less than a round number, such as $19.99 or £2.98. The theory is that this drives demand greater than would be expected if consumers were perfectly rational.

Psychological pricing can be used to the perceived value of a product up as well. By charging $350 for designer jeans, retailers are at times able to create more demand for the product than if they were priced at $19.99 for example.

Stop & Shop Price Cruncher

A British Stop & Shop ad from the 1994 holiday season, informing consumers what they would save on the purchase of each item.

15.3.4: Product Line

Product lining is the marketing strategy of offering several related products for sale as individual units.

Learning Objective

Explain the strategies of creating a product line

Key Points

• Line extensions strategies involve adding goods related to the initial product, whose purchase or use is keyed to the product.
• A line extension strategy should only be considered when the producer is certain that the capability exists to efficiently manufacture a product that compares well with the base product.
• Line-filling strategies occur when a void in the existing product line has not been filled or a new void has developed due to the activities of competitors or the request of consumers.
• Line-pruning strategies involve the process of getting rid of products that no longer contribute to company profits.

Key Terms

product line

a series of several related goods or services for sale as individual units

line vulnerability

the percentage of sales or profits that are derived from only a few products in the line.

product mix

the number of different categories and lines of goods or services offered by a company

line depth

the number of subcategories a product category has.

line consistency

how closely related the products that make up the line are.

Product lining is the marketing strategy of offering several related products for sale as individual units. A product line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of subcategories a category has. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line. The number of different categories of a company is referred to as width of product mix. The total number of products sold in all lines is referred to as length of product mix. If a line of products is sold with the same brand name, this is referred to as family branding.

Walmart Exterior

Large companies, such as Walmart, often have product lines that cover a wide variety of similar or related needs.

Variables to Consider When Selecting a Product Line Strategy

There are two basic strategies for dealing with whether the company will attempt to carry every conceivable product needed and wanted by the consumer or whether they will carry selected items. The first is a full-line strategy while the second is called a limited line strategy. Few full-line manufacturers attempt to provide items for every conceivable market niche. And few limited-line manufacturers would refuse to add an item if the demand were great enough. Each strategy has its advantages and disadvantages.

Line extensions strategies involve adding goods related to the initial product, whose purchase or use is keyed to the product. For example, a computer company may provide an extensive selection of software to be used with its primary hardware. This strategy not only increases sales volume, it also strengthens the manufacturer’s name association with the owner of the basic equipment and offers dealers a broader line. These added items tend to be similar to existing brands with no innovations. They also have certain risks. Often the company may not have a high level of expertise with either producing or marketing these related products. Excessive costs, inferior products, and the loss of goodwill with distributors and customers are all possible deleterious outcomes.

There is also a strong possibility that such a product decision could create conflict within the channel of distribution. In the computer example just described, this company may have entered the software business over the strong objection of their long-term supplier of software. If their venture into the software business fails, re-establishing a positive relationship with this supplier could be quite difficult. A line extension strategy should only be considered when the producer is certain that the capability exists to efficiently manufacture a product that compares well with the base product. The producer should also be sure of profitable competition in this new market.

Line-filling strategies occur when a void in the existing product line has not been filled or a new void has developed due to the activities of competitors or the request of consumers. Before considering such a strategy, several key questions should be answered:

• Can the new product support itself?
• Will it cannibalize existing products?
• Will existing outlets be willing to stock it?
• Will competitors fill the gap if we don’t?
• What will happen if we don’t act?

Assuming a firm decides to fill out its product line further, there are several ways of implementing this decision.

Ways to Implement the Filling Out of a Product Line

1. Product proliferation: The introduction of new varieties of the initial product or products that are similar.
2. Brand extension: Strong brand preference allows the company to introduce the related product under the brand umbrella.
3. Private branding: Producing and distributing a related product under the brand of a distributor or other producers.

In addition to the demand of consumers or pressures from competitors, there are other legitimate reasons to engage in these tactics. First, the additional products may have a greater appeal and serve a greater customer base than did the original product. Second, the additional product or brand can create excitement both for the manufacturer and distributor. Third, shelf space taken by the new product means it cannot be used by competitors. Finally, the danger of the original product becoming outmoded is hedged.

Yet, there is serious risk that must be considered as well. Unless there are markets for the proliferations that will expand the brand’s share, the newer forms will cannibalize the original product and depress profits. Line-pruning strategies involve the process of getting rid of products that no longer contribute to company profits. A simple fact of marketing is that sooner or later a product will decline in demand and require pruning.

15.3.5: Promotions

Promotional pricing means temporarily reducing the price of an established product in order to increase interest in customers.

Learning Objective

Explain why and how marketers use promotion

Key Points

• Promotion is one of the market mix elements, and a term used frequently in marketing.
• Fundamentally, however, there are three basic objectives of promotion: to present information to consumers as well as others, to increase demand, and to differentiate a product.
• Promotional pricing often involves reducing prices to unsustainably low levels. In some cases, products and services may be sold at or below cost.

Key Term

Promotional pricing

The temporary reduction of the price of an established product in order to increase interest in customers.

Promotion is one of the market mix elements, and a term used frequently in marketing. Fundamentally, there are three basic objectives of promotion:

• To present information to consumers as well as others.
• To increase demand.
• To differentiate a product.

There are different ways to promote a product in different areas of media. Promoters use internet advertisement, special events, endorsements, and newspapers to advertise their product. Many times with the purchase of a product there is an incentive like discounts, free items, or a contest. This is to increase the sales of a given product.

Promotional Pricing

Promotional pricing means temporarily reducing the price of an established product in order to increase interest in customers. This is sometimes done because the sales of the product are falling and the firm wants to renew customer’s interest in it. Or perhaps the product has gone out of fashion, and the firm wants to clear their stock (e.g., sales on last season’s clothes).

Promotional pricing often involves reducing prices to unsustainably low levels. In some cases, products and services may be sold at or below cost. A buy-one-get-one-free scheme may even be used. When this is done, interest in goods can be greatly increased, meaning sales are also likely to increase dramatically.

This technique may be used by retailers or producers alike. When it is used by retailers, the goal is generally to attract attention to the business and to attract regular customers. When the technique is used by producers, the goal is generally to attract customers to a product or brand and to encourage brand loyalty.

Quaker Oats man

A Quaker Oats promotion at a Publix grocery store.

15.4: Pricing Products

15.4.1: The Meaning of Price

Price is both the money someone charges for a good or service and what the consumer is willing to give up to receive a good or service.

Learning Objective

Differentiate between cost, customer’s view of price, and society’s view of price

Key Points

• When you ask about the cost of a good or service, you’re really asking how much you will have to give up in order to get it.
• For the business to increase value, it can either increase the perceived benefits or reduce the perceived costs. Both of these elements should be considered elements of price.
• Viewing price from the customer’s perspective helps define value — the most important basis for creating a competitive advantage.
• There are two different ways to look at the role price plays in a society; rational man and irrational man.

Key Term

value

The degree of importance you give to something.

Examples

• Wedding photographers frequently charge thousands of dollars for a wedding, be it a large, opulent event, or a small scale affair. Unlike Louis Vuitton, most wedding photographers are individuals working from home, or small studios, and so charging a high price is not purely about protecting the brand, or about the cost of the equipment (although there is certainly a high initial cost to starting out). Rather, it is about the need that customers have to capture these memories. Because the customer feels there is value in having a good wedding photographer, they are willing to pay prices that are not related to the cost.
• Louis Vuitton is a designer of luxury goods such as handbags, luggage, watches, etc. The company has been criticised for burning unsold merchandise, rather than putting them back on the market at discounted prices. This action is defended by saying that it must be done in order to maintain the value of the brand – if discounted items enter the market place, the brand value would fall.

What does a Price Convey

Buying something means paying a price. But what exactly is “price? “

• Price is the money someone charges for a good or service. For example, an item of clothing will cost a certain amount of money. Or a computer specialist will charge a certain amount of money for fixing your computer.
• Price is also that which you, a consumer, has to give up in order to receive a product or service. Price does not necessarily always mean money. Bartering is when you exchange goods or services in return for goods or services. For example, I teach you English in exchange for you teaching me about graphic design. In that case, I give up my time and knowledge.

Even though the question, “How much? ” could be phrased as “How much does it cost? ” price and cost are two different things. Whereas the price of a product is what you, the consumer has to pay to obtain it, the cost is what the business pays to make it. When you ask about the cost of a good or service, you’re really asking how much will you have to give up to get it.

Different Perspectives on Price

The perception of price differs based on the perspective from which it is beign viewed.

Louis Vuitton

Louis Vuitton sells luxury designer goods such as these suitcases. If Louis Vuitton merchandise was offered at low prices it might significantly undermine the brand value, much of which is based upon exclusivity.

The Customer’s View

A customer can either be the ultimate user of the finished product or a business that purchases components of the finished product. It is the customer that seeks to satisfy a need or set of needs through the purchase of a particular product or set of products. Consequently, the customer uses several criteria to determine how much they are willing to expend, or the price they are willing to pay, in order to satisfy these needs. Ideally, the customer would like to pay as little as possible.

For the business to increase value, it can either increase the perceived benefits or reduce the perceived costs. Both of these elements should be considered elements of price.

To a certain extent, perceived benefits are the opposite of perceived costs. For example, playing a premium price is compensated for by having this exquisite work of art displayed in one’s home. Other possible perceived benefits directly related to the price-value equations are:

• Status
• Convenience
• The deal
• Brand
• Quality
• Choice

Many of these benefits tend to overlap. For instance, a Mercedes Benz E750 is a very high-status brand name and possesses superb quality. This makes it worth the USD 100,000 price tag. Further, if one can negotiate a deal reducing the price by USD 15,000, that would be his incentive to purchase. Likewise, someone living in an isolated mountain community is willing to pay substantially more for groceries at a local store than drive 78 miles (25.53 kilometers) to the nearest Safeway. That person is also willing to sacrifice choice for greater convenience.

Increasing these perceived benefits are represented by a recently coined term, value-added. Providing value-added elements to the product has become a popular strategic alternative.

Perceived costs include the actual dollar amount printed on the product, plus a host of additional factors. As noted, perceived costs are the mirror-opposite of the benefits. When finding a gas station that is selling its highest grade for USD 0.06 less per gallon, the customer must consider the 16 mile (25.75 kilometer) drive to get there, the long line, the fact that the middle grade is not available, and heavy traffic. Therefore, inconvenience, limited choice, and poor service are possible perceived costs. Other common perceived costs include risk of making a mistake, related costs, lost opportunity, and unexpected consequences.

Ultimately, it is beneficial to view price from the customer’s perspective because it helps define value — the most important basis for creating a competitive advantage.

Society’s View

Price, at least in dollars and cents, has been the historical view of value. Derived from a bartering system (exchanging goods of equal value), the monetary system of each society provides a more convient way to purchase goods and accumulate wealth. Price has also become a variable society employs to control its economic health. Price can be inclusive or exclusive. In many countries, such as Russia, China, and South Africa, high prices for products such as food, health care, housing, and automobiles, means that most of the population is excluded from purchase. In contrast, countries such as Denmark, Germany, and Great Britain charge little for health care and consequently make it available to all.

There are two different ways to look at the role price plays in a society; rational man and irrational man. The former is the primary assumption underlying economic theory, and suggests that the results of price manipulation are predictable. The latter role for price acknowledges that man’s response to price is sometimes unpredictable and pretesting price manipulation is a necessary task.

15.4.2: Impacts of Supply and Demand on Pricing

The supply and demand model states that the price of a good will be the level where the quantity demanded equals the quantity supplied.

Learning Objective

Apply the concept of supply and demand to price determination

Key Points

• In the supply and demand model of price determination, there is never a surplus or shortage of goods at the equilibrium level. The market always settles at the point where supply equals demand.
• If demand increases (decreases) and supply is unchanged, then it leads to a higher (lower) equilibrium price and quantity.
• If supply increases (decreases) and demand is unchanged, then it leads to a lower (higher) equilibrium price and higher (lower) quantity.
• If a price for a particular product goes up and the customer is aware of all relevant information, demand will be reduced for that product.
• Demand-oriented pricing focuses on the nature of the demand curve for the product or service being priced.

Key Terms

Supply and demand model

An economic model of price determination in a market.

demand-oriented pricing

A pricing model focused on the nature of the demand curve for the product or service being priced.

demand curve

An economic model showing the quantity demanded at various price levels.

Example

• Suppose the equilibrium price of burgers is $10, and 200 widgets are eaten every day in a particular town. A sudden outbreak of mad cow disease leads to people not wanting to eat burgers at all–demand drops. Now, only 50 burgers are eaten per day. As a result of the fall in demand, price drops as well (while the actual quantities of demand and supply will depend on the shape of the demand and supply curves, for the sake of example, let’s say the price drops to $4).

Supply, Demand, and Pricing

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.

The four basic laws of supply and demand are:

1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.
2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity.
3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
4. If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity.

Equilibrium is defined as the price-quantity pair where the quantity demanded is equal to the quantity supplied, represented by the intersection of the demand and supply curves. Market equilibrium is a situation in a market when the price is such that the quantity that consumers wish to demand is correctly balanced by the quantity that firms wish to supply.

Economics assumes that the consumer is a rational decision maker and has perfect information. Therefore, if a price for a particular product goes up and the customer is aware of all relevant information, demand will be reduced for that product. Should price decline, demand would increase. That is, the quantity demanded typically rises causing a downward sloping demand curve. A demand curve shows the quantity demanded at various price levels.

Price affected by supply and demand

The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

As a seller changes the price requested to a lower level, the product or service may become an attractive use of financial resources to a larger number of buyers, thus, expanding the total market for the item. This total market demand by all buyers for a product type (not just for the company’s own brand name) is called “primary demand. ” Additionally, a lower price may cause buyers to shift purchases from competitors, assuming that the competitors do not meet the lower price. If primary demand does not expand and competitors meet the lower price, the result will be lower total revenue for all sellers.

Demand-oriented pricing focuses on the nature of the demand curve for the product or service being priced. The nature of the demand curve is influenced largely by the structure of the industry in which a firm competes. That is, if a firm operates in an industry that is extremely competitive, price may be used to some strategic advantage in acquiring and maintaining market share. On the other hand, if the firm operates in an environment with a few dominant players, the range in which price can vary may be minimal.

15.5: New Product Development

15.5.1: Innovation

Innovation is the creation of better, more effective products, processes, services, or technologies.

Learning Objective

Subdivide the innovation process in to sources, goals, failures, and diffusion

Key Points

• Innovation is defined in this context as the development of better products or services.
• In business and economics, innovation is the catalyst to growth. With rapid advancements in transportation and communications over the past few decades, the old-world concepts of factor endowments and comparative advantage, which focused on an area’s unique inputs, are outmoded for today’s economy.
• In the organizational context, innovation may be linked to positive changes in efficiency, productivity, quality, competitiveness, market share, and others. All organizations can innovate, including hospitals, universities, and local governments.

Key Term

innovation

The creation of better or more effective products, processes, services, technologies, or ideas that are not readily available but will soon be.

Example

• Innovations in the method of iron production catalyzed the Industrial Revolution of the nineteenth century.

In business and economics, innovation is the catalyst to growth. With rapid advancements in transportation and communications over the past few decades, the old-world concepts of factor endowments and comparative advantage, which focused on an area’s unique inputs, are outmoded for today’s global economy.

Organizations

In the organizational context, innovation may be linked to positive changes in efficiency, productivity, quality, competitiveness, market share, and others. All organizations can innovate, including hospitals, universities, and local governments.

Sources of Innovation

The famous robotics engineer Joseph F. Engelberger asserts that innovations require only three things: (1) A recognized need; (2) competent people with relevant technology; (3) financial support.

The Kline Chain-linked model of innovation places emphasis on potential market needs as drivers of the innovation process, and describes the complex and often iterative feedback loops between marketing, design, manufacturing, and research and development (R&D). Innovation by businesses is achieved in many ways, with much attention now given to formal research and development for “breakthrough innovations. ” R&D helps spur on patents and other scientific innovations that lead to productive growth in such areas as industry, medicine, engineering, and government. Yet, innovations can be developed by less formal on-the-job modifications of practice, through exchange and combination of professional experience and by many other routes. The more radical and revolutionary innovations tend to emerge from R&D, while more incremental innovations may emerge from practice—but there are many exceptions to each of these trends. An important innovation factor includes customers buying products or using services. As a result, firms may incorporate users in focus groups (user-centered approach), work closely with so-called lead users (lead user approach) or users might adapt their products themselves.

Goals and Failures

Programs of organizational innovation are typically tightly linked to organizational goals and objectives, to the business plan, and to market competitive positioning. One driver for innovation programs in corporations is to achieve growth objectives. A survey across a large number of manufacturing and services organizations found that systematic programs of organizational innovation are most frequently driven by (ranked in decreasing order of popularity): Improved quality, creation of new markets, extension of the product, range, reduced labor costs, improved production processes, reduced materials, reduced environmental damage, replacement of products/services, reduced energy consumption, and conformance to regulations. These goals vary between improvements to products, processes and services and dispel a popular myth that innovation deals mainly with new product development. Most of the goals could apply to any organization, be it a manufacturing facility, marketing firm, hospital or local government. Whether innovation goals are successfully achieved depends greatly on the environment prevailing in the firm. Conversely, failure can develop in programs of innovations. The causes of failure have been widely researched and can vary considerably. Some causes will be external to the organization and outside its influence of control while others will be internal and ultimately within the control of the organization. Internal causes of failure can be divided into causes associated with the cultural infrastructure and causes associated with the innovation process itself. Common causes of failure within the innovation process in most organizations can be distilled into five types: (1) Poor goal definition; (2) poor alignment of actions to goals; (3) poor participation in teams; (4) poor monitoring of results; (5) poor communication and access to information.

Diffusion of Innovations

Once innovation occurs, innovations may be spread from the innovator to other individuals and groups. This process has been proposed that the life cycle of innovations can be described using the “S-curve’ or diffusion curve. The S-curve maps growth of revenue or productivity against time. In the early stage of a particular innovation, growth is relatively slow as the new product establishes itself. At some point customers begin to demand and the product growth increases more rapidly. New incremental innovations or changes to the product allow growth to continue. Toward the end of its life cycle growth slows and may even begin to decline. In the later stages, no amount of new investment in that product will yield a normal rate of return.

Innovative companies will typically be working on new innovations that will eventually replace older ones. Successive S-curves will come along to replace older ones and continue to drive growth upwards . The S-curve derives from an assumption that new products are likely to have “product life” (i.e. a start-up phase, a rapid increase in revenue and eventual decline). In fact the great majority of innovations never get off the bottom of the curve, and never produce normal returns.

Technological Innovation Chart

In the figure above the first curve shows a current technology. The second shows an emerging technology that currently yields lower growth but will eventually overtake current technology and lead to even greater levels of growth.

15.5.2: New Product Ideas

New product ideas can generate from existing frustrations using a certain product, or a desire to do something better or more simply.

Learning Objective

Explain the front-end process of new product development (NPD) and the characteristics of a SWOT analysis

Key Points

• Most new product ideas come from experiences, like frustrations with an existing product.
• There are two parallel paths involved in the NPD process: one involves the idea generation, product design and detail engineering; the other involves market research and marketing analysis.
• Lots of ideas are generated about the new product. Out of these ideas many are implemented. The ideas are generated in many forms. There are many factors responsible for generation of an idea.

Key Terms

life cycle

The useful life of a product or system; the developmental history of an individual or group in society.

SWOT Analysis

a structured planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture

product life cycle

the stages that a good or service goes through from when it is first introduced to when it is taken off the market

Example

• Airbnb.com, which has been wildly successful, started when their founders needed to generate $100 in order to pay their rent. A conference in a nearby town prompted them to rent out air mattresses in their apartment. They realized might have a good business idea.

In business and engineering, new product development (NPD) is the complete process of bringing a new product to market. A product is a set of benefits offered for exchange. It can be tangible (something physical you can touch) or intangible (like a service, experience, or belief). There are two parallel paths involved in the NPD process: idea generation, including product design and detail engineering; and market research and marketing analysis. Companies typically see new product development as the first stage in generating and commercializing a new product within the overall strategic process of product life cycle management, used to maintain or grow their market share.

Ideas for new products can be obtained from basic research using SWOT analysis: Strengths, Weaknesses, Opportunities & Threats. Many methods may be used to gain insight into new product lines or product features, including:

SWOT Analysis

Here is an example of the SWOT analysis matrix.

• Market and consumer trends
• Research and development
• Competitors
• Focus groups and trade shows
• Employees and corporate spies
• Salespeople
• Ethnographic discovery methods (searching for user patterns and habits)

Five Different Front-End Elements

1. Opportunity identification: Large or incremental business and technological chances are identified in a relatively structured way. Using the guidelines established here, resources are allocated to new projects, leading to a structured New Product & Process Development or NPPD strategy.
2. Opportunity analysis: This element translates identified opportunities into implications for the business and technology specific context of the company. This element focuses on aligning ideas to target customer groups, and can include market studies and/or technical trials and research.
3. Idea genesis: The evolutionary and iterative process of progressing an initial idea from birth to maturation into a tangible idea. This process can occur internally or externally (e.g., a supplier offering a new material or technology, or a customer presenting an unusual request.
4. Idea selection: The decision to pursue an idea is determined by analyzing its potential business value.
5. Concept and technology development: During this part of the front-end, the business case is developed based on estimates of the total available market, customer needs, investment requirements, competition analysis and project uncertainty. Some organizations consider this the first stage of the NPPD process

15.5.3: Following a Product Development Process

Product development is idea generation, screening, business analysis, technical development, manufacturing, testing, and commercialization.

Learning Objective

Outline the several stages in new product development

Key Points

• Ideas for new products can be obtained from customers (employing user innovation), the company’s research and development department, competitors, focus groups, employees, salespeople, and more.
• The object of idea screening is to eliminate unsound concepts prior to devoting resources to them.
• The focus of the business analysis is primarily on profits, but other considerations, such as social responsibilities, may also be involved.
• Manufacturing planning must consider how to secure the availability of required funds, facilities, and personnel at the intended time, as well as the methods of coordinating this effort.
• Test marketing is the final step before commercialization; the objective is to test all the variabilites in the marketing plan including elements of the product.

Key Term

Focus Group

A group of people, sampled from a larger population, interviewed in open session for market research or political analysis

New Product Development Process

There are several stages in the new product development process–not always followed in order:

Idea Generation

Generating new product ideas is a creative task that requires a specific way of thinking. Ideas for new products can be obtained from customers (employing user innovation), the company’s R&D department, competitors, focus groups, employees, sales people, corporate spies, trade shows, or through a policy of Open Innovation. Formal idea generating techniques include attribute listing, forced relationships, brainstorming, morphological analysis, and problem analysis.

Idea Screening

The second step in the product development process is screening. It is a critical part of the development activity. The object is to eliminate unsound concepts prior to devoting resources to them. The screeners must ask at least three questions:

1. Will the customer in the target market benefit from the product?
2. Is it technically feasible to manufacture the product?
3. Will the product be profitable when manufactured and delivered to the customer at the target price?

Business Analysis

After the various product ideas survive their initial screening, very few viable proposals will remain. Before the development of prototypes can be decided upon, however, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs required. The focus of the business analysis is primarily on profits, but other considerations, such as social responsibilities, may also be involved. Management must:

• Estimate the likely selling price based upon competition and customer feedback.
• Estimate sales volume based upon size of market.
• Estimate profitability and the break even point.

Technical and Marketing Development

A product that has passed the screening and business analysis stages is ready for technical and marketing development. Technical development involves two steps. The first is the applied laboratory research required to develop exact product specifications.The goal of this research is to construct a prototype model of the product that can be subjected to further study. Once the prototype has been created, manufacturing-methods research can be undertaken to plan the best way of making the product in commercial quantities under normal manufacturing conditions. This is an extremely important step, because there is a significant distinction between what an engineer can assemble in a laboratory and what a factory worker can produce.

Prototypes

One step in the product development process is technical development.

While the laboratory technicians are working on the prototype, the marketing department is responsible for testing the new product with its intended consumers and developing the other elements of the marketing mix. They must ask the following questions:

1. Who is the target market, and who is the decision maker in the purchasing process?
2. What product features must the product incorporate?
3. What benefits will the product provide?
4. How will consumers react to the product?
5. How will the product be produced most cost effectively?
6. What will it cost to produce it?

Marketers must then prove feasibility through a virtual computer-aided rendering and rapid prototyping, and test the concept by asking a sample of prospective customers what they think of the idea.

Manufacturing Planning

Assuming that the product has cleared the technical and marketing development stage, the manufacturing department is asked to prepare plans for producing it. The plan begins with an appraisal of the existing production plant and the necessary tooling required to achieve the most economical production. Compromise between attractiveness and economy is often necessary. Finally, manufacturing planning must consider how to secure the availability of required funds, facilities, and personnel at the intended time, as well as the methods of coordinating this effort.

Marketing Planning

It is at this point that the product planner must prepare a complete marketing plan–one that starts with a statement of objectives and ends with the fusion of product, distribution, promotion, and pricing into an integrated program of marketing action.

Test Marketing

Test marketing is the final step before commercialization; the objective is to test all the variabilites in the marketing plan including elements of the product.

Commercialization (often considered post-NPD)

At last, the product is ready to go. It has survived the development process, and it is now on the way to commercial success. How can it be guided to that marketing success? It is the purpose of the lifecycle marketing plan to answer this question. Such a complete marketing program will, of course, involve additional decisions about distribution, promotion, and pricing.

15.5.4: Screening

Idea screening attempts to eliminate unsound product concepts prior to devoting resources to them.

Learning Objective

Explain how product developers use a simple checklist and assign weights of importance in order to best screen ideas

Key Points

• If a poor product idea is allowed to pass the screening state, it wastes effort and money in subsequent stages until it is later abandoned. However, the possibility of screening out a worthwhile idea is even more serious.
• The first technique of screening is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor.
• A second technique goes beyond the first, in which criteria are assigned importance weights, with products rated on a point scale measuring product compatibility.
• New product criteria include value added, sales volume, patent protection and affect on present products.

Key Terms

patent

A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention; a letter patent.

idea screening

the process of testing concepts and eliminating unsound ones

Idea screening is an early step in the new product development process and is a critical part of the development activity. If a poor product idea is allowed to pass the screening state, it wastes effort and money in subsequent stages until it is later abandoned. However, the possibility of screening out a worthwhile idea is even more serious, There are two common techniques for screening new product ideas. Both involve the comparison of a potential product idea against criteria of acceptable new products.

The first technique is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor by such criteria as value added, sales volume, patent protection and affect on present products. Unfortunately, it is quite difficult for raters to define what is fair or poor. In addition, the rating system does not address the issue of the time and expense associated with each idea, nor does it instruct with regard to scores. A second technique goes beyond the first, in which criteria are assigned importance weights, with products rated on a point scale measuring product compatibility. These scores are then multiplied by their respective weights and added to yield a total score for the new product idea.

In summary:

The object is to eliminate unsound concepts prior to devoting resources to them.

The screeners should ask several questions:

1. Will the customer in the target market benefit from the product?
2. What is the size and growth forecast of the market segment / target market?
3. What is the current or expected competitive pressure for the product idea?
4. What are the industry sales and market trends the product idea is based on?
5. Is it technically feasible to manufacture the product?
6. Will the product be profitable when manufactured and delivered to the customer at the target price?

Product Screening

Before introducing the iPad to market, Apple had to go through a process of screening in order to conclude the new product would be a worthwhile investment.

15.5.5: Analysis

The focus of the business analysis is primarily on profits, but other considerations such as social responsibilities may also be involved.

Learning Objective

Explain the business analysis stage of new product development

Key Points

• Before the development of prototypes can be decided upon, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs.
• The first step in the business analysis is to examine the projected demand. This would include two major sources of revenue: The sales of the product and the sales or license of the technology developed for or generated as a by-product of the given product.
• A complete cost appraisal is also necessary as a part of the business analysis.
• The Fourt-Woodlock equation is a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year.

Key Terms

learning curve

An experience or graphic representation of progress in learning measured against the time required to achieve mastery of something.

economies of scale

The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long-run average cost of each unit.

After the various product ideas survive their initial screen, very few viable proposals will remain. Before the development of prototypes can be decided upon, however, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs. The focus of the business analysis is primarily on profits, but other considerations such as social responsibilities may also be involved. The first step in the business analysis is to examine the projected demand. This would include two major sources of revenue: The sales of the product and the sales or license of the technology developed for or generated as a by-product of the given product. A complete cost appraisal is also necessary as a part of the business analysis. It is difficult to anticipate all the costs that will be involved in product development, but the following cost items are typical:

• Expected development cost, including both technical and marketing research and development.
• Expected set-up costs. These can include production, manufacturing equipment, distribution, etc.
• Operating costs that account for possible economies of scale and learning curves.
• Marketing costs, especially promotion and distribution.
• Management costs.

Other necessary steps in business analysis include:

• Estimating the likely selling price based upon competition and customer feedback.
• Estimating sales volume based upon the size of the target market and such tools as the Fourt-Woodlock equation.
• Estimating profitability and the break-even point.

The Fourt-Woodlock equation is a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year. Since it includes the effects of initial trial and repeat rates, the equation is useful in new product development .

The Fourt-Woodlock Equation

The left-hand-side of the equation is the volume of purchases per unit time (usually taken to be one year). On the right-hand-side, the first parentheses describes trial volume, and the second describes repeat volume. HH is the total number of households in the geographic area of projection, and TR (“trial rate”) is the percentage of those households which will purchase the product for the first time in a given time period. TU (“trial units”) is the number of units purchased on this first purchase occasion. MR is “measured repeat,” or the percentage of those who tried the product who will purchase it at least one more time within the first year of the product’s launch. RR is the repeats per repeater ( the number of repeat purchases within that same year). RU is the number of repeat units purchased on each repeat event.

15.5.6: Testing

The objective of testing is to test all the variabilites in the marketing plan, including elements of the product.

Learning Objective

Compare and contrast initial product testing and test marketing

Key Points

• Product testing is totally initiated by the producer. He or she selects the sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate.
• In test marketing, the consumer must make the decision him- or herself, must pay using his or her money, and the test product must compete with the existing products in the actual marketing environment.
• Because of the special expertise needed to conduct test markets and the associated expenses, most manufacturers employ independent marketing research agencies with highly trained project directors, statisticians, psychologists, and field supervisors.

Key Terms

marketing mix

The marketing mix is a business tool used in marketing products. The marketing mix is often crucial when determining a product or brand’s unique selling point and is often synonymous with the four Ps: price, product, promotion, and place.

Market Share

Percentage of some market held by a company.

Example

• In this stage, one of the best things you can do as an entrepreneur is find cheap easy ways to test the market for your product. One way to do that might be spending $50 on Facebook or Google ads, before you even go and build a product.

Testing is the final step before commercialization. The objective is to test all the variabilites in the marketing plan including elements of the product. Test marketing represents an actual launching of the total marketing program, but on a limited basis.

Three general issues are addressed through test marketing. First, the overall workability of the marketing plan is assessed. Second, alternative allocations of the budget are evaluated. Third, whether the new product is inspiring users to switch from other brands is determined. In the end, the test market should include an estimate of sales, market share, and financial performance over the life of the product.

Product Testing

This is a photo of a temperature and humidity chamber used to simulate transport, warehouse environments, and shelf life conditions of a packaged product.

Initial product testing and test marketing are not the same. Product testing is totally initiated by the producer. He or she selects a sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate. Test marketing, on the other hand, is distinguished by the fact that the test cities should represent the national market. The consumer must make the decision him- or herself, must pay with his or her money, and the test product must compete with the existing products in the actual marketing environment. For these and other reasons, a market test is an accurate simulation of the national market and serves as a method for reducing risk. It should enhance the new product’s probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale.

However, running a test marketing simulation has inherent risks. First, there are substantial costs in buying the necessary plant and machinery needed to manufacture the product or locating manufacturers willing to make limited runs. There are also promotional costs, particularly advertising and personal selling. Although not always easy to identify, there are indirect costs as well. For example, the money used to test market could be used for other activities; in other words, there is an opportunity cost. There is also a risk of losing consumer goodwill through the testing of an inferior product. Finally, engaging in a test market might allow competitors to become aware of a new product and quickly copy it.

Because of the special expertise needed to conduct test markets and take on associated expenses, most manufacturers employ independent marketing research agencies with highly trained project directors, statisticians, psychologists, and field supervisors. Such firms assist the product manager in making the remaining test market decisions. These include:

1. Duration of testing: the product should be tested long enough to account for market factors to even out, allow for repeat purchases, and account for deficiencies in any other elements in the new product (three to six months of testing may be sufficient for a frequently purchased and rapidly consumed convenience item).
2. Selection of test market cities: the test market cities should reflect the norms for the new product in such areas as advertising, competition, distribution system, and product usage.
3. Number of test cities: should be based on the number of variations considered (i.e., price, package, or promotion), representativeness, and cost.
4. Sample size determination: the number of stores used should be adequate to represent the total market.

Even after all the test results are in, adjustments in the product are still made. Additional testing may be required, or the product may be discontinued.

15.5.7: Commercialization

Once a product is ready to take to market, commercialization involves key decisions about distribution, promotion, and pricing.

Learning Objective

Outline the basics of commercialization

Key Points

• The actual launch of a new product is the final stage of new product development, and the one where the most money will have to be spent for advertising, sales promotion, and other marketing efforts.
• Commercialization of a product will only take place if the following three questions can be answered: When is the appropriate time to introduce the product? Where is the appropriate market to launch the product? To whom will the product be targeted primarily?
• The company has to decide on an action plan for introducing the product by implementing the above decisions.

Key Term

marketing mix

The marketing mix is a business tool used in marketing products. The marketing mix is often crucial when determining a product or brand’s unique selling point and is often synonymous with the four Ps: price, product, promotion, and place.

Commercialization is the process or cycle of introducing a new product or production method into the market . This actual launch of a new product is the final stage of new product development, and the one where the most money will have to be spent for advertising, sales promotion, and other marketing efforts. Commercialization is often confused with sales, marketing or business development. The commercialization process has three key aspects:

Commercialization

Bringing new products to market will require creative marketing techniques to achieve success like Red Bull did by creating mascot automobiles.

• It is essential to look at many ideas to get one or two products or businesses that can be sustained long-term. This is often known as the funnel.
• Commercialization is a stage-wise process, and each stage has its own key goals and milestones.
• It is vital to involve key stakeholders early on, including customers.

Commercialization of a product will only take place if the following three questions can be answered:

1. When is the appropriate time to introduce the product? When facing the danger of cannibalizing the sales of the company’s other products, if the product can be improved further, or if the economy is down, the launch should be delayed.
2. Where is the appropriate market to launch the product? It can be in a single location, in several regions, or it might be more appropriate for a national or international market. This decision will be strongly influenced by the company’s resources in terms of capital, managerial confidence and operational capacities. Smaller companies usually launch in attractive cities or regions, while larger companies enter a national market all at once. Global roll outs are generally only undertaken by multinational conglomerates, since they have the necessary size and make use of international distribution systems. Other multinationals use the “lead-country” strategy by introducing the new product in one country/region at a time.
3. To whom will the product be targeted primarily? These primary consumer groups should consist of innovators, early adopters, heavy users and/or opinion leaders. This will ensure adoption by other buyers in the marketplace during the product growth period.

The company has to decide on an action plan for introducing the product by thinking about the questions above and making informed decisions. It has to develop a viable marketing mix and create a respective marketing budget.

15.6: Product Strategy

15.6.1: Developing Products

Organizations assess the current market for new product opportunities and, when potentially profitable, develop new product prototypes to test feasibility of production.

Learning Objective

Outline the steps involved in new product development, understanding the logic behind them

Key Points

• Product development is the process of identifying consumer needs within a market and innovating towards developing a product to fulfill those needs.
• Internal and external factors impacting production and demand should all be considered during the product development period.
• The eight steps of Koen provide useful context on how organizations develop products. Market research, brainstorming, screening, prototyping, testing, process engineering, and distribution are all key phases in development.
• Another useful concept is the idea of a minimum viable product (MVP). Due to the cost of mass production and perfecting a product, MVP allows rapid prototyping and testing to ensure a demand exists.

Key Terms

scale

To grow and expand rapidly.

conceptualizing

To conceive an idea for something.

New Product Opportunities

The process of identifying consumer needs within a market, and innovating towards developing a product to fulfill those needs, is referred to as new product development. When developing new products, the most important thing to keep in mind is that the product itself must successfully fill an existing need in the market, transforming a market opportunity into a tangible and marketable product.

Cost, time of development, price points, ability to scale, distribution, legalities, and competition should all be considered during the product development period. Through assessing the opportunity, risks, costs and external environment, organizations can ensure they focus on developing and investing in the products with the highest potential.

How To Develop Products

There are a number of useful frameworks for product development and product design, each of which focus on a full process of identifying market needs, ideating upon solutions, conceptualizing these solutions, and ultimately prototyping the new product for testing. One of the more well-known approaches is called eight stages of Koen:

Eight Stages of Koen

1. Idea generation – Using market research, SWOT assessments, industry trends, trade shows, and data gathering techniques, organizations identify the existing opportunities in the market. Ideas to fill these consumer needs are brainstormed. When brainstorming, any and all ideas are valid and should be considered thoroughly.
2. Idea screening – Once all of the ideas are on the board, the screening process can begin. Screening revolves around identifying which products best align with the target market and the need being filled, along with the technical feasibility and potential profitability of producing it.
3. Idea development and testing – In this phase, the organization focuses on identifying marketing and engineering needs for production. The idea, concept, and brand identity of the new product should be considered, and technical aspects such as patents, features, and cost saving should be considered. 3D printing is an excellent advantage for prototyping as well, and consumers can be invited to test 3D printed models of the product.
4. Business analysis – At this point, estimated selling prices, volume and profitability should be projected, researched, and confirmed.
5. Beta testing and market testing – After producing and testing the prototype, an organization can now package and send this to small focus groups, trade shows and user testing sessions. This initial run through will allow comments from real consumers and criticisms to be addressed before mass marketing.
6. Technical implementation – Assuming the beta testing goes well, the technical aspects of larger scale manufacturing must be organized. This includes building in quality management, resource estimations, technical spec sheets, engineering planning, department scheduling, sourcing, logistics, and all the other various inputs specific products may need for production.
7. Commercialization – The product is finally ready for commercialization. At this point, the organization can officially launch the product, advertise, fill distribution pipelines, and refine the process.
8. New product pricing – Once the product has been on the shelves for a some time, sufficient data can be collected to identify the financial impacts of this new product. Differentiating between segments, price points, consumer groups, and competitive markets can yield useful strategic information for the firm.

Pyramid of Production Systems

Refining production for a new product requires consideration of a variety of factors, including productivity, quality, economics, flexibility, and sustainability.

Refining production for a new product requires consideration of a variety of factors, including productivity, quality, economics, flexibility and sustainability.

Through executing these eight steps, organizations can effectively mitigate risk while capturing new and interesting opportunities in the external markets.

Minimum Viable Product

Another useful concept to learn in regards to product development is referred to as the minimum viable product (MVP). A minimum viable product is the least investment of time and resources required to bring the product to market for testing. Often an MVP project will be developed rapidly and distributed in one or two locales, representative of the general market population. This mitigates risk and exposure while ensuring the organization can confirm the demand for a given product at a given price point.

15.6.2: Developing Services

Service products are offered by a wide variety of industries such as barbers, travel agencies, and consulting firms.

Learning Objective

Explain how services are a key aspect of the goods industry

Key Points

• It is important to remember that all products – whether they are goods, services, blankets, diapers, or plate glass – possess peculiarities that require adjustments in the marketing effort.
• Behind every product is a series of supporting services, such as warranties and money-back guarantees.
• An industrial customer might be keenly interested in related services such as prompt delivery, reliable price quotations, credit, test facilities, demonstration capabilities, liberal return policies, engineering expertise, and so forth.

Key Term

credit

A privilege of delayed payment extended to a buyer or borrower on the seller’s or lender’s belief that what is given will be repaid.

Example

• The price of your merchandise or service tells the customer a lot about what they can expect from your business. This is why in some instances, salons and other services are able to charge a premium. Although they are delivering a product/service that is similar to competitors, the higher price suggests theirs has greater value.

Service products are reflected by a wide variety of industries: utilities, barbers, travel agencies, health spas, consulting firms, medical care and banking, to name but a few. They account for nearly 50% of the average consumer’s total expenditures, 70% of the jobs, and two-thirds of the GNP. Clearly, the service sector is large and is growing. It is important to remember that all products—whether they are goods, services, blankets, diapers, or plate glass—possess peculiarities that require adjustments in the marketing effort. However, offering an exceptional product at the right price, through the most accessible channels, promoted extensively and accurately, should work for any type of product.

Service Development

Dog walking is a service industry that has developed in recent years.

Moreover, behind every product is a series of supporting services, such as warranties and money-back guarantees. In many instances, such services may be as important as the product itself. In fact, at times it is difficult to separate the associated services from the product features. Consequently, companies must constantly monitor the services offered by the company and its competitors. Based on the results of data-gathering devices such as customer surveys, consumer complaints, and suggestion boxes, the product manager can determine the types of services to offer, the form the service will take, and the price charged.

An industrial customer might be keenly interested in related services such as prompt delivery, reliable price quotations, credit, test facilities, demonstration capabilities, liberal return policies, engineering expertise, and so forth. Although there are a wide range of supportive services, the following are most prevalent:

1. Credit and financing: With the increased acceptance of debt by the consumer, offering credit and/or financing has become an important part of the total product. For certain market segments and certain products, the availability of credit may make the difference between buying or not buying the product.
2. Warranty: There are several types of durable products, retail stores, and even service products where warranties are expected. These warranties can provide a wide array of restitution, with a very limited warranty at one end of the continuum and extended warranties at the other.
3. Money-back guarantees: The ultimate warranty is the money-back guarantee. To the customer, a money-back guarantee reduces risk almost totally. There are certain market segments (e.g., low risk takers) that perceive this service as very important. Obviously this service is effective only if the product is superior and the product will be returned by only a few people.
4. Delivery, installation, and training: Firms that sell products that tend to be physically cumbersome or located far from the customer might consider delivery to be an integral part of the new product. Very few major appliance stores, lumber yards, or furniture stores could survive without provisions for this service. Similarly, there are products that are quite complicated and/or very technical, and whose average consumer could neither learn how to install or use it without assistance from the manufacturer. Both professional and home computer companies have been forced to provide such services.

15.6.3: Classifying Consumer Products

Consumer products can be classified as convenience, shopping, or specialty goods.

Learning Objective

Categorize consumer product into three groups: convenience, shopping, specialty

Key Points

• A convenience good is one that requires a minimum amount of effort on the part of the consumer.
• Goods that consumers want to be able to compare, such as automobiles, appliances, and homes,are categorized as shopping goods.
• Specialty goods are products so unique that consumers will go to any lengths to seek out and purchase them.

Key Terms

wholesaler

a person or company that sells goods wholesale is a middleman that buys its merchandise from a third party supplier and resells the merchandise to retail businesses or the end consumer. A wholesaler normally does not sell to other wholesalers.

reseller

a company or individual that purchases goods or services with the intention of reselling them rather than consuming or using them

Examples

• In its online product catalog, retailer Sears divides its products into “departments”, then presents products to potential shoppers according to (1) function or (2) brand. Each product has a Sears item-number and a manufacturer’s model-number. Sears uses the departments and product groupings with the intention of helping customers browse products by function or brand within a traditional Raj department-store structure.
• Intangible Data Products can further be classified into Virtual Digital Goods (“VDG”) that are virtually located on a computer OS and accessible to users as conventional file types, such as JPG and MP3 files. Open Source Code, GNU Linux, or even Android, may manipulate and/or convert base Virtual Digital Goods (“VDG”) into process-oriented Real Digital Goods (“RDG”), as part of an application process or manufactured service that may be viewed on Personal Data Assistant (“PDA”) or other hand-held tangible devices or OS computer.

Classifying Consumer Products

A classification long used in marketing separates products targeted at consumers into three groups:

1. Convenience
2. Shopping
3. And specialty

Convenience Goods

A convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. Vending machines typically dispense convenience goods, as do automatic teller machines. These products are usually of low unit value, they are highly standardized, and, frequently, they are nationally advertised. Yet, the key is to convince resellers (i.e., wholesalers and retailers) to carry the product. If the product is not available when, where, and in a form desirable by the consumer, the convenience product will fail. From the consumer’s perspective, little time, planning, or effort go into buying convenience goods. Consequently, marketers must establish a high level of brand awareness and recognition. This is accomplished through extensive mass advertising; sales promotion devices, such as coupons and point-of-purchase displays; and effective packaging. The fact that many of our product purchases are often on impulse is evidence that these strategies work. Availability is also important. Consumers have come to expect a wide spectrum of products to be conveniently located at their local supermarkets, ranging from packaged goods used daily (e.g., bread and soft drinks) to products purchased rarely or in an emergency, such as snow shovels, carpet cleaners, and flowers.

Convenience Goods

Convenience goods are typically found in convenience stores, such as the one pictured here.

Shopping Goods

In contrast, consumers want to be able to compare products categorized as shopping goods. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare values, and, therefore, these goods need not be distributed so widely. Although many shopping goods are nationally advertised, often, it is the ability of the retailer to differentiate itself that creates the sale. The differentiation could be equated with a strong brand name, such as Sears Roebuck, effective merchandising, aggressive personal selling, or the availability of credit. Discounting, or promotional price-cutting, is a characteristic of many shopping goods because of retailers’ desire to provide attractive shopping values. In the end, product turn over is slower, and retailers have a great deal of their capital tied-up in inventory. This, combined with the necessity to price discount and provide exceptional service, means that retailers expect strong support from manufacturers with shopping goods.

Specialty Goods

Specialty goods represent the third product classification. From the consumer’s perspective, these products are so unique that they will go to any lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods. Although these products may be custom-made (e.g., a hairpiece) or one-of-a-kind (e.g., a statue), it is also possible that the marketer has been very successful in differentiating the product in the mind of the consumer. Crisco shortening, for instance, may be a unique product in the mind of a consumer, and the consumer would pay any price for it. Such a consumer would not accept a substitute and would be willing to go to another store or put off their pie baking until the product arrives. Another example might be the strong attachment some people feel toward a particular hair stylist or barber. A person may wait a long time for that individual and might even move with that person to another hair salon. It is generally desirable for a marketer to lift the product from the shopping to the specialty class. With the exception of price cutting, the entire range of marketing activities are required to accomplish this goal.

15.6.4: Classifying Business Products

Business products are goods or services that are sold to other businesses rather than to end-consumers.

Learning Objective

Explain the different marketing strategies of various types of indistrial goods

Key Points

• Forests, mines, and quarries provide extractiveproducts to producers.
• Manufactured products are those that have undergone some processing. Semi-manufactured goods are raw materials that have received some processing but require more before they are useful to the purchaser.
• Parts are manufactured items that are ready to be incorporated into other products.
• Process machinery (sometimes called installations) refers to major pieces of equipment used in the manufacture of other goods.
• Equipment is made up of portable factory equipment (e.g., fork lift trucks, fire extinguishers) and office equipment (e.g., computers, copier machines).
• Supplies and service do not enter the finished product at all, but are nevertheless consumed in conjunction with making the product.

Key Terms

lathe

A machine tool used to shape a piece of material, or workpiece, by rotating the workpiece against a cutting tool.

process

A series of events to produce a result, especially as contrasted to product.

Although consumer products are more familiar to most individuals, business and industrial goods represent very important product categories as well. In the case of some manufacturers, business products are their entire focus. Industrial products can either be categorized from the perspective of the producer and how they shop for the product, or the perspective of the manufacturer and how they are produced and how much they cost. The latter criteria offers a more insightful classification for industrial products.

Forests, mines, and quarries provide extractive products to producers. Although there are some farm products that are ready for consumption when they leave the farm, most farm and other extractive products require some processing before purchase by the consumer. A useful way to divide extractive products is into farm products and natural products, since they are marketed in slightly different ways.

Extractive Products

Quarries are examples of business that provide extractive products for other businesses.

Manufactured products are those that have undergone some processing. The demands for manufactured industrial goods are usually derived from the demands for ultimate consumer goods. There are a number of specific types of manufactured industrial goods.

Semi-manufactured goods are raw materials that have received some processing but require more before they are useful to the purchaser. Lumber and crude oil are examples of these types of products. Since these products tend to be standardized, there is a strong emphasis on price and vendor reliability.

Parts are manufactured items that are ready to be incorporated into other products. For instance, the motors that go into lawn mowers and steering wheels on new cars are carefully assembled when they arrive at the manufacturing plant. Since products such as these are usually ordered well in advance and in large quantities, price and service are the two most important marketing considerations.

Process machinery (sometimes called installations) refers to major pieces of equipment used in the manufacture of other goods. This category would include the physical plant of a manufacturer (boilers, lathes, blast furnaces, elevators, and conveyor systems). The marketing process would incorporate the efforts of a professional sales force, supported by engineers and technicians, and a tremendous amount of personalized service.

Equipment is made up of portable factory equipment (e.g., fork lift trucks, fire extinguishers) and office equipment (e.g., computers, copier machines). Although these products do not contribute directly to the physical product, they do aid in the production process. These products may be sold directly from the manufacturer to the user, or a middleman can be used in geographically dispersed markets. The marketing strategy employs a wide range of activities, including product quality and features, price, service, vendor deals, and promotion.

Supplies and service do not enter the finished product at all, but are nevertheless consumed in conjunction with making the product. Supplies would include paper, pencils, brooms, soap, etc. These products are normally purchased as convenience products with a minimum of effort and evaluation. Business services include maintenance (e,g., office cleaning), repairs (e.g., plumbing), and advisory (e.g., legal). Because the need for services tends to be unpredictable, they are often contracted for a relatively long period of time.

15.6.5: Marketing Classes of Products

Products can be classified based on consumer versus industrial goods and goods versus services.

Learning Objective

Categorize products into consumer goods, industrial goods, goods, services

Key Points

• When we purchase products for our own consumption with no intention of selling these products to others, we are referring to consumer goods.
• Industrial goods are purchased by an individual or organization in order to modify them or simply distribute them to the ultimate consumer in order to make a profit or meet some other objective.
• Consumer goods can be classified as convenience, shopping, or specialty goods.
• Service products are characterized as being intangible, produced and consumed simultaneously, lacking standardization, and having high buyer involvement.
• All intermediaries that buy finished or semi-finished products and resell them for profit are part of the reseller market. This market includes approximately 383,000 wholesalers and 1,300,000 retailers that operate in the United States, with the exception of products obtained directly from the producer, all products are sold through resellers. Since resellers operate under unique business characteristics, they must be approached carefully. Producers are always cognizant of the fact that successful marketing to resellers is just as important as successful marketing to consumers.

Key Terms

intangible

incapable of being perceived by the senses; incorporeal

Consumer

Someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing.

marketing

The promotion, distribution and selling of a product or service; includes market research and advertising.

Example

• Industrial market example: A steel mill might purchase computer software, pencils, and flooring as part of the operation and maintenance of its business. Likewise, a refrigerator manufacturer might purchase sheets of steel, wiring, and shelving in order to produce its final product. These purchases occur in the industrial market. Evidence suggests that industrial markets function differently from consumer markets, and that the buying process is particularly different.

The two most commonly used methods of classifying products are: (1) Consumer goods versus industrial goods, and (2) goods products (i.e., durables and non-durables) versus service products.

Consumer Goods and Industrial Goods

The traditional classification of products is to dichotomize all products as being either consumer goods or industrial goods. When we purchase products for our own consumption with no intention of selling these products to others, we are referring to consumer goods . Conversely, industrial goods are purchased by an individual or an organization in order to modify them or simply distribute them to the ultimate consumer in order to make a profit or meet some other objective.

Olympus Camera

This Olympus camera is considered to be a consumer good.

Classification of Consumer Goods

A classification long used in marketing separates products targeted at consumers into three groups: (1) Convenience goods, (2) shopping goods and (3) specialty goods.

A convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. These products are usually of low unit value, they are highly standardized, and frequently they are nationally advertised.

Consumers desire to compare products categorized as shopping goods. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare values; therefore, these goods need not be distributed so widely. Although many shopping goods are nationally advertised, often it is the ability of the retailer to differentiate itself that creates the sale. Discounting, or promotional price-cutting, is a characteristic of many shopping goods because of retailers’ desire to provide attractive shopping values.

Specialty goods represent the third product classification. From the consumer’s perspective, these products are so unique that they will go to any lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods.

Classification of Industrial Goods

Although consumer products are more familiar to most readers, industrial goods represent a very important product category. For some manufacturers, industrial goods are the only product sold. The methods of industrial marketing are somewhat more specialized. Industrial products can either be categorized from the perspective of the producer and how they shop for the product, or the perspective of the manufacturer and how they are produced and how much they cost. The latter criteria offers a more insightful classification for industrial products.

Forests, mines, and quarries provide extractive products to producers. Most extractive products require some processing before purchase by the consumer. Manufactured products are those that have undergone some processing. The demand for manufactured industrial goods are usually derived from the demand for ultimate consumer goods.

Goods Versus Services

Service products are reflected by a wide variety of industries—utilities, barbers, travel agencies, health spas, consulting firms, medical facilities and banks are but a few. They account for nearly 50 percent of the average consumer’s total expenditures and 70 percent of jobs. Like goods products, service products are quite heterogeneous. Nevertheless, there are several characteristics that are generalized to service products.

Intangible: With the purchase of a good, one has something that can be seen, touched, tasted, worn or displayed. This is not true with a service. Although one pays money and consumes the service, there is nothing tangible to show for it.

Simultaneous Production and Consumption: Service products are characterized as those that are being consumed at the same time they are being produced. In contrast, goods products are produced, stored, and then consumed. A result of this characteristic is that the provider of the service is often present when consumption takes place.

Little Standardization: Because service products are so closely related to the people providing the service, ensuring the same level of satisfaction from time to time is quite difficult.

High Buyer Involvement: With many service products, the purchaser may provide a great deal of input into the final form of the product. For example, in the case of a cruise, a good travel agent would provide a large selection of brochures and pamphlets describing the various cruise locations, options provided in terms of cabin location and size, islands visited, food, entertainment, prices, and whether there are facilities for children.

It should be noted that these four characteristics associated with service products vary in intensity from product to product. In fact, service products are best viewed as being on a continuum in respect to these four characteristics.

15.6.6: Using a Product Life Cycle Framework

Evidence suggests that every product goes through a lifecycle with different phases of sales and profits.

Learning Objective

Explain the five stages of the product life cycle

Key Points

• A company has to be good at both developing new products and managing them in the face of changing tastes, technologies, and competition.
• It should be noted that the predictive capabilities of the product lifecycle are dependent upon several factors, both controllable and uncontrollable, and that no two companies may follow the same exact pattern or produce the same results.
• Some argue that the competitive situation is the single most important factor influencing the duration of height of a product lifecycle curve.
• Almost all new products can expect fewer than 5, 10, or 15 years of market protection.
• Usually the improvements brought about by non-product tactics are relatively short-lived, and basic alterations to product offerings provide longer benefits.

Key Terms

patent

A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention; a letter patent.

distinctiveness

Something which distinguishes something from anything else

obsolete

no longer in use; gone into disuse; disused or neglected (often by preference for something newer, which replaces the subject).

Example

• Product life-cycle predictions are dependent upon controllable and uncontrollable factors. For example, differences in the competitive situation during each of these stages may dictate different marketing approaches.

The Product Lifecycle

A company has to be good at both developing new products and managing them in the face of changing tastes, technologies, and competition. Evidence suggests that every product goes through a lifecycle with different phases of sales and profits. As such, the manager must find new products to replace those that are in the declining stage of the product lifecycle and learn how to manage products optimally as they move from one stage to the next. The five stages of the product life cycle and their components can be defined as follows:

1. Product development: the period during which new product ideas are generated, operationalized, and tested prior to commercialization.
2. Introduction: the period during which a new product is introduced. Initial distribution is obtained and promotion is obtained.
3. Growth: the period during which the product is accepted by consumers and the trade. Initial distribution is expanded, promotion is increased, repeat orders from initial buyers are obtained, and word-of-mouth advertising leads to more and more new users.
4. Maturity: the period during which competition becomes serious. Towards the end of this period, competitors’ products cut deeply into the company’s market position.
5. Decline: the product becomes obsolete and its competitive disadvantage result in decline in sales and, eventually, deletion.

It should be noted that the predictive capabilities of the product lifecycle are dependent upon several factors, both controllable and uncontrollable, and that no two companies may follow the same exact pattern or produce the same results. For example, differences in the competitive situation during each of these stages may dictate different marketing approaches. Some argue that the competitive situation is the single most important factor influencing the duration of height of a product lifecycle curve. A useful way of looking at this phenomenon is in terms of competitive distinctiveness.

Product Lifecycle

The product lifecycle.

Often, new products may, upon introduction, realistically expect a long period of lasting distinctiveness or market protection—through such factors as secrecy, patent protection, and the time and cash required to develop competitive products. However, almost all new products can expect fewer than 5, 10, or 15 years of market protection.

Of course, changes in other elements of the marketing mix may also affect the performance of the product during its lifecycle. For example, a vigorous promotional program or a dramatic lowering of price may improve the sales picture in the decline period, at least temporarily. The black-and-white TV market illustrated this point. Usually the improvements brought about by non-product tactics are relatively short-lived, and basic alterations to product offerings provide longer benefits. Whether one accepts the S-shaped curve as a valid product-sales pattern or as a pattern that holds only for some products (but not for others), the product lifecycle concept can still be very useful. It offers a framework for dealing systematically with product management issues and activities. Thus, the marketer must be cognizant of the generalizations that apply to a given product as it moves through the various stages. This process begins with product development and ends with the deletion (discontinuation) of the product.

15.7: Product Packaging and Branding

15.7.1: A Brief Definition of Brand

A brand refers to a name, term, symbol, or any other type of feature that defines or identifies a seller’s product or service.

Learning Objective

Explain the history and importance of branding

Key Points

• The word “brand” is derived from the Old Norse brand meaning “to burn,” which refers to the practice of producers burning their mark (or brand) onto their products.
• During the Industrial Revolution, the production of many household items, such as soap, was moved from local communities to centralized factories where they were branded with a logo or insignia, extending the meaning of “brand” to that of trademark.
• All of a brand’s elements (i.e., logo, color, shape, letters, images) work as a psychological trigger or stimulus that causes an association to all other thoughts we have about a brand.
• Brands provide external cues to taste, design, performance, quality, value, and prestige if they are developed and managed properly.
• Brands convey positive or negative messages about a product. They also indicated the company or service to the consumer, which is a direct result of past advertising, promotion, and product reputation.
• A brand can convey up to six levels of meaning: Attributes, Benefits, Values, Culture, Personality and User.

Key Term

brand

A name, symbol, logo, or other item used to distinguish a product, service, or its provider.

Example

• Campbell Soup, Coca-Cola, Juicy Fruit gum, Aunt Jemima, and Quaker Oats were among the first products to be “branded. “

Defining a Brand

A brand consists of any name, term, design, style, words, symbols or any other feature that distinguishes the goods and services of one seller from another. A brand also distinguishes one product from another in the eyes of the customer. All of its elements (i.e., logo, color, shape, letters, images) work as a psychological trigger or stimulus that causes an association to all other thoughts we have about this brand. Tunes, celebrities, and catchphrases are also oftentimes considered brands.

Coca-Cola Brand Logo

The Coca-Cola logo is an example of a widely-recognized trademark and global brand.

History

The word “brand” is derived from the Old Norse ‘brand’ meaning “to burn,” which refers to the practice of producers burning their mark (or brand) onto their products. Italians are considered among the first to use brands in the form of watermarks on paper in the 1200s. However, in mass-marketing, this concept originated in the 19^th century with the introduction of packaged goods.

During the Industrial Revolution, the production of many household items, such as soap, was moved from local communities to centralized factories to be mass-produced and sold to the wider market. Illiteracy was still prevalent and packing crates were handled by stevedores who couldn’t read. Factories branded their logo or insignia on the barrels used and the logo of the companies to which the cargo was being shipped. This allowed the products to be delivered to the proper location. The meaning of “brand” extended to that of the trademark symbol, and communicated to retailers and their customers that mass produced products should be trusted as much as local competitors. Campbell Soup, Coca-Cola , Juicy Fruit gum, Aunt Jemima, and Quaker Oats were among the first U.S. products to be “branded. “

Connotations

A successful brand can create and sustain a strong, positive, and lasting impression in the mind of a consumer. Brands provide external cues to taste, design, performance, quality, value and prestige if they are developed and managed properly. Brands convey positive or negative messages about a product, along with indicating the company or service to the consumer, which is a direct result of past advertising, promotion, and product reputation.

A brand can convey up to six levels of meaning:

• Attributes: The Mercedes-Benz brand, for example, suggests expensive, well-built, well-engineered, durable, high-prestige automobiles.
• Benefits: attributes must be translated into functional and emotional benefits.
• Values: Mercedes stands for high performance, safety, and prestige.
• Culture: Mercedes represents German culture, organized, efficient, high quality.
• Personality: the brand projects a certain personality.
• User: the brand suggests the kind of consumer who buys and uses the product.

15.7.2: Brand Categories

Similar goods and services are classified in brand categories.

Learning Objective

Define a brand

Key Points

• Brand categories, or generic classification of products, group similar goods and services.
• A brand is a name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers.
• Brand awareness refers to the customer’s ability to recall and recognize the brand under different conditions, using memory associations to link to the brand name, logo, jingles, and so forth.

Key Terms

Brand Equity

the value of having a well-known name, logo, or other identifier

Brand categories

A generic classification of products or services.

Example

• Coke, Pepsi, Sprite, and all other soda brand products fall into the same brand category of soft drinks.

Brand Categories

A brand is a name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers.

Branding began as a functional marketing tool. Italians are considered among thefirst to use brands in the form of watermarks on paper in the 1200s. People in the Middle Ages were illiterate. Medieval guilds — candle makers, goldsmiths,cobblers; carpenters, painters and masons; bakers and fishmongers — created symbols to be etched or stamped into their work, products or crates which represented and certified the quality of a guild’s work.

Brand categories are generic classifications of products or services. Similar and competing products (or services) all fall into the same brand category. For example, all the different perfumes fall into the brand category of perfume because they all satisfy the same consumer need.

Brand awareness refers to the customer’s ability to recall and recognize the brand under different conditions, using memory associations to link to the brand name, logo, jingles, and so forth. It consists of both brand recognition and brand recall. It helps the customers understand to which product or service category the particular brand belongs and what products and services are sold under the brand name. It also ensures that customers know which of their needs are satisfied by the brand through its products (Keller). Brand awareness is of critical importance, since customers will not consider your brand if they are not aware of it .

Brand logo

Brand awareness refers to thecustomer’s ability to recall and recognize the brand under different conditions,using memory associations to link to the brand name, logo, jingles, and so forth.

There are various levels of brand awareness that require different levels and combinations of brand recognition and recall. Top-of-Mind is the goal of most companies. Top-of-Mind Awareness occurs when your brand is what pops into a consumer’s mind when asked to name brands in a product category. For example, when someone is asked to name a type of facial tissue, the common answer is Kleenex, which is a top-of-mind brand. Aided Awareness occurs when a consumer is shown or reads a list of brands, and expresses familiarity with your brand only after they hear or see it as a type of memory aid. Strategic Awareness occurs when your brand is not only top-of-mind to consumers, but also has distinctive qualities that stick out to consumers as making it better than the other brands in your market. The distinctions that set your product apart from the competition are also known as the Unique Selling Points or USP.

15.7.3: The Benefits of a Good Brand

Good branding gives a company several advantages including establishing a positive reputation and building an image attractive to consumers.

Learning Objective

Explain the components of a strong brand

Key Points

• Branding develops an image of a company’s products in the minds of consumers, attributing goods with certain unique qualities or characteristics that, if done effectively, are attractive to the target audience.
• A brand widely known in the market has brand recognition and builds up positive sentiment which further strengthens the company position amongst competitors.
• Benefits of a strong brand include: being able to command higher prices, speeding up new product acceptance, enabling market share penetration by advertising, and resisting price erosion.

Key Terms

good

an object produced for market

brand image

The set of emotional and sensory perceptions a consumer associates with a particular product or service in their mental construct of a brand.

Example

• Disney has brand recognition worldwide; its castle logo with Walt Disney’s signature, as well as its characters (like Mickey Mouse) are instantly recognizable.

Benefits of a Strong Brand

A brand is the personality that identifies a product, service or company (name, term, sign, symbol, design, or combination thereof); it also represents a relationship to key constituencies: customers, staff, partners, investors etc. Proper branding can yield higher product sales, and higher sales of products associated with the brand (or brand association). For example, a a customer who loves Pillsbury biscuits (and trusts the brand) is more likely to try other products the company offers, such as chocolate chip cookies.

Some people distinguish the psychological aspect of brand associations (e.g., thoughts, feelings, perceptions, images, experiences, beliefs, attitudes, etc.) that become tied to the brand from the experiential aspect—the sum of all points of contact with the brand, otherwise known as brand experience. Brand experience is a brand’s action perceived by a person. The psychological aspect, sometimes referred to as the brand image, is a symbolic construct created within the minds of people, consisting of all the information and expectations associated with a product, service, or company providing them .

Brands

Good branding gives a company several advantages, including establishing a positive reputation and building an image attractive to consumers.

The branding process seeks to develop or align the expectations behind the brand experience, creating an impression that a product or service associated with a brand possesses certain qualities or characteristics that set it apart from other (e.g., competitor) products or services. A brand is therefore one of the most valuable elements in an advertising theme, as it demonstrates the uniqueness of what the brand owner is able to offer in the marketplace. Orientation of the whole organization towards its brand is called brand orientation. Brand orientation is developed in response to market intelligence. Brand strength analysis describes efforts to determine the strength a brand has compared with its competitors. The art of creating and maintaining a brand is called brand management.

Careful brand management seeks to make the product or services appealing and/or relevant to the target audience. Brands should reflect more than mere differential of product cost versus selling price. They should represent the sum of all valuable qualities of a product to the consumer.

A brand which is widely known in the marketplace acquires brand recognition. When brand recognition builds to the point of a critical mass of positive sentiment in the marketplace, it is said to have achieved brand franchise. Brand recognition is most successful when a brand is recognized independent of the company’s name, but rather through visual signifiers like logos, slogans, and colors. For example, Disney has been successful branding with their particular script font, originally created for Walt Disney’s “signature” logo, and which it now uses in the logo for the website GO.com.

Consumers may view branding as an aspect of products or services, as it often serves to denote certain attractive qualities or characteristics. From the perspective of brand owners, branded products or services also command higher prices. Where two products resemble each other, but one of the products has no associated branding (such as a generic, store-branded product), people may often select the more expensive branded product on the basis of the quality or reputation of the brand or brand owner. Benefits of good brand recognition include facilitating of new product acceptance, enabling market share penetration by advertising, and resisting price erosion.

15.7.4: Developing a Brand

Developing a brand successfully requires a company to analyze the characteristics and values a customer base desires.

Learning Objective

Explain how companies can develop their brand

Key Points

• Brands have intrinsic attributes (functional characteristics and design of the products) and extrinsic attributes (packaging, pricing, marketing tactics) that develops the brand image and personality.
• A well-developed brand creates value beyond the actual product.
• Every design shown and communication made to the consumer are related to branding.

Key Terms

advertising

communication whose purpose is to influence potential customers about products and services.

marketing

Marketing is the process of communicating the value of a product or service to customers.

Examples

• Extrinsic attributes of a brand include Oreo cookie packaging, celebrity spokespersons, and marketing slogans.
• Extrinsic attributes of a brand include oreo cookie packaging, celebrity spokespersons, and marketing slogans.

Developing a Brand

The goal when developing a brand is to create value. You do that by emulating the characteristics and values that your customers desire. Branding is present throughout everything your company touches—it is not just a logo. Every design shown and communication made to the consumer are examples of branding.

Branding Attributes

Brands have intrinsic and extrinsic attributes. Intrinsic attributes refer to functional characteristics of the brand: its shape, performance, and physical capacity (e.g. Gillette razors shave unwanted hair and are able to do so more closely than most products in their product class because of their curved shape). Should any of these attributes be changed, they will not function in the same way or be the same product.

Examples of extrinsic attributes are features like the price of the Gillette razors, their packaging, the Gillette brand name, and mechanisms that enable consumers to form associations that give meaning to the brand. For example, it can appear more desirable because David Beckham, who is a brand himself, advertizes it.

Some refer to a brand’s function as the creation and communication of a multidimensional character of a product—one that is not easily copied and damaged by competitors’ efforts.

Brands have different elements, namely brand personality (functional abilities), brand skill (its fundamental traits—e.g. Chanel No 5 is seen as sexy) and brand relationships (with buyers) or brand magic. These elements are what give the brand added value.

Marketing and advertising are about selling your products and services. Branding is about selling everything associated with your organization . The consumer perception of brands is brand knowledge: brand awareness, recognition and recall, and brand image denote how consumers perceive a brand based on quality and attitudes towards it and what stays in their memory.

Branding

Branding is about selling everything associated with your organization.

This suggests that brand associations are anything linked in memory to a brand. “The essence of branding is promising and delivering” (Low and Lamb Jr, 2000). The successful organizations realize that the employees are influential to brand strategy. Aaker referred to studies using different methods and larger samples, which point out that “consumers noted for high-preference brands, 82% related to employee behavior; for low-preference brands, 90% related to influence of employee behavior (attitudes, competence, and personalization of the service).” Therefore, a part of brand strategy must focus on building brand association among employees at all levels. “If the employees are aligned with the brand strategy, including the promise, then they will deliver a consistent expression of the brand to their customers at every touch point.”

Brand Development Index or (BDI) measures the relative sales strength of a brand within a specific market (e.g. Pepsi brand in 10 – 50 year olds). It is a measure of the relative sales strength of a given brand in a specific market area.

15.7.5: Brand Management Strategies

Through effective brand management, organizations can build a loyal following of engaged consumers.

Learning Objective

Assess the variety of brand management strategies companies employ, and identify the potential advantages and disadvantages of each one

Key Points

• Brand management can enable high levels of awareness, engagement, retention and loyalty from users, which translates into significant organizational value.
• There are a wide variety of brand management strategies, each of which has some pros and cons organizations will want to consider on a case by case basis.
• Some examples of brand management strategies include iconic branding, individual branding, multi-product branding, sub-branding, and co-branding.
• Modern day branding incorporates a number of new tactics that organizations must be aware of to succeed. The social media landscape empowers companies to engage with consumers in a meaningful way (if properly managed).
• Through understanding both the organization’s culture and the target market(s), organizations must make informed strategic and tactical decisions regarding how to build a brand.

Key Terms

engagement

In marketing, this is the degree to which individuals follow, discuss, comment on, and participate with a brand.

loyalty

In business, this is a customer’s propensity to buy from the same organization again as a result of a meaningful brand relationship.

retention

In general, this is the process of remembering something. In business, however, it refers to the ability of an organization to keep its current customers.

Brand management is a wide and varied study of the various approaches organizations can take to maximize consumer awareness, engagement, retention, and loyalty. Brand management strategies are constantly evolving, and the various potential distribution channels between organizations and their consumers is also rapidly changing. The rise of social networks is an incredible opportunity for meaningful engagement with current and prospective customers, and free outlets like Youtube enable viral distribution of assets for virtually no cost (indeed, sometime for a profit!).

The reason for brand management is relatively simple. Through creating a lasting impression and meaningful relationship with users, organizations can retain customers and create brand loyalty. Brand loyalty simply means that customers, when making a purchase to fulfill a given need, will default to their brand of choice. Brand of choice is something every organization wants to be, as the cost of maintaining loyal customers is much lower than the cost of acquiring new ones.

Brand Management Strategies

Loyal customers are cheaper, and happy customers are likely to talk about the company in a positive light. As a result, building brand is a key to success in an enormous number of industries. There are many approaches to this, both traditional and modern, and understanding both the strategy and the potential tactical channels available is integral to making smart branding decisions:

• Individual Branding – This has proven highly beneficial for a number of large organizations that offer a wide variety of goods. Proctor and Gamble (P&G) is a classic example of this working successfully. P&G own the brands Dawn, Joy, Crest, Scope, Gain, Tide, Fixodent, Pepto-Bismol, Swiffer, Ivory, Olay, Old Spice, and the list goes on and on. Many of these products actually compete head to head. This strategy allows minimal risk of the parent company being hurt by an individual brand, and allows a sense of competition between brands. It also allows P&G to capture a variety of demographics simultaneously by positioning each brand to large consumer groups.
• Multi-product Branding – The inverse of individual branding in some ways, multi-product branding allows companies like Samsung, Apple, Sony, and Virgin to focus consumer loyalty on the broader parent brand. Through doing so, all investments in branding boost the brand across all product spheres. This creates some efficiency in promoting brand, but also attaches all of the risk and positioning to that one single brand name.
• Sub-branding – Something of a cross between individual and multi-product branding, sub-branding allows an organization to create relatively large sub-brands for given product groups. A good example is Honda and Acura, one is positioned in a higher price bracket yet both are Honda. 
• Co-branding – As the name suggests, often companies collaborate on projects and pursue branding together. For example, Bose is often co-branded with various vehicle manufacturers. Similarly, Google is often co-branded with Samsung products. This allows each organization to benefit from each other’s loyal consumer base.
• Iconic Branding (Attitude) – A bit less clear than the strategies above, iconic branding is all about building a persona. This persona tends to arise through stories, establishing a counter-culture, and building a community. Nike’s brand is iconic, for example. By promoting the ‘Just Do It’ mentality, they sell a perspective alongside their products. Red Bull takes a similar approach, going so far as to sponsor amazing feats of athleticism and daring to demonstrate the values they represent. This type of branding is complex and extremely difficult to accomplish, but can build a powerful and loyal following.

Tactics and Developments in Brand Management

Social media has changed the landscape for branding, and at this point encompasses a critical and necessary series of channels to leverage when pursuing any of the above branding strategies. Distributing messaging and displaying the core values of the organization is both easier and more difficult than ever. In just a click of a button, organizations can make a huge impression on the general public. However, the  digital landscape is noisy; being heard can be extremely challenging.

Along similar lines is social proofing. Companies like Amazon offer consumers the ability to rate a product or service, which ultimately establishes a brand quality level many others consumers will trust and see as more objective. Social proofing can have an enormous impact on the perception of an organizations brand.

Brand Touch-point Wheel

As a supplement to the various strategies listed above, these touch-points indicate where the tactics of these strategies will come into play. Understanding where the organization will be in direct communication with a prospective consumer is imperative to ensuring messaging is clean, consistent, and clear across the board.

As a supplement to the various strategies listed above, these touch-points indicate where the tactics of these strategies will come into play. Understanding where the organization will be in direct communication with a prospective consumer is imperative to ensuring messaging is clean, consistent and clear across the board.

15.7.6: Packaging and Labeling

Packaging refers to the physical appearance of a product when a consumer sees it, and labels are an informative component of packaging.

Learning Objective

Explain the important features of packaging

Key Points

• The role of packaging in marketing has become quite significant as it is one of the ways companies can get consumers to notice products.
• A common use of packaging is marketing. The packaging and labels can be used by marketers to encourage potential buyers to purchase the product.
• Packaging is also used for convenience and information transmission. Packages and labels communicate how to use, transport, recycle, or dispose of the package or product.
• Labels serve to capture the attention of shoppers as well as provide useful information regarding the product.
• Labels are attached on the product package to provide information such as manufacturer of the product, date of manufacture, date of expiry, its ingredients, how to use the product, and its handling.

Key Term

Packaging

Physical appearance of a good prepared for retail sale

Example

• The packaging of perfumes, for instance, attempts to appeal to the sensibilities of its target consumer. For instance, a perfume geared towards younger females may have colorful, feminine packaging, but a perfume for older professional women may have more subdued and sophisticated packaging.

Packaging

With the increased importance placed on self-service marketing, the role of packaging is becoming quite significant. For example, in a typical supermarket a shopper passes about 600 items per minute, or one item every tenth of a second. Thus, the only way to get some consumers to notice the product is through displays, shelf hangers, tear-off coupon blocks, other point-of-purchase devices, and, last but not least, effective packages. Considering the importance placed on the package, it is not surprising that a great deal of research is spent on motivational research, color testing, psychological manipulation, and so forth, in order to ascertain how the majority of consumers will react to a new package. Based on the results of this research, past experience, and the current and anticipated decisions of competitors, the marketer will initially determine the primary role of the package relative to the product. Should it include quality, safety, distinction, affordability, convenience, or aesthetic beauty?

Various Packaging Designs, including labeling

Packaging refers to the physical appearance of a product when a consumer sees it, and labels are an informative component of packaging.

Common uses of packaging include:

• Physical protection: The objects enclosed in the package may require protection from, among other things, mechanical shock, vibration, electrostatic discharge, compression, temperature, etc.
• Information transmission: Packages and labels communicate how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some types of information are required by governments. Some packages and labels also are used for track and trace purposes.
• Marketing: The packaging and labels can be used by marketers to encourage potential buyers to purchase the product. Package graphic design and physical design have been important and constantly evolving phenomenon for several decades. Marketing communications and graphic design are applied to the surface of the package and (in many cases) the point of sale display, examples of which are shown here:.
• Convenience: Packages can have features that add convenience in distribution, handling, stacking, display, sale, opening, re-closing, use, dispensing, reuse, recycling, and ease of disposal.
• Barrier protection: A barrier from oxygen, water vapor, dust, etc., is often required. Permeation is a critical factor in design. Some packages contain desiccants or oxygen absorbency to help extend shelf life. Modified atmospheres or controlled atmospheres are also maintained in some food packages. Keeping the contents clean, fresh, sterile and safe for the intended shelf life is a primary function.
• Security: Packaging can play an important role in reducing the security risks of shipment. Packages can be made with improved tamper resistance to deter tampering and also can have tamper-evident features to help indicate tampering. Packages can be engineered to help reduce the risks of package pilferage.

