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Organiza�onal Theory and Behavior

Organiza�onal behavior is the field of study that inves�gates how organiza�onal structures

affect behavior within organiza�ons.

Organiza�onal behavior includes behavior within the organiza�on

and in rela�on to other organiza�ons.

Micro organiza�onal behavior refers to individual and group

dynamics in an organiza�onal se�ng.

Macro organiza�onal theory studies whole organiza�ons and

industries, including how they adapt, and the strategies, structures,

and con�ngencies that guide them.

Concepts such as leadership, decision making, team building,

mo�va�on, and job sa�sfac�on are all facets of organiza�onal

behavior. They are management responsibili�es.

Company or corporate culture, although difficult to define, is

extremely relevant to organiza�onal behavior.

Key Term

behavior—the way a living creature acts

What Is Organiza�onal Behavior?

Learning Resource

Key Points

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As a field of study, organiza�onal behavior is concerned with the impact individuals, groups,

and structures have on human behavior within organiza�ons. It is an interdisciplinary field that

includes sociology, psychology, communica�on, and management. Organiza�onal behavior

complements organiza�onal theory, which focuses on organiza�onal and intra‑organiza�onal

topics, and human‑resource studies, which is more focused on everyday business prac�ces.

Edgar Schein’s Organiza�onal Culture

Model

There are three central components of an

organiza�on’s culture: ar�facts (visual

symbols such as an office dress code),

values (company goals and standards), and

assump�ons (implicit, unacknowledged

standards or biases). 

Types of Organiza�onal Behavior

Organiza�onal studies examine organiza�ons from mul�ple perspec�ves, using various

methods and levels of analysis. Micro organiza�onal behavior refers to individual and group

dynamics in organiza�ons. Macro organiza�onal theory studies whole organiza�ons and

industries, especially how they adapt; and the strategies, structures, and con�ngencies that

guide them. Some scholars also include the categories of meso‑scale structures involving

power, culture, and the networks of individuals in organiza�ons. Field‑level analysis studies

how en�re popula�ons of organiza�ons interact.

Many factors come into play whenever people interact in organiza�ons. Modern organiza�onal

studies a�empt to understand and model these factors. Organiza�onal studies seek to control,

predict, and explain. Organiza�onal behavior can play a major role in organiza�onal

development, enhancing not only the en�re organiza�on’s performance, but also individual

and group performance, sa�sfac�on, and commitment.

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Topics in Organiza�onal Behavior

Organiza�onal behavior study is par�cularly relevant in the field of management because it

encompasses many of the daily issues managers face. These include leadership, decision

making, team building, mo�va�on, and job sa�sfac�on. Understanding not only how to

delegate tasks and organize resources but also how to analyze behavior and mo�vate

produc�vity is cri�cal for success in management.

Organiza�onal behavior study also concentrates on culture. Although difficult to define,

corporate culture is extremely relevant to how organiza�ons behave. A Wall Street stock‑

trading company, for example, will have a drama�cally different work culture from an academic

department at a university. Understanding and defining these work cultures and their

behavioral implica�ons is also a central topic within the organiza�onal behavior field.

Why Study Organiza�onal Theory?

Organiza�onal theory studies organiza�ons to iden�fy how they solve problems and how they

maximize efficiency and produc�vity.

Correctly applying organiza�onal theory can have several benefits for

an organiza�on and society at large. Developments in organiza�ons

help boost economic poten�al and help generate the tools needed to

fuel a capitalis�c system.

Once an organiza�on sees a window for expansion, it begins to grow,

altering the economic equilibrium by catapul�ng itself forward. This

expansion induces changes in the organiza�on’s infrastructure, in

compe�ng organiza�ons, and in the economy as a whole.

One example of how development in organiza�onal theory improves

efficiency is in factory produc�on. Henry Ford created the assembly

line, a system of organiza�on that enabled efficiency and drove both

Ford and the US economy forward.

Key Terms

Key Points

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efficiency—the extent to which a resource, such as electricity, is used

for the intended purpose; the ra�o of useful work to energy

expended 

norma�ve—of, pertaining to, or using a standard

Defini�on of Organiza�onal Theory

Organiza�onal theory studies organiza�ons to iden�fy the pa�erns and structures they use to

solve problems, maximize efficiency and produc�vity, and meet the expecta�ons of

stakeholders. These pa�erns are used to formulate norma�ve theories of how organiza�ons

func�on best. Therefore, organiza�onal theory can be a tool for learning the best ways to run

an organiza�on or iden�fy organiza�ons that are managed in a way that increases the

likelihood that they will succeed.

Applying Organiza�onal Theory

Correctly applying organiza�onal theory can have several benefits for both the organiza�on

and society at large. As many organiza�ons strive to integrate themselves into capitalis�c

socie�es, there is a ripple effect on compe�ng firms and the economy as a whole. Once an

organiza�on sees a window for expansion, it begins to grow by producing more, and thus

alters the economic equilibrium by catapul�ng itself forward into a new environment of

produc�on. This expansion induces changes in the organiza�on’s infrastructure, in compe�ng

organiza�ons, and in the economy as a whole. Other firms observe innova�ve developments

and recreate them efficiently. Developments in organiza�ons help boost economic poten�al in

a society and help generate the tools necessary to fuel the capitalis�c system.