Labeling

A label is a carrier of information about the product. The attached label provides customers with information to aid their purchase decision or help improve the experience of using the product. Labels can include:

• Care and use of the product
• Recipes or suggestions
• Ingredients or nutritional information
• Product guarantees
• Manufacturer name and address
• Weight statements
• Sell by date and expiration dates
• Warnings

Symbols Used in Labels

Many types of symbols for package labeling are nationally and internationally standardized. For consumer packaging, symbols exist for product certifications, trademarks, and proof of purchase. Some requirements and symbols exist to communicate aspects of consumer use and safety. For example, the estimated sign notes conformance to EU weights and measures accuracy regulations. Examples of environmental and recycling symbols include the recycling symbol, the resin identification code, and the “green dot.”

Labeling Laws

žIn some countries, many products, including food and pharmaceuticals, are required by law to contain certain labels such as ingredients, nutritional information, or usage warning information (FDA). For example, a law label is a legally required tag or label on new items describing the fabric and filling regulating the United States mattress, upholstery, and stuffed article industry. The purpose of the law label is to inform the consumer of the hidden contents, or “filling materials” inside bedding & furniture products. Laws requiring these tags were passed in the United States to inform consumers as to whether the stuffed article they were buying contained new or recycled materials. The recycling logo,, needed to be displayed on the label. The Fair Packaging and Labeling Act (FPLA) is a law that applies to labels on many consumer products that states the products identity, the company that manufactures it, and the net quantity of contents.

Labels Indicating Recycled Material

Laws were passed in the United States to inform consumers as to whether the stuffed articles they were buying contained new or recycled materials.

14.1: Customer Relationships

14.1.1: The Exchange of Value

Learning Objective

Explain how customers evaluate value

Key Points

• Value, in quantitative terms, is equal to expected benefits divided by expected cost.
• For a firm to deliver value to its customers, they must consider what is known as the “total market offering”.
• The key to deliver high perceived value is attaching value to each of the individuals or organizations; thereby, helping them to solve a problem, offering a solution, giving results, and making them happy.

Key Terms

value

The degree of importance you give to something.

marketplace

The world of commerce and trade.

The value of a product is the mental estimation a consumer makes of it. Formally it may be conceptualized as the relationship between the consumer’s perceived benefits in relation to the perceived costs of receiving these benefits. Value changes based on time, place and people in relation to changing environmental factors. It is a creative energy exchange between people and organizations in the marketplace, and it is often expressed in the equation:

Value can also be expressed as 

Value is thus subjective (i.e., a function of consumers’ estimation) and relational (i.e., both benefits and cost must be positive values). For a firm to deliver value to its customers, they must consider what is known as the “total market offering. ” This includes the reputation of the organization, staff representation, product benefits, and technological characteristics as compared to competitors’ market offerings and prices. Value can thus be defined as the relationship of a firm’s market offerings to those of its competitors .

Value Proposition

This image depicts the point where value opportunity exists.

Value in marketing can be defined by both qualitative and quantitative measures. On the qualitative side, value is the perceived gain composed of individual’s emotional, mental and physical condition plus various social, economic, cultural and environmental factors. On the quantitative side, value is the actual gain measured in terms of financial numbers, percentages, and dollars. Normally, in the exchange process, the seller is more active than the buyer as he or she identifies the needs of the potential buyers and persuades them to buy the product.

However, when a buyer plays an active role, he or she will be treated as a marketer. For an individual to deliver value, one has to grow his or her knowledge and skill sets to showcase benefits delivered in a transaction (e.g., getting paid for a job). For an organization to deliver value, it has to improve its value to cost ratio. When an organization delivers high value at high price, the perceived value may be low. When it delivers high value at low price, the perceived value may be high. The key to deliver high perceived value is attaching value to each of the individuals or organizations—making them believe that what you are offering is beyond expectation—helping them to solve a problem, offering a solution, giving results, and making them happy.

The value in the marketplace varies from place to place as well as from market to market, and there are parallels between cultural expectations and consumer expectations in relation to perceived value. For example, a consumer in Japan might value a pizza topped with tuna more so than one topped with pepperoni.

14.1.2: Customer Relationship Management

Learning Objective

Integrate the customer relationship management perspective into the broader organizational strategy, and recognize how organization’s benefit from retention

Key Points

• Customer relationship management (CRM) is a central process to organizational strategy in which the organization builds connections with users through communication and data.
• The primary objective of CRM is the retention of current users.
• CRM processes can loosely be divided into three categories: operational, analytical, and collaborative.
• Generally speaking, consumers benefit from CRM through better understanding of consumer needs, improved targeting, and customer support being offered across a wide variety of channels.
• Technology plays a key role in modern CRM processes, providing a huge variety of useful tools, programs, and scripts to automate process and integrate CRM perspectives.

Key Terms

customer retention

The act of keeping customers consistently consuming products offered by an organization.

CRM

An acronym that stands for Customer Relationship Management, or the process of interacting with past, present, and future consumers.

Customer Retention is Key

Interactions between an organization and its past, current, and prospective customers is critical to success. While it delivers a wide range of benefits, the central focal point of customer relationship management (CRM) is customer retention.

Customer retention is a simple concept. When customer needs are being met, and expectations are exceed, it is highly likely that current customers will remain customers, or be retained. The rate at which an organization can retain its customer base can be a key source of competitive advantage. 

Primary Functions of CRM

CRM can be loosely divided into three categories:

1. Operational – These include the primary activities of CRM work. Operational CRM relates to integrating sales, marketing, and customer support to ensure that customer satisfaction is as high as possible. 
2. Analytical – CRM has a substantial data-oriented side as well, particularly with the rise of useful CRM data gathering tools. Utilizing the benefits of big data (where available), organizations can accurately asses who their core consumers are, how they behave, what they’re looking for, and how satisfied they are.
3. Collaborative – Finally, it’s worth noting that CRM functions are collaborative across strategic alliances. Of particular importance are suppliers and vendors (earlier on the overall supply chain). For example, let’s say you own a coffee shop. In sourcing your coffee beans, you notice customer retention is low if they order a particular roast of coffee. It may be worth discussing this with your supplier to either replace that particular roast, or identify what hasn’t been working with the current batches.

Why Customers Appreciate It

Most importantly, organizations are doing all of this to make customers happier. The upsides to this from the customer point of view are fairly significant:

• Marketing/sales messages are individualized to be of interest to the consumer
• Pricing is constantly evolved to match what the market believes is appropriate
• Quality of products are constantly assessed and, if necessary, improved by on consumer behavior
• Customer support assistance is integrated across a wide variety of media channels

Of course, there are downsides as well. Ongoing discussions regarding privacy relative to the observation of consumer behavior are still relevant concerns for modern consumers. There is also a paradox in all of this. As organizations optimize for user tastes based on data, it is the largest data points that will drive changes. As a result, while some consumers will benefit (presumably the majority), the rest of the users are at risk of being ignored entirely.

Technology and CRM

It is also worth noting the significant impact of modern technology and modern tools on this area of management. From the vast sea of social networking tools like Twitter and Facebook, to far more specialized tools for monitoring, analyzing and assessing user behavior, the ever-increasing integration of technology is almost always a constant opportunity (and risk) for organizations. Listing each and every prospective tool wouldn’t even be possible. For aspiring CRM specialists and data analysts, however, what’s most important to keep in mind is that most tasks have supporting technological tools. Before diving into a complex problem, it almost always pays off to hop online and see what tools you could install to save you time and money while improving your efficiency and accuracy.

Where CRM Fits

This image is rather complex, but the intent is quite simple. Within an organization’s framework, CRM fits within Business Intelligence. In many ways, CRM is driven by data-oriented conclusions to improve customer outcomes.

This image is rather complex, but the intent is quite simple. Within an organization’s framework, CRM fits within Business Intelligence. In many ways, CRM is driven by data-oriented conclusions to improve customer outcomes.

14.1.3: Long-Term Relationships: Satisfaction and Loyalty

Learning Objective

Explain how to increase customer satisfaction

Key Points

• Customers’ perceived value, brand trust, customers’ satisfaction, repeat purchase behavior, and commitment are found to be the key influencing factors of brand loyalty.
• Commitment and repeated purchase behavior are considered as necessary conditions for brand loyalty followed by perceived value, satisfaction, and brand trust.
• Unsatisfied customers are not loyal customers, thus customer satisfaction is seen as a key performance indicator within business.
• Although sales or market share can indicate how well a firm is performing currently, satisfaction is perhaps the best indicator of how likely it is that the firm’s customers will make further purchases in the future.

Key Terms

Market Share

Percentage of some market held by a company.

oligopoly

an economic condition in which a small number of sellers exert control over the market of a commodity

Brand loyalty in marketing consists of a consumer’s commitment to repurchase or otherwise continue using the brand and can be demonstrated by repeated buying of a product or service, or other positive behaviors, such as word of mouth advocacy. Brand loyalty is more than simple repurchasing, however. Customers may repurchase a brand due to situational constraints (such as vendor lock in), a lack of viable alternatives, or out of convenience. Such loyalty is referred to as “spurious loyalty. ” True brand loyalty exists when customers have a high relative attitude toward the brand which is then exhibited through repurchase behavior. This type of loyalty can be a great asset to the firm. Customers are willing to pay higher prices; they may cost less to serve and can bring new customers to the firm. For example, if Joe has brand loyalty to Company A, he will purchase Company A’s products, even if Company B’s are cheaper and/or of a higher quality.

Factors Influencing Brand Loyalty

It has been suggested that loyalty includes some degree of pre-dispositional commitment toward a brand. Brand loyalty is viewed as a multidimensional construct. Customers’ perceived value, brand trust, customers’ satisfaction, repeat purchase behavior, and commitment are found to be the key influencing factors of brand loyalty. Commitment and repeated purchase behavior are considered as necessary conditions for brand loyalty followed by perceived value, satisfaction, and brand trust. Fred Reichheld, one of the most influential writers on brand loyalty, claimed that enhancing customer loyalty could have dramatic effects on profitability. Among the benefits from brand loyalty—specifically, longer tenure or staying as a customer for longer—was said to be lower sensitivity to price. This claim had not been empirically tested until recently. Recent research found evidence that longer-term customers were indeed less sensitive to price increases.

Customer Satisfaction and Loyalty

Customer satisfaction, a term frequently used in marketing, is a measure of how products and services supplied by a company meet or surpass customer expectation. Customer satisfaction is defined as “the number of customers, or percentage of total customers, whose reported experience with a firm, its products, or its services (ratings) exceeds specified satisfaction goals. ” In a survey of nearly 200 senior marketing managers, 71% responded that they found a customer satisfaction metric very useful in managing and monitoring their businesses. Unsatisfied customers are not loyal customers, thus customer satisfaction is seen as a key performance indicator within business and is often part of a “Balanced Scorecard. ” In a competitive marketplace where businesses compete for customers, customer satisfaction is seen as a key differentiator and increasingly has become a key element of business strategy.

It is essential for businesses to effectively manage customer satisfaction. To be able do this, firms need reliable and representative measures of satisfaction. In researching satisfaction, firms generally ask customers whether their product or service has met or exceeded expectations. Thus, expectations are a key factor behind satisfaction. When customers have high expectations and the reality falls short, they will be disappointed and will likely rate their experience as less than satisfying. For this reason, a luxury resort, for example, might receive a lower satisfaction rating than a budget motel—even though its facilities and service would be deemed superior in “absolute” terms. The importance of customer satisfaction diminishes when a firm has increased bargaining power. For example, cell phone plan providers, such as AT&T and Verizon, participate in an industry that is an oligopoly, where only a few suppliers of a certain product or service exist. As such, many cell phone plan contracts have a lot of fine print with provisions that they would never get away if there were, say,100 cell phone plan providers, because customer satisfaction would be way too low, and customers would easily have the option of leaving for a better contract offer.

Although sales or market share can indicate how well a firm is performing currently, satisfaction is perhaps the best indicator of how likely it is that the firm’s customers will make further purchases in the future. Much research has focused on the relationship between customer satisfaction and retention. Studies indicate that the ramifications of satisfaction are most strongly realized at the extremes. On a five-point scale shown here , individuals who rate their satisfaction level as “5” are likely to become return customers and might even evangelize for the firm. Individuals who rate their satisfaction level as “1,” by contrast, are unlikely to return. Further, they can hurt the firm by making negative comments about it to prospective customers. Willingness to recommend is a key metric relating to customer satisfaction.

Customer Satisfaction Scale

Example of a scale used to gauge customer satisfaction in a survey.

14.1.4: Activities in Marketing Departments

Learning Objective

Outline the specific functions of marketing departments

Key Points

• The role of a marketing manager can vary significantly based on a business’s size, corporate culture, and industry. To create an effective, cost-efficient marketing management strategy, firms must possess an objective understanding of their own business and the market in which they operate.
• Common functions include market research, product and market planning, development, branding, packaging, and labelling.
• Marketing departments are often (but not always) responsible for customer support services, standardization and grading, and physical distribution.

Key Terms

grading

the process of classification of products into different categories on the basis of quality, size etc.

standardization

the process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc

Marketing Managers

Marketing managers are often responsible for influencing the level, timing, and composition of customer demand. The role of a marketing manager can vary significantly based on a company’s size, corporate culture, and industry context. For example, in a large consumer products company, the marketing manager may act as the overall general manager of his or her assigned product. To create an effective, cost-efficient marketing management strategy, firms must possess a detailed, objective understanding of their own business and the market in which they operate. In analyzing these issues, the discipline of marketing management often overlaps with the related discipline of strategic planning.

Specific marketing functions

Marketing functions can include some or all of the following:

Market Research: Marketing research is the systematic investigation of the facts relevant to various aspects in marketing. It helps in identifying the needs of the customers. It involves study of the markets and customers, their tastes and preferences, and what they are willing to buy, when they are likely to buy, etc.

Marketing planning: Marketing plans are prepared to achieve marketing objectives of an organization.

Product Planning and Development: PPD is concerned with identifying customers needs, developing new products and improving existing products in order to meet desires of customers.

Buying and Assembling: Buying is the purchase of raw materials for use in manufacture of finished goods for resale. Assembling is the collection of specific type of products from different buyers under a common roof.

Standardization and Grading: Standardization refers to the process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight, etc. It helps in ensuring that products confirm to standards. Grading refers to the process of classification of products into different categories on the basis of quality, size, etc. Grading is generally done for agricultural products, such as fruits and vegetables. Graded products are of uniform quality and become easy to market.

Branding: A brand is a name, sign, symbol, or design assigned to a product so as to differentiate it from products of competitors.

Packaging: Packaging is the act of designing and producing the package for a product. A package is a wrapper or container in which a product is kept.

Labeling: A label is a carrier of information about the product. Labels are attached to the product package to provide information about the product, such as manufacturer of the product, date of manufacture, date of expiry, its ingredients, how to use the product, and its handling.

Customer Support Services: In today’s competitive environment, customer support services play an important role in marketing. Services such as after sale services, maintenance services, and handling customer complaints provide satisfaction to customers and also helps in building product loyalty.

Promotion: Promotion refers to communication used to inform, persuade, and influence the prospective customers to buy a product.

Physical Distribution: Is concerned with making the goods and services available at the right place. It includes 2 important decisions:

• Channels of Distribution are middleman or intermediaries like wholesaler, agents, and retailers that facilitate the movement of goods and services and their title between the point of production and the point of consumption, by performing various marketing activities.
• Physical movement of goods from producers to consumers through means of transport, storage and warehousing, and inventory control .

14.1.5: The Marketing Concept

Learning Objective

Explain the relationship between marketing concept and market orientation

Key Points

• The marketing concept proposes that in order to satisfy its organizational objectives, an organization should anticipate the needs and wants of consumers and satisfy these more effectively than competitors.
• Market orientation is the organization-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization-wide responsiveness to it.
• Market orientation can be achieved with market research, contacting surveys, or interviews with the help of the customers to identify their needs and preferences.

Key Terms

Marketing Research

the systematic collection and evaluation of data regarding customers’ preferences for actual and potential products and services

Market Orientation

implementation of the marketing concept, which is a particular business philosophy.

Market Concept

the generation of appropriate market intelligence pertaining to current and future customer needs, and the relative abilities of competitive entities to satisfy these needs; the integration and dissemination of such intelligence across departments; and the coordinated design and execution of the organization’s strategic response to market opportunities.

Marketing Concept

a business philosophy that holds that long term profitability is best achieved by focusing the coordinated activities of the organization toward satisfying the needs of a particular market segment(s).

Example

• A firm focused on the marketing concept would employ market research to gauge consumer desires, use R&D (research and development) to develop a product attuned to the revealed information, and then utilize promotion techniques to ensure persons know the product exists.

The Marketing Concept

The marketing concept holds that achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions. It proposes that in order to satisfy its organizational objectives, an organization should anticipate the needs and wants of consumers and satisfy these more effectively than competitors.

The marketing concept highlights the following:

• Identification of market or target customers
• Understanding of needs and wants of customers in the target market
• Developing of products or services according to needs and wants of customers
• Satisfying their needs better than the competitors
• Doing all this at a profit

The marketing concept centers on market orientation. Market orientation is the organization-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization-wide responsiveness to it. The marketing orientation is perhaps the most common orientation used in contemporary marketing. It includes monitoring competitors’ actions and their effect on customer preferences as well as analyzing the effect of other exogenous factors.

Market orientation can be achieved with market research, contacting surveys, or interviews with the help of customers to identify their needs and preferences. These methods may also lead to updates on your competitors’ products or services. For a market oriented company, product innovation is very important. Furthermore, all company resources must make an effort to reach the common goal.

Marketing Concept versus Market Concept

The marketing concept is a business philosophy that holds that long term profitability is best achieved by focusing the coordinated activities of the organization toward satisfying the needs of a particular market segment(s). The attempt to define the concept of market orientation has led to a number of arguments in the academic field.

The market concept is the generation of appropriate market intelligence pertaining to current and future customer needs and the relative abilities of competitive entities to satisfy these needs. It is the integration and dissemination of such intelligence across departments and the coordinated design and execution of the organization’s strategic response to market opportunities. Market orientation is implementation of the marketing concept, which is a particular business philosophy.

The Various Components of Marketing

Successful marketing strategies include the consideration of a variety of factors, such as market research and product branding.

14.1.6: The History of the Marketing Concept

Learning Objective

Outline the history of market orientation

Key Points

• An orientation, in the marketing context, related to a perception or attitude a firm holds towards its product or service, essentially concerns consumers and end-users.
• The marketing orientation evolved from earlier orientations; namely, the production orientation, the product orientation and the selling orientation.
• The marketing orientation is perhaps the most common orientation used in contemporary marketing. It involves a firm essentially basing its marketing plans around the marketing concept, and thus supplying products to suit the new tastes of consumers.

Key Term

orientation

The act of orienting or the state of being oriented.

One marketing standard chronology (Bartels, 1974; Dawson, 1969; Keith, 1960; Kotler and Keller, 2006) subdivides marketing history as follows:

• Production orientation era
• Product orientation era
• Sales orientation era
• Market orientation era
• Customer orientation
• Relationship orientation
• Social/mobile marketing orientation

What’s an Orientation?

An orientation, in the marketing context, related to a perception or attitude, a firm holds towards its product or service, essentially concerns consumers and end-users. Throughout history, marketing has changed considerably in conjunction with consumer tastes. Constant throughout; however, is that marketing is some form of communication aimed broadly at improving eventual sales.

Earlier Approaches

The marketing orientation evolved from earlier orientations; namely, the production orientation, the product orientation and the selling orientation.

Production: production methods until the 1950s; a firm focusing on a production orientation specializes in producing as much as possible of a given product or service. Thus, this signifies a firm exploiting economies of scale until the minimum efficient scale is reached. A production orientation may be deployed when a high demand for a product or service exists, coupled with a good certainty that consumer tastes will not rapidly alter (similar to the sales orientation).

Product: quality of the product until the 1960s; a firm employing a product orientation is chiefly concerned with the quality of its own product. A firm would also assume that as long as its product was of a high standard, people would buy and consume the product.

Selling: selling methods 1950s and 1960s; a firm using a sales orientation focuses primarily on the selling/promotion of a particular product, and not determining new consumer desires as such. Consequently, this entails simply selling an already existing product, and using promotion techniques to attain the highest sales possible.

Such an orientation may suit scenarios in which a firm holds dead stock, or otherwise sells a product that is in high demand, with little likelihood of changes in consumer tastes that would diminish demand.

Marketing: needs and wants of customers 1970 to present day; the marketing orientation is perhaps the most common orientation used in contemporary marketing. It involves a firm essentially basing its marketing plans around the marketing concept; and thus supplying products to suit new consumer tastes. As an example, a firm would employ market research to gauge consumer desires; use R&D to develop a product attuned to the revealed information; and then use promotional tools to ensure people know the product exists .

Marketing

Internet marketing

14.1.7: Modern Trends in Marketing

Learning Objective

Compare relationship marketing, business marketing and societal marketing

Key Points

• Relationship marketing tries to unambiguously transcend the simple post purchase-exchange process with a customer to make more truthful and richer contact by providing a more holistic, personalized purchase, and uses the experience to create stronger ties.
• The overall goals of relationship marketing are to find, attract, and win new clients; nurture and retain those the company already has; entice former clients back into the fold; and reduce the costs of both marketing and also servicing clients.
• The tremendous growth and change that business marketing is experiencing is due in large part to the technological revolution, the entrepreneurial revolution, and a revolution within marketing itself.

Key Terms

social responsibility

A voluntarily assumed obligation toward the good of society at large as opposed to the self alone.

landing page

A web page at which a user first arrives at a website.

The marketing concept is the philosophy that companies should focus on and strive to satisfy customer needs while also making profits. More specifically, it involves identifying target customers, understanding the needs and wants of customers, and developing products or services according to those needs–thereby satisfying the needs better than competitors.

Modern trends in marketing include relationship marketing, business or industrial marketing, and societal marketing . Modern marketing is also inseparable from the digital realm. E-marketing and online marketing are essential tools for modern firms. Internet marketing is sometimes considered to be broad in scope, not only referring to the Internet, but also including e-mail and wireless media as well as driving audiences from traditional methods like radios and billboards to Internet properties or landing pages.

Modern Trends In Marketing

Modern trends in marketing include relationship marketing, industrial marketing, and societal marketing.

Relationship Marketing

Relationship marketing was first developed through direct response marketing campaigns emphasizing customer retention and satisfaction, rather than a dominant focus on sales transactions. Relationship marketing differs from other forms of marketing in recognizing the long-term value of relationships and extending communication beyond intrusive promotional messages. Relationship marketing refers to a short-term arrangement where the buyer and seller have an interest in providing a more satisfying exchange. This approach tries to transcend the simple post-purchase exchange with a customer to make a deeper connection by providing a holistic, personalized experience to create stronger ties. Relationship marketing is often applied when there are competitive alternatives for customers to choose from and when there is an ongoing and periodic desire for the product or service.

The practice of relationship marketing has been facilitated by several generations of customer relationship management software that allow the tracking and analysis of customer preferences, activities, tastes, likes, dislikes, and complaints. With the growth of the Internet and mobile platforms, relationship marketing has continued to evolve as technology opens more collaborative and social communication channels. This includes tools for managing relationships that go beyond simple demographic and customer service data. A key principle of relationship marketing is the retention of customers through varying means and practices to ensure repeated trade from preexisting customers by satisfying needs better than the competition. The overall goals of relationship marketing are to find, attract, and win new clients; nurture and retain those the company already has; entice former clients back into the fold; and reduce the costs of both marketing and also servicing clients.

Business/Industrial Marketing

Business marketing is the practice of selling products and services to other companies or organizations that either resell them, use them as components in products or services they offer, or use them to support their operations. Also known as industrial marketing, business marketing is at times called business-to-business marketing, or B2B marketing.

The tremendous growth and change in business marketing is due to three “revolutions” occurring around the world today. First is the technological revolution. Technology is changing at an unprecedented pace, speeding up the pace of new product and service development.

Second is the entrepreneurial revolution. To stay competitive, many companies have downsized and reinvented themselves. Adaptability, flexibility, speed, aggressiveness, and innovation are the keys to remaining competitive. Marketing is taking the entrepreneurial lead by finding market segments, untapped needs, and new uses for existing products; and by creating new processes for sales, distribution, and customer service.

The third revolution is occurring within marketing. Companies are looking beyond traditional assumptions and adopting new frameworks, theories, models, and concepts. They are also moving away from the mass market and being preoccupied with transactions. Relationships, partnerships, and alliances define marketing today. The cookie cutter approach is out. Companies are customizing marketing programs to individual accounts.

Societal Marketing

Societal marketing holds that the organization’s task is to determine the needs, wants, and interests of a target market and to deliver satisfaction more effectively and efficiently than competitors in a way that preserves or enhances social, ethical, and ecological well-being. It is linked with corporate social responsibility and sustainable development. The main focus of societal marketing is on customer satisfaction and the welfare of society at large, which can be attained through providing eco-friendly products–for example, those that remove social and environmental ills like drugs and pollution.

In terms of societal marketing, products can be classified in terms of long-term benefits and immediate satisfaction:

• Deficient products bring neither long-run or short-term benefits;
• Pleasing products bring a high level of immediate satisfaction, but can cause harm to society;
• Salutary products bring low short-term satisfaction, but benefit society;
• Desirable products combine long-run benefits and immediate satisfaction.

Societal marketing suggests that, for the well-being of society, deficient products should be eliminated; products should be modified to reach the fourth category by incorporating missing short-term benefits into salutary products and long-term benefits into pleasing products; and a company’s ultimate goal should be to develop desirable products.

14.2: Marketing Strategies

14.2.1: The Target Market

Target markets enable organizations to filter populations to identify the ideal characteristics of their customer group.

Learning Objective

Recognize the targeting parameters that organizations commonly use to separate target markets from populations

Key Points

• Target marketing enables the filtering of a broad population, using specific characteristics that denote likelihood to purchase a given good or service.
• Through effective targeting, organizations can acquire a higher volume of users at a lower cost per user. Simply put, marketing is cheaper and more effective if well targeted.
• Target marketing requires making assumptions and observations, and testing those observations against big data. Statistical assessments of significance is extremely useful when conducting target market research.
• While organizations can target on a variety of characteristics, the most common include geographic, demographic, pyschographic, behavioral, and product-related.

Key Terms

Demographic

Of or related to the study of human populations, and how they change.

Psychographic

Based on individual psychological characteristics, rather than demographic or other factors.

A target market is simply a specified group of potential consumers who are likely to have a need for (or interest in) a given product or service. As a business, targeting is the process of filtering a population for the characteristics that most closely align with their customer base. It’s easy to see why this is a valuable tactic for businesses. Through identifying who the ideal consumers are, acquiring these consumers and gathering data about their current needs is that much easier and cheaper. 

Target Markets

This is a simple image of three circles, each one smaller within the next. The idea is that a target market is a specific segment of a broader population, filtered through strategically collecting information.

This is a simple image of three circles, each one smaller within the next. The idea is that a target market is a specific segment of a broader population, filtered through strategically collecting information.

An Example

Let’s take a simple example. You work at a university, in their marketing department. They pose a simple question: who should we advertise our services to to get the most applications at the lowest cost? Your first instinct is to young men and women who have (or likely will) complete a high school diploma, and who live in relatively close proximity to the university. 

However, your marketing manager informs you that this target market may not be the perfect match for the majority of your marketing spend. As you start researching the question, you realize a great deal of the paying customers of universities are actually the parents of students and not the students themselves. Interestingly, marketing to the parents may be more valuable (or maybe not!). You bring this conclusion back to your marketing manager, who goes a step further and asks about school guidance counselors.

As you can see from this example, choosing a target market isn’t always quite as simple as it seems. Sure – it may be true that advertising to 16-18 year old students currently enrolled in high school performs best in some ways. But it may be true also that promoting to guidance counselors and high school teachers ultimately reaches more students, and for cheaper on a per student basis.

Common Targeting Approaches

Target markets can be specified using virtually any metric or approach. However, all marketers should be familiar with the basic market segmentation approaches that are most common across industries:

• Geographic – For many businesses, the location and region (and potentially the climate) are hugely relevant data points, creating the first large filter on targeting.
• Demographic/socioeconomic – This filter focuses mostly on gender, age, career, education level, marital status, wages and other biographical information.
• Psychographic – Compared to the previous two, this is a bit more complex. Psychographic targeting revolves around attitudes, religion, lifestyle, and values. Picture certain news channels, which seem to cater to certain types of opinions.
• Behavioral – This usually refers to their purchasing behaviors, relative either to your business, industry, or complementary industries. An example of this would be a headphones company targeting users who purchase DJ equipment.
• Product-related – Some user groups build up relationships with the products themselves. Smartphone users, for example, will find themselves bombarded with targeting specifically for the particular operating system.

The ultimate objective of most effective targeting approaches will be to filter the broader population into a small, idealized segment that is highly likely to convert into paying customers. 

14.2.2: The Marketing Mix

The marketing mix is used to reach a target market and is often referred to as the “four Ps” of marketing: product, price, promotion, and place.

Learning Objective

Break down the marketing mix into the “four Ps”

Key Points

• Those selling a product must develop a product that meets the needs of the target market, set a price for the product, get it to a place where the consumers can buy it (distribute it), and inform the target market about it (promotion).
• A product is seen as an item that satisfies what a consumer in the target market needs or wants. It is a tangible good or an intangible service. The price is the amount a customer pays for the product. The price is very important as it determines the company’s profit and hence, its survival.
• Promotion represents all of the methods of communication that a marketer may use to provide information to different parties about the product. Place refers to providing the product at a place which is convenient for consumers to access. Place is synonymous with distribution.

Key Terms

marketing mix

The marketing mix is a business tool used in marketing products. The marketing mix is often crucial when determining a product or brand’s unique selling point and is often synonymous with the four Ps: price, product, promotion, and place.

Promotion

Promotion represents all of the methods of communication that a marketer may use to provide information to different parties about the product. Promotion comprises elements such as: advertising, public relations, personal selling and sales promotion.

Example

• This is an example of a model of a green marketing-mix applying the “four Ps.” Product: A producer should offer ecological products which not only must not contaminate the environment but should protect it and even liquidate existing environmental damages. Price: Prices for such products may be a little higher than conventional alternatives. But target groups like LOHAS (Lifestyles of Health and Sustainability) are willing to pay extra for green products. Place: Distribution logistics are of crucial importance with a focus on ecological packaging. Marketing local and seasonal products (e.g. vegetables from regional farms is more easy to be marketed “green” than imported products). Promotion: A communication with the market should stress the environmental benefits (e.g. the company possesses a CP certificate or is ISO 14000 certified). This may be publicized to improve a firm’s image. Furthermore, the fact that a company spends expenditures on environmental protection should be advertised since sponsoring a natural environment is very important.

The marketing mix is a business tool used in marketing and by marketers. The marketing mix is often crucial when determining a product or brand’s offer, and is often associated with the four P’s: price, product, promotion, and place.

Product

A product is seen as an item that satisfies what a consumer in the target market needs or wants. It is a tangible good or an intangible service. Intangible products are service-based like products in the tourism industry, the hotel industry and the financial industry. Tangible products are those that have an independent, physical existence. Typical examples of mass-produced, tangible objects are the car and the disposable razor.

Every product is subject to a life-cycle including a growth phase, followed by a maturity phase, and finally an eventual period of decline as sales falls. Marketers must do careful research on how long the life-cycle of the product they are marketing is likely to be and focus their attention on different challenges that arise as the product moves through each stage.

The marketer must also consider the product mix. Marketers can expand the current product mix by increasing a certain product line’s depth or by increasing the number of product lines. Marketers should consider how to position the product, how to exploit the brand, how to exploit the company’s resources, and how to configure the product mix so that each product complements others. The marketer must also consider product development strategies.

Price

The price is the amount a customer pays for the product. The price is very important as it determines the company’s profit and hence, survival. Adjusting the price has a profound impact on the marketing strategy, as it will often affect the demand and sales as well. The marketer should set a price that complements the other elements of the marketing mix. When setting a price, the marketer must be aware of the customer’s perceived value for the product.

There are various strategies that can be applied when pricing a product like skimming and penetration pricing. Skimming means to price the product highly to increase profits. For example if you invent a new software which no one else has, you can skim the market because the customers are forced to buy from you until there is more competition. Penetration pricing can be applied when you want to enter a market and price your product lower than the perceived market price so that more people will buy it and this will increase your market share.

Promotion

Promotion represents all of the methods of communication that a marketer may use to provide information to different parties about the product. Promotion comprises elements such as advertising, public relations, personal selling and sales promotion.

Advertising covers any communication that is paid for. This can be in the form of television commercials, radio and Internet advertisements or through print media and billboards. Public relations is where the communication is not directly paid for and includes press releases, sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. Word-of-mouth is any apparently informal communication about the product by ordinary individuals, satisfied customers or people specifically engaged to create word-of-mouth momentum. Sales staff often play an important role in word-of-mouth and public relations.

Fedex Billboard

Billboards are a common method of promotion for advertisers.

Place

Place refers to providing the product at a place or places which is convenient for consumers to access it. Place is synonymous with distribution. Various strategies such as intensive distribution, selective distribution, exclusive distribution and franchising can be used by the marketer to complement the other aspects of the marketing mix.

13.1: The History of Unions

13.1.1: Organized Labor

Learning Objective

Explain the basic function of a labor union

Key Points

• Through its leadership, labor unions bargain with the employers on behalf of union members and negotiates labor contracts with employers.
• Union members, employers, and sometimes non-members are bound to the final negotiated agreement.
• In addition to their collective bargaining activities, labor unions provide benefits to their members, organize industrial actions, and participate in political activities.
• Labor union density has declined in recent decades, particularly in the private sector.

Key Terms

labor union

A continuous association of wage-earners for the purpose of maintaining or improving the conditions of their employment; a trade union.

collective bargaining

A method of negotiation in which employees negotiate as a group with their employers, usually via a trade union

Example

• An early example of a labor union is the Knights of Labor. The Noble and Holy Order of the Knights of Labor (KOL) was founded in Philadelphia in 1869 by Uriah Stephens and six other men. The union was formed for the purpose of organizing the flyers and educating and directing the power of the industrial masses, according to their constitution of 1878. The union grew slowly until the economic depression of the 1870s, when large numbers of workers joined the organization. The Knights only permitted certain groups of individuals into their order which promoted social division amongst the people around them. Bankers, speculators, lawyers, liquor dealers, gamblers, and teachers were all excluded from the union. These workers were known as the “non-producers,” because their jobs did not entail physical labor. Factory workers and business men were known as the “producers,” because their job constructed a physical product. The working force producers were welcomed into the order. Women were also welcome to join the Knights, as well as black workers by the year 1883. However, Asians were excluded. In November 1885, the Knights of a Washington city pushed to get rid of their Asian population. The Knights were strongly for the Chinese Exclusion Act of 1882 because it greatly helped them deteriorate the Asian community.

Labor Unions

A labor union is an organization of workers that have banded together to achieve common goals, such as higher pay, increasing the number employees an employer hires, and better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file members) and negotiates labor contracts (collective bargaining) with employers. Other actions may include the negotiation of:

• Wages
• Work rules
• Complaint procedures
• Rules governing hiring
• Firing and promotion of workers
• Benefits
• Workplace safety and policies

The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases, on other non-member workers. Union officials can force compulsory union dues from employees, members and nonmembers alike, as a condition for keeping their jobs.

Additional Labor Union Activities

Aside from collective bargaining, activities vary but may include:

• Provision of benefits to members: Early trade unions often provided a range of benefits to insure members against unemployment, ill health, old age, and funeral expenses. In many developed countries, these functions have been assumed by the state; however, the provision of professional training, legal advice and representation for members is still an important benefit of trade union membership.
• Industrial action: Trade unions may enforce strikes or resistance to lock outs in furtherance of particular goals.
• Political activity: Trade unions may promote legislation favorable to the interests of their members or workers as a whole. To this end they may pursue campaigns, undertake lobbying, or financially support individual candidates or parties for public office. In some countries, trade unions may be invited to participate in government hearings about educational or other labor market reforms.

Unions, Wages, and the Future

Unions have generally won higher wages and better working conditions for their members. However, the increase in the salaries is said to have reduced the number of jobs available for union members. Since the 1970s, the proportion of employees who are part of unions has been on a steady decline. Some business thinkers believe that improvement in minimum wage and safety regulations has reduced the need for unions to negotiate.

Unions seem to do better in regulated, monopolistic environments. Economic surveys show that union negotiate salaries that are 15% to 20% higher than nonunion salaries.

Percent of Industries Unionized (USA)

• Public Sector, 37.4
• Private Sector, 7.2
• Life, Physical, and Social Science, 1
• Community and Social Service,, 16.1
• Education, Training, and Library, 38.1
• Health Care Practitioner and Technical, 13.6
• Health Care Support, 35.6
• Protective Service, 35.6
• Building, Grounds Cleanings, and Maintenance, 11.3
• Office and Administrative Support, 10.3
• Construction and Extraction, 21
• Installation, Maintenance, and Repair, 16.4
• Production, 16.6
• Transportation and Material Moving, 18.2

Trade union density will vary according to country as well.

Trade Union Density in Different Countries (%)

The density of trade unions in different countries.

13.1.2: A Brief History of Organized Labor

Learning Objective

Outline the increases and declines in the labor union movement of the last 150 years

Key Points

• A large-scale consolidation of unions took place in the 1870s and 1880s. The Knights of Labor became a major force in the late 1880s until its collapse. The American Federation of Labor (AFL) proved to be more durable.
• Unions grew rapidly from 1900-1919. This period was followed by a long decline. It was brought back to life by the Wagner Act of 1935. During this period, it became normal to find unions in heavy industry.
• The image of the labor movement was damaged in the 1950s by reports of corruption in its ranks. Labor unions had already been weakened by the introduction of the Taft-Hartley Act of 1947. Union membership in the US was at its highest in 1954, before steady decline in recent decades.
• Union membership in the US was at its highest in 1954.
• The history of workers in relation to organized labor has emerged as an area of scholarly interest.

Key Terms

The Knights of Labor

The Knights of Labor (K of L) (officially “Noble and Holy Order of the Knights of Labor”) was the largest and one of the most important American labor organizations of the 1880s.

American Federation of Labor

The American Federation of Labor (AFL) was one of the first federations of labor unions in the United States. It was founded in Columbus, Ohio in December 1886 by an alliance of craft unions disaffected from the Knights of Labor, a national labor association.

CIO

Congress of Industrial Organizations, a former United States trade union federation (also known as the Committee of Industrial Organization) that merged with the American Federation of Labor to form the AFL-CIO in 1955

Example

• The Noble and Holy Order of the Knights of Labor (KOL) was founded in Philadelphia in 1869 by Uriah Stephens and six other men. The union was formed for the purpose of organizing the flyers, educating and directing the power of the industrial masses, according to their Constitution of 1878. The union grew slowly until the economic depression of the 1870s, when large numbers of workers joined the organisation. The Knights only permitted certain groups of individuals into their Order which promoted social division amongst the people around them. Bankers, speculators, lawyers, liquor dealers, gamblers, and teachers were all excluded from the union. These workers were known as the “non-producers” because their jobs did not entail physical labour. Factory workers and business men were known as the “producers” because their job constructed a physical product. The working force producers were welcomed into the Order. Women were also welcome to join the Knights, as well as black workers by the year 1883. However, Asians were excluded. In November 1885, the Knights of a Washington city pushed to get rid of their Asian population. The knights were strongly for the Chinese Exclusion Act of 1882 because it greatly helped them deteriorate the Asian community.

The Emergence of Umbrella Unions

Unions started emerging in the mid-19^th century. The 1870s and 1880s saw large-scale consolidation, with the Knights of Labor quickly becoming a major force in the late 1880s before collapsing due to poor organization. The American Federation of Labor (AFL), led by Samuel Gompers until his death in 1924, proved much more durable. It was a coalition of many national unions, and helped resolve jurisdictional disputes, created citywide coalitions that helped coordinate strikes, and after 1907 became a player in national politics, usually on the side of the Democrats.

Rapid growth came in 1900-1919, but was followed by a long decline until the Wagner Act of 1935 led to an invigoration of the labor movement, a development that finally became a permanent factor in the heavy industry. The CIO under John L. Lewis split off and competed aggressively for membership. The AFL was always larger and both federations grew enormously during World War II. After the Communists in the CIO were purged in 1946-1948, a merger into the AFL-CIO became possible in 1955.

The Strength of Labor Unions

The Taft-Hartley Act of 1947 was a conservative measure that weakened the unions, and highly publicized reports of corruption in the Teamsters and other unions hurt the image of the labor movement during the 1950s. Unions formed a backbone element of the New Deal Coalition and of Modern liberalism in the United States. The percentage of workers belonging to a union (or “density”) in the United States peaked in 1954 at almost 35% and the total number of union members peaked in 1979 at an estimated 21.0 million. Membership has declined since (currently 14.8 million and 12% of the labor force). Private sector union membership then began a steady decline that continues into the 2010s, but the membership of public sector unions grew steadily (now 37%).

Union membership, 1947-2010

The graph shows steadily declining union membership in the last 6 decades.

Pressures dictating the nature and power of organized labor have included the evolution and power of the corporation, efforts by employers and private agencies to limit or control unions, and U.S. labor law. As a response, organized unions and labor federations have competed, evolved, merged, and split against a backdrop of changing social philosophies and periodic federal intervention.

As commentator E. J. Dionne has noted, the union movement has traditionally espoused a set of values—solidarity being the most important, the sense that each should look out for the interests of all. From this followed commitments to mutual assistance, to a rough-and-ready sense of equality, to a disdain for elitism, and to a belief that democracy and individual rights did not stop at the plant gate or the office reception room. Dionne notes that these values are “increasingly foreign to American culture”… “Labor-based political parties have been an important electoral force in every advanced capitalist country. Every one, that is, except the United States. Elsewhere, these parties were established in the late nineteenth or early twentieth centuries, and, ever since, there has been a great debate about why the American experience was different. “

Current Labor Union Studies

The history of organized labor has been a specialty of scholars since the 1890s, and has produced a large amount of scholarly literature. In the 1960s, as social history gained popularity, a new emphasis emerged on the history of workers, with special regard to gender and race. This is called “the new labor history”. Much scholarship has attempted to bring the social history perspectives into the study of organized labor.

13.1.3: Modern Labor Organizations

Learning Objective

Analyze the current state of labor unions

Key Points

• Today, most labor unions in the United States are members of one of two larger umbrella organizations.
• Unions have become an issue in the 2008-10 economic crisis, with the two of the largest automakers receiving $85 billion in loans in order to stay viable.
• Union membership had been declining in the United States since 1954. In 2007, the labor department reported the first increase in union memberships in 25 years and the largest increase since 1979.
• The U.S. Bureau of Labor Statistics’ most recent survey indicates that union membership in the has risen to 12.4% of all workers, from 12.1% in 2007. For a short period, private sector union membership rebounded, increasing from 7.5% in 2007 to 7.6% in 2008. However, that trend has since reversed.

Key Term

National Labor Relations Act

An act to diminish the causes of labor disputes burdening or obstructing interstate and foreign commerce, to create a National Labor Relations Board, and for other purposes.

Example

• The American Federation of Labor (AFL) was one of the first federations of labor unions in the United States. It was founded in Columbus, Ohio in December 1886 by an alliance of craft unions disaffected from the Knights of Labor, a national labor association. Samuel Gompers of the Cigar Makers’ International Union was elected president of the Federation at its founding convention and was reelected every year except one until his death in 1924. The AFL was the largest union grouping in the United States for the first half of the twentieth century, even after the creation of the Congress of Industrial Organizations (CIO) by unions that were expelled by the AFL in 1935 over its opposition to industrial unionism. In 1955, the AFL merged with its longtime rival, the CIO, to form the AFL-CIO, a federation which remains in place to this day. Together with its offspring, the AFL has comprised the longest lasting and most influential labor federation in the United States.

What Are the Major Labor Unions?

Today, most labor unions in the United States are members of one of two larger umbrella organizations:

• The American Federation of Labor–Congress of Industrial Organizations (AFL-CIO); or
• The Change to Win Federation, which split from the AFL-CIO in 2005-2006.

Both organizations advocate policies and legislation favorable to workers in the United States and Canada, and take an active role in politics favoring the Democratic party but not exclusively so.

The AFL-CIO is especially concerned with global trade and economical issues.

How Are Labor Unions Regulated?

• Private sector union members are tightly regulated by the National Labor Relations Act (NLRA), passed in 1935.
• Public sector unions are regulated partly by federal and partly by state laws.

What is the State of Labor Union Membership Today?

Union membership had been declining in the United States since 1954. In 2007, the labor department reported the first increase in union memberships in 25 years and the largest increase since 1979.

Most of the recent gains in union membership have been in the service sector, while the number of unionized employees in the manufacturing sector has declined. Most of the gains in the service sector have come in West Coast states like California where union membership is now at 16.7%, compared with a national average of about 12.1%.

Historically, the rapid growth of public employee unions since the 1960s has served to mask an even more dramatic decline in private-sector union membership. Although most industrialized countries have seen a drop in unionization rates, the drop in union density (the unionized proportion of the working population) has been more significant in the United States than elsewhere.

In general the public sector unions have shown robust growth rates because wages and working conditions are set through negotiations with elected local and state officials. In such settings, the unions’ political power thus comes into play. Unlike corporations, the local government cannot threaten to move elsewhere, nor is there any threat from foreign competition.

How Does the Public View Labor Unions?

Public approval of unions climbed during the 1980s much as it did in other industrialized nations, but declined to below 50% for the first time in 2009 during the Great Recession.

It’s not clear if this is a long-term trend or a function of a high unemployment rate, which historically correlates with lower public approval of labor unions.

One explanation for loss of public support is simply the lack of union power. No longer do a sizable percentage of American workers belong to unions or have family members who do. Unions no longer carry the “threat effect:” the power of unions to raise wages of non-union shops by virtue of the threat of unions to organize those shops.

Unions have become an issue in the 2008-10 economic crisis with the two of the largest automakers receiving $85 billion in loans in order to stay viable. Some conservatives have blamed the near bankruptcy on unions and their costly labor agreements, including pension and health plans that put the U.S. automakers at a disadvantage to foreign companies. Others point out that the United Auto Workers has made extensive concessions to the car companies over the last 20 years in order to help the companies remain competitive, and allege that the automakers’ recent troubles are better ascribed to other factors.

How Did Ronald Reagan’s Influence Union Membership?

Most unions were strongly opposed to Reagan in the 1980 presidential election.

On August 3, 1981, the Professional Air Traffic Controllers Organization (PATCO) union—which had supported Reagan—rejected the government’s pay raise offer and sent its 16,000 members out on strike shutting down the nation’s commercial airlines. They demanded a reduction in the work week to 32 from 40 hours, doubling of wages, a $10,000 bonus, and early retirement.

Federal law forbade such a strike, and the Transportation Department implemented a backup plan (of supervisors and military air controllers) to keep the system running. The strikers were given 48 hours to return to work, otherwise they would be fired and banned from ever again working in a federal capacity.

A fourth of the strikers came back to work, but 13,000 did not. The strike collapsed, PATCO vanished, and the union movement as a whole suffered a major reversal, which accelerated the decline of membership across the board in the private sector.

Union coverage rate in the United States, 1973-2009

13.2: Organized Labor and Related Laws

13.2.1: Norris–La Guardia Act

The Norris–LaGuardia Act removed certain legal and judicial barriers against the activities of organized labor in the United States.

Learning Objective

Explain the formation of the Norris-LaGuardia Act

Key Points

• The three provisions of the act include protecting workers’ rights to self-organization and liberty, removing nonviolent labor dispute jurisdiction from federal courts, and outlawing the “yellow dog” contract that prohibited a worker from joining a labor union as a term of employment.
• The Supreme Court held that the act prohibits employers from barring the peaceful dissemination of information concerning the terms and conditions of employment by those involved in an active labor dispute, even when such dissemination occurs on employer property.
• George William Norris was a Republican U.S. politician from Nebraska and a leader of progressive and liberal causes in Congress. Fiorello Henry LaGuardia was a Republican Mayor of New York who was elected to Congress and was able to appeal across party lines to achieve popularity.
• Fiorello Henry LaGuardia (1882 – 1947) was Mayor of New York for three terms from 1934 to 1945 as a Republican who appealed across party lines and heavily supported President Franklin D. Roosevelt as a New Dealer. He is acclaimed as one of the greatest mayors in American history.

Key Terms

injunction

A writ or process, granted by a court of equity, and, in some cases, under statutes, by a court of law, whereby a party is required to do or to refrain from doing certain acts, according to the exigency of the writ.

yellow-dog contracts

An agreement between an employer and an employee in which the employee agrees, as a condition of employment, not to be a member of a labor union. Such contracts were used in the U.S until the 1930s to prevent the formation of unions, most often by permitting employers to take legal action against union organizers.

Example

• Section 13A of the Norris-La Guardia Act was fully applied by the Supreme Court of the United States in New Negro Alliance v. Sanitary Grocery Co., in which, in an opinion authored by Justice Owen Roberts, the Court held that the act meant to prohibit employers from proscribing the peaceful dissemination of information concerning the terms and conditions of employment by those involved in an active labor dispute, even when such dissemination occurs on employer property.

The Norris–LaGuardia Act (also known as the Anti-Injunction Bill) was a 1932 United States federal law that banned yellow-dog contracts, barred federal courts from issuing injunctions against nonviolent labor disputes, and created a positive right of noninterference by employers against workers joining trade unions. The common title followed from the names of the sponsors of the legislation: Senator George W. Norris of Nebraska and Representative Fiorello H. La Guardia of New York, both Republicans.

The Act stated that yellow-dog contracts were unenforceable in federal court. It also established as United States law that employees should be free to form unions without employer interference, and also withdrew from the federal courts jurisdiction relative to the issuance of injunctions in nonviolent labor disputes. No federal court can offer jurisdiction. The three provisions include protecting worker’s self-organization and liberty, removing jurisdiction from federal courts, and outlawing the “yellow dog” contract.

Section 13A of the act was fully applied by the Supreme Court of the United States in New Negro Alliance v. Sanitary Grocery Co., in which the Court held that the Act prohibits employers from barring the peaceful dissemination of information concerning the terms and conditions of employment by those involved in an active labor dispute, even when such dissemination occurs on employer property.

The Authors of the Act

George Norris and Fiorello LaGuardia

Senator George W. Norris and Representative Fiorello H. LaGuardia were the chief sponsors of the Act.

George William Norris (1861 – 1944) was a U.S. politician from the state of Nebraska and a leader of progressive and liberal causes in Congress. He served five terms in the United States House of Representatives as a Republican from 1903 until 1913 and five terms in the United States Senate from 1913 until 1943, four terms as a Republican and the final term as an Independent.

Fiorello Henry LaGuardia (1882 – 1947) was Mayor of New York for three terms from 1934 to 1945 as a Republican. Previously he was elected to Congress in 1916 and 1918, and again from 1922 through 1930. He is often acclaimed as one of the three or four greatest mayors in American history. Only five feet tall, he was called “the Little Flower”. LaGuardia was a Republican who appealed across party lines, was very popular in New York during the 1930s. As a New Dealer, he supported President Franklin D. Roosevelt, a Democrat, and in turn Roosevelt heavily funded the city and cut off patronage from LaGuardia’s foes. La Guardia revitalized New York City and restored public faith in City Hall.

13.2.2: National Labor Relations Act

The National Labor Relations Act limits employers’ relations to workers who create labor unions and collectively act in support of demands.

Learning Objective

Analyze the controversy behind the National Labor Relations Act

Key Points

• The act encourages the practice of collective bargaining by protecting workers’ freedom of association, self-organization, and designation of representatives of their own choosing.
• The NLRA was controversial and employers campaigned to outlaw a number of union practices such as closed shops, secondary boycotts, jurisdictional strikes, mass picketing, and strikes.
• The Taft-Hartley Act amended the National Labor Relations Act. It was seen as a means of demobilizing the labor movement by imposing limits on labor’s ability to strike and by prohibiting radicals from their leadership.
• The Taft-Hartley Act is a United States federal law, which amended the National Labor Relations Act, that monitors the activities and power of labor unions. The Taft–Hartley Act was seen as a means of demobilizing the labor movement by imposing limits on labor’s ability to strike and by prohibiting radicals from their leadership. The Taft–Hartley Act prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns.

Key Terms

National Labor Relations Act

An act to diminish the causes of labor disputes burdening or obstructing interstate and foreign commerce, to create a National Labor Relations Board, and for other purposes.

wildcat strikes

A strike action taken by workers without the authorization of their trade union officials. The Memphis Sanitation Strike and the Baltimore Municipal Strike of 1974 started as wildcat strikes, only to later be supported by the union.

The National Labor Relations Act (NLRA) is a 1935 United States federal law that limits the means with which employers may react to workers in the private sector who create labor unions, engage in collective bargaining, and take part in strikes and other forms of concerted activity in support of their demands. It was signed into law by President Franklin D. Roosevelt.

The law holds that wildcat strikes are illegal, and that workers must formally request that the National Labor Relations Board end their association with their labor union if they feel that the union is not sufficiently supportive of them before they can legally go on strike.

Key Principles of the NLRA

The key principles of the NLRA include:

• Encouraging the practice and procedure of collective bargaining by protecting the exercise by workers of full freedom of association, self-organization, and designation of representatives of their own choosing.
• Protecting a wide range of activities, whether a union is involved or not, in order to promote organization and collective bargaining.
• Protecting employees as a class and expressly not on the basis of a relationship with an employer.

The law originally defined and prohibited five unfair labor practices:

1. Interfering with, restraining, or coercing employees in their rights, including freedom of association; mutual aid or protection; self-organization; the right to form, join, or assist labor organizations; the right to bargain collectively for wages and working conditions through representatives of their own choosing; and the right to engage in other protected concerted activities with or without a union.
2. “Dominating” or interfering with the formation or administration of any labor organization.
3. Discriminating against employees to encourage or discourage acts of support for a labor organization.
4. Discriminating against employees who file charges or testify.
5. Refusing to bargain collectively with the representative of the employer’s employees.

Controversy

The American Liberty League, an organization made up of conservatives, viewed the act as a threat to freedom and engaged in a campaign of opposition in order to repeal these “socialist” efforts. This campaign continued until the NLRA was found constitutional by the Supreme Court in 1937. As time went by, employers and their allies in Congress also criticized the NLRA for its expansive definition of “employee” and for allowing supervisors and plant guards to form unions, sometimes affiliated with the unions that represented the employees whom they were supposed to supervise or police.

Many accused the NLRB of a general pro-union and anti-employer bias. In addition, employers campaigned over the years to outlaw a number of union practices such as closed shops; secondary boycotts; jurisdictional strikes; mass picketing; strikes in violation of contractual no-strike clauses; pension, health, and welfare plans sponsored by unions; and multi-employer bargaining.

The Taft-Hartley Amendment

The Taft-Hartley Amendment of 1947 is a United States federal law that monitors the activities and power of labor unions. The act was a means of demobilizing the labor movement by imposing limits on labor’s ability to strike and by prohibiting radicals from their leadership.

The Taft–Hartley Act prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns. It also required union officers to sign non-communist affidavits with the government. The act authorized the President to intervene in strikes or potential strikes that create a national emergency, a reaction to the national coal miners’ strikes called by the United Mine Workers of America in the 1940s.

The act was sponsored by Senator Robert Taft and Representative Fred A. Hartley, Jr. It became law by overriding U.S. President Harry S. Truman’s veto on June 23, 1947; labor leaders called it the “slave-labor bill,” while President Truman argued that it was a “dangerous intrusion on free speech,” and that it would “conflict with important principles of our democratic society. “

Nevertheless, Truman would subsequently use it twelve times during his presidency. President George W. Bush invoked the law most recently in connection with the employer lockout of the International Longshore and Warehouse Union during negotiations with West Coast shipping in 2001.

Democratic Senator Robert F. Wagner

Sponsor of the National Labor Relations Act/Wagner Act.

13.2.3: Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) established a national minimum wage, “time-and-a-half” for overtime in certain jobs, and etc.

Learning Objective

Outline the application of the Fair Labor Standard Act

Key Points

• The Fair Labor Standards Act established a national minimum wage, guaranteed “time and a half” for overtime in certain jobs, and prohibited most employment of minors in “oppressive child labor”.
• The 1947 Portal-to-Portal Act specified exactly what type of time was considered compensable work time.
• The Fair Labor Standards Amendment included changes to overtime compensation, defined a “regular rate,” raised the minimum wage from 40 cents to 75 cents per hour and extended child labor coverage.
• Generally, employees of a company that does at least $500,000 of business or gross sales in a year will be subject to the FLSA’s protections.
• Several exemptions to the FLSA exist that relieve an employer from having to meet the statutory minimum wage, overtime, and record-keeping requirements. The largest exceptions apply to the so-called “white collar” exemptions that are applicable to professional, administrative and executive employees. Exemptions are narrowly construed; an employer must prove that the employees fit “plainly and unmistakeably” within the exemption’s terms.
• The FLSA applies to “any individual employed by an employer” but not to independent contractors or volunteers because they are not considered “employees” under the FLSA. Still, an employer cannot simply exempt workers from the FLSA by calling them independent contractors, and many employers have illegally misclassified their workers as independent contractors. Courts will look at the “economic reality” of the relationship between the putative employer and the worker to determine whether the worker is, in fact, an independent contractor.

Key Terms

independent contractor

A person working independently, under a contract; a self-employed person.

overtime

The rate of pay, usually higher, for work done outside of or in addition to regular hours.

minimum wage

The lowest rate at which an employer can legally pay an employee; usually expressed as pay per hour.

It established a national minimum wage, guaranteed “time and a half” for overtime in certain jobs and prohibited most employment of minors in “oppressive child labor. ” Children under the age of 18 cannot do certain dangerous jobs, and children under the age of 16 cannot work. 700,000 workers were affected by the FLSA.

Amendments

The 1947 Portal-to-Portal Act specified exactly what type of time was considered compensable work time. In general, as long as an employee is engaging in activities that benefit the employer, regardless of when they’re performed, the employer has an obligation to pay the employee for his or her time. It also specified that travel to and from the work place was a normal incident of employment and shouldn’t be considered paid working time.

The full effect of the FLSA of 1938 was postponed by the wartime inflation of the 1940s, which lowered wage values to below the level specified in the act. The October 26, 1949 Fair Labor Standards Amendment included changes to overtime compensation, defined a “regular rate,” redefined the term “produced,” raised the minimum wage from 40 cents to 75 cents per hour, and extended child labor coverage. In 1955, the FLSA was amended once again to increase minimum wage, this time to $1 per hour. Subsequent amendments have continued to raise the minimum wage level according to inflation.

Practical Application

Generally, employees of a company who does at least $500,000 of business or gross sales in a year will be subject to the FLSA’s protections. Several exemptions exist that relieve an employer from having to meet the statutory minimum wage, overtime, and record-keeping requirements. The largest exceptions apply to the so-called “white collar” exemptions that are applicable to professional, administrative, and executive employees. Exemptions are narrowly construed; an employer must prove that the employees fit “plainly and unmistakeably” within the exemption’s terms.

The FLSA applies to “any individual employed by an employer” but not to independent contractors or volunteers because they are not considered “employees” under the FLSA. Still, an employer cannot simply exempt workers from the FLSA by calling them independent contractors, and many employers have illegally misclassified their workers as independent contractors. Some employers similarly mislabel employees as volunteers. Courts will look at the “economic reality” of the relationship between the putative employer and the worker to determine whether the worker is, in fact, an independent contractor.

Presuming an employee is not exempt from overtime, there are many instances in which overtime is not paid properly, including when an employee is not paid for travel time between job sites, activities before their shift starts or after it ends, and activities to prepare for work that are central to work activities. If an employee is entitled to overtime, they must be paid one and a half times the employee’s “regular rate of pay” for all hours worked over 40 in the same work week.

13.2.4: Labor Management Relations Act

The Labor Management Relations Act (Taft-Hartley Amendment) is a U.S federal law that monitors the activities and power of labor unions.

Learning Objective

Examine the Taft-Hartley Act’s impact on the National Labor Relations Act

Key Points

• The National Labor Relations Act, which Congress passed in 1935, banned employer interference in workers’ decisions to join and act in concert with labor unions. The 1947 Taft-Hartley Act amended the NLRA to limit the power and activity of unions.
• The NLRA prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns.
• President Harry Truman vetoed Taft-Hartley claiming it was a “dangerous intrusion on free speech,” but Congress overrode his veto. Majorities of both parties voted for the bill as well as the override.
• President Harry Truman vetoed Taft-Hartley, but Congress overrode his veto. Majorities of both parties voted for the bill as well as the override. Organized labor nearly succeeded in pushing Congress to amend the law to increase the protections for strikers and targets of employer retaliation during the Carter and Clinton administrations, but failed on both occasions because of Republican opposition and lukewarm support for these changes from the Democratic President in office at the time.

Key Terms

wildcat strikes

A strike action taken by workers without the authorization of their trade union officials. The Memphis Sanitation Strike and the Baltimore Municipal Strike of 1974 started as wildcat strikes, only to later be supported by the union.

Labor Management Relations Act

The official name of the Taft-Hartley Act.

jurisdictional strike

A concerted refusal to work undertaken by a union to assert its members’ right to particular job assignments and to protest the assignment of disputed work to members of another union or to unorganized workers.

The Labor Management Relations Act, or the Taft-Hartley Act, is a United States federal law that monitors the activities and limits the power of labor unions. The act was sponsored by Senator Robert Taft and Representative Fred A. Hartley, Jr. and became law by overriding U.S. President Harry S. Truman’s veto on June 23, 1947 . Labor leaders called it the “slave-labor bill,” while President Truman argued that it was a “dangerous intrusion on free speech,” and that it would “conflict with important principles of our democratic society. ” Nevertheless, Truman subsequently used it twelve times during his presidency. The Taft–Hartley Act amended the National Labor Relations Act (NLRA) which Congress passed in 1935.

Senator Robert A. Taft

Co-sponsor of the Taft-Hartley Act.

NLRA’s Purpose

1. To promote the full flow of commerce, to prescribe the legitimate rights of both employees and employers in their relations affecting commerce.
2. To provide orderly and peaceful procedures for preventing the interference by either with the legitimate rights of the other.
3. To protect the rights of individual employees in their relations with labor organizations whose activities affect commerce.
4. To define and proscribe practices on the part of labor and management which affect commerce and are inimical to the general welfare
5. To protect the rights of the public in connection with labor disputes affecting commerce

Taft-Hartley Amendment’s Impact

The amendments enacted in Taft-Hartley added a list of prohibited actions, or unfair labor practices, on the part of unions to the NLRA, which had previously only prohibited unfair labor practices committed by employers. The Taft–Hartley Act prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns. It also required union officers to sign non-communist affidavits with the government. Union shops were heavily restricted, and states were allowed to pass right-to-work laws that outlawed closed union shops. Furthermore, the executive branch of the Federal government could obtain legal strikebreaking injunctions if an impending or current strike imperiled the national health or safety, a test that has been interpreted broadly by the courts.

Opposition to the Act

President Harry Truman vetoed Taft-Hartley, but Congress overrode his veto. Majorities of both parties voted for the bill as well as the override. Union leaders in the Congress of Industrial Organizations (CIO) vigorously campaigned for Truman in the 1948 election based upon a (never fulfilled) promise to repeal Taft-Hartley. Organized labor nearly succeeded in pushing Congress to amend the law to increase the protections for strikers and targets of employer retaliation during the Carter and Clinton administrations, but failed on both occasions because of Republican opposition and lukewarm support for these changes from the Democratic president in office at the time.

13.2.5: Landrum-Griffin Act

The Landrum-Griffin Act of 1959 is a U.S. labor law regulating labor unions’ internal affairs and officials’ relationships with employers.

Learning Objective

Explain how the Landrum-Griffin Act affected labor unions in the US

Key Points

• During the middle and late 1950s, the labor movement was under intense Congressional scrutiny for corruption, racketeering, and other misconduct.
• Some important provisions of the Act are as follows: unions have to hold secret elections, reviewable by the Department of Labor; union members are protected against abuses by a bill of rights; and unions must submit annual financial reports to the Department of Labor.
• While intended largely to limit union corruption and create a more equitable power structure within the unions, the Act was not without flaws in this regard.
• Ultimately, the act’s technical failures were exploited by both the courts and union officials—most famously the Teamsters, whose president, Jimmy Hoffa, among others, notably raided the union pension coffers for his own personal investments.

Key Terms

Senator Griffin

Robert Paul Griffin (born November 6, 1923) was a U.S. Representative, U.S. Senator from the state of Michigan and Justice of the Michigan Supreme Court.

Teamsters Union

The International Brotherhood of Teamsters (IBT) is a labor union in the United States and Canada. Formed in 1903 by the merger of several local and regional locals of teamsters, the union now represents a diverse membership of blue-collar and professional workers in both the public and private sectors.

Department of Labor

The United States Department of Labor (DOL) is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics; many U.S. states also have such departments.

The Landrum-Griffin Act

The Labor Management Reporting and Disclosure Act of 1959 (also “LMRDA” of the “Landrum-Griffin Act”), is a United States labor law that regulates labor unions’ internal affairs and their officials’ relationships with employers. It was sponsored by Democrat Phil Landrum and Republican Robert P. Griffin.

History and Background

After passage of the Taft-Hartley Act, the number of union victories in NLRB-conducted elections declined. During the 12-year administration of the Wagner Act, unions won victories in over 80 percent of elections. But in that first year after passage of the Taft-Hartley Act, unions only won around 70 percent of the representation elections conducted by the agency.

During the middle and late 1950s, the labor movement was under intense Congressional scrutiny for corruption, racketeering, and other misconduct. Enacted in 1959 after revelations of corruption and undemocratic practices in the International Brotherhood of Teamsters, International Longshoremen’s Association, United Mine Workers and other unions received wide public attention, the Act required unions to hold secret elections for local union offices on a regular basis, and provided for review by the United States Department of Labor of union members’ claims of improper election activity. Organized labor opposed the act because it strengthened the Taft-Hartley Act of 1947.

Provisions

Important provisions of the law were as follows:

• Unions had to hold secret elections, reviewable by the Department of Labor.
• Union members are protected against abuses by a bill of rights that includes guarantees of freedom of speech and periodic secret elections of officers.
• Bar members of the Communist Party and convicted felons from holding union office.
• Require unions to submit annual financial reports to the DOL.
• Declare that every union officer must act as a fiduciary in handling the assets and conducting the affairs of the union.
• Limit the power of unions to put subordinate bodies in trusteeship, a temporary suspension of democratic processes within a union.
• Provide certain minimum standards before a union may expel or take other disciplinary action against a member of the union.

Amendment to the National Labor Relations Act

Congress also amended the National Labor Relations Act, as part of the same piece of legislation that created the LMRDA, by tightening the Taft-Hartley Act’s prohibitions against secondary boycotts, prohibiting certain types of “hot cargo” agreements, under which an employer agreed to cease doing business with other employers, and empowering the General Counsel of the National Labor Relations Board to seek an injunction against a union that engages in recognitional picketing of an employer for more than thirty days without filing a petition for representation with the NLRB.

Consequences and Results

While intended largely to limit union corruption and create a more equitable power structure within the unions, the Act was not without flaws in this regard. Twenty years after the passage of the Act, co-sponsor Senator Robert Griffin extolled its success in writing, saying: “Today, nearly two decades after enactment, it is undeniable that the Landrum-Griffin Act has played a significant role in enabling union members to participate more freely in the affairs of their unions. On the other hand, it cannot be said that union corruption and abuses of union power have disappeared. But such conduct in the union movement is not as common as it was twenty years ago; and, in large measure, that can be credited to the existence of the Landrum-Griffin Act. ” Senator Griffin acknowledged the shortcomings, particularly with regard to the Teamsters. However, Griffin argued that these violations were contrary to the Act, placing the blame instead on the Department of Labor for failing to pursue action against the Teamsters union for its corruptions.

Ultimately, the act’s technical failures were exploited by both the courts and union officials—most famously the Teamsters, whose president, Jimmy Hoffa, among others, notably raided the union pension coffers for his own personal investments. While the Act ostensibly was created to foster democracy, the judiciary frequently interpreted it in ways to minimize internal union dissonance and labor disruption, favoring instead the stern hand of management. As law professor Alan Hyde put it: “Indeed, the courts advance democratic bargaining only when assured that such democracy will not disadvantage more fundamental policy interests, such as harmony between employers and “unions” (read union elites) or control of inflation. “

Republican Senator Robert P. Griffin

Co-sponsor of the Landrum-Griffin Act.

13.3: Collective Bargaining

13.3.1: A Brief Definition

Through collective bargaining, employers and employees negotiate the conditions of employment.

Learning Objective

Define the monopoly union model, the right-to-manage model, and the efficient bargaining model as theories of collective bargaining

Key Points

• The ability to form trade unions is recognized through international human rights conventions as an essential right of workers.
• Trade union representatives usually represent the employees during the collective bargaining process. The union representatives negotiate with a single employer or a group of businesses. Negotiations with a group of businesses results in an industry-wide agreement.
• There are various economic theories which attempt to explain the various aspects of collective bargaining.
• The agreement reached as a result of the collective bargaining process functions as a contract between the parties.

Key Terms

efficient bargaining model

The efficient bargaining model sees the union and the firm bargaining over both wages and employment (or, more realistically, hours of work).

collective bargaining agreement

A collective agreement or collective bargaining agreement (CBA) is an agreement between employers and employees which regulates the terms and conditions of employees in their workplace, their duties, and the duties of the employer. It is usually the result of a process of collective bargaining between an employer (or a number of employers) and a trade union representing workers.

monopoly union model

This model states that the monopoly union has the power to maximize the wage rate; the firm then chooses the level of employment.

Example

• Factory workers may unionize and use collective bargaining to determine a wage rate that is mutually beneficial to the workers and the employers.

Collective Bargaining Defined

Collective bargaining is a process of negotiation between employers and a group of employees aimed at reaching an agreement that regulates working conditions .

Collective Bargaining

Map of proposed collective bargaining legislation

The right to collectively bargain is recognized through international human rights conventions. Article 23 of the Universal Declaration of Human Rights identifies the ability to organize trade unions as a fundamental human right. Item 2(a) of the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work defines the “freedom of association and the effective recognition of the right to collective bargaining” as an essential right of workers.

The Participants

The interests of the employees are commonly presented by representatives of a trade union to which the employees belong. The union may negotiate with a single employer (who is typically representing a company’s shareholders) or may negotiate with a group of businesses, depending on the country, to reach an industry-wide agreement.

The Result

The parties often refer to the result of the negotiation as a collective bargaining agreement (CBA) or as a collective employment agreement (CEA). A collective agreement functions as a labor contract between an employer and one or more unions.

The collective agreements reached by these negotiations usually set out wage scales, working hours, training, health and safety, overtime, grievance mechanisms, and rights to participate in workplace or company affairs.

Collective Bargaining Models

Different economic theories provide a number of models intended to explain some aspects of collective bargaining:

• The so-called monopoly union model (Dunlop, 1944) states that the monopoly union has the power to maximize the wage rate; the firm then chooses the level of employment.
• The right-to-manage model, developed by the British school during the 1980s (Nickell), views the labor union and the firm bargaining over the wage rate according to a typical Nash Bargaining Maximin.
• The efficient bargaining model (McDonald and Solow, 1981) sees the union and the firm bargaining over both wages and employment (or, more realistically, hours of work).

13.3.2: Resolving Disagreements

Labor arbitration has been used as an alternative to strikes to resolve labor disputes for more than a century.

Learning Objective

Distinguish between interest arbitration and grievance arbitration

Key Points

• There are two types of labor arbitration: interest arbitration and grievance arbitration.
• Governments, in addition to labor organizations, rely on arbitration to resolve particularly large labor disputes.
• Unions and employers have used arbitration to resolve employee and union grievances arising under a collective bargaining agreement.
• The Supreme Court has held that grievance arbitration is a preferred dispute resolution technique and that courts cannot overturn arbitrators’ awards, unless the award does not draw its essence from the collective bargaining agreement.

Key Terms

arbitration

In general, a form of justice where both parties designate a person whose ruling they will accept formally. More specifically in Market Anarchist (market anarchy) theory, arbitration designates the process by which two agencies pre-negotiate a set of common rules in anticipation of cases where a customer from each agency is involved in a dispute.

grievance arbitration

Provides a method for resolving disputes over the interpretation and application of a collective bargaining agreement.

interest arbitration

Provides a method for resolving disputes about the terms to be included in a new contract when the parties are unable to agree.

Examples

• The Coal Strike of 1902 was a strike by the United Mine Workers of America in the anthracite coal fields of eastern Pennsylvania. The strikers were asking for higher wages, shorter workdays, and the recognition of their union. The strike threatened to shut down the winter fuel supply to all major cities. President Theodore Roosevelt became involved and set up a fact-finding commission that suspended the strike. The strike never resumed, as the miners received more pay for fewer hours; the owners got a higher price for coal, and did not recognize the trade union as a bargaining agent. It was the first labor episode in which the federal government intervened as a neutral arbitrator.
• The United Steelworkers of America adopted an elaborate form of interest arbitration, known as the Experimental Negotiating Agreement, in the 1970s as a means of avoiding the long and costly strikes that had made the industry vulnerable to foreign competition.
• Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides’ final offers, to set the terms for contracts for players who are not eligible for free agency. Interest arbitration is now most frequently used by public employees who have no right to strike (for example,, law enforcement and firefighters).

Labor Arbitration

Arbitration has been used as a means of resolving labor disputes for more than a century. Labor organizations in the United States, such as the National Labor Union, called for arbitration as early as 1866 as an alternative to strikes to resolve disputes over the wages, benefits and other rights that workers enjoy. Governments have also relied on arbitration to resolve particularly large labor disputes, such as the Coal Strike of 1902.

Types of Labor Arbitration

Labor arbitration comes in two varieties: interest arbitration, which provides a method for resolving disputes about the terms to be included in a new contract when the parties are unable to agree, and grievance arbitration, which provides a method for resolving disputes over the interpretation and application of a collective bargaining agreement.

Interest Arbitration

This type of arbitration, wherein a neutral arbitrator decides the terms of the collective bargaining agreement, is commonly known as interest arbitration. The United Steelworkers of America adopted an elaborate form of interest arbitration, known as the Experimental Negotiating Agreement, in the 1970s as a means of avoiding the long and costly strikes that had made the industry vulnerable to foreign competition.

Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides’ final offers, to set the terms for contracts for players who are not eligible for free agency. Interest arbitration is now most frequently used by public employees who have no right to strike (for example, law enforcement and firefighters).

Grievance Arbitration

Unions and employers have also employed arbitration to resolve employee and union grievances arising under a collective bargaining agreement. The Amalgamated Clothing Workers of America made arbitration a central element of the Protocol of Peace it negotiated with garment manufacturers in the second decade of the twentieth century. Grievance arbitration became even more popular during World War II, when most unions had adopted a no-strike pledge.

Arbitration in the Eyes of the Law

The Supreme Court subsequently made labor arbitration a key aspect of federal labor policy in three cases which came to be known as the Steelworkers’ Trilogy. The Court held that grievance arbitration was a preferred dispute resolution technique and that courts could not overturn arbitrators’ awards unless the award does not draw its essence from the collective bargaining agreement.

These protections for arbitrator awards are premised on the union-management system, which provides both parties with due process. Due process in this context means that both parties have experienced representation throughout the process, and that the arbitrators practice only as neutrals.

Political Cartoon about the Anthracite Coal Strike

The two sides were supposed to listen to expert testimony and come to a friendly agreement; cartoon from the Cleveland Dealer

13.4: Managing Employees

13.4.1: Pay

By considering internal and external equity, a company can work toward a fair base pay system, attracting and retaining the best employees.

Learning Objective

Combine internal equity and external equity analysis to determine fair pay

Key Points

• Companies decide the pay associated with each job by analyzing the content of each job, assessing the value each job contributes to the company, pricing each job in the market, and looking at the relationship between what they value internally and what the market values externally.
• A base pay system needs to be internally equitable; the amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives.
• Job analysis is a systematic method to discover and describe the differences and similarities among jobs. Job evaluation is a process that takes the information gathered by the job analysis and places a value on the job.
• “External equity” refers to the relationship between one company’s pay levels in comparison to what other employers pay. Market definition is important to measuring external equity.
• Market definition is important to measuring external equity.

Key Terms

job evaluation

Job evaluation is a systematic way of determining the value or worth of a job in relation to other jobs in an organisation. It tries to make a systematic comparison between jobs to assess their relative worth for the purpose of establishing a rational pay structure.

internal equity

Internal equity is the idea of compensating employees in similar jobs in a similar way

job analysis

Job analysis is the formal process of identifying the content of a job in terms of activities involved and attributes needed to perform the work.

Example

• Imagine that see a job posted on the internet. It reads, “Office Assistant wanted, starting at $8.00 an hour.” How did the manager decide to pay $8.00 per hour? Why did he or she decide that was fair? The manager looks at the internal and external equity to determine that $8.00 an hour is a fair base pay for workers.

Is the Pay Fair?

Imagine that see a job posted on the internet. It reads, “Office Assistant wanted, starting at $8.00 an hour.” How did the manager decide to pay $8.00 per hour? Why did he or she decide that was fair? In this subchapter, we will cover the two types of “fairness” important in designing a base pay system.

Internal Equity

The first consideration is that the base pay system needs to be internally equitable: the amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives . In determining this, the manager should ask, “How does the work of the office assistant described above compare with the work of the office manager?” Another question to be asked is, “Does this worker contribute to solutions for customers more than another?”

Hourly wage and compensation growth for production/non-supervisory workers, 1959-2009

This graph shows that compensation and wages have been more or less stagnant since the 1970’s.

Internal equity implies that pay rates should be the same for jobs where the work is similar and different for jobs where the work is dissimilar. Compensation specialists use two tools to help make these decisions: job analysis and job evaluation.

What is Job Analysis?

A job analysis is a systematic method to discover and describe the differences and similarities among jobs. A good job analysis collects sufficient information to adequately identify, define, and describe the content of a job. Since job titles may be misleading (for example, “systems analyst” does not reveal much about the job) the content of the job is more important to the analysis than the title.

In general, a typical job analysis attempts to describe the following:

• skill (the experience, training, education, and ability required by the job);
• effort (the degree of effort actually expended in performing the job);
• responsibility (the degree of accountability required in the performance of a job); and
• working conditions of each job (the physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation).

What is a Job Evaluation?

A job evaluation is a process that takes the information gathered by the job analysis and places a value on the job. It is the process of systematically determining the relative worth of jobs based on a judgment of each job’s value to the organization. The most commonly used method of job evaluation in the United States and Europe is the “point method.” The point method consists of three steps:

1. defining a set of compensable factors;
2. creating a numerical scale for each compensable factor; and
3. weighting each compensable factor.

Each job’s relative value is determined by the total points assigned to it . The result of the job analysis and job evaluation processes will be a pay structure or queue in which jobs are ordered by their value to the organization.

Entry Level Wages for College Graduates, 1973-2009

New college graduates are scarely earning more than they did a few decades ago.

External Equity

“External equity” refers to the relationship between one company’s pay levels in comparison to what other employers pay. Some employers set their pay levels higher than their competition, hoping to attract the best applicants. This is called “leading the market.”

Other employers set their pay levels lower than their competition, hoping to save labor costs. This is called “lagging the market.” The risk in lagging the market is that the company will be unable to attract the best applicants.

Most employers set their pay levels the same as their competition. This is called “matching the market.” Matching the market maximizes the quality of talent while minimizing labor costs. An important question in external equity is how you define your market. Traditionally, markets can be defined in one of three ways:

• By identifying companies who hire employees with the same occupations or skills
• By identifying companies who operate in the same geographic area
• By identifying direct competitors, that is, those companies who produce the same products and services.

Once you have defined your market, the next step is to survey the compensation paid by employers in your market.

Combining Internal and External Equity

How do companies combine internal and external equity to decide the pay associated with each job?

• First, they analyze the content of each job.
• Second, they assess the value each job contributes to the company.
• Third, they price each job in the market.
• Finally, they look at the relationship between what they value internally and what the market values externally.

By following each of these steps, a company will have a fair base pay system, which will lead to attracting and retaining the best employees.

13.4.2: Scheduling Work

Job design is the allocation of specific work tasks to individuals and groups, in line with the company’s general direction and strategy.

Learning Objective

Explain the evolution of job design theory

Key Points

• A task can be best defined as a piece of assigned work expected to be done within a certain time. Motivation describes forces within the individual that account for the level, direction, and persistence of effort expended at work.
• Traditional approaches to job design include Taylorism, Hertzberg’s Motivation-Hygiene Theory, and goal-setting theory.
• Contemporary approaches include the socio-technical systems (STS) approach, and the Job Characteristics Model (JCM).
• The key to effectively crafting a meaningful job for an employee is starting the thought process by looking at the values and strategy of the organization.
• The “Socio-Technical Systems” (STS) approach of job design states that the design of the organization must fit its goals, employees must be actively involved in designing the structure of the organization, support systems must fit in with the design of the organization, et al. The “Job Characteristics Model” (JCM) maintains five important elements that motivate workers and performance: The “Psychological Empowerment Theory” posits that when a person is aware of the impact that they are having, they benefit more than if they cannot relate a positive impact to any of their behaviors or practices.
• The key to effectively crafting a meaningful job for an employee is starting the thought process by looking at the values and strategy of the organization.

Key Terms

resource Allocation

Resource allocation is used to assign the available resources in an economic way. It is part of resource management. In project management, resource allocation is the scheduling of activities and the resources required by those activities while taking into consideration both the resource availability and the project time.

Taylorism

scientific management; a theory of management of the early 20th century that analyzed workflows in order to improve efficiency

Example

• Intrapreneurship is an example of motivation through job design, either formally or informally. Many companies are famous for setting up internal organizations whose purpose is to promote innovation within their ranks. (1) One of the most well-known is the Skunk Works group at Lockheed Martin. The group was originally named after a reference in a cartoon and was first brought together in 1943 to build the P-80 fighter jet. Because the project was to eventually become a part of the war effort, the project was internally protected and secretive. Kelly Johnson, later famous for Kelly’s 14 rules of intrapreneurship, was the director of this group. (2) Another example could be 3M, who encourage many projects within the company. They give certain freedom to employees to create their own projects, and they even give them funds to use for these projects. (In the days of its founders, HP used to have similar policies and just such an innovation-friendly atmosphere and intrapreneurial reputation. ) (3) Besides 3M, Intel also has a tradition of implementing intrapreneurship. (4) Google is also known to be intrapreneur friendly, allowing their employees to spend up to 20% of their time to pursue projects of their choice.

Scheduling Work

Introduction

Job design is defined as the allocation of specific work tasks to individuals and groups (Schermerhorn, Job Design Alternatives, 2006). Allocating jobs and tasks means specifying the contents, methods and relationships of jobs to satisfy technological and organizational requirements as well as the personal needs of jobholders. If successful job design is not implemented, than the companies general strategy and direction will be strongly diverted. Meaningful jobs must also exemplify the company’s goals and culture.

Elements to Job Design

In order to better understand job design it is helpful to define some key elements and their relationship with job design processes.

A task is a piece of assigned work expected to be done within a certain time. It is important to strictly and thoroughly identify tasks that need completion. In addition, it is essential to design jobs that motivate employees. Motivation describes forces within the individual that account for the level, direction, and persistence of effort expended at work (Schermerhorn). In job design, it is necessary to identify and structure jobs in a way that the company’s resources are being efficiently used. Resource Allocation occurs when organizations decide to appropriate or allocate certain resources to specific jobs, tasks or dilemmas facing the organization.

Jobs need to be constructed so that efficiency of the worker or department is maximized. Organizations need to use the resources and creativity of their employees effectively and efficiently. Reward systems also play a role in job design. Reward systems include compensation, bonuses, raises, job security, benefits, and various other methods of reward for employees.

Traditional Approaches to Job Design

Frederick Taylor developed a theory in an effort to establish a science for every job within an organization (Taylorism or Scientific Management) . The principles of Taylorism are as follows:

Frederick Taylor

Frederick Winslow Taylor lived from 1856 to 1915. Taylorism was named after him.

• Create a standard method for each job;
• Successfully select and hire proper workers;
• Effectively train these workers;
• Support these workers.

Hertzberg’s Motivation-Hygiene Theory attempts to uncover psychological needs of employees and enhance employee satisfaction. Employers are encouraged to design jobs that enhance and motivate employees beyond simply meeting a daily or weekly quota. This theory highlights the importance of rewards systems and monitoring when and how employees are rewarded.

Edwin Locke’s Goal Setting Theory mainly focuses on the motivational properties of task goals (Schermerhorn). Task goals can be highly motivating when set and managed properly. One of the problems with a goal setting theory in job design is that individuals are more strongly motivated by establishing or setting their own personal goals. If organizations set these goals for their employees, then the effectiveness of this technique is diminished.

Current Approaches to Job Design

Technology and the flattening of the global economy have contributed greatly to the changes we now see in jobs and job content across the world. We now recognize that a person presented with quality meaningful work is more likely to do that work well. Because of this insight, job design presently takes some prominent forms.

The first of which is designed around the evolution from individual work to work-groups. This job design practice is called “socio-technical systems” (STS) approach. This approach has the following guiding principles:

• The design of the organization must fit its goals.
• Employees must be actively involved in designing the structure of the organization.
• Control of variances in production or service must be undertaken as close to their source as possible.
• Subsystems must be designed around relatively self-contained and recognizable units of work.
• Support systems must fit in with the design of the organization.
• The design should allow for a high quality of working life.

Another modern job design theory is the Job Characteristics Model (JCM), which maintains five important elements that motivate workers and performance:

• Skill variety,
• Task identity,
• Task significance,
• Autonomy,
• Job feedback.

The individual elements are then proposed, which lead to positive outcomes through three psychological states: experienced meaningfulness, experienced responsibility, and the knowledge of results (Parker & Turner, 2002).

Steps to Effective Job Design

The key to effectively crafting a meaningful job for an employee is starting the thought process by looking at the values and strategy of the organization. By framing the job in these contexts, the job design process is more likely to align potential employees with the purpose of the company. Once you have this context, the following steps will ensure both meaningful and effective job design:

1. Assess skills, needs, abilities, and motivations of employees and the organization.
2. Design the job to meet those needs, abilities and motivations.
3. Implement the new job design.
4. Audit the success of the job design and begin with step one periodically as well as when problems have been identified.

13.4.3: Executive Compensation

Levels of executive pay have been controversial in recent times, with only tenuous links between executive pay and company performance.

Learning Objective

Analyze the arguments for and against huge growth in executive compensation

Key Points

• When looking at the long-term prospects of the company, a good CEO will assemble and maintain a top-notch management team and nurture leaders to take over.
• Executive pay is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and call options on the company stock, benefits, and perquisites.
• Excessive executive compensation has been criticized from all quarters, but defenders say that it is because of the competition that exists between companies for a limited number of top executives.

Key Term

chief executive officer

The highest-ranking corporate officer or executive officer of a corporation, company, or agency, responsible for carrying out the policies of the board of directors on a day-to-day basis; CEO.

Example

• The ratio of CEO pay to average worker pay is far greater in the U.S. compared with other countries. In Japan, the ratio of CEO pay to average worker pay is 11:1; in Italy, it is 20:1; in Britain, it is 22:1; in Mexico, it is 47:1; and in the U.S., the ratio is 475:1.

A Top-notch Team is Needed for Corporate Success

Typically, the chief executive officer (CEO) directs the fortunes of the company. It helps that the CEO has a good team that includes the chief operating officer (COO) who leads the operations of a company, and chief financial officer (CFO) who manages the finances. Also important in different companies are the chief marketing officer (CMO) and the chief information officer (CIO), who manages the information systems. When looking at the long-term prospects of the company, a good CEO will assemble and maintain a top-notch management team and nurture leaders to take over.

Controversy Over Executive Compensation

Executive pay (also known as executive compensation) is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.

Many policy makers are concerned about the huge growth in executive compensation and the lack of a relationship between performance and compensation. An example from the recent financial crisis are the CEOs who led their companies into insolvency and bankruptcy yet were still given huge pay packages .

More Compensation Heading to the Very Top

During the financial crisis of 2008, many CEOs led their companies into insolvency and bankruptcy yet were still given huge pay packages.

In general, the compensation of CEOs in the United States has risen to over 400 times the salary of the average U.S. worker, compared to about 30 times only a few decades ago . This is different from other countries where the disparity is not so great.

Growth of CEO Pay In America

The compensation of CEOs in the United States has risen to over 400 times the salary of the average U.S. worker, compared to about 30 times only a few decades ago.

The explosion in executive pay has become controversial, criticized by not only leftists but conservative establishmentarians such as Ben Bernanke, Peter Drucker, John Bogle, and Warren Buffet. The idea that stock options and other alleged pay-for-performance are driven by economics has also been questioned. A 2001 article in Fortune, “The Great CEO Pay Heist” drew criticism for this line of thinking: instead of arguing that “the stock isn’t moving, so the CEO shouldn’t be rewarded”, it instead argued that “the stock isn’t moving, so we’ve got to find some other basis for rewarding the CEO. ” This line of thinking is exactly why executive compensation has come under so much criticism.

Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay. For example, while in conservative Japan a senior executive has few alternatives to his current employer, in the United States it is acceptable and even admirable for a senior executive to jump to a competitor, to a private equity firm, or to a private equity portfolio company. Portfolio company executives take a pay cut but are routinely granted stock options for ownership of 10% of the portfolio company, contingent on a successful tenure. Rather than signaling a conspiracy, defenders argue, the increase in executive pay is a mere byproduct of supply and demand for executive talent. However, U.S. executives make substantially more than their European and Asian counterparts.

As of 20120, the current ratio of CEO pay to average worker pay was:

• Japan 11
• Germany 12
• France 15
• Italy 20
• Canada 20
• South Africa 21
• Britain 22
• Hong Kong 41
• Mexico 47
• Venezuela 50
• United States 475

13.4.4: Sexual Harrassment

Sexual harassment is bullying or coercion of a sexual nature, or unwelcome/inappropriate promises of rewards in exchange for sexual favors.

Learning Objective

Explain the effects of sexual harassment and how organizational policies can prevent it from occuring

Key Points

• Harassment can include unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature. It includes a range of behavior from mild transgressions to sexual abuse or sexual assault.
• In the workplace, harassment may be considered illegal when it is so frequent or severe that it creates a hostile or offensive work environment, or when it results in an adverse employment decision.
• Psychologists and social workers report that severe or chronic sexual harassment can have the same psychological effects as rape or sexual assault.
• Studies show that the organizational climate (an organization’s tolerance, policy, procedure etc.) and workplace environment are essential for understanding the conditions in which sexual harassment is likely to occur, and the way its victims will be affected.

Key Terms

sexual harassment

bullying or coercion of a sexual nature, or the unwelcome or inappropriate promise of rewards in exchange for sexual favors.

retaliation

a sometimes violent response to an act of harm or perceived injustice.

Example

• Academic studies have carefully shown how cultural differences affect attitudes about sex, sexual advances, and hostility at work. In one study, American, Australian, and German collegians were offered written scenarios of sexual overtures in offices. Responses from all three nationalities were similar, but as a group, they were far more likely to brand the episodes with terms like harassment than were their peers from Brazil. Faced with the same scenarios, the Brazilians tended to see only innocuous pokes at romance and sex that didn’t constitute abuse of power or create a hostile environment. A similar experiment showed a comparable split between typical adults living in the United States (more prone to see harassment) and Ecuador (more likely to see scenarios as flirtatious or harmless sexual jousting).

Sexual Harassment Defined

Sexual harassment is bullying or coercion of a sexual nature, or the unwelcome or inappropriate promise of rewards in exchange for sexual favors. Harassment can include unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature. Sexual harassment can includes a range of behavior from mild transgressions (like jokes or innuendos) to sexual abuse or sexual assault, but laws against sexual harassment typically don’t prohibit simple teasing, offhand comments, or minor isolated incidents. In the workplace, harassment may be considered illegal when it is so frequent or severe that it creates a hostile or offensive work environment, or when it results in an adverse employment decision (such as the victim being fired or demoted, or when the victim decides to quit the job). Sexual harassment may occur in a variety of circumstances. Often, but not always, the harasser is in a position of power or authority over the victim (due to differences in age, level of employment, or years with the company). For many businesses and other organizations, preventing sexual harassment—and addressing any incidents of it— has become a major priority within their ranks.

Effect on Victims

Effects of sexual harassment can vary depending on the individual victim and the severity and duration of the harassment. Psychologists and social workers report that severe or chronic sexual harassment can have the same psychological effects as rape or sexual assault. Victims who do not submit to harassment may also experience other forms of harassment including retaliation in the form of isolation or bullying. Common psychological effects of sexual harassment and retaliation that could affect your academic, professional, financial or social life include:

• Decreased work or school performance as a result of stress conditions, including increased absenteeism in fear of repeated harassment;
• Fear of being fired or refused a promotion or job opportunity; loss of job or career, and loss of income;
• Having one’s personal life offered up for public scrutiny—the victim becomes the “accused,” and his or her person, appearance, lifestyle, and private life can often come under attack;
• Becoming publicly sexualized (i.e. groups of people “evaluate” the victim to establish if he or she is “worth” the sexual attention or the risk to the harasser’s career);
• Defamation of character and reputation;
• Loss of trust in environments similar to where the harassment occurred;
• Loss of trust in the types of people that occupy similar positions as the harasser or his or her colleagues; difficulties or stress with peer relationships, or relationships with colleagues;
• Extreme stress on relationships with significant others, including personal sexual life, sometimes resulting in divorce;
• Weakening of support network, or being ostracized from professional or academic circles (friends, colleagues, or family may distance themselves from the victim, or shun him or her altogether);
• Having to relocate to another city, another job, or another school.

Organizational Policies and Procedures

When organizations do not take the satisfactory measures for properly investigating sexual harassment, do not offer psychological counseling and guidance, or just decide to ignore the problem or not take it seriously, this could lead to:

• Decreased productivity and increased team conflict;
• Decreased study or job satisfaction;
• Loss of students or staff;
• Resignations of alleged harassers;
• Increased absenteeism by staff or students experiencing harassment;
• Decrease in success at meeting academic or financial goals;
• Increased health care costs and sick pay costs because of the health consequences of harassment and/or retaliation;
• High jury awards for the victim of the harassment;

If the problem is ignored or not treated properly, a company’s or school’s image can suffer. Moreover, the knowledge that harassment is permitted can undermine the ethical standards of the organization in general, as staff and/or students lose respect for, and trust in, their superiors or supervisors who indulge in, turn a blind eye to, or handle incidents of sexual harassment improperly.

Studies show that the organizational climate (an organization’s tolerance, policies, procedures, etc.) and workplace environment are essential for understanding the conditions in which sexual harassment is likely to occur, and the way its victims will be affected. According to Dr. Orit Kamir, the most effective way to avoid sexual harassment in the workplace, and also influence the public’s state of mind, is for the employer to adopt a clear policy prohibiting sexual harassment and to make it very clear to his or her employees.

Sexual Harassment In the Military

Historically, sexual harassment has been prevalent in the military. Pictured here are members of I.A.M. Strong, the Army’s campaign to combat sexual harassment and sexual assaults.

13.4.5: Childcare

Empowering a strong work/life balance for employees increases loyalty and job satisfaction while building a strong family-oriented culture.

Learning Objective

Understand the value of various parental benefits from the organizational perspective

Key Points

• Benefits that empower employees to establish a strong work/life balance can provide significant organizational benefits.
• New parents need more support than most, and integrating chlid care programs, maternity/paternity leave, and emergency leave is absolutely critical to building a strong and more focused workforce.
• There are various ways to approach child care, but most smaller to medium sized organizations will outsource this to local professionals. Keep in mind, different childcare centers specialize in different age groups.
• Providing child care benefits increases employee loyalty and focus, decreases anxiety, and reduces absenteeism while building a strong, family-oriented organizational culture.

Key Terms

childcare

The act or practice of taking care of children.

absenteeism

The practice of missing days of work.

Providing benefits such as childcare, maternity/paternity leave, flexible working, and emergency leave is critical for helping employees keep a healthy work/life balance. The responsibilities of parenting require a great deal of time and energy, and supporting new parents as they find time for everything can significantly improve employee satisfaction, retaining key talent through good benefits and employee support. 

How To Support Parents

Childcare

The scope of a child care program is up to the business itself, as well as the decision to create this benefit in house or to outsource it. Most commonly, businesses will create agreements with childcare providers in the local area, covering or sharing the costs of childcare while the parents are at work. However, not all programs will fit all age groups. Larger organizations may want to consider partnerships for the following:

• Infant care (0-1 year old)
• Corporate child center (0-3 years old)
• Corporate kindergarten (3-6 years old)
• Corporate camp for holidays (3-14 years old)

Through providing childcare benefits, employers can potentially realize the following benefits:

• Reduced employee absenteeism
• Increased focus at work
• Decreased healthcare costs
• Development of a strong, family-oriented culture
• Increased employee loyalty
• Reduced HR costs (recruiting/onboarding new employees)

Other Parental Support Programs

New parents need more than childcare to fully balance work and life demands. Providing ample time for maternal and paternal leave is critical to empowering employees to adjust to their new responsibilities. Parents need time to organize their new lives, and create a strong ecosystem for their family to thrive.

Along similar lines, emergency leave is also absolutely necessary in case something happens. Employees who are afraid of getting in trouble for having to leave work early will be less loyal, less focused and more anxious about the demands of their home and work lives. Trusting employees to get the job done when and how they can, and providing a flexible and family-oriented work culture, is an incredible advantage.

Daycare

This image shows children at a daycare, where employee children can socialize and learn while the parents are at work.

This image depicts children at daycare, where they can learn and socialize while parents are at work.

13.4.6: Drug Screening

Explaining why drug testing is necessary and following proven process guidelines will go a long way toward appeasing workers.

Learning Objective

Explain the common practice of firms’ drug testing

Key Points

• While most employees feel the purpose of drug screening is to identify people doing something illegal off duty and then punish them, the real point is to prevent impaired workers from hurting themselves or others.
• There are two kinds of employment drug testing: pre-employment drug screening and publish-employment drug testing.
• There are legal issues relating to drug testing that must be adhered to. For instance, the Fourth Amendment ensures protection against unreasonable search and seizure, and drug testing can be argued to fall under this.
• There are issues regarding the legality of drug testing.

Key Term

drug test

Any chemical check for the presence of (usually illegal) drugs in a sample of one’s blood, hair, or urine.

Example

• In Maryland, drug testing laws make it possible to screen for drugs using a hair specimen for pre-employment purposes only.

Drug Screening

When employees discuss the subject of examinations for illegal or illicit chemical use, there is almost always a negative tone to the discourse. No person really likes the idea that he or she is in any way suspected of such activity. As an unfortunate consequence of our societal behavior, however, a company requiring a drug test is reasonable, and can be done without rancor.

As with almost any managerial policy, the more the workforce understands about why it was created and what it entails, the less resistance there will likely be.

The Purpose of Drug Testing

There are two kinds of employment drug testing: pre-employment drug screening and publish-employment drug testing.

Pre-employment testing is carried out prior to recruiting individuals to make certain that drug abusers do not enter into the business. This is done under the premise that human assets are the biggest assets of a reputed organization. Talented staff members have a positive impact on productivity. However, this productivity is jeopardized when a company’s workers use illicit drugs.

In accordance with the most recent reports (2009) released by Compound Abuse and Mental Health Expert services Administration (SAMHSA), out of 19.3 million illicit drug abusers aged 18 many years or older, 12.9 million had been employed full time or part time in United States. This knowledge signifies that many illicit drug users are finding employment and that they may well impact the organizational lifestyle.

Pre-employment drug testing can help in generating a sense of fear in people looking for work, as the odds are, if they use drugs, their application will be rejected due to them screening positive.

Comparing it with the automatic process undergone by everyone in federal service will help clarify the importance of having “clean” employees, as the idea of impaired FBI agents is clearly problematic to all. Relating that to the performance of duties at the corporate level is not a huge leap of logic.

Drug Screening and Constitutional Law

Some states do not have specific laws addressing this issue, so it is up to corporate policy to determine the best approach.

The Fourth Amendment ensures protection against unreasonable search and seizure, and these examinations have been held to be covered by this provision. One issue that comes up in the practice of conducting these processes is how much is too much. Even people who understand the rationale and grudgingly approve of it become incensed if the checks occur too often. All citizens are protected against the denial of life, liberty and the pursuit of happiness, and this has been ruled to mean excessive intrusion on person or privacy.

Making Employees Understand the Necessity of Drug Testing

One key to approaching the subject with the workforce is to address it in the venue of safety.

Most employees feel the purpose of drug screening is to identify people doing something illegal off duty and then punish them. Keeping the focus on what the real point is, which is the prevention of impaired workers from hurting themselves or others, can be key to acceptance. Many employees do not consider the ramifications to the enterprise or employer should their actions result in loss, injury, or fatality. They do not know the legal responsibility an employer has to ensure that employees are competent and ready to work.

Knowing that their mishaps could cost the employer will help employees realize why it is important that everyone be substance free on the job. Even though they understand the reasons for it, the physical process of the examination is ultimately humiliating and degrading, with some workers tolerating it better than others. Choosing a company that has a good reputation, who are willing to collect feedback from those who are examined will also ease the effort. Testing at the workplace, instead of some third-party location, is less disruptive and faster.

Nevertheless, the practice of drug testing in a company protects everyone. Remaining careful to avoid any perception of bias through uniform and fair exercise will appease workers as much as possible. Following proven process guidelines will ensure that any challenge to the program will result in a finding for the company.

Strand of Hair

A strand of hair is all it takes to tell the story of illicit drug use.

13.4.7: Violence in the Workplace

Conflict in the workplace arises when there is a non-acceptance of the differences which exist between people at work.

Learning Objective

Explain the causes of and solutions to conflict in the workplace

Key Points

• Human resource managers report spending 24% to 60% of their time dealing with employee disputes.
• Causes for conflict within the workplace may include poor organizational structures, a strong spirit of competitiveness and non-cooperation, poor communication, personality conflicts, frequent change, and lack of teamwork.
• Strategies to help resolve worker conflict may include listening carefully, staying impartial, and agreeing to work on an action plan going forward.

Key Term

conflict

A clash or disagreement, often violent, between two opposing groups or individuals.

Example

• A disgruntled employee may violently act out against another employee if she feels slighted or the need to retaliate. However, due to different styles of interaction or differing values or beliefs, the cause of the conflict may just be a miscommunication.

Introduction

The Pillow Fight

Unfortunately, most employee conflicts aren’t as good-natured as this pillow fight.

Human resource managers report spending 24% to 60% of their time dealing with employee disputes.

According to a study by the Society of Human Resource Management (SHRM), the number of violent incidents in the workplace has been increasing. Nearly 60% of respondents said violence had occurred in their organization during the past three years, and they identified “personality conflicts” as the leading cause.

Why Conflicts Arise

Conflict arises when one or more person tries to ensure their preferred outcome is achieved to the exclusion of the preferred outcome of others. Causes of conflict within an organization include:

1. Poor organization structures where people may feel alienated or isolated, thus the spirit of competitiveness and non-cooperation may be strong.
2. Poor communication where people don’t have the opportunity to express how they feel or to clear up causes of conflict which may arise.
3. Personality conflicts which cause people to clash with each other due to different styles of interaction or differing values or beliefs.
4. Poorly managed change within an organization, which can lead to people feeling insecure and threatened.
5. Lack of teamwork /poor performance, where some members of the team believe other colleagues are not competent in the jobs they do.

Overall, conflict arises when there is a non-acceptance of the differences which exist between people at work. It is also more likely to happen in organizations where there is a high level of uncertainty, or where there are poor industrial relations. The atmosphere this causes can result in a raising of tension levels and poor relationships at work.

Conflict Resolution Strategies

The following strategies can help effectively resolve worker conflict:

1. Be a good listener. The parties involved should all want to tell their story. Even though getting people to speak freely can increase the level of conflict, it’s a good idea to get all the complaints and issues out so you can begin working on a solution.
2. Stay impartial without getting the the staff to hate you and the establishment. If your staff has been divided into camps, each espousing one idea over another, make sure you understand the motivations of each group.
3. Stay logical. Don’t let your feelings for the people on staff influence your decision. If you don’t get along with the people in one group, do not dismiss their ideas and claims.
4. Agree an action plan. Who will do what , when and how. Monitor progress and review within an agreed period. Move on from the conflict once it has been resolved.

13.4.8: Complaint Procedures

Different participation systems can be implemented to authentically get employee input and to capitalize on the benefits.

Learning Objective

Explain employee influence in an organization

Key Points

• Employees are the resources of an organization in the same way as material assets but they are also the firm’s stakeholders. Even so, they do not often command the majority of attention in terms of decision-making influences.
• Grievance and due process systems allow employees to address grievances and to argue their point if they feel they are wronged by management or another employee.
• Employers benefit from the increased trust that comes from sharing information and giving employees influence.
• Open-book management empowers employees with the information they need to see the reality of the organizational situation and to give relevant and helpful input.
• Feedback programs can be a less expensive way to get feedback from employees concerning specific programs or policies.
• Team mechanisms such as quality circles, work teams, and total-quality management teams provide employees with the ability to synthesize their individual input into a better solution to organizational problems.

Key Terms

open-book management

A management phrase coined by John Case of Inc. magazine, who began using the term in 1993 (Aggarwal & Simkins, 2001). The basis of OBM is that the information received by employees should not only help them do their jobs effectively, but help them understand how the company is doing as a whole (Kidwell & Scherer, 2001). The technique is to give employees all relevant financial information about the company so they can make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.

grievance

A wrong or hardship suffered, which is the grounds of a complaint.

feedback

Critical assessment on information produced.

Example

• In order to benefit from complaints and observations of employees, an employer may use a feedback program, which for example, may entail her creating a survey for the employees to complete and review various aspects of the organizational situation in the workplace.

Employees: Often the Unheard Stakeholders

Employees are the resources of an organization in much the same way as material assets. They are also the firm’s stakeholders.

The concept of employees as stakeholders refers to the interest employees have in the success of the company and the fact that actions taken by the organization directly affect the employees (Olson, 2003). Though employees are the stakeholders who are arguably most visible to management on a day-to-day basis, they do not often command the majority of attention in terms of decision-making influences.

Employees can get their Voices Heard

Employers benefit from the increased trust that comes from sharing information and giving employees influence (Pfeffer & Viega, Putting People First for Organizational Success, 1998). However, managers who are used to having control often find it “disconcerting, difficult and even impossible” to share power in the form of influence in exchange for the many organizational benefits (Marken, 2004).

Employees can obtain influence in organizational decisions in several ways :

Employees

They can obtain influence in organizational decisions in several ways.

• Grievance and due process systems allow employees to address grievances and to argue their point if they feel they are wronged by management or another employee.
• Many different participation systems can be implemented to authentically get employee input and to capitalize on the benefits associated with employee influence.
• Open-book management empowers employees with the information they need to see the reality of the organizational situation and to give relevant and helpful input (Case, 1997).
• Similar to open-book management are open-door policies, where management makes it clear that employees can informally raise issues or give input at any time.
• Feedback programs, sometimes implemented in the form of employee surveys or through direct employee-management interaction, can be a less expensive way to get feedback from employees concerning specific programs or policies (Solnik, 2006).
• Team mechanisms such as quality circles, work teams, and total-quality management teams provide employees with the ability to synthesize their individual input into a better solution to organizational problems.

13.5: Union Negotiation Tactics

13.5.1: Strikes

Strike action, also called a labor strike, is a work stoppage caused by the mass refusal of employees to work.

Learning Objective

Outline the basic procedures of a workers strike

Key Points

• A strike usually takes place in response to employee grievances.
• A strike is typically reserved as a threat of last resort during negotiations between the company and the union, which may occur just before or immediately after the contract expires.
• Occasionally, workers decide to strike without the sanction of a labor union. In many countries, these unofficial strikes do not enjoy the same legal protections as recognized union strikes.
• Sometimes people continue to work during a strike action, or temporary and permanent replacement workers are hired to take the place of those on strike.
• Unions faced with a strikebreaking situation may try to inhibit the use of strikebreakers by a variety of methods. Companies may respond by increasing security forces and seeking court injunctions.
• Unions faced with a strikebreaking situation may try to inhibit the use of strikebreakers by a variety of methods. Companies may respond by increasing security forces and seeking court injunctions.

Key Terms

work-to-rule

Of or pertaining to a labor protest in which employees do only the minimum work required by the rules of a workplace, following safety or other regulations to the letter in order to cause a slowdown.

labor union

A continuous association of wage-earners for the purpose of maintaining or improving the conditions of their employment; a trade union.

collective bargaining

A method of negotiation in which employees negotiate as a group with their employers, usually via a trade union

Example

• The Minneapolis General Strike of 1934 grew out of a strike by Teamsters against most of the trucking companies operating in Minneapolis, a major distribution center for the Upper Midwest. The strike began on May 16, 1934 in the Market District (the modern day Warehouse District) and ensuing violence lasted periodically throughout the summer. Led by local leaders associated with the Trotskyist Communist League of America, a group that later founded the Socialist Workers Party (United States), the strike paved the way for the organization of over-the-road drivers and the growth of the Teamsters labor union.

What is a Strike?

A strike action, also called labor strike, is a work stoppage caused by the mass refusal of employees to work. A strike usually takes place in response to employee grievances.

Strikes became important during the Industrial Revolution when mass labor became important in factories and mines. In most countries, strike actions were quickly made illegal, as factory owners had far more political power than workers. Most western countries partially legalized striking in the late 19^th or early 20^th centuries.

Why Do Workers Strike?

Most strikes are undertaken by labor unions during collective bargaining. The object of collective bargaining is to obtain a contract (an agreement between the union and the company) which may include a no-strike clause or penalizes the union and/or the workers if they walk out while the contract is in force. The strike is typically reserved as a threat of last resort during negotiations between the company and the union.

Occasionally, workers decide to strike without the sanction of a labor union. This is either because the union refuses to endorse the tactic, or because the workers concerned are not unionized. Such strikes are often described as unofficial.

Strikes without formal union authorization are also known as wildcat strikes. In many countries, wildcat strikes do not enjoy the same legal protections as recognized union strikes, and may result in penalties for the union members who participate.

What Happens During A Strike?

1. A strike may consist of workers refusing to attend work or picketing outside the workplace to prevent or dissuade people from working in their place or conducting business with their employer.
2. Less frequently workers may occupy the workplace, but refuse either to do their jobs or to leave. This is known as a sit-down strike.
3. A similar tactic is the work-in, where employees occupy the workplace but still continue work, often without pay. This tactic attempts to show they are still useful, or that worker self-management can be successful. This occurred with factory occupations in the Bienno Rossi strikes-the “two red years” of Italy from 1919-1920.
4. Another unconventional tactic is work-to-rule, in which workers perform their tasks exactly as they are required but no better. For example, workers might follow all safety regulations in a way that it impedes their productivity. Such strikes may be a form of “partial strike” or “slowdown. “

What is a Strikebreaker?

A strikebreaker continues to work during strike action by trade unionists or acts as a temporary or permanent replacement worker hired to take the place of those on strike.

The act of working during a strike – whether by strikebreakers, management personnel, non-unionized employees or members of other unions not on strike – is known as “crossing the picket line,” regardless of whether it involves actually physically crossing a line of picketing strikers. Crossing a picket line can result in passive and/or active retaliation against that working person.

What Methods do Employers use to Deal with Strikes?

Most strikes called by unions are somewhat predictable; they typically occur after the contract has expired.

1. Strike preparation: Companies which produce products for sale will frequently increase inventories prior to a strike. Salaried employees may be called upon to take the place of strikers, which may entail advance training. If the company has multiple locations, personnel may be redeployed to meet the needs of reduced staff.
2. Companies may also take out strike insurance prior to an anticipated strike, helping to offset the losses which the strike would cause.
3. One of the weapons traditionally wielded by already-established unions is strike action. Some companies may decline entirely to negotiate with the union, and respond to the strike by hiring replacement workers. This may create a crisis situation for strikers — do they stick to their original plan and rely upon their solidarity, or is there a chance that the strike may be lost? How long will the strike last? Will strikers’ jobs still be there if the strike fails? Are other strikers defecting from the strike? Companies that hire strikebreakers typically play upon these fears when they attempt to convince union members to abandon the strike and cross the union’s picket line.
4. Another counter to a strike is a lockout, the form of work stoppage in which an employer refuses to allow employees to work.

Unions faced with a strikebreaking situation may try to inhibit the use of strikebreakers by a variety of methods:

• establishing picket lines where the strikebreakers enter the workplace
• discouraging strike breakers from taking or keeping strikebreaking jobs
• raising the cost of hiring strikebreakers for the company
• employing public relations tactics

Teamsters clash with armed police in Minneapolis, 1934.

Members of the Teamsters union wielding pipes clash with armed police during a 1934 strike in Minneapolis.

13.5.2: Boycotts

Union boycotts are a form of industrial action by a trade union in support of a strike initiated by workers in another, separate enterprise.

Learning Objective

Differentiate between a trade dispute with a worker’s direct employer and “secondary action”

Key Points

• The term “secondary action” is intended to be distinct from a trade dispute with a worker’s direct employer, and so may be used to refer to a dispute with the employer’s parent company, its suppliers, financiers, contracting parties, or any other employer in another industry.
• In most countries there are limits on the purpose for which people can go on strike. In many English-speaking nations, restrictions have been placed on which organizations trade unions may strike against.
• Secondary action is illegal in the United States. It is banned by the Sherman Antitrust Act and by the Taft-Hartley Act, which amends the Wagner Act of 1935.

Key Terms

agribusiness

Big business connected to agriculture, either owning or operating large scale farms, or catering to those who do.

boycott

To abstain, either as an individual or group, from using, buying, or dealing with someone or some organization as an expression of protest.

industrial action

In a workplace, a strike or other protest by workers.

Example

• Because farm laborers in the United States are not covered by the Wagner Act, the United Farm Workers’ (UFW) union has been able to legally use secondary boycotting of grocery store chains as an aid to their strikes against California agribusinesses and to their primary boycotts of California grapes, lettuce, and wine. The UFW’s secondary boycotts involved asking consumers to stop shopping at a grocery store chain until such time as the chain stopped carrying the boycotted grapes, lettuce, or wine.

Union Boycotts: Supporting Strikers

Union boycotts, or secondary action, is industrial action by a trade union in support of a strike initiated by workers in another, separate enterprise .

Union Boycotts

Also known as secondary action, is industrial action by a trade union in support of a strike initiated by workers in another, separate enterprise.

The term “secondary action” is intended to be distinct from a trade dispute with a worker’s direct employer, and so may be used to refer to a dispute with the employer’s parent company, its suppliers, financiers, contracting parties, or any other employer in another industry.

Going on Strike: Legal Limits

In most countries there are limits on the purpose for which people can go on strike, and in many English-speaking nations restrictions have been placed on which organisations trade unions may strike against. In the U.S. and U.K., workers can typically strike against their direct employer only.

In continental Europe, secondary action is generally lawful and the right to strike is seen as a part of a broader political freedom. Secondary action is illegal in the United States. It is banned by the Sherman Antitrust Act and by the Taft-Hartley Act, which amends the Wagner Act of 1935.

Because farm laborers in the United States are not covered by the Wagner Act, the United Farm Workers’ (UFW) union has been able to legally use secondary boycotting of grocery store chains as an aid to their strikes against California agribusinesses and to their primary boycotts of California grapes, lettuce, and wine. The UFW’s secondary boycotts involved asking consumers to stop shopping at a grocery store chain until such time as the chain stopped carrying the boycotted grapes, lettuce, or wine.

13.5.3: Lockouts

Employers are generally motivated to prevent, mitigate the impact of, and undermine strikes when they occur by using a variety of tactics.

Learning Objective

Explain how companies prevent and stop strikes

Key Points

• One of the weapons traditionally wielded by already established unions is strike action.
• Unions faced with a strikebreaking situation may try to inhibit the use of strikebreakers by a variety of methods.
• One method of inhibiting or ending a strike is firing union members who are striking, which can result in the elimination of the union, This is often referred to as union busting.
• At the federal level President John Kennedy, a Democrat, in 1962 issued Executive Order 10988, upgrading the status of unions of federal workers.
• In 2011 as states faced a growing fiscal crisis and the Republicans made major gains in the 2010 elections, public sector unions came under heavy attack in Wisconsin, Indiana, New Jersey and Ohio from conservative Republican legislatures.
• Traditionally, women had been under-represented in union organizing due to the belief that “it was a woman’s ‘nature’ to be a loyal ‘office wife'” and to not show disloyalty by joining a union. As the industrial sector began to decline more attention has turned to organizing women in white-collar service jobs, or what has been called the pink-collar sector. The increased membership of women has also shed new light on gender issues, with family issues and other women’s concerns gaining more legitimacy in the work place.

Key Terms

Solidarity

A bond of unity between individuals, united around a common goal or against a common enemy, such as the unifying principle that defines the labor movement.

picket line

The boundary created by striking workers, generally at the workplace entrance, which other workers are asked not to pass.

strikebreaking

Activity intended to disrupt or end without an agreement a strike by workers.

Example

• The United Auto Workers’ numbers of automobile union members are representative of the decline in unions in the manufacturing sector: 1,619,000 active members in 1970, 1,446,000 in 1980, 952,000 in 1990, 623,000 in 2004, and 377,000 in 2010 (with far more retired than active members).

Union Tactics

Methods to Deal with Strikes

Most strikes called by unions are somewhat predictable; they typically occur after the contract has expired. However, not all strikes are called by union organizations. Some strikes have been called in an effort to pressure employers to recognize unions. Other strikes may be spontaneous actions by working people. Spontaneous strikes are sometimes called “wildcat strikes;” they were the key fighting point in May 1968 in France. Most commonly, they are responses to serious (often life-threatening) safety hazards in the workplace rather than wage or hour disputes, etc.

Whatever the cause of the strike, employers are generally motivated to take measures to prevent them, mitigate the impact, or to undermine strikes when they do occur.

Strike Preparation

Companies which produce products for sale will frequently increase inventories prior to a strike. Salaried employees may be called upon to take the place of strikers, which may entail advance training. If the company has multiple locations, personnel may be redeployed to meet the needs of reduced staff.

Companies may also take out strike insurance prior to an anticipated strike, to help offset the losses which the strike would cause.

One of the weapons traditionally wielded by already-established unions is strike action. Some companies may decline entirely to negotiate with the union, and respond to the strike by hiring replacement workers. This may create a crisis situation for strikers. Do they stick to their original plan and rely upon their solidarity, or is there a chance that the strike may be lost? How long will the strike last? Will strikers’ jobs still be there if the strike fails? Are other strikers defecting from the strike? Companies that hire strikebreakers typically play upon these fears when they attempt to convince union members to abandon the strike and cross the union’s picket line.

Unions faced with a strikebreaking situation may try to inhibit the use of strikebreakers by a variety of methods, establishing picket lines where the strikebreakers enter the workplace; discouraging strike breakers from taking, or from keeping strikebreaking jobs; raising the cost of hiring strikebreakers for the company; or employing public relations tactics. Companies may respond by increasing security forces and seeking court injunctions.

Strikebreaking

Some companies negotiate with the union during a strike; other companies may see a strike as an opportunity to eliminate the union. This is sometimes accomplished by the importation of replacement workers, strikebreakers, or “scabs. ” Historically, strike breaking has often coincided with union busting. It was also called “Black legging” in the early twentieth century, during the Russian socialist movement.

Strikebreaker

Strikebreaking tactics are often met with hostile reactions from strikers

Union Busting

One method of inhibiting or ending a strike is firing union members who are striking, which can result in elimination of the union. Although this has happened, it is rare due to laws regarding firing and “right to strike” having a wide range of differences in the United States, depending on whether union members are public or private sector. Laws also vary country to country. In the United States, it is legal to fire striking public sector employees if the strike is illegal. Conversely in the United Kingdom, “It is important to understand that there is no right to strike in UK law.” Employees who strike risk dismissal, unless it is an official strike (one called or endorsed by their union), in which case they are protected from unlawful dismissal and cannot be fired for at least 12 weeks.

Lockouts

Another counter to a strike is a lockout, the form of work stoppage in which an employer refuses to allow employees to work. Two of the three employers involved in the Caravan park grocery workers strike of 2003-2004 locked out their employees in response to a strike against the third member of the employer bargaining group. Lockouts are, with certain exceptions, lawful under United States labor law.

Violence

Historically, some employers have attempted to break union strikes by force. One of the most famous examples of this occurred during the Homestead Strike of 1892. Industrialist Henry Clay Frick sent private security agents from the Pinkerton National Detective Agency to break the Amalgamated Association of Iron and Steel Workers strike at a Homestead, Pennsylvania steel mill. Two strikers were killed, 12 wounded, along with 2 Pinkertons killed and 11 wounded. In the aftermath, Frick was shot in the neck and then stabbed by Alexander Berkman, surviving the attack, while Berkman was sentenced to 22 years in prison.

13.5.4: Trends in Labor-Management Relations

Labor-Management relations have been impacted by the decline in union participation, alongside the increase of globalization.

Learning Objective

Understand why unions are declining, both in the United States and elsewhere, and the impact this may have on labor-management relations

Key Points

• The most notable recent trend in management-labor relations is a decline in union participation.
• Unions have declined significantly in the United States since the 1950’s, representing less than 20% of the modern day workforce.
• Globalization and the outsourcing of many jobs, notably in manufacturing, has reduced labor union participation and created a barrier between the organization and the labor they utilize to produce.

Key Term

deregulation

The act of reducing or removing legal or regulatory intervention on a specific issue.

The relationship between management and unions is complex. On the one hand, unions and management collaborate and come to agreement on how workers should be compensated, and what rights and safety measures must be observed to maintain a healthy working environment. 

On the other hand, there is inherently some conflict of interest. Indeed, the foundations of unions is largely one of bringing workers together to ensure (and fight for) proper rights, compensation, and treatment by the organizations. As a result, there is some compromise involved in how unions and management negotiate.

Current Trends in Labor Unions

The most significant trend in the United States when considering labor unions is fairly simple. They are far less prevalent now than they used to be. The initial rise of labor unions in the United States occurred during the Great Depression (1930’s), which has steadily decreased over time. This decrease in labor union participation has also been seen internationally, particularly in recent years. This could be for a number of reasons, but the outcome is the same. Labor unions since the turn of the millennium only represent a small fraction of the U.S. workforce (as illustrated in the chart below).

The trends in labor unions are many, but particularly worthy of note are the impacts of globalization, decrease in manufacturing, and deregulation.

Union Membership

Lower union membership is an important trend in labor dynamics, reducing the conversation between organizations and unions overall.

Lower union membership is an important trend in labor dynamics, reducing the conversation between organizations and unions overall.

Globalization

Union labor laws are domestic, which is to say that the rights of employees are protected by the national government where they reside. As a result, globalization offers the capability for businesses to exploit areas without unions (often with lower labor costs) while diminishing the bargaining power of unions domestically (wherever that may be).

Manufacturing

It’s also worth noting that many union-oriented industries have seen some declines in the United States. Manufacturing, for example, is often outsourced. With fewer employees in union-protected industries, it’s a natural trend that unions will represent a smaller portion of the overall national workforce.

Deregulation

Finally, politics and unions are interdependent. Some economists and researchers have noted that political approaches during the 1980’s created an impact on the ability for employers to diminish the power of unions. This supposition is supported by the decline of unions alongside the propensity for illegal firings during union campaigns (see chart below).

Illegal Union Firings (U.S.)

This chart illustrates the rise of illegal firings during union elections, notably rising in the 1980’s and continuing onwards from there. This is an important trend in the regulatory side of management and union relations.

This chart illustrates the rise of illegal firings during union elections, notably rising in the 1980’s and continuing onwards from there. This is an important trend in the regulatory side of management and union relations.

Conclusion

All and all, management in modern times has seen a lower amount of participation in union negotiations on behalf of organizations. This is primarily reflected by lower union involvement in many industries, alongside the rise of globalization and outsourcing.

12.1: Human Resources and Relevant Laws

12.1.1: National Labor Relations Act

Learning Objective

Explain the development of the National Labor Relations Act (NLRA)

Key Points

• The key principles of the National Labor Relations Act include: encouraging the practice and procedure of collective bargaining and protecting the exercise by workers of full freedom of association.
• The law defined and prohibited five unfair practices which include: interfering with, restraining or coercing employees in their rights; and dominating or interfering with the formation or administration of any labor organization.
• The act was controversial as it was viewed as a threat to freedom and the NLRB was accused of a pro-union and anti-employer bias.
• While opponents have introduced several hundred bills to amend or repeal the lay only the Taft-Hartley amendment was passed in 1947.

Key Term

National Labor Relations Act

An act to diminish the causes of labor disputes burdening or obstructing interstate and foreign commerce, to create a National Labor Relations Board, and for other purposes.

Examples

• It was found that an employer unlawfully interrogated three employees. The Board adopted the judge’s finding that the employer threatened one of the employees during the course of his interrogation. The Board also adopted the judge’s finding that the employer unlawfully laid off five employees, including the three employees it had interrogated. Member Hayes concurred in part and would have affirmed the judge’s analysis of the unlawful layoff without further comment. Charge filed by Local 713, International Brotherhood of Trade Unions. Administrative Law Judge Raymond P. Green issued his decision on August 30, 2011. Members Hayes, Griffin, and Block participated.
• It was found that an employer, a commercial laundry company, violated the Act by: (1) warning the union’s shop steward not to provide information about bargaining to employees; (2) warning employees not to provide information to the union; (3) warning employees not to speak about the union during the workday, including break and lunch times; (4) threatening to discharge employees if they participated in union or other protected activities; (5) threatening employees that the shop would be closed and they would be discharged if the employer had to accept the union’s contract proposals; (6) threatening to discharge employees if they went on strike; (7) promising employees a wage increase and new benefits if the union no longer represented them; (8) polling employees as to whether they supported the union; (9) interrogating employees about their union membership, activities, and sympathies; (10) deducting union dues from employees’ paychecks, but failing to remit those funds to the union; (11) issuing written warnings to, and then discharging, an employee for supporting the union; (12) failing to bargain in good faith with the union; (13) conditioning bargaining upon the commitment of the union to refrain from handbilling the employer’s customers or engaging in any strike or picketing activity; (14) unilaterally stopping payments to various union funds; (15) unilaterally granting employees a wage increase; (16) refusing to bargain with the union because the union’s shop steward was present; and (17) unilaterally implementing new rules regarding the union’s access to unit employees at the facility. Charge filed by Laundry, Dry-Cleaning & Allied Workers Joint Board. Administrative Law Judge Steven Davis issued his decision on December 17, 2010. Chairman Pearce and Members Hayes and Griffin participated.

Introduction

The end of wartime economic controls saw the revelation of previously pent-up demands by American workers for better wages. This led to a series of major labor strikes that polarized American attitudes toward unions, as occurred in the 1890s. In 1935, the Democratic-controlled Congress enacted the National Labor Relations Act, establishing the right of most private-sector workers to form unions, bargain with management over wages and working conditions, and hold strikes to obtain their demands. The National Labor Relations Board, a federal agency, was established to oversee union elections and address unfair labor complaints.

President Roosevelt signed this legislation into law on July 5, 1935. A key principle of the NLRA is embodied in the concluding paragraph of section 1: “Encouraging the practice and procedure of collective bargaining and by protecting the exercise by workers of full freedom of association, self-organization, and designation of representatives of their own choosing, for the purpose of negotiating the terms and conditions of their employment or other mutual aid or protection. “

NLRA key principles also include:

• Protecting a wide range of activities, whether a union is involved or not, in order to promote organization and collective bargaining
• Protecting employees as a class and expressly not on the basis of a relationship with an employer
• Allowance of one exclusive bargaining representative for a unit of employees
• Promotion of the practice and procedure of collective bargaining
• Employers’ duty to bargain with the representative of its employees

Unfair Practices

The law defined and prohibited five unfair labor practices. These prohibitions still exist, while others have been added under subsequent legislation. The original employer unfair labor practices consisted of:

• Interfering with, restraining or coercing employees in their rights under Section 7*
• “Dominating” or interfering with the formation or administration of any labor organization
• Discriminating against employees to encourage or discourage acts of support for a labor organization
• Discriminating against employees who file charges or testify
• Refusing to bargain collectively with the representative of the employer’s employees

*Section 7 rights include: freedom of association; mutual aid or protection; self-organization; to form, join, or assist labor organizations; to bargain collectively for wages and working conditions through representatives of their own choosing; and to engage in other protected concerted activities with or without a union.

Amendments

In the decade following its passage, opponents of the Wagner Act introduced several hundred bills to amend and/or repeal the law. These bills either failed or were vetoed, until the passage of the Taft-Hartley amendments in 1947. More recent failed amendments included attempts in 1978 to permit triple backpay awards and union collective bargaining certification based on signed union authorization cards—a provision similar to a proposed amendment in the Employee Free Choice Act. Under the NLRA, unions can become the representative based on signed union authorization cards only if the employer voluntarily recognizes the union. If the employer refuses to recognize the union, the union can then be certified through a secret-ballot election conducted by the NLRB.

Labor

The National Labor Relations Act is to establish the right of most private-sector workers to form unions, bargain with management.

12.1.2: Labor-Management Relations Act

Learning Objective

Explain the purpose of the Labor-Management Relations Act

Key Points

• The Taft–Hartley Act amended the National Labor Relations Act (informally the Wagner Act), which Congress passed in 1935. The principal author of the Taft–Hartley Act was J. Mack Swigert of the Cincinnati law firm Taft, Stettinius & Hollister.
• The Taft–Hartley Act added a list of unfair labor practices on the part of unions to the National Labor Relations Act. It was seen, by some, as a means of demobilizing the labor movement by imposing limits on labor’s ability to strike and by prohibiting radicals from their leadership.
• Despite President Truman arguing that it would “conflict with important principles of our democratic society” and his attempted veto, he would subsequently use it 12 times during his presidency.

Key Terms

Labor Management Relations Act

The official name of the Taft-Hartley Act.

Taft-Hartley Act

The Taft-Hartley Act is a United States federal law that monitors the activities and power of labor unions.

Example

• The Taft-Hartley Act makes it illegal for federal government employees or workers in corporations owned by the government to strike. Those who do so can expect to be met with harsh sanctions. An example of the consequences can be seen in the outcome of the Professional Air Traffic Controllers Organization’s (PATCO) strike in 1981. Workers were fired; some were jailed and in the end, the (PATCO) was dismantled.

History of the Labor-Management Relations Act

Enacted June 23, 1947, the Labor-Management Relations Act (informally the Taft-Hartley Act) is a United States federal law that monitors the activities and power of labor unions. The act, still effective, was sponsored by Senator Robert Taft and Representative Fred A. Hartley, Jr. and became law by overriding U.S. President Harry S. Truman’s veto on June 23, 1947 ; labor leaders called it the “slave-labor bill,” while President Truman argued that it was a “dangerous intrusion on free speech,” and that it would “conflict with important principles of our democratic society. ” Nevertheless, Truman would subsequently use it 12 times during his presidency. The Taft–Hartley Act amended the National Labor Relations Act (informally, the Wagner Act), which Congress passed in 1935. The principal author of the Taft–Hartley Act was J. Mack Swigert of the Cincinnati law firm Taft, Stettinius & Hollister.

President Harry S. Truman

A portrait of former U.S. President Harry S. Truman who failed in his attempted veto of the 1947 Labor-Management Relations Act.

Taft–Hartley was one of more than 250 union-related bills pending in both houses of Congress in 1947. As a response to the rising union movement and Cold War hostilities, the bill could be seen as a response by business to the post-World War II labor upsurge of 1946. During the year after D-Day, more than five million American workers were involved in strikes, which lasted on average four times longer than those during the war. The Taft–Hartley Act was seen as a means of demobilizing the labor movement by imposing limits on labor’s ability to strike and by prohibiting radicals from their leadership.

Purpose of the Labor-Management Relations Act

The National Labor Relations Act was enacted for a number of reasons, including to promote the full flow of commerce, prescribe the legitimate rights of both employees and employers in their relations affecting commerce, provide orderly and peaceful procedures for preventing the interference by either with the legitimate rights of the other, protect the rights of individual employees in their relations with labor organizations whose activities affect commerce, define and proscribe practices on the part of labor and management which affect commerce and are inimical to the general welfare, and to protect the rights of the public in connection with labor disputes affecting commerce.

The amendments enacted in the Labor Management Relations Act (Taft-Hartley) added a list of prohibited actions, or unfair labor practices, on the part of unions to the NLRA, which had previously only prohibited unfair labor practices committed by employers. The Taft–Hartley Act prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns. It also required union officers to sign non-communist affidavits with the government. Union shops were heavily restricted, and states were allowed to pass right-to-work laws that outlawed closed union shops. Furthermore, the executive branch of the Federal government could obtain legal strikebreaking injunctions if an impending or current strike imperiled the national health or safety, a test that has been interpreted broadly by the courts.

12.1.3: Fair Labor Standards Act

Learning Objective

Explain the specifications of the Fair Labor Standards Act of 1938 (FLSA)

Key Points

• While the Fair Labor Standards act of 1938 declared a goal of assuring “a minimum standard of living necessary for the health, efficiency, and general well-being of workers,” it also allowed employers to replace striking workers.
• The standards apply to employees in the private sector as well as those in Federal, State, and local governments.
• Not all jobs are covered under the FLSA overtime rules. This is because they either are specifically excluded from the statue or because they are governed by another federal act.
• Employees whose jobs are covered by the FLSA are classified as being either “exempt” or “nonexempt. ” Nonexempt employees are entitled to overtime pay while exempt employees are not.

Key Terms

Fair Labor Standards Act

The FLSA established a national minimum wage, guaranteed “time-and-a-half” for overtime in certain jobs, and prohibited most employment of minors in “oppressive child labor,” a term that is defined in the statute. It applies to employees engaged in interstate commerce or employed by an enterprise engaged in commerce or in the production of goods for commerce, unless the employer can claim an exemption from coverage.

exempt

Not entitled to overtime pay when working overtime.

nonexempt

Nonexempt employees are entitled to overtime pay.

Examples

• In many companies, you’ll find exempt and nonexempt workers. The category they fall in depends on rules established by the Fair Labor Standards Act. Those who are nonexempt are paid overtime. Blue collar workers (including manual workers) fall into this category. Police officers, fire fighters, paramedics, and other first responders are also entitled to overtime wages and minimum wage pay.
• Jobs that are excluded from coverage under the FLSA include movie theater employees and many agricultural workers. These jobs are specifically excluded from the statute. Most railroad workers are also not covered as they are governed by the Railway Labor Act or the Motor Carriers Act.

Introduction

The Fair Labor Standards Act of 1938 established a national minimum wage, forbade “oppressive” child labor, and provided for overtime pay in designated occupations. It declared the goal of assuring “a minimum standard of living necessary for the health, efficiency, and general well-being of workers.” But it also allowed employers to replace striking workers.

Specifications

The standards apply to employees in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Many states also have minimum wage laws, at a rate not less than one and one-half times the regular rate of pay is required after 40 hours of work in a workweek.

Covered nonexempt employees must receive for hours worked over 40 per workweek (any fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods) at a rate not less than one and one-half times the regular rate of pay. There is no limit on the number of hours employees 16 years or older may work in any workweek. The FLSA does not require [[#|overtime pay]] for work on weekends, holidays, or regular days of rest, unless overtime is worked on such days. Particular jobs may be completely excluded from coverage under the FLSA overtime rules. There are two general types of exclusion. Some jobs are specifically excluded in the statute itself. For example, employees of movie theaters and many agricultural workers are not governed by the FLSA overtime rules. Another type of exclusion is for jobs which are governed by some other specific federal. As a general rule, if a job is governed by some other federal, the FLSA does not apply. For example, most railroad workers are governed by the Railway Labor Act, and many are governed by the Motor Carriers Act, and not the FLSA.

Exempt or Nonexempt

Employees whose jobs are governed by the FLSA are either “exempt” or “nonexempt. ” Nonexempt employees are entitled to overtime pay. Exempt employees are not. Most employees covered by the FLSA are nonexempt.

History of the Minimum Wage

This graph of the minimum wage in the United States shows the fluctuation in government guarantees for minimum standards of labor.

12.1.4: Equal Pay Act

Learning Objective

Explain the reasons and results of the Equal Pay Act of 1963

Key Points

• Congress denounced sex discrimination due to its effect on wages and living standards, resource utilization, and commerce.
• While women’s salaries when compared to men’s have seen a dramatic increase since the Equal Pay Act was implemented, the act’s goal of equal pay for equal work still has not been completely achieved.
• The act was signed into law on June 10, 1963 by John F. Kennedy as part of his New Frontier Program.

Key Terms

seniority

A measure of the amount of time a person has been a member of an organization, as compared to other members, and with an eye towards awarding privileges to those who have been members longer.

merit

Something worthy of a high rating.

Example

• After graduating from college with the same degrees, both Charlie and Lucy start working at the same IT company. Their resumes look so similar that it is hard to distinguish the two new hires on paper. Their jobs are basically the same, they work at the same location, and neither one of them has a supervisory role. Based on this, both Charlie and Lucy should receive equal salaries as they are doing what is considered “substantially equal work. “

The Equal Pay Act

The Equal Pay Act of 1963 is a United States federal law amending the Fair Labor Standards Act, aimed at abolishing wage disparity based on sex. It was signed into law on June 10, 1963 by John F. Kennedy as part of his New Frontier Program.

John F. Kennedy

Former President John F. Kennedy signed the Equal Pay Act into law in 1963.

Reasons for the Act

In passing the bill, Congress denounces sex discrimination for the following reasons:

• It depresses wages and living standards for employees necessary for their health and efficiency.
• It prevents the maximum utilization of the available labor resources.
• It tends to cause labor disputes, thereby burdening, affecting, and obstructing commerce.
• It burdens commerce and the free flow of goods in commerce.
• It constitutes an unfair method of competition.

The law states:

“No employer having employees subject to any provisions of this section shall discriminate, within any establishment in which such employees are employed, between employees on the basis of sex by paying wages to employees in such establishment at a rate less than the rate at which he pays wages to employees of the opposite sex in such establishment for equal work on jobs, the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions, except where such payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii)a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. “

Results

According to the Bureau of Labor Statistics, women’s salaries vis-à-vis men’s have risen dramatically since the EPA’s enactment, from 62% of men’s earnings in 1970 to 80% in 2004. Nonetheless, the EPA’s equal pay for equal work goals have not been completely achieved, as demonstrated by the BLS data and Congressional findings within the text of the proposed Paycheck Fairness Act.

12.1.5: Civil Rights Act

Learning Objective

Outline the stipulations in the Civil Rights Act of 1964

Key Points

• The Civil Right Acts ended racial segregation in public venues like schools, the workplace, and public accommodations (facilities that served the general public).
• John F. Kennedy called for the bill in his civil rights speech on June 11, 1963 after a series of protests from the African-American community, but it was Lyndon B. Johnson who signed the Act into law in July, 1964.
• The Civil Rights Act has 11 titles which deal with voting and discrimination issues. Powers given to enforce the act were initially weak, but were supplemented during later years.

Key Terms

discrimination

(sometimes discrimination against) distinct treatment of an individual or group to their disadvantage; treatment or consideration based on class or category rather than individual merit; partiality; prejudice; bigotry.

segregation

Passing of laws to separate people geographically, residentially, racially, religiously or by gender.

Example

• White-only restaurants are an example of the type of discrimination that was outlawed as a result of the Civil Rights Act.

The Civil Rights Act of 1964 was a landmark piece of legislation in the United States that outlawed major forms of discrimination against African Americans and women. It ended unequal application of voter registration requirements and racial segregation in schools, at the workplace and by facilities that served the general public (“public accommodations”).

Powers given to enforce the act were initially weak, but were supplemented during later years. Congress asserted its authority to legislate under several different parts of the United States Constitution, principally its power to regulate interstate commerce under Article One, its duty to guarantee all citizens equal protection of the laws under the Fourteenth Amendment and its duty to protect voting rights under the Fifteenth Amendment. The Act was signed into law by President Lyndon B. Johnson, who would later sign the landmark Voting Rights Act into law.

The bill was called for by President John F. Kennedy in his civil rights speech of June 11, 1963, in which he asked for legislation “giving all Americans the right to be served in facilities which are open to the public—hotels, restaurants, theaters, retail stores, and similar establishments,” as well as “greater protection for the right to vote. ” Kennedy delivered this speech following a series of protests from the African-American community, the most concurrent being the Birmingham campaign which concluded in May 1963.

Titles under the Civil Rights Act

Title I

• Barred unequal application of voter registration requirements.

Title II

• Outlawed discrimination based on race, color, religion or national origin in hotels, motels, restaurants, theaters, and all other public accommodations engaged in interstate commerce; exempted private clubs without defining the term “private. “

Title III

• Prohibited state and municipal governments from denying access to public facilities on grounds of race, color, religion or national origin.

Title IV

• Encouraged the desegregation of public schools and authorized the U.S. Attorney General to file suits to enforce said act.

Title V

• Expanded the Civil Rights Commission established by the earlier Civil Rights Act of 1957 with additional powers, rules and procedures.

Title VI

• Prevented discrimination by government agencies that receive federal funds. If an agency is found in violation of Title VI, that agency may lose its federal funding.

Title VII

• Prohibited discrimination by covered employers on the basis of race, color, religion, sex or national origin. Title VII also prohibited discrimination against an individual because of his or her association with another individual of a particular race, color, religion, sex, or national origin. An employer cannot discriminate against a person because of his interracial association with another, such as by an interracial marriage.

Title VIII

• Required compilation of voter-registration and voting data in geographic areas specified by the Commission on Civil Rights.

Title IX

• Made it easier to move civil rights cases from state courts with segregationist judges and all-white juries to federal court. This was of crucial importance to civil rights activists who could not get a fair trial in state courts.

Title X

• Established the Community Relations Service, tasked with assisting in community disputes involving claims of discrimination.

Title XI

• Gives the jury rights to put any proceeding for criminal contempt arising under title II, III, IV, V, VI, or VII of the Civil Rights Act, on trial, and if convicted, can be fined no more than $1,000 or imprisoned for more than six months.

12.1.6: Age Discrimination and Health Act

Learning Objective

Explain how the Age Discrimination in Employment Act of 1967 (ADEA) protects individuals

Key Points

• Not only does the ADEA make it unlawful to discriminate against employees and job applicants based on their age (40 or over), but the act also allows employers to favor older workers even if it is at the expense of younger workers.
• The ADEA applies to organizations with 20 or more employees and also include state and local governments, employment agencies, labor organizations, and the federal government.
• Eligibility for apprenticeship programs, job noticies and advertisements, pre-employment inquiries about age, and the provision of benefits, are all covered under the act.

Key Terms

apprenticeship

The system by which a person learning a craft or trade is instructed by a master for a set time under set conditions.

discrimination

(sometimes discrimination against) distinct treatment of an individual or group to their disadvantage; treatment or consideration based on class or category rather than individual merit; partiality; prejudice; bigotry.

Example

• The following announcement of the National Association of Broadcasters Education Foundation apprenticeship program exemplifies the lack of age discrimination in appreticeship programs. “Who Can Participate? College seniors, recent graduates and individuals with the appropriate skill set seeking to enter the broadcast industry. Participants must have been trained in IT, digital technologies, broadcast engineering or other related areas. ” Source: http://www.nabef.org/initiatives/tap.asp

Introduction

The Age Discrimination in Employment Act of 1967 (ADEA) protects individuals who are 40 years of age or older from employment discrimination based on age. It was signed into law by former U.S. President Lyndon B. Johnson.

Lyndon B. Johnson, in the Oval Office.

Former U.S. President Lyndon B. Johnson.

The ADEA’s protections apply to both employees and job applicants. Under the ADEA, it is unlawful to discriminate against a person because of his/her age with respect to any term, condition, or privilege of employment, including hiring, firing, promotion, layoff, compensation, benefits, job assignments, and training. The ADEA permits employers to favor older workers based on age even when doing so adversely affects a younger worker who is 40 or older.

It is also unlawful to retaliate against an individual for opposing employment practices that discriminate based on age or for filing an age discrimination charge, testifying, or participating in any way in an investigation, proceeding, or litigation under the ADEA.

The ADEA applies to employers with 20 or more employees, including state and local governments. It also applies to employment agencies and labor organizations, as well as to the federal government. ADEA protections include:

• Apprenticeship Programs It is generally unlawful for apprenticeship programs, including joint labor-management apprenticeship programs, to discriminate on the basis of an individual’s age. Age limitations in apprenticeship programs are valid only if they fall within certain specific exceptions under the ADEA or if the EEOC grants a specific exemption.
• Job Notices and Advertisements The ADEA generally makes it unlawful to include age preferences, limitations, or specifications in job notices or advertisements. A job notice or advertisement may specify an age limit only in the rare circumstances where age is shown to be a “bona fide occupational qualification” (BFOQ) reasonably necessary to the normal operation of the business.
• Pre-Employment Inquiries The ADEA does not specifically prohibit an employer from asking an applicant’s age or date of birth. However, because such inquiries may deter older workers from applying for employment or may otherwise indicate possible intent to discriminate based on age, requests for age information will be closely scrutinized to make sure that the inquiry was made for a lawful purpose, rather than for a purpose prohibited by the ADEA.
• Benefits The Older Workers Benefit Protection Act of 1990 (OWBPA) amended the ADEA to specifically prohibit employers from denying benefits to older employees. Congress recognized that the cost of providing certain benefits to older workers is greater than the cost of providing those same benefits to younger workers, and that those greater costs would create a disincentive to hire older workers. Therefore, in limited circumstances, an employer may be permitted to reduce benefits based on age, as long as the cost of providing the reduced benefits to older workers is the same as the cost of providing benefits to younger workers. Employers are permitted to coordinate retiree health benefit plans with eligibility for Medicare or a comparable state-sponsored health benefit.
• Waivers of ADEA Rights An employer may ask an employee to waive his/her rights or claims under the ADEA either in the settlement of an ADEA administrative or court claim or in connection with an exit incentive program or other employment termination program. However, the ADEA, as amended by OWBPA, sets out specific minimum standards that must be met in order for a waiver to be considered knowing and voluntary and, therefore, valid. Among other requirements, a valid ADEA waiver must: be in writing and be understandable; specifically refer to ADEA rights or claims; not waive rights or claims that may arise in the future; be in exchange for valuable consideration; advise the individual in writing to consult an attorney before signing the waiver; and provide the individual at least 21 days to consider the agreement and at least seven days to revoke the agreement after signing it.

12.1.7: Occupational Safety and Health Act

Learning Objective

Explain the Occupational Safety and Health Act (OSHA)

Key Points

• The act came about due to an increased awareness of the impact chemicals had on the environment.
• The Occupational Safety and Health Administration was created to enforce workplace health and safety standards.
• The act applies to many diverse employers but does not include the United States or any state of political sub division of a state.

Key Term

toxic

Having a chemical nature that is harmful to health or lethal if consumed or otherwise entering into the body in sufficient quantities.

Example

• Jill’s office was small but at least it was her own, and she enjoyed the convenience of having a state-of-the art printer and copier within arms reach. Then one day everything changed. He boss ran in and told her that the printer and copier would have to be moved immediately as having them that close to her was in violation of the Occupational Safety and Health Act. In addition to the noise they make, both machines emit Volatile Organic Compounds and other hazardous particles.

The Occupational Safety and Health Act is the primary federal law which governs occupational health and safety in the private sector and federal government in the United States. It was enacted by Congress in 1970 and was signed by President Richard Nixon on December 29, 1970. Its main goal is to ensure that employers provide employees with an environment free from recognized hazards, such as exposure to toxic chemicals, excessive noise levels, mechanical dangers, heat or cold stress, or unsanitary conditions.

Origin

In the mid-1960s, growing awareness of the environmental impact of many chemicals had led to a politically powerful environmental movement. Some labor leaders seized on the public’s growing unease over chemicals in the environment, arguing that the effect of these compounds on worker health was even worse than the low-level exposure plants and animals received in the wild. On January 23, 1968, President Lyndon B. Johnson submitted a comprehensive occupational health and safety bill to Congress. Led by the United States Chamber of Commerce and the National Association of Manufacturers, the legislation was widely opposed by business. Many labor leaders, including the leadership of the AFL-CIO, did not fight for the legislation, claiming workers had little interest in the bill.

In passing the Act, Congress declared its intent “to assure so far as possible every working man and woman in the Nation safe and healthful working conditions and to preserve our human resources. “

Purposes of the Act

• OSHA was given the authority both to set and enforce workplace health and safety standards. The act also created the independent Occupational Safety and Health Review Commission to review enforcement priorities, actions, and cases.
• Established the National Institute of Occupational Safety and Health (NIOSH), an independent research institute in the then-Centers for Disease Control.
• Defines an employer to be any “person engaged in a business affecting commerce who has employees, but does not include the United States or any state or political subdivision of a State. ” The act applies to employers as diverse as manufacturers, construction companies, law firms, hospitals, charities, labor unions, and private schools.
• The “general duty clause” requires employers to 1) maintain conditions or adopt practices reasonably necessary and appropriate to protect workers on the job; 2) be familiar with and comply with standards applicable to their establishments; and 3) ensure that employees have and use personal protective equipment when required for safety and health.
• All employers must report to OSHA within eight hours if an employee dies from a work-related incident, or three or more employees are hospitalized as a result of a work-related incident. Additionally, all fatal on-the-job heart attacks must also be reported.
• OSHA inspectors are permited to enter, inspect, and investigate, during regular working hours, any workplace covered by the Act.
• Employers must also communicate with employees about hazards in the workplace. By regulation, OSHA requires that employers keep a record of every non-consumer chemical product used in the workplace.
• The act prohibits any employer from discharging, retaliating, or discriminating against any employee because the worker has exercised rights under the act. These rights include complaining to OSHA and seeking an OSHA inspection, participating in an OSHA inspection, and participating or testifying in any proceeding related to an OSHA inspection.

OSHA Symbol

Employers must communicate to their employees their rights under OSHA.

12.1.8: Employee Retirement Income Security Act

Learning Objective

Explain the Employee Retirement Income Security Act (ERISA) of 1974

Key Points

• ERISA protects the interests of benefit plan participants and their beneficiaries by requiring the disclosure of financial and other information concerning the plan; establishing standards of conduct for plan fiduciaries; providing appropriate remedies and access to federal courts.
• ERISA’s rules protect participants by making sure they are informed about the plan’s features and funding; their grievances are heard; they are able to collect their money.
• ERISA was created in part due to the 1963 Studebaker plant closure in which thousands of employees were left pension-less due to poor funding. Legislation proposed in 1967 addressing the funding, vesting, reporting, and disclosure issues, was opposed by business group and labor unions.

Key Terms

pension

A regularly paid gratuity paid regularly as benefit due to a person in consideration of past services; notably to one retired from service, on account of retirement age, disability or similar cause; especially, a regular stipend paid by a government to retired public officers, disabled soldiers; sometimes passed on to the heirs, or even specifically for them, as to the families of soldiers killed in service.

fiduciary

Related to trusts and trustees.

Example

• The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is an example of the type of protection ERISA provides. Because of COBRA certain former employees, retirees, spouses, former spouses, and dependent children (“qualified beneficiaries”) the right to temporary continuation of health coverage at group rates.

The Employee Retirement Income Security Act of 1974 (ERISA) was enacted on September 2, 1974. ERISA is a federal law that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:

• Requiring the disclosure of financial and other information concerning the plan to beneficiaries.
• Establishing standards of conduct for plan fiduciaries.
• Providing for appropriate remedies and access to the federal courts.

In general, ERISA does not cover retirement plans established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans

ERISA Rules

• Requires plans to provide participants with plan information including important information about plan features and funding.
• Sets minimum standards for participation, vesting, benefit accrual, and funding. provides fiduciary responsibilities for those who manage and control plan assets.
• Requires plans to establish a grievance and appeals process for participants to get benefits from their plans.
• Gives participants the right to sue for benefits and breaches of fiduciary duty
• If a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).

History

In 1961, U.S. President John F. Kennedy created the President’s Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker, an automobile manufacturer, closed its plant in 1963. Studebaker’s pension plan was so poorly funded that only 3,600 workers who were of retirement age received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions .

Studebaker Avanti 1963

The Avanti was one of the last cars created by Studebaker before their plant was closed. At the time of closure, more than 2500 employees didn’t receive owed benefits and compensation due to poor plan funding.

In 1967, Senator Jacob K. Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, that sought to retain the flexibility they enjoyed under pre-ERISA law.

ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974, Labor Day. In the years since 1974, ERISA has been amended repeatedly.

Pension & Health Benefit Plans

ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established. Under ERISA, pension plans must provide for vesting of employees’ pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.

ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one. There have been several significant amendments to ERISA concerning health benefit plans two of which are the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Pension Vesting

Before ERISA, some defined benefit pension plans required decades of service before an employee’s benefit became vested. It was not unusual for a plan to provide no benefit at all to an employee who left employment before the specified retirement age (e.g. 65), regardless of the length of the employee’s service.

Under the Pension Protection Act of 2006 (PPA), employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a second sixth year gradual-vesting schedule Employee contributions are always 100% vested. Accrued benefits under a defined benefit plan must become vested at 100% after five years or under a third seventh year gradual vesting schedule.

Pension Funding

Under ERISA, minimum funding requirements were established for defined benefit plans. By their nature, defined contribution plans are always fully funded, even if the employee has not yet become vested in the employer contributions.

The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called “at-risk status”).

12.1.9: Affirmative Action

Learning Objective

Assess the role of affirmative action in the US

Key Points

• Federal contractors and subcontractors are legally required to adopt affirmative action measures. Government contractors undergo compliance reviews conducted by the OFCCP.
• Affirmative action measures are meant to remedy the disadvantages that were associated with blatant historical discrimination.
• Some affirmative action policies have been criticized for bringing on reverse discrimination.
• Government contractors undergo compliance reviews conducted by the OFCCP.