One example of how development in an organiza�on affects the modern era is factory

produc�on. The concept of factory produc�on amplified produc�on as a whole and allowed

for the organized division of labor. It centralized facets of the workforce and began to define

the rules of produc�on and trade, which also led to specializa�on.

Henry Ford implemented an innova�ve design by modifying factory produc�on and crea�ng

the assembly line, which is s�ll used in many factories today. These developments make it

easier for a company to produce, so firms are incen�vized to aggregate and use more efficient

methods for running their companies.

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Organiza�onal theory can also help iden�fy malicious or negligent corporate prac�ces,

informing the development of future precau�onary measures. The nuclear accident at Three

Mile Island helped determine ways to prevent similar incidents in the future. In that case,

developments in organiza�onal theory led to stronger government regula�ons and stronger

produc�on‑related safety mandates.

Licenses and A�ribu�ons

Why Study Organiza�onal Theory (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/why‑study‑organiza�onal‑theory/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on‑ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑nc‑sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Classical Versus Behavioral Perspec�ves

The classical perspec�ve focuses on direct inputs to efficiency, while the behavioral

perspec�ve examines both direct and indirect inputs to efficiency.

The classical perspec�ve of management emerged from the Industrial

Revolu�on and focuses on the efficiency, produc�vity, and output of

employees as well as the organiza�on as a whole. It generally does

not focus on human or behavioral a�ributes or varia�on among

employees.

The classical perspec�ve of management is o�en cri�cized for

ignoring human desires and needs in the workplace and does not

consider human error in work performance. The classical perspec�ve

has strong influences on modern opera�ons and process

improvement.

The behavioral perspec�ve of management (some�mes called the

“human rela�ons perspec�ve”) takes a much different approach from

the classical perspec�ve: It is generally more concerned with

employee well‑being and encourages management approaches that

consider the employee as a mo�vated person who genuinely wants

to work.

Key Terms

micromanage—to rely on extreme supervision and close monitoring

of employee work

Learning Resource

Key Points

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psychosocial—related to one’s psychological development in, and

interac�on with, a social environment

The Classical Perspec�ve of Management

The classical perspec�ve of management, which emerged from the Industrial Revolu�on,

focuses on improving the efficiency, produc�vity, and output of employees, as well as the

business as a whole. However, it generally does not focus on human or behavioral a�ributes or

variances among employees, such as how job sa�sfac�on improves employee efficiency.

Frederick Winslow Taylor

Scien�fic management theory, which was first introduced by Frederick Winslow Taylor,

focused on produc�on efficiency and employee produc�vity. By managing produc�on

efficiency as a science, Taylor thought that worker produc�vity could be completely controlled.

He used the scien�fic method of measurement to create guidelines for the training and

management of employees. This quan�ta�ve, efficiency‑based approach is representa�ve of

the classical perspec�ve.

Max Weber

Another leader in the classical perspec�ve of management, Max Weber, created the

bureaucracy theory of management, which focuses on the theme of ra�onaliza�on, rules, and

exper�se for an organiza�on as a whole. Weber’s theory also focuses on efficiency and clear

roles in an organiza�on, meaning that management should run as effec�vely as possible with

as li�le bureaucracy as possible. One example of Weber’s management theory is the modern

“flat” organiza�on, which promotes as few managerial levels as possible.

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The classical perspec�ve of

management focused on improving

worker produc�vity. 

Source: Sea�le Public Library, Wikimedia Commons. 

Henri Fayol

Henri Fayol, another leader in classical management theory, also focused on the efficiency of

workers, but he looked at it from a managerial perspec�ve. He focused on improving

management efficiency rather than each individual’s efficiency. Fayol’s six func�ons of

management evolved into the four essen�al func�ons of management: planning, organizing,

leading, and controlling.

The classical perspec�ve of management theory pulls largely from these three theorists

(Taylor, Weber, and Fayol) and focuses on the efficiency of employees and improving an

organiza�on’s produc�vity through quan�ta�ve (i.e., measurable, data‑driven) methods. The

classical perspec�ve is o�en cri�cized for ignoring human desires and needs in the workplace.

It typically does not consider human error in work performance. The classical perspec�ve

strongly influences process improvement in modern opera�ons, in which quan�ta�ve metrics

determine how effec�vely a process is running.

The Behavioral Perspec�ve of Management

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The behavioral perspec�ve of management (some�mes called the “human rela�ons

perspec�ve”) takes a much different approach from the classical perspec�ve. It began in the

1920s with theorists such as Elton Mayo, Abraham Maslow, and Mary Parker Folle�.

The Hawthorne Studies

The Hawthorne studies were an important start to the behavioral perspec�ve of management.

These were a series of research studies were conducted with the workers at the Hawthorne

plant of the Western Electric Company. The Hawthorne studies found that workers were more

strongly mo�vated by psychosocial factors than by economic or financial incen�ves.