Key Terms

affirmative action

a policy or program providing advantages for people of a minority group who are seen to have traditionally been discriminated against, with the aim of creating a more egalitarian society through preferential access to education, employment, health care, social welfare, etc.

quota

a restriction on the import of something to a specific quantity.

Example

• Examples of affirmative action measures undertaken by the United States Department of Labor include outreach campaigns, targeted recruitment, employee and management development, and employee support programs.

In the United States, affirmative action refers to equal opportunity employment measures that Federal contractors and subcontractors are legally required to adopt. These measures are intended to prevent discrimination against employees or applicants for employment, on the basis of race, religion, gender, or nationality.

Examples of affirmative action offered by the United States Department of Labor include outreach campaigns, targeted recruitment, employee and management development, and employee support programs.The impetus towards affirmative action is to redress the disadvantages associated with overt historical discrimination. Further impetus is a desire to ensure public institutions, such as universities, hospitals, and police forces, are more representative of the populations they serve. Affirmative action began as a tool to address the persisting inequalities for African Americans in the 1960s and the specific term was first used to describe U.S. government policy in 1961.

Slaves Waiting for Sale: Richmond, Virginia. Painted upon the sketch of 1853

Slaves were forced to work on plantations often under brutal conditions.

Controversy

Affirmative action is a large subject of controversy. Some policies adopted as affirmative action, such as racial quotas or gender quotas for collegiate admission, have been criticized as a form of reverse discrimination, and such implementation of affirmative action has been ruled unconstitutional by the majority opinion in the case of Gratz v. Bollinger. Affirmative action as a practice was upheld by the court’s decision in Grutter v. Bollinger.

Requirements

• Each government contractor with 50 or more employees and $50,000 or more in government contracts is required to develop a written affirmative action program (AAP) for each of its establishments.
• A written affirmative action program helps the contractor identify and analyze potential problems in the participation and utilization of women and minorities in the contractor’s workforce.
• If there are problems, the contractor will specify in its AAP the specific procedures it will follow and the good faith efforts it will make to provide equal employment opportunity.
• Expanded efforts in outreach, recruitment, training and other areas are some of the affirmative steps contractors can take to help members of the protected groups compete for jobs on equal footing with other applicants and employees.

Enforcement and Compliance

OFCCP conducts compliance reviews to investigate the employment practices of government contractors. During a compliance review, a compliance officer examines the contractor’s affirmative action program, checks personnel, payroll, and other employment records, interviews employees and company officials, and investigates virtually all aspects of employment in the company. The investigator also checks to see whether the contractor is making special efforts to achieve equal opportunity through affirmative action. If problems are discovered, OFCCP will recommend corrective action and suggest ways to achieve equal employment opportunity.

12.1.10: Americans with Disabilities Act

Learning Objective

Analyze the effect of the Americans with Disabilities Act (ADA) on various parties involved

Key Points

• The Americans with Disabilities Act covers the entire range of employment practices and was signed into law in 1990 by President George H. W. Bush.
• The Americans with Disabilities Act applies to private employers, state and local governments, employment agencies, and labor unions.
• The Americans with Disabilities Act is enforced by four federal agencies: (1) the Equal Employment Opportunity Commission (EEOC); (2) the Department of Transportation; (3) the Federal Communications Commission (FCC); (4) the Department of Justice.
• The Department of Labor’s Office of Disability Employment Policy (ODEP) only provides publications and technical assistance regarding the ADA’s basic requirements.

Key Terms

discrimination

(sometimes discrimination against) distinct treatment of an individual or group to their disadvantage; treatment or consideration based on class or category rather than individual merit; partiality; prejudice; bigotry.

disability

State of being disabled; deprivation or want of ability; absence of competent physical, intellectual, or moral power, means, fitness, and the like.

Example

• Application of the ADA: A moving company conducts job interviews in a second floor office and there is no elevator. Beth, who uses a wheelchair is called in for an interview. She has applied for a secretarial position. Since she uses a wheelchair, she requests a reasonable accommodation. It would be undue hardship for the company to install an elevator, but the employer has another option. It can conduct the interview in a first floor office. The employer is responsible for moving the location of the interview to a reasonable accommodation.

The Americans with Disabilities Act (ADA) prohibits discrimination against people with disabilities in employment, transportation, public accommodation, communications, and governmental activities. It covers all employment practices, including application procedures, hiring, firing, advancement, compensation, training, and other terms, conditions, and privileges of employment. It applies to recruitment, advertising, tenure, layoff, leave, fringe benefits, and all other employment-related activities .

Signing of the ADA Act of 1990

President George H. W. Bush signs the Americans with Disabilities Act of 1990 into law. Pictured (left to right): Evan Kemp, Rev Harold Wilke, Pres. Bush, Sandra Parrino, Justin Dart

Specifications of ADA

The ADA applies to private employers, state and local governments, employment agencies, and labor unions. Employers with 25 or more employees were covered as of July 26, 1992. Employers with 15 or more employees were covered two years later, beginning July 26, 1994.

Employment discrimination is prohibited against “qualified individuals with disabilities. ” This includes applicants for employment and current employees. An individual is considered to have a “disability” if he or she has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment. Persons discriminated against because they have a known association or relationship with an individual with a disability also are protected.

Compliance and Enforcement

The Department of Labor’s Office of Disability Employment Policy (ODEP) provides publications and other technical assistance on the basic requirements of the ADA. It does not enforce any part of the law.

There are four federal agencies that enforce the ADA:

• The Equal Employment Opportunity Commission (EEOC) enforces regulations covering employment.
• The Department of Transportation enforces regulations governing transit.
• The Federal Communications Commission (FCC) enforces regulations covering telecommunication services.
• The Department of Justice enforces regulations governing public accommodations and state and local government services.

Opposition to the Act

Employers: The ADA has been a frequent target of criticism by employers who claim that individuals who are diagnosed with one of the so-called “lesser disabilities” are being “accommodated” when they should not be. On the other hand, court decisions have made necessary “an individualized assessment to prove that an impairment is protected under the ADA. Therefore, the plaintiff must offer evidence that the extent of the limitation caused by the impairment is substantial in terms of his or her own experience. ” A medical diagnosis or physician’s declaration of disability is no longer enough. Even those who support the intent of the law worry that it might have unintended consequences. Among other arguments, supporters hypothesize that the Americans with Disabilities Act creates additional legal risks for employers who then quietly avoid hiring people with disabilities to avoid this risk.

Religious Groups: The debate over the Americans with Disabilities Act led some religious groups to take opposite positions. Groups, such as the Association of Christian Schools International, opposed the ADA in its original form. ACSI opposed the Act primarily because the ADA labeled religious institutions public accommodations, and thus would have required churches to make costly structural changes to ensure access for all. The cost argument advanced by ACSI and others prevailed in keeping religious institutions from being labeled as public accommodations, and thus churches were permitted to remain inaccessible if they chose. In addition to opposing the ADA on grounds of cost, church groups like the National Association of Evangelicals testified against the ADA’s Title I (employment) provisions on grounds of religious liberty. The NAE felt that the regulation of the internal employment of churches was “… an improper intrusion [of] the federal government. “

Business Interests: Many members of the business community opposed the passage of the Americans with Disabilities Act. The U.S. Chamber of Commerce argued that the costs of the ADA would be “enormous” and have “a disastrous impact on many small businesses struggling to survive. ” The National Federation of Independent Businesses, an organization that lobbies for small businesses, called the ADA “a disaster for small business. ” Pro-business conservative commentators joined in opposition, writing that the Americans with Disabilities Act was “an expensive headache to millions” that would not necessarily improve the lives of people with disabilities.

12.2: Performance, Promotion, and Firing

12.2.1: Review Techniques

The four methods of collecting performance review data: objective production, personnel, judgmental evaluation, and peer or self evaluation.

Learning Objective

Explain the rationale and characteristics of review and turnover techniques

Key Points

• The objective production method consists of direct, limited measures such as sales figures, production numbers, and electronic performance monitoring.
• The personnel method involves the recording of withdrawal behaviors, such as absenteeism and accidents.
• In Peer evaluations, members of a group evaluate and appraise the performance of their fellow group members, and in self-assessments, individuals assess and evaluate their own behavior and job performance.
• Strategic Human Resource Management is gaining in popularity over Traditional Human Resource Management.

Key Term

staff turnover

The relative rate at which an employer gains and loses staff.

Example

• The following example portrays how employees can give a company a competitive advantage. IBM releases a new software package. A few months later Microsoft realeases a similar version. This can be easily imitated and thus easy to copy. However, if IBM offers a superior, “knock them out of the park” customer service, they will have a competitive advantage over Microsoft because this is not easily copied. Having a highly skilled and knowedgeable customer service team is difficult for Microsoft to imitate, thus IBM has the advantage.

Turnover Defined

In a human resources context, turnover is the rate at which employees leave an organization. Simple ways to describe it are “how long employees tend to stay” or “the rate of traffic through the revolving door. “

Staff turnover can be optimal when a poorly performing employee decides to leave an organization, or dysfunctional when the high turnover rate increases the costs associated with recruitment and training of new employees, or if good employees consistently decide to leave .

Employee Turnover

Turnover can be optimal when a poorly performing employee decides to leave an organization.

Measuring Turnover

Turnover is measured for individual companies and for their industry as a whole. If an employer is said to have a high turnover relative to its competitors, it means that employees of that company have a shorter average tenure than those of other companies in the same industry. High turnover may be harmful to a company’s productivity if skilled workers are often leaving and the worker population contains a high percentage of novice workers.

In the United States, the average total non-farm seasonally adjusted monthly turnover rate was 3.3% for the period from December 2000 to November 2008. However rates vary widely when compared over different periods of time or different job sectors. For example, during the period 2001 to 2006, the annual turnover rate for all industry sectors averaged 39.6% before seasonal adjustments, while the leisure and hospitality sector experienced an average annual rate of 74.6% during the same period.

Preventing Turnover

Preventing the turnover of employees is important in any business. Without them, the business would be unsuccessful. However, more and more employers today are finding that employees remain for approximately 23 to 24 months, according to the 2006 Bureau of Labor Statistics. The Employment Policy Foundation states that it costs a company an average of $15,000 per employee, which includes separation costs, including paperwork, unemployment; vacancy costs, including overtime or temporary employees; and replacement costs including advertisement, interview time, relocation, training, and decreased productivity when colleagues depart.

Research on employee job turnover has attempted to understand the causes of individual decisions to leave an organization. It has been found that lower performance, lack of reward contingencies for performance, and better external job opportunities are the main causes. Other variables related to turnover are the conditions in the external job market, the availability of other job opportunities, and the length of employee tenure.

Providing a stimulating workplace environment, which fosters happy, motivated, and empowered individuals, lowers employee turnover and absentee rates. Promoting a work environment that fosters personal and professional growth promotes harmony and encouragement on all levels, so the effects are felt company wide.

Continual training and reinforcement also develops a workforce that is competent, consistent, competitive, effective, and efficient. Beginning on the first day of work, providing individuals with the necessary skills to perform their job is important. Before the first day, it is important the interview and hiring process expose new hires to an explanation of the company, so individuals know whether the job is their best choice.

Networking and strategizing within the company provides ongoing performance management and helps build relationships among coworkers. It is also important to motivate employees to focus on customer success, profitable growth, and the company well-being. Employers can keep their employees informed and involved by including them in future plans, new purchases, policy changes, as well as introducing new employees to the employees who have gone above and beyond in meetings. Engagement shows employees that they are valuable through information or recognition rewards and makes them feel included.

In addition, by paying above-market wages, the worker’s motivation to leave the job and look for a job elsewhere will be reduced. This strategy makes sense because it is often expensive to train replacement workers.

When companies hire the best people, new hired talent and veterans are enabled to reach company goals, maximizing the investment of each employee. Taking the time to listen to employees and making them feel involved will create loyalty, in turn reducing turnover and allowing for growth.

12.2.2: Managing Up and Employee Feedback

Organizations derive significant value from empowering employees to help manage their managers.

Learning Objective

Identify the value of empowering employees to provide feedback to managers

Key Points

• Management can be viewed as a functional skill, just like any other field. As a result, the individuals being managed will be quite valuable in assessing how skilled a manager is at their function.
• Not all management is from manager to employee. It is also critical for employees to assess management, and provide meaningful feedback about their performance.
• Through promoting upwards management, organizations derive the substantial benefit of an iterative improvement between both managers and employees through a feedback loop.
• Effective evaluations of performance should include a work assessment, comparison to established objectives, room for providing qualitative feedback, and rewards.

Key Term

feedback

Providing observations and suggestions based on current performance to achieve improvements.

Management is more complex than a simple top-down mentality. Management is a functional discipline in many ways, where the ability for an individual to successfully manage is the professional skill being assessed. Just as an accountant is measured by their performance producing accurate and timely financial submissions, so too is a manager measured by the satisfaction and productivity of their employees.

Why Manage Up

As an employee, it is important to organizational success to manage one’s manager to some degree. This is because managers are working towards becoming better managers, and the people in the best position to help them accomplish this objective are the employees themselves. Good managers will value employees willing to provide feedback, make objective observations, and help managers grow.

Through encouraging employees across the organization to manage up, organizations capture the benefit of having an open feedback loop between work groups and their managers, where both parties can potentially improve their performance. Managing down improves employees’ ability to accomplish their tasks, while managing up improves management’s ability to enable employees. 

Effective Evaluation in the Workplace

A proper evaluation will have different requirements based upon the function being evaluated. However, most effective evaluation approaches will include the following:

• Assessment – For both managers managing down and employees managing up, some form of formal assessment is useful in enabling effective evaluations. This assessment should focus on strengths and weaknesses, usually utilizing some sort of sliding scale. An effective assessment should be as objective as possible, focusing on actionable areas of improvement.
• Objectives – Evaluation requires an understanding of what that individual should be trying to accomplish, and some form of benchmark to measure if these objectives are being met. It can also be useful to provide feedback which can actively be applied to achieving these objectives. 
• Sharing Feedback – Aside from assessment metrics and objectives, good feedback also tends to include qualitative thinking. It’s not always as simple as rating an individual’s performance on a scale of 1-10. More often comments and discussions are necessary for feedback to be useful. Any evaluation in the workplace should have some outlet for this, be it 1-to-1 discussions or more formal quarterly feedback sessions.
• Rewards and Consequences – Finally, feedback and evaluations must be tied to some sort of motivating outcome for the individual receiving it. If a manager is performing well, and the team is satisfied, it would be reasonable to provide the manager a bonus or a raise. Similarly, if employees are exceeding expectations, the same rules apply.

Feedback Loop

This image demonstrates the basic concept of iterative feedback, where suggestions lead to evolving behavior.

This image demonstrates the basic concept of iterative feedback, where suggestions lead to evolving behavior.

12.2.3: Promotions

When a person receives a promotion, they are rewarded for good performance by receiving a higher rank or position in the organization.

Learning Objective

Explain the impact of a promotion

Key Points

• A person’s promotion can involve advancement in several areas including: designation, salary and benefits, and the type of job activities they have to perform.
• The power that hiring and promoting managers have in terms of awarding promotions differs from one organization to the next.
• The degree to which job activities change varies between industries and sectors. In some fields, even after an employee is promoted, they continue to do similar work and the differences may be in the complexity of the task rather than the activity.

Key Term

Promotion

the advancement of an employee’s rank or position in an organizational hierarchy system.

Promotions

A promotion is the advancement of an employee’s rank or position in an organizational hierarchy system .A promotion may be an employee’s reward for a good performance, such as a positive appraisal. Before a company promotes an employee to a particular position, it ensures that the person is able to handle the added responsibilities by screening the employee with interviews and tests and giving them training or on-the-job experience.

Organizational chart

A military organizational chart

A Promotion’s Impact on Salary & Benefits

A promotion can involve advancement in terms of designation, salary, and benefits. In some organizations, the type of job activities may change a great deal. In many companies and public service organizations, more senior positions have a different title: an analyst who is promoted becomes a principal analyst, an economist becomes a senior economist, and an associate professor becomes a full professor.

The amount of salary increase associated with a promotion varies between industries and sectors, and depends on what parts of the hierarchical ladder an employee is moving. In some industries or sectors, there may be only a modest increase in salary for a promotions; in other fields, a promotion may substantially increase an employee’s salary.

The same is true with benefits and other privileges. In some industries, the promotion only changes the title and salary, and there are no additional benefits or privileges (beyond the psycho-social benefits that may accrue to the individual). In some not-for-profit organizations, the values of the organization or the tightness of funding may result in there being only modest salary increases associated with a promotion. In other industries, especially in private sector companies, a promotion to senior management may carry a number of benefits, such as stock options, a reserved parking space, a corner office with a secretary, and bonus pay for good performance.

A Promotion’s Impact on Job Activities

The degree to which job activities change varies between industries and sectors. In some fields, even after an employee is promoted, they continue to do similar work. For example, a policy analyst in the federal government who is promoted to the post of senior policy analyst will continue to do similar tasks such as writing briefing notes and carrying out policy research. The differences may be in the complexity of the files to which the individual is assigned, or in the sensitivity of the issues with which they are asked to deal.

In other fields, when an employee is promoted, their work changes substantially. For example, whereas a staff engineer in a civil engineering firm will spend their time doing engineering inspections and working with blueprints, a senior engineer may spend most of their day in meetings with senior managers and reading financial reports.

Who Can Grant a Promotion

Different organizations grant hiring and promoting managers different levels of discretion with which to award promotions. In some parts of the private sector, the senior management has a very high level of discretion to award promotions. They can promote employees without going through as many procedures or formalities, such as testing, screening, and interviewing. In the public sector and in academia, there are usually many more checks and balances in place to prevent favoritism or bias.

In many Western public service bodies, when a manager wants to promote an employee, they must follow a number of steps, such as advertising the position, accepting applications from qualified candidates, screening and interviewing candidates, and then documenting why they chose a particular candidate. In academia, a similar approach is used, with the added safeguard of including several layers of committee review of the proposed promotion using committees that include members of other faculty and experts from other universities.

12.2.4: Terminations

Terminations occur in a variety of ways, both voluntary and involuntary, and determine the employee’s future relationship with the employer.

Learning Objective

Explain the various methods of termination of one’s work

Key Points

• Being fired is generally thought of as the employee’s fault, and therefore is mostly considered dishonorable and a sign of failure. Being laid off is a less severe form of involuntary termination because it is most often caused by economic cycles or the company’s need to restructure itself.
• Firms that wish for an employee to exit on his or her own accord but do not wish to pursue firing, may degrade the employee’s working conditions, hoping that he or she will leave “voluntarily. ” This type of forced resignation is considered illegal in certain areas.
• Whether a person’s ability to get a new job is negatively impacted by the termination or the person has the possibility to return to the former company in the future depends on the nature of the termination.

Key Term

Dismissal

Dismissal is where the employer chooses to require the employee to leave, generally for a reason which is the fault of the employee. The most common colloquial term for dismissal in America is “getting fired” whereas in Britain the term “getting the sack” is used.

Example

• Rehire post-termination: Public school teachers in New York who are laid off are placed on a preferred eligible list for employment in the school district where they were laid off for seven years. If a teacher who was laid off applies to fill a job opening, he or she is given priority over other applicants.

Terminations can occur in a variety of methods, both voluntary and involuntary. The type of termination will determine the employee’s future relationship (or lack of) with the employer.

Being Fired

To be fired is generally thought of to be the employee’s fault, and therefore is considered in most cases to be dishonorable and a sign of failure. Often, it may hinder the new job seeker’s chances of finding new employment, particularly if he or she has been fired from earlier jobs. Job seekers sometimes do not mention jobs which they were fired from on their résumés; accordingly, unexplained gaps in employment, and refusal to contact previous employers are often regarded as “red flags. “

Being Laid-Off

A less severe form of involuntary termination is often referred to as a layoff. A layoff is usually not strictly related to personal performance, but instead due to economic cycles or the company’s need to restructure itself, the firm itself going out of business, or a change in the function of the employer. In a postmodern risk economy, such as that of the United States, a large proportion of workers may be laid off at some time in their life, and often for reasons unrelated to performance or ethics.

Often, layoffs occur as a result of “downsizing”, “reduction in force”, or “redundancy. ” These are not technically classified as firings; laid-off employees’ positions are terminated and not refilled, because either the company wishes to reduce its size or operations or otherwise lacks the economic stability to retain the position. In some cases, a laid-off employee may eventually be offered their old position again by his or her respective company, though by this time he or she may have found a new job.

Attrition

Some companies resort to attrition as a means to reduce their workforce. Under such a plan, no employees are forced to leave their jobs. However, those who do depart voluntarily are not replaced. Additionally, employees are given the option to resign in exchange for a fixed amount of money, frequently a few years of their salary. Such plans have been carried out by the United States Federal Government under President Bill Clinton during the 1990s, and by the Ford Motor Company in 2005. However, “layoff” may be specifically addressed and defined differently in the articles of a contract in the case of unionized work.

Mutual Agreement Termination

Some terminations occur as a result of mutual agreement between the employer and employee. When this happens, it is sometimes debatable if the termination was truly mutual. In many of these cases, it was originally the employer’s wish for the employee to depart, but the employer offered the mutual termination agreement in order to soften the firing (as in a forced resignation). But there are also times when a termination date is agreed upon before the employment starts in an employment contract.

Forced Resignation

Firms that wish for an employee to exit on his or her own accord but do not wish to pursue firing, may degrade the employee’s working conditions, hoping that he or she will leave “voluntarily” . The employee may be moved to a different geographical location, assigned to an undesirable shift, given too few hours if part time, demoted, or assigned to work in uncomfortable conditions. Other forms of manipulation may be used and often these tactics are done so that the employer won’t have to fill out termination papers in jurisdictions without at-will employment. In addition, with a few exceptions, employees who voluntarily leave generally cannot collect unemployment benefits. Such tactics may amount to constructive dismissal, which is illegal in some jurisdictions.

Gen. David H. Petraeus Retires August 2011

Most military or armed forces personnel are subject to a type of forced resignation. Retirement age for military personnel is between 55 to 65, no matter their level of performance.

Rehire Following Termination

Depending on the circumstances, one whose employment has been terminated may or may not be able to be rehired by the same employer. If the decision to terminate was the employee’s, the willingness of the employer to rehire is often contingent upon the relationship the employee had with the employer, the amount of notice given by the employee prior to departure, and the needs of the employer.

In some cases, when an employee departed on good terms, he or she may be given special priority by the employer when seeking rehire. An employee may be terminated without prejudice, meaning that the fired employee may be rehired readily for the same or a similar job in the future. This is usually true in the case of a layoff. Conversely, a person can be terminated with prejudice, meaning that an employer will not rehire the former employee to a similar job in the future. This can be for many reasons, including: incompetence, misconduct, insubordination or “attitude. “

12.2.5: Retirements

When a person retires, they stop working completely or semi-retire by reducing their hours.

Learning Objective

Explain post-retirement financing

Key Points

• Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions no longer allow the person to work or as a result of legislation concerning their position.
• Retirement in most countries is of recent origin, being introduced during the late 19th and early 20th centuries. Previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death.
• When retiring prior to age 59½, there is a 10 percent IRS penalty on withdrawals from a retirement plan like a 401(k) or IRA.

Key Terms

Individual Retirement Account

An Individual Retirement Arrangement (IRA) is a form of retirement plan that provides tax advantages for retirement savings in the United States. The term encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company

Retirement

Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.

Examples

• These days, many baby boomers are semi-retired. They may have taken early retirement from the companies they worked for, but like Brent Bowers, who took early retirement from the New York Times, they still work for themselves. They fall into a category of graying entrepreneurs.
• A 401(K) is an example of an individual retirement plan.

Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions no longer allow the person to work (by illness or accident) or as a result of legislation concerning their position.

International Views on Retirement

In most countries, the idea of retirement is of recent origin, being introduced during the late 19^th and early 20^th centuries. Previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death. Germany was the first country to introduce retirement. Most developed countries today have systems to provide pensions or retirement, which may be sponsored by employers and/or the state. In many poorer countries, support for the old is still mainly provided through the family.

Retirement with a pension is considered a right of the worker in many societies. Hard ideological, social, cultural and political battles have been fought over whether this is a right. In many western countries, this right is mentioned in national constitutions. While conventional wisdom has it that one can retire and take 7 percent or more out of a portfolio year after year, this would not have worked in the past. Making periodic inflation-adjusted withdrawals from retirement savings can make meaningless many assumptions that are based on long term average investment returns.

Post-Retirement Finances

Those contemplating early retirement will want to know if they have enough to survive possible bear markets. The history of the U.S. stock market shows that one would need to live on about 4 percent of the initial portfolio per year to ensure that the portfolio is not depleted before the end of the retirement. This allows for increasing withdrawals with inflation to maintain a consistent spending ability throughout the retirement, and to continue making withdrawals even in dramatic and prolonged bear markets. The 4 percent figure does not assume any pension or change in spending levels throughout the retirement.

When retiring prior to age 59½, there is a 10 percent IRS penalty on withdrawals from a retirement plan like a 401(k) plan or a Traditional Individual Retirement Account (IRA). Exceptions apply under certain circumstances. At age 59 and six months, the penalty-free status is achieved and the 10 percent IRS penalty no longer applies. To avoid the 10 percent penalty prior to age 59½, a person should consult a lawyer about the use of IRS rule 72 T. This rule must be applied for with the IRS. It allows the distribution of a IRA account prior to age 59½ in equal amounts of a period of either 5 years or until the age of 59½, which ever is the longest time period without a 10 percent penalty. Taxes still must be paid on the distributions.

Navy Retiree

In addition to traditional retirement benefits from 401(k)s or IRAs, military personnel are eligible for veterans benefits from things such as the G.I. Bill.

World Pop 65+, retirement age

This bubble map shows the global distribution of population aged at least 65 years in 2005 as a percentage of the top nation (China – 99,142,000).

12.2.6: Attrition

An employee leaving one company to join another one is known as attrition.

Learning Objective

Explain how and why people leave their company

Key Points

• The contract between employees and employers specifies the responsibility of each party in the case that the employment relationship ends.
• Personal reasons and the state of the company itself make up the reasons an employee may decide to leave and join a new organization.
• Attrition rate (%) = number of employees resigned for the month / (total number of employees at the start of the month + number of employees joined for that month – number of employees resigned) x 100.

Key Term

severance pay

Money paid as compensation to someone whose employment is ended.

Example

• Attrition is a key concern in the auto industry as it matures and becomes more and more competitive. In addition to ensuring that salary needs are met, companies also must make sure that they offer employees growth opportunities within the company to maintain them.

Attrition

An employee or employer may end the relationship at any time. This is referred to as at-will employment. The contract between the two parties specifies the responsibilities of each when ending the relationship and may include requirements such as notice periods, severance pay, and security measures.

Employees leaving a company to join another company is known as attrition.

The top reasons why people change careers:

• The downsizing or the restructuring of an organization (54%)
• New challenges or opportunities that arise (30%)
• Poor or ineffective leadership (25%)
• Having a poor relationship with a manager (22%)
• For better work-life balance (21%)
• Contributions are not being recognized (21%)
• For better compensation and benefits (18%)
• For better alignment with personal and organizational values (17%)
• Personal strengths and capabilities are not a good fit with an organization (16%)
• The financial instability of an organization (13%)
• An organization relocated (12%)

Churn Rate

In some business contexts, churn rate could also refer to high employee turnover within a company. For instance, most fast food restaurants have a routinely high churn rate among employees. For larger companies, such as Fortune 500 companies, the attrition rate tends to be much lower compared to a fast food franchise. The company size and industry also play a key role in attrition rate. An “acceptable” attrition rate for a given company is relative to its industry. It would not likely be useful to compare the attrition of fast food employees with a Fortune 500 company in a corporate setting.

Attrition Rate

Churn rate can also describe the number of employees that move within a certain period. For example, the annual churn rate would be the total number of moves completed in a 12-month period divided by the average number of occupants during the same 12-month period. Monthly and quarterly churn rates can also be calculated.

Formulae:

Attrition rate (%) = number of employees resigned for the month / (total number of employees at the start of the month + number of employees joined for that month – number of employees resigned) x 100

Labor Economics – Short Run Supply

The income and leisure trade-off in the short run

12.3: Compensation

12.3.1: Forms of Financial Compensation

Compensation is a monetary benefit given to workers in return for services provided by them and it can take a number of different forms.

Learning Objective

Explain each part of a total rewards system including salary, benefits, incentive pay, and an employee stock option (ESO)

Key Points

• There are six basic forms of compensation: salary, short-term incentives (STIs or bonuses), long-term incentive plans (LTIPs), benefits, paid expenses, and insurance.
• Short-term incentives are usually formula-driven, whereas bonuses are awarded after-the-fact and are usually discretionary.
• Wages are given to workers whereas salaries are given to employees. They are both affected by market forces, as well as other factors, such as tradition, social structure, or government regulation (e.g., minimum wage laws).
• Executive pay is usually a mixture of these different forms of compensation, with a salary, bonuses, benefits and expenses, and shares or call options on company stock.
• Salaries are often seen as part of a “total rewards” system that includes benefits and perquisites.
• Employee stock options (ESOs) are sometimes offered to management, with the objective of giving them an incentive to behave in a way that boosts the company’s stock price.

Key Terms

perquisite

Any monetary or other incidental benefit beyond salary.

salary

A fixed amount of money paid to a worker, usually measured on a monthly or annual basis, not hourly, as wages. Implies a degree of professionalism and/or autonomy.

Examples

• Different companies offer different types of stock options to their employees, allowing them to buy company stock at a discounted price. One such scheme, for example, may allow employees to buy shares of the company by calculating the mean share price over the last six months, and offering a discount of 10% or 15% on that price to employees.
• Different companies offer different types of stock options to their employees, allowing them to buy company stock at a discounted price. One such scheme, for example, may allow employees to buy shares of the company by calculating the mean share price over the last six months, and offering a discount of 10% or 15% on that price to employees.

There are six basic tools of compensation or remuneration:

• Salary
• Short-term incentives (STIs), sometimes known as bonuses
• Long-term incentive plans (LTIP)
• Employee benefits
• Paid expenses (perquisites)
• Insurance

A salary is a form of renumeration paid periodically by an employer to an employee, the amount and frequency of which may be specified in an employment contract. From a business point of view, salary can be deemed as the cost of acquiring human resources for running operations and is then termed personnel expense or salary expense.

Salary

A salary is a form of remuneration paid periodically by an employer to an employee, the amount and frequency of which may be specified in an employment contract.

In accounting practice, salaries are typically recorded in payroll accounts. While there is no first pay stub for the first work-for-pay exchange, the first salaried work would have required a human society advanced enough to have a barter system to allow work to be exchanged for goods or other work. More significantly, it presupposes the existence of organized employers—perhaps a government or a religious body—that would facilitate work-for-hire exchanges on a regular enough basis to constitute salaried work.

Today, the idea of a salary continues to evolve as part of a system of all the combined rewards that employers offer to employees. Salary (also now known as fixed pay) is coming to be seen as part of a “total rewards” system, which includes bonuses, incentive pay, and commissions, benefits and perquisites (or perks), and various other tools which help employers link rewards to an employee’s measured performance. An employee stock option (ESO) is a call option on the common stock of a company, granted by the company to an employee as part of the employee’s remuneration package.

The objective is to give employees an incentive to behave in ways that will boost the company’s stock price. If the company’s stock market price rises above the call price, the employee would exercise the option, pay the call price, and would be issued with ordinary shares in the company. The employee would experience a direct financial benefit of the difference between the market and call prices. If the market price falls below the stock call price at the time the option needs to be exercised, the employee is not obligated to call on the option, in which case the option will lapse.

Restrictions on the option (such as vesting and limited transferability) attempt to align the holder’s interest with those of the business shareholders. Employee stock options are mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation.

Alternatively, employee-type stock options can be offered to non-employees: suppliers, consultants, lawyers, and promoters for services rendered. Employee stock options are similar to warrants, which are call options issued by a company with respect to its own stock.

12.3.2: Pay Systems

Organizations can remunerate labor according to different criteria, including hours worked, output produced, or a combination of the two.

Learning Objective

Identify the different wage payment systems used by organizations by which they remunerate labor

Key Points

• Under a time rate system, the worker is paid by hour, day, week or month. Under a high wage plan, the worker is paid highly in exchange for a high level of performance.
• Under a piecework system, the worker is paid according to output. A straight piecework system is completely independent of time taken, whereas a differential piecework system rewards more efficient workers.
• A combination of time and piecework systems also exist, such as the Gantt Task and Bonus System, and Emerson’s Efficiency System (see examples).
• Under a lockstep compensation system, salaries are based purely on seniority within an organization. This system is easy to administer, but can reduce incentives for employees to perform.

Key Terms

remuneration

a payment for work done; wages, salary, emolument

wage

An amount of money paid to a worker for a specified quantity of work, usually expressed on an hourly basis.

contingent worker

a provisional group of employees who work for an organization on a non-permanent basis

Examples

• Frederick Winslow Taylor (1896) introduced a piecework system that sought to counter the negative incentives of a straight piecework system. His system offered two different rates for the same job: A higher pay rate if the work is finished quickly and with high quality, and a lower rate for slower, lower quality work.
• Frederick Winslow Taylor (1896) introduced a piecework system that sought to counter the negative incentives of a straight piecework system. His system offered two different rates for the same job: a higher paying rate if the work is finishes quickly and with high quality, and a lower rate for slower, lower quality work.
• The Gantt task and bonus system is a combination of time and piece work. Under this system, the worker is paid on a time basis if the work is below a certain standard, and a piece rate basis if it meets or exceeds this standard.

Wage payment systems are the different methods adopted by organizations by which they remunerate labor There exists several systems of employee wage payment and incentives, which can be classified as following:

Time Rate System: Under this system, the worker is paid by the hour, day, week, or month.

High Wage Plan: Under this plan, a worker is paid a wage rate that is substantially higher than the rate prevailing in the area or in the industry. In return, he is expected to maintain a very high level of performance, both quantitative and qualitative.

Measured Day Work: According to this method, the hourly rate of the time worker consists of two parts viz, fixed and variable. The fixed element is based on the nature of the job (i.e., the rate for this part is fixed on the basis of job requirements). The variable portion varies for each worker depending upon his merit rating and the cost-of-living index.

Differential Time Rate: According to this method, different hourly rates are fixed for different levels of efficiency.

Payment by Results Piece Work Straight Piecework System: The wages of the worker depends upon his output and rate of each unit of output; it is in fact independent of the time taken by him.

Piecework system

A family in New York City making dolls’ clothes by piecework in 1912. Each family member earns money based on how many pieces they produce.

Differential Piece Work System: This system provides for higher rewards to more efficient workers. For different levels of output below and above the standard, different piece rates are applicable.

Taylor Differential Piece Work System Merrick Differential Piece Rate System Combination of Time and Piece Work Gantt Task and Bonus System: The system consists of paying a worker on a time basis if he does not attain the standard and on piece basis (high rate) if he does.

Emerson’s Efficiency System: Under this system, minimum time wages are guaranteed. Beyond a certain efficiency level, bonus in addition to minimum day wages is given.

Renumeration systems are procedures for determining an employee’s salary.

For example, lockstep compensation is a system of remuneration in which the employees’ salaries are based purely on their seniority within the organization. In the legal profession, where this system is most commonly found, all law school graduates hired by a law firm who graduated in the same year, receive the same base pay, regardless of the background, experience, or ability of each. During the late-2000s financial crisis, some law firms began replacing the lockstep system with “merit-based” systems.The lockstep system of compensation has the benefit of being easy to administer, reducing internal competition within firms, and maintaining a single company philosophy. At the same time, however, it has been criticized for being inefficient and reducing incentives for employees to improve performance.

12.3.3: Standard Benefits

Human resource requisites regarding employee compensation include a wide variety of common benefits beyond salary.

Learning Objective

List the various standard benefits human resource professionals must take into account when compensating employees

Key Points

• Compensation is more than just salary. Employees require a wide variety of supports in order to work and live comfortably.
• Benefits are a great source of differentiation and talent recruiting for organizations, as excellent benefits can tip the scales in an organization’s favor when negotiating with new potential employees (as well as when trying to retain current talent).
• Standard benefits can vary fairly widely, but generally revolve around health care, transportation, retirement, various forms of insurance, relocation, dependent support, childcare, and a strong work-life balance.

Key Terms

dependent

An individual who an employee supports financially, often a spouse or a child.

pension

An annuity paid regularly as benefit due to a retired employee, serviceman etc. in consideration of past services, originally and chiefly by a government but also by various private pension schemes.

Compensation incorporates more than just salary, and benefits are a key legal, motivational, and organizational consideration when it comes to employee relations. Organizations provide a wide range of benefits for employees, and understanding what can be expected as a new employee is an important aspect of negotiation.

Standard Benefits

Standard benefits span a wide variety of employee needs, and represent a key reason for employees to find full-time employers who provide a full selection of standard benefits. Human resource professionals must familiarize themselves with the organizational offerings revolving around:

• Relocation assistance – Often enough, hiring employees requires some percentage of those employees to move from one location to another. Talent is found all across the globe, and motivating talent to come to you requires assistance with visas, housing, flights, and a wide variety of other costs.
• Medical, prescription, vision and dental plans – Particularly in countries with poor social benefits, medical insurance is a requisite for hiring full-time talent (sometimes even legally required). In socially supportive countries, these benefits are provided by the government as a basic need.
• Dependent care – Just as noted above regarding health insurance, many working professionals have individuals who are dependent upon them (spouses and children primarily). These individuals are covered under group health insurance plans for that given employee.
• Retirement benefit plans (pension, 401(k), 403(b)) – Employees are entitled to various retirement-related benefits such as long-term investments, pensions, and other savings for retirement age. The primary draw for most of these benefits is the tax benefits, whereas withdrawing this capital past the retirement age is tax free.
• Group-term life and long term care insurance plans – Life insurance and long-term care are benefits paid by employers to insure individuals against various types of risks and disasters. Employees with life insurance or long-term care insurance will see their dependents (and themselves, in the case of long-term care) supported if a serious ailment or tragedy occurs.
• Legal assistance plans – Not quite as standard as the rest of the benefits above, legal assistance plans can be put in place for jobs where personal liability is high. Legal assistance is expensive, and in circumstances where legal assistance is in place the employee will be covered by organizational resources.
• Child care benefits – Supporting employee families is absolutely critical to retaining great talent. With two working parents being quite common, having childcare options in place for employees is a key benefit, allowing parents to focus on their work (not to mention the huge cost savings of group plans via an organization).
• Transportation benefits – Another common benefit is paid transportation. Particularly in countries/regions where public transportation is the norm (as opposed to personal vehicles), it’s quite common for the employer to pay for all work related transportation.
• Paid time off (PTO) in the form of vacation and sick pay – All organizations must provide paid time off, vacation, and sick pay in certain circumstances. Many countries have stringent legislation governing minimum requirements for paid time off and vacation leave to ensure the people in that country have a healthy working environment.

While there are other, less common benefits that can be provided, this list is a comprehensive overview of what employees can normally expect from employers in regards to standard benefits of employment. 

12.3.4: Fringe Benefits

Fringe benefits are various indirect benefits, often of a more discretionary nature than standard benefits.

Learning Objective

Explain fringe benefits

Key Points

• The term was coined during World War II to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited.
• Companies that offer such work-life perks aim to raise employee satisfaction and thus corporate loyalty.
• Certain fringe benefits may be excluded from an employee’s gross income and are thus not subject to federal income taxes. An example of this is flexible spending accounts, 401(k), and 403(b). Accident, health, and life insurance plans also act in this way.

Key Terms

401(k)

401(k) are “defined contribution plans” with annual contributions limited (currently to $17,000). Contributions are “tax-deferred” in that they are deducted from paychecks before taxes and then taxed when a withdrawal is made from the 401(k) account. Depending on the employer’s program, a portion of the employee’s contribution may be matched by the employer.

tax shelter

A legal structure that reduces tax liability for a person or that person’s assets.

403 (b)

A U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan.

Example

• Examples of fringe benefits, depending on employee seniority and job requirement, are take-home vehicles, hotel stays, and first choice of such things as job assignments and vacation scheduling, as well as first option to apply to certain internal vacancies. Other fringe benefits can include employee discount programs at shops, hotels, gyms, movie theaters, and so on.

The term “fringe benefits” was coined by the War Labor Board during World War II to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited. The term perks (also perqs) is often used colloquially to refer to those benefits of a more discretionary nature.

Perks are often given to employees who are doing notably well or have seniority. Common perks are hotel stays, free refreshments, leisure activities on work time, stationery, allowances for lunch, and take-home vehicles . When multiple choices exist, select employees may also be given first choice on such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.

Company Car

One of the perks this lifeguard enjoys is the use of a company car.

Benefits may also include formal or informal employee discount programs that grant workers access to specialized offerings from local and regional vendors (e.g., movies and theme park tickets, wellness programs, discounted shopping, hotels and resorts, and so on). Companies who offer these types of work-life perks seek to raise employee satisfaction, corporate loyalty, and worker retention by providing valuable benefits that go beyond a base salary figure.

Some fringe benefits (for example, accident and health plans, and group-term life insurance coverage up to US $50,000) may be excluded from the employee’s gross income and are therefore not subject to federal income tax in the United States. Some function as tax shelters (for example, flexible spending accounts, 401(k),and 403 (b)). Fringe benefits are also thought of as the costs of keeping employees other than salary. These benefit rates are typically calculated using fixed percentages that vary depending on the employee’s classification and often change from year to year.

12.4: Developing Employees

12.4.1: Training

Training is the acquisition of knowledge, skills, and competencies through a conscious skills development program.

Learning Objective

Compare and contrast on-the-job and off-the-job training

Key Points

• Training has specific goals of improving one’s capability, capacity, and performance, so that he or she may perform his or her job with higher quality and more efficiency.
• On-the-job training takes place in a normal working situation, and has a general reputation as being most effective for vocational work. Off-the-job training takes place away from normal work situations, and has proven more effective in inculcating concepts and ideas.
• An On the Job Training Plan or an OJT Plan is a detailed plan of what is to be covered, how long it will take, and what the training outcomes should be.
• A more recent development in job training is the On the Job Training Plan or OJT Plan. According to the United States Department of the Interior, a proper OJT plan should include an overview of the subjects to be covered, the number of hours the training is expected to take, an estimated completion date, and a method by which the training will be evaluated.

Key Terms

on-the-job training

Training that takes place in regular working situations using actual tools and equipment that trainees will use when fully trained.

off-the-job training

Training that takes place away from normal work situations, and tends to be more effective in inculcating concepts and ideas.

Example

• Training might involve days of work where employees learn to operate machinery, review safety practices, or be introduced to workplace decorum.

The concept behind training is for the trainee to acquire knowledge, skills, and competencies from the trainer as a result of being taught vocational or practical skills. The trainee gains knowledge that relates to specific useful competencies in his or her field. Training has specific goals of improving one’s capability, capacity, and performance. It forms the core of apprenticeships and provides the backbone of content at institutes of technology (also known as technical colleges or polytechnics). These activities are often focused upon, and evaluated against, the job that an individual currently holds.

Types of Training

One can generally categorize training as on-the-job or off-the-job:

On-the-job training takes place in a normal working situation, using the actual tools, equipment, documents or materials that trainees will use once they are fully trained. On-the-job training has a general reputation as being most effective for vocational work.

Off-the-job training takes place away from normal work situations—implying that the employee does not count as a directly productive worker while such training takes place. Off-the-job training has the advantage in that it allows people to get away from work and concentrate more thoroughly on the training itself. This type of training has proven more effective in inculcating concepts and ideas .

An astronaut in training.

An Example of Training

A more recent development in job training is the On the Job Training Plan or OJT Plan. According to the United States Department of the Interior, a proper OJT plan should include:

• An overview of the subjects to be covered;
• The number of hours the training is expected to take, with an estimated completion date;
• A method by which the training will be evaluated.

The stakeholders in training and development are categorized into several classes. The sponsors of training and development are senior managers. The clients of training and development are business planners. Line managers are responsible for coaching, resources, and performance. The participants are those who actually undergo the processes. The facilitators are Human Resources management staff. And the providers are specialists in the field. Each of these groups has its own agenda and motivations, which sometimes conflict with the agendas and motivations of the others.

12.4.2: Long-Term Development

Professional development refers to skills and knowledge attained for both personal development and career advancement.

Learning Objective

Outline the various methods used for long term professional development

Key Points

• Those who engage in professional development share a common purpose of enhancing their ability to do their work. At the heart of professional development is the individual’s interest in lifelong learning and increasing their own skills and knowledge.
• There are a variety of approaches to professional development, including consultation, coaching, communities of practice, lesson study, mentoring, reflective supervision and technical assistance.
• Professional development on the job may develop or enhance process skills, sometimes referred to as leadership skills, as well as task skills. Some examples for process skills are ‘effectiveness skills,’ ‘team functioning skills,’ and ‘systems thinking skills’.
• The 21st century has seen a significant growth in online professional development. Content providers incorporate collaborative platforms such as discussion boards and wikis, thereby encouraging and facilitating interaction, and optimizing training effectiveness.
• The 21st century has seen a significant growth in online professional development. Content providers incorporate collaborative platforms such as discussion boards and wikis, thereby encouraging and facilitating interaction, and optimizing training effectiveness.

Key Terms

technical assistance

A method of professional development that aims to assist individuals and their organization to improve by offering resources and information, supporting networking and change efforts.

reflective supervision

A method of professional development which aims to support, develop, and ultimately evaluate the performance of employees through a process of inquiry that encourages their understanding and articulation of the rationale for their own practices.

communities of practice

Approach to professional development by engaging in shared inquiry and learning with people who have a common goal.

Examples

• Many American states have professional development requirements for school teachers. For example, Arkansas teachers must complete 60 hours of documented professional development activities annually. Professional development credits are named differently from state to state. For example, teachers in Indiana are required to earn 90 Continuing Renewal Units (CRUs) per year; in Massachusetts, teachers need 150 Professional Development Points (PDPs); and in Georgia, must earn 10 Professional Learning Units (PLUs). American and Canadian nurses, as well as those in the United Kingdom, are required to participate in formal and informal professional development (earning Continuing education units, or CEUs) in order to maintain professional registration. Other groups such as engineering and geoscience regulatory bodies also have mandatory professional development requirements.
• Some examples of approaches to professional development include the case study method, consultation, coaching, communities of practice, lesson study, mentoring, reflective supervision, etc.

Long Term Development

In addition to the basic training required for a trade, occupation, or profession, observers of the labor-market recognize the need to continue training beyond initial qualifications: to maintain, upgrade, and update skills throughout working life. This is known as professional development.

Professional development refers to skills and knowledge attained for both personal development and career advancement. Professional development encompasses all types of facilitated learning opportunities, ranging from college degrees to formal coursework, conferences, and informal learning opportunities situated in practice. It has been described as intensive and collaborative, ideally incorporating an evaluative stage. There are a variety of approaches to professional development, including consultation, coaching, communities of practice, lesson study, mentoring, reflective supervision and technical assistance.

Who Participates and Why?

A wide variety of people, such as teachers, military officers and non-commissioned officers, health care professionals, lawyers, accountants and engineers engage in professional development. Individuals may participate in professional development because of an interest in lifelong learning, a sense of moral obligation, to maintain and improve professional competence, enhance career progression, keep abreast of new technology and practice, or to comply with professional regulatory organizations.

Many American states have professional development requirements for school teachers. For example, Arkansas teachers must complete 60 hours of documented professional development activities annually. American and Canadian nurses, as well as those in the United Kingdom, are required to participate in formal and informal professional development to maintain professional registration. Other groups such as engineering and geoscience regulatory bodies also have mandatory professional development requirements.

Approaches

In a broad sense, professional development may include formal types of vocational education, typically post-secondary or poly-technical training leading to a qualification or credential required to obtain or retain employment . Professional development may also come in the form of pre-service or in-service professional development programs. These programs may be formal, or informal, group, or individualized. Individuals may pursue professional development independently, or programs may be offered by human resource departments. Professional development on the job may develop or enhance process skills, sometimes referred to as leadership skills, as well as task skills. Some examples for process skills are ‘effectiveness skills,’ ‘team functioning skills,’ and ‘systems thinking skills. ‘

CPR Training

This first-aid course is a form of professional development. While not directly relevant to, say, teachers, it nonetheless provides an important skill that may be used in case of an emergency, and thus would indirectly benefit a teacher who learns these skills.

Some examples of approaches to professional development include:

Case Study Method – the case study method is a teaching approach that consists of presenting the students with a case, putting them in the role of a decision maker facing the problem.

Consultation – to assist an individual or group of individuals to clarify and address immediate concerns by following a systematic problem-solving process.

Coaching – to enhance a person’s competencies in a specific skill area by providing a process of observation, reflection, and action.

Lesson Study – to solve practical dilemmas related to intervention or instruction through participation with other professionals in systematically examining practice.

Mentoring – to promote an individual’s awareness and refinement of his or her own professional development by providing and recommending structured opportunities for reflection and observation.

Other methods include communities of practice, reflective supervision, and technical assistance.

Online Professional Development

The 21st century has seen a significant growth in online professional development. Content providers incorporate collaborative platforms such as discussion boards and wikis, thereby encouraging and facilitating interaction, and optimizing training effectiveness.

Whereas many other industries have used online sources of continuing education and professional practices for many years, traditionally, educators have turned solely to internal professional development departments, local education agencies (LEAs), and local colleges and universities to acquire the necessary education to meet the required hours/units for renewal of their state teaching licenses.

However, the economic pressures facing school districts, combined with a greater conviction that online professional development can be effective, has led to increased interest in this option. Rather than replacing traditional sources of professional development, online sources and providers have served to augment existing options and can bring a widening access to topics and a broader scope to “learning communities. ” As teacher performance comes under increased scrutiny, a study conducted by Boston College found that English and math teachers who took professional development courses online improved their instructional practices and boosted their subject knowledge scores, producing modest performance gains for their students. This type of research-based and outcomes-focused study has lent credibility to the idea that online professional development can and will serve an important role in supporting the educational goals of the United States Department of Education.

12.4.3: Performance Assessment

A performance appraisal is done to assess an employee’s job performance and productivity on certain preestablished criteria and objectives.

Learning Objective

Explain the steps in performance appraisal (PA)

Key Points

• A performance appraisal is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain preestablished criteria and organizational objectives.
• There are three main methods used to collect performance appraisal data: objective production, personnel, and judgmental evaluation. The latter are the most commonly used with a large variety of evaluation methods.
• A performance assessment is typically conducted annually, though the frequency of an evaluation, and policies concerning them, varies widely from workplace to workplace.
• An evaluation may include an assessment on how well the employee is doing, and employee goals that are expected to be met (or have significant progress made) by a set time, such as the next evaluation.
• Performance assessment is often included in performance management systems. These systems are used “to manage and align” all of an organization’s resources in order to achieve the highest possible performance.

Key Terms

Evaluation

An assessment, such as an annual personnel performance review, used as the basis for a salary increase or bonus, or a summary of a particular situation.

performance appraisal

a method by which how well an employee did a job is evaluated

Example

• Sometimes, an employee who has performed very well since his last review period may get an increase in pay or be promoted to a more prestigious position. However, a pay raise that is denied is not always the result of a poor review, as economic conditions and other factors dictate the ability for employers to raise their workers’ pay.

A performance appraisal (PA) or performance evaluation is a systematic and periodic process that assesses an individual employee’s job performance and productivity, in relation to certain preestablished criteria and organizational objectives. Other aspects of individual employees are considered as well, such as organizational citizenship behavior, accomplishments, potential for future improvement, strengths and weaknesses .

Performance Appraisal

A performance appraisal (PA) or performance evaluation is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain preestablished criteria and organizational objectives.

Three main methods are used to collect PA data: objective production, personnel, and judgmental evaluation. The latter are the most commonly used with a large variety of evaluation methods.

A PA is typically conducted annually. However, the frequency of an evaluation, and policies concerning them, varies widely from workplace to workplace. Sometimes, an evaluation will be given to a new employee when a probationary period lapses, after which they may be conducted on a regular basis (such as every year).

Usually, the employee’s supervisor (and frequently, a more senior manager) is responsible for evaluating the employee. A private conference is often scheduled to discuss the evaluation. The interview could function as:

“Providing feedback to employees, counseling and developing employees, and conveying and discussing compensation, job status, or disciplinary decisions”.

The process of an evaluation may include one or more of these things:

• An assessment on how well the employee is doing. Sometimes, this may include a scale rating indicating strengths and weaknesses in key areas (e.g., following instructions, promptness, and ability to get along with others). Often, the supervisor and manager will discuss the key areas. Or, as some have dared to expose, employers often don’t care about following instructions, arriving on time, or the ability to get along with others.
• Employee goals that are expected to be met (or have made significant progress) by a set time, such as the next evaluation. Sometimes, the employee may voluntarily offer a goal, while at other times it will be set by his boss. A significantly-underperforming employee may be given an performance improvement plan, which details specific goals that must be met to maintain his/her job.
• Sharing of feedback by a worker’s fellow employees and supervisors. The employee is given his chance to share his/her feelings, concerns and suggestions about the workplace as well.
• Details about workplace standing, promotions and pay raises. Sometimes, an employee who has performed very well since his last review period may get an increase in pay or be promoted to a more prestigious position. However, a pay raise that is denied is not always the result of a poor review, as economic conditions and other factors dictate the ability for employers to raise their workers’ pay.

PA is often included in performance management systems. These systems are used “to manage and align” all of an organization’s resources in order to achieve the highest possible performance. How performance is managed in an organization determines to a large extent its success or failure. Therefore, improving PA for everyone should be among the highest priorities of contemporary organizations.

12.4.4: Reducing Turnover

Turnover is the rate at which employees leave an organization.

Learning Objective

Explain the root causes for high turnover

Key Points

• Turnover is measured for individual companies and for their industry as a whole.
• Turnover can be optimal when a poorly performing employee decides to leave an organization. Turnover can be dysfunctional if a high turnover rate increases the costs associated with recruitment and training of new employees, or if good employees consistently decide to leave.
• Research on job turnover has attempted to understand the causes of individual decisions to leave an organization. It has been found that lower performance, lack of reward contingencies for performance, and better external job opportunities are the main causes.
• Providing a stimulating workplace environment, which fosters happy, motivated, and empowered individuals, lowers employee turnover and absentee rates.

Key Term

staff turnover

The relative rate at which an employer gains and loses staff.

Example

• In the United States, the average total non-farm seasonally adjusted monthly turnover rate was 3.3% for the period from December 2000 to November 2008. However rates vary widely when compared over different periods of time or different job sectors. For example, during the period 2001 to 2006, the annual turnover rate for all industry sectors averaged 39.6% before seasonal adjustments, while the leisure and hospitality sector experienced an average annual rate of 74.6% during the same period.

Turnover Defined

In a human resources context, turnover is the rate at which employees leave an organization. Simple ways to describe it are “how long employees tend to stay” or “the rate of traffic through the revolving door. “

Staff turnover can be optimal when a poorly performing employee decides to leave an organization, or dysfunctional when the high turnover rate increases the costs associated with recruitment and training of new employees, or if good employees consistently decide to leave .

Employee Turnover

Turnover can be optimal when a poorly performing employee decides to leave an organization.

Measuring Turnover

Turnover is measured for individual companies and for their industry as a whole. If an employer is said to have a high turnover relative to its competitors, it means that employees of that company have a shorter average tenure than those of other companies in the same industry. High turnover may be harmful to a company’s productivity if skilled workers are often leaving and the worker population contains a high percentage of novice workers.

In the United States, the average total non-farm seasonally adjusted monthly turnover rate was 3.3% for the period from December 2000 to November 2008. However rates vary widely when compared over different periods of time or different job sectors. For example, during the period 2001 to 2006, the annual turnover rate for all industry sectors averaged 39.6% before seasonal adjustments, while the leisure and hospitality sector experienced an average annual rate of 74.6% during the same period.

Preventing Turnover

Preventing the turnover of employees is important in any business. Without them, the business would be unsuccessful. However, more and more employers today are finding that employees remain for approximately 23 to 24 months, according to the 2006 Bureau of Labor Statistics. The Employment Policy Foundation states that it costs a company an average of $15,000 per employee, which includes separation costs, including paperwork, unemployment; vacancy costs, including overtime or temporary employees; and replacement costs including advertisement, interview time, relocation, training, and decreased productivity when colleagues depart.

Research on employee job turnover has attempted to understand the causes of individual decisions to leave an organization. It has been found that lower performance, lack of reward contingencies for performance, and better external job opportunities are the main causes. Other variables related to turnover are the conditions in the external job market, the availability of other job opportunities, and the length of employee tenure.

Providing a stimulating workplace environment, which fosters happy, motivated, and empowered individuals, lowers employee turnover and absentee rates. Promoting a work environment that fosters personal and professional growth promotes harmony and encouragement on all levels, so the effects are felt company wide.

Continual training and reinforcement also develops a workforce that is competent, consistent, competitive, effective, and efficient. Beginning on the first day of work, providing individuals with the necessary skills to perform their job is important. Before the first day, it is important the interview and hiring process expose new hires to an explanation of the company, so individuals know whether the job is their best choice.

Networking and strategizing within the company provides ongoing performance management and helps build relationships among coworkers. It is also important to motivate employees to focus on customer success, profitable growth, and the company well-being. Employers can keep their employees informed and involved by including them in future plans, new purchases, policy changes, as well as introducing new employees to the employees who have gone above and beyond in meetings. Engagement shows employees that they are valuable through information or recognition rewards and makes them feel included.

In addition, by paying above-market wages, the worker’s motivation to leave the job and look for a job elsewhere will be reduced. This strategy makes sense because it is often expensive to train replacement workers.

When companies hire the best people, new hired talent and veterans are enabled to reach company goals, maximizing the investment of each employee. Taking the time to listen to employees and making them feel involved will create loyalty, in turn reducing turnover and allowing for growth.

12.5: The Functions and Goals of HR

12.5.1: Activities in the Human Resources Department

Human resource departments are responsible for a wide variety of activities across a number of core organizational functions

Learning Objective

Understanding the activities of human resource departments 

Key Points

• Human resource management is a central pillar of many organizations. Human resource departments are responsible for activities spanning a wide variety of core functions.
• In short, human resource activities fall under the following five core functions: staffing, development, compensation, safety and health, and employee and labor relations.
• Within each of these core functions, HR conducts a wide variety of activities. 
• These activities are all linked by a concern for employee well-being and ensuring organizations treat employees in a way that provides mutual benefit for both the employee and the organization.

Key Terms

On-boarding

A series of activities designed to train new employees and prepare them for integration with the organization and their responsibilities.

unions

Legal groups of professionals in a given field who collectively address common issues within that discipline.

Core Functions of HR

Human resources (HR) professionals conduct a wide variety of tasks within an organizational structure. A brief review of the core functions of human resource departments will be useful in framing the more common activities a human resource professional will conduct. The core functions can be summarized as:

Staffing

This includes the activities of hiring new full-time or part-time employees, hiring contractors, and terminating employee contracts

Staffing activities include:

• Identifying and fulfilling talent needs (through recruitment, primarily)
• Utilizing various recruitment technologies to acquire a high volume of applicants (and to filter based on experience)
• Terminating contracts when necessary
• Maintaining ethical hiring practices and aligning with the regulatory environment
• Writing employee contracts and negotiating salary and benefits

Development

On-boarding new employees and providing resources for continued development is a key investment for organizations, and HR is charged with maintaining a developmental approach to existing human resources. 

Development activities include:

• Training and preparing new employees for their role
• Providing training opportunities (internal training, educational programs, conferences, etc.) to keep employees up to date in their respective fields
• Preparing management prospects and providing feedback to employees and managers

Compensation

Salary and benefits are also within the scope of human resource management. This includes identifying appropriate compensation based on role, performance, and legal requirements. 

Compensation activities include:

• Setting compensation levels to match the market, using benchmarks such as industry standards for a given job function
• Negotiating group health insurance rates, retirement plans, and other benefits with third party providers
• Discussing raises and other compensation increases and/or decreases with employees in the organization
• Ensuring compliance with legal and cultural expectations when it comes to employee compensation

Safety and Health

Achieving best practices in various industries include careful considering of safety and health concerns for employees.

Safety and health activities include:

• Ensuring compliance with legal requirements based on job function for safety measures (i.e. hard hats in construction, available counseling for law enforcement, appropriate safety equipment for chemists, etc.)
• Implementing new safety measures when laws change in a given industry
• Discussing safety and compliance with relevant government departments
• Discussing safety and compliance with unions

Employee and Labor Relations

Defending employee rights, coordinating with unions, and mediating disagreements between the organization and its human resources is also a core HR function. 

Employee and labor relations activities include:

• Mediating disagreements between employees and employers
• Mediating disagreements between employees and other employees
• Considering claims of harassment and other workplace abuses
• Discussing employee rights with unions, management, and stakeholders
• Acting as the voice of the organization and/or the voice of the employees during any broader organizational issues pertaining to employee welfare

HR Competencies

This chart highlights a few of the key competencies expected of human resource teams in organizations.

This image is a small chart which highlights a few of the key competencies expected of human resource teams in organizations.

12.5.2: Development of Human Resources

Human resource development combines training and career development to improve the effectiveness of the individual, group, and organization.

Learning Objective

Explain the function of Human Resource development (HRD)

Key Points

• Human resources is the set of individuals who make up the workforce of an organization, business sector, or an economy.
• As a process, human resource development takes place within organizations and includes both training and development and organization development.
• Human resources development (HRD) as a theory is a framework for the expansion of human capital within an organization through the development of both the organization and the individual to achieve performance improvement.

Key Term

human capital

Human capital is the stock of competencies, knowledge, and social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural, and psychological complexity as they interact in explicit and/or economic transactions.

Example

• Examples of human resource development include formal activities like classroom training, college coures, and a change effort planned by the organization. An example of an informal activity is a manager coaching his or her employee.

Human resources is the set of individuals who make up the workforce of an organization, business sector, or an economy. “Human capital” is sometimes used synonymously with human resources, although human capital typically refers to a more narrow view (i.e., the knowledge the individuals embody and can contribute to an organization). Likewise, other terms sometimes used include “manpower,” “talent,” “labor,” or simply “people. “

Human resources development (HRD) as a theory is a framework for the expansion of human capital within an organization through the development of both the organization and the individual to achieve performance improvement. Adam Smith states, “The capacities of individuals depended on their access to education. ” The same statement applies to organizations themselves, but it requires a much broader field to cover both areas.

Human resource development is the integrated use of training, organization, and career development efforts to improve individual, group, and organizational effectiveness. HRD develops the key competencies that enable individuals in organizations to perform current and future jobs through planned learning activities. Groups within organizations use HRD to initiate and manage change. Also, HRD ensures a match between individual and organizational needs.

HRD as a process occurs within organizations and encapsulates:

1. Training and development (TD), the development of human expertise for the purpose of improving performance
2. Organization development (OD), empowering the organization to take advantage of its human resource capital.

TD alone can leave an organization unable to tap into the increase in human, knowledge, or talent capital. OD alone can result in an oppressed, under-realized workforce. HRD practicitioners find the interstices of win/win solutions that develop the employee and the organization in a mutually beneficial manner. HRD does not occur without the organization, so the practice of HRD within an organization is inhibited or promoted upon the platform of the organization’s mission, vision, and values.

Human Resource

Human resource development combines training and career development to improve the effectiveness of the individual, group, and organization.

12.5.3: The Mission of Human Resource Management

Human resource management is responsible for the attraction, selection, training, assessment, and rewarding of employees.

Learning Objective

Break down human resource management (HRM) to Attraction, Selection, Training, Assessment, Rewarding

Key Points

• HR also oversees organizational leadership and culture, and ensures compliance with employment and labor laws.
• Employer brand was first used in the early 1990s to denote an organization’s reputation as an employer. Since then, it has become widely adopted by the global management community. Employer branding is “the image of your organization as a ‘great place to work'”.
• Just as a customer brand proposition is used to define a product or service offer, an employee value proposition (EVP) is used to define an organization’s employment offer.
• A performance appraisal (PA) or performance evaluation is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain pre-established criteria and organizational objectives.
• Remuneration is the total compensation that employees receive in exchange for the service that they perform for their employer.
• A performance appraisal (PA) or performance evaluation is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain pre-established criteria and organizational objectives. To collect PA data, there are three main methods: objective production, personnel, and judgmental evaluation.
• Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary, and complementary benefits including healthcare, pension plans, and stock options. The HR department plays a critical role in determining raises or bonuses based on employee performance.

Key Terms

candidate

A person who applies to a job position.

recruiter

One who recruits, particularly one employed to recruit others.

Example

• An HR manager at a firm such as an investment bank may work to recruit new researchers for the bank, train those entry-level researchers for other positions at the bank, monitor their performance throughout their tenure at the bank, and may determine their pay raises.

Human resource management (HRM, or simply HR) is the management of an organization’s workforce, or human resources . It is responsible for the attraction, selection, training, assessment, and rewarding of employees. HR also oversees organizational leadership and culture, and ensures compliance with employment and labor laws.

Human Resource Management

Human resource management is the management of an organization’s workforce, or human resources.

Attraction

Employer brand was first used in the early 1990s to denote an organization’s reputation as an employer. Since then, it has become widely adopted by the global management community. Employer branding is “the image of your organization as a ‘great place to work.'” Just as a customer brand proposition is used to define a product or service offer, an employee value proposition (EVP) is used to define an organization’s employment offer. Likewise, the marketing disciplines associated with branding and brand management have been increasingly applied by the human resources and talent management community to attract, engage, and retain talented candidates and employees.

Selection

The stages in selection include sourcing candidates by networking, advertising, or other methods. The HR recruiter utilizes professional interviewing techniques to understand the candidate’s skills, motivations to make a move, and to screen potential candidates using testing (skills or personality). The process is meant to evaluate the candidate and also evaluate how the candidate will fit into the organization. The recruiter will meet with the hiring manager to obtain specific position and type information before beginning the process. After recruiters understand the type of person the company needs, they begin the process of informing their network of the opportunity. Recruiters play an important role by preparing the candidate and company for the interview, providing feedback to both parties, and handling salary and benefits negotiations.

Training

Training and development (T&D) encompasses three main activities: training, education, and development. Garavan, Costine, and Heraty, of the Irish Institute of Training and Development, note that these ideas are often considered to be synonymous. However, to practitioners, they encompass three separate, although interrelated, activities:

Training: This activity is both focused upon, and evaluated against, the job that an individual currently holds.

Education: This activity focuses upon the jobs that an individual may potentially hold in the future, and is evaluated against those jobs.

Development: This activity focuses upon the activities that the organization employing the individual, or that the individual is part of, may partake in the future, and is almost impossible to evaluate.

Assessment

A performance appraisal (PA) or performance evaluation is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain pre-established criteria and organizational objectives. Other aspects of individual employees are considered as well, such as organizational citizenship behavior, accomplishments, potential for future improvement, and strengths and weaknesses.

To collect PA data, there are three main methods: objective production, personnel, and judgmental evaluation. Judgmental evaluations are the most commonly used with a large variety of evaluation methods. A PA is typically conducted annually. The interview could function as “providing feedback to employees, counseling and developing employees, and conveying and discussing compensation, job status, or disciplinary decisions.”

Rewarding

Remuneration is the total compensation that employees receive in exchange for the service that they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary, and complementary benefits including healthcare, pension plans, and stock options. The HR department plays a critical role in determining raises or bonuses based on employee performance.

12.5.4: Demand Planning

HR forecasting is the process of ascertaining the net requirements for staff by determining present and future HR needs.

Learning Objective

Explain the benefits of HR forecasting

Key Points

• HR forecasting can be categorized into transaction-based forecasting, event-based forecasting, and process-based forecasting.
• Transaction-based forecasting focuses on tracking internal change by the organization’s managers. Event-based forecasting is concerned with changes in the external environment. Process-based forecasting is focused on the flow or sequencing of several work activities.
• HR forecasting can reduce HR costs, increase organizational flexibility, ensure a close linkage to the Macro Business Forecasting Process, and ensure that organizational requirements take precedence over issues of resource constraint and scarcity.
• The five stages of the HR forecasting process are: identifying organizational goals, objectives and plans, determining overall demand requirements for personnel, assessing in-house skills and other internal supply characteristics, determining the net demand requirements that must be met from external, environmental supply sources and developing HR plans and programs to ensure that the right people are in the right place.
• The HR process may be affected by environmental factors including the economy, labor markets and unions, governmental laws and regulations, industry product life cycles, technology changes, demographic changes, etc. The HR process may also be affected by organizational factors such as restructuring, strategic goals, corporate missions, job satisfaction, workforce coverage, job analysis, organizational culture, etc.
• HR forecasting can be categorized into current, short-run, medium-run and long-run forecasting. Current forecasting can be used to meet the immediate operational needs of the organization (up to the end of the current operating cycle, or a maximum of one year into the future). On the other hand, long-run forecasting typically extends five or more years ahead of the current operational period. Due to the number of changes that could affect an organization’s operations, the long-run forecast is extremely flexible.

Key Terms

mission

A set of tasks that fulfills a purpose or duty; an assignment set by an employer.

forecast

An estimation of a future condition.

restructuring

A reorganization; an alteration of structure.

Example

• An HR forecaster at a large firm, like a pharmaceutical company, may examine a variety of different internal and external factors. She may consider the workforce demand for the pharmaceutical company, like how many researchers and chemists the company may need, assess the in-house skills of the current employees, and develop programs to develop the new and existing workforce of the company. The HR forecaster will also consider environmental factors, such as the pharmaceutical market, technological changes in pharmaceutical production, and demographic changes of employees and customers. The forecaster will consider organizational factors as well, such as the company’s corporate mission, operational goals, and pharmaceutical production budgets. Finally, the HR forecaster will consider these plans over a time horizon that is approved by an HR manager.

Demand Planning

HR Forecasting and Planning

HR forecasting is the heart of the HR planning process. The purpose of HR forecasting is to ascertain the net requirements for staff by determining the levels of demand for, and supply of, human resources now and in the future.

Forecasting Activity Categories

• Transaction-based forecasting focuses on tracking internal change instituted by the organization’s managers.
• Event-based forecasting is concerned with changes in the external environment.
• Process-based forecasting is not focused on a specific internal organizational event but on the flow or sequencing of several work activities.

Benefits of HR Forecasting

• Reduces HR costs.
• Increases organizational flexibility.
• Ensures a close linkage to the Macro Business Forecasting Process.
• Ensures that organizational requirements take precedence over issues of resource constraint and scarcity.

HR Demand is the organization’s projected requirement for human resources, whereas HR Supply is defined as the source of workers to meet demand requirements, obtained either internally (current members of the organization’s workforce) or from external agencies.

Key Personnel Analyses Conducted by HR Forecasters

• Specialist/Technical/Professional Personnel: These employees tend to be in high demand due to trade qualifications that are essential.
• Employment Equity-Designated Group Membership: Should be a proportional representation of each grouping. Examples of these groups include African Americans, women, and those with disabilities.

5 Stages of the Forecasting Process

• Identify organizational goals, objectives, and plans.
• Determine overall demand requirements for personnel.
• Assess in-house skills and other internal supply characteristics.
• Determine the net demand requirements that must be met from external, environmental supply sources.
• Develop HR plans and programs to ensure that the right people are in the right place.

Environmental factors affecting the HR process include the following:

• economy,
• labor markets and unions,
• governmental laws and regulations,
• industry and product life cycles,
• technological changes,
• competitor labor usage,
• global market for skilled labor,
• demographic changes.

The following are the organizational factors affecting HR forecasting:

• Corporate mission, strategic goals;
• Operational goals, production budgets;
• HR Policies;
• Organizational structure, restructuring;
• Worker KSA’s, competencies, expectations;
• HRMS level of development;
• Organizational culture, climate, job satisfaction, communications;
• Job analysis, workforce coverage, current data.

HR Forecasting Time Horizons

Current Forecast

The current forecast is the one being used to meet the immediate operational needs of the organization (up to the end of the current operating cycle, or a maximum of one year into the future).

Short-Run Forecast

The short-run forecast extends forward from the current forecast and states the HR requirements for the next one-to-two year period beyond the current operational requirements.

Medium-Run Forecast

Typically, the medium-run forecast identifies requirements for two to five years into the future.

Long-Run Forecast

The long-run forecast extends five or more years ahead of the current operational period. Due to the number of changes that could affect an organization’s operations, the long-run forecast is extremely flexible.

12.6: Diversity in Human Resources

12.6.1: Defining Diversity

Diversity in an organization should reflect a globalized and multicultural workforce where value is placed on diversity of thought.

Learning Objective

Differentiate between a Monolithic, a Plural, and a Multicultural organizational structure

Key Points

• A company that employs a diverse workforce is better able to understand the demographics of the marketplace it serves. It is thus better equipped to thrive in that marketplace than a company that has a more limited range of employee demographics.
• According to the deficit model, organizations that do not have a strong culture of diversity and inclusion will invite lower productivity, higher absenteeism, and higher turnover, all of which will result in higher costs to the company.
• One of the greatest challenges an organization has when trying to adopt a more inclusive environment is assimilation for any member outside of the dominant group.

Key Term

Diversity

A variety; the quality of being different

Example

• Beginning in the 1970s, women began to enter fields like medicine, law, and business. More women were going to college and expected to be employed at the age of 35, as opposed to past generations of women who only worked intermittently due to marriage and childbirth. Women entering the workforce created diversity.

Components of a Diverse Organization

A multicultural or diverse organization not only contains many different cultural groups, but it values this diversity. It encourages healthy conflict as a source of avoiding groupthink. Groupthink can occur when group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas or viewpoints.

In this globalized economy, a multicultural workforce should reflect a diversity of thought. The perspectives shared from individual standpoints will benefit organizations that are savvy enough to capitalize on them. The theory is that a company with a diverse workforce is better able to understand the demographics of the marketplace it serves. It is thus also better equipped to thrive in that marketplace than a company that has a more limited range of employee demographics.

Productivity and costs can be analyzed to assist in building the business case for diversity. According to the deficit model, organizations that do not have a strong diversity inclusion culture will invite lower productivity, higher absenteeism, and higher turnover, all of which will result in higher costs to the company.

According to the investment model, or value-added model to diversity inclusion strategies, a company choosing to foster an inclusive environment will experience many benefits. These benefits include increased productivity, better problem solving capabilities, and increased market share. Either model, however, requires an intentional implementation from top leadership for the organizational culture to truly be one of inclusion and acceptance.

Three Types of Organizations

In a journal article entitled “The Multicultural Organization”, Taylor Cox, Jr. talks about three organization types that focus on the development of cultural diversity. These three types are the monolithic organization, the plural organization, and the multicultural organization. In the monolithic organization, the amount of structural integration (the presence of persons from different cultural groups in a single organization) is minimal and white male privilege is very tangible. This type of organization may have women and marginalized members within the workforce, but not in positions of leadership and power.

The plural organization has a more heterogeneous membership than the monolithic organization and takes steps to be more inclusive of persons from cultural backgrounds that differ from the dominant group. This type of organization seeks to empower those from a marginalized standpoint to encourage opportunities for promotion and positions of leadership. The multicultural organization contains many different cultural groups and it highly values this diversity and encourages healthy conflict to avoid groupthink.

12.6.2: How Businesses Benefit from Diversity

Diversity brings substantial potential benefits such as better decision making and problem solving, and greater creativity and innovation.

Learning Objective

Explain the benefits of diversity in an organization

Key Points

• Diversity provides organizations with the ability to compete in global markets.
• Simply recognizing diversity in a corporation helps link the variety of talents within the organization. The act of recognizing diversity also allows for those employees with these talents to feel needed and have a sense of belonging, which in turn increases their commitment to the company.
• Standpoint theory suggests that marginalized groups bring a different perspective to an organization that challenges the status quo since their socially constructed world view will differ from that of the dominant group.

Key Term

Diversity

A variety; the quality of being different

Example

• An example of a company involved with creating diversity in the workplace is MentorNet, a nonprofit online mentoring organization that focuses on women and underrepresented minorities in the STEM (Science, Technology, Engineering, and Mathematics) fields. MentorNet has used an algorithm to match over 30,000 mentor relationships since 1997. The organization gives students, especially women and underrepresented minorities, the chance to seek mentors to discuss how to overcome obstacles in their fields and eventually their workplace.

Diversity is beneficial to both the organization and its members. Diversity brings substantial potential benefits such as better decision making and improved problem solving; greater creativity and innovation, which leads to enhanced product development; and more successful marketing to different types of customers. Diversity provides organizations with the ability to compete in global markets.

Simply recognizing diversity in a corporation helps link the variety of talents within the organization. The act of recognizing diversity also allows for those employees with these talents to feel needed and have a sense of belonging, which in turn increases their commitment to the company and allows each of them to contribute in a unique way. Standpoint theory suggests that marginalized groups bring a different perspective to an organization that challenges the status quo since their socially constructed world view will differ from that of the dominant group.

Although the standpoint of the dominant group will often carry more weight, a transformational leader will encourage conflicting standpoints to coexist within an organization. This will create a forum for sanctioned conflict to ensue. Conflict stems from challenging the way things have always been done, and ideas and problems that have not been explored from multiple perspectives. Standpoint theory gives a voice to those in a position to see patterns of behavior that those immersed in the culture have difficulty acknowledging. These unique and varying standpoints help eradicate groupthink which can develop within a homogenous group. But there are still many challenges to fostering an inclusive environment in the workplace for diversity of thought and ideas.

12.7: Recruitment

12.7.1: Finding Good Candidates

It is beneficial to attract applicants with the highest potential for success at the organization.

Learning Objective

Explain the different types of hiring concepts and placement classifications

Key Points

• Selective hiring helps prevent the costly turnover of staff and increases the likeliness of high employee morale and productivity.
• The proper start to a recruitment effort is to perform a job analysis—to document the actual or intended requirement of the job to be performed. This information is captured in a job description and provides the recruitment effort with the boundaries and objectives of the search.
• Job descriptions need to be reviewed or updated prior to a recruitment effort to reflect present day requirements. Each job description should be associated with a list of critical skills, behaviors or attitudes that will make or break the job performance.
• When screening potential employees, managers need to select based on cultural fit and attitude as well as technical skills and competencies.

Key Terms

recruitment

Recruitment refers to the process of attracting, screening, and selecting a qualified person for a job.

job analysis

Job analysis is the formal process of identifying the content of a job in terms of activities involved and attributes needed to perform the work.

job description

an outline of the description of the tasks and responsibilities in a post within an organization

Example

• There are some companies, such as Southwest Airlines, based out of the United States, who hire primarily based on attitude because they espouse the philosophy that you hire for attitude, train for skill. According to former CEO Herb Kelleher, “We can change skill levels through training. We can’t change attitude” (O’Reilly & Pfeffer).

In recruiting, it is beneficial to attract not only a large quantity of applicants but a group of individuals with the necessary skills and requirements for the position. After obtaining a large, qualified applicant base managers need to identify those applicants with the highest potential for success at the organization. According to Pfeffer and Veiga 1998, selecting the best person for the job is an extremely critical piece of the human resources inflow process. Selective hiring helps prevent the costly turnover of staff and increases the likeliness of high employee morale and productivity.

The proper start to a recruitment effort is to perform a job analysis, to document the actual or intended requirement of the job to be performed. This information is captured in a job description and provides the recruitment effort with the boundaries and objectives of the search. Often a company will have job descriptions that represent a historical collection of tasks performed in the past. These job descriptions need to be reviewed or updated prior to a recruitment effort to reflect present day requirements. Each job description should be associated with a list of critical skills, behaviors, or attitudes that will make or break the job performance. When screening potential employees, managers need to select based on cultural fit and attitude as well as technical skills and competencies. In recent years, the focus of hiring is increasingly shifted from solely the immediate hard skills such as engineering, finances, or accounting, to the longer term soft skills such as communication, team leadership, brand building.

There are some companies, such as Southwest Airlines, who hire primarily based on attitude because they espouse the philosophy that one must “hire for attitude and train for skill. ” According to former CEO Herb Kelleher, “We can change skill levels through training. We can’t change attitude” (O’Reilly & Pfeffer). After determining the most important qualifications, managers can design the rest of the selection process so that it is in alignment with the other human resource processes. Starting a recruitment with an accurate job analysis and job description ensures the recruitment process effort starts off on a proper track for success. This soft skills requirement is especially critical for multinationals, where expatriates, local employees, customers, and vendors would need to work together. To ease the situation, recruiters are beginning to adopt the IITTI (pronounced as “ET”) standardized image and etiquette certification tool to measure the background soft skills of job-seekers.

After the job analysis, the process moves onto sourcing, which involves 1) advertising, a common part of the recruiting process, often encompassing multiple media, such as the Internet, general newspapers, job ad newspapers, professional publications, window advertisements, job centers, and campus graduate recruitment programs; and 2) recruitment research, which is the proactive identification of passive candidates who are happy in their current positions and are not actively looking to move companies. This initial research for so-called passive candidates, also called name generation, results in a contact information of potential candidates who can then be contacted discreetly to be screened and approached on behalf of an executive search firm or corporate client.

Managers must strive to identify the best applicants at the lowest cost. Companies have a variety of processes available to screen potential employees, so managers must determine which system will generate the most accurate results. The methods of selection vary both in levels of effectiveness and in cost of application. In addition to biographical information, companies can conduct personal interviews, perform background checks, or request testing. Because of the costs associated with these measures, companies try to narrow down the number of applicants in each round of hiring. In some countries, such as the United States, the selection procedures are subject to Equal Employment Opportunity guidelines. Therefore, the companies also need to ensure that the process is accurate, with a high level of validity, reliable, and related to critical aspects of the job. Proactively taking these measures will help companies avoid litigation related to discrimination in the selection process.

Recruitment

Recruitment for the Army

12.7.2: Selecting the right People

Having a common set of information about applicants allows hiring managers to avoid prejudices.

Learning Objective

List the various interview styles used by employers to hire efficiently

Key Points

• Many companies choose to use several rounds of screening with different interviewers to discover additional facets of the applicant’s attitude or skill as well as develop a more well-rounded opinion of the applicant from diverse perspectives.
• There are two common types of interviews: behavioral and situational.
• The purpose of behavioral interviewing is to find links between the job’s requirement and how the applicant’s experience and past behaviors match those requirements.
• A situational interview requires the applicant to explain how he or she would handle a series of hypothetical situations. Situational-based questions evaluate the applicant’s judgment, ability, and knowledge.

Key Term

interview

A formal meeting, in person, for the assessment of a candidate or applicant.

Examples

• Example of situational interview question: You and a colleague are working on a project together; however, your colleague fails to do his agreed portion of the work. What would you do?
• Examples of behavioral interview questions: Describe a time when you were faced with a stressful situation. How did you handle the situation? Give me an example of when you showed initiative and assumed a leadership role?

Having a common set of information about the applicants upon which to compare after all the interviews have been conducted allows hiring managers to avoid prejudices . This also ensures that all interviewees are given a fair chance (Smith G.). Many companies choose to use several rounds of screening with different interviewers to discover additional facets of the applicant’s attitude or skill as well as develop a more well-rounded opinion of the applicant from diverse perspectives. Involving senior management in the interview process also acts as a signal to applicants about the company culture and value of each new hire. There are two common types of interviews: behavioral and situational.

Online Recruiting

Monster.com is a popular job board for people seeking employment.

Behavioral Interview

In a behavioral interview, the interviewer asks the applicant to reflect on his or her past experiences (Janz, 1982). After deciding what skills are needed for the position, the interviewer will ask questions to find out if the candidate possesses these skills. The purpose of behavioral interviewing is to find links between the job’s requirement and how the applicant’s experience and past behaviors match those requirements. Examples of behavioral interview questions:

• Describe a time when you were faced with a stressful situation.
• How did you handle the situation?
• Give me an example of when you showed initiative and assumed a leadership role.

Situational Interview

A situational interview requires the applicant to explain how he or she would handle a series of hypothetical situations. Situational-based questions evaluate the applicant’s judgment, ability, and knowledge (Latham & Saari, 1984). Before administering this type of interview, it is a good idea for the hiring manager to consider possible responses and develop a scoring key for evaluation purposes. Examples of situational interview questions:

• You and a colleague are working on a project together; however, your colleague fails to do his agreed portion of the work. What would you do?
• A client approaches you and claims that she has not received a payment that supposedly had been sent five days ago from your office. She is very angry. What would you do?

Selection Tests

When making a hiring decision, it is critical to understand the applicant’s personality style, values, and motivations (Smith G.). Technical aptitude is important, but attitude is often more important. The reality is that technical skills can be learned, but interpersonal work attitudes are usually more difficult to change (Schaefer). Behavioral assessments and personality profiles are a good way for hiring managers to learn how the individual will interact with their coworkers, customers, and supervisors (Smith G.). Tests such as the Myers Briggs and D.I.S.C profile assessments are popular tools that provide an accurate analysis of an applicant’s attitudes and interpersonal skills; however, it is critical that the tests are administered, scored, and interpreted by a licensed professional. Other selection tests used in hiring may include cognitive tests, which measure general intelligence, work sample tests that demonstrate the applicant’s ability to perform specific job duties, and integrity tests, which measure honesty (Kulik, 2004).

Background Checks

Background checks are a way for employers to verify the accuracy of information provided by applicants in resumes and applications. Information gathered in background checks may include employment history, education, credit reports, driving records, and criminal records. Employers must obtain written consent from the applicant before conducting a background check, and the information gathered in a background check should be relevant to the job.

Evaluation

Employers may choose to use just one or a combination of the screening methods to predict future job performance. It is important for companies to assess the effectiveness of their selective hiring process using metrics. This provides a benchmark for future performance as well as a means of evaluating the success of a particular method. Companies can continuously improve their selection practices to ensure a good fit for future employees that will successfully accomplish all that the job entails as well as fit into the organizational culture. If companies are not successful in their hiring practices, high turnover, low employee morale, and decreased productivity will result. Research shows that the “degree of cultural fit and value congruence between job applicants and their organizations significantly predicts both subsequent turnover and job performance” (Pfeffer & Viega, Putting People First for Organizational Success, 1998). Thus, companies need to assess their hiring in terms of technical success as well as cultural fit. Evaluating the hiring process will help ensure continuing success because human capital is often a company’s most important asset.

11.1: Management and Motivation

11.1.1: Introduction to Motivation

Learning Objective

Discuss the relevance of motivation to the workplace

Key Points

• Conceptually, motivation should not be confused with either volition or optimism. Motivation is related to, but distinct from, emotion.
• Studies have found that employees are not motivated solely by money but motivation is linked to employee behavior and their attitudes.
• At one time, employees were considered just another input into the production of goods and services, but this changed after the Hawthorne studies.

Key Terms

motivation

Willingness of action, especially in behavior.

volition

The mental power or ability of choosing; the will.

Motivation is a term that refers to a process that elicits, controls, and sustains certain behaviors. It is a group phenomenon which affects the nature of an individual’s behavior, the strength of the behavior, and the persistence of the behavior. For instance: an individual has not eaten, so he or she feels hungry, and as a response he or she eats and diminishes feelings of hunger.

There are many approaches to motivation: physiological, behavioral, cognitive, and social. It is the crucial element in setting and attaining goals—and research shows you can influence your own levels of motivation and self-control. According to various theories, motivation may be rooted in a basic need to minimize physical pain and maximize pleasure; or it may include specific needs such as eating and resting; or a desired object, goal, state of being, or ideal; or it may be attributed to less-apparent reasons such as altruism, selfishness, morality, or avoiding mortality. Conceptually, motivation should not be confused with either volition or optimism. Motivation is related to, but distinct from, emotion.

At one time, employees were considered just another input into the production of goods and services. But this changed after the Hawthorne studies. The Hawthorne studies were conducted by Elton Mayo at Hawthorne Plant in the 1920s. The researchers were studying the effect of different working environments on productivity. They used lighting as an experimental variable (the effect of bright lighting and dull lighting). Initially they noticed that employees were working harder but it was not because of the lighting. They concluded that productivity increased due to attention that the workers got from the research team and not because of changes to the experimental variable . The Hawthorne studies found that employees are not motivated solely by money but motivation is linked to employee behavior and their attitudes. The Hawthorne Studies began the human relations approach to management, so the needs and motivation of employees became the primary focus of managers.

Carrot and Stick

Motivation theories often use the metaphor of a carrot dangling from a stick to describe how people are motivated to achieve goals.

11.1.2: Classical Theory of Motivation

Learning Objective

Compare Maslow’s and Herzberg’s theories of the hierarchy of needs

Key Points

• A good manager will try to figure out which levels of needs are important for a certain individual or employee.
• Maslow’s Hierarchy of Needs consist of the following: Physiology (hunger, thirst, sleep, etc. ); Safety/Security/Shelter/Health; Belongingness/Love/Friendship; Self-esteem/Recognition/Achievement; Self actualization.
• Frederick Herzberg’s two-factor theory, a.k.a. intrinsic/extrinsic motivation, concludes that certain factors in the workplace result in job satisfaction but, if absent, they don’t lead to dissatisfaction but rather to no satisfaction at all.

Key Term

demotivation

Feeling or state of being unmotivated or demotivated.

Needs Hierarchy Theory

The content of this theory includes the hierarchy of needs from Abraham H. Maslow and the two-factor theory from Frederick Irving Herzberg. Maslow’s theory is one of the most widely discussed theories of motivation .

History of Motivation

Maslow’s theory is one of the most widely discussed theories of motivation.

The American motivation psychologist Abraham H. Maslow developed the Hierarchy of Needs consistent of five hierarchical classes. It shows the complexity of human requirements. According to him, people are motivated by unsatisfied needs. The lower level needs such as physiological and safety needs will have to be satisfied before higher level needs are to be addressed. We can relate Maslow’s Hierarchy of Needs theory with employee motivation. For example, if a manager is trying to motivate his employees by satisfying their needs, according to Maslow, he should try to satisfy the lower-level needs before he tries to satisfy the upper-level needs or the employees will not be motivated. Also the manager has to remember that not everyone will be satisfied by the same needs.

A good manager will try to figure out which levels of needs are active for a certain individual or employee. The basic requirements build the first step in his pyramid. If there is any deficit on this level, the whole behavior of an individual will be oriented to satisfy this deficit. Subsequently we do have the second level, which awakens a need for security. Basically it is oriented on a future need for security. After securing those two levels, the motives shift in the social sphere, which form the third stage. Psychological requirements comprise the fourth level, while the top of the hierarchy is self-realization. So the theory can be summarized as follows: Human beings have wants and desires which influence their behavior.

Only unsatisfied needs influence behavior; satisfied needs do not. Since needs are many, they are arranged in order of importance, from the basic to the complex. The person advances to the next level of needs only after the lower-level need is at least minimally satisfied. The further the progress up the hierarchy, the more individuality, humanness and psychological health a person will show. The needs, listed from basic (lowest or earliest) to most complex (highest or latest) are as follows:

• Physiology (hunger, thirst, sleep, etc. )
• Safety/Security/Shelter/Health
• Belongingness/Love/Friendship
• Self-esteem/Recognition/Achievement
• Self actualization

Herzberg’s Two-factor Theory

Frederick Herzberg’s two-factor theory, a.k.a. intrinsic/extrinsic motivation, concludes that certain factors in the workplace result in job satisfaction, but if absent, they don’t lead to dissatisfaction but rather to no satisfaction at all. The factors that motivate people can change over their lifetime, but “respect for me as a person” is one of the top motivating factors at any stage of life. He distinguished between: Motivators (e.g. challenging work, recognition, responsibility) which give positive satisfaction, and Hygiene factors (e.g. status, job security, salary and fringe benefits) that do not motivate when present but, if absent, result in demotivation. The name Hygiene factors is used because, like hygiene, the presence will not make you healthier, but absence can cause health deterioration. The theory is sometimes called the “Motivator-Hygiene Theory” or “The Dual Structure Theory. ” Herzberg’s theory has found application in such occupational fields as information systems and in studies of user satisfaction.

11.1.3: Frederick Taylor

Learning Objective

Explain Taylorism: the theory of scientific management

Key Points

• It can be said that the quality of life at work extends to life outside of work. This can be evaluated by comparing the wages of the “expert leaders” to those of “general laborers”.
• Taylor proposed a “neat, understandable world in the factory, an organization of men whose acts would be planned, coordinated, and controlled under continuous expert direction”.
• Factory production was to become a matter of efficient and scientific management—the planning and administration of workers and machines alike as components of one big machine.

Key Term

workflow

A process and/or procedure in which tasks are completed. It may be defined with a flowchart to define actors, actions, results, decisions, and action paths.

Scientific management, also called Taylorism, is a theory of management that analyzed and synthesized workflows. Its main objective was improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineering of processes and to management. Its development began with Frederick Winslow Taylor in the 1880s and 1890s within the manufacturing industries. Its peak of influence came in the 1910s, but by the 1920s, its influence started to dwindle. The 1920s saw the beginning of an era of competition and syncretism with opposing or complementary ideas.

Frederick Taylor

Scientific management, also called Taylorism, is a theory of management that analyzed and synthesized workflows.

Although scientific management as a distinct theory or school of thought was obsolete by the 1930s, most of its themes are still important parts of industrial engineering and management today. These include analysis; synthesis; logic; rationality; empiricism; work ethic; efficiency and elimination of waste; standardization of best practices; disdain for tradition preserved merely for its own sake or merely to protect the social status of particular workers with particular skill sets; the transformation of craft production into mass production; and knowledge transfer between workers and from workers into tools, processes, and documentation.

Features of Scientific Management

• Social philosophy, a promise of reform through growth and expansion
• Application of engineering principles to the industrial system of the production
• Time and motion studies to ensure efficiency
• Standarization
• Factory work to be planned, coordinated, and controlled under expert direction
• Information centralized/controlled in planning department, which increases potential for survillance and controlling the production process
• Expert directions by engineers, factory planning, time and motion studies, standardization, and the intensive division of labors

Taylor proposed a “neat, understandable world in the factory, an organization of men whose acts would be planned, coordinated, and controlled under continuous expert direction. ” Factory production was to become a matter of efficient and scientific management—the planning and administration of workers and machines alike as components of one big machine.

11.1.4: Elton Mayo

Learning Objective

Analyze Elton Mayo’s theories on motivation and management

Key Points

• The human relations movement refers to the researchers of organizational development who study the behavior of people in groups, particularly workplaces.
• The movement viewed workers in terms of their psychology and fit with companies rather than as interchangeable parts, and it resulted in the creation of the discipline of human resource management.
• Norms of cooperation and higher output were established because of a feeling of importance, physical conditions or financial incentives had little motivational value.

Key Term

human resource management

The process of hiring and developing employees so that they become more valuable to the organization.

The human relations movement refers to the researchers of organizational development who study the behavior of people in groups, in particular workplace groups. It originated in the 1930s’ Hawthorne Studies, which examined the effects of social relations, motivation, and employee satisfaction on factory productivity. The movement viewed workers in terms of their psychology and fit with companies rather than as interchangeable parts, and it resulted in the creation of the discipline of human resource management.

George Elton Mayo is known as the founder of the Human Relations Movement and was known for his research, including the Hawthorne Studies and his book, The Human Problems of an Industrialized Civilization (1933). The research he conducted under the Hawthorne Studies of the 1930s showed the importance of groups in affecting the behavior of individuals at work. Mayo’s employees, Roethlisberger and Dickson, conducted the practical experiments. This enabled Mayo to make certain deductions about how managers should behave. He carried out a number of investigations to look at ways of improving productivity—for example, by changing lighting conditions in the workplace. What he found, however, was that work satisfaction depended to a large extent on the informal social pattern of the work group. Where norms of cooperation and higher output were established because of a feeling of importance, physical conditions or financial incentives had little motivational value. People will form work groups, and this can be used by management to benefit the organization. In short, he concluded that people’s work performance is dependent on both social issues and job content. He suggested a tension between workers’ “logic of sentiment” and managers’ “logic of cost and efficiency” which could lead to conflict within organizations.

Motivation

Motivation makes for courageous decisions.

George Elton Mayo stressed the importance of natural groups, in which social aspects take precedence over functional organizational structures. He also encouraged upwards communication, by which communication is two-way, from worker to chief executive, as well as vice versa. Companies need their employees to be able to successfully communicate and convey information, to be able to interpret others’ emotions, to be open to others’ feelings, and to be able to solve conflicts and arrive at resolutions. By acquiring these skills, the employees, those in management positions, and the customer can maintain more compatible relationships. Cohesive and good leadership is needed to communicate goals and to ensure effective and coherent decision making. It has become a concern of many companies to improve the job-oriented interpersonal skills of employees. The teaching of these skills to employees is referred to as “soft skills” training.

Criticisms

Elton Mayo’s work is considered the counterpoint of Taylorism and scientific management by various academics. Taylorism, founded by F. W. Taylor, sought to apply science to the management of employees in the workplace in order to gain economic efficiency through labor productivity. On the other hand, Elton Mayo’s work has been widely attributed to the discovery of the “social person,” thereby allowing for workers to be seen as individuals rather than merely robots designed to work for unethical and unrealistic productivity expectations. However, this theory has been contested, as Mayo’s purported role in the human relations movement has been questioned. Nonetheless, although Taylorism attempted to justify scientific management as a holistic philosophy rather than a set of principles, the human relations movement worked parallel to the notion of scientific management aiming to address the social welfare needs of workers and therefore elicit their co-operation as a workforce.

11.1.5: The Hawthorne Effect

Learning Objective

Apply the Hawthorne effect to business organizations

Key Points

• Changing a variable usually increased productivity, even if the variable was just a change back to the original condition.
• The central idea behind the Hawthorne effect is that changes in the behavior of participants during the course of a study may be related only to the special social situation and social treatment that they received.
• Output was measured mechanically by counting how many finished relays each worker dropped down a chute.

Key Term

illumination

The act of illuminating, or supplying with light; the state of being illuminated.

The Hawthorne Effect

The central idea behind the Hawthorne effect, a term used as early as 1950 by John R. P. French, is that changes in the behavior of participants during the course of a study may be “related only to the special social situation and social treatment they received. ” The term gets its name from a factory called the Hawthorne Works, where a series of experiments on factory workers was carried out between 1924 and 1932 . This effect was observed for minute increases in illumination.

The Last Vestige of the Hawthorne Works Plant in Cicero, Illinois

The term Hawthorne effect was applied in reference to a set of studies begun in 1924 at the former Hawthorne Works plant.

Evaluation of the Hawthorne effect continues in the present day. Most industrial and occupational psychology and organizational behavior textbooks refer to the illumination studies. Only occasionally are the rest of the studies mentioned. In the lighting studies, light intensity was altered to examine its effect on worker productivity. In one of the studies, experimenters chose two women as test subjects and asked them to choose four other workers to join the test group. Together the women worked in a separate room over the course of five years (1927–1932) assembling telephone relays. Output was measured mechanically by counting how many finished relays each worker dropped down a chute. This measuring began in secret two weeks before moving the women to an experiment room and continued throughout the study.

Relay Assembly Experiments

In the experiment room, they had a supervisor who discussed changes with them and at times used their suggestions. Then the researchers spent five years measuring how different variables impacted individual and group productivity. Some of the variables were: giving two five-minute breaks (after a discussion with them on the best length of time), and then changing to two ten-minute breaks (not their preference). Productivity increased, but when they received six five-minute rests, they disliked it and reduced output.

Providing food during the breaks shortened the day by 30 minutes (output went up), while shortening it more increased the output per hour, but decreased overall output. Changing a variable usually increased productivity, even if the variable was just a change back to the original condition. However, it is said that this is the natural process of the human being to adapt to the environment without knowing the objective of the experiment occurring. Researchers concluded that the workers worked harder because they thought that they were being monitored individually. Researchers hypothesized that choosing one’s own coworkers, working as a group, being treated as special (as evidenced by working in a separate room), and having a sympathetic supervisor were the real reasons for the productivity increase.

One interpretation, mainly due to Elton Mayo, was that “the six individuals became a team and the team gave itself wholeheartedly and spontaneously to cooperation in the experiment. ” (There was a second relay assembly test room study whose results were not as significant as the first experiment. )

Bank Wiring Room Experiments

The purpose of the next study was to find out how payment incentives would affect productivity. The surprising result was that productivity actually decreased. Workers apparently had become suspicious that their productivity may have been boosted to justify firing some of the workers later on. The study was conducted by Elton Mayo and W. Lloyd Warner between 1931 and 1932 on a group of fourteen men who put together telephone switching equipment. The researchers found that although the workers were paid according to individual productivity, productivity decreased because the men were afraid that the company would lower the base rate. Detailed observation between the men revealed the existence of informal groups or “cliques” within the formal groups. These cliques developed informal rules of behavior as well as mechanisms to enforce them. The cliques served to control group members and to manage bosses; when bosses asked questions, clique members gave the same responses, even if they were untrue. These results show that workers were more responsive to the social force of their peer groups than to the control and incentives of management.

11.2: Theories of Motivation

11.2.1: Maslow’s Hierarchy of Needs

Maslow’s hierarchy of needs are a series of physiological and emotional requirements for human contentment, arranged in order of necessity.

Learning Objective

Explain Maslow’s hierarchy of needs

Key Points

• Maslow’s hierarchy of needs is often portrayed in the shape of a pyramid, with the greatest and most fundamental levels of needs at the bottom, and the need for self-actualization at the top.
• The order of needs as categorized by Maslow are physiological; safety; love and belonging; esteem; and self-actualization.
• Maslow acknowledged that many different levels of motivation are likely to be present in a human all at once. His focus in discussing the hierarchy was to identify the basic types of motivation and the order that they generally progress as lower needs are reasonably well met.

Key Terms

esteem

to regard someone with respect.

security

The condition of not being threatened, especially physically, psychologically, emotionally, or financially.

potential

currently unrealized ability.

Examples

• For the most part, physiological needs are obvious – they are the literal requirements for human survival. If these requirements are not met, the human body simply cannot continue to function. Air, water, and food are metabolic requirements for survival in all animals, including humans. Clothing and shelter provide necessary protection from the elements. The intensity of the human sexual instinct is shaped more by sexual competition than maintaining a birth rate adequate to survival of the species.
• With their physical needs relatively satisfied, the individual’s safety needs take precedence and dominate behavior. In the absence of physical safety – due to war, natural disaster, or, in cases of family violence, childhood abuse, etc. – people (re-)experience post-traumatic stress disorder and trans-generational trauma transfer. In the absence of economic safety – due to economic crisis and lack of work opportunities – these safety needs manifest themselves in such things as a preference for job security, grievance procedures for protecting the individual from unilateral authority, savings accounts, insurance policies, reasonable disability accommodations, and the like. This level is more likely to be found in children because they have a greater need to feel safe.
• After physiological and safety needs are fulfilled, the third layer of human needs are interpersonal and involve feelings of belongingness. The need is especially strong in childhood and can over-ride the need for safety as witnessed in children who cling to abusive parents. Deficiencies with respect to this aspect of Maslow’s hierarchy – due to hospitalism, neglect, shunning, ostracism etc. – can impact individual’s ability to form and maintain emotionally significant relationships in general.
• All humans have a need to be respected and to have self-esteem and self-respect. Esteem presents the normal human desire to be accepted and valued by others. People need to engage themselves to gain recognition and have an activity or activities that give the person a sense of contribution, to feel self-valued, be it in a profession or hobby. Imbalances at this level can result in low self-esteem or an inferiority complex.
• The perceived need for self-actualization pertains to what a person’s full potential is and realizing that potential. Maslow describes this desire as the desire to become more and more what one is, to become everything that one is capable of becoming. For example one individual may have the strong desire to become an ideal parent, in another it may be expressed athletically, and in another it may be expressed in painting, pictures, or inventions.

The most fundamental and basic needs are what Maslow called “deficiency needs” or “d-needs”:

• Esteem
• Friendship and love
• Security
• Physical needs

If these “deficiency needs” are not met, the body gives no physical indication but the individual feels anxious and tense. Maslow’s theory suggests that the most basic level of needs must be met before the individual will focus on higher level needs.

Maslow’s Hierarchy of Needs

Maslow’s hierarchy captures the varying degree of needs by which humans are motivated. According to the psychological perspective, decision makers are motivated by these needs and decisions are influenced accordingly.

The human mind is so complex that separate motivations from different levels of Maslow’s pyramid usually occur at the same time. Maslow referred to these levels and their satisfaction in terms such as “relative,” “general,” and “primarily.” His focus in establishing the hierarchy of needs was to identify the basic types of motivations and the order in which that they generally progress as lower needs are reasonably well met.

Physiological Needs

Physiological needs are generally obvious because they are requiremed for survival. If requirements are not met, the body cannot continue to function. People lacking food, love, esteem, or safety would consider food to be their greatest need. Air, water, food, clothing, and shelter are the basic physiological needs.

Safety Needs

Once physical needs are satisfied, individual safety takes precedence. Safety and Security needs include:

• Personal security
• Financial security
• Health and well-being
• Safety net against accidents/illness and their adverse impacts
• Love and belonging

Interpersonal Needs

After physiological and safety needs are fulfilled, the third layer of human needs are interpersonal. This involves feelings of belongingness. Deficiencies in interpersonal needs, due to neglect, shunning, ostracism, etc., can impact an individual’s ability to form and maintain emotionally significant relationships in general, such as:

• Friendship
• Intimacy
• Family

Humans need to feel a sense of belonging and acceptance, whether it comes from a large social group, such as clubs, religious groups, professional organizations, gangs, family, or mentors. Humans need to love and be loved (sexually and non-sexually) by others. Without these connections, many people become susceptible to loneliness, social anxiety, and clinical depression. This need for belonging can sometimes overcome physiological and security needs. For example, an anorexic may ignore the need to eat and the security of health for a feeling of control and belonging.

Esteem

Esteem represents the normal human desire to be accepted and valued by others. People need to engage themselves to gain recognition and have an activity or activities that give the person a sense of contribution, to feel self-valued, be it in a profession or hobby. Imbalances at this level can result in low self-esteem or an inferiority complex. Many people with low self-esteem will not be able to improve their view of themselves simply by receiving fame, respect, and glory externally, but must first accept themselves internally. Psychological imbalances, such as depression, can prevent one from obtaining self-esteem on both levels.

Maslow noted two versions of esteem needs: a “lower” version and a “higher” version. The “lower” version of esteem is the need for respect from others. This may include a need for status, recognition, fame, prestige, and attention. The “higher” version manifests itself as the need for self-respect. For example, the person may have a need for strength, competence, mastery, self-confidence , independence, and freedom. This “higher” version takes precedence over the “lower” version because it relies on an inner competence established through experience. Deprivation of these needs may lead to an inferiority complex, weakness, and helplessness.

Maslow also states that even though these are examples of how the quest for knowledge is separate from basic needs, he warns that these “two hierarchies are interrelated rather than sharply separated. ” This means that this level of need, as well as the next and highest level, are not strict, separate levels but closely related to others, and this is possibly the reason that these two levels of need are left out of most textbooks.

Self-actualization

“What a man can be, he must be. ” This quotation forms the basis of the perceived need for self-actualization. This level of need refers to what a person’s full potential is and the realization of that potential. Maslow describes this level as the desire to accomplish everything that one can, to become the most that one can be. Individuals may perceive or focus on this need very specifically. For example, one individual may have the strong desire to become an ideal parent. In another, the desire may be expressed athletically. For others, it may be expressed in paintings, pictures, or inventions. As previously mentioned, Maslow believed that to understand this level of need, the person must not only achieve the previous needs, but master them.

11.2.2: Herzberg’s Two-Factor Theory

The Two-factor theory indicates that one set of factors at work cause job satisfaction, while another set of factors cause dissatisfaction.

Learning Objective

Explain Herzberg’s two factor theory

Key Points

• Factor 1: Motivators such as challenging work and recognition give positive satisfaction created by the job’s intrinsic conditions. Factor 2: Hygiene factors such as status, job security and salary do not themselves create positive satisfaction, but their absence can cause dissatisfaction.
• Individuals look for the gratification of higher-level psychological needs associated with achievement, recognition, responsibility, and advancement, rather than the satisfaction of lower-order needs such as minimum salary levels or safe and pleasant working conditions.
• If management wants to increase satisfaction on the job, it should be concerned with the nature of the work itself. On the other hand, if management wishes to reduce dissatisfaction, then it must focus on improving the job environment.

Key Terms

productivity

Productivity is a measure of the efficiency of production and is defined as total output per one unit of a total input.

Need Hierarchy

Abraham Maslow’s theory created in 1943 that postulates that needs can be categorized into the following 5 categories which are the basis for human motivations: Physiological, Safety, Belongingness and Love, Esteem, and Self-Actualization

motivate

To provide someone with an incentive to do something; to encourage.

Example

• To motivate employees management must enrich the content of the actual work they ask them to do. For example, building into tasks set a greater level of responsibility, and the opportunity to learn new skills. In advocating making work more interesting, and improving the quality of the work experience for the individual, Herzberg coined the phrase ‘Quality of Working Life’.

The Two-factor theory (also known as Herzberg’s motivation-hygiene theory and Dual-Factor Theory) states that certain factors in the workplace cause job satisfaction, while a separate set of factors cause dissatisfaction. It was developed by Frederick Herzberg, a psychologist, who theorized that job satisfaction and job dissatisfaction act independently of each other.

Fundamentals of the Theory

Attitudes and their connection with industrial mental health are related to Maslow’s theory of motivation. According to Herzberg, individuals are not content with the satisfaction of lower-order needs at work such as minimum salary levels or safe and pleasant working conditions. Rather, individuals look for the gratification of higher-level psychological needs having to do with achievement, recognition, responsibility, advancement, and the nature of the work itself. This appears to parallel Maslow’s theory of a need hierarchy.

Maslow’s hierarchy

Maslow’s hierarchy captures the varying degree of needs by which humans are motivated. According to the psychological perspective, decision makers are motivated by these needs and decisions are influenced accordingly.

However, Herzberg added a new dimension to this theory by proposing a two-factor model of motivation, based on the notion that the presence of one set of job characteristics or incentives leads to worker satisfaction at work, while another and separate set of job characteristics leads to dissatisfaction at work. Thus, satisfaction and dissatisfaction are not on a continuum with one increasing as the other diminishes, but are independent phenomena.

This theory suggests that to improve job attitudes and productivity, administrators must recognize and attend to both sets of characteristics and not assume that an increase in satisfaction leads to decrease in unpleasurable dissatisfaction.

Herzberg found that the job characteristics related to what an individual does (the nature of the work he performs) apparently have the capacity to gratify such needs as achievement, competency, status, personal worth, and self-realization, thus making him happy and satisfied. However, the absence of such gratifying job characteristics does not appear to lead to unhappiness and dissatisfaction. Instead, dissatisfaction results from unfavorable assessments of such job-related factors as company policies, supervision, technical problems, salary, interpersonal relations on the job, and working conditions.

Thus, if management wishes to increase satisfaction on the job, it should be concerned with the nature of the work itself—the opportunities it presents for gaining status, assuming responsibility, and for achieving self-realization. If, on the other hand, management wishes to reduce dissatisfaction, then it must focus on the job environment—policies, procedures, supervision, and working conditions. If management is equally concerned with both satisfaction and dissatisfaction, then managers must give attention to both sets of job factors.

Theory Development

The two-factor theory was developed from data collected by Herzberg from interviews with 203 American accountants and engineers in Pittsburgh, chosen because of their professions’ growing importance in the business world. The subjects were asked to relate times when they felt exceptionally good or bad about their present job or any previous job, and to provide reasons, and a description of the sequence of events giving rise to that positive or negative feeling.

The two-factor theory distinguishes between:

• Motivators (e.g. challenging work, recognition, responsibility) that give positive satisfaction, arising from intrinsic conditions of the job itself, such as recognition, achievement, or personal growth .
• Hygiene factors (e.g. status, job security, salary, fringe benefits, work conditions) that do not give positive satisfaction, though dissatisfaction results from their absence. These are extrinsic to the work itself, and include aspects such as company policies, supervisory practices, or wages/salary.

Essentially, motivation factors are needed to motivate an employee to higher performance. Hygiene factors are needed to ensure an employee is not dissatisfied. Herzberg also further classified our actions and how and why we do them. For example, if you perform a work related action because you have to, then that is classed as movement, but if you perform a work related action because you want to, then that is classed as motivation.

Implications of Herzberg’s Theory

Herzberg’s theory attempts to uncover psychological needs of employees and enhance employee satisfaction. In order to apply this theory, employers are encouraged to design jobs that enhance and motivate employees beyond simply meeting a daily or weekly quota. This theory highlights the importance of rewards systems and monitoring when and how employees are rewarded. Herzberg’s theory implies that simple recognition is often enough to motivate employees and increase job satisfaction.

Herzberg argues that both motivation and hygiene are equally important, but that good hygiene will only lead to average performance, preventing dissatisfaction, but not, by itself, create a positive attitude or motivation to work. To motivate the employee, management must enrich the content of the actual work they ask them to do.

11.2.3: MacGregor’s Theory X and Theory Y

Theory X and Theory Y describe two contrasting models of workforce motivation applied by managers in human resource management, organizational behavior, organizational communication, and organizational development.

Learning Objective

Differentiate between the motivators in Theory X and the motivators in Theory Y

Key Points

• Theory X and Theory Y, put forward by Douglas McGregor, describe two contrasting models of workforce motivation and management.
• Theory X is a much more traditional management style, predicated on the assumption that external rewards, punishments, and supervision are effective ways to manage employees.
• Theory Y focuses on the internal mechanisms of motivation (relative to the employee), assuming that employees have a natural drive to contribute, take ownership of their work, and pursue organizational objectives on their own.
• While Theory Y may seem optimal, it does have some drawbacks. Through empowering everyone towards autonomy, it can be easy to lose organizational alignment. Strong organizational objectives and processes are necessary in order for it to work.
• There is some balance to be achieved between these two perspectives, though Theory Y motivators tend to be the preferably approach to building strong collaborative cultures.

Among the many theories of motivation is Douglas McGregor’s concept of Theory X and Theory Y. His initial work focused on demonstrating two contrasting motivators in the workplace: external motivators such as supervision, rewards, penalties, and rules (X) versus internal motivators such as passion, job satisfaction, accountability, and feelings of self-worth (Y).

The true value in creating this contrast is understanding the situations where X or Y may work better, and recognizing that motivation is both internally and externally complex. To draw something of a parallel here, Maslow’s hierarchy has some loose alignment with McGregor’s theories, wherein the lower levels of the hierarchy are more along ‘X’ lines while the higher levels have more of a ‘Y’ feel to them.

Theory X

The core assumption here is that, in a given workplace environment, employees won’t have the intrinsic motivations required to accomplish objectives. Instead, a system should be in place where external motivators create desired behavioral outcomes. This is considered more of a firm managerial approach, where management will set objectives, supervise execution, and provide corresponding returns.

This can be implemented in two ways. Employees can be externally motivated by the existence of supervision or punishment or externally motivated by the absence of supervision or punishment. 

In the first scenario, supervision is tight, and rewards are positive for strong performance and negative for bad performance. In this method, authoritarian management pushes employees toward desired outcomes. Workplaces like this focus on shaping their employees into what they want them to be. The latter scenario represents a softer approach that reduces animosity and anxiety.

Theory Y

Theory Y is a bit more complex, as  the manager is not entirely in control (and thus, feels less like a management style). However, properly understanding Theory Y concepts can help managers manage and hire better.

Theory Y assumes that employees enjoy a challenge, and strive to add value for the sake of self-worth and a desire to contribute to a community. The focal point here is on building strong, friendly relationships between management and employees, and removing most (if not all) authority from the arrangement. In such a situation, there is no push and no push back, simply unclouded business objectives.

This, in theory, sounds ideal. However, managers and employees who work in this framework do eventually encounter some challenges. Through a hands off management approach, it can be easy to lose alignment, as different individuals go in slightly different tactical directions. It can also result in enabling less motivated employees to take advantage of a relaxed work environment. There are various ways to address these concerns, though, such as building organizational processes to create alignment and through hiring carefully.

Theory X and Theory Y

This image demonstrates where the true source of motivation is derived in each theory. Under Theory X, management uses control to direct behavior. Under Theory Y, behavior is dictated by the employees themselves through communication with management and an understanding of the agreed upon broader strategy and objectives.

This image demonstrates where the true source of motivation is derived in each theory. Under Theory X, management uses control to direct behavior. Under Theory Y, behavior is dictated by employees through communication with management and an understanding of the agreed upon broader strategy and objectives.

Using Both

No model is perfect, and every circumstance requires some individual thought. Most often, experienced managers will find the need to use both at some point, though Theory Y usually leads to preferable outcomes and company culture. Some employees require different sources of motivations depending on where they are in their own personal development, not to mention some tasks seems to work out better when externally driven, while others work better when internally driven. Having comfort with both concepts is the ideal tool set for a motivational manager.

11.2.4: Ouchi’s Theory Z

Ouchi’s theory focuses on increasing employee loyalty to the company by providing a job for life and focusing on the employee’s well-being.

Learning Objective

Explain how the Ouchi Theory promotes a strong work force

Key Points

• Theory Z is a name applied to three distinctly different psychological theories, one of which was was developed by Dr. William Ouchi.
• According to Ouchi, Theory Z management tends to promote stable employment, high productivity, and high employee morale and satisfaction.
• William Ouchi takes Japanese business techniques and adapts them to the American corporate environment.
• One of the most important pieces of this theory is that management must have a high degree of confidence in its workers in order for this type of participative management to work.

Key Terms

turnover

In a human resources context, turnover or staff turnover or labor turnover is the rate at which an employer gains and loses employees.

morale

The capacity of people to maintain belief in an institution or a goal, or even in oneself and others.

Introduction

Theory Z is a name applied to three distinct psychological theories. One was developed by Abraham H. Maslow in his paper Theory Z and the other is Dr. William Ouchi’s so-called “Japanese Management” style popularized during the Asian economic boom of the 1980s. The third was developed by W. J. Reddin in Managerial Effectiveness.

For Ouchi, Theory Z focused on increasing employee loyalty to the company by providing a job for life with a strong focus on the well-being of the employee, both on and off the job. According to Ouchi, Theory Z management tends to promote:

• Stable employment
• High productivity
• High employee morale and satisfaction

History of Ouchi’s Theory

Professor Ouchi spent years researching Japanese companies and examining American companies using the Theory Z management styles .

Toyota: A Product of Japanese Productivity

Professor Ouchi spent years researching Japanese companies using the Theory Z management styes.

By the 1980s, Japan was known for the highest productivity anywhere in the world, while America’s productivity had fallen drastically. The word “Wa” in Japanese can be applied to Theory Z because they both deal with promoting partnerships and group work.

The word “Wa” means a perfect circle or harmony, which influences Japanese society to always come to a solution via teamwork. Promoting Theory Z and the Japanese word “Wa” is how the Japanese economy became so powerful. Because the Japanese show a high level enthusiasm to work, some of the researchers also claim that the “Z” in the Theory Z stands for “Zeal. “

Ouchi’s Conclusions

Ouchi wrote a book called Theory Z: How American Business Can Meet the Japanese Challenge (1981). In this book, Ouchi shows how American corporations can meet the Japanese challenges with a highly effective management style that promises to transform business in the 1980s.

The secret to Japanese success, according to Ouchi, is not technology, but a special way of managing people. “This is a managing style that focuses on a strong company philosophy, a distinct corporate culture, long-range staff development, and consensus decision-making” (Ouchi, 1981). Ouchi claims that the results show:

• Lower turnover
• Increased job commitment
• Dramatically higher productivity

William Ouchi doesn’t say that the Japanese culture for business is necessarily the best strategy for the American companies. Instead, he takes Japanese business techniques and adapts them to the American corporate environment.

Much like McGregor’s theories, Ouchi’s Theory Z makes certain assumptions about workers. Some of the assumptions about workers under this theory include:

• Workers tend to want to build happy and intimate working relationships with those that they work for and with, as well as the people that work for them.
• Workers have a high need to be supported by the company, and highly value a working environment in which such things as family, cultures and traditions, and social institutions are regarded as equally important as the work itself. These types of workers have a very well developed sense of order, discipline, a moral obligation to work hard, and a sense of cohesion with their fellow workers.
• Workers can be trusted to do their jobs to their utmost ability, so long as management can be trusted to support them and look out for their well-being (Massie & Douglas, 1992).

One of the most important pieces of this theory is that management must have a high degree of confidence in its workers in order for this type of participative management to work. This theory assumes that workers will be participating in the decisions of the company to a great degree.

Ouchi explains that the employees must be very knowledgeable about the various issues of the company, as well as possess the competence to make those decisions. He also points out, however, that management sometimes has a tendency to underestimate the ability of the workers to effectively contribute to the decision-making process (Bittel, 1989). For this reason, Theory Z stresses the need for the workers to become generalists, rather than specialists, and to increase their knowledge of the company and its processes through job rotations and constant training.

Promotions tend to be slower in this type of setting, as workers are given a much longer opportunity to receive training and more time to learn the ins and outs of the company’s operations.

The desire, under this theory, is to develop a work force, which has more loyalty toward staying with the company for an entire career. It is expected that once employees do rise to a position of high level management, they will know a great deal more about the company and how it operates, and will be able to use Theory Z management theories effectively on the newer employees.

11.3: Modern Views on Motivation

11.3.1: Equity Theory

Equity theory states that perceptions of equality in the input/outcome ratio of employees determines their relative job satisfaction.

Learning Objective

Explain equity theory

Key Points

• Equity theory was developed in 1963 by John Stacey Adams, who stated that an employee will consider himself to be fairly treated if the ratio of his inputs to outcomes is equivalent to those around him (by his perception).
• Inputs include effort, time, loyalty, seniority, commitment, personal sacrifice, etc. Outcomes, on the other hand, include salary, benefits, job security, reputation, sense of achievement, gratitude, etc.
• According to equity theory, the person who gets “too much” and the person who gets “too little” both feel distressed. The person who gets too much may feel guilt or shame. The person who gets too little may feel angry or humiliated.
• (1) Individuals try to maximize outcomes
• (2) [a] Groups will evolve systems of equity, and induce members to adhere to these systems
• [b] Groups will reward those who treat others equitably, and punish those who don’t.
• (3) Individuals in an inequitable relationship feel ‘distressed’. Those who get too little feel angry/humiliated, while those with too much feel guilt or shame.
• (4) Those in distress will attempt to eliminate the inequity, in order to eliminate the distress.
• 3 Primary assumptions:
• (1) Employees except a fair return for their contribution
• (2) Employees can and do determine what an equitable return should be by comparing themselves to coworkers
• (3) Distressed employees attempt to fix an inequitable situation by distorting inputs and outcomes in their own minds, by actually changing inputs/outcomes, or by leaving the organization.
• Implications of Equity Theory:
• – The value of inputs and outcomes will vary from person to person
• – Employees may adjust outcomes according to purchasing power and local market conditions
• – An overcompensated employee may adjust their efforts, or may inflate the value of their inputs in their mind, adopting a sense of superiority and thus decrease their efforts.
• Criticisms:
• – Some say the model is too simple; there are other variables that affect people’s perceptions of fairness which vary from person to person
• – Much theory related to Equity Theory has been conducted in laboratories and not real world settings

Key Terms

equity theory

an attempt to explain relational satisfaction in terms of perceptions of fair or unfair distributions of resources within interpersonal relationships

Inputs

Each participant’s contributions that are viewed as entitling him/her to rewards or costs. Examples include time, effort, and loyalty.

outcomes

The positive and negative consequences that an individual perceives to be a result of his/her actions. Examples include praise, bonuses, and promotions.

ratio

The relative magnitudes of two quantities (usually expressed as a quotient).

Example

• Consider two employees doing the same job, and putting in the same inputs (say, time and effort). If employee X gets a raise and employee Y does not, then the latter may feel unfairly treated, diminishing his job satisfaction and possibly quality of work.

Equity theory was first developed in 1963 by John Stacey Adams, a workplace and behavioral psychologist, who asserted that employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it, against the perceived inputs and outcomes of others.

For example, if an employee was given a salary increase but a peer was given a larger salary increase for the same amount of work, the first employee would evaluate this change, perceive an inequality, and be distressed. However, if the first employee perceived the other employee being given more responsibility and therefore relatively more work along with the salary increase, then the first employee may evaluate the change, conclude that there was no loss in equality status, and not resist the change.

An individual will consider that he is treated fairly if he perceives the ratio of his inputs to his outcomes to be equivalent to those around him .

Formula expressing equal equity theory

Ratio of one individual’s outputs to inputs is perceived as equal to that of another individual in comparison.

Defining Inputs & Outcomes

Inputs are defined as each participant’s contributions to the relational exchange and are viewed as entitling him/her to rewards or costs. The inputs that a participant contributes to a relationship can be either assets (entitling him/her to rewards) or liabilities(entitling him/her to costs). Individual traits such as boorishness and cruelty are seen as liabilities entitling the possessor to costs. Inputs typically include:

• Time
• Effort
• Loyalty
• Commitment
• Adaptability
• Flexibility
• Tolerance
• Determination
• Enthusiasm
• Personal sacrifice
• Support from coworkers and colleagues
• Skill

Outcomes are defined as the positive and negative consequences that an individual perceives a participant has incurred as a consequence of his/her relationship with another. When the ratio of inputs to outcomes is close, then the employee should be very satisfied with their job. Outcomes can be both tangible and intangible.

Typical outcomes include:

• Job security
• Salary
• Expenses
• Recognition
• Responsibility
• Sense of achievement
• Praise

Four Propositions of Equity Theory

1. Individuals will try to maximize their outcomes.
2. A) Individuals can maximize collective rewards by evolving accepted systems for equitably apportioning resources among members. Thus, groups will evolve such systems of equity, and will attempt to induce members to accept and adhere to these systems. B) Groups will generally reward members who treat others equitably and generally punish members who treat each other inequitably.
3. When individuals find themselves participating in inequitable relationships, they will become distressed. The more inequitable the relationship, the more distress they will feel. According to equity theory, the person who gets “too much” and the person who gets “too little” both feel distressed. The person who gets too much may feel guilt or shame. The person who gets too little may feel angry or humiliated.
4. Individuals who discover they are in inequitable relationships will attempt to eliminate their distress by restoring equity.

Three Primary Equity Theory Assumptions Applied to Most Businesses

1. Employees expect a fair return for what they contribute to their jobs, a concept referred to as the “equity norm.”
2. Employees determine what their equitable return should be after comparing their inputs and outcomes with those of their coworkers, a concept referred to as “social comparison.”
3. Employees who perceive themselves as being in an inequitable situation will seek to reduce the inequity either by distorting inputs and/or outcomes in their own minds, by directly altering inputs and/or outcomes, or by leaving the organization.

Implications for Managers

Equity theory has several implications for business managers:

• People measure the totals of their inputs and outcomes. This means a working mother may accept lower monetary compensation in return for more flexible working hours.
• Different employees ascribe personal values to inputs and outcomes. Thus, two employees of equal experience and qualification performing the same work for the same pay may have quite different perceptions of the fairness of the deal.
• Employees are able to adjust for purchasing power and local market conditions. Thus a teacher from Alberta may accept lower compensation than his colleague in Toronto if his cost of living is different, while a teacher in a remote African village may accept a totally different pay structure.
• Although it may be acceptable for more senior staff to receive higher compensation, there are limits to the balance of the scales of equity and employees can find excessive executive pay demotivating.
• Staff perceptions of inputs and outcomes of themselves and others may be incorrect, and perceptions need to be managed effectively.

11.3.2: Expectancy Theory

Expectancy Theory postulates that an individual’s motivation can be derived through identifying an appropriate expectation.

Learning Objective

Understand the three relationships and four variables that result in Expectancy Theory

Key Points

• Victor Vroom at the Yale School of Management put forward a concept called Expectancy Theory, which suggests behavior is motivated by an anticipated outcome.
• There are three interactions: expectancy (effort → performance), instrumentality (performance → outcome), and valence (outcome → reward).
• Expectancy allows an individual to move from effort to performance, and is predicated upon the belief that one can accomplish a given goal.
• Instrumentality is confidence that a given performance will result in the desired reward. This is best enabled through an established relationship or contract that guarantees the reward.
• Valence is the degree to which this reward matters to the individual being motivated, which could be pictured as a spectrum. The higher the valence, the higher the motivation. 

Key Terms

self-efficacy

One’s belief that he or she can accomplish a given objective.

valence

A value assigned to an object, behavior, or other consequence that has relative scale.

Expectancy Theory, initially put forward by Victor Vroom at the Yale School of Management, suggests that behavior is motivated by the anticipated result or consequences expected. The concept of choice is central to this theory, as there are a variety of behaviors that an individual could potentially choose. To anticipate what choice will be made , identify what consequences would be expected as an outcome, and select the motivation which will result in the optimal outcome.

The Building Blocks

Expectancy Theory boils down to a few simple variables, which in conjunction produce the projected outcome based upon the motivational inputs. This is described as three relationships using four inputs:

1. Expectancy: effort → performance (E→P)
2. Instrumentality: performance → outcome (P→O)
3. Valence: V(R) outcome → reward

What you’ll notice is a full equation, where each variable leads to the next:

Effort (E) → Performance (P) → Outcome (O) → Reward (R)

Expectancy Theory

This illustration visually expresses the three relationships that ultimately equate to a given motivation.

This illustration visually expresses the three relationships which ultimately equate to a given motivation.

Expectancy

Moving from effort to performance requires three things. First is self-efficacy, or the belief that one can accomplish the goal. Second is the appropriate goal difficulty. Third is the perception of control, the concept that accomplishing the objectives is within one’s influence.

Instrumentality

To move from performance to outcome, the individual must trust that the delivery of a given output will result in the desired reward. An example of this could be a commission on a sale. Established policies in place, preferably via a contract, will guarantee the reward will be delivered based upon an agreed upon performance.

Valence

This is simply the valuation of a given reward from the individual being motivated. This can be intrinsically positive or negative, which is to say the pursuit of OR avoidance of an outcome. This is why it is called a valence. Based upon the values, desires, and objectives of an individual, the individual will have a certain valued reaction to the reward. If one reward has a more extreme valence than another, it will consequently result in a higher level of motivation.

Expectancy Theory combines these three concepts into the conclusion that these three interactions will ultimately create a desired motivational response.

11.3.3: Goal-Setting Theory

If done correctly, having more specific and well-enumerated goals lead to higher performance and a greater chance of achieving those goals.

Learning Objective

Explain the procedures and outcomes of goal setting

Key Points

• According to the theory, goal setting affects outcomes in four ways: choice (focus on goal-relevant activities); effort (an enumerated target can raise effort); persistence (goals focus employees to work through setbacks); and cognition (change inefficient behaviors).
• Goal-setting helps managers: since managers cannot consistently drive motivation and monitor employee activities, goal setting can work as a self-regulatory mechanism for employees to work with less guidance and oversight.
• Do not encourage employees to “do their best. ” Instead, specific goals should be set, that are both challenging as well as realistic. It is best if these goals are set after deliberation with the employee in question.
• For employees to care about goals that are set, six interdependent factors need to be considered: importance of the expected outcomes to the employee; self efficacy; commitment to others; goal feedback; task complexity; and goal motivation.
• Feedback is particularly important, in order to sustain motivation and commitment, as well as to ensure that efforts are correctly guided.
• It is important that the goals of a manager align with the goals of the organization as a whole. Another limitation is that rigorous goal setting may hamper complex and creative tasks, as individuals become preoccupied with meeting the goals rather than performing tasks.
• Locke and Latham (2002) urge managers not to encourage employees to “do their best”. They state that this attitude is useless in eliciting specific behavior. Instead, specific goals should be set, which are both challenging as well as realistic. It is best if these goals are set after deliberation with the employee in question.
• For employees to care about goals that are set, 6 interdependent factors need to be considered: Importance of the expected outcomes to the employee, Self Efficacy, Commitment to others, Goal feedback, Task complexity, Goal Motivation.
• Feedback is particularly important, in order to sustain motivation and commitment, as well as to ensure that efforts are correctly guided.
• Goal setting has limitations. It is important that the goals of a manager – and of specific individuals – align with the goals of the organization as a whole. If goals are not aligned, performance may suffer. Another limitation is that rigorous goal setting may hamper complex tasks, as individuals become preoccupied with meeting the goals rather than performing tasks. This may also be true with particularly creative work, where setting rigorous goals may hamper the creative process.

Key Terms

goal

a result that one is attempting to achieve

self-efficacy

the measure of the belief in one’s own ability to complete tasks and reach goals

cognitive

the part of mental function that deals with logic, as opposed to affective which deals with emotions

Example

• Goals are often set at the start of a period, with evaluation at the end of that period. For example, sales personnel may be tasked with selling a certain number of units per quarter (e.g. a car salesman may have a goal to sell one car a week).

Goal Setting Theory

Setting goals affects outcomes in four ways:

1. Choice: Goals direct efforts towards goal-relevant activities and away from distractions.
2. Effort: Goals can lead to more effort; for example, if one typically produces four widgets an hour, and has the goal of producing six, one may work more efficiently as a result.
3. Persistence: People become more likely to work through setbacks if pursuing a goal.
4. Cognition: Goals can lead individuals to develop and change their behavior.

Goals that are difficult to achieve and specific tend to increase performance more than goals that are not. A goal can become more specific through quantification or enumeration (should be measurable), such as by demanding “…increase productivity by 50%,” or by defining certain tasks that must be completed.

Goal-Setting Theory

Goals lead to higher performance in an organization.

Psychologists have examined the behavioral effects of goal-setting, concluding in 90% of laboratory and field studies that specific and challenging goals led to higher performance than when the goals were easy or did not exists.

While some managers believe it is sufficient to urge employees to “do their best,” psychologists have disagreed on this style’s effectiveness. Some psychologists have found that people who are told to “do their best” don’t. To elicit some specific form of behavior from others, it is important that all employees have a clear understanding what is expected. “Doing their best” does not provide that clear measure. A goal is important because it establishes a specified direction and measure of performance.

However, when goals are established at a management level and thereafter solely laid down, employee motivation with regard to achieving these goals is rather suppressed. To increase motivation, employees must be involved in the goal setting process and the goals must be challenging as well.

People perform better when they are committed to achieve certain goals. Goal commitment is dependent on:

• Importance of the expected outcomes of goal attainment
• Self-efficacy – one’s belief that he is able to achieve the goals
• Commitment to others – promises or engagements to others can strongly improve commitment
• Feedback – keep track of performance to allow employees to see how effective they have been in attaining the goals to ensure that any deficiencies are quickly corrected.
• Task complexity – more difficult goals require more cognitive strategies and well-developed skills. The more difficult the tasks, the smaller the group of people who possess the necessary skills and strategies. From an organizational perspective it is thereby more difficult to successfully attain more difficult goals since resources become more scarce.
• Employee motivation – the more employees are motivated, the more they are stimulated and interested in accepting goals.

These success factors are interdependent. For example the expected outcomes of goals are positively influenced when employees are involved in the goal setting process. Not only does participation increase commitment in attaining the goals that are set, participation influences self-efficacy as well.

Goal-commitment, the most influential moderator, becomes especially important when dealing with difficult or complex goals. If people lack commitment to goals, they lack motivation to reach them. To commit to a goal, one must believe in its importance or significance.

The enhancement of performance through goals requires feedback. Goal setting and feedback go hand in hand. Without feedback, goal setting is unlikely to work. Providing feedback on short-term objectives helps to sustain motivation and commitment to a goal. Besides, feedback should be provided on the strategies followed to achieve the goals and the final outcomes achieved as well. Feedback on strategies to obtain goals is very important, especially for complex work, because challenging goals put focus on outcomes rather than on performance strategies, so they impair performance.

Proper feedback is also very essential, and the following hints may help for providing a good feedback:

• Create a positive context for feedback.
• Use constructive and positive language.
• Focus on behaviors and strategies.
• Tailor feedback to the needs of the individual worker.
• Make feedback a two-way communication process.

Goal-setting may have little effect if individuals can’t see the state of their performance in relation to the goal. By gauging their performance, individuals can determine whether they need to work harder or changing their methods.

Goal-setting theory has limitations. In an organization, a goal of a manager may not align with the goals of the organization as a whole. In such cases, the goals of an individual may come into direct conflict with the employing organization. Without aligning goals between the organization and the individual, performance may suffer. Moreover, for complex or creative tasks, goal-setting may actual impair performance because the individual may become preoccupied with meeting goals and not performing tasks.

11.3.4: Reinforcement Theory

Reinforcement theory, or operant conditioning, is a implementation of cause and effect thinking into workplace motivation.

Learning Objective

Recognize the role of cause and effect via reinforcement in motivating good performance

Key Points

• B.F. Skinner originally founded the basic premise behind Reinforcement Theory, which is best described as cause and effect. When a behavior occurs, individuals associate the consequences with the behavior.
• Reinforcement, be it positive or negative, increases a behavior. This is best done through rewards or the removal of frustrations.
• Punishment, be it positive or negative, is designed to decrease a behavior. This is best done through providing an adverse response.
• Various factors can influence the efficacy of reinforcement. Most notably, the size, immediacy, and need for a given reward (or level of avoidance for a given punishment).

Key Term

reinforcement

The process of repeating a behavior with desirable consequences.

The basic premise behind B.F. Skinner’s Theory of Reinforcement is both simple and intuitive: an individual’s behavior is a function of its consequences. Think of it as a simple cause and effect graph. Every behavior will be a cause that creates some sort of consequence as an effect. If I work hard today, I’ll make more money. If I make more money, I’m more likely to want to work hard. This creates behavioral reinforcement, where the desired behavior is enabled and promoted by the desired outcome from a behavior.

The Primary Inputs

This theory relies on four primary inputs or aspects of operant conditioning, generated from the external environment. These four inputs are positive reinforcement, negative reinforcement, positive punishment, and negative punishment. A fifth input could be described as extinction, which is a lack of reinforcement for a behavior that had previously been reinforced.

Operant Conditioning

This chart demonstrates the various facets of operant conditioning, which can be framed via reinforcement and punishment (both positive and negative for each).

This chart demonstrates the various facets of operant conditioning, which can be framed via reinforcement and punishment (both positive and negative for each).

Reinforcement

Positive reinforcement: When a behavior (and subsequent response) is rewarding, the frequency of that behavior will be increased. For example, if an employee identifies a new market opportunity that creates profit, an organization may give her a bonus. This will positively reinforce the desired behavior.

Negative reinforcement: When a desired behavior is responded to with the removal of something the individual doesn’t like, the behavior is reinforced. For example, an employee demonstrates a strong sense of work ethic and wraps up a few projects faster than expected. This employee happens to have a long commute. The manager tells the employee to go ahead and work from home for a few days, considering how much progress she has made. This is an example of removing a negative stimuli for reinforcing a behavior.

Punishment

Positive punishment: Conditioning at it’s simplest, punishment is simply identifying a negative behavior and providing an adverse stimuli to dissuade future instances. A simple example would be suspending an employee for inappropriate behavior.

Negative punishment: Similar to negative reinforcement, negative punishment revolves around removing something to condition a response. To use our previous example for negative reinforcement, an employee prefers to work at home. However, his performance has been suffering lately. A negative punishment would be to revoke the right to work at home until performance improves.

Factors Impacting Success

Reinforcement can be impacted by various factors:

Satiation – In short, the degree of need. If an employee is quite wealthy, for example, it may not be particularly helpful to offer a bonus.

Immediacy – The time between the desired behavior and the potential reinforcement will have impact on how significantly the reinforcement will be correlated with the behavior. To use the bonus example, if an employee does something great, don’t wait around to provide a bonus. Make sure it’s fresh in their minds; this helps associate the outcome cause with the effect.

Size – Of course, the scale of the reward or punishment has a big impact on the scale of the response. A bigger bonus means a bigger impact (to a degree, see the satiation aspect above).

11.4: Motivation Techniques in Practice

11.4.1: Behavior Modification

Modifying behavior through reinforcement and environmental stimuli can increase positive actions and decrease negative actions in the workplace.

Learning Objective

Differentiate between the various stimuli managers use to create or reinforce certain types of behavior

Key Points

• Behavior modification is a central concept in organizational behavior, pulling from a wide variety of multidisciplinary perspectives such as psychology and sociology.
• An important concern for creating a business is the environment, which will actively modify behavior in a variety of ways. Being able to proactively predict how a given environment may impact behavior is a great opportunity.
• Reinforcement, both positive and negative, can be created via incentives or the removal and avoidance of negative stimuli. 
• Punishments, such as demotions, are also used to avoid repeating undesirable past behaviors.

Key Terms

reinforcement

The process which enables behavior with desirable consequences to be repeated.

stimuli

An external force which generates a response or a reaction from something else

Identifying how to keep employees interested and motivated in their work is a substantial aspect of organizational behavior. This area of business is uniquely combined with psychology and sociology to create an understanding of how people behave at work, and why. As an overview, there are a few key concepts which will help to frame motivational theory, and how it is commonly applied in the workplace.

Environment Matters

How people behave is largely impacted by how they interact with the world around them. As an organization, it’s useful to consider how the structure of an office, and the availability of certain resources, may impact overall behavior of all employees. External forces that impact behavior are referred to as stimuli, and understanding what type of stimuli may modify behavior is useful in leading organizations.

Take an example of an open office environment, as compared to an environment of cubicles and individual offices. With easy access to privacy and walls between employees, tendencies toward individual work and decision-making via small groups and small meetings may be more likely compared to an office with long tables, no offices, and no walls. This is just a simple example of a cultural decision that will result in modified behavior. 

Reinforcement (Positive and Negative)

Behavior modification in organizational management is often linked with B.F. Skinner’s contributions to the study of behavior. Reinforcement, both positive and negative, can be created via incentives or the removal and avoidance of negative stimuli. These influences on behavior are different than environmental influences because they are deliberately reactive to employee behaviors (as opposed to proactive or incidental). Hence the idea of reinforcing something deliberately, after it occurs.

Concepts like this tend to look much simpler in action than in theory. A simple example can be seen in the restaurant industry. A server might be motivated to perform better after receiving higher tips for exceptional service. This is positive reinforcement. On the other hand, a server might be motivated to perform better after his or her boss received negative feedback from an unhappy customer. This is negative reinforcement.

Punishment

Punishments, such as demotions, are also used to avoid repeating undesirable past behaviors. For example, a restaurant manager might require the server who makes the most mistakes (such as mixing up orders) to pick up the least desirable shifts. 

Operant Conditioning

Behavior can be promoted or demoted through strategic use of positive and negative reinforcements, as well as positive and negative punishments.

This is an excellent diagram, which quickly demonstrates the way in which operant conditioning via reinforcement (positive and negative) and punishment (positive and negative). In essence, behavior can be promoted or demoted through strategic use of positive and negative reinforcements, and positive and negative punishments.

11.4.2: Job Design

Designing jobs and job characteristics strategically to empower employee satisfaction and motivation is a central responsibility of management.

Learning Objective

List the various core dimensions of strategic job design, along with the psychological states which accompany them

Key Points

• Job design is the process of specifying the contents, objectives, responsibilities, and relationships the job will fulfill or interact with.
• Clever job design can be a highly motivating aspect of an employee’s day-to-day operations. Effectively building motivation and satisfaction into the job design itself empowers positive employee behaviors.
• Skill variety, task identity, task significance, autonomy, and feedback are core components of effective job design.
• If effectively designed, a job should induce the psychological states of meaningfulness, responsibility, and ownership of the results.
• Managers can also leverage intrinsic and extrinsic rewards, job rotation, job enrichment and job enlargement to better motivate employee’s via job design.

Key Term

Autonomy

The ability to determine and enact one’s own objectives and processes in the workplace.

Job Design

Job design is an important prerequisite to effective workplace motivation, as designing a job effectively can empower positive behaviors and create a strong infrastructure for employee success. Job design is specifying the contents, responsibilities, objectives, and relationships required to satisfy the expectations of the role. Understanding how to effectively design a job is a key managerial skill, with various models and theories to assist in pursuing this tactfully.

Job Characteristic Theory

Proposed by Hackman & Oldman in 1976, this theory underlines five critical characteristics job design should keep in mind, which satisfy three critical psychological states of the employee filling the role. The objective of this model is to generate intrinsic motivation, satisfaction, and performance while minimizing turnover.

Core Job Dimensions

1. Skill variety — Doing the same thing day in and day out gets tedious. The natural solution is designing jobs with enough variety to stimulate ongoing interest, growth, and satisfaction.
2. Task identity — Being part of a team is motivating, but so too is having ownership of a facet of the process. Having a clear understanding of what one is responsible for, and some degree of control over said task, is motivating.
3. Task significance — Being relevant to organizational success provides key motivation to completing the tasks at hand. Knowing one’s importance tends to lead to satisfaction.
4. Autonomy — No one likes being micro-managed, and having some freedom to be the expert is critical to job satisfaction. Generally speaking, we hire individuals for their specialized knowledge. Giving specialists autonomy to make the right decisions is a win win.
5. Feedback — Finally, everyone needs objective feedback as to how they are doing and how they can do better. Providing well-constructed feedback with tangible outcomes is a key component of job design.

Psychological States

1. Experienced Meaningfulness – Through accomplishing the first three dimensions above, employees feel what they do is meaningful. This is a positive psychological state.
2. Experienced Responsibility – Dimension four brings about a sense of accountability, which is motivating.
3. Knowledge of Results – Dimension five provides a sense of progress, growth, and personal assessment. Understanding one’s accomplishments is a healthy state of mind for motivation and satisfaction.

Job Design Techniques

As a motivational force in the organization, managers must consider how they can design jobs tactfully to create empowered, motivated, and satisfied employees. Here are a few established methods to accomplish this objective:

• Job Rotation – As noted in the above model, it’s not particularly motivating to do the exact same thing every day. As a result, rotating jobs and expanding the skill sets of employees accomplishes two objectives: increased employee satisfaction will and broader employee skill sets.
• Job Enlargement (horizontal) – Zooming out a little, and granting employees the autonomy to assess the quality of their work, improve efficiency of their processes, and address mistakes often empowers satisfaction in the workplace.
• Intrinsic and Extrinsic Rewards – Having autonomy is motivating, but particularly motivating when rewards are granted on the performance level. Consider a salesman. Receiving a commission on every sale motivates both performance and job satisfaction.
• Job Enrichment (vertical) – As a manager, it is your responsibility to dedicate some (if not all) of your managerial planning to experienced employees as they grow into their roles. By giving over control of the employee’s work task planning to the employees themselves, they feel a strong sense of progress in their career and ownership of their outcomes.

11.4.3: Flextime

Under flextime, workers are allowed to determine their work schedule instead of working during the standard hours of 9 a.m. to 5 p.m.

Learning Objective

Evaluate flextime as an alternative work schedule

Key Points

• Even with flextime, employees are usually expected to work during a core period of time during the working day depending on the needs of the business (from 11 a.m. to 3 p.m. for example).
• Some companies have a flexplace policy which allows employees to decide where they do their work.
• Flextime benefits for employees include: a better work-life balance, less commute, less fatigue, more days off, and lower sickness.
• Flextime benefits for the company include: better motivated workers; more efficient and effective operation; less fatigued workers, so less errors; people work overtime hours without receiving overtime rates; fewer facilities required; and lower sickness.

Key Terms

work-life balance

The relative importance of work and personal life to a particular individual.

telecommuting

Telecommuting or telework are terms often used interchangeably to refer to a work arrangement in which employees enjoy flexibility in work location and hours. A person who telecommutes is known as a “telecommuter” and a person who teleworks is known as a “teleworker. ” Telecommute generally refers to the elimination of the daily commute to a central place of work. Many telecommuters work from home, while others, occasionally also referred to as “nomad workers” or “web commuters” utilize mobile telecommunications technology to work from coffee shops or other locations.

flexitime

An arrangement that allows employees to set their own working hours within agreed limits; normally must include certain periods (core time) when they must be at work.

Example

• Flextime works well for parents when both parents work. A working mother might choose to work from Monday to Friday from 7 a.m. to 3 p.m. so that she can be home when the children return from school (or pick them up). Her husband may go to work later, to see the children off to school, and thus stay at work later.

Flextime

Flexitime is a variable work schedule, in contrast to traditional work arrangements requiring employees to work a standard 9 a.m. to 5 p.m. day. Its invention is usually credited to William Henning. Under flextime, there is typically a core period (of approximately 50% of total working time / working day) of the day, when employees are expected to be at work (for example, between 11 a.m. and 3 p.m.). The rest of the working day is “flexitime”, in which employees can choose when they work, subject to achieving total daily, weekly, or monthly hours in the region of what the employer expects, and subject to the necessary work being done .

Telecommuting

This man is telecommuting from a restaurant. As a result of improvement in technology and Internet connectivity, one can telecommute from almost anywhere now.

A flextime policy allows staff to determine when they will work, while a flexplace policy allows staff to determine where they will work. Its practical realization can mainly be attributed to the entrepreneur Wilhelm Haller who founded Hengstler Gleitzeit, and later “Interflex Datensysteme GmbH” in Southern Germany, where today a number of companies offer Flexitime (Gleitzeit) solutions which have grown out of his initiative.

Advantages of Flextime

The advantages of flexitime for the individual include: better work-life balance, less commute, less fatigue, more days off, and lower sickness. The benefits for the company include: better motivated workers; more efficient and effective operation; less fatigued workers, so less errors; people work overtime hours without receiving overtime rates; fewer facilities required; and lower sickness.

For employers, flexitime can aid the recruitment and retention of staff. It has been a particularly popular option in 2009 for employers trying to reduce staff costs without having to make redundancies during the recession. It can also help provide staff cover outside normal working hours and reduce the need for overtime. Flexitime can also improve the provision of equal opportunities to staff unable to work standard hours. Flexitime can give employees greater freedom to organize their working lives to suit personal needs. In addition, travelling can be cheaper and easier if it is out of peak time.

A recent review by the Cochrane Collaboration has found that flexible working arrangements, such as flextime and telecommuting can have positive effects on health, but the effects are primarily seen when employees have some control over their new schedules. Additionally, individuals who telecommute to work most of the work week are more satisfied with their jobs than are traditional employees who commute into a physical office location.

11.4.4: Cross-Training and Job Sharing

Cross training involves workers being trained in tangent job functions, while job sharing involves two people working together on the same job.

Learning Objective

Explain cross-training and job training

Key Points

• Cross training involves workers being trained in tangent job functions to increase oversight in ways that are impossible through management interactions with workers alone; it also empowers them to be more effective.
• Job sharing is an employment arrangement where typically two people are retained on a part time or reduced time basis to perform a job normally fulfilled by one person working full time.
• There are challenges associated with making job sharing work, but studies show that net productivity increases when two people share the same 40-hour job.

Key Terms

Cross-training

Cross-training in business operations involves training employees to engage in quality control measures. Employees are trained in tangent job functions to increase oversight in ways that are impossible through management interactions with workers alone.

job sharing

Job sharing is an employment arrangement where typically two people are retained on a part-time or reduced-time basis to perform a job normally fulfilled by one person working full-time.

featherbedding

The employment of more workers than is necessary because of union rules, especially upon the introduction of new technology

job specification

the criteria required to be filled by an employee

Example

• Mary and Susan job share. Mary works on Monday and Tuesday, and Susan occupies the same position on Thursday and Friday. Mary and Susan both work on Wednesday. This is when they update each other on the current status of the projects on which they collaborate.

Cross-Training and Job Sharing

What is Cross-training?

Cross-training in business operations involves training employees to engage in quality control measures. Employees are trained in tangent job functions to increase oversight in ways that are impossible through management interactions with workers alone .

Workers working together on an assembly line

Workers on an assembly line, who normally do a single task, benefit from cross-training to develop their skills and be able to work on a variety of areas.

Advantages

The advantages of cross-training employees include the following:

• Helps customers and clients by empowering employees to answer questions about the entire organization
• Illuminates inefficient methods, outdated techniques, and bureaucratic drift, which allows staff to re-evaluate the work methods
• Raises awareness of how other departments operate
• Enhances routine scheduling and enables staff to move around the tasks of the operation
• Better coverage, increased flexibility, and the ability to cope with unexpected absences, emergencies, and illnesses
• Increases the employability of staff who have the opportunity to train in areas outside of their original responsibilities

There are other, more general advantages as well:

• Increased flexibility and versatility
• Appreciated intellectual capital
• Improved individual efficiency
• Increased standardization of jobs
• Heightened morale

Job Sharing

Job sharing is an employment arrangement where typically two people are retained on a part time or reduced time basis to perform a job normally fulfilled by one person working full time. Compensation is apportioned between the workers, thus leading to a net reduction in per employee income. Job sharing should not be confused with the more pejorative term featherbedding, which describes the deliberate retention of excess workers on a payroll. For employees seeking more free time, job sharing may be a way to take back more control of their personal lives. Employees who job share frequently attribute their decision to quality of life issues. Studies have shown that net productivity increases when two people share the same 40-hour job.

However, there is an inherent challenge in making job sharing work for the rest of the company’s stakeholders. The hand-off or handover communication between those sharing the job is essential, and co workers must adapt to working with each other. For example, one person is responsible for a task on Monday, but another performs it on Tuesday.

11.4.5: Working from Home

Innovations in technology have allowed for telecommuting, a practice in which employees work from home or on the go.

Learning Objective

Evaluate the advantages and disadvantages to telecommuting

Key Points

• The terms “telecommuting” and “telework” are both used to describe a work arrangement in which employees have the flexibility to choose their work location and hours.
• Communities, employers, employees, and the environment receive benefits from telecommuting.
• The disadvantages of telecommuting include a possible negative impact on career advancement and workplace communication issues.
• Entrepreneurs can choose to run a business from home for a variety of reasons, such as lower business expenses, personal health limitations, and a more flexible schedule due to the lack of a commute.
• Work-at-home parents may have decided to start a home-based business due ot the incompatibility of a 9-5 work day with school hours or sick days.

Key Terms

virtual office

A virtual office is a combination of off-site live communication and address services that allow users to reduce traditional office costs while maintaining business professionalism. Frequently the term is confused with “office business centers” or “executive suites” which demand a conventional lease whereas a true virtual office does not require that expense.

telecommute

To work from home, sometimes for part of a working day or week, using a computer connected to one’s employer’s network or via the Internet.

Example

• Examples of large companies which began as a home-based business include Apple Computer, Hewlett-Packard, and Amazon.com.

Advantages of Telecommuting

Telecommuting refers to a work arrangement in which employees enjoy flexibility in work location and hours. With modern telecommunication technology, no longer is it necessary for employees to undergo a daily commute to a central place of work. Many telecommuters work from home, while others, who are occasionally referred to as “nomad workers” or “web commuters”, work from coffee shops or other locations.