Abraham Maslow

Around the �me of the Hawthorne studies, Abraham Maslow created his hierarchy‑of‑needs

theory, which showed that workers were mo�vated through a series of lower‑level to higher‑

level needs. This theory has been applied in the workplace to be�er understand “so�” factors

of employee mo�va�on, such as goal se�ng and team involvement, in order to be�er manage

employees.

Douglas McGregor

Addi�onal theories in the behavioral perspec�ve include Douglas McGregor’s theory X and

theory Y, which address the percep�ons managers have about their employees and how

employees react to those percep�ons. Theory X management assumes employees are

inherently lazy and need micromanagement. Theory Y management focuses on crea�ng work

condi�ons that foster workers’ inherent crea�vity, commitment, and need for self‑fulfillment.

McGregor’s theory of management is an example of how behavior‑management theory looks

more into the “human” factors of management and encourages managers to understand how

psychological characteris�cs can improve or hinder employee performance.

Generally, the behavioral perspec�ve is much more concerned with employee well‑being and

encourages management approaches that consider the employee as a mo�vated worker who

wants to produce quality work. This theory, therefore, encourages a management approach

that is less focused on micromanaging and more focused on building rela�onships with

employees to help them achieve their workplace goals and work as effec�vely and efficiently

as possible.

Scien�fic Management: Taylor and the Gilbreths

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Scien�fic management focuses on improving efficiency and output through scien�fic studies of

workers’ processes.

Scien�fic management, or Taylorism, is a management theory that

analyzes work flows to improve economic efficiency, especially labor

produc�vity. This management theory, developed by Frederick

Winslow Taylor, was dominant in manufacturing industries in the

1880s and 1890s.

Important components of scien�fic management include analysis,

synthesis, logic, ra�onality, empiricism, work ethic, efficiency,

elimina�ng waste, and standardized best prac�ces.

Taylor and the Gilbreths introduced methods of measuring worker

produc�vity, including �me and mo�on studies, which are s�ll used

today in opera�ons and management.

Key Terms

mo�on study—created by Frank and Lillian Gilbreth, a study

analyzing work mo�ons by filming workers and emphasizing areas for

efficiency improvement by reducing mo�on

Taylorism—also known as scien�fic management, an early twen�eth‑

century theory of management that analyzed workflows to improve

efficiency

�me study—created by Frederick Winslow Taylor, a study of a job

and its component parts used to determine the most efficient

method of working

scien�fic management—an early twen�eth‑century theory that

analyzed workflows in order to improve efficiency

Taylorism

Key Points

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Scien�fic management, or Taylorism, is a management theory that analyzes work flows to

improve economic efficiency, especially labor produc�vity. This management theory,

developed by Frederick Winslow Taylor, was popular in the 1880s and 1890s in manufacturing

industries.

While the terms scien�fic management and Taylorism are o�en treated as synonymous, an

alterna�ve view considers Taylorism to be the first form of scien�fic management. Taylorism is

some�mes called the “classical perspec�ve,” meaning it is s�ll observed for its influence but no

longer prac�ced exclusively. Scien�fic management was best known from 1910 to 1920, but in

the 1920s, compe�ng management theories and methods emerged, rendering scien�fic

management largely obsolete by the 1930s. However, many scien�fic management themes are

s�ll seen in industrial engineering and management today.

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Frederick Winslow Taylor

Frederick Winslow Taylor is considered the creator of scien�fic

management.

Important components of scien�fic management include analysis, synthesis, logic, ra�onality,

empiricism, work ethic, efficiency, elimina�on of waste, and standardized best prac�ces. All of

these components focus on the efficiency of the worker and not on any specific behavioral

quali�es or varia�ons among workers.

Today, an example of scien�fic management is determining the amount of �me it takes

workers to complete a specific task and determining ways to decrease the amount of �me by

elimina�ng waste in the workers’ processes. A significant part of Taylorism was �me studies.

Taylor was concerned with reducing process �me and worked with factory managers on

scien�fic �me studies. At their most basic level, �me studies involve breaking down each job

into component parts, �ming each element, and rearranging the parts into the most efficient

method of working. By coun�ng and calcula�ng, Taylor sought to transform management into

a set of calculated and wri�en techniques.

Frank and Lillian Gilbreth

While Taylor was conduc�ng his �me studies, Frank and Lillian Gilbreth were comple�ng their

work in mo�on studies to further scien�fic management. The Gilbreths filmed the details of a

worker’s ac�vi�es while recording the �me it took to complete them. The films helped to

create a visual record of how work was completed, and emphasized areas for improvement.

They were also used to train workers in the best way to perform their work.

This method allowed the Gilbreths to build on the best elements of the work flows and create

a standardized best prac�ce. Time and mo�on studies are used together to achieve ra�onal

and reasonable results and find the best prac�ce for implemen�ng new work methods. While

Taylor’s work is o�en associated with that of the Gilbreths, there is o�en a clear philosophical

divide between the two scien�fic‑management theories. Taylor was focused on reducing

process �me, while the Gilbreths tried to make the overall process more efficient by reducing

the mo�ons involved. They saw their approach as more concerned with workers’ welfare than

Taylorism, in which workers were less relevant than profit. This difference