To be successful, telecommuting should incorporate training and development that includes evaluation, simulation programs, team meetings, written materials, and forums. Information sharing should be considered synchronous in a virtual office and building processes to handle conflicts should be developed. Operational and administrative support should be redesigned to support the virtual office environment. Facilities need to be coordinated properly in order to support the virtual office and technical support should be coordinated properly.

Telecommuting offers benefits to communities, employers, and employees. For communities, telecommuting can offer fuller employment by increasing the employability of circumstantially marginalized groups, such as work at home parents and caregivers, the disabled, retirees, and people living in remote areas. Furthermore, working from home reduces traffic congestion and traffic accidents, relieves the strain on transportation infrastructures, reduces greenhouse gases, saves fuel, and reduces energy use.

For companies, telecommuting and work-from-home arrangements may:

• Expand the talent pool
• Reduce the spread of illness
• Reduce costs
• Increase productivity
• Reduce their carbon footprint and energy usage
• Reduce turnover and absenteeism
• Improve employee morale
• Offer a continuity of operations strategy
• And improve their ability to handle business across multiple timezones

For individuals, telecommuting improves work-life balance. Working from home can free up the equivalent of 15 to 25 workdays a year from time that would have otherwise been spent commuting, and save between $4,000 and $21,000 per year in travel and work-related costs.

Environmental Benefits and Government Regulation

Telecommuting gained more ground in the United States in 1996 after the Clean Air Act amendments were adopted. The act required companies with over 100 employees to encourage car pools, public transportation, shortened workweeks, and telecommuting. In 2004, an appropriations bill was enacted by Congress to encourage telecommuting for certain Federal agencies. The bill threatened to withhold money from agencies that failed to provide telecommuting options to all eligible employees. The energy-saving potential of telecommuting from gas savings alone would total more than twice what the U.S. currently produces from all renewable energy sources combined.

Employee Motivation and Satisfaction

Work-from-home flexibility is a desirable asset for employees. A meta-analysis of 46 studies on telecommuting by Ravi Gajendran and David A. Harrison found that telecommuting has largely positive benefits for employees and employers, mainly relating to job satisfaction, autonomy, stress, manager-rated job performance, and work-family conflict. The meta-analysis found generally no detrimental effects on the quality of workplace relationships and career outcomes. Only high-intensity telecommuting (where employees work from home for more than 2.5 days a week) was found to harm employee relationships with coworkers, but this was found to be offset by beneficial effects on work-family conflict.

Potential Drawbacks and Concerns

Telecommuting has come to be viewed by some as more a complement rather than a substitute for work in the workplace. Barriers to continued growth of telecommuting include distrust from employers and personal disconnectedness for employees. Traditional line managers are accustomed to managing by observation and not necessarily by results. This causes a serious obstacle in organizations attempting to adopt telecommuting. The main concern about telecommuting is the fear of loss of control. While 75% of managers say they trust their employees, a third say they’d like to be able to see them, just to be sure.

Managers may view the teleworker as experiencing a drop in productivity during the first few months. This drop occurs as the employee, his peers, and the manager adjust to the new work regimen. The drop could also be accountable to an inadequate office setup. Managers should be patient and give the teleworker time to adapt. Eventually, productivity of the teleworker should climb, as over two-thirds of employers report increased productivity among telecommuters.

From an employee perspective, some believe that telecommuting can negatively affect one’s career. A recent survey of 1,300 executives from 71 countries indicated a belief that people who work from home are less likely to get promoted. The reasoning is that companies rarely promote people into leadership roles who haven’t been consistently seen and measured.

Home-Based Business

Another category of people who work from home are those who have a home-based business. Entrepreneurs choose to run businesses from home for a variety of reasons, including lower business expenses, personal health limitations, and a more flexible schedule due to the lack of a commute. This flexibility can give an entrepreneur more options when planning tasks, especially parenting duties.

11.4.6: Employee Responsibility

Employees are often empowered and motivated by responsibility, autonomy, and participation in setting their own objectives.

Learning Objective

Realize the intrinsic motivational value of collaborating with employees to set objectives and delegate responsibility

Key Points

• Accountability and responsibility in the workplace are positively correlated with higher levels of employee motivation.
• Maslow’s Hierarchy of Needs supports this premise, identifying the intrinsic value of self-fulfillment and self-esteem derived from autonomy and responsibility.
• Edwin Locke’s goal theory identifies value in shared goal-setting, and suggests increased responsibility and employee involvement results in higher levels of motivation.
• When deriving shared goals, it is critical to recognize why a given task is relevant to the big picture, how it can be accomplished, and what the objectives themselves will be.

Key Term

accountability

Responsible or answerable for; ownership of the consequences.

Employee motivation is a complex concept, and what is effective for one employee may or may not be effective for another. However, it has been observed that many employees respond positively to increases in responsibility and accountability from a motivational perspective. Employee participation, intrinsic rewards, Locke’s goal theory, and Maslow’s Hierarchy of Needs are all useful perspectives in understanding why employee responsibility correlates positively with motivation.

Why Responsibility Motivates

As the concept of responsibility and its application to motivation is qualitative, it is useful to explore a variety of motivational theories relevant to the impact of responsibility.

Employee Participation

Employees recognize that responsibility and accountability are displays of trust, and an increase in employee participation in strategic decision-making and tactical thinking builds confidence and enables buy-in when decisions are made. Various studies of employee participation in process improvement discussions demonstrate that when employees are consulted and involved in making important operational decisions, they feel shared responsibility for the outcomes of those decisions. This shared responsibility drives positive performance, as they are now accountable not only for the execution but for the concept itself. 

Maslow’s Hierarchy of Needs

A commonly cited example of motivational theory, Maslow’s Hierarchy of Needs essentially stipulates that fulfilling lower levels needs (such as food, hygiene, shelter, safety, etc.) is generally accomplished through salary and benefits. However, these hygiene factors don’t result in higher level motivation and higher level thinking. Social affiliation, belonging, a sense of self-respect, a feeling that what one does is meaningful, accountability, and finally self-actualization are identified as the more powerful and higher level motivators. From this perspective, empowering employee responsibility fulfills critical needs in terms of self-esteem (the fourth level of the hierarchy) and, to some degree, self actualization (the fifth level).

Maslow’s Hierarchy Of Needs

Maslow’s Hierarchy of Needs underlines the importance of upper level motivators and the fulfillment of intrinsic needs as employees develop into roles of responsibility.

Maslow’s Hierarchy of Needs underlines the importance of upper level motivators and the fulfillment of intrinsic needs as employees develop into roles of responsibility.

Locke’s Goal Theory

Edwin A. Locke put forward the relatively simple concept that setting specific goals at the appropriate difficultly level will empower higher degrees of performance. What’s interesting here is that when employees themselves are involved in the goal-setting process, when they feel responsibility for the objectives they themselves helped to determine, the level of motivation is higher. This implies that shared responsibility in goal-setting has a positive impact on overall motivation.

How to Delegate Responsibility

With this motivational theory in mind, it is a relatively safe assumption that many employees will be more motivated when given responsibility of their tasks. Managers must understand how much responsibility can be delegated to a given employee, and how that responsibility should be handed over. Making an employee accountable for a task or tactic they don’t agree with, for example, could have disastrous results (as the intrinsic motivators may not be present). Managers must know how to hand off responsibility responsibly.

• What are the objectives?  When providing an employee with responsibility over a project, task, or process, managers and/or leaders should clearly underline what the objectives are and how success will be determined. The employee must know not only what it is they will be working on, but what the expectations and end goals of that task will be. This should be an open discussion, where agreement and alignment is created before moving forward.
• How will the objectives be accomplished? Following this, the employee must be given a say in how this process will be approached. Employees are functional experts in the fields they are hired for, and thus will almost always have strong opinions on best practices and overall process. Managers should actively listen to how the employee suggests pursuing a given task, and provide suggestions and feedback to ensure the employee is moving in the right direction relative to the long term strategy of the organization. Agreement on “the how” is important before moving forward.
• Why this is relevant? Finally, being accountable for a process requires time and energy. Understanding why the task is critical for organizational success is critical for employee empowerment and motivation. 

Once all of these concepts are agreed upon, the employee is ready to take on the responsibility for the task at hand. This managerial strategy empowers employees to grow and take responsibility for their actions, ultimately developing more leaders at the organization.

11.4.7: Employee Ownership

Various business and compensation models focus on empowering employee ownership in pursuit of a higher level of commitment and motivation.

Learning Objective

Understand the ways to enable employee ownership

Key Points

• Organizations have a variety of methods, from cooperative structures to stock options, to empower employee motivation by providing employees with ownership of the organization or its processes.
• Ownership motivates both intrinsically and extrinsically. Intrinsically, ownership creates a sense of shared vision and accountability. Extrinsically, ownership provides employees with a share of the profits.
• Stock options, coops, franchises, and commission are common examples of compensation and/or structural strategies that enable employees to have some ownership of the company.
• Vroom’s expectancy theory and social cognitive theory both support the concept of employee ownership as a potential source of motivation.

Key Terms

autonomy

The ability to function independently; the freedom to make independent decisions.

Commission

A percentage fee for the salesman on the sale of a product or service.

Why Ownership Motivates

Various business models and compensation models cater to the concept that employee ownership is a highly valuable approach to generate employee motivation. Through providing employees a stake in the company, be it through shares of stock, variable income models, or through partnerships or coops, each employee will have a direct stake in the financial and operational success of the organization.

As an extrinsic motivator, the simple capital returns of ownership will play a role in empowering employee commitment. As a direct recipient of some share of the profit, the employee will recognize a direct correlation between their efforts and their returns. From an intrinsic point of view, employees who feel a sense of ownership of the organization will similarly feel the accountability, pride, and fulfillment that comes from growing that business into a successful venture. Considering the strong sense of intrinsic and extrinsic incentives attainable through employee ownership, it functions as an excellent motivator.

How to Empower Ownership

As mentioned above, there are a number of models and reward mechanisms that can create a sense of ownership. Some of the more common methods include:

• Commission – Consider a car salesman. The employee contract stipulates that any sale of a vehicle will result in a total bonus of 20% of the overall profit on that vehicle or 2% of the sales price (whichever is higher). This salesman now has a direct stake in the organization’s revenues, and is motivated to contribute to the bottom line due to an extrinsic reward (the commission).
• Coop – A more extreme example would be a coop. Coops function off of the basic principles of shared ownership, which makes them an ideal example for this discussion. In a coop, every employee has an equal stake in the company, assuming both equal risk and equal reward. In a way, every single individual within the coop is an owner of the organization itself, and intrinsically and extrinsically motivated to optimize performance and achieve the best results.
• Franchise – Another interesting form of ownership is a franchise. Franchising is essentially the process of a parent organization selling the rights to a given brand and product line to an external owner (usually in another region or country). The frachisee will have complete ownership of their own branch of the organization, and thus will have a strong incentive to succeed.
• Stock Options – Perhaps the simplest and most common example of shared ownership would be stock options. Many publicly traded organizations offer stock options to some or all of their employees. All this means is that some employees get a small percentage of financial ownership of the company (usually quite small). When the company performs well, it is likely that the stock price will increase and the shares each employee holds will appreciate in value. This can be seen a motivator.

Theoretical Support

Vroom’s Expectancy Theory

One useful motivational model from psychology is Vroom’s expectancy theory. Under this perspective, motivation is derived through the pursuit of expected and desired outcomes. At its simplest, this theory assumes that there is a certain amount of effort an employee will exert. This expression of effort will anticipate a certain degree of performance. That degree of performance will result in a desired outcome. The value of that desired outcome for the employee must be relevant. Combining all of this, employees exert energy to perform under the assumption that they will achievement objectives which result in a desirable outcome.

Social Cognitive Theory

Bandura’s social cognitive theory functions on the premise of self-efficacy. This simply means that there is a strong correlation between an employee’s feeling of autonomy and capacity to achieve results, and their overall level of motivation and performance. Employees who feel both capable of a task, and who have ownership of the outcomes of that task (i.e. rewards, be they intrinsic or extrinsic), will be more likely to perform well.

10.1: Introduction to Operations Management

10.1.1: Operations Management

Learning Objective

Explain the role of operations management

Key Points

• The goal of operations management is to maximize efficiency while producing goods and services that effectively fulfill customer needs.
• Operations is one of the three strategic functions of any organization.
• Operations decisions include decisions that are strategic in nature, meaning that they have long-term consequences and often involve a great deal of expense and resource commitments.

Key Terms

Operations management

Management of processes that transform inputs into goods and services that add value for the customer.

tactic

A maneuver or action calculated to achieve some end.

strategy

A plan of action intended to accomplish a specific goal.

Examples

• JetBlue airlines is a successful airline that has an organization strategy of providing high-value air transportation service to travelers. JetBlue strives to provide fun, comfortable, and safe air service to popular destinations at a price that middle-income passengers can afford. Given JetBlue’s organization strategy, the airline features an operations strategy that focuses on low costs, competent and service-oriented employees, and reliable aircraft.
• JetBlue locates (“location” is an operations decision area) its main transportation hub in New York City, a city of 19 million people that helps ensure that JetBlue’s planes fly at full capacity. In the area of equipment decisions, JetBlue operates only one type of aircraft, the Airbus 320, which has high passenger carrying capacity (to maximize revenue), provides good fuel economy and requires only two pilots (versus three) to operate. Having one type of aircraft reduces training costs for pilots and mechanics, reduces investments in parts inventories, and enables JetBlue to negotiate greater discounts on high-volume purchases from Airbus.

What is Operations Management?

Operations management is the management of processes that transform inputs into goods and services that add value for the customer.

The Goal of Operations Management

The goal of operations management is to maximize efficiency while producing goods and services that effectively fulfill customer needs.

Countless operating decisions must be made that have both long- and short-term impacts on the organization’s ability to produce goods and services that provide added value to customers. If the organization has made mostly good operating decisions in designing and executing its transformation system to meet the needs of customers, its prospects for long-term survival are greatly enhanced.

For example, if an organization makes furniture, some of the operations management decisions involve the following:

• purchasing wood and fabric,
• hiring and training workers,
• location and layout of the furniture factory,
• purchase cutting tools and other fabrication equipment.

If the organization makes good operations decisions, it will be able to produce affordable, functional, and attractive furniture that customers will purchase at a price that will earn profits for the company.

The Role of Operations Management in the Organization

Operations is one of the three strategic functions of any organization. This means that it is a vital part of accomplishing the organization’s strategy and ensuring its long-term survival. The other two areas of strategic importance to the organization are marketing and finance. The operations strategy should support the overall organization strategy. Many companies prepare a 5-year pro-forma to assist in their operation planning. The pro forma uses information from past and current financial statements in an effort to predict future events such as sales, and capital investments.

Strategic Versus Tactical Operations Decisions

Operations decisions include decisions that are strategic in nature, meaning that they have long-term consequences and often involve a great deal of expense and resource commitments.

Strategic operations decisions include the following:

• facility location decisions,
• the type of technologies that the organization will use,
• determining how labor and equipment are organized,
• how much long-term capacity the organization will provide to meet customer demand.

Tactical operations decisions have short to medium term impact on the organization, often involve less commitment of resources, and can be changed more easily than strategic decisions. The following are some tactical decisions:

• workforce scheduling,
• establishing quality assurance procedures,
• contracting with vendors,
• managing inventory.

Strategic and tactical operations decisions determine how well the organization can accomplish its goals. They also provide opportunities for the organization to achieve unique competitive advantages that attract and keep customers.

For example, United Parcel Service (UPS), an international package delivery service, formed a partnership with its customer, Toshiba computers. Toshiba needs to provide a repair service to its laptop computer customers. The old approach of providing this service was cumbersome and time-consuming:

1. UPS picked up the customer computers.
2. UPS delivered the computers to Toshiba.
3. Toshiba repaired the computers.
4. UPS picked up the repaired computers and delivered them back to the customers.

Under this traditional approach, the total time to get a laptop computer repaired was two weeks—a long time for people to be without their laptop! Then they came up with an innovative idea for Toshiba to provide better service to its customers.

UPS hired, trained, and certified its own employees to repair Toshiba laptop computers. The new repair process is much more efficient:

1. UPS picks up computers from Toshiba owners.
2. UPS repairs the computers.
3. UPS delivers the computers back to their owners.

The total time to get a computer repaired is now about two days.

Most Toshiba customers think that Toshiba is doing a great job of repairing their computers, when in fact Toshiba never touches the computers! The result of this operations innovation is better service to Toshiba customers and a strong and profitable strategic partnership between UPS and its customer, Toshiba.

Operations Management

Blueprint for a commercial operations management solution.

10.1.2: A Study of Process

Learning Objective

Analyze the importance of operations management in protecting an organization’s competitive advantage

Key Points

• Operations management transforms inputs (labor, capital, equipment, land, buildings, materials, and information) into outputs (goods and services) that provide added value to customers.
• All organizations must strive to maximize the quality of their transformation processes to meet customer needs.
• Controlling the transformation process makes it difficult for competitors to manufacture products of the same quality as the original producer.

Key Terms

process

A series of events to produce a result, especially as contrasted to product.

input

Something fed into a process with the intention of it shaping or affecting the outputs of that process.

output

Production; quantity produced, created, or completed.

Examples

• The 3M Company is a good example of the strategic importance of transforming inputs into outputs that provide competitive advantage in the marketplace. This company manufactures a top-quality adhesive tape called “Magic Tape. ” Magic Tape is used for everyday taping applications, but it offers attractive features that most other tapes do not, including smooth removal from the tape roll, an adhesive that is sticky enough to hold items in place (but not too sticky that it can not be removed and readjusted, if necessary! ), and a non-reflective surface. For several decades, 3M has enjoyed a substantial profit margin on its Magic Tape product, because 3M engineers make the manufacturing equipment and design the manufacturing processes that produce Magic Tape. In other words, 3M enjoys a commanding competitive advantage by controlling the transformation processes that turn raw material inputs into the high value-added Magic Tape product. Controlling the transformation process makes it extremely difficult for competitors to produce tape of the same quality as Magic Tape, allowing 3M to reap significant profits from this superior product.
• An opposite example of the strategic implications of the input/output transformation process is 3M’s decision in the 1980s to stop manufacturing VHS tape for video players and recorders. In the VHS tape market, 3M had no proprietary manufacturing advantage, as there were many Asian competitors that could produce high-quality, VHS tape at lower cost. Since 3M had no proprietary control over the transformation process for VHS tape that would allow the company to protect its profit margins for this product, it dropped VHS tape from its offerings. The two 3M examples of Magic Tape and VHS tape show how important the transformation process and operations management can be to providing and protecting an organization’s competitive advantage.

Operations Management and the Transformation Process

Operations management transforms inputs (labor, capital, equipment, land, buildings, materials and information) into outputs (goods and services) that provide added value to customers.

Figure 1 summarizes the transformation process. The arrow labeled “Transformation System” is the critical element in the model that will determine how well the organization produces goods and services that meet customer needs. It does not matter whether the organization is a for-profit company, a non-profit organization (religious organizations, hospitals, etc.), or a government agency; all organizations must strive to maximize the quality of their transformation processes to meet customer needs.

Example: Strategic Importance of Operations Management

The 3M Company is a good example of the strategic importance of transforming inputs into outputs that provide competitive advantage in the marketplace.

3M manufactures a top-quality adhesive tape called “Magic Tape”. Magic Tape is used for everyday taping applications, but it offers attractive features that most other tapes do not, including:

• Smooth removal from the tape roll
• An adhesive that is sticky enough to hold items in place (but not too sticky that it can not be removed and readjusted if necessary! )
• A non-reflective surface

For several decades, 3M has enjoyed a substantial profit margin on its Magic Tape product because 3M engineers make the manufacturing equipment and design the manufacturing processes that produce Magic Tape. In other words, 3M enjoys a commanding competitive advantage by controlling the transformation processes that turn raw material inputs into the high value-added Magic Tape product.

Controlling the transformation process makes it extremely difficult for competitors to produce tape of the same quality as Magic Tape, allowing 3M to reap significant profits from this superior product.

An opposite example of the strategic implications of the input/output transformation process is 3M’s decision in the 1980s to stop manufacturing VHS tape for video players and recorders.

In the VHS tape market 3M had no proprietary manufacturing advantage, as there were many Asian competitors that could produce high-quality VHS tape at lower cost. Since 3M had no proprietary control over the transformation process for VHS tape that would allow the company to protect its profit margins for this product, it dropped VHS tape from its offerings.

The two 3M examples of Magic Tape and VHS tape show how important the transformation process and operations management can be to providing and protecting an organization’s competitive advantage.

Example of a typical transformation process

10.1.3: Service Operations

Learning Objective

Identify the key differences between services and other types of goods, and recognize the operational implications of these differences

Key Points

• Service operations are the operational strategies and tactics which go into delivering an intangible good to prospective consumers.
• Understanding this field of work requires an understanding of what a service constitutes. One useful perspective in differentiating services from other goods is the ‘5 I’s of services’ perspective.
• As services behave somewhat differently than tangible products, operations managers must take into account different considerations when optimizing their operational strategy.
• Improving overall quality through measuring consumer satisfaction, planning facilities for optimal use of space, and effective scheduling are a few examples of considerations service operators consider.

Key Terms

NPS surveys

Management tools that can be used to gauge the loyalty of a firm’s customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth. 

opportunity costs

The overall cost of something missed; through deciding to do ‘A’, an individual or organization incurs the opportunity cost of doing ‘B’.

Intangibility

The state of not being touchable. For example, an idea is real, but not tangible.

Service operations are simply the application of operations management to an intangible good (i.e. a service). To understand how service operations function, let’s first take a look at what is considered a service.

Service-Goods Continuum

This simple line graph shows industries that are nearly 100% service-related at the top and industries that are nearly 100% product-related at the bottom. It is an illustration of how the service-product continuum is more of a spectrum than a black and white rule.

This image is a simple line graph, showing at the top industries which are nearly 100% service-related and at the bottom industries which are nearly 100% product-related. It is an illustration of how the service-product continuum is more of a spectrum than a black and white rule.

Services Defined

An easy way to remember what a service is (compared to a product) is through using the ‘5 I’s of Services’:

1. Intangibility – Services cannot be touched, shipped, handled, or looked at. They are an occurrence, not a tangible good.
2. Inventory – Services cannot be stored for later use. They occur, or they do not occur.
3. Inseparability – Services cannot be pulled into different parts or separated (as many tangible goods can be—which makes operations management quite different for products).
4. Inconsistency – Services tend to be unique. A teacher may teach you a topic, and another teacher may teach you the same topic in another course. Each teacher will deliver this topic somewhat differently. This is a good example of service inconsistency.
5. Involvement – Consumers are often directly involved in the service delivery. A therapist is a good example of this. The consumer is the center of the service, and thus each instance of the service is unique based on the individual involved.

Managing Service Operations

This definition offers a great deal of insight when applied to the concept of operational management. Without a tangible good to ship, handle and produce, operational managers are instead focused on the execution of an activity to fill a consumer need. This management of an instance is rather different than the management of a product.

Managing operations is just as critical on the service side as it is on the product side. While there are countless considerations to be made, many of which are unique to specific organizations or industries, these core operational decisions are strong indications of the mentality service management specialists consider:

Location

Choosing where to open a facility, how to lay out the facility, what size is appropriate, and overall how efficiently a given space can be used relative to the cost are key considerations. Consider a car mechanic opening a garage. Depending upon how many jobs she anticipates having within a given period of time, and how many employees she expects to be able to manage simultaneously, she may want to open a facility with three garages or five garages. It really depends on how much output she expects she can accomplish, and how much input demand will provide.

Scheduling

Just as a product manufacturing facility will know when a product will be where, so too do service operators need to know when a given service should start and what duration of time is required to complete it. Maximizing output through planning properly can minimize opportunity costs and maximize revenue, and plays an integral role in operational management of services. Take a doctor’s office. If they simply had everyone come in whenever they wanted, there would be times when the staff would have nothing to do (but be obligated to be there, and be paid), and other times when there would be too much to do and capital and customers would be lost.

Quality

As the ‘5 I’s of Services’ indicate, most services tend to be completely unique. A hair dresser rarely gives the same haircut twice and, even if they do, it would be cut to fit a different individual. As a result, managing for high quality output is rather complex. Each execution is measured relative to the specific instance and that specific consumer, making tools like NPS surveys and other measures of individual satisfaction highly useful in optimizing. Following these ratings, operational specialists must consider the comments received and work to find a way to integrate this feedback into future services.

10.2: Quality Management

10.2.1: Philosophies

Quality management adopts a number of management principles that can be used to guide organizations towards improved performance.

Learning Objective

Recognize how top management can improve quality performance

Key Points

• There are eight primary quality management principles.
• The principles are the basis of the ISO 9001:2008 quality management system standard.
• One of the permanent quality objectives of an organization should be the continual improvement of its overall performance.

Key Terms

Quality Management

Process of ensuring that an organization or product is consistent. It can be considered to have four main components: quality planning, quality control, quality assurance, and quality improvement. Quality management is focused not only on product/service quality, but also the means to achieve it.

value

The degree of importance you give to something.

ISO 9001:2008

The ISO 9000 family of standards are related to quality management systems and designed to help organizations ensure that they meet the needs of customers and other stakeholders while meeting statutory and regulatory requirements related to the product.

Example

• In the 1950s and 1960s, Japanese goods were synonymous with cheapness and low quality but over time, their quality initiatives began to be successful, with Japan achieving very high levels of quality in products from the 1970s onward. For example, Japanese cars regularly top the J.D. Power customer satisfaction ratings. In the 1980s, Deming was asked by Ford Motor Company to start a quality initiative after they realized that they were falling behind Japanese manufacturers. A number of highly successful quality initiatives have been invented by the Japanese (see for example, on this page: Genichi Taguchi, QFD, Toyota Production System. Many of the methods not only provide techniques but also have associated quality culture (i.e., people factors). These methods are now adopted by the same western countries that decades earlier derided Japanese methods.

The Principles of Quality Management

Quality management adopts a number of management principles that can be used by top management to guide their organizations towards improved performance. The principles include:

• Customer focus: Since the organizations depend on their customers, they should understand current and future customer needs, should meet customer requirements, and try to exceed the expectations of customers. An organization attains customer focus when all people in the organization know both the internal and external customers and also what customer requirements must be met to ensure that both the internal and external customers are satisfied.
• Leadership: Leaders of an organization establish unity of purpose and direction of it. They should go for creation and maintenance of such an internal environment, in which people can become fully involved in achieving the organization’s quality objective.
• Involvement of people: People at all levels of an organization are the essence of it. Their complete involvement enables their abilities to be used for the benefit of the organization.
• Process approach: The desired result can be achieved when activities and related resources are managed in an organization as process.
• System approach to management: An organization’s effectiveness and efficiency in achieving its quality objectives are contributed by identifying, understanding, and managing all interrelated processes as a system.
• Continual improvement: One of the permanent quality objectives of an organization should be the continual improvement of its overall performance.
• Factual approach to decision making: Effective decisions are always based on the data analysis and information.
• Mutually beneficial supplier relationships: Since an organization and its suppliers are interdependent, therefore, a mutually beneficial relationship between them increases the ability of both to add value.

These eight principles form the basis for the quality management system standard ISO 9001:2008.

10.2.2: TQM

Total quality management (TQM) is an integrative philosophy of management for continuously improving the quality of products and processes.

Learning Objective

Explain the principles of Total Quality Management (TQM)

Key Points

• TQM functions on the premise that the quality of products and processes is the responsibility of everyone who is involved with the creation or consumption of the goods or services offered by an organization.
• Satisfying the customer involves making sure both internal and external customers are happy.
• The internal suppliers are the subordinates who answer to a particular supervisor. Satisfying them involves giving them the tools and motivation they need to do their jobs.
• It is important to go beyond satisfaction, making the customer – and supplier – feel important and valued, and part of the process.
• “Lean” focuses on eliminating the wasteful use of time, energy or resources, and instead focusing activities completely on the creation of value.
• The focus of the Six Sigma management strategy is to reduce defect by minimizing variation in processes.

Key Terms

poka-yoke

A methodology of using low-cost techniques to error-proof production processes.

Total Quality Management (TQM)

A strategic approach to management aimed at embedding awareness of quality in all organizational processes.

Example

• ‘Lean’ is based on the Toyota Production System, which aimed to minimize overburden, inconsistency and waste. It was developed between 1948-1975, and was a precursor to lean manufacturing.

Total Quality Management (TQM) is an integrative philosophy of management for continuously improving the quality of products and processes .

TQM Practices Are Used in Many Industries

Here, two aviation structural mechanics are collaborating on the wing of a F/A-18C Hornet, performing routine maintenance in the hangar bay. TQM practices ensure each person involved with a product is responsible for its quality.

Overview

TQM functions on the premise that the quality of products and processes is the responsibility of everyone involved in the creation or consumption of the goods or services the organization offers. TQM capitalizes on the involvement of management, the workforce, suppliers, and even customers in order to meet or exceed customer expectations.

Considering the practices of TQM as discussed in six empirical studies, Cua, McKone, and Schroeder (2001) identified nine common TQM practices:

1. Cross-functional product design;
2. Process management;
3. Supplier quality management;
4. Customer involvement;
5. Information and feedback;
6. Committed leadership;
7. Strategic planning;
8. Cross-functional training; and
9. Employee involvement.

Basic Principles of Total Quality Management

The basic principles for the Total Quality Management philosophy of doing business are to satisfy the customer, satisfy the supplier, and continuously improve the business processes.

Satisfy the Customer

The first, and major, TQM principle is to satisfy the customer–the person who pays for the product or service. Customers want to get their money’s worth from a product or service they purchase.

Satisfy the Users: If the user of the product is different than the purchaser, then both the user and customer must be satisfied, although the person who pays gets priority.

Company Philosophy: A company that seeks to satisfy the customer by providing them value for what they buy and the quality they expect will get more repeat business, referral business, and reduced complaints and service expenses. Some top companies not only provide quality products but also give extra service to make their customers feel important and valued.

Internal Customers: Within a company, a worker provides a product or service to his or her supervisors. If the person has any influence on the wages the worker receives, that person can be thought of as an internal customer. A worker should have the mindset of satisfying internal customers in order to keep his or her job and to get a raise or promotion.

Chain of Customers:Often in a company, there is a chain of customers–each improving a product and passing it along until it is finally sold to the external customer. Each worker must not only seek to satisfy the immediate internal customer, but must also look up the chain to try to satisfy the ultimate customer.

Satisfy the Supplier

A second TQM principle is to satisfy the supplier, which is the person or organization from whom you are purchasing goods or services.

External Suppliers: A company must look to satisfy their external suppliers by providing them with clear instructions and requirements and then paying them fairly and on time. It is in the company’s best interest that its suppliers provide quality goods or services if the company hopes to provide quality goods or services to its external customers.

Internal Suppliers: A supervisor must try to keep workers happy and productive by providing good task instructions, the tools they need to do their job, and good working conditions. The supervisor must also reward the workers with praise and good pay.

Get Better Work: The reason to do this is to get more productivity out of the workers, as well as to keep the good workers. An effective supervisor with a good team of workers will certainly satisfy his or her internal customers.

Empower Workers: One area of satisfying the internal suppler is by empowering the workers. This means allowing them to make decisions on things that they can control. This not only takes the burden off the supervisor, but it also motivates these internal suppliers to do better work.

Continuous Improvement

The third principle of TQM is continuous improvement. You can never be satisfied with the method used, because there always can be improvements. The competition is always improving, so it is necessary to strive to keep ahead of the game.

Work Smarter, Not Harder: Some companies have tried to improve by making employees work harder. This may be counterproductive, especially if the process itself is flawed. For example, trying to increase worker output on a defective machine may result in more defective parts. Examining the source of problems and delays and then solving those problems is what works best. Often, the process has bottlenecks that are the real cause of the problem. Those are what should be removed.

Worker Suggestions: Workers are often a source of continuous improvements. They can provide suggestions on how to improve a process and eliminate waste or unnecessary work.

Quality Methods: There are also many quality methods, such as just-in-time production, variability reduction, and poka-yoke, that can improve processes and reduce waste.

10.2.3: Quality Inspections and Standards

Companies ensure the quality of products and services by adhering to ISO standards and performing quality audits to ensure compliance.

Learning Objective

Recognize the ISO’s role in ensuring quality standards

Key Points

• The Quality Management System (QMS) standards were created by the International Organization for Standardization (ISO) in 1987, and are reviewed and updated every few years. These standards are used to certify the processes and systems of an organization, but not the product or service itself.
• In 1994 three major standards were released as part of the ISO 9000:1994 series. Major revisions were made in 2008.
• A quality audit is the systematic examination of a quality system, and is carried out by internal or external auditors. It is a key element in ISO 9001 standards.
• Since 2008, the focus of quality audits has shifted from simply procedural adherence to measuring the effectiveness of actual QMS’s.

Key Terms

ISO 9000

a set of standards related to quality management systems and designed to help organizations ensure that they meet the needs of customers and other stakeholders while meeting statutory and regulatory requirements related to the product

Quality Management System (QMS)

The organizational structure, procedures, processes, and resources needed to implement quality management.

Quality Audit

The process of systematic examination of a quality system carried out by an internal or external quality auditor or audit team. It is an important part of an organization’s quality management system and is a key element in the ISO quality system standard, ISO 9001.

International Organization for Standardization (ISO)

An international standard-setting body composed of representatives from various national standards organizations. Founded on February 23, 1947, the organization promulgates worldwide proprietary, industrial, and commercial standards.

ISO 14000

a set of standards related to environmental management designed to help organizations reduce the negative environmental effect of their operations, meet legal requirements, and continually improve

Example

• Quality audits and adherence to ISO standards are not just for private corporations; the US Food and Drug Administration requires that medical devices undergo quality auditing, and several countries require quality audits of their educational systems.

Quality Standards

The International Organization for Standardization (ISO) created the Quality Management System (QMS) standards in 1987. They were the ISO 9000:1987 series of standards, comprising ISO 9001:1987, ISO 9002:1987, and ISO 9003:1987; which were applicable in different types of industries, based on the type of activity or process (designing, production, or service delivery).

The standards are reviewed every few years by the ISO. The version in 1994 was called the ISO 9000:1994 series; consisting of the ISO 9001:1994, 9002:1994 and 9003:1994 versions.

A major revision occurred in 2008, and the series was called ISO 9000:2000 series. The ISO 9002 and 9003 standards were integrated into one single certifiable standard: ISO 9001:2008. After December 2003, organizations holding ISO 9002 or 9003 standards had to complete a transition to the new standard.

The ISO 9004:2009 document gives guidelines for performance improvement over and above the basic standard (ISO 9001:2000). This standard provides a measurement framework for improved quality management, similar to and based upon the measurement framework for process assessment.

The Quality Management System standards created by ISO are meant to certify the processes and the system of an organization, not the product or service itself. ISO 9000 standards do not certify the quality of the product or service.

In 2005 the International Organization for Standardization released a standard, ISO 22000, meant for the food industry. This standard covers the values and principles of ISO 9000 and the HACCP standards. It gives one single integrated standard for the food industry and is expected to become more popular in the coming years in the industry.

ISO has also released standards for other industries. For example, Technical Standard TS 16949 defines requirements in addition to those in ISO 9001:2008 specifically for the automotive industry.

ISO has a number of standards that support quality management. One group describes processes (including ISO/IEC 12207 & ISO/IEC 15288), and another describes process assessment and improvement (ISO 15504).

Quality Audits

A quality audit is the process of systematic examination of a quality system carried out by an internal or external quality auditor or audit team. It is an important part of organization’s quality management system and is a key element in the ISO quality system standard, ISO 9001.

Quality audits are typically performed at predefined time intervals and ensure that the institution has clearly defined internal system monitoring procedures linked to effective action. This can help determine if the organization complies with the defined quality system processes and can involve procedural or results-based assessment criteria.

Quality Check

Quality assurance inspectors regularly perform audits.

With the upgrade of the ISO 9000 series of standards from the 1994 to 2008 series, the focus of the audits has shifted from purely procedural adherence towards measurement of the actual effectiveness of the Quality Management System (QMS) and the results that have been achieved through the implementation of a QMS.

Audits are an essential management tool to be used for verifying objective evidence of processes, to assess how successfully processes have been implemented, for judging the effectiveness of achieving any defined target levels, to provide evidence concerning reduction and elimination of problem areas.

For the benefit of the organisation, quality auditing should not only report non-conformance and corrective actions, but also highlight areas of good practice. In this way, other departments may share information and amend their working practices, which contributes to continual improvement.

Quality audits can be an integral part of compliance or regulatory requirements. One example is the US Food and Drug Administration, which requires quality auditing to be performed as part of its Quality System Regulation (QSR) for medical devices (Title 21 of the US Code of Federal Regulations part 820).

Several countries have adopted quality audits in their higher education system (including New Zealand, Australia, Sweden, Finland, Norway, and the USA). Initiated in the UK, the process is focused primarily on procedural issues rather than on the results or the efficiency of a quality system implementation.

Audits can also be used for safety purposes. Evans and Parker (2008) describe auditing as one of the most powerful safety monitoring techniques and “an effective way to avoid complacency and highlight slowly deteriorating conditions,” especially when the auditing focuses not just on compliance but effectiveness.

The processes and tasks that a quality audit involves can be managed using a wide variety of software and self-assessment tools. Some of these relate specifically to quality in terms of fitness for purpose and conformance to standards, while others relate to quality costs or (more accurately) to the cost of poor quality. In analyzing quality costs, a cost of quality audit can be applied across any organization rather than just to conventional production or assembly processes.

10.2.4: Reducing Waste and Environmental Impacts

Reducing waste by more efficient manufacturing is a key goal of management, with supply chain sustainability seen as a key component.

Learning Objective

Explain the benefits of reducing waste

Key Points

• Waste minimization is often achieved through more efficient manufacturing processes and the usage of better materials, but often requires some initial investment.
• Governments often provide incentives to companies for waste minimization, including subsidies and reduced taxes for companies that take steps to reduce waste.
• A more sustainable supply chain is increasingly seen as leading to a more profitable supply chain, and, thus, managers are increasingly looking for ways to make their supply chains more sustainable.
• Collaboration is seen as a way of achieving the goal of supply chain sustainability.
• Many companies avoid collaboration due to a fear of a loss of commercial control.

Key Terms

Supply Chain Sustainability

An essential component to delivering long-term profitability. It has replaced monetary cost, value, and speed as the dominant topic of discussion among purchasing and supply professionals.

Collaboration

Working together to achieve a common goal.

Example

• Wal-Mart asked suppliers to be more efficient in their deliveries through it’s Supplier Energy Efficiency Project (SEEP). As a result, suppliers reduced GHG emissions by 3,300 metric tons and saved $200,000 in energy costs.

Reducing Waste: The Incentives

In industrial production, using more efficient manufacturing processes and better materials will generally reduce the production of waste. The application of waste minimization techniques has led to the development of innovative and commercially successful replacement products. Waste minimization has proven benefits to industry and the wider environment.

Waste minimization often requires investment, which is, at least in theory, usually compensated by the savings. However, waste reduction in one part of the production process may create waste production in another part.

There are government incentives for waste minimization, which focus on the environmental benefits of adopting waste minimization strategies.

In the United Kingdom, several pilot schemes, such as The Catalyst Project and the Dee Waste Minimisation Project, have shown the efficacy of such policies. Fourteen companies in Merseyside took part in the Catalyst Project; the project generated overall savings of £9 million and landfill waste was reduced by 12,000 tonnes per year. ).

Colorful recycling containers

By producing using materials that are recyclable, landfill waste can be minimized.

Supply Chain Sustainability

Supply chain sustainability is a business issue affecting an organization’s supply chain or logistics network in terms of environmental, risk, and waste costs.

Sustainability in the supply chain is increasingly seen among high-level executives as essential to delivering long-term profitability and has replaced monetary cost, value, and speed as the dominant topic of discussion among purchasing and supply professionals.

One of the key requirements of successful sustainable supply chains is collaboration. The practice of collaboration, such as sharing distribution to reduce waste by ensuring that half-empty vehicles do not get sent out and that deliveries to the same address are on the same truck, is not widespread because many companies fear a loss of commercial control by working with others.

Investment in alternative modes of transportation, such as use of canals and airships, can play an important role in helping companies reduce the cost and environmental impact of their deliveries.

Sustainability has been found to be a major component of supplier relationship management as an efficient way to cut costs among retailer giants such as Wal-Mart. In fact, under Wal-Mart’s Supplier Energy Efficiency Project (SEEP), which is aimed at eliminating emissions from the company’s supply chain, suppliers reduced GHG emissions by 3,300 metric tons and saved $200,000 in energy costs.

Realizing the efficiency that effective supplier relationship management creates, Wal-Mart has asked suppliers to be more efficient in managing their environmental footprint.

Looking to the supply chain to maximize efficiency and cut costs is a key cost-cutting measure; using the same suppliers in a tight-knit relationship saves time and energy. As industry leaders continue to add in cost-cutting measures, we are likely to see this trend continue in supply chain sustainability for sustained improvement in relationship building and cost reduction.

10.3: Productivity

10.3.1: Impacts of Productivity on Output

Productivity, or the efficiency of production, is important because it can drive increases in output and improvements in living standards.

Learning Objective

Develop a model to measure productivity

Key Points

• Productivity is generally measured as the ratio of the total output to total input.
• In an economy, higher productivity leads to higher real income, the ability to enjoy more leisure time, and better social services, such as health and education–all leading to higher living standards.
• Surplus value refers to the difference between returns and costs. The higher is surplus value; the more productive is the process.
• Small differences in productivity between countries can compound, leading to large differences in prosperity in the long run.

Key Terms

Surplus value

The part of the new value made by production that is taken by enterprises as generic gross profit.

productivity

The state of being productive, fertile, or efficient; the rate at which goods or services are produced by a standard population of workers.

Example

• From 1964-65 to 1999-2000, labor productivity in Australia’s market sector grew at a compound annual rate of 2.4%. The contribution of growing capital intensity of IT to growth in labor productivity has been generally rising over time. Indeed, during the latter part of the 1990s, it accounted for the bulk of the contribution of rising capital intensity and has clearly played a major role in the growth of Australia’s labor productivity. Thus, the growth in labor productivity, and the role of IT in this, has clearly been a factor in Australia’s continued competitiveness in the global economy.

Defining Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of production output to what is required to produce it (inputs). The measure of productivity is defined as a total output per one unit of a total input.

Productivity

Productivity is a measure of the efficiency of production.

In order to obtain a measurable form of productivity, operationalization of the concept is necessary. In explaining and operationalizing, a set of production models are used. A production model is a numerical expression of the production process that is based on production data (i.e., measured data in the form of prices and quantities of inputs and outputs0.

Production Income Model

There are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalize the rate of success in production. This criterion is the ability to produce surplus value.

As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it; in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed.

Impact on Output

When there is productivity growth, even the existing commitment of resources generates more output and income. Income generated per unit of input increases. Additional resources are also attracted into production and can be profitably employed.

At the national level, productivity growth raises living standards because more real income improves people’s ability to purchase goods and services (whether they are necessities or luxuries), enjoy leisure, improve housing and education and contribute to social and environmental programs.

Over long periods of time, small differences in rates of productivity growth compound, such as interest in a bank account, and can make an enormous difference to a society’s prosperity. Nothing contributes more to the reduction of poverty, increases in leisure, and to the country’s ability to finance education, public health, environment, and the arts.

10.3.2: Productivity Gains from Software

New ways of developing and using software have led to higher efficiency and productivity through greater interaction between users.

Learning Objective

Explain how collaborative software increases productivity

Key Points

• Collaborative software, or groupware, puts computers in the center of communications between groups of workers, managers, and technicians. This way of working has produced major gains in productivity since it was first introduced.
• Examples of collaborative software include document sharing, shared calendars, instant messaging, and web conferencing.
• In agile software development, solutions arise through collaboration between self-organizing, cross-functional teams. It involves adaptive planning and flexbile responses: tasks are broken into small increments with minimal longer-term planning, and responses evolve to problems as they arise.
• The values espoused in the Agile Manifesto focus on people and functionality, rather than rigidity, documentation, and planning. It is thought that better, more useful software can be developed with these values.

Key Terms

Agile software development

A group of software development methods based on iterative and incremental development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams. The basic idea behind the agile method is to develop a system through repeated cycles (iterative) and in smaller portions at a time (incremental), allowing software developers to take advantage of what was learned during development of earlier parts or versions of the system.

Collaborative software

Computer software designed to help people involved in a common task achieve goals.

Example

• Google Docs are a particularly popular and easy to use set of collaborative softwares. Users can link their calendars, and work on documents, spreadsheets, or presentations simultaneously and in real time. The simplicity and availability of Google Docs make them particularly popular.

Collaborative Software

Collaborative software was originally designated as groupware and this term can be traced as far back as the late 1980s, when Richman and Slovak said, “Like an electronic sinew that binds teams together, the new groupware aims to place the computer squarely in the middle of communications among managers, technicians, and anyone else who interacts in groups, revolutionizing the way they work. “

Collaborative software has produced major gains in productivity. The definition of an office has dramatically changed as an individual is able to work efficiently as a member of a group wherever there is a computer (or an iPad, or iPhone, or Blackberry) .

Software

Collaborative software has produced major gains in productivity.

Examples of the major gains include:

• Document sharing (including group editing)
• Group calendars
• Instant messaging
• Web conferencing

Agile Software Development

Agile software development is a group of software development methods based on iterative and incremental development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams.

It promotes adaptive planning, evolutionary development and delivery, a time-boxed iterative approach, and encourages rapid and flexible response to change. It is a conceptual framework that promotes foreseen interactions throughout the development cycle.

Agile methods break tasks into small increments with minimal planning and do not directly involve long-term planning.

Iterations are short time frames (timeboxes) that typically last from one to four weeks. Each iteration involves a team working through a full software development cycle when a working product is demonstrated to stakeholders. The development cycle includes:

• Planning
• Requirements analysis
• Design
• Coding
• Unit testing
• Acceptance testing

This approach minimizes overall risk and allows the project to adapt to changes quickly. Stakeholders produce documentation as required.

An iteration might not add enough functionality to warrant a market release, but the goal is to have an available release (with minimal bugs) at the end of each iteration. Multiple iterations might be required to release a product or new features.

According to the Agile Manifesto:

Through this work we have come to value: individuals and interactions over

processes

and tools; working software over comprehensive documentation; customer collaboration over contract negotiation; responding to change over following a plan. That is, while there is value in the items on the

right

, we value the items on the left more.

10.3.3: Productivity Gains from Hardware

Productivity improving technologies lower traditional factors of production of land, labor capital, materials, and energy.

Learning Objective

Outline the progression of productivity improving technologies in the 20th century

Key Points

• Productivity gains were not just the result of inventions, but also of continuous improvements to those inventions which greatly increased output in relation to both capital and labor compared to the original inventions.
• The technology of building mills and mechanical clocks was important to the development of the machines of the Industrial Revolution.
• Machine tools–which cut, grind, and shape metal parts–were another important mechanical innovation of the Industrial Revolution.
• The evolution of hardware has allowed computing to become widespread due to its low cost and effectiveness. Microchips are now used in everything from greeting cards to missile defense systems.

Key Terms

Industrial Revolution

The major technological, socioeconomic, and cultural change in the late 18th and early 19th century, resulting from the replacement of an economy based on manual labor to one dominated by industry and machine manufacture.

cloud

Regarded as an amorphous omnipresent space for processing and storage on the Internet; the focus of cloud computing.

Example

• In the 1990s, one could buy an IBM desktop computer with a 486 processor, 4 megabytes of RAM, 250 megabytes HDD, and a 3.5″ floppy disk for more than you would pay today for a top-of-the-range ultra lightweight laptop with an Intel Core i7 processor, 8GB of RAM, 1TB HDD, and a Blu-Ray player. This progression in hardware technology, coupled with huge drops in cost, has allowed almost anyone to have access to these technologies. Even in the developing world, ultra low-cost laptops have been designed to allow children in poor communities to learn about and use modern technologies.

Productivity Improving Technologies

Productivity improving technologies are technologies that lower the traditional factors of production of land, labor capital, materials, and energy that go into production of economic output. Increases in productivity are responsible for increases in per capita living standards. Since the beginning of the Industrial Revolution, some major contributors to productivity have been:

1. The spinning jenny and spinning mule greatly increased the productivity of thread manufacturing compared to the spinning wheel.
2. Replacing human and animal power with water power, wind power, steam, electricity, and internal combustion greatly increased the use of energy.
3. Energy efficiency in the conversion of energy to useful work.
4. Infrastructures: canals, railroads, highways, and pipelines.
5. Mechanization of both production machinery and agricultural machines.
6. Work practices and processes: the American system of manufacturing, Taylorism or scientific management, mass production, assembly line, modern business enterprise.
7. Materials handling: bulk materials, palletization, and containerization.
8. Scientific agriculture: fertilizers and the green revolution, livestock and poultry management.
9. New materials, new processes for production and dematerialization.
10. Communications: telegraph, telephone, radio, satellites, fiber optic network, and the Internet.
11. Home economics: public water supply, household gas, appliances.
12. Automation and process control.
13. Computers and software, data processing.

Productivity gains were not just the result of inventions, but also of continuous improvements to those inventions which greatly increased output in relation to both capital and labor compared to the original inventions. Productivity also arises from developing economies of scale, despite that not actually being a technology in its own right.

Industrial Machinery

The most important mechanical devices before the Industrial Revolution were water and windmills. Just before the Industrial Revolution, water power was applied to bellows for iron smelting. Wind and water power were also used in sawmills. The technology of building mills and mechanical clocks was important to the development of the machines of the Industrial Revolution.

The spinning wheel was a medieval invention that increased thread making productivity by a factor greater than ten. Later in the Industrial Revolution came the flying shuttle, a simple device that doubled the productivity of weaving. Spinning thread had been a limiting factor in cloth making, requiring 10 spinners using the spinning wheel to supply one weaver. With the spinning jenny, a spinner could spin eight threads at once. The spinning mule allowed a large number of threads to be spun by a single machine using water power. A change in consumer preference for cotton at the time of increased cloth production resulted in the invention of the cotton gin. Steam power eventually was used as a supplement to water during the Industrial Revolution, and both were used until electrification.

Machine Tools

Machine tools, which cut, grind, and shape metal parts, were another important mechanical innovation of the Industrial Revolution. Before machine tools, it was prohibitively expensive to make precision parts, an essential requirement for many machines and interchangeable parts. Perhaps the best early example of a productivity increase by machine tools and special purpose machines is the Portsmouth Block Mills. With these machines, 10 men could produce as many blocks as 110 skilled craftsmen.

Historically important machine tools are the screw-cutting lathe, milling machine, and metal planer (metalworking), which all came into use between 1800 and 1840. However, around 1900, it was the combination of small electric motors, specialty steels, and new cutting and grinding materials that allowed machine tools to mass produce steel parts.

Productivity Gains From Computer Hardware

Computer hardware is the collection of physical elements that comprise a computer system. Computer hardware refers to the physical parts or components of computer (objects you can touch), such as a:

• Monitor;
• Keyboard;
• Printer;
• Chip;
• Hard disk; and
• Mouse.

The history of computing hardware is the record of the ongoing effort to make hardware faster, cheaper, and capable of storing more data.

The Rapid Increase in Productivity

Early electric data processing was done by running punched cards through tabulating machines, the holes in the cards allowing electrical contact to incremental electronic counters. Tabulating machines were in a category called “unit record equipment,” through which the flow of punched cards was arranged in a program-like sequence to allow sophisticated data processing. They were widely used before the introduction of computers.

The first digital computers were more productive than tabulating machines, but not by a great amount. Early computers used thousands of vacuum tubes (thermionic valves), which used a lot of electricity and constantly needed replacing. By the 1950s, the vacuum tubes were replaced by transistors which were much more reliable and used relatively little electricity. By the 1960s, thousands of transistors and other electronic components were being manufactured on silicon semiconductor wafers as integrated circuits, which are universally used in today’s computers.

In 1973, IBM introduced point of sale (POS) terminals in which electronic cash registers were networked to the store’s mainframe computer. By the 1980s, bar code readers were added. These technologies automated inventory management. The Bureau of Labor Statistics estimated that bar code scanners at checkout increased ringing speed by 30% and reduced the labor requirements of cashiers and baggers by 10-15%.

Computers did not revolutionize manufacturing because automation, in the form of control systems, had already been in existence for decades. Although they did allow more sophisticated control, which led to improved product quality and process optimization. Today’s servers and mainframes are capable of processing enormous amounts of data. Moreover, this type of processing power has become much easier to obtain through cloud computing services .

Intel CPU

Hardware advancements, such as the CPU, greatly increased productivity for many areas of society.

Productivity Technology

The introduction of the spinning mule into cotton production processes helped to drastically increase industry consumption of cotton. This example is the only one in existence made by the inventor Samuel Crompton. It can be found in the collection of Bolton Museum and Archive Service.

10.4: Controlling the Supply Chain

10.4.1: Purchasing

Purchasing is the formal process of buying goods and services.

Learning Objective

Explain the purchasing process

Key Points

• Purchasing directors and procurement directors guide and define the organization’s acquisition procedures and standards.
• Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process.
• The purchasing process usually starts with a demand for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department.
• Purchase orders can be of various types: standard, one-time buy, planned (agreement with a specific item at an approximate date), and blanket (an agreement with non-specific date, quantity, and amount).
• Purchase orders are normally accompanied by terms and conditions, which form the contractual agreement of the transaction.

Key Term

Purchasing

Purchasing refers to a business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise.

Example

• Successful supply chain management requires a shift from the management of individual functions to the integration of activities, such as purchasing, into key supply chain processes. For example, a purchasing department will place orders as requirements become known.

Purchasing is the formal process of buying goods and services. Purchasing managers/directors, and procurement managers/directors, guide the organization’s acquisition procedures and standards. The purchasing process can vary from one organization to another but usually involves certain key elements.

Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization, each of which completes a different part of the acquisition process. The three departments do not report to the same senior manager, which prevents unethical practices and lends credibility to the process. These departments may be designated as any of the following: purchasing, receiving, accounts payable or engineering, purchasing and accounts payable, or plant management. Combinations vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.

The purchasing process typically starts with a demand or specific requirements for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department. A Request for Proposal (RFP) or Request for Quotation (RFQ) is then produced. Suppliers respond to the RFQ with quotes, and a review is undertaken in order to determine the best offer (a judgment based on price, availability, and quality) and issue the purchase order.

Purchase orders (POs) can be of various types:

• Standard: a one time buy
• Planned: an agreement on a specific item at an approximate date
• Blanket: an agreement on specific terms and conditions (date and quantity and amount are not specified)

POs are normally accompanied by terms and conditions, which represent the contractual agreement of the transaction. The supplier delivers the product and/or service and the customer records the delivery (in some cases, the delivery is accompanied by a goods inspection process). The supplier then issues an invoice that is cross-checked with the purchase order and the record of the product and/or service received. Finally, payment is made.

Successful supply chain management requires an effective shift from the management of individual functions to the integration of activities, such as purchasing, into key supply chain processes. For instance, a purchasing department will place orders as requirements become known.

Acquisition Process

Model of the acquisition process for major systems in industry and defense: The process is defined by a series of phases, during which technology is defined and matured into viable concepts, which are subsequently developed and prepared for production.

10.4.2: Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage of stocked goods to reduce costs and improve sales.

Learning Objective

Recognize the applications and benefits of inventory management

Key Points

• Inventory refers to a list compiled for some formal purpose, such as the details of an estate or the contents of a rented house.
• Inventory management is required at different locations within a facility or within many locations of a supply network in order to plan for the production and stock of materials.
• Inventory management addresses issues including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; and future inventory price forecasting.
• Supply chain activities can be grouped into strategic, tactical, and operational categories.
• Supply chain activities can be grouped into strategic, tactical, and operational levels.

Key Terms

tactical planning

an organization’s process of determining how to optimize current resources and operations

supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

In the United Kingdom, inventory typically refers to a list compiled for some formal purpose, such as one that itemizes an estate going to probate or the contents of a furnished house to be rented. In the U.S. and Canada, inventory has become the equivalent of the British term stock; that is, it refers to material that is available from and stocked by a business. In the context of accounting, inventory or stock is considered an asset.

Inventory Management

Inventory management tracks the shape and percentage of stocked goods. At different locations within a facility, or within many locations of a supply network, inventory management must precede the regular and planned course of production and stocking of materials .

Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage of stocked goods.

Inventory management addresses a number of concerns, including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; future inventory price forecasting; physical inventory; available physical space for inventory; quality management; replenishment; returns and defective goods; and demand forecasting. By effectively managing these issues, a business can achieve optimal inventory levels. However, the management process is on-going as a business and its needs shift and respond to the wider environment.

Inventory management often involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It requires systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status, and handle all functions related to the tracking and management of material. These include the monitoring of material moved into and out of stockroom locations, as well as the reconciling of inventory balances. Processes may also include ABC analysis, lot tracking, and cycle counting support.

Management of inventories, aimed primarily at determining and controlling stock levels within the physical distribution system, serves to balance the need for product availability against the need for minimizing stock holding and handling costs. Reasons for keeping an inventory include:

• Time: The time lag in the supply chain from supplier to user requires the availability of a certain amount of inventory for use during this lead time. In practice, inventory is maintained for consumption during variations in lead time, and lead time itself can be addressed by ordering a specified number of days in advance.
• Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and movement of goods.
• Economies of scale: To deliver one unit of product at a time, and in response to the specific need and location of a given user, would be costly and logistically difficult. In contrast, bulk buying, movement, and storage translate into economies of scale and inventory.

Inventory and the Supply Chain

Supply chain activities can be grouped into strategic, tactical, and operational levels. Inventory considerations present at each level include:

Strategic: Network optimization, including the number, location, and size of warehousing, distribution centers, and facilities.

Tactical: Inventory decisions, including quantity, location, and quality of inventory.

Operational: Sourcing planning, including current inventory and forecast demand, done in collaboration with all suppliers; inbound operations, including transportation from suppliers and receiving inventory; outbound operations, including all fulfillment activities, warehousing, and transportation to customers; management of non-moving, short-dated inventory and avoidance of short-dated products.

10.4.3: Scheduling

The purpose of scheduling is to minimize production time and costs.

Learning Objective

Explain the benefits of using modern scheduling tools

Key Points

• Production scheduling aims to maximize the efficiency of operations and reduce costs.
• Benefits of production scheduling include process change-over reduction; inventory reduction; leveling; reduced scheduling effort; increased production efficiency; labor load leveling; accurate delivery date quotes; and real time information.
• Minute-by-minute production scheduling for each manufacturing facility in the supply chain occurs at the operational level of supply chain activities.
• Benefits of production scheduling include process change-over reduction, inventory reduction, leveling, reduced scheduling effort, increased production efficiency, labor load leveling, accurate delivery date quotes and real time information.
• Production scheduling for each manufacturing facility in the supply chain (minute by minute) takes place at the operational level of supply chain activities.

Key Terms

Backward scheduling

Backward scheduling is planning the tasks from the due date or required-by date to determine the start date and/or any changes in capacity required.

Forward scheduling

Forward scheduling is planning the tasks from the date resources become available to determine the shipping date or the due date.

maturity date

the time of the final payment of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid

Example

• In order to reduce costs, an airline may want to minimize the number of airport gates required for its aircraft. Scheduling software allows planners to determine how this might be done, enabling them to analyze time tables, aircraft usage, or the flow of passengers.

Scheduling is an important tool in the manufacturing and engineering industries, where it can significantly impact the productivity of a particular process. In manufacturing, the purpose of scheduling is to minimize production time and cost by telling a production facility when to make a product and with which staff and equipment.

Production scheduling aims to maximize the efficiency of an operation and reduce its costs . Modern scheduling tools greatly outperform older, manual scheduling methods. Today’s tools provide the production scheduler with powerful graphical interfaces, which can be used to visually optimize real time work loads in various stages of production. Further, pattern recognition software reveals scheduling opportunities that might not be apparent without this view into the data.

Scheduling Visualization

This Gantt chart aids in scheduling by visualizing and relating phases of production.

For example, in order to reduce costs, an airline may want to minimize the number of airport gates required for its aircraft. Scheduling software allows planners to see how this might be done, enabling them to analyze time tables, aircraft usage, or the flow of passengers.

Companies use backward and forward scheduling to allocate plant and machinery resources, determine human resources and production processes, and purchase materials. Forward scheduling involves planning tasks from the date that resources become available in order to determine the shipping date or the due date. Backward scheduling involves planning tasks from the due date or required-by date in order to determine the start date and/or necessary changes in capacity.

Production scheduling has a number of benefits:

• Process change-over reduction
• Inventory reduction and leveling
• Reduced scheduling effort
• Increased production efficiency
• Labor load leveling
• Accurate delivery date quotes
• Real time information

Finally, minute-by-minute production scheduling occurs for each manufacturing facility in the supply chain at the operational level of supply chain activities.

10.4.4: Routing

Routing is the process of selecting paths in a network along which to send network traffic.

Learning Objective

Explain the process of routing

Key Points

• Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the Internet), and transportation networks.
• A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity.
• Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it.
• At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting.

Key Terms

transport network

A transport network, or transportation network in American English, is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of somecommodity.

routing

a method of finding paths from origins to destinations in a network such as the Internet, along which information can be passed

Routing is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the internet), and transportation networks. This chapter focuses on the role of routing in transportation networks.

Transport Networks

A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity. Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it. A transport network may combine different modes of transport.

Tactical Level

At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting of goods. A goal of a company when transporting goods is to ensure efficiency. Wear and tear of vehicles and the cost of gas can make some routes more expensive than others. In order to reduce costs, companies often look for ways to streamline routes and supply chain activities. GPS, or global positioning system, is a technological advancement that has helped companies determine which routes are the most expensive to maintain. These routes can be analyzed to determine if they can be eliminated, divided, and/or merged with other routes, or if finding a new route can help make the route more efficient. Sometimes transport is subcontracted to specialists or logistics partners.

Anycast Routing

A visual display of Anycast routing.

10.4.5: Outsourcing

Outsourcing is the contracting of an existing business process to an external, independent organization.

Learning Objective

Analyze the effects of outsourcing on the supply chain

Key Points

• The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product.
• Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house.
• Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement.
• Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

Key Term

supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Example

• In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing.

Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

Outsourcing

Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

The Rise of Outsourcing

In the 1990s, industries began to focus on “core competencies,” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships.

This transition also re-focused the fundamental perspectives of each respective organization. OEMs became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above instead of from within. Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work -in-process visibility and vendor-managed inventory (VMI).

Outsourcing and the Supply Chain

The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands.

Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage, and outsource everything else. This movement has been particularly evident in logistics, where the provision of transport, warehousing, and inventory control is increasingly subcontracted to specialists or logistics partners. Also, managing and controlling this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

10.4.6: Logistics

Logistics plans, implements, and controls the forward and reverse flow and storage of goods between the point of origin and consumption.

Learning Objective

Differentiate between supply chain and logistics

Key Points

• Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing.
• Logistics applies to activities within one company involving distribution of the product, whereas the term “supply chain” also encompasses manufacturing and procurement and, therefore, has a much broader focus.
• Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts called “supply chain logisticians”.
• In business, logistics may have either internal focus (inbound logistics) or external focus (outbound logistics), covering the flow and storage of materials from point of origin to point of consumption (see supply chain management).
• There are two fundamentally different forms of logistics. One optimizes a steady flow of material through a network of transport links and storage nodes, and the other coordinates a sequence of resources to carry out some project.
• There are two fundamentally different forms of logistics: one optimizes a steady flow of material through a network of transport links and storage nodes; the other coordinates a sequence of resources to carry out some project.

Key Terms

inventory

The stock of an item on hand at a particular location or business.

supply chain

A system of organizations, people, technology, activities, information. and resources involved in moving a product or service from supplier to customer.

logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from their point of origin to point of consumption for the purpose of satisfying customer requirements.

Logistics

The term Logistics Management or Supply Chain Management is the part of Supply Chain Management that plans, implements, and controls the efficient, effective, forward, and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer’s requirements.

Distribution chain

Example of how companies may be supplied by the same distributor.

Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing. This can involve anything from consumer goods, such as food to IT materials, and aerospace and defense equipment.

There is often confusion over the terms “supply chain” and “logistics. ” It is now generally accepted that the logistics applies to activities within one company/organization involving distribution of product, whereas supply chain also encompasses manufacturing and procurement and, therefore, has a much broader focus as it involves multiple enterprises, including suppliers, manufacturers, and retailers, working together to meet a customer’s need for a product or service.

The Evolution of Logistics

Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts or supply chain logisticians. Business logistics can be defined as “having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer,” and is the science of process and incorporates all industry sectors. The goal of logistics work is to manage the fruition of project life cycles, supply chains, and resultant efficiencies.

Starting in the 1990s, several companies chose to outsource the logistics aspect of supply chain management by partnering with a 3PL, third-party logistics provider. Companies also outsource production to contract manufacturers. Technology companies have risen to meet the demand to help manage these complex systems.

Logistic Focus

In business, logistics may have either an internal focus (inbound logistics) or external focus (outbound logistics).

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores.

Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user.

10.4.7: Quality Control

Quality control is a process that evaluates output against a standard and takes corrective action when output doesn’t meet that standard.

Learning Objective

Discuss the role of quality control in business

Key Points

• The purpose of quality control is to make sure that certain processes perform to a company’s set standards.
• Quality control in relation to customers involves the continuous act of making sure products, designed and manufactured, are produced to meet and exceed customer needs.
• Quality should be measured differently for products and services and judged by their own set of dimensions.
• Controls include product inspection, where every product is visually examined, often with a stereo microscope to perceive fine detail before the product is sold into the external market.
• Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers.

Key Terms

quality control

A control, such as inspection or testing, introduced into an industrial or business process to ensure quality.

organizational culture

Organizational culture is the collective behavior of humans who are part of an organization and the meanings that the people attach to their actions.

total quality management

A strategic approach to management aimed at embedding awareness of quality in all organizational processes.

Example

• Controls include product inspection, where every product is examined visually. Inspectors will be provided with lists and descriptions of unacceptable product defects such as cracks or surface blemishes.

Quality can be thought of as the degree to which performance of a product or service meets or exceeds expectations. Quality control is a process that evaluates output against a standard and takes corrective action when output doesn’t meet these predetermined standards. Therefore, quality control in relation to customers would be the continuous act of making sure products, designed and manufactured, are produced to meet and exceed the needs of customers. For contract work, particularly work awarded by government agencies, quality control issues are among the top reasons for not renewing a contract .

quality control

The purpose of quality control is to make sure that certain processes are performing up to a company’s set standards.

This approach places an emphasis on three aspects:

• Elements such as controls, job management, defined and well-managed processes, performance and integrity criteria, and identification of records
• Competence, such as knowledge, skills, experience, and qualifications
• Soft elements, such as personnel integrity, confidence, organizational culture, motivation, team spirit, and quality relationships

Controls include product inspection, where every product is examined visually, often using a stereo microscope for fine detail before the product is sold on the external market. Inspectors will be provided with lists and descriptions of unacceptable product defects such as cracks or surface blemishes.

An emphasis on quality control heightened during World War II. At that time quality control evolved to quality assurance and is now better known as a Strategic Approach, a tool for improving not only products but also processes and services. Quality should be measured differently for products and services, and judged by their own set of dimensions. Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers. Most of the time, managers aim to improve or maintain the quality of an organization as a whole; this is referred to as Total Quality Management (TQM). TQM involves a continual effort for quality improvement by everyone in an organization. The entire supply chain must be involved for an organization to meet and exceed goals of quality control.

10.4.8: Investment in Operations

Investment in information technology has made supply chains faster, cheaper, and more reliable.

Learning Objective

Examine the effect of technological advances on supply chain optimization

Key Points

• Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.
• Supply chain managers try to maximize the profitable operation of their manufacturing and distribution supply chain.
• Supply chain optimization may include refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways.
• Optimization solutions are typically part of, or linked to, the company’s replenishment systems distribution requirements planning, so that orders can be automatically generated to maintain the model stock profile. The algorithms used are similar to those used in making financial investment decisions; the analogy is quite precise, as inventory can be considered to be an investment in prospective return on sales.
• Supply chain optimization may include refinements at various stages of the product lifecycle, so that new, ongoing and obsolete items are optimized in different ways: and adaptations for different classes of products, for example seasonal merchandise.

Key Term

supply chains

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Example

• Because the movement of product (called the stock transfer) needs to be in economic shipping units (i.e., complete unit loads or full truckloads), a series of decisions must be made. Many existing distribution planning systems round quantities up to the nearest full shipping unit. The creation of truckloads, for example, as economic shipping units requires optimization systems that ensure that axle constraints and space constraints are met, and that loading can be achieved in a damage-free way. These goals are generally achieved by adding time-phased requirements until loads meet a specified minimum weight or cube.

Supply chains have become faster, cheaper, and more reliable through investment in information technology, cost-analysis, and process-analysis.

Supply chain optimization applies processes and tools that ensure optimal operation of a manufacturing and distribution supply chain. These include the optimal placement of inventory within the supply chain and the minimizing of operating costs associated with manufacturing, transportation, and distribution. Optimization may also incorporate computer-based mathematical modelling techniques .

Supply Chain

Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.

Ongoing investment in a company’s operations is necessary in order for supply chain optimization to be achieved. Supply chain managers may employ optimization such as maximizing gross margin return on inventory invested (GMROII); balancing the cost of inventory at all points in the supply chain with availability to the customer; minimizing total operating expenses (e.g., transportation, inventory, and manufacturing); and maximizing gross profit of products distributed through the supply chain.

Supply chain optimization addresses the general supply chain problem of delivering products to customers at low cost and high profit. This involves balancing the costs of inventory, transportation, distribution, and manufacturing, and supply chain optimization has applications in all industries that manufacture and/or distribute goods (retail, industrial, and/or consumer packaged goods [CPG]).

The classic supply chain approach has been to forecast future inventory demand using statistical trending and “best fit” techniques, which are based on historic demand and predicted future events. The advantage of this approach is that it can be applied to data aggregated at a fairly high level (e.g., category of merchandise; weekly, by customer category), thus requiring modest database sizes and small amounts of manipulation. Unpredictability in demand is subsequently managed by setting safety stock levels; for example, a distributor might hold two weeks of supply for a steadily in-demand article but twice that supply for an article whose demand is more erratic.

Using this forecast demand, a supply chain manufacturing and distribution plan is created to manufacture and distribute products to meet the demand at low cost and/or high profit. This plan typically addresses several questions:

• How much of each product should be manufactured each day?
• How much of each product should be made at each manufacturing plant?
• Which manufacturing plants should re-stock which warehouses with which products?
• What transportation modes should be used for warehouse replenishment and customer deliveries?

The technical ability to record and quickly manipulate large databases has allowed for the emergence of a new breed of supply chain optimization solutions, which are capable of forecasting at a granular level (for example, per article per customer per day). Some vendors are applying “best fit” models to this data, to which safety stock rules are applied, while other vendors have started to apply stochastic techniques to the optimization problem.

Supply chain optimization may include additional refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways. Finally, while most software vendors are offering supply chain optimization as a packaged solution and integrated in ERP software, some vendors are running the software on behalf of clients as application service providers.

10.5: Planning for Operations

10.5.1: New Product Development

Organizations put a lot of time and money into new products and thus deploy various methods in an attempt to mitigate the risks.

Learning Objective

Distinguish between minimum viable product, continuous deployment, split testing, vanity metrics, laboratory tests, expert evaluations and customer evaluations

Key Points

• Organizations use formal systems to evaluate new products.
• Product testing and sales forecasts are used to help diminish the risk of introducing a new product.
• It’s possible to eliminate some of the risks associated with introducing a new product by launching the smallest amount of the product possible to test demand.
• Several methods can be used to evaluate new products before they are launched.

Key Terms

product differentiation

perceived differences between the product of one firm and that of its rivals so that some customers value it more

product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user.

minimum viable product

The minimum viable product is a product stripped down to it’s most basic, necessary features in order to get that product into the consumer’s hands in the quickest, most affordable way.

product placement

a form of advertising where a brand, good, or service is placed in the media, for money

Example

• The birth of Zappos provides an example of how an organization can release the smallest amount of the product possible to collect the maximum amount of validated learning about customers with the least amount of effort (a minimum valuable product). Zappos founder Nick Swinmurn wanted to test the hypothesis that customers were ready and willing to buy shoes online. Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price, and sold them directly to customers if they purchased the shoe through his website. Swinmurn deduced that customer demand was present, and Zappos would eventually grow into a billion dollar business based on the model of selling shoes online.

Introduction

Organizations invest a lot of money to create new products that perform effectively. Nonetheless, firms often struggle to convince people to incorporate these new products into their routines (Arts 2008). For example, it took 18 years for microwave ovens to gain acceptance in Greece (Tellis, Stremersch, and Yin 2003). The ultimate success of new products depends on consumers accepting them (Arts 2008). .

New product

Organizations invest a lot of money to create new products that perform effectively.

Product Evaluation

The term “product” refers to both goods and services. A product is anything that can be offered to a market to satisfy a want or need. When an organization adds a new product, there is both potential benefit and risk. As a result, organizations implement formal systems for evaluating new products. In particular, there is a concerted effort to forecast projected sales and thus reduce some of the financial risk.

While evaluating new products, there is also the possibility of generating innovative ideas that can later go through the testing process. Idea generation is an essential part of marketing strategy and is critical to the success of a company. When such product ideas move further along, a key step is to create a prototype or working version of the new offering. Again, market testing is crucial at every stage in the development process.

Minimum Viable Product

A minimum viable product (MVP) is the “version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. ” The goal of an MVP is to test fundamental business hypotheses (or leap-of-faith assumptions) and to help entrepreneurs begin the learning process as quickly as possible.

For example, Ries notes that Zappos founder Nick Swinmurn wanted to test the hypothesis that customers were ready and willing to buy shoes online. Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price, and sold them directly to customers if they purchased the shoe through his website. Swinmurn deduced that customer demand was present, and Zappos would eventually grow into a billion-dollar business based on the model of selling shoes online.

Continuous Deployment

Continuous deployment is a process “whereby all code that is written for an application is immediately deployed into production,” resulting in a reduction of cycle times. Ries states that some of the companies he’s worked with deploy new code into production as often as 50 times a day. The phrase was coined by Timothy Fitz, one of Ries’s colleagues and an early engineer at IMVU.

Split Testing

A split test or A/B test is an experiment in which “different versions of a product are offered to customers at the same time. ” The goal of a split test is to observe changes in behavior between the two groups and to measure the impact of each version on an actionable metric. A/B testing can also be performed in serial fashion where a group of users one week may see one version of the product while the next week users see another.

Vanity Metrics

Vanity metrics are measurements which give “the rosiest picture possible” but do not accurately reflect the key drivers of a business. This is in contrast to actionable metrics, the measurement of which can lead to a business decision and subsequent action.

Laboratory Tests

Laboratory tests provide information regarding the performance of new products in extreme settings. For example, a new copy machine can be tested at various work loads, like numbers of copies and speed per minute to test the relationship between workload and paper jam.

Expert Evaluations

Expert evaluators can be used at all phases of the new product development process. For instance, experts can be used to estimate whether or not a new product idea will be accepted in the marketplace before a prototype even exists.

Customer Evaluations

In later stages of development, customers can be recruited to evaluate prototypes. There is an attempt to test new products under conditions that are relatively close to actual use.

10.5.2: Designing the Operation

Designing effective operations is critical, and can have both short-term and long-term impacts on an organization’s longevity.

Learning Objective

Explain the importance of operations management on the success of a business

Key Points

• Operations management is a strategic function within an organization.
• Operations decisions include elements needed to produce goods and services, and make them available to customers.
• Operations management touches upon multiple areas of a business, from engineering and research & development, to human resources and accounting.

Key Terms

operation

The method or practice by which actions are done.

Operations management

An area of management concerned with overseeing, designing, controlling the process of production, and redesigning business operations in the production of goods and/or services.

Designing the Operation

Operations management is a strategic function in organizations that adds value to customers and allows businesses to successfully produce goods and deliver services. Operational decisions determine how well these goods and services meet the needs of the organization’s target market, and consequently, whether the organization will be able to survive over the long-term .

Smooth Landing

Operations management plays a key role in the success in airline companies.

If the organization has made mostly good operational decisions in designing and executing its transformation system to meet the needs of customers, its prospects for long-term survival are greatly enhanced.

Operations management and planning are common in industries such as the airlines, manufacturing companies, service provider organizations, the military, and government. Some examples of management and planning include:

• Scheduling airlines, including both planes and crew
• Deciding the appropriate place to site new facilities such as a warehouse, factory, or fire station
• Managing the flow of water from reservoirs; identifying possible future development paths for parts of the telecommunications industry
• Establishing the information needs and appropriate systems to supply them within the health service
• Identifying and understanding the strategies adopted by companies for their information systems

Operational Decisions

As mentioned, operations decisions have both long-term and short-term impacts on the organization’s ability to produce goods and services, and can provide added value to customers and employees. Operations management touches upon multiple areas of a business, from engineering and research & development, to human resources and accounting. Likewise, the decisions management makes when parceling technological, monetary, and people resources across the organization typically falls under the following areas:

• Inventory decisions
• Capacity decisions
• Quality decisions
• Scheduling decisions
• Process decisions
• Technology decisions
• Location decisions

Most often when a company sets operational goals and objectives, they are considered relatively short term.

10.5.3: Capacity Planning

Capacity planning revolves around answering the question “How much? ” in both long-term and short-term situations.

Learning Objective

Compare and contrast long-term and short-term capacity decisions

Key Points

• Capacity planning takes place on a daily basis in some industries.
• Organizations must closely examine the services and the cost of services offered to their customers when making capacity decisions.
• In a grocery store or supermarket, managers must ensure that sufficient cash registers and employees are on-hand to meet check-out demand and provide good customer service.

Key Term

capacity

The maximum that can be produced on a machine or in a facility or group.

Introduction

When making capacity decisions, managers must answer the simple question, “How much?” Determining the organization’s capacity to produce goods and services involves both long-term and short-term decisions. Long-term capacity decisions involve facilities and major equipment investments .

capacity

The question managers must answer for capacity decisions is simply “How much?”

Long-term decisions

In 2007, Airbus introduced its Super Jumbo Jet that carries up to 850 passengers and costs USD 3 billion. The Super Jumbo Jet provides huge amounts of passenger carrying capacity, but before an airline purchases this jet, it needs to decide if it has enough passengers to generate the revenue to pay for the plane and earn profits for the airline. Buying a large single airplane like the Super Jumbo Jet may not be the right capacity decision for an airline that serves numerous medium-sized cities. On the other hand, an airline that serves passengers traveling between large cities like New York City, USA, and Shanghai, China might find the Super Jumbo Jet to be a perfect choice for meeting consumer demand.

Short-term decisions

Capacity decisions are also required in short-term situations. In a grocery store, the number of customers that need to pay for their groceries at any one point during the day will vary significantly. To provide good customer service, managers must make sure that sufficient cash registers and employees are on-hand to meet check-out demand at any given time.

Similarly, hotels must make sure that they have enough employees to register arriving guests, clean hotel rooms, and provide food and beverages to customers. These decisions must be made carefully to avoid excessive labor costs that result from having an excess of employees available for the number of customers being served.

10.5.4: Facilities Layout

Facility layout decisions are based on criteria aimed at creating an effective and efficient workflow and high standard production.

Learning Objective

Outline the key considerations in facility design

Key Points

• There are three types of workflow layouts that managers can choose from.
• Office and factory facilities are approached differently.
• A facility manager’s industry can also influence the facilities layout design.

Key Term

facilities layout

Facility layout is simply the way a facility is arranged in order to maximize processes that are not only efficient but effective towards the overall organizational goal.

Examples

• A paper mill is a good example of a repetitive process. The manufacturing requirements are well-understood, capital investment in automation is high, and production volume is extremely high to keep unit production costs as low as possible.
• Health care clinics provide a good example of an intermittent process. X-ray equipment and technicians are organized into an “X-ray Department”. Other departments are created for pediatrics, lab, gynecology, pharmacy, physical therapy, and many more. Patients are routed only to the departments that are needed for their particular treatment requirements.

Introduction

Facilities is defined as the workspace and equipment needed to carry out the operations of the organization. This includes offices, factories, computers, and trucks.

The location, design, and layout of an organizations’ facilities are central to maximising the efficiency of the overall operations system.

In this unit, we’re going to focus on facility design and layout.

Facilities Design and Layout

After choosing the facility’s location, the next stage in operations planning is to design the best physical layout for the facility. The avaliable space needs to be assessed with workstations, equipment, storage, and other amenities need to be arranged. The aim is to allow for the most efficient workflow without disruption. A workplace that has carefully arranged its layout will allow for a more effictive and efficient workflow and produce its good or services to a high standard.

There are three types of workflow layouts that managers can choose from:

• Process layout: arranged in departments (e.g., hospitals).
• Product layout: production line (e.g., a car assembly plant).
• Fixed-position layout: building a large item (e.g., jumbo jet).

Facility Layout Considerations

Facility managers should consider several factors when designing the layout of a facility to achieve maximum effectiveness.

• Does the design and layout allow for growth or change? Is there a chance that your company will experience significant growth? Could some other change come about that could influence the layout of your facility? In business, anything is possible. Make sure that same is true of your facilities layout. While making changes is a costly and undertaking them shouldn’t be taken lightly, your layout should be flexible enough to allow a redesign if the situation calls for it.
• Is the process flow smooth? If you are running a factory, for example, the flow should be such that the raw materials enter at one end and the finished product exits at the other. The flow doesn’t have to form a straight line, but there should be no backtracking. Backtracking creates confusion. Employees get confused (“Has that been done yet? “), parts get lost, and coordination is very difficult. You need to have a smooth process to be efficient.
• Are materials being handled efficiently? Here simplicity is best.
• Does the facility layout aid the business in meeting its production needs? Is there enough space and is it used efficiently? Have you allowed enough space for shipping and receiving? Can different areas of the business communicate effectively? Does the layout lend itself to promotional activities? (e.g., showing the facilites to potential customers)
• Does the layout contribute to employee satisfaction and moral? Numerous studies have linked employee moral to productivity. So managers should take this point into consideration when designing the layout of their facilities. How can this be done? Paint the walls light colors, allow for windows and space, include a cafeteria and a gym. Some of the options may cost lots of money, but if it increases productivity in the long run, it is probably worth making the investment.

Are the Facilities for an Office or a Factory?

Office Space

An office will have different layout requirements than a factory.

Office and factory facilities are approached differently.

Factories move materials from point A to point B to produce a final products. The process uses equipment and utilities. Minimizing transportation costs may be one of the criteria of planning the layout of a factory. Another important consideration for factories in the necessity for maintenance of machinery. As such, careful consideration of enabling access to technicians is critical to ensuring minimal workflow disruptions in a scenario of updating, repairing or replacing machinery.

Offices, on the other hand, produces information. The form may be physical, electronic, or oral, but the the final result is still information. Office facility layout is harder to quantify than factory facilities layout, but the goal should be to minimize communication costs and maximize productivity.

Your industry can also influence the facilities layout design. The facility layout for service industries will differ from that of retailers and manufacturers. It all depends on organization’s needs.

10.5.5: Location Choice and Site Planning

An organization’s location choice impacts its efficiency and effectiveness, so it is important for it to properly weigh the various factors.

Learning Objective

Outline the key considerations for deciding the location of facilities

Key Points

• There are many factors that can determine where an organization will locate its facilities. For any given situation, some factors become more important than others in how facility location affects an organization’s efficiency and effectiveness.
• The factors determining where a company chooses to locate its facilites include supply, customer, community, and labor considerations.
• An essential part of choosing a location is doing proper research to verity that the location matches an organization’s strategic requirements.

Key Term

facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Example

• The following shows the importance of researching a location choice to make sure it is in line with strategic requirements. In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs. Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation. In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

Introduction

There are many factors that can determine where an organization will locate its facilities. For any given situation, some factors become more important than others in how facility location affects an organization’s efficiency and effectiveness.

Key Factors

• Proximity to sources of supply: Firms that process bulk raw materials usually locate close to the source of supply to reduce transportation costs. Paper mills locate close to forests, canneries are built close to farming areas, and fish processing plants are located close to the harbors where the fishing vessels dock.
• Proximity to customers: There are several reasons why an organization would locate close to end customers. Service firms need to be close to customers to be convenient, as is the case for grocery stores, gas stations, fast food restaurants, and hospitals. Transportation costs can also require proximity to customers, as in the case of concrete manufacturing. Perishable products often require that they be produced close to the final market, as is the case for bakeries and fresh flowers.
• Community factors: Communities may offer a number of incentives to entice companies, including waiving or reducing taxes, and providing access roads, water and sewer connections, and utilities. Community attitudes can also play a role in an organization’s location decision. Some communities may actively discourage companies that might bring more pollution, noise, and traffic to the area. Some communities may not want a prison to be located in their community. Other communities may welcome such firms because of the jobs, tax revenues, and economic diversity they promise.
• Labor factors: Research shows that the majority of location decisions are largely based on labor factors, since labor is a critical variable for many firms. Labor factors include the prevailing wage rate in a community for similar jobs, the supply of qualified workers, and the average education level of the local population (percentage of high school graduates, etc.). Other labor factors can include the degree of union organizing and the general work ethic of a community, as well as other measures of absenteeism, and worker longevity in a job can play a strong role when a firm makes a location decision.
• Other factors: Many other factors can play a role in the location decision, including quality of life (crime rates, good schools, climate, and recreation options), access to major transportation arteries, construction costs, proximity of the competition, and opportunities for future expansion.

As mentioned earlier, the importance of any location factor can vary greatly, depending on the circumstances of the decision.

Colorado river

Colorado is beautiful, but it might not be the best location for all organizations.

In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs.

Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation.

In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

10.5.6: Sustainability Initiatives

Sustainability initiatives consider every dimension of how a business operates in the social, cultural, and economic environment.

Learning Objective

Explain the principles of corporate sustainability

Key Points

• Transparency deals with the idea that having an engaging and open environment within the company, as well as the community, will improve performance and increase profits.
• Employee development involves the idea that people are the most important renewable resource and, therefore, are the strongest asset to any organization.
• Resource efficiency refers to that fact that companies must adapt to a rapidly changing environment by being prepared to change and implement new creative ideas related to sustainability.
• Essential principles of a sustainability initiative include triple top-line value production, nature-based knowledge and technology, products of service and products of consumption, renewable energy, local economies, and continuous improvement.

Key Terms

sustainability

The capacity to support, maintain, or endure.

stewardship

The act of caring for or improving with time.

geothermal

Pertaining to heat energy extracted from reservoirs in the earth’s interior.

Example

• The following shows the importance of researching a location choice to make sure it is in line with strategic requirements. In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs. Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation. In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

Sustainability, in a general sense, is the capacity to support, maintain, or endure. Since the 1980s, human sustainability has been related to the integration of environmental, economic, and social dimensions towards global stewardship and responsible management of resources .

Sustainability

Sustainability is related to the integration of environmental, economic, and social dimensions towards global stewardship and responsible management of resources.

Corporate sustainability is a business approach that creates long-term consumer and employee value by not only creating a “green” strategy aimed towards the natural environment, but taking into consideration every dimension of how a business operates in the social, cultural, and economic environment. It also involves formulating strategies to build a company that fosters longevity through transparency and proper employee development. Three key principles that should form the foundation of a corporate sustainability initiative are: transparency, employee development, and resource efficiency.

Transparency deals with the idea that having an engaging and open environment within the company, as well as the community, will improve performance and increase profits. An open culture promotes employee involvement in regards to the innovation and creative processes. Reaching out to the community creates a much bigger team and provides evaluation from all angles. Companies are looking inward and realizing changes must be made to fulfill environment needs such as energy efficiency, limiting product waste and toxicity, and designing innovative products.

Employee development involves the idea that people are the most important renewable resource and, therefore, are the strongest asset to any organization. A strong development program could be the underlying factor for a company’s success or failure. Employees are the concrete foundation for the company and must be thoroughly analyzed and evaluated to tap into their true motivations and desires. For a company that wants to reach its greatest potential, employees must work towards improvement rather than perfection. Programs should be implemented that reward star performers, foster the creative learning process, and provide comprehensive training and evaluating.

Resource efficiency refers to that fact that companies must adapt to a rapidly changing environment by being prepared to change and implement new creative ideas related to sustainability. Companies should not throw away old products and materials, but rather be prepared with upgraded technology that can transform the product. New solutions that improve recycling and waste redirecting can ultimately reduce costs and increase profits. For example, Wal-Mart Stores Inc. has redirected more than 64% of the waste generated by stores and Sam’s Club facilities. In 2009 alone, they recycled more than 1.3 million pounds of aluminum, 120 million pounds of plastics, 11.6 million pounds of mixed paper, and 4.6 billion pounds of cardboard. On an annual basis, they expect to save around $20 million and prevent 38 million pounds of waste being sent to landfills.

Essential Principles of a Sustainability Initiative

1. Triple top-line value production: This establishes three simultaneous requirements of sustainable business activities: 1) financial benefits for the company, 2) natural world betterment, and 3) social advantages for employees and members of the local community—with each of these three components recognized as equal in status.
2. Nature-based knowledge and technology: This biomimicry-based principal involves the conscious emulation of natural-world genius in terms of growing our food, harnessing our energy, construction, conducting business, healing ourselves, processing information, and designing our communities.
3. Products of service and products of consumption: Products of service are durable goods routinely leased by the customer that are made of technical materials and are returned to the manufacturer and re-processed into a new generation of products when they are worn out. Products of consumption are shorter lived items made only of biodegradable materials. This principal requires that we manufacture only these two types of products and necessitates the gradual but continual reductions of products of service and their replacement with products of consumption as technological advancements allow.
4. Solar, wind, geothermal, and ocean energy: This principal advocates employing only sustainable energy technology—solar, wind, ocean, and geothermal—that can meet our energy needs indefinitely without negative effects for life on Earth.
5. Local-based organizations and economies: This principle calls for durable, beautiful, and healthy communities with locally-owned and operated businesses and locally-managed non-profit organizations, along with regional corporations and shareholders working together in a dense web of partnerships and collaborations.
6. Continuous improvement process: This principle suggests that operational processes inside successful organizations include provisions for constant advancements and upgrade as the company does its business.

9.1: Defining an Organization

9.1.1: The Role of Management in an Organization

Learning Objective

Categorize the three primary managerial levels in an organization

Key Points

• Management may be described as the the people who design an organization’s structure and determine how different aspects of the organization will interact.
• Management entails six basic functions: planning, organizing, staffing, leading, controlling, and motivating.
• Different levels of management will participate in different components of this design process, with upper management creating the initial organizational architecture and structure.
• Organizational design is largely a function based on systems thinking: identifying the moving parts within an organization that add value and ensuring that these parts function together as an effective and efficient whole.
• Organizational design is less static in modern organizations; therefore, management must actively adapt organizational design to various challenges, opportunities, and technological improvements to maintain competitive output.

Key Terms

organization chart

A graphic display of reporting relationships, which sometimes displays position titles and position holders.

systems thinking

The process of understanding how parts influence one another within a whole.

Management and Organizational Design

Management can be described as the people who design an organization’s structure and determine how different aspects of the organization will interact. When designing an organization, managers must consider characteristics such as simplicity, flexibility, reliability, economy, and acceptability. Different levels of management will participate in different components of this design process, with upper management creating the initial organizational architecture and structure.

Organizational design is largely a function based on systems thinking. Systems thinking involves identifying the moving parts within an organization that add value and ensuring that these parts function together as an effective and efficient whole. Perspective is essential in systems thinking: a manager’s role in organizational design is to refrain from thinking of departments, individuals, processes, and problems as separate from the system and instead think of them as indivisible components of the broader organizational process.

Modern organizations exist within a framework of globalization and constant technological disruptions; as a result their organizational design is less static than in the past. Management must actively adapt organizations to meet various challenges, opportunities, and technological improvements to maintain competitive output. Because the organization is always changing, the problems of process and design are essentially limitless. Using a systems approach, managers view their objectives as moving targets and actively engage in expanding the organization day by day.

Management Processes

Organizations can be viewed as systems in which management creates the architecture for the system of production. Managers’ role in organizational design is central but must be understood in the context of their overall responsibilities within the organization.

Management operates through functions such as planning, organizing, staffing, leading/directing, controlling/monitoring, and motivation. These functions enable management to create strategies and compile resources to lead operations and monitor outputs.

The functions of management

Management operates through four main functions: planning, organizing, directing (i.e., leading), and controlling (i.e., monitoring and assessing).

Management Hierarchy

All levels of management perform these functions. However, the amount of time a manager spends on each function depends on the level of management and the needs of the organization—factors which play a role in organizational design.

• Top-level managers include the board of directors, president, vice-president, CEO, and other similar positions. They are responsible for planning and directing the entire organization.
• Middle-level managers include general managers, branch managers, and department managers, all of whom are accountable to the top-level management for the functions of their departments. They devote more time to organizing and directing.
• First-level managers include supervisors, section leads, foremen, and similar positions. They focus on controlling and directing.

As a result of this hierarchy, upper management will view the organizational design from a macro-level and consider all moving parts of the organization. Middle-management will generally focus on operations within functional or geographic areas. Lower-level managers will look at specific processes within functions or regions. From an organizational-design perspective, the higher managers are in the organization, the broader the view they will take and the greater number of moving parts they will consider.

9.1.2: Basic Types of Organizations

Learning Objective

Describe the basic types of organizations using four common structures

Key Points

• Organizations fall into one of four basic types: pyramids/hierarchies, committees/juries, matrix organizations, and ecologies.
• From a business perspective, the choice of organizational design has substantial implications for strategy, authority distribution, resource allocation, and functional approaches.
• A pyramid/hierarchy has a leader who is responsible for making all decisions that affect the organization. This leader manages other organizational members.
• Committees/juries consist of groups of peers who decide collectively, sometimes by casting votes, on the appropriate courses of action within the organization.
• Matrix organizations assign workers to more than one reporting line in an attempt to maximize the benefits of both functional and decentralized organizational forms.
• In ecologies, each business unit represents an individual profit center that holds employees accountable for the unit’s profitability.

Key Terms

decentralized

A structure where business units operate autonomously and have greater decision-making power.

functional

A structure that consists of activities such as coordination, supervision, and task allocation.

common law

A precedent or policy developed by judges through decisions of courts and similar tribunals.

Basic Organizational Structures

An organization is a social entity with collective goals that is linked to an external environment. Most organizational structures fall into one of four types: pyramids/hierarchies, committees/juries, matrix organizations, and ecologies. From a business perspective, the choice of organizational design has substantial implications for strategy, authority distribution, resource allocation, and functional approaches.

Pyramid/Hierarchy

An organization using a pyramid or hierarchy structure has a leader who is responsible for and makes all the decisions affecting the organization. This leader manages other organizational members. Pyramids and hierarchies often rely on bureaucratic practices, such as clearly defined roles and responsibilities and rigid command and control structures. Like a physical pyramid, these organizations need a sturdy base with sufficient members to support various levels of management within the overall structure so that the organization does not fall short of its goals.

From a business perspective, a hierarchy will often be divided according to function or geography. For example, a global retailer may utilize a geographic hierarchy at the upper level, with each geographic branch creating a functional hierarchy beneath it. A smaller organization operating in a single region may simply have a functional hierarchy.

The Iraqi Special Security Organization

This organizational chart of the Iraqi Special Security Organization illustrates a hierarchy. Note the multiple separate layers to the organization’s hierarchy; the lowest layer includes individual branches, the next layer involves supervisory directorates, which report to the director’s office, who is accountable to the scientific branch.

Committee/Jury

Committees or juries consist of groups of peers who decide collectively, sometimes by casting votes, on the appropriate courses of action within an organization. Committees and juries have a basic distinction: members of a committee usually perform additional actions after the group reaches a decision, while a jury’s work concludes once the group has reached a decision. In countries with common-law practices, for example, a jury of peers render innocent or guilty verdicts in the court system. Juries are often used to determine athletic contests, book awards, and similar contests.

In the business world, a committee structure is more commonly found in smaller institutions. A start-up company with three people, for example, may easily function as a committee in which decisions are made via discussion. Committees represent a decentralized approach to organizational design and tend to have a collaborative, often unstructured workplace. The more people involved, the more disparate and less effective committee structures become.

Matrix

Matrix organizations assign employees to two reporting lines, each with a boss representing a different hierarchy. One hierarchy is functional and assures that experts in the organization are well-trained and assessed by bosses who are highly qualified in the same areas of expertise. The other hierarchy is executive and works to ensure the experts bring specific projects to completion. Matrix organizations are by far the most complex and are more common in large corporations.

Projects can be organized by product, region, customer type, or other organizational need. The matrix structure combines the best parts of both separate structures. In a matrix organization, teams of employees perform work to take advantage of the strengths and compensate for the weaknesses of both the functional and decentralized forms of organizational structure. Matrix organizations may be further categorized as one of the following types:

• Weak/Functional Matrix: A project manager with limited authority is assigned to oversee cross-functional aspects of the project. Functional managers maintain control over their resources and project areas.
• Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is shared equally between the project manager and functional managers, combining the best aspects of functional and project-oriented organizations. This system is the most difficult to maintain because of difficulties in power-sharing.
• Strong/Project Matrix: A project manager is primarily responsible for the project. Functional managers provide technical expertise and assign resources as needed.

Ecology

In ecologies, each business unit represents an individual profit center that holds employees accountable for the unit’s profitability. These kinds of organizations foster intense competition, as all members are paid for the actual work they perform. Ineffective parts of the organization are left to fail and thriving parts are rewarded with more work. Companies that use this organizational structure define roles and responsibilities strictly, and each business unit tends to operate autonomously. In an ecology organization, clearly defined, measurable objectives that reflect the business’s goals are critical.

9.1.3: The Organizational Chart

Learning Objective

Compare the various types of organization charts that describe company structures

Key Points

• Organization charts are a vital tool of management and can be classified into three broad categories: hierarchical, matrix, and flat (or horizontal).
• Organization charts illustrate the structure of an organization, the relationships and relative ranks of its business units/divisions, and the positions or roles assigned to each unit/division.
• Before working with an organization, employees should procure a copy of its organizational chart. A new employee or manager can then understand how authority is distributed within the organization and with whom to consult about various concerns.

Key Term

decentralized

Dispersed rather than concentrated in a single, central location or authority.

The Purpose of Organization Charts

An organization chart (sometimes called an organizational chart, an org chart, or an organogram) is a diagram that illustrates the structure of an organization, the relationships and relative ranks of its business units/divisions, and the positions or roles assigned to each unit/division.

Examples of such roles include managers of various departments, subordinates within these departments, directors, and chief executive officers. When an organization chart grows too large, it can be split into smaller charts that show only individual departments within the organization.

Prior to applying for a job or beginning work with an organization, a prospective employee should procure a copy of the organization chart. New employees or managers can then know with whom to consult about particular issues, as well as understand the distribution of authority within the company. The org chart can also provide insight into the broader strategy of the company—such as the degree of innovation versus process control being pursued, the flexibility of project management, the degree of autonomy, and the broader company culture.

The different types of organization charts include hierarchical, matrix, and flat (also known as horizontal). These are described briefly below.

Hierarchical Organization Charts

A hierarchical organization is an organizational structure with several reporting layers. Every entity within the organization—except for the owners—is subordinate and reports to a higher level entity.

Matrix Organization Charts

A matrix organizational chart displays how people with similar skills are pooled together for work assignments.

Matrix organizational chart

In a matrix structure, the organization is grouped by both product and function. Product lines are managed horizontally and functions are managed vertically. This means that each function—e.g., research, production, sales, and finance—has separate internal divisions for each product.

Flat or Horizontal Organization Charts

A flat organization chart shows few or no levels of intervening management between staff and managers. A flat chart will simply look like a line of boxes with no overt authority implied.

9.2: Components of an Organization

9.2.1: Schein’s Common Elements of an Organization

The four common elements of an organization include common purpose, coordinated effort, division of labor, and hierarchy of authority.

Learning Objective

Describe the common elements that define an organizational structure, according to Edgar Schein

Key Points

• Organizational psychologist Edgar Schein proposed four common elements of an organization’s structure: common purpose, coordinated effort, division of labor, and hierarchy of authority.
• Common purpose unifies employees or members by giving everyone an understanding of the organization’s mission, strategy, and values.
• Coordinated effort is the organization of individual efforts into a group or collective effort.
• Division of labor is an arrangement in which different people perform discrete parts of a task for greater efficiency.
• Hierarchy of authority is the control mechanism for making sure the right people do the right things at the right time. This control enables organization members to make decisions quickly when necessary.

Key Term

organizational psychologist

A person who conducts scientific study of employees and workplaces.

Common Elements of Organizations

Organizational psychologist Edgar Schein proposes four common elements of an organization’s structure:

1. Common purpose
2. Coordinated effort
3. Division of labor
4. Hierarchy of authority

From a manager’s point of view, operations are made successful by instilling a common purpose to create a coordinated effort across the organization and organizing resources based on tasks and decision making. Each of the four elements is relatively straightforward in theory but represents a critical component of an effective structure.

Common Purpose

An organization without a clear purpose or mission soon begins to drift and become disorganized. A common purpose unifies employees or members and gives everyone an understanding of the organization’s direction. Ensuring that the common purpose is effectively communicated across organizations (particularly large organizations with many moving parts) is a central task for managers. Managers communicate this purpose by educating all employees on the general strategy, mission statement, values, and short- and long-term objectives of the organization.

Coordinated Effort

Coordinating effort involves working together in a way that maximizes resources. The common purpose is achieved through the coordinated effort of all individuals and groups within an organization. The broader group’s diverse skill sets and personalities must be leveraged in a way that adds value. The act of coordinating organizational effort is perhaps the most important responsibility of managers because it motivates and distributes human resources to capture value.

Division of Labor

Division of labor is also known as work specification for greater efficiency. It involves delegating specific parts of a broader task to different people within the organization based upon their particular abilities and skills. Using division of labor, an organization can parcel out a complex work effort for specialists to perform. By systematically dividing complex tasks into specialized jobs, an organization uses its human resources more efficiently.

Hierarchy of Authority

Hierarchy of authority is essentially the chain of command—a control mechanism for making sure the right people do the right things at the right time. While there are a wide variety of organizational structures—some with more centralization of authority than others—hierarchy in decision making is a critical factor for success. Knowing who will make decisions under what circumstances enables organizations to be agile, while ambiguity of authority can often slow the decision-making process. Authority enables organizations to set directions and select strategies, which can in turn enable a common purpose.

9.2.2: Characteristics of Organizational Structures

Important characteristics of an organization’s structure include span of control, departmentalization, centralization, and decentralization.

Learning Objective

Outline the departmentalization options available to corporations from an organizational structure perspective and differentiate between centralized and decentralized decision-making, and the resulting structural implications

Key Points

• Organizational structures provide basic frameworks to help operations proceed smoothly and functionally.
• Span of control refers to the number of subordinates a supervisor has; it is used as a means of ensuring proper coordination and a sense of accountability among employees.
• Departmentalization is the basis by which an organization groups tasks together. There are five common approaches: functional, divisional, matrix, team, and network.
• Centralization occurs when decision-making authority is located in the upper organizational levels. Centralization increases consistency in the processes and procedures that employees use in performing tasks.
• Decentralization occurs when decision-making authority is located in the lower organizational levels. With decentralized authority, important decisions are made by middle-level and supervisory-level managers, thereby increasing adaptability.

Key Term

span of control

The number of subordinates a supervisor has.

Organizational structures provide basic frameworks to help operations proceed smoothly and functionally. Types of organizational structures include functional, divisional, matrix, team, network, and horizontal structures. Each of these structures provides different degrees of four common organizational elements: span of control, departmentalization, centralization, and decentralization.

Span of Control

Span of control—or the number of subordinates a supervisor has—is used as a means of ensuring proper coordination and a sense of accountability among employees. It determines the number of levels of management an organization has as well as the number of employees a manager can efficiently and effectively manage. In the execution of a task, hierarchical organizations usually have different levels of task processes. Workers at various levels send reports on their progress to the next levels until the work is completed.

In the past it was not uncommon to see average spans of one to four (one manager supervising four employees). With the development of inexpensive information technology in the 1980s, corporate leaders flattened many organizational structures and caused average spans to move closer to one to ten. As this technology developed further and eased many middle-managerial tasks (such as collecting, manipulating, and presenting operational information), upper management found they could save money by hiring fewer middle managers.

Departmentalization

Departmentalization is the process of grouping individuals into departments and grouping departments into total organizations. Different approaches include:

• Functional – departmentalization by common skills and work tasks
• Divisional – departmentalization by common product, program, or geographical location
• Matrix – a complex combination of functional and divisional
• Team – departmentalization by teams of people brought together to accomplish specific tasks
• Network – independent departments providing functions for a central core breaker

Centralization

Centralization occurs when decision-making authority is located in the upper organizational levels. Centralization increases consistency in the processes and procedures that employees use in performing tasks. In this way, it promotes workplace harmony among workers and reduces the cost of production. Centralization is usually helpful when an organization is in crisis and/or faces the risk of failure.

Centralization allows for rapid, department-wide decision-making; there is also less duplication of work because fewer employees perform the same task. However, it can limit flexibility and natural synergies. Autonomy in decision-making is reserved for only a small number of individuals within the workforce, potentially limiting creativity.

Centralization vs. decentralization

This diagram compares visual representations of a centralized vs. decentralized organizational structure. Notice how the representation of the centralized organization looks like one large asterisk with many spokes, whereas the representation of the decentralized organization looks like many small interconnected asterisks.

Decentralization

Decentralization occurs when decision-making authority is dispersed among the lower organizational levels. With decentralized authority, important decisions are made by middle-level and supervisory-level managers. Because there are fewer hierarchical layers to navigate, this kind of structure helps to enable adaptability, quick reactions to lower level issues, and more empowered employees. However, making organization-wide changes that are implemented homogeneously can become quite difficult in this system.

9.3: Common Organizational Structures

9.3.1: Functional Structure

An organization with a functional structure is divided based on functional areas, such as IT, finance, or marketing.

Learning Objective

Explain the functional structure within the larger context of organizational structures in general

Key Points

• A functional organization is a common type of organizational structure in which the organization is divided into smaller groups based on specialized functional areas, such as IT, finance, or marketing.
• Functional departmentalization arguably allows for greater operational efficiency because employees with shared skills and knowledge are grouped together by function.
• A disadvantage of this type of structure is that the different functional groups may not communicate with one another, potentially decreasing flexibility and innovation. A recent trend aimed at combating this disadvantage is the use of teams that cross traditional departmental lines.

Key Terms

departmentalization

The organization of something into groups according to function, geographic location, etc.

silo

In business, a unit or department within which communication and collaboration occurs vertically, with limited cooperation outside the unit.

Overview of the Functional Structure

An organization can be arranged according to a variety of structures, which determine how the organization will operate and perform. In a functional structure, a common configuration, an organization is divided into smaller groups by areas of specialty (such as IT, finance, operations, and marketing). Some refer to these functional areas as “silos”—entities that are vertical and disconnected from each other. Correspondingly, the company’s top management team typically consists of several functional heads (such as the chief financial officer and the chief operating officer). Communication generally occurs within each functional department and is transmitted across departments through the department heads.

Functional structure at FedEx

This organizational chart shows a broad functional structure at FedEx. Each different functions (e.g., HR, finance, marketing) is managed from the top down via functional heads (the CFO, the CIO, various VPs, etc.).

Advantages of a Functional Structure

Functional departments arguably permit greater operational efficiency because employees with shared skills and knowledge are grouped together by functions performed. Each group of specialists can therefore operate independently with management acting as the point of cross-communication between functional areas. This arrangement allows for increased specialization.

Disadvantages of a Functional Structure

A disadvantage of this structure is that the different functional groups may not communicate with one another, potentially decreasing flexibility and innovation. Functional structures may also be susceptible to tunnel vision, with each function perceiving the organization only from within the frame of its own operation. Recent trends that aim to combat these disadvantages include the use of teams that cross traditional departmental lines and the promotion of cross-functional communication.

Functional structures appear in a variety of organizations across many industries. They may be most effective within large corporations that produce relatively homogeneous goods. Smaller companies that require more adaptability and creativity may feel confined by the communicative and creative silos functional structures tend to produce.

9.3.2: Divisional Structure

Divisional structures group various organizational functions into product or regional divisions.

Learning Objective

Describe the basic premise behind divisional structures within the general framework of organizational structure

Key Points

• The divisional structure is a type of organizational structure that groups each organizational function into a division. These divisions can correspond to either products or geographies.
• Each division contains all the necessary resources and functions within it to support that product line or geography (for example, its own finance, IT, and marketing departments).
• A multidivisional form (or “M-form”) is a legal structure in which one parent company owns subsidiary companies, each of which uses the parent company’s brand and name.
• The divisional structure is useful because failure of one division doesn’t directly threaten the other divisions. In the multidivisional structure, the subsidiaries benefit from the use of the brand and capital of the parent company.
• Disadvantages of divisional structure can include operational inefficiencies from separating specialized function. For the multidivisional structure, disadvantages can include increased accounting and taxes.

Key Terms

subsidiary

A company owned by a parent company or holding company.

division

A section of a large company.

parent company

An entity that owns or controls another entity.

Divisional Structure Overview

Organizations can be structured in various ways, with each structure determining the manner in which the organization operates and performs. A divisional organization groups each organizational function into a division.

U.S. Department of Energy organization chart

The DOE organization chart shows a divisional structure with different divisions under each of three under-secretaries for energy. Each of the three division is in charge of a different set of tasks: environmental responsibilities, nuclear-energy responsibilities, or research responsibilities.

Divisional Strategies

Each division within this structure can correspond to either products or geographies of the organization. Each division contains all the necessary resources and functions within it to support that particular product line or geography (for example, its own finance, IT, and marketing departments). Product and geographic divisional structures may be characterized as follows:

• Product departmentalization: A divisional structure organized by product departmentalization means that the various activities related to the product or service are under the authority of one manager. If the division builds luxury sedans or SUVs, for example, the SUV division will have its own sales, engineering, and marketing departments distinct from those departments within the luxury sedan division.
• Geographic departmentalization: Geographic departmentalization involves grouping activities based on geography, such as an Asia/Pacific or Latin American division. Geographic departmentalization is particularly important if tastes and brand responses differ across regions, as it allows for flexibility in product offerings and marketing strategies (an approach known as localization).

A common legal structure known as the multidivisional form (or “M-form”) also uses the divisional structure. In this form, one parent company owns subsidiary companies, each of which uses its brand and name. The whole organization is ultimately controlled by central management; however, most decisions are left to autonomous divisions. This business structure is typically found in companies that operate worldwide—for example, Virgin Group is the parent company of Virgin Mobile and Virgin Records.

Advantages of a Divisional Structure

As with all organizational structure types, the divisional structure offers distinct advantages and disadvantages. Generally speaking, divisions work best for companies with wide variance in product offerings or regions of geographic operation. The divisional structure can be useful because it affords the company greater operational flexibility. In addition, the failure of one division does not directly threaten the other divisions. In the multidivisional structure, subsidiaries benefit from the use of the brand and capital of the parent company.

Disadvantages of a Divisional Structure

Some disadvantages of this structure include operational inefficiencies from separating specialized functions—for example, finance personnel in one division do not communicate with those in another division. Disadvantages of the multidivisional structure can include increased accounting and tax implications.

9.3.3: Matrix Structure

The matrix structure is a type of organizational structure in which individuals are grouped via two operational frames.

Learning Objective

Illustrate the way two different operational perspectives can be crossed in a matrix structure to organize a company

Key Points

• The matrix structure is a type of organizational structure in which individuals are grouped simultaneously by two different operational perspectives.
• Matrix structures are inherently complex and versatile, making them more appropriate for large companies operating across different industries or geographic regions.
• Proponents suggest that matrix management is more dynamic than functional management in that it allows team members to share information more readily across task boundaries; it also allows for specialization that can increase depth of knowledge.
• A disadvantage of the matrix structure is the increased complexity in the chain of command, which can lead to a higher manager-to-worker ratio and contribute to conflicting loyalties among employees.

Key Term

matrix

A two-dimensional array.

Overview of the Matrix Structure

Organizations can be structured in various ways, and the structure of an organization determines how it operates and performs. The matrix structure is a type of organizational structure in which individuals are grouped by two different operational perspectives simultaneously; this structure has both advantages and disadvantages but is generally best employed by companies large enough to justify the increased complexity.

Matrix organizational structure

In a matrix structure, the organization is grouped by both product and function. Product lines are managed horizontally and functions are managed vertically. This means that each function—e.g., research, production, sales, and finance—has separate internal divisions for each product.

In matrix management, the organization is grouped by any two perspectives the company deems most appropriate. Common organizational perspectives include function and product, function and region, or region and product. In an organization grouped by function and product, for example, each product line will have management that corresponds to each function. If the organization has three functions and three products, the matrix structure will have nine (
) potential managerial interactions. This example illustrates how inherently complex matrix structures are in comparison to other, more linear structures.

Advantages of a Matrix Structure

Proponents of matrix management suggest that this structure allows team members to share information more readily across task boundaries, countering the “silo” critique of functional management. Matrix structures also allow for specialization that can both increase depth of knowledge and assign individuals according to project needs.

Disadvantages of a Matrix Structure

A disadvantage of the matrix structure is the increased complexity in the chain of command when employees are assigned to both functional and project managers. This increase in complexity can result in a higher manager-to-worker ratio, which can in turn increase costs or lead to conflicting employee loyalties. It can also create a gridlock in decision making if a manager on one end of the matrix disagrees with another manager. Blurred authority in a matrix structure can result in reduced agility in decision making and conflict resolution.

Matrix structures should generally only be used when the operational complexity of the organization demands it. A company that operates in various regions with various products may require interaction between product development teams and geographic marketing specialists—suggesting a matrix may be applicable. Generally speaking, larger companies with a need for a great deal of cross-departmental communication benefit most from this model.

9.3.4: Team-Based Structure

The team structure is a newer, less hierarchical organizational structure in which individuals are grouped into teams.

Learning Objective

Classify team-based structures within the larger context of the most common organizational structures

Key Points

• The team structure in large organizations is a newer type of organizational structure. A team should be a group of workers, with complementary skills and synergistic efforts, all working toward a common goal.
• An organization may have several teams that can change over time. Teams that include members from different functions are known as cross-functional teams.
• Although teams are characterized as less hierarchical, they typically still include a management structure (or management team).
• Critics argue that the use of the word “team” to describe modern organizational structures is a fad—that some teams are not really teams at all but merely groups of staff.
• One aspect of team-based structures likely to persist indefinitely is the integration of team cultures within an broader structure (such as a functional structure with interspersed teams).

Key Terms

hierarchical

Classified or arranged according to various criteria into successive ranks or grades.

synergistic

Cooperative, working together, interacting, mutually stimulating.

Overview of the Team-Based Structure

Organizations can be structured in various ways, and the structure of an organization determines how it operates and performs. The team structure in large organizations is considered a newer type of organization that is less hierarchical, less structured, and more fluid than traditional structures (such as functional or divisional). A team is a group of employees—ideally with complementary skills and synergistic efforts—working toward a common goal. Teams are created by grouping employees in a way that generates a variety of expertise and addresses a specific operational component of an organization. These teams can change and adapt to fulfill group and organizational objectives.

Some teams endure over time, while others—such as project teams—are disbanded at the project’s end. Teams that include members from different functions are known as cross-functional teams. Although teams are described as less hierarchical, they typically still include a management structure.

Critics argue that the use of the word “team” to describe modern organizational structures is a fad; according to them, some teams are not really teams at all but rather groups of staff. That said, team-building is now a frequent practice of many organizations and can include activities such as bonding exercises and even overnight retreats to foster team cohesion. To the extent that these exercises are meaningful to employees, they can be effective in improving employee motivation and company productivity.

Integration with Other Structures

One aspect of team-based structures that will likely persist indefinitely is the integration of team cultures within an broader structure (e.g., a functional structure with teams interspersed). Such integration allows for the authority and organization of a more concrete structure while at the same time capturing the cross-functional and projected-oriented advantages of teams.

For example, imagine Proctor and Gamble brings together a group of employees from finance, marketing, and research and development—all representing different geographic regions. This newly created team is tasked with the project of creating a laundry detergent that is convenient, economic, and aligned with the company’s manufacturing capabilities. The project team might be allocated a certain number of hours a month to devote to team objectives; however, members of the team are still expected to work within their respective functional departments.

9.3.5: Network Structure

In the network structure, managers coordinate and control relationships with the firm that are both internal and external.

Learning Objective

Identify the structural implications of a network-based organizational design

Key Points

• The network structure is a newer type of organizational structure viewed as less hierarchical (i.e., more “flat”), more decentralized, and more flexible than other structures.
• In a network structure, managers coordinate and control relationships that are both internal and external to the firm.
• The concept underlying the network structure is the social network—a social structure of interactions. Open communication and reliable partners (both internally and externally) are key components of social networks.
• Proponents argue that the network structure is more agile than other structures. Because it is decentralized, a network organization has fewer tiers, a wider span of control, and a bottom-up flow of decision making and ideas.
• A disadvantage of the network structure is that this more fluid structure can lead to more complex relations in the organization.

Key Terms

agile

Apt or ready to move; nimble; active.

decentralized

Diffuse; having no center or several centers.

network

Any interconnected group or system.

Overview of the Network Structure

An organization can be structured in various ways that determine how it operates and performs. The network structure is a newer type of organizational structure often viewed as less hierarchical (i.e., more flat), more decentralized, and more flexible than other structures. In this structure, managers coordinate and control relations that are both internal and external to the firm.

The concept underlying the network structure is the social network—a social structure of interactions. At the organizational level, social networks can include intra-organizational or inter-organizational ties representing either formal or informal relationships. At the industry level, complex networks can include technological and innovation networks that may span several geographic areas and organizations. From a management perspective, the network structure is unique among other organizational structures that focus on the internal dynamics within the firm.

A network organization sounds complex, but it is at its core a simple concept. Take, for example, a T-shirt design company. Because the company leaders are mainly interested in design, they may not want to get too heavily involved in either manufacturing or retail; however, both aspects of the business are necessary to complete their operations. To maintain control of their product, they may rent retail space through their network and purchase production capabilities from a variety of partner organizations that have their own manufacturing facilities. While the core company focuses mainly on designing products and tracking finances, this network of partnerships enables it to be much more than just a design operation.

Like other organizational structures, the network structure has its advantages and its disadvantages.

Advantages of a Network Structure

Proponents argue that the network structure is more agile compared to other structures (such as functional areas, divisions, or even some teams). Communication is less siloed and flows freely, possibly opening up more opportunities for innovation. Because the network structure is decentralized, it has fewer tiers in its organizational makeup, a wider span of control, and a bottom-up flow of decision making and ideas.

Disadvantages of a Network Structure

On the other hand, this more fluid structure can lead to a more complex set of relationships in the organization. For example, lines of accountability may be less clear, and reliance on external vendors can be quite high. These potentially unpredictable variables essentially reduce the core company’s control over its operational success.

9.3.6: Modular Structure

In the modular structure, an organization focuses on developing specialized and relatively autonomous strategic business units.

Learning Objective

Define the nature and value of a modular structure in an organizational framework

Key Points

• The modular structure divides the business into small, tightly knit strategic business units (SBUs),which focus on specific elements of the organizational process.
• Interdependencies between modules tends to be weak; however, flexibility is extremely high.
• An advantage of the modular structure is that loosely coupled structures enable organizations to be more flexible and restructure more easily. For example, a firm can switch between different providers and thus respond more quickly to different market needs.
• Increased internalization and more tightly coupled structures can produce better communication and intellectual property gains. As a result, some argue that the modularity of a firm should be limited to the extent the flexibility it affords results in gains.
• Various degrees of modularity are possible; however, a business must be consistent in the degree of modularity it employs.

Key Terms

modular

Consisting of separate units, especially where each unit performs a specified function and could be replaced by a similar unit for the same function, independently of other units.

disaggregation

A division or breaking up into constituent parts, particularly categories which have been lumped together.

Overview of the Modular Structure

Organizations can be structured in various ways that determine how the organization operates and performs. The modular structure focuses on dividing the business into small, tightly knit strategic business units (SBUs), which focus on specific elements of the organizational process. Interdependence among the units is limited because the focus of many SBUs is more inward than outward and because loyalty within SBUs tends to be very strong.

The term modularity is widely used in studies of technological and organizational systems. Product systems are deemed modular when they can be broken down into a number of components that can then be mixed and matched to connect, interact, or exchange resources. Modularization within organizations leads to the disaggregation of the traditional form of hierarchical governance into relatively small, autonomous organizational units (modules). Although modules are not generally interdependent, the modular organization is extremely flexible.

For example, a firm that employs contract manufacturing rather than in-house manufacturing is using an organizational component that is more independent. The firm can switch between different contract manufacturers that perform different functions; the contract manufacturer can similarly work for different firms. Another (more internally focused) modular model involves the existence of various consumer services which cater to dramatically different needs or demographics. At GNU Health, for example, the surgery unit may interact with different departments at different times for different reasons.

Modular organizations

A modular organization involves several largely independent bodies that can rearrange and work with different other departments as needed. This image shows the GNU health module interacting with many different departments, such as oncology, radiology, surgery and pediatrics, across many contexts, such as location and socioeconomic status.

Advantages of a Modular Structure

One advantage of the modular structure is that loosely coupled structures can enable organizations to be more flexible and restructure more easily. For example, a firm can switch between different providers and thus respond more quickly to different market needs. An organization can also fill its own corporate needs internally by creating a new modular department, which can operate interdependently with the whole.

Disadvantages of a Modular Structure

On the other hand, more internalization and more tightly coupled structures can produce better communication and intellectual property gains. As a result, critics of the modular organization argue that a firm’s modularity should be limited to the extent that its flexible nature affords gains. Various degrees of modularity are possible but not necessarily useful if the pros do not outweigh the cons. Managers must carefully consider whether or not a modular structure would be useful, either entirely or partially, for a given organization.

9.4: Factors to Consider in Organizational Design

9.4.1: Considering the Environment

Considerations of the external environment—including uncertainty, competition, and resources—are key in determining organizational design.

Learning Objective

Identify the inherent complexities in the external environment that influence the design of an organization’s structure

Key Points

• Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization’s operations, and the environment in which it operates.
• According to several theories, considerations of the external environment are a key aspect of organizational design. These considerations include how organizations cope with conditions of uncertainty, procure external resources, and compete with other organizations.
• A company in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. In contrast, a company in a mature market with limited variability and uncertainty should pursue more structure.
• A company with a low-cost strategy relative to its competition may benefit from a more simplistic and fixed structural approach to operations, while a company pursuing differentiation must prioritize flexibility and a more diversified structure.

Key Terms

differentiation

A strategy focused on creating a unique product for a particular population.

strategy

A plan of action intended to accomplish a specific goal.

Overview

Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization’s operations, and the environment in which it operates. Considerations of the external environment are a key aspect of organizational design. The environment in which an organization operates can be defined from a number of different angles, each of which generates different structural and design strategies to remain competitive.

Complexity

Complexity theory postulates that organizations must adapt to uncertainty in their environments. The complexity theory treats organizations and firms as collections of strategies and structures that interact to achieve the highest efficiency within a given environment. Therefore, companies in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. Alternatively, a fixed and specific approach to organizational design will capture more value in a mature market, where variability and uncertainty are limited.

Resource Dependence

Another perspective on organizational design is resource dependence theory—the study of how external resources affect the behavior of the organization. Procuring external resources is important in both the strategic and tactical management of any company. Resource-dependence theory explores the implications regarding the optimal divisional structure of organizations, recruitment of board members and employees, production strategies, contract structure, external organizational links, and many other aspects of organizational strategy.

Competition

Another environmental factor that shapes organization design is competition. Higher levels of competition require different organizational structures to offset competitors’ advantages while emphasizing the company’s own strengths. A company that demonstrates strength in differentiation relative to the competition benefits from implementing a divisional or matrix strategy, which in turn allows the company to manage a wide variety of demographic-specific products or services. Alternatively, a company that demonstrates a low-cost strength (producing products cheaper than the competition) benefits from employing a structural or bureaucratic strategy to streamline operations.

Identifying External Factors

In considering organizational design relative to the environment, managers may find it helpful to employ two specific frameworks to identify external factors and internal strengths and weaknesses:

• SWOT analysis: In this particular model, a company’s strengths and weaknesses are assessed in the context of the opportunities and threats in the business environment. A SWOT analysis enables a company to identify the ideal structure to maximize its internal strengths while capturing external opportunities and avoiding threats.
• Porter’s five-forces analysis: This analysis identifies factors of the industry’s competitive environment that may substantially influence a company’s strategic design. The five forces include power of buyers, power of suppliers, rivalry (competition), substitutes, and barriers to entry (how difficult it is for new firms to enter the industry). Understanding these varying forces gives the company an idea of how adaptable or fixed the organizational structure should be to capture value.

Porter’s five-forces model

Porter’s five-forces analysis identifies five environmental factors that can influence a company’s strategic design: power of buyers, power of suppliers, competition, substitutes, and barriers to entry.

Smaller, more agile companies tend to thrive better in uncertain or constantly changing markets, while larger, more structured companies function best in consistent, predictable environments. Understanding these tools and frameworks alongside the varying external forces that act upon a business will allow companies to make strategic organizational decisions that optimize their competitive strength.

9.4.2: Considering Company Size

The size and operational scale of a company is important to consider when identifying the ideal organization structure.

Learning Objective

Explain how the size of a company helps determine the organizational structure that optimizes operational efficiency and managerial capacity

Key Points

• Company size plays a substantial role in determining the ideal structure of the company: the larger the company, the greater need for increased complexity and divisions to achieve synergy.
• Companies may adopt any of six organizational structures based on company size and diversity in scope of operations: pre-bureaucratic, bureaucratic, post-bureaucratic, functional, divisional, and matrix.
• Smaller companies function best with pre-bureaucratic or post-bureaucratic structures. Pre-bureaucratic structures are inherently adaptable and flexible and therefore particularly effective for small companies aspiring to expand.
• Larger companies usually achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).
• Understanding the varying pros and cons of each structure will help companies to plan their organization design and structure in a way that optimizes resources and allows for growth.

Key Terms

economies of scope

Strategies of incorporating a wider variety of products or services to capture value through the ways in which they interact or overlap.

Homogeneous

Having a uniform makeup; having the same composition throughout.

economies of scale

Processes in which an increase in quantity will result in a decrease in average cost of production (per unit).

Company Size and Organizational Structure

Organizational design can be defined narrowly as the strategic process of shaping the organization’s structure and roles to create or optimize competitive capabilities in a given market. This definition underscores why it is important for companies to identify the factors of the organization that determine its ideal structure—most specifically the size, scope, and operational initiatives of the company.

Company size plays a particularly important role in determining an organization’s ideal structure: the larger the company, the greater the need for increased complexity and divisions to achieve synergy. The organizational structure should be designed in ways that specifically optimize the effort and input compared to output. Larger companies with a wider range of operational initiatives require careful structural considerations to achieve this optimization.

Types of Organizational Structure

Companies may adopt one of six organizational structures based upon company size and diversity of scope of operations.

Pre-bureaucratic

Ideal for smaller companies, the pre-bureaucratic structure deliberately lacks standardized tasks and strategic division of responsibility. Instead, this is an agile framework aimed at leveraging employees in any and all roles to optimize competitiveness.

Bureaucratic

A bureaucratic framework functions well in large corporations with relatively complex operational initiatives. This structure is rigid and mechanical, with strict subordination to ensure consistency across varying business units.

Post-bureaucratic

This structure is a combination of bureaucratic and pre-bureaucratic, where individual contribution and control are coupled with authority and structure. In this structure, consensus is the driving force behind decision making and authority. Post-bureaucratic structure is better suited to smaller or medium-sized organizations (such as nonprofits or community organizations) where the importance of the decisions made outweighs the importance of efficiency.

Functional

A functional structure focuses on developing highly efficient and specific divisions which perform specialized tasks. This structure works well for large organizations pursuing economies of scale, usually through production of a large quantity of homogeneous goods at the lowest possible cost and highest possible speed. The downside of this structure is that each division is generally autonomous, with limited communication across business functions.

Divisional

A divisional structure is also a framework best leveraged by larger companies; instead of economies of scale, however, they are in pursuit of economies of scope. Economies of scope simply means a high variance in product or service. As a result, different divisions will handle different products or geographic locations/markets. For example, Disney may have a division for TV shows, a division for movies, a division for theme parks, and a division for merchandise.

Matrix

A matrix structure is used by the largest companies with the highest level of complexity. This structure combines functional and divisional concepts to create a product-specific and division-specific organization. In the Disney example, the theme park division would also contain a functional structure within it (i.e., theme park accounting, theme park sales, theme park customer service, etc.).

Strategic Organizational Design

Structure becomes more difficult to change as companies evolve; for this reason, understanding which specific structure will function best within a given company environment is an important early step for the management team. Smaller companies function best as pre-bureaucratic or post-bureaucratic; the inherent adaptability and flexibility of the pre-bureaucratic structure is particularly effective for small companies aspiring to expand. Larger companies, on the other hand, achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).

McDonald’s fast-food restaurants departmentalize varying elements of their operation to optimize efficiency. This structure is divisional, meaning each specific company operation is segmented (for example, operations, finance/accounting, marketing, etc.).

9.4.3: Considering Technology

Technology impacts organizational design and productivity by enhancing the efficiency of communication and resource flow.

Learning Objective

Recognize the intrinsic structural value of the ever-evolving technological environment

Key Points

• Organizations use technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization. These uses of technology become potential sources of economic value and competitive advantage.
• An example of an organizational structure emerging from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet.
• A network structure is another kind of organizational structure that is heavily reliant upon technology for communication.
• More traditional organizational structures also benefit greatly from the advance of technology. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Key Terms

supply chain

A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from the supplier to the customer.

network

Any interconnected group or system.

Organizational design can be defined narrowly as the strategic process of shaping an organization’s structure and roles to create or optimize capabilities for competition in a given market.

Technology is an important factor to consider in organizational design. Modern organizations can be treated as complex and adaptive systems that include a mix of human and technological interactions. Organizations can utilize technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization, thereby adding potential sources of economic value and competitive advantage.

Technology

Technology has opened doors to incorporating new and advanced forms of organizational design. This is most notably seen through rapid global communications and the ability to constantly and economically be in contact.

Technological Organizational Structures

An example of an organizational structure that has emerged from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet. Over the internet, an organization with a small core can still operate globally as a market leader in its niche. This can dramatically reduce costs and overhead, remove the necessity for an expensive office building, and enable small, dynamic teams to travel and conduct work wherever they are needed.

A similar organizational design that is heavily reliant upon technological capabilities is the network structure. While the network structure existed prior to recent technologies (i.e., affordable communications via internet, cell phones, etc.), the existence of complex telecommunications networks and logistics technologies has greatly increased the viability of this structure.

Technology and Traditional Structures

Technology can also affect other longstanding elements of an organization. For example, information systems allow managers to take a much more analytic view of their businesses than before the advent of such systems. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Technology has also impacted supply chain management—the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management now has the capacity to track, forecast, predict, and refine the outbound logistics, contributing to a wide variety of logistical advantages (such as minimizing costs from warehousing, fuel, negative environmental impacts, or packaging).

Technology simplifies the process of managing reports, collecting communications, and keeping in touch, enabling management in more formal structures to take on more workers. Increases in technology have essentially allowed organizations to scale up their companies through more effective and efficient teams.

9.4.4: Considering the Organizational Life Cycle

The life cycle of an organization is important to consider when determining its overall design and structure.

Learning Objective

Describe the way in which life cycles influence an organization’s overall design and structure

Key Points

• From an organizational perspective, the “life cycle” can refer to various factors such as the age of the organization, the maturation of a particular product or process, or the maturation of the broader industry.
• In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to its age. Richard L. Daft outlines different patterns of age dependence in his four stages model.
• The idea of the Enterprise Life Cycle in enterprise architecture argues for a life cycle concept as an overarching design strategy—a dynamic, iterative process of changing the enterprise over time by incorporating, maintaining, and disposing of new and existing elements of the enterprise.
• Companies must understand clearly where they are in their life cycle and what influence this will have on their optimal organizational structure.

Key Terms

life cycle

The useful life of a product or system; the developmental history of an individual, group or entity.

assessment

An appraisal or evaluation.

strategy

A plan of action intended to accomplish a specific goal.

Organization design can be defined narrowly as the strategic process of shaping organizational structure and roles to create or optimize capabilities for competition in a given market. The life cycle of an organization, industry, and/or product can be an important factor in organization design.

The life cycle of a business

Organizations must always be striving to sustain their position in a given competitive environment. This often requires structural evolution and rapid iterations in the feedback loop of disruption, growth, refinement, and renewal.

Overview of the Life Cycle

From an organizational perspective, “life cycle” can refer to various factors such as the age of the organization itself, the maturation of a particular product or process, or the maturation of the broader industry. In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to the age of that organization. Generally speaking, organizations go through the following stages:

1. Birth
2. Growth
3. Maturity
4. Decline
5. Death

The Enterprise Life Cycle

The Enterprise Life Cycle is a model that underlines the way in which organizations remain relevant. The Enterprise Life Cycle is the dynamic, iterative process of changing an enterprise over time by incorporating new business processes, technologies, and capabilities, as well as maintaining, using, and disposing of existing elements of the enterprise.

Richard L. Daft’s Four Stages

Richard L. Daft theorized four stages of the organizational life cycle, each with critical transitions:

1. Entrepreneurial stage → Crisis: Need for leadership
2. Collectivity stage → Crisis: Need for delegation
3. Formalization stage → Crisis: Too much red tape
4. Elaboration stage → Crisis: Need for revitalization

Structural Implications of the Life Cycle

The life cycle of an organization is important to consider when making decisions about the organization’s structure and design. Richard L. Daft’s model underlines critical problems within each stage of an organization’s life cycle that can often be solved through intelligent structural design.

Daft first notes that the entrepreneurial (or startup) stage of an organization requires leadership. In this situation, decision-making must be enabled and bureaucracy should be minimized. This lends itself well to pre-bureaucratic stuctures in which everyone involved is empowered to take the reins and employ their creativity and innovation.

In the collectivity stage, momentum has been created and expansion is required. This is where functional or divisional strategies may begin to emerge, enabling managers to build teams and delegate tasks.

Companies continue to expand in the formalization stage, requiring increased bureaucracy and more levels of authority to approve a given decision. In this stage they grow large enough to accommodate functional, divisional, or even matrix structures in order to produce at scale. Organizations in this stage must be careful not to fall too strongly into rigid structures that inhibit or disrupt efficiency, communication, or decision-making.

The Enterprise Life Cycle comes strongly into play in the elaboration stage. During this stage the organization must retain its relevance in the industry through reinforcing competitive advantages and/or creating new products to fill changing consumer needs. This requires a great deal of organized creativity and exploration of new markets, which may justify team or divisional structures within the broader organizational structure. Such structures allow small teams to experiment and react quickly as they try new entrepreneurial strategies while the larger organization maintains operative efficiency in established markets.

9.5: Trends in Organization

9.5.1: Flattening Hierarchies

Flattening hierarchies can benefit smaller organizations by increasing employee empowerment, participation, and efficiency.

Learning Objective

Define a flattened hierarchy, specifically in which situations where the utilization of this model is appropriate and beneficial for an organization

Key Points

• A hierarchy can link entities either directly or indirectly; it can also link entities either vertically or horizontally. The only direct links in a hierarchy are to a person’s immediate superior or subordinates.
• The flat organization model essentially “flattens” the hierarchy and promotes employee involvement through a decentralized decision-making process.
• According to the logic behind this model, well-trained workers will be more productive when they are directly involved in the decision-making process rather than closely supervised by many layers of management.
• Flat organizations are most relevant in specific scenarios—most notably small organizations that are dependent upon creativity, freedom of action, and high-powered employees.

Key Term

hierarchy

An arrangement of items in which each item is represented as being above, below, or at the same level as other items.

Links within Hierarchies

Hierarchies can be linked in several different ways. A hierarchy can link entities either directly or indirectly; it can also link entities either vertically or horizontally. The only direct links in a hierarchy are to a person’s immediate superior or subordinates. Parts of the hierarchy that are not linked vertically to one another can be horizontally linked through a path by traveling up the hierarchy; this path eventually reaches a common direct or indirect superior and then travels down the hierarchy again. An example of this would be two colleagues who each report to a common superior but have the same relative amount of authority in the organization.

Flat Hierarchies

Flat (or horizontal) organizational structures have few or no levels of intervening management between staff and managers. This “flattened” hierarchy promotes employee involvement through a decentralized decision-making process. The idea is that well-trained workers will be more productive when they are directly involved in the decision-making process rather than closely supervised by many layers of management.

Flat organization chart

This diagram illustrates the structure of a flat organization: there is no low- or mid-level management—just one manager and the rest of the staff.

Advantages of Flattened Hierarchies

Flat structures empower each individual within the company to be involved in decision-making processes. This allows for a great deal of creative discussion and operational diversity and tends to create great variance in new ideas. By elevating the level of responsibility of baseline employees and eliminating layers of middle management, comments and feedback can quickly reach all personnel involved in decisions. Response to customer feedback can be carried out more rapidly.

This type of structure generally works best in smaller organizations or individual units within larger organizations. Start-up companies, “mom and pop shops,” and other small independent businesses are the most common examples of a flat structure.

Disadvantages of Flattened Hierarchies

Flat organizations are difficult to maintain as companies grow larger and more complex. When organizations reach a critical size, they can retain a streamlined structure; however, they cannot keep a completely flat manager-to-staff hierarchy without impacting productivity. Certain financial responsibilities may also require a traditional hierarchical structure. While the flat structure can foster employee empowerment, involvement, and creativity, it can also create inefficiency in decision-making processes. Some theorize that flat organizations become more traditionally hierarchical when they gear themselves more toward productivity.

Because the interaction between workers is more frequent, this organizational structure generally depends on a more personal relationship between workers and managers. As a result, the structure can be more time-consuming to build than a traditional hierarchical model.

9.5.2: Decentralizing Responsibility

In decentralized structures, responsibility for decision making is broadly dispersed down to the lower levels of an organization.

Learning Objective

Compare and contrast centralization and decentralization of responsibility within the organizational hierarchy

Key Points

• Decentralization is the process of dispersing decision making authority among the people, citizens, employees, or other elements of an organization or sector.
• A decentralized organization shows fewer tiers in the organizational structure, a wider span of control, and a bottom-to-top flow of ideas and decision making.
• The bottom-to-top flow of information allows lower-level employees to better inform the officials of the organization during any decision making processes.
• When companies decentralize authority, however, there can be confusion as to how final decisions are made.

Key Terms

governance

Accountability for consistent and cohesive policies, processes, and decision rights.

authority

The power to enforce rules or give orders.

mechanistic organization

A bureaucratic structure.

Decentralization is the process of dispersing decision making authority among the people, citizens, employees, or other elements of an organization or sector. In decentralized structures, responsibility for decision making and accountability are broadly dispersed down to the lower levels of an organization. This dispersion can be intentional or unintentional. A decentralized organization tends to show fewer tiers in its organizational structure (less hierarchy), a wider span of control, and a bottom-to-top or horizontal flow of decision making and ideas.

Decentralization

The management structure in a decentralized organization changes from a top-down approach to more of a peer-to-peer approach.

Contrasting Centralized and Decentralized Structures

In a centralized organization, decisions are made by top executives on the basis of current policies. These decisions or policies are then enforced through several tiers of hierarchy within the organization, gradually broadening the span of control until they reach the bottom tier.

In a decentralized organization, the top executives delegate much of their decision making authority to lower tiers of the organizational structure. This type of structure tends to be seen in organizations that run on less rigid policies and wider spans of control among each officer of the organization. The wider spans of control also reduce the number of tiers within the organization, giving its structure a flat appearance .

Decentralized organizational chart

This image illustrates a decentralized (often referred to as a “flat”) organizational chart. Note that there are not multiple layers of management; there is one manager and then the rest of the staff. This means that each staff-person necessarily has more responsibility and therefore more autonomy.

Advantages of Decentralization

One advantage of this structure—if the correct controls are in place—is the bottom-up flow of information. This flow allows lower-level employees to better inform the officials of the organization during any decision making processes. For example, if an experienced technician at the lowest tier of an organization knows how to increase the efficiency of the production, the bottom-to-top flow of information can allow this knowledge to pass up to the executive officers.

Disadvantages of Decentralization

On the other side of the argument, when companies decentralize authority there can be confusion as to how final decisions are made. It can be difficult to empower multiple people without certain decisions negatively interacting with other decisions. Decentralized organizations must be mindful of the possibility of running in too many different directions at once. Because of this, decentralization is most effective in organizations that have transparent strategies, a strong mission, and a clear vision.

9.5.3: Increasing Empowerment

Modern organizations are more aware of the value of empowered employees and actively strive to structurally increase empowerment.

Learning Objective

Discuss the advantages of empowerment in an organization, and how organizational structure can improve upon the promotion of empowered employees

Key Points

• Empowerment is a process that enables individuals and groups to fully access their personal and collective power, authority, and influence, and to employ this power when engaging with other people, other institutions, or society.
• Leaders within an organization can play a strong role in encouraging employees to put empowerment into practice.
• To enable empowerment, managers can share information, provide employees with autonomy, and migrate to self-managed teams when possible.
• Though the idea of empowerment can produce successful results, it is important to understand the risks. More decision-makers means more discussion about how a process should be accomplished and more moving parts within the organization, increasing complexity.

Key Term

empowerment

The accessing and employing of political, social, or economic power by an individual or group.

Defining Empowerment

Empowerment is a process that enables individuals and groups to fully access personal and collective power and employ this power when engaging with other people, other institutions, or society. Empowerment does not give people power; rather, it helps to release and express the power that people already have.

Empowerment encourages people to gain the skills and knowledge that allows them to overcome obstacles in life and work. This will ultimately enable personal development and a deeper sense of professional fulfillment. Empowering people in organizations can encourage more confident, capable, and motivated employees. Organizations are increasingly aware that empowerment often leads to better performance and higher operational efficiency, and there is a general trend toward structuring organizations for empowerment.

Empowerment within the Organization

Empowering employees in the workplace means providing them with opportunities to make their own decisions related to their tasks. This can be a powerful and positive aspect within an organization that promotes shared power and enables checks and balances in decision-making processes.

Empowerment in organizations includes:

• Making decisions about personal and collective circumstances;
• Accessing information and resources for decision-making;
• Considering a range of options from which to choose (and understanding the options rather than just deciding yes or no);
• Exercising assertiveness in collective decision-making;
• Employing positive thoughts toward the ability to make change;
• Learning and accessing skills for improving personal and collective circumstances; and
• Informing others’ perceptions though exchange, education, and engagement.

Though the idea of empowerment can produce very successful results, there are certain risks are involved. When turning responsibility over to others, it is important to keep in mind that diversifying power creates more voices and therefore potentially more conflict and discussion. All of these elements can slow down the decision-making process. As organizations move toward higher levels of empowerment, protocols should be put in place to mitigate failure and improve decision-making efficiency across the board.

Decentralization

One key technique of empowering employees and providing autonomy is decentralizing the organizational structure. Notice how the diagram of the centralized organization looks like one large asterisk with many spokes, whereas the diagram of the decentralized organization looks like many small interconnected asterisks.

Increasing Empowerment

Leaders within an organization can encourage employees to put empowerment into practice in several ways. If leaders want to tap into the possibilities of an empowerment-based company, they need to have confidence in employees. Employees should also be given opportunities to make their own decisions and succeed. For an empowerment-based organization, rules and policies that interfere with self-management should be made more lenient. Leaders should also set goals that can inspire people.

The following are three key concepts that leaders can use to empower employees throughout an organization:

• Share information with everyone. By sharing information with everyone, leaders gain a clear picture of the company and its current situation. Allowing all employees to view company information helps to build trust between employers and employees. This also provides decision-makers with important perspectives to assess prior to deciding.
• Create autonomy through boundaries. By opening communication through information sharing, space can be created for feedback and dialogue about what holds people back from being empowered. It is critical that leaders minimize micro-management so that employees, who are specialists at the function they are assigned, can set the tone for how a particular task is accomplished.
• Replace the old hierarchy with self-managed teams. By replacing the old hierarchy with self-managed teams, more responsibility is placed upon unique and self-managed teams; this can lead to better communication, diversity of strategies, and higher performance.

The success of the modern organization relies heavily on understanding the complexity of a diverse global market. Leveraging employee knowledge and enabling autonomy is increasingly important in capturing value and attaining competitive advantages in this complex business environment.

9.5.4: Increasing Adaptation

In order to succeed, modern organizations must constantly adapt to evolving technologies and expanding global markets.

Learning Objective

Identify the importance and inherent value of increasing adaptation within company structures and performance

Key Points

• Technological advances, global market expansions, and the potential for constant (sometimes disruptive) innovation all point to the need for organizations to be adaptive.
• Blockbuster and Netflix provide a classic example: in this case, Blockbuster was simply too slow to adapt to the demand for live-streaming videos.
• If an organization takes on the identity of a growing, adapting, and learning organization, these qualities become part of the fabric of how it operates.
• Implementing an adaptable strategy may have effects that ripple across an organization. Minimizing disruption can reduce costs and save time.
• Resistance to change is considered a major obstacle to creating effective adaptability in an organization. Integrating changes step by step while utilizing focus groups and training sessions can improve the efficacy of adaptation.

Key Term

adaptation

Adjustment to extant conditions; modification of a thing or its parts in a way that makes it more fit for existence under the conditions of its current environment.

The Importance of Adaptation

Organizational adaption is becoming increasingly relevant to both strategy and structure as the business environment changes more quickly each year. Technological innovations, global market expansions, and the potential for constant (sometimes disruptive) innovation all point to the need for organizations to be adaptive.

There are a number of examples in which some organizations have adapted to new technologies or global competition, while others have failed to adapt and subsequently gone under. Blockbuster and Netflix provide a classic example: in this case, Blockbuster was simply too slow to adapt to the demand for live-streaming videos. Netflix, on the other hand, embraced this technological evolution and pioneered a user-friendly interface, gaining the company enormous value.

Increasing Adaptation

Strategic management largely pertains to adapting an organization to its business environment. The greatest agent for organizational change is the socialization aspect of culture, which can be empowered structurally. If an organization takes on the identity of a growing, adapting, and learning organization, these qualities become part of the fabric of how it operates. Knowing how and being able to increase this adaptability is important to organizational success.

Implementing a strategy of adaptation may have effects that ripple across an organization. Increasing an organization’s ability to adapt to change and minimize disruption can reduce costs and save time. One approach for increasing adaptation is to appoint an individual to champion the changes, address and eventually enlist opponents, and proactively identify and mitigate problems.

Challenges in Adaptation

Resistance to change is considered a major obstacle to creating effective adaptability in an organization. Organizational change can lead to loss of stability and—if this instability becomes great enough—loss of organizational effectiveness.

Organizational loss of effectiveness (LOE)

Organizational change can cause a loss of stability and results in the development of a predictable and measurable set of symptoms within an organization. When a significant number of these symptoms are present simultaneously, an organizational loss of effectiveness (LOE) will occur (Grady, 2005).

The following are methods that can be employed to help an organization and its staff to cope with change:

• Form focus groups. Staff from different departments can be selected to form focus groups, where quality data can be collected. In focus group discussions, staff should be given the chance to freely express their opinions and share their experiences.
• Provide training. Providing training courses to staff on new processes or structures can help to increase staff competence and reduce their resistance to change.
• Implement changes step by step. This involves first implementing the system in small groups—such as several departments or sections—and then widening the scope of implementation. This step-by-step approach can help by exposing problems raised simultaneously across the small groups and providing management with sufficient time to solve these problems before implementing the system across the organization.

9.5.5: Moving to Flexible Work Schedules

Employers can offer flexible working arrangements in the form of flextime and telecommuting work.

Learning Objective

Identify critical factors of success in creating a “telework” organization

Key Points

• Companies have begun to recognize how important a healthy work-life balance is to the productivity and creativity of their employees. Integrating new technologies for flexible schedules is a great opportunity to capture this value.
• Flextime and telecommuting (telework) are popular strategies that enable employees to set their own schedules and work from wherever is most convenient for them.
• In addition to supporting the required incremental technologies, a well-functioning telework organization needs a management system that is at least as effective as that of a traditional organization.
• Management teams face additional issues such as how to supervise employees who are often out of the office, how to monitor staff productivity with less personal interaction, how to build a strong virtual team, and how to maintain relationships between remote employees.

Key Term

telecommute

To work from home, sometimes for part of a working day or week, using a computer connected to the employer’s network or via the internet.

Companies have begun to recognize how important a healthy work-life balance is to the productivity and creativity of their employees. Research by Kenexa Research Institute in 2007 showed that employees who were more favorable toward their organization’s efforts to support work-life balance also indicated a lower intent to leave the organization, greater pride in their organization, a willingness to recommend the organization as a place to work, and higher overall job satisfaction.

Employers can offer a range of different programs and initiatives that support such a work-life balance. Flexible working arrangements such as flextime and telecommuting work are becoming increasingly popular. More proactive employers can also provide compulsory leave, implement strict maximum hours, or foster an environment that encourages employees not to continue working after hours.

Telecommuting

Telecommuting (or telework) is a work arrangement in which employees do not commute to a central place of work. A person who telecommutes is known as a “telecommuter,” “teleworker,” or “home-sourced employee.” Many telecommuters work from home while others—sometimes called “nomad workers”—use mobile telecommunications technology to work from coffee shops or other locations. This allows employees the flexibility of adapting their work schedule to their living situation.

This arrangement is also quite popular in circumstances of sick leave, pregnancy, parenting, and other important life events. In the past these events could have resulted in temporary loss of employment. Being able to work from anywhere with an internet connection is a modern luxury that adaptable companies should be well aware of.

Home office

This small office is designed for telecommuting.

Flextime

Flextime (also called flexitime or flexi-time) is a variable work schedule, unlike traditional work arrangements in which employees work a standard 9 a.m. to 5 p.m. shift. In this arrangement, there is typically a core period of approximately 50% of the total working day when employees are expected to be at work (for example, between 11 a.m. and 3 p.m.). The rest of the working day is “flextime” in which employees can choose when they work. Employees are still required to complete the necessary work and achieve total daily, weekly, or monthly hours in the region of what the employer expects.

A flextime policy allows staff to determine when they will work, and a flexplace policy allows staff to determine where they will work. These strategies allow employees to adapt their work hours based on public transport schedules, child-care responsibilities, rush-hour traffic, and other elements.

Establishing a Telework Organization

In addition to supporting the required incremental technologies, a well-functioning telework organization needs a management system that is at least as effective as that of a traditional organization. Management teams face additional issues such as how to supervise employees who are often out of the office, how to monitor staff productivity with less personal interaction, how to build a strong virtual team, and how to maintain relationships between remote employees.

Some suggested best practices for maintaining a successful telework organization include:

• Develop a daily schedule. Setting a standardized daily schedule can help remote teleworkers feel as though they are really at work. It can also make it easier for supervisors to monitor staff activities and can lead to increased productivity.
• Establish milestone dates. Milestone dates help keep projects on track and make it easier to spot problems while there is still time to effectively deal with them.
• Encourage social networking. Employee surveys show that being able to keep in touch and communicate with colleagues despite physical distance can boost employee satisfaction and encourage top talent to stick around.
• Address problems right away. Respond to problems immediately even if they are reported by email or text message. This will prevent teleworkers from feeling isolated.
• Design key performance indicators (KPIs) for remote workers. These KPIs can also be used to measure the effectiveness of in-office staff and maintain an equivalence among the distinct employee categories.
• Start workdays by holding a five-minute team video-conference. This helps supervisors to maintain a regular check-in routine; it also enables employees to catch up on team work progress and feel connected to the whole organization.
• Manage by observation. A successful telework or telecommuting program requires a management style that is results-oriented (as opposed to task-oriented). This is referred to as management by objectives as opposed to management by observation.

9.5.6: Increasing Coordination

Increasing coordination helps organizations to maintain efficient operations through communication and control.

Learning Objective

Identify the way in which effective coordination across an organization can be increased through effective structure and good management

Key Points

• Coordination is a managerial function in which different activities of the business are properly adjusted and interlinked.
• The management team must pay special attention to issues related to coordination and governance and be able to improve upon coordination through effective management.
• Managers should strengthen communication across all facets of the organization to increase the level of integration between each moving part.
• If there is a lack of coordination, there is a risk that responsibility will become dispersed and tasks will be left unclaimed. Organizing accountability for every task helps to ensure that efforts are tangibly coordinated.

Key Terms

division

A section of a large company.

margin

A permissible difference; allowing some freedom to move within limits.

centralization

The act or process of combining or reducing several parts into a whole.

Defining Coordination

Coordination is the act of organizing and enabling different people to work together to achieve an organization’s goals. It is a managerial function in which different activities of the business are properly adjusted and interlinked.

Employees within the functional divisions of an organization tend to perform a specialized set of tasks, such as engineering. This leads to operational efficiency within that group. However, it can also lead to a lack of communication between various functional groups within an organization, rendering the organization slow and inflexible .

Organizational structure

This is an example of an organizational structure. At a high level are multiple functional groups, or “modules”—technical, marketing, and intellectual property. The linked working groups (e.g., data coding workgroup, security workgroup, and audio and video compression workgroup) within the technical functional group likely have coordinated functions.

Increasing Coordination

Coordination is simply the managerial ability to maintain operations and ensure they are properly integrated with one another; therefore, increasing coordination is closely related to improving managerial skills. The management team must pay special attention to issues related to coordination and governance and be able to improve upon coordination through effective management.

Increasing coordination internally can be accomplished by keeping all moving parts of the organization on the same page. There are a number of ways to improve upon the coordination of different departments, work groups, teams, or functional specialists. These include creating a well-communicated and accurate mission statement; clearly defining strategic objectives; monitoring and evaluating each functional group; providing company-wide updates and communications from each department; and, wherever possible, promoting cross-departmental meetings and projects. While this list is long and complex, the underlying concept is relatively simple: managers should strengthen communication across all facets of the organization to increase the level of integration between each moving part.

Structural Implications

In practice, coordination involves a delicate balance between centralization and decentralization. However, maintaining coordination does not necessarily imply that decision-making processes are centralized or that actions are carried out without the support of employees. Put simply, it is important to ensure that there is a person or team in place that takes responsibility for general tasks.

If there is a lack of coordination, there is a risk that responsibility will become dispersed and tasks will be left unclaimed. Organizing accountability for every task helps to ensure that efforts are tangibly coordinated and provides structure to operational expectations. Structure is a central determinant of effective coordination across an organization as it enables communications, underlines responsibilities, and provides concrete authority in decision-making.

8.1: An Introduction to Management

8.1.1: Definition of Management

Learning Objective

Recognize the difference between traditional, team, and servant management.

Key Points

• Management processes include planning, organizing, directing and controlling.
• An important aspect of management’s function is the allocation of finite resources.
• Resources can be human, financial, technological or natural.
• There are different management styles: Traditional, team, and servant.

Key Terms

resource

Something that one uses to achieve an objective. An examples of a resource could be a raw material or an employee.

system

A whole composed of relationships among the members.

Example

• A manager who is in charge of developing a new product, for example, must coordinate the efforts of his team (human resources) and make sure they get the tools needed to get the job done. If the goal is not met, it is the manager who is held responsible.

Management: An Overview

Management is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. Since organizations can be viewed as systems, management can also be defined as human action, including design, to facilitate the production of useful outcomes from a system. This view opens the opportunity to manage oneself, a pre-requisite to attempting to manage others.

Definition of Management

The Management Process

Management functions include: Planning, organizing, staffing, leading or directing, and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal.

There are several different resource types within management. Resourcing encompasses the deployment and manipulation of:

• Human resources
• Financial resources
• Technological resources
• Natural resources

Different type of Management Styles

There are different types of management styles, and the management process has changed over recent years. The addition of work teams and servant leadership has changed what is expected from managers, and what managers expect from their employees.

Traditional Management

There is a hierarchy of employees, low level management, mid-level management, and senior management. In traditional management systems, the manager sets out expectations for the employees who need to meet goals, but the manager receives the reward of meeting those goals.

Team Managment

In a team management arrangement the manager is a guiding hand to help the members of the team work together to solve problems but doesn’t dictate policy and the entire team receives the reward of meeting those goals.

Servant Management

With this approach, the manager helps supply resources the employees need to meet company goals. In servant leadership, the organization recognizes employees as experts in their field and work to help them work efficiently.

No matter which type of management style is used by an organization, the main objective of managers is to help employees reach company goals and maintain company standards and policies.

8.1.2: The Need for Management

Learning Objective

Explain the purpose of management

Key Points

• Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively.
• Good managers are needed to keep their organizations on track by ensuring that everything that’s being done is ethically geared toward providing what customers want.
• Good management is needed to inject motivation, creativity, discipline, and enthusiasm into areas in which they either don’t exist or they’re not necessarily wanted.
• People who work for managers must realize that it is their job to make their managers value them.

Key Term

entrepreneurship

The art or science of innovation and risk-taking for profit in business.

Example

• IBM is still in business today due to the management skills of Louis V. Gerstner, Jr. When he arrived at IBM in April 1993, an active plan was in place to dis-aggregate the company. The prevailing wisdom of the time held that IBM’s core mainframe business was headed for obsolescence. The company’s own management was in the process of allowing its various divisions to rebrand and manage themselves — the so-called “Baby Blues. ” Gerstner reversed this plan, realizing from his previous experiences at RJR and American Express that there remained a vital need for a broad-based information technology integrator. His decision to keep the company together was the defining decision of his tenure, as this gave IBM the capabilities to deliver complete IT solutions to customers. Services could be sold as an add-on to companies that had already bought IBM computers, while barely profitable pieces of hardware were used to open the door to more profitable deals.

The Purpose of Management

The purpose of management is to serve customers. Yet, if one looks through most management books for a definition of management, 99.9 percent of the time the word customer will not be mentioned. This is astonishing because serving customers in order to obtain a profit is the crux of every business organization. Equally remiss is the fact that most definitions of management neatly filter out service in their descriptions of management.

Good managers constantly streamline their organizations toward making a sale. In other words, good managers are needed to keep their organizations on track by ensuring that everything that’s being done is ethically geared toward providing what customers want . In this regard, a good manager is responsible for reducing waste and ambiguity, keeping costs down, and motivating others to do the same. In the same vein, good managers regularly take educated risks and exercise good judgement (the basis of entrepreneurship). These risks include:

The Need for Management

Management is needed in order to coordinate the activities of a business and make sure all employees are working together toward the accomplishment of the organization’s goals.

• Trying new things;
• Successfully adjusting to constant change;
• Developing subordinates (good managers aren’t afraid of letting other people shine and, in fact, they encourage it);
• Improving their own skills.

The Need for Management

Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. Since organizations can be viewed as systems, management can also be defined as human action (including design) to facilitate the production of useful outcomes from a system. Therefore, management is needed in order to facilitate a coordinated effort toward the accomplishment of the organization’s goals.

Since most managers are responsible for more work than one person can normally perform, a good manager delegates and integrates his or her work (or the work of others). A manager does this by acting as a clear channel of communication within the business that he or she serves. Good management is needed to inject motivation, creativity, discipline, and enthusiasm into areas in which they either don’t exist or they’re not necessarily wanted.

The various functions of management are classified as:

• Planning
• Organizing
• Staffing
• Leading/Directing
• Controlling/Monitoring
• Motivation

Management is also responsible for the formation and implementation of business policies and strategies.

8.1.3: Trends in Management

Learning Objective

Understand the evolving nature of management perspectives and strategies

Key Points

• Management is a constantly evolving field, with a wide variety of formal and informal approaches and perspectives.
• While new management perspectives are emerging everyday in manufacturing, technology, software, and social entrepreneurship, some of the most notable new perspectives are in software development.
• Scrum and agile management styles focus primarily on iteration and the capacity to build non-hierarchical work structures that empower growth and innovation without the rigidity of traditional management.
• Social entrepreneurship is a recent emergence in management, in which entrepreneurial management styles are being taken to the non-profit and community development sectors.

Key Terms

iteration

The process of repeating a process in pursuit of incremental improvement.

Scrum

A management philosophy predicated upon a feedback-driven iterative evolution of process.

Management is a rapidly evolving field. Even now startups all over the world are trying out new, innovative ways of looking at how to align their resources, how to make decisions, and what managerial approaches (or lack of managerial approaches) might yield the best culture for growth. It’s an intriguing time for management, and experimentation is constant. 

When looking at new management approaches, it’s useful to consider the area in which these organizations operate. Software, non-profit, and entrepreneurship are all seeing substantial deviations from standard corporate management approaches. 

Software

The two big words in software management over the past decade or two have been Scrum and Agile. Each of these approaches is a management philosophy equipped for rapid construction, iteration, and implementation.

Iterative Development

The agile management philosophy is an adaptation of iterative management. The concept is fairly simple. All production of new and innovative products and services will require constant refinement and improvement through iterative experimentation.

The agile management philosophy is an adaptation of iterative management. The concept is fairly simple. All production of new and innovative products and services will require constant refinement and improvement through iterative experimentation.

Scrum has been around since the late 1980s, but not particularly prevalent until the early 21st century. Scrum is defined as a feedback-driven empirical approach that highlights transparency, inspection, and adaptation. In terms of values, scrum discards traditional hierarchy and promotes commitment, courage, focus, openness, and respect in a team-oriented, objectives-driven environment. In terms of structure, you’ll find three groups:

Development Team – This will be your functional specialists, all collaborating on a daily basis to construct a facet (or perhaps the entirety) of a new piece of software. In scrum, this is quite often cross-functional.

Scrum Master – A facilitator, this individual focuses on removing impediments and acting as a buffer between the team and external distractions (usually integration with other teams). The scrum master will also assess progress holistically, and ensure alignment with the scrum mentality.

Product Owner (PO) – The PO focuses on being a voice of the customer and the representation of stakeholders in the team environment. Stakeholders, in this context, represent anyone with an interest in the output of that team (primarily organizational owners and other teams). The PO is not a manager, but instead a bridge between the team and the external environment they operate in.

Scrum Framework

This is an excellent illustration of how scrum mentality works. It is intrinsically a horizontal management style, meaning there is no particular managerial presence. The idea is the that the process itself is self-sustaining in pursuit of agreed upon objectives via an iterative cycle of production.

This is an excellent illustration of how scrum mentality works. It is intrinsically a horizontal management style, meaning there is no particular managerial presence. The idea is the that the process itself is self-sustaining in pursuit of agree upon objectives via an iterative cycle of production.

Social Entrepreneurship

Utilizing the ever-evolving perspectives of start up companies and entrepreneurs, non-profit organizations and other community-oriented groups have begun replacing traditional management approaches with a more grassroots perspective. A key metric to a social entrepreneur isn’t profit but community impact, usually in areas such as poverty alleviation, health care, education, and community development. This management style is small, focused, innovation-driven, and non-hierarchical. 

8.2: Functions of Managers

8.2.1: Planning and Decisions

Planning is the most fundamental of the five management functions; without it, none of the other functions can be carried out effectively.

Learning Objective

Identify planning as the most fundamental role of management

Key Points

• Planning is a way to project expectations, anticipate problems, and guide decision making.
• The planning process includes the selection of objectives, programs, or projects, and the policies and procedures needed to accomplish them.
• Plans exist at the strategic level, the program level, and the project level.
• It is important to review plans as conditions and circumstances change over time.

Key Terms

vision

An ideal or a goal toward which one aspires.

mission

A set of tasks that fulfills a purpose or duty; an assignment set by an employer.

tactic

A maneuver or action calculated to achieve some end.

Example

• Revlon’s vision and mission statement are examples of how companies focus their attention on a common purpose to help make decisions. Its mission is to emerge as the leader in cosmetic and personal care throughout the world. Its vision is to satisfy the needs of their customers with glamour and excitement that they provide at an affordable price.

What Does Planning Have to Do with Management?

Management operates through various functions, often classified as:

• Planning
• Organizing
• Staffing
• Leading/Directing
• Controlling/Monitoring

Of the five functions, planning is the most fundamental; it is the management form from which the other four stem. To wit:

• A manager is ready to organize and staff only after goals and plans to reach the goals are in place.
• Likewise, the leading function (that is, influencing the behavior of people in the organization) depends on the goals to be achieved.
• Finally, in the controlling function, the determination of whether or not goals are being accomplished and standards are being met is based on the planning function. The planning function provides the goals and standards that drive the controlling function.

Therefore, plans are the seeds from which the organization functions. Even so, the need for planning is often apparent only after the fact. In the short run, planning is easy to postpone. The postponement of planning especially plagues labor-oriented, hands-on managers.

The Master Plan

Planning takes time, but its importance should not be overlooked.

What is Planning?

Planning is concerned with the future impact of today’s decisions. It is a technique of projecting expectations, anticipating problems, and guiding decision making.

The major purpose of planning is to focus the attention of all involved on a common purpose and to inform the decisions that needs to be made along the way. A plan helps to, and serves as a way to, measure the efficiency and effectiveness of an organization in accomplishing its strategic plans.

Companies often use SWOT analysis when planning. SWOT is a structured planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. Of these four items, it is hardest for companies to control threats.

Some important planning terms, from most general to most specific, are:

• Vision: Nonspecific directional and motivational guidance for the entire organization. Top managers normally provide a vision for the business. It is the most emotional of the four.
• Mission: An organization’s reason for being. It is concerned with scope of the business and what distinguishes this business from similar businesses. Mission reflects the culture and values of top management.
• Objectives: Ideas that refine the mission and address key issues within the organization such as market standing, innovation, productivity, physical and financial resources, profitability, management, and worker performance and efficiency. They are expected to be general, observable, challenging, and untimed.
• Goals: Specific statements of anticipated results that further define the organization’s objectives. They are expected to be SMART: Specific, Measurable, Attainable, Rewarding, and Timed.
• Tactics: Who, what, when, where and how activities will take place to accomplish a goal.

The Anatomy of Plans

Plans can be created for projects, programs, or strategies. During the planning process, decision makers deliberately select objectives, programs, or projects, as well as the policies and procedures for accomplishing them within organizations. The creation of plans inevitably involves decision-making, because the planner must select from among considered alternatives.

Plans can one of the following forms:

• Prospectus
• Blueprint
• Proclamation
• Budget
• Campaign

Strategy Level, Program Level, and Project Plans

At the strategy level, plans articulate longer-term objectives and executive management’s vision of how the organization intends to achieve those objectives. In the process of determining a company’s strategic plan, three basic questions are answered:

1. Where are we now?
2. Where do we want to be?
3. How do we get there?

Program level plans translate strategic plans within functional areas to coordinate activity across functions and up and down the layers of an organization. A budget is an example of a financial plan that formalizes strategic plans in monetary terms.

On the other hand, project plans are more granular and lay out the specific tactics that need to be followed by members of the organization in order to execute the strategy.

The courses of action in a project plan include:

• A calendar of events
• The division of tasks
• The required resources and scheduling
• Expectations for quality and completion of the work

Can Plans Change?

Regardless of the level of planning, plans must be re-examined regularly in the light of changing conditions and circumstances.

8.2.2: Organizing Tasks

Managers must organize to see their plans to fruition, thus assigning tasks to individuals and arranging them in an framework that allows decision making.

Learning Objective

Explain the nature of organization

Key Points

• Organization deals with issues like human resources, finance, and the establishment of priorities.
• Some of the characteristics associated with organization include: specialization and division of work; goal achievement; the grouping of individuals into departments; differentiated functions; and continuity.
• Organization helps companies achieve goals, make the best use of resources; grow; and focus on the betterment of their employees.
• Organizational design is a process that helps managers organize and align the structure, process, rewards, metrics, and talent with the business’ strategy.

Key Terms

organizing

the management function of forming patterns of relationships among workers, and making optimum use of the resources required to enable the successful carrying out of plans

matrix

Matrix management is a type of organizational management in which people with similar skills are pooled for work assignments.

diversification

A corporate strategy in which a company acquires or establishes a business other than that of its current product

resource

Something that one uses to achieve an objective. An examples of a resource could be a raw material or an employee.

Example

• A company might decide that a functional structure is best for them. In such a structure, the engineering department would be staffed only with software engineers. If a company decides that a matrix structure is best for it. An example would be a company that produces two products, “product a” and “product b”. Using the matrix structure, this company would organize functions within the company as follows: “product a” sales department, “product a” customer service department, “product a” accounting, “product b” sales department, “product b” customer service department, “product b” accounting department.

Organizing: An Overview

Once a plan has been created, a manager can begin to organize.

Organizing, in a company’s point of view, is the management function that usually follows planning. It involves the assignment of tasks, the grouping of tasks into departments, and the assignment of authority and allocation of resources across the organization. During the organizing process, managers co-coordinate employees, resources, policies and procedures to facilitate the goals set out in the plan.

Organizing is highly complex and can involve:

• Human resources
• Finance
• The establishment of priorities

The synchronization of all of these elements is important if results are to be obtained.

The Nature of Organization

The following are the important characteristics of organization.

Specialization and Division of Work

• The entire philosophy of organization is centered on the concepts of specialization and division of work.
• The division of work is assigning responsibility for each organizational component to a specific individual or group thereof. It becomes specialization when the responsibility for a specific task lies with a designated expert in that field.
• The efforts of the operatives are coordinated to allow the process at hand to function correctly. Certain operatives occupy positions of management at various points in the process to ensure coordination.

Orientation Towards Goals

Every organization has its own purposes and objectives. Organizing is the function employed to achieve the overall goals of the organization. Organization harmonizes the individual goals of the employees with overall objectives of the firm.

Composition of individuals and groups

• Individuals form a group and the groups form an organization. Thus, organization is the composition of individual and groups.
• Individuals are grouped into departments and their work is coordinated and directed towards organizational goals.

Differentiated functions

• The organization divides the entire work and assigns the tasks to individuals in order to achieve the organizational objectives; each one has to perform a different task and tasks of one individual must be coordinated with the tasks of others. Collecting these tasks at the final stage is called integration.

Continuity

• An organization is a group of people with a defined relationship in which they work together to achieve the goals of that organization. This relationship does not come to end after completing each task. Organization is a never ending process.

Benefits of Organization

Together, these characteristics:

Help to achieve organizational goals

• Organization is employed to achieve the overall objectives of business firms. Organization focuses attention of individuals objectives towards overall objectives.

Optimise the use of resources

• To make optimum use of resources such as men, material, money, machine and method, it is necessary to design an organization properly.
• Work should be divided and right people should be given right jobs to reduce the wastage of resources in an organization.

Aid managers in performing other managerial functions

• Additional planning, organizing, staffing, directing and controlling cannot be implemented without proper organization.

Facilitate growth and

diversification

• A good organization structure is essential for expanding business activity. Organization structure determines the input resources needed for expansion of a business activity similarly organization is essential for product diversification such as establishing a new product line.

Facilitate human treatment of employees

• Organization has to operate for the betterment of employees and must not encourage monotony of work due to higher degree of specialization.
• These days, organization has adapted the modern concept of systems approach based on human relations and it discards the traditional productivity and specialization approach.

Organizational Design: Helping Managers Organize

Organization design can be defined narrowly, as the process of reshaping organization structure and roles, or it can more effectively be defined as the alignment of structure, process, rewards, metrics and talent with the strategy of the business.

Organizational Design

This is one type of matrix organizational structure.

Organization design may involve strategic decisions, but is properly viewed as a path to effective strategy execution. The design process nearly always entails making trade-offs of one set of structural benefits against another.

Many companies fall into the trap of making repeated changes in organization structure, with little benefit to the business. This often occurs because changes in structure are relatively easy to execute while creating the impression that something substantial is happening. This often leads to cynicism and confusion within the organization.

More powerful change happens when there are clear design objectives driven by a new business strategy or forces in the market that require a different approach to organizing resources.

8.2.3: Staffing Roles

The managerial responsibility of staffing is an involved process of hiring, training, compensating, positioning, and assessing team members to enable operational success.

Learning Objective

List the various functions involved in staffing for managers

Key Points

• Building a team can make or break an operational process, and the manager is tasked with the majority of the responsibility in accomplishing this.
• The complexity of the modern job market, and the huge volume of qualified talent, makes the hiring process both an incredible opportunity and a complex filtering process.
• Once an employee is selected, training them for success and determining optimal compensation is key to getting the employee satisfied and up to speed.
• On the more strategic side of staffing, managers must appraise performance and identify gaps in the overall team’s execution.
• Staffing is only one of many responsibilities managers must attend to, giving some idea of the scope of responsibilities often shouldered by modern management.

Key Term

performance appraisals

Employees have set objectives and milestones, and performance can be assessed via comparing actual outcomes to desired outcomes.

Managerial Staffing Responsibilities

One of the core functions of a manager is building and maintaining a team, which is accomplished through staffing responsibilities. Simply put, staffing is the managerial process of hiring, positioning, and overseeing employees. Often enough, human resources are both the most expensive and the most valuable assets a business has. Having internal talent can be a core competitive advantage, and bringing in the right people and positioning them for success is a core managerial responsibility.

Managers perform job analyses for each of the roles they intend to manage. This analysis includes hiring, training, compensation, performance appraisals, identification of gaps, and various compliance considerations.

Hiring

Finding talent is an enormous challenge and opportunity in today’s economy. With the diversity of skill sets, the high volume of applicants, and the growing complexity of organizational needs, managers are busier than ever when it comes to the hiring process. Many job postings will receive hundreds or even thousands of applicants, and filtering through this large applicant pool can be expedited by software solutions and the hiring of third parties to manage the hiring process.

Once a few key candidates are selected, there are a variety of important considerations prior to hiring. Managers often conduct one-on-one interviews, team interviews, personality tests, skill assessments, reference checks, and a variety of other alignment tests to ensure fit. Hiring is an expensive process, with expensive repercussions for mistakes. It is a core managerial function with substantial consequences, both positive and negative.

Training

Once a new employee is selected, it can take anywhere from a week to 6 months to truly get them up to speed. Every job is different, and every job has different training requisites. Investing both time and capital in preparing employees for success can create significant increases in value and return on investment, as well as empowering employees to grow and improve. Hiring employees without proper on-boarding can result in costly mistakes, role uncertainty, and ultimately job dissatisfaction.

Compensation

Compensation as a managerial responsibility isn’t just about salary (though certainly that’s an important component). Managers must understand what their employees need, and help to provide it via benefits, bonuses, training, and opportunities for professional growth. From health care to helping with a university degree, organizations have the opportunity to create employee loyalty as well as develop talent via strong staffing skills on behalf of management.

Performance Appraisals

Whether management does it on an ongoing basis, an annual basis, or a quarterly basis, most managers must consider the performance of their employees at one point or another. This can be done formally (and often is at larger firms) or informally, and must include both past performance and the expectations set at the beginning of the appraisal period. The employee must know before hand what it is they will be assessed on, and what the objectives and expectations are. It is also relatively common to attach incentives to performance appraisals, to provide value when value is provided.

Identifying Gaps

From a more strategic frame, managers must consider the overall process and objectives their work group is aiming to accomplish alongside what resources and skills must be present to do so. That means identifying where there are functional or skill gaps in a given team, and solving that problem. There are more solutions than just hiring full-time employees too. Managers may notice a skill gap that only requires 10 hours per week to fill. In this case, hiring a contractor on an hourly basis is lower risk and lower cost than hiring a new employee.

Compliance

Finally, managers must comply with a variety of legal aspects in collaboration with the HR department. Employee rights, unions, and other legal requirements from the governing bodies must be built into contracts and operations. 

Conclusion

When combining all of these responsibilities, you have one facet of a manager’s overall responsibilities. This provides some scope to not only how much is involved in staffing, but how much can be involved in the role of management in general. Managers must also plan, organize, direct, and control.

Management Process

Other managerial functions are highlighted in this diagram, in addition to the tasks involved in staffing.

Other managerial functions are highlighted in this diagram, in addition to the tasks involved in staffing.

8.2.4: Leading Teams

Certain leadership competencies help people become effective leaders; successful team leaders follow planning and implementation processes.

Learning Objective

Evaluate effective team leadership

Key Points

• Team leaders provide guidance, instruction, direction, and leadership to their respective teams. They must build teams and ensure that they work well together.
• A team leader reports to a project manager who oversees several teams.
• Effective team leaders possess six leadership competencies that translate to the success of their teams.
• Team leaders must be able to balance being a member of the team and a leader who manages the progress of the team.

Key Terms

leading

the management function of determining what must be done in a situation and getting others to do it

goal

a result that one is attempting to achieve

leadership

The capacity of someone to lead.

project manager

one who manages projects.

Example

• Here are examples of what employees view as good and bad team leaders. The members of Bob’s team think that he is a great team leader. All of them are impressed by his knowledge. But it is not his knowledge alone that makes him a good team leader. He also has the ability to “facilitate” discussion without imposing their own opinions. During the discussions je engages his team members with thought provoking “what if” scenarios. In the end, he is able to take multiple ideas and combine them into one concise statement reflective of all input. In contrast, John frustrates his team members. He sits in meetings and simply takes notes without doing anything to inspire creative thinking. He is only wants to make sure that the end results express his ideas. His team members feel dejected and useless.

Leading Teams

The Team Leader: an Overview

A team leader or team lead is someone (or in certain cases there may be multiple team leaders) who provides guidance, instruction, direction, and leadership to a group of other individuals (the team) for the purpose of achieving a key result or group of aligned results.

There are many elements that create, and are essential to be an effective leader who has the power to motivate a team and drive success. There is often a balancing act that the leader must manage between being a leader and a member while ensuring the goal is clear and obtainable.

A good team leader listens constructively to the membership and to the customer(s) of the results that the team is charged with delivering.

The Team Leader: Reporting Structure

The team lead reports to a project manager (overseeing several teams). The team leader monitors the quantitative and qualitative result that is to be achieved. The leader works with the team membership.

The team membership may not directly report or answer to the team leader (who is very often a senior member of the organization but may or may not be a manager), but would be expected to provide support to the team leader and other team members in achieving the team’s goals.

The Team Leader: Responsibilities

The responsibilities of a team lead vary greatly between organizations, but usually include some responsibility for team building and ensuring teamwork.

The term is used to emphasize the cooperative nature of a team, in contrast to a typical command structure, where the head of a team would be its commander.

The Team Leader: Leadership Competencies

There are six leadership competencies that are the building blocks to becoming an effective leader:

• Focus on the goal,
• Ensure a collaborative climate,
• Build confidence,
• Demonstrate sufficient technical know-how,
• Set priorities,
• Manage performance as described When Teams Work Best by LaFasto and Larson.

Does an effective team leader both merge into the group as a member of the team and also maintain a leadership role? And if so, how?

A leader is the key player in the game that is comprised of challenge and risk. Therefore, an effective team leader must be both a component to the team and also a leader to manage the team’s progress.

The leader cannot possibly be competent in every area without being engaged in the team. The leader must know each member and the team as a whole in order to bring them all together and create a process that is open, productive, and promotes confidence.

An effective leader uses each member’s contributions and energy to focus on a common goal.

Essentially, a leader’s job is to add importance to the team’s effort, which cannot be done without being a member.

It is very common for a team leader to be in the dark about their team and the everyday operations. This is a consequence of a leader’s disengagement and lack of membership with the team.

Moreover, the team’s contention usually gives birth at this point and lends itself to decreased productivity and satisfaction. An effective leader needs to be able to pinpoint problems and praise excellence within the group, which cannot be done from the sidelines.

The leader is a part of the overall process; therefore, a relationship naturally exists. However, it is up to the leader whether to nurture that relationship or minimize its importance.

The team leader must understand the team’s vision and clearly define the goal to guarantee success and member loyalty. One cannot lead a team without knowing the purpose and goal of the team. The team leader creates a collaborative climate to ensure that the best thinking and ideas of the team are represented. Again, a wholesome climate cannot be established without knowing the members and becoming engaged in the team.

The foundation of a highly motivated and successful team is the members’ understanding and relevance of their goal. An effective leader’s trust in the team goal is vital to the member’s commitment.

The members become isolated and discouraged when the leader’s investment is minimal. Team members want the opportunity to prove their value and worth to the goal and the leader. The leader must be involved and a member of the team to effectively influence the members’ productivity and function in the grand scheme of things.

Leading Teams

Team Leadership

8.2.5: Knowledge Management

Organizations use knowledge management to identify, create, represent, distribute, and enable strategy and process.

Learning Objective

Explain the importance and recent developments in Knowledge Management (KM)

Key Points

• Knowledge management typically focuses on specific organizational objectives.
• Criteria have been developed that help organizations measure the benefits they receive from knowledge management.
• Technology plays a large role in the development of knowledge management tools.
• Knowledge management efforts tend to overlap those of organizational learning and are, in fact, seen as an enabler of organizational learning.

Key Terms

management development

the process by which company employees responsible for overseeing departments or the whole company learn and improve their skills not only to benefit themselves but also their employing organizations

artificial intelligence

The branch of computer science dealing with the reproduction or mimicking of human-level intelligence, self-awareness, knowledge, conscience, thought in computer programs.

groupware

software designed to be used collaboratively by multiple users on a network

organizational learning

In Organizational development (OD), learning is a characteristic of an adaptive organization, i.e., an organization that is able to sense changes in signals from its environment (both internal and external) and adapt accordingly.

Example

• Here are examples of the knowledge management tools various companies use: At Xerox and World Bank, groups meet regularly to share knowledge and learn from each other. Accenture and Ernst & Young use databases of codified knowledge assets (known as knowledge repositories). Hewlett-Packard and Microsoft use expertise directories.

Knowledge Management

Knowledge management (KM) comprises a range of strategies and practices used in an organization to identify, create, represent, distribute, and enable the adoption of insights and experiences. Such insights and experiences comprise of knowledge, either embodied in individuals or embedded in organizations, such as processes or practices. Once an organization has the framework in place that knowledge management provides, it can design its strategy, structure and processes in such a way that it uses what it knows to. This, in turn, creates value for its customers and the community as a whole.

Organizational Functions of Knowledge Management and Their Benefit

Knowledge management efforts typically focus on organizational objectives such as:

• Improved performance
• Competitive advantage
• Innovation
• The sharing of lessons learned
• Integration
• Continuous improvement of the organization

As a result, companies benefit as they are able to:

• Develop new products and services that add value to their customers (innovation, competitive advantage)
• Improve the value of their existing products (the sharing of lessons learned, improved performance, competitive advantage)
• Control costs and promote reuse (integration, continuous improvement of the organization, the sharing of lessons learned);
• Respond to environmental changes faster and experience less uncertainty (the sharing of lessons learned which can provide general knowledge about the environment)

How does an Organization Know it is Receiving these Benefits?

Here are a few of the criteria for measuring the efficacy of a knowledge management strategy:

1. How long it takes to respond: This metric includes the speed in which the organization responds to customer needs, requests, or problems; brings a new product or service to market; and enters new markets.
2. How much knowledge is reused: This metric measures how often employees access and use knowledge assets and avoid “re-inventing the wheel”.
3. How much is made from new products: This metric loos at the revenue from products that have been developed recently or are a certain number of years old.
4. How satisfied and empowered employees are and feel: This metric measure the ability of the organization to hire talented staff, the ability of the organization to keep talented staff, and the amount of influence these knowledgeable staff members have.

Facets of Knowledge Management

Early KM technologies included online corporate yellow pages as expertise locators and document management systems. Combined with the early development of collaborative technologies (in particular Lotus Notes), KM technologies expanded in the mid-1990s. Subsequent KM efforts leveraged semantic technologies for search and retrieval and the development of e-learning tools for communities of practices (Capozzi 2007). Knowledge management systems can thus be categorized as falling into one or more of the following groups:

• Groupware
• Document management systems
• Expert systems
• Semantic networks
• Relational and object oriented databases
• Simulation tools
• Artificial intelligence (Gupta & Sharma 2004)

More recently, the development of social computing tools (such as bookmarks, blogs, and wikis) have allowed more unstructured, self-governing or ecosystem approaches to the transfer, capture and creation of knowledge, including the development of new forms of communities, networks.

Software tools in knowledge management are a collection of technologies and are not necessarily acquired as a single software solution. Furthermore, these knowledge management software tools have the advantage of using the organization’s existing information technology infrastructure.

Organizations and business decision makers spend a great deal of resources and make significant investments in the latest technology, systems and infrastructure to support knowledge management. It is imperative that these investments are validated properly, made wisely, and that the most appropriate technologies and software tools are selected or combined to facilitate knowledge management.

Knowledge Management in Education and in Corporations

An established discipline since 1991 (see Nonaka 1991), KM includes courses taught in the fields of business administration, information systems, management, and library and information sciences (Alavi & Leidner 1999). More recently, other fields have started contributing to KM research, such as information and media, computer science, public health, and public policy. Many large companies and non-profit organizations have resources dedicated to internal KM efforts, often as a part of their business strategy, information technology, or human resource management departments (Addicott, McGivern & Ferlie 2006). Several consulting companies also exist that provide strategy and advice regarding KM to these organizations.

Knowledge Management

The Knowledge Spiral

8.2.6: Controlling Activities

Controlling is a core managerial function defined by observing and optimizing operational processes.

Learning Objective

Understand the managerial process of control

Key Points

• Organizations are essentially a combination of processes, each of which benefits from managerial control.
• Control is simply the activity of observing a given organizational process, measuring the performance compared to a previously established metric, and improving it where possible.
• At the upper-managerial level, control revolves around setting strategic objectives in the short and long term, as well as measuring success.

Key Term

iterate

Repeating processes in order to identify and incorporate improvements.

Controlling

One facet of management is called controlling, and it is an important piece of the management puzzle. Control is observing current (and projecting future) processes and operational systems in order to avoid mistakes, identify improvements, ensure objectives are accomplished, and consider the big picture. Organizations are made up of operational systems, each of which can be iterated upon and optimized for improved performance.

The Four Elements of Control

The process of control can usually be divided into the following four components:

1. The process to be controlled – This is simply the aspect (or entirety) of a process being measured. For example, let’s say getting customers to a website via online ads.
2. The sensor – The sensor is the component that measures the condition being controlled. In this case, Google analytics will provide the information of how many individuals see the ad and how many come to the website as a result.
3. The comparator – The comparator is the expectation the actual results will be compared to. In our example, let’s say we’re looking for 5% of people who see the ad to come to the website.
4. The activator – The activator is what will intervene to improve the process, if necessary. Let’s say overall only 2% of people clicked the ad and came to the website. The activator will be the tactical changes management will take to get the current operational efficiency improved to the desired level.

Production Control

This chart demonstrates the control process chronologically over time, and the way in which management can actively impact the execution of a given operation.

This chart demonstrates the control process chronologically over time, and the way in which management can actively impact the execution of a given operation.

Strategic Control

The above example relates primarily to an operational process. Optimizing operational processes is often done at the mid-managerial level. At the upper managerial level, strategic control is a similar process in a broader context. Strategic control pertains to four elements as well:

• Mission statements/vision statements/operational plans – the identification and communication of the strategic outcomes desired by the organization
• Short and long-term objectives – the description of the strategic activities to be carried out (attached to specific managed resources) in pursuit of the above statements
• Measurement and Tracking – the creation and implementation of a reporting system to track the progress and success of the objectives identified
• Enabling Iteration – Once the operations are in place, the organization will begin pursuing the noted objectives. At this point, the organization needs systems to change and evolve the process for improvement.

Management Control Systems

This chart demonstrates the relationship between various work groups in the controlling process.

This chart demonstrates the relationship between various work groups in the controlling process.

8.2.7: Customer Experience Management

Customer experience management focuses the operations and processes of a business around the need of the individual customer.

Learning Objective

Explain the difference between Customer Experience Management (CEM) and Customer Relationship Management (CRM)

Key Points

• The goal of customer experience management (CEM) is to move customers from satisfied to loyal and then from loyal to advocates.
• Customer experience solutions optimize the end-to-end customer experience.
• Customer experience management differs from customer relationship management is that the former focuses on customer need and desire.

Key Terms

business model

The particular way in which a business organization ensures that it generates income, one that includes the choice of offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

customer relationship management

Customer relationship management (CRM) is a widely implemented model for managing a company’s interactions with customers, clients, and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support.

Example

• The customer experience has emerged as the single most important aspect in achieving success for companies across all industries (Peppers & Rogers, 2005). For example, Starbucks spent less than $10MM on advertising from 1987 to 1998, yet added over 2,000 new stores to accommodate growing sales. Starbucks’ popularity is based on the experience that drove its customers to highly recommend their store to friends and family.

What Is Customer Experience Management (CEM)?

Customer experience management (CEM) is a strategy that focuses the operations and processes of a business around the needs of the individual customer. Companies are focusing on the importance of the experience. Jeananne Rae says that companies are realizing that “building great consumer experiences is a complex enterprise, involving strategy, integration of technology, orchestrating business models, brand management and CEO commitment.”

According to Bernd Schmitt, “the term ‘customer experience management’ represents the discipline, methodology and/or process used to comprehensively manage a customer’s cross-channel exposure, interaction and transaction with a company, product, brand or service.”

The goal of customer experience management is to move customers from satisfied to loyal and then from loyal to advocate.

In-N-Out Burger

University Tower in Irvine, next to the University of California. This office building is home to the corporate headquarters of In-N-Out Burger. The In-N-Out restaurant chain has developed a highly loyal customer base and has been rated as one of the top fast food restaurants in several customer satisfaction surveys.

Customer experience solutions provide strategies, process models, and information technology to design, manage, and optimize the end-to-end customer experience process.

Why Isn’t Customer Relationship Management Enough?

Traditionally, managing the customer relationship has been the domain of customer relationship management (CRM). However, CRM strategies and solutions are designed to focus on product, price, and enterprise process, with minimal or no focus on customer need and desire.

The result is a sharp mismatch between the organization’s approach to customer expectations and what customers actually want, resulting in the failure of many CRM implementations.

Where CRM is enterprise-focused and designed to manage customers for maximum efficiency, CEM is a strategy that focuses the operations and processes of a business around the needs of the individual customer.

Companies are focusing on the importance of the experience and, as Jeananne Rae notes, realizing that “building great consumer experiences is a complex enterprise, involving strategy, integration of technology, orchestrating business models, brand management and CEO commitment” (2006).

8.3: Types of Management

8.3.1: Management Levels: A Hierarchical View

An organization can have many different managers, across many different titles, authority levels, and levels of the management hierarchy.

Learning Objective

Recognize the difference between low-level, middle-level and top-level management

Key Points

• The three levels of management typically found in an organization are low-level management, middle-level management, and top-level management.
• Top-level managers are responsible for controlling and overseeing the entire organization.
• Middle-level managers are responsible for executing organizational plans which comply with the company’s policies. These managers act at an intermediary between top-level management and low-level management.
• Low-level managers focus on controlling and directing. They serve as role models for the employees they supervise.

Key Terms

middle management

company employees that are accountable for controlling and overseeing a department

top management

company employees responsible for controlling and overseeing the entire organization

board of directors

A group of people, elected by stockholders, to establish corporate policies, and make management decisions.

manager

A person whose job is to manage something, such as a business, a restaurant, or a sports team.

hierarchy

Any group of objects ranked so that every one but the topmost is subordinate to a specified one above it.

Example

• Examples of top-level managers include a company’s board of directors, president, vice-president and CEO; examples of middle-level managers include general managers, branch managers, and department managers; examples of low-level managers include supervisors, section leads, and foremen.

Management Levels: An Overview

Most organizations have three management levels:

• Low-level managers;
• Middle-level managers; and
• Top-level managers.

These managers are classified in a hierarchy of authority, and perform different tasks. In many organizations, the number of managers in every level resembles a pyramid.

Below, you’ll find the specifications of each level’s different responsibilities and their likely job titles.

Top-level managers

The board of directors, president, vice-president, and CEO are all examples of top-level managers.

These managers are responsible for controlling and overseeing the entire organization. They develop goals, strategic plans, company policies, and make decisions on the direction of the business.

In addition, top-level managers play a significant role in the mobilization of outside resources.

Top-level managers are accountable to the shareholders and general public.

Middle-level managers

General managers, branch managers, and department managers are all examples of middle-level managers. They are accountable to the top management for their department’s function.

Middle-level managers devote more time to organizational and directional functions than top-level managers. Their roles can be emphasized as:

• Executing organizational plans in conformance with the company’s policies and the objectives of the top management;
• Defining and discussing information and policies from top management to lower management; and most importantly
• Inspiring and providing guidance to low-level managers towards better performance.

Some of their functions are as follows:

• Designing and implementing effective group and intergroup work and information systems;
• Defining and monitoring group-level performance indicators;
• Diagnosing and resolving problems within and among work groups;
• Designing and implementing reward systems supporting cooperative behavior.

Low-level managers

Supervisors, section leads, and foremen are examples of low-level management titles. These managers focus on controlling and directing.

Low-level managers usually have the responsibility of:

• Assigning employees tasks;
• Guiding and supervising employees on day-to-day activities;
• Ensuring the quality and quantity of production;
• Making recommendations and suggestions; and
• Upchanneling employee problems.

Also referred to as first-level managers, low-level managers are role models for employees. These managers provide:

• Basic supervision;
• Motivation;
• Career planning;
• Performance feedback; and
• Staff supervision.

Management Levels

Hierarchical view of management in organizations

8.3.2: Management Areas: A Functional View

Organizational management is often approached by identifying business functions and assigning leadership to those functions.

Learning Objective

Understand management areas and why they are often viewed from a functional perspective

Key Points

• Organizations are essentially a group of different functions, aligned to create a specific product or service. Assigning managers to different functional areas is a popular approach to business management.
• Viewing organizational management from this perspective is useful in ensuring each function has a specialist in place with the knowledge and expertise to make sound decisions.
• Some common management areas include marketing, finance, IT, sales, human resources, and legal.
• Taking a look at an organizational chart is useful in understanding how management areas are commonly identified from a functional view.

Key Terms

organizational chart

A chart outlining the structure of an organization and the way in which the different roles, functions, and departments interact with one another.

best practices

The specific professional activities that produce near optimal results.

Understanding Functional Management Areas

Businesses are comprised of a variety of different tasks which, when coordinated properly, create value through producing products and/or services. Each of these different tasks, or functions, require management and alignment. One approach to management is assigning leadership roles with authority and accountability over these different tasks, or management areas.

This view creates management positions with authority over a given functional department. These management areas can span a wide variety of skills and functions, but the most recognizable and common include marketing, finance, human resources, operations, software development, and IT.

This functional view emphasizes managers who are specialists in their fields who are also capable of leading teams, balancing budgets, and thinking tactically (and sometimes strategically, at the upper levels). 

The Role of a Functional Management

Functional management is focused on the execution of a specific organizational task within functional areas, through organizing and leading an organization’s talent in a given field. Functional managers have a high level of technical knowledge and skills relative to the area they manage and focus their efforts on achieving best practices.

Let’s quickly explore an example of a functional manager to clarify the role and responsibilities. A human resources manager in an organization would be expected to oversee all operations within the scope of human resources. At a medium or larger sized organization, this could include managing specialists in payroll, recruitment, talent development, legal, and a variety of other specializations within the scope of a human resources team. 

The manager shouldn’t execute each specific task, but instead understand what is required to complete these tasks. The manager must have the broad technical knowledge required to ensure each individual within that functional team has the skills, resources, and alignment necessary to effectively carry out these functions. 

Illustrating Functional Management

A simple way to understand how this all plays out in an organization is a simple organizational chart (org chart, as they are commonly referred to). By taking a look at how the departments are divided, it becomes fairly easy to assume what types of management areas exist from a functional view. As a result, it’s fairly common to receive an org chart when you start a job (particularly at larger companies), to understand who reports to whom, and regarding what tasks. 

Organizational Chart

This is a simple example of an organizational chart, in this case at an advertising agency. By looking at each functional area, and considering how it relates to broader functional areas, it becomes clear how management areas are divided from a functional perspective.

This is a simple example of an organizational chart, in this case at an advertising agency. Through looking at each functional area, and considering how they interact with broader functional areas, it becomes clear how management areas are divided from a functional perspective.

8.4: Decision Making

8.4.1: Observation: Framing the Problem

A frame in social theory consists of a schema of interpretation that individuals rely on to understand and respond to events.

Learning Objective

Apply the framing problem to decision making

Key Points

• People do not look at an event and then “apply” a frame to it; people constantly project into the world around them the interpretive frames that allow them to make sense of it.
• The basis of framing is the selective influence of information on a person’s decision- making process based on internal heuristics.
• Framing can affect the outcome (i.e., the choices one makes) of choice problems, to the extent that several of the classic axioms of rational choice do not hold. This led to the development of the prospect theory as an alternative to rational choice theory.
• Depending on how the information is presented, framing can lead to entirely rational individuals making completely different decisions based on the way information is presented. Numerous experiments have shown this to be the case.
• Generally, people prefer absolute certainty in situations where information is positively framed, while they prefer risk-seeking behavior when decisions are framed in negative terms.

Key Terms

Rational choice theory

Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modelling social and economic behavior. Rationality, interpreted as “wanting more rather than less of a good,” is widely used as an assumption of the behavior of individuals in microeconomic models and analysis and appears in almost all economics textbook treatments of human decision making.

schema

An outline or image universally applicable to a general conception, under which it is likely to be presented to the mind.

heuristics

A mental shortcut that may not always yield desired results.

Example

• Tversky and Kahneman’s (1981) Asian disease experiment demonstrated the problem with framing. Two groups of subjects were given a fictional scenario with the same information, presented in different ways. An unusual disease from Asia was going to hit the United States and kill 600 people. Group A were given two alternatives: either save 200 people for certain; or save 600 with a 1/3 probably, with a 2/3 chance that all will die. Group B was given the following choices: 400 die for certain; or nobody dies with a 1/3 probability, and a 2/3 chance and all die. Group A overwhelmingly selected the first option, while Group B chose the latter option in their case. This experiment demonstrated the huge effect that framing can have on otherwise rational decision making.

A frame in social theory consists of a schema of interpretation that individuals rely on to understand and respond to events. In other words, people build a series of mental filters through biological and cultural influences and use those filters to understand the world. Their choices are influenced by their frames.

Explanation

When one seeks to explain an event, the understanding often depends on the individual’s frame. If a friend rapidly closes and opens an eye, we will respond very differently depending on whether we attribute this to a purely “physical” frame (s/he blinked) or to a social frame (s/he winked).

Though the former might result from a speck of dust (resulting in an involuntary and not particularly meaningful reaction), the latter would imply a voluntary and meaningful action (e.g., to convey humor to an accomplice).

People do not look at an event and then “apply” a frame to it; people constantly project into the world around them the interpretive frames that allow them to make sense of it. People only shift frames when incongruity calls for a frame shift. In other words, people only become aware of the frames that they already use when something forces them to replace one frame with another.

Framing is so effective because it is a heuristic, or a mental shortcut that may not always yield desired results and is seen as a “rule of thumb.” According to Susan T. Fiske and Shelley E. Taylor, human beings are by nature “cognitive misers,” meaning they prefer to do as little thinking as possible. Frames provide people a quick and easy way to process information. Hence, people will use the previously mentioned mental filters (a series of which is called a “schema”) to make sense of incoming messages. This gives the sender and framer of the information enormous power to use these schemas to influence how the receivers will interpret the message.

The Brain’s Heuristics for Emotions

Emotions appear to aid the decision-making process.

The Framing of Problems

Amos Tversky and Daniel Kahneman have shown that framing can affect the outcome (i.e., the choices one makes) of choice problems, to the extent that several of the classic axioms of rational choice do not hold. This led to the development of the prospect theory as an alternative to rational choice theory.

The context or framing of problems adopted by decision makers results in part from extrinsic manipulation of the decision options offered, as well as from forces intrinsic to decision makers (e.g., their norms, habits, and unique temperament).

Experimental Demonstration

Tversky and Kahneman (1981) demonstrated systematic reversals of preference when the same problem is presented in different ways, for example, in the Asian disease problem. Participants were asked to “imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume the exact scientific estimate of the consequences of the programs are as follows. “

The first group of participants was presented with a choice between programs: In a group of 600 people, Program A: “200 people will be saved;” Program B: “there is a one-thirds probability that 600 people will be saved, and a two-thirds probability that no people will be saved. ” Of participants, 72% preferred program A (the remainder, 28%, opted for program B).

The second group of participants was presented with the choice between the following: In a group of 600 people, Program C: “400 people will die” Program D: “there is a one-third probability that nobody will die, and a two-thirds probability that 600 people will die”

In this decision frame, 78% preferred program D, with the remaining 22% opting for program C.

Programs A and C are identical, as are programs B and D. The change in the decision frame between the two groups of participants produced a preference reversal: When the programs were presented in terms of lives saved, the participants preferred the secure program, A (= C). When the programs were presented in terms of expected deaths, participants chose the gamble D (= B).

Absolute and Relative Influences

Framing effects arise because one can frequently frame a decision using multiple scenarios, wherein one may express benefits either as a relative risk reduction (RRR), or as absolute risk reduction (ARR). Extrinsic control over the cognitive distinctions (between risk tolerance and reward anticipation), adopted by decision makers, can occur through altering the presentation of relative risks and absolute benefits.

People generally prefer the absolute certainty inherent in a positive framing-effect, which offers an assurance of gains. When decision options appear framed as a likely gain, risk-averse choices predominate.

A shift toward risk-seeking behavior occurs when a decision maker frames decisions in negative terms or adopts a negative framing effect.

8.4.2: Developing Alternate Plans of Action

It is important to develop and consider alternatives for dealing with any given situation.

Learning Objective

Explain the benefits of decision planning

Key Points

• After defining a problem, decision makers must take steps to identify alternative actions to respond to it.
• Developing alternatives requires decision makers to gather data, interpret that data, and brainstorm to come up with multiple solutions that can be compared and ranked.
• Creative thinking, and thinking out of the box, are key to coming up with a full range of alternatives.

Key Term

brainstorming

A method of problem solving in which members of a group contribute ideas spontaneously.

Example

• If a company has an opportunity to enter a new geographical market, managers must choose the best way to do so. Should they enter in a licensing agreement? Or make a franchise agreement with a local franchisee? Or enter the market directly by acquiring existing operations within that target market? Managers must collect data on the market, analyze this data, and consider the advantages and disadvantages of each possible alternative.

Decision Planning

Making a decision without planning is fairly common, but does not often end well. Planning allows for decisions to be made comfortably and in a smart way. Planning also makes decision making much simpler . Any decision will get four benefits out of planning:

Flowchart Diagram

Simplistic decision diagram of when to create Wikipedia articles

1. Planning establishes independent goals. It is a conscious and directed series of choices.
2. Planning provides a standard of measurement. It is a measurement of whether you are going toward or further away from your goal.
3. Planning converts values to action. You think twice about the plan and decide what will help advance your plan best.
4. Planning allows for limited resources to be committed in an orderly way. Always govern the use of what is limited to you (e.g., money, time, and so on).

Developing Alternatives

The need to make a decision arises because there are many available alternatives. Hence, the next step after defining the main problem would be to identify the alternatives available for that particular situation.

Gathering data helps decision makers have actual evidence that will aid them in coming up with a solution. Brainstorming helps them develop alternatives. Coming up with more than one solution enables decision makers to see which one can actually work.

While brainstorming, individuals do not have to restrict themselves to thinking about the very obvious options. Instead, they can use their creative skills and come up with alternatives that may look a little irrelevant. This is important because sometimes solutions can come from these out-of-the-box ideas.

8.4.3: Analyzing the Options

Evaluating alternatives is an important and difficult step of the decision-making process.

Learning Objective

Analyze the misleading effects of evaluating alternatives

Key Points

• The normative approach to analyzing decision-making assumes rational decision-makers with well-defined preferences. On the other hand, the descriptive approach is based on empirical observations and experiments. Finally, the prescriptive enterprise develops methods to improve decision making.
• Whichever approach is taken, there is always the problem that misleading effects can lead to a bad decision. These effects can take the form of heuristics, which help in some situations and not in others.
• Decision making often includes the need to assign a reason to justify the decision.
• – Subjective models – people create misleading and incorrect decision making models
• – Focusing illusion – people neglect important outcomes because they are focused on other, more obvious aspects
• – Selective search for evidence – focusing on facts that support certain conclusions
• – Premature termination of search for evidence
• – Selective perception – screening out of information not thought to be important
• – Wishful thinking – our desire to see things in a positive light may distort our perception
• – Recency – placing more emphasis on more recent events
• Repetition bias – believing that which we hear most often
• – Group think – pressure to conform to the opinions of a group
• – Source credibility bias
• – Anchoring – accepting initial information as factual and basing subsequent opinions around that
• – Over confidence
• – Recallability trap – a distorted ability to recall life events objectively
• – Outguessing randomness trap – imagination of patterns where none exist

Key Term

Prescriptive

Prescriptive analytics automatically synthesizes big data, mathematical sciences, business rules, and machine learning to make predictions and then suggest decision options to take advantage of the predictions.

Example

• Evaluating alternatives is an important and difficult step of the decision-making process, and involves discerning the advantages and disadvantages of each option, and ultimately ranking them.

Evaluating the alternatives can be said to be one of the most important stages of the decision-making process . This is the stage where you have to analyze each alternative that you have come up with. You have to find out the advantages and disadvantages of each option. This can be done with the research you have done on that particular alternative. At this stage, you can also filter out the options that you think are impossible or do not serve your purpose. Rating each option with a numerical digit would also help in the filtration process.

Money and Decision Making

Relation between (monetary) gains and losses and their subjective value.

Misleading Effects

But even respecting the considerations above, there still might be problems in making the “right” decision because of different misleading effects, which mainly arise because of the constraints of inductive reasoning. This generally means that our model of a situation or problem might not be ideal to solve it in an optimal way. Biases can creep into our decision-making processes. Many different people have made a decision about the same question (e.g., “Should I have a doctor look at this troubling breast cancer symptom I’ve discovered? ” “Why did I ignore the evidence that the project was going over budget? “) and then craft potential cognitive interventions aimed at improving decision-making outcomes.

At every step of decision making, misperceptions based on incorrect input, biases, lack of information, and other traps can corrupt the choices we make. We are particularly vulnerable to traps involving uncertainty because most of us are not good at judging chances. Complex and important decisions are the most prone to distortion because they tend to have many assumptions and estimates, as well as influence by misaligned parties.

Research has shown that over time we develop unconscious routines to cope with the inherent intricacy in most decision making. These thinking patterns, known as heuristics, can help us in many situations. We are nimble at judging distance, time, weight, and volume. For example, in judging distance our minds rely on a heuristic that associate clearness with closeness. The better the visibility of an object, the closer it must be.

But some heuristics can muddle our thinking with biases and irrational preferences. The danger with these traps is that they are invisible to most of us.

Justification in Decision Making

Decision making often includes the need to assign a reason to justify the decision. This factor is illustrated by an experiment by A. Tversky and E. Shafir in 1992. For this experiment, a very attractive vacation package was offered to a group of students who had just passed an exam. It was also offered to another group of students who had just failed the exam and had the chance to rewrite it over their vacation. All students had the option to buy the ticket straight away, to stay at home, or to pay and keep the option open until they would get their results. Even though the actual exam result did not influence the decision, it was required in order to provide a rationale.

8.4.4: Putting the Plan to Work

After analyzing the options, the next step is the implementation of a solution.

Learning Objective

Outline the key steps in the decision making process

Key Points

• Implementation is a difficult and important step, as decisions made need to be carried out.
• It is important that all the people involved in implementation know about the implications.
• The decisive actions are taken, and additional actions are taken to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision making) all over again.

Key Terms

planning

The act of formulating a course of action, or of drawing up plans.

contingency planning

the process of forming an alternative set of actions in case the original set of intended actions fails

Decision Making

Steps in the decision making process include:

• Objectives must first be established.
• Objectives must be classified and placed in order of importance.
• Alternative actions must be developed.
• The alternatives must be evaluated against all the objectives.
• The alternative that is able to achieve all the objectives is the tentative decision.
• The tentative decision is evaluated for more possible consequences.

The decisive actions are taken, and additional actions are taken to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision making) all over again . There are steps that are generally followed that result in a decision model that can be used to determine an optimal production plan. In a situation featuring conflict, role-playing is helpful for predicting decisions to be made by the parties involved.

SYSTEM

The SYSTEM pyramid explains the key leadership attributes for strategic thinking.

Decision Planning

Making a decision without planning is fairly common, but does not often end well. Planning allows for decisions to be made comfortably and in an intelligent way. Planning also simplifies the decision-making process. Any decision will get four benefits out of planning:

1. Planning establishes independent goals. It is a conscious and directed series of choices.
2. Planning provides a standard of measurement. It is a measurement of whether you are going toward or further away from your goal.
3. Planning converts values to action. You think twice about the plan and decide what will help advance your plan best.
4. Planning allows for limited resources to be committed in an orderly way. Always govern the use of what is limited to you (e.g., money, time, and so on).

8.4.5: Closing the Feedback Loop

Feedback is the process where past information influences the a similar phenomenon in the present or future.

Learning Objective

Explain the role of the feedback loop in decision making and the different types of feedback associated with it

Key Points

• It is important to note that information by itself is not feedback unless it is translated into action.
• Feedback is also a synonym for feedback signals, feedback mechanisms, and feedback loops.
• The making and implementation of a decision is not the end of the decision-making process. Regular monitoring, and measuring the results of implementation against expected standards from an early stage will help close the feedback loop by altering decisions, if necessary.

Key Terms

Feedback mechanism

the action or means used to subsequently modify the gap in a feedback loop

Feedback loop

Feedback is a process in which information about the past or the present influences the same phenomenon in the present or future. As part of a chain of cause-and-effect that forms a circuit or loop, the event is said to “feed back” into itself. The feedback loop is the complete causal path that leads from the initial detection of the gap to the subsequent modification of the gap.

Feedback signal

the measurement of the actual level of the parameter of interest in a feedback loop

Example

• Suppose a company decides to produce 200 widgets a day based on the expected demand. Once this plan is put into action, the company undertakes regular monitoring and discovers that only 150 widgets are being sold. The company can then alter their production process to ensure that they are not overproducing. If done early, this feedback loop ensures that a correct decision is ultimately made.

Feedback is a process in which information about the past or the present influences the same phenomenon in the present or future. As part of a chain of cause-and-effect that forms a circuit or loop, the event is said to “feed back” into itself.

Ramaprasad (1983) defines feedback generally as “information about the gap between the actual level and the reference level of a system parameter which is used to alter the gap in some way,” emphasising that the information by itself is not feedback unless translated into action. “…’feedback’ exists between two parts when each affects the other…”

Feedback is also a synonym for:

• Feedback signal: The measurement of the actual level of the parameter of interest.
• Feedback mechanism: The action or means used to subsequently modify the gap.
• Feedback loop: The complete causal path that leads from the initial detection of the gap to the subsequent modification of the gap.

The Feedback Loop in Decision Making

Just making a decision, and implementing it is not the end of the decision-making process. It is crucial to monitor your decision regularly once it is implemented. At this stage, you have to keep a close eye on the progress made by implementing the solution. You may need to measure the results of implementation against your expected standards. Monitoring of solutions early on will help you close the feedback loop by altering your decisions, if you notice a deviation of results from your expectations.

In the end, you will be able to see what you did right and wrong when coming up and putting the decision to use and you may choose to revisit the past decision or take a different tact when faced with similar problems in the future.

8.5: Characteristics of Good Managers

8.5.1: Leadership

Leadership is organizing a group of people to achieve a common goal.

Learning Objective

Differentiate between a leader and a manager

Key Points

• While people can manage many things, including their time, money, fuel consumption, and people, one can only lead people.
• Even though leadership is a subset of management, the term “leader” seems to have a halo attached to it, while the term “manager” comes with a bit of a stigma.
• The search for the qualities that make a good leader has been going on for centuries and continues today.

Key Terms

manage

To handle or control a situation or job.

lead

To provide direction and influence.

Management and Leadership

In today’s business world, there seems to be a halo affixed to the term “leader,” while the label of “manager” has a more negative connotation. “Leader” brings to mind heroic figures rallying people together to give their all for a cause, while “manager” brings to mind less-charismatic individuals trying to make people into more efficient cogs in the corporate machine.

When one considers this definition of management, it becomes apparent that leadership is actually a sub-category of management. Management (from Old French ménagement, “the art of conducting, directing,” from Latin “manu agere” or “to lead by the hand”) characterizes the process of leading and directing all or part of an organization, often a business, through the deployment and manipulation of resources (human, financial, material, intellectual, or intangible).

People can manage their time, their budget, their fuel, and yes, their people, but one can only lead people (or to be more inclusive, one can only lead intelligent living things, since shepherds and dog trainers may object to a homo sapiens-centric definition).

Perhaps the perception of a cog-manipulating manager is rooted in this difference between animate and inanimate objects. When people feel used, manipulated, or led against their will by a person in authority, they feel as if they are being treated like inanimate objects. They say the person in authority is a “lousy manager. ” But when the person in authority increases their autonomy, makes them feel at liberty to accept or reject his or her vision, and fills them with a real personal desire to bring this vision to life, they say he/she is a great leader.

Great leaders are often described as having charisma. Charisma is defined as a compelling attractiveness or charm that can inspire devotion in others. Also, many great leaders have referent power, which is the ability to inspire their followers with a high level of identification with, admiration of, or respect for the powerholder/ leader.

Leadership in a Team Setting

When applying these concepts for “manager” and “leader” in a team setting, one finds interesting results. If there is a team leader that is perceived to be unconcerned with the team members’ needs or has a personal agenda more important than the team’s goals, then the leader is perceived to be more of a “manager” and becomes estranged from the team members. Conversely, the team leaders who are admired and followed loyally are those who show concern for the team members as individuals with real needs, and who put “the cause” of the team above their own persona agenda.

Realistically, most organizations do need leaders who sometimes look at their teams with cold, analytical eyes, evaluating inefficiencies and making unpopular choices. But it would be a mistake to think that one has to be an “estranged, unliked manager” in order to execute these responsibilities. If a team leader’s tasks, such as efficiency analysis, were done hand-in-hand with sincerely seeking to know team members’ individual needs, then the team leader would be perceived to have a genuine desire to make the team more successful. Additionally, ineffective leaders may hide an unwillingness to make tough decisions by faking the “touchy-feely” attitudes associated with great leaders with high emotional-intelligence.

Leadership Research

Leadership is “organizing a group of people to achieve a common goal”. The leader may or may not have any formal authority. Scholars of leadership have produced theories involving traits, situational interaction, function, behavior, power, vision and values, charisma, and intelligence, among others.

US Army leadership

Commander of the International Security Assistance Force Gen. David H. Petraeus (center), U.S. Army, talks with U.S. soldiers of the 2nd Battalion, 327th Infantry Regiment, 1st Brigade Combat Team, 101st Airborne Division at Combat Outpost Monti in eastern Afghanistan on Aug. 5, 2010.

New methods and measurements were developed after these influential reviews that would ultimately re-establish the trait theory as a viable approach to the study of leadership. For example, improvements in researchers’ use of the round robin research design methodology allowed researchers to see that individuals can and do emerge as leaders across a variety of situations and tasks.

Additionally, during the 1980s, statistical advances allowed researchers to conduct meta-analyses, in which they could quantitatively analyze and summarize the findings from a wide array of studies. This advent allowed trait theorists to create a comprehensive picture of previous leadership research rather than rely on the qualitative reviews of the past. Equipped with new methods, leadership researchers revealed that individuals can and do emerge as leaders across a variety of situations and tasks. They found significant relationships between leadership and individual traits such as the following:

• Intelligence
• Adjustment
• Extraversion
• Conscientiousness
• Openness to experience
• General self-efficacy

While the trait theory of leadership has certainly regained popularity, its re-emergence has not been accompanied by a corresponding increase in sophisticated conceptual frameworks.

8.5.2: Styles of Leadership

A leadership style is the manner and approach of providing direction, implementing plans, and motivating people.

Learning Objective

Recognize the differences between different leadership styles and attitudes

Key Points

• Leadership styles can be categorized as being authoritarian, democratic, laissez-faire, transactional, or narcissistic.
• Authoritarian leaders keep strict control over their subordinates and keep a distinct professional relationship with their followers.
• Leaders who embrace a democratic style of leadership guide and control and make key decisions when necessary, but otherwise share decision making with their followers, promote the interests of the group, and practice social equality.
• Laissez-faire leadership is a “hands off” approach.
• Narcissistic leadership is a common form of leadership and can be either healthy or destructive.
• Transactional leaders motivate their subordinates by using rewards and punishments.

Key Term

narcissistic

Obsessed with one’s own self-image and ego.

Example

• Examples of authoritarian communicative behavior include a police officer directing traffic, a teacher ordering a student to do his or her assignment, and a supervisor instructing a subordinate to clean a work station. All of these positions require a distinct set of characteristics that give the leader the position to get things in order or get a point across.

A leadership style is the manner and approach of providing direction, implementing plans, and motivating people. There are many different leadership styles that can be exhibited by leaders in politics, business, or other fields .

Leadership

A leadership style is the manner and approach of providing direction, implementing plans, and motivating people.

Authoritarian

An authoritarian or autocratic leader keeps strict, close control over followers by closely regulating the policies and procedures given to followers. To maintain emphasis on the distinction between authoritarian leaders and their followers, these types of leaders make sure to only create a distinct professional relationship. They believe direct supervision to be key in maintaining a successful environment and followership. Due to fear of followers being unproductive, authoritarian leaders keep close supervision and feel this is necessary in order for anything to be done.

Democratic

The democratic leadership style consists of the leader sharing the decision-making abilities with group members by promoting the interests of the group members and by practicing social equality. This style of leadership encompasses discussion, debate and sharing of ideas, and encouragement of people to feel good about their involvement. The boundaries of democratic participation tend to be circumscribed by the organization or group needs and the instrumental value of people’s attributes (skills, attitudes, etc.). The democratic style encompasses the notion that everyone, by virtue of their human status, should play a part in the group’s decisions. However, the democratic style of leadership still requires guidance and control by a specific leader. The democratic style demands the leader make decisions on who should be called upon within the group and who is given the right to participate in, make, and vote on decisions.

Laissez-Faire

The laissez-faire leadership style was first described by Lewin, Lippitt, and White in 1938, along with the autocratic leadership and the democratic leadership styles. The laissez-faire style is sometimes described as a “hands off” leadership style because the leader delegates the tasks to the followers while providing little or no direction. If the leader withdraws too much, it can sometimes result in a lack of productivity, cohesiveness, and satisfaction. Lassiez-faire leaders allow followers to have complete freedom to make decisions concerning the completion of their work. It allows followers a high degree of autonomy and self-rule, while at the same time offering guidance and support when requested. The lassiez-faire leader using guided freedom provides the followers with all materials necessary to accomplish their goals, but does not directly participate in decision making unless the followers requests the leader’s assistance. This is an effective style to use when:

• The followers are highly skilled, experienced, and educated;
• The followers have pride in their work and the drive to do it successfully on their own;
• Outside experts, such as staff specialists or consultants, are being used; and
• Followers are trustworthy and experienced.

This style should not be used when:

• Followers feel insecure at the unavailability of a leader.
• The leader cannot or will not provide regular feedback to their followers.

Transactional

The transactional style of leadership was first described by Max Weber in 1947, and then later described by Bernard Bass in 1981. Mainly used by management, transactional leaders focus their leadership on motivating followers through a system of rewards and punishments. There are two factors which form the basis for this system: contingent reward and management by exception. Contingent reward provides rewards (materialistic or psychological) for effort and recognizes good performance. Management by exception allows the leader to maintain the status quo; the leader intervenes when subordinates do not meet acceptable performance levels and initiates corrective action to improve performance.

Narcissistic

Narcissistic leadership is a common form of leadership. The narcissism may be healthy or destructive, although there is a continuum between the two. To critics, narcissistic leadership (especially destructive) is driven by unyielding arrogance, self-absorption, and a personal egotistic need for power and admiration. A study published in the journal, Personality and Social PsychologyBulletin, suggests that when a group is without a leader, a narcissist often takes charge; researchers found that people who score high in narcissism tend to take control of leaderless groups. Freud considered “the narcissistic type… especially suited to act as a support for others, to take on the role of leaders and to… impress others as being ‘personalities’. “

8.5.3: Technical Skills

Technical skills involve the process or technique knowledge, as well as proficiency, that may be needed in order to be a successful manager.

Learning Objective

Identify the managerial need for technical skills

Key Points

• The three managerial skills Robert Katz identified as being necessary to be a successful manager are technical, human, and conceptual.
• Technical skills are easier to learn than human and conceptual skills.
• Technical skills become less important at the top management levels of large firms as chief executives can use the technical abilities of their employees. However, high-level managers may still need these skills in smaller firms.

Key Terms

conceptual

Of, or relating to concepts or mental conception; existing in the imagination.

technical skill

the learned capacity or ability to carry out pre-determined results through tools, machines, techniques, crafts, systems, and methods of organization

conceptual skill

the ability to formulate ideas

Example

• Examples of technical skills include project management skills for engineers building bridges, aircraft, and ships.

To perform management functions and assume multiple roles, managers must be skilled. Robert Katz identified three managerial skills essential to successful management: technical, human, and conceptual. Technical skill involves process or technique knowledge and proficiency. Managers use the processes, techniques, and tools of a specific area. These are the specific skills and knowledge related to the individual’s profession or specialization. Examples include project management skills for engineers building bridges, aircraft, and ships. Technical skills include the ability to properly operate a computer, efficiently use the various software programs that are required in a particular environment, and the utilization of other electronic devices that pertain to the job function. These skills are especially important for lower level managers, as they are often responsible for training their subordinates.

Training surgical technical skills with simulation at Valdecilla

Technical skills are especially important for lower level managers, as they are often responsible for training their subordinates.

Katz pointed out that training programs tend to focus on skills in this area. These skills are easier to learn than those in the other two groups. Managers use the processes, techniques, and tools of a specific area. A manager’s level in the organization determines the relative importance of possessing technical skills. For instance, supervisors need technical skills to manage their area of specialty. As the pace of change accelerates and diverse technologies converge, new global industries are being created (e.g., telecommunications). Technological change alters the fundamental structure of firms and calls for new organizational leadership approaches and management skills.

At the top management level, conceptual and design abilities and human skills are especially valuable, but there is relatively little need for technical abilities. The assumption, especially in large companies, is that chief executives can utilize the technical abilities of their subordinates. In smaller firms, however, technical experience may still be quite important.  

8.5.4: Conceptual Thought

Conceptual thought involves seeing the important elements in any situation and, according to Robert Katz, is the key management skills.

Learning Objective

Explain the managerial need for conceptual skills

Key Points

• People who are able to see the key elements in any situation can see the enterprise as a whole, see the relationship between the various parts, understand their dependence on each other, and recognize that changes in one part will influence the others.
• Conceptual skills are likened to a “helicopter mind,” meaning that one is able to rise above a problem and see it in context.
• These skills are not critical for lower-level mangers, gain importance for middle-management and are essential for the success of higher-level managers.

Key Terms

design

To plan and carry out (a picture, work of art, construction etc. ).

conceptual

Of, or relating to concepts or mental conception; existing in the imagination.

Example

• Using their conceptual skills, manager are able to study a situation and figure out how to break it down into manageable pieces. When a project just begins, for example, it is easy to become overwhelmed by the work and decisions associated with getting it done. A manager using their conceptual skills will be able to resist getting tangled in the tasks and information associated with the project and instead tackle it in a clear and organized manner.

A scheme of management skills was suggested by Robert L. Katz (1986) in the Harvard Business Review. Katz, who was interested in the selection and training of managers, suggested that effective administration rested on three groups of basic skills, each of which could be developed. Katz saw conceptual skills as being the ability to see the significant elements in any situation.

Conceptual skills of a manager

Conceptual skills are probably some of the most important management skills.

Conceptual skills are probably some of the most important management skills. There are some very basic principles behind conceptual skills. The inputs by people who are hired especially for their exceptional conceptual skills often influence the decision-making process in an organization, be it about a simple thing like a change in the employees dress code, to something as big as a revamped advertising campaign for a product.

Seeing the elements involves being able to:

• See the enterprise as a whole
• See the relationships between the various parts
• Understand their dependence on one another
• Recognize that changes in one part affect all the others

This ability also extends to recognizing the relationship of the individual organizations to the political, social, and economic forces of the nation as a whole. This has since been called the “helicopter mind,” that is, being able to rise above a problem and see it in context. These conceptual skills are likely to be demonstrated by a manager or executive higher in the organization. Indeed, at these higher levels of management, organizations require these skills.

Conceptual skills are not critical for lower-level supervisors but gain in importance at the middle-management level. At the top management level, conceptual and design abilities are especially valuable

8.5.5: Analytical Mindset

Deriving, interpreting, and communicating patterns within data allows managers to make informed strategic and tactical decisions.

Learning Objective

Understand the value of analytical thinking as it pertains to management, and recall the various perspectives of analysis

Key Points

• A strong sense of analytical understanding is a highly useful skill set in both business and science.
• Pursuing objective information to drive data-driven decisions requires a highly developed analytical skill set, and is a critical component of managerial decision-making.
• Analytics can be used to assess and visualize decisions, describe the implications of historical data, predict and model future expectations, and optimize internal processes.
• In the age of big data, the importance of analytics has never been higher. The ability to navigate and derive value from big data is critical to successful organizational management.

Key Terms

cherry-picking

To pick only a part of the whole truth, often in order to support an opinion or personal agenda. In analysis, it is seeing what one wants to see in the data (as opposed to what’s there).

analytics

The derivation, interpretation, and expression of patterns within data sets.

Defining Analytics

The derivation, interpretation, and expression of patterns within data sets is referred to as analytics. This broad definition can fit numerous contexts, and is highly relevant in virtually every modern field of business and science. There are many instances in a business environment where analytical thinking skills are applied to produce meaningful observations. In fields from marketing to operations to finance to strategic decision-making, managers must both understand and employ analytical skills to succeed in the modern business environment. 

Analyzing the Operational Environment

This image shows how information from the operational environment translates into meaningful data, information and ultimately intelligence for decision-making.

This image is an excellent illustration of how information from the operational environment translates into meaningful data, information and ultimately intelligence for decision-making.

How to be Analytical

Strong analytical skills are as much a developed competency as they are a perspective. Pursuing objective, fact-based decision-making and data-driven conclusions requires a commitment to an analytical mentality. Pushing gut feelings and intuition into the background in favor of framing issues through analysis is a constant struggle in nearly every organization. It is a critical role of management to ask the right questions and align employee behavior with analytical thinking.

Depending on the particular role, industry, organization and objectives, a manager may use one or more of the following analytical models to frame tactical and strategic questions:

• Decision analytics – Using data-driven models and visualizing outcomes of specific organizational behaviors can enable managers to visualize the various outcomes of different strategic approaches.
• Descriptive analytics – Collecting historical data from reporting, scorecards, clustering and various other sources of information, managers can underline trends and identify opportunities and/or risks.
• Predictive analytics – Leveraging statistical models and machine learning, managers can predict future outcomes with varying degrees of statistical confidence.
• Prescriptive analytics – Using optimization and simulation, managers can produce recommended decisions through analytical modeling.

Domains of Analytics

• Behavioral analytics
• Cohort Analysis
• Contextual data modeling
• Enterprise Optimization
• Financial services analytics
• Marketing analytics
• Pricing analytics
• Retail sales analytics
• Risk & Credit analytics
• Supply Chain analytics
• Talent analytics
• Transportation analytics
• Customer Analytics

More Important Now Than Ever

In the current technological environment of big data, analytics has never been more relevant and central to the organization. With endless data available, it is easier than ever to derive advantage or make substantial mistakes in digesting this data. Indeed, utilizing analytics incorrectly can be just as disastrous as not using it at all! In a world with this much data, maintaining objectivity and refraining from cherry-picking to prove one’s opinion is a very important skill.

Managers must be owners not only of the decisions they make, but the validity of the process in which they make them. Analytics is the core skill set required for success in this domain, arguably the most important facet of management.

8.5.6: Sensitivity to Human Relations

Good managers have an innate sensitivity to the needs of the people they manage, and a highly developed emotional intelligence.

Learning Objective

Integrate emotional intelligence and human resource needs into the broader field of management

Key Points

• Management is primarily the task of aligning internal resources to create efficient production processes. These resources are often human resources with complex emotional needs.
• Strong managers have an innate sensitivity to human resource needs, which is enabled by a high level of emotional intelligence (EQ).
• EQ can be defined in a variety of ways. Central to EQ is communication, courtesy, interpersonal skills, positive attitude, and a strong sense of teamwork.
• To create a comfortable working environment for employees, managers should focus on motivating, setting goals, delegating and communicating effectively.

Key Term

Interpersonal skills

The competencies related to human interaction, such as social skills, communication, and emotional intelligence.

Management is a functional discipline that requires a wide variety of skill sets, including organizational skills, technical skills, and people skills (or ‘soft skills’). Effective management is often centered around people skills, as the resource being managed is primary the effort of human resources.

As a result, managers who are sensitive to human resources are much more likely to be successful in a leadership role. 

Soft Skills and Emotional Intelligence

The skills required to lead from a human sensitivity perspective are often referred to as soft skills or EQ (emotional intelligence). According to a research done at Eastern Kentucky University, soft skills can be summarized as the following ten attributes:

1. Communication – Speaking, writing, presenting, and listening
2. Courtesy – Showing appropriate respect and pleasantries when dealing with others
3. Flexibility – Both adaptable and teachable, good managers can fill the unique needs of each employee they manage through changing their own habits
4. Integrity – Understanding the ethical implications of decisions is integral to success
5. Interpersonal skills – This is an extensive list of characteristics involving social ability, friendliness, sense of humor, patience, etc.
6. Positive attitude – A confident and upbeat personality tends to trickle down through work groups
7. Professionalism – Reliability and professionalism go hand and hand, and showing a strong sense of professionalism can emotionally reassure employees
8. Responsibility – A willingess to take credit for the team’s mistakes and a willingness to give the team credit for their successes is a key component of responsible management
9. Teamwork – Mangers must be collaborators, capable of filling the many roles required in a team
10. Work ethic – Finally, management is hard work, and strong work ethic sets a good example.

As you can see here, the vast majority of these skills involve integrating with human resources. High performing managers are sensitive to the needs, emotions, perspectives ,and well-being of the individuals they are managing.

How to Manage Sensitively

With the above core skills in mind, managers with a strong sense of human resource sensitivity focus on managing people via the following four phases:

1. Motivating – Understand what your employees are good at, and what they enjoy. Let them know they are appreciated for their skills and attitude and ensure they have everything they need to succeed in their role.
2. Setting Goals – Create agreement among the team regarding direction, and identify practical objectives that won’t overburden or intimidate team members. Offer feedback, and receive feedback in turn. Ensure that feedback maintains a positive note.
3. Delegating – Managers must take on the functional role of delegation. This simply means dividing tasks among the work group, and letting each individual know what is expected of them and how they will contribute. Give employees credit for their successes, and as a manager it is on you to take responsibility for any failures.
4. Focus on Communication – Communicating well and avoiding misunderstandings will save time and stress. Make sure tasks are clear and feedback channels are open. Listen carefully and clarify what you’re hearing. Take an active interest in your employees.

Through focusing on these core human relations activities while managing, employees are likely to have the clarity, confidence, and commitment required to succeed in the workplace. 

The Three Levels of Leadership

Much of a leader’s responsibilities lie in managing and motivating externally. This is to say that leaders are not only defined by their internal competencies, but more importantly by their ability to translate these competencies externally.

Much of a leaders responsibilities lie in managing and motivating externally. This is to say that leaders are not only defined by their internal competencies, but more importantly by their ability to translate these competencies externally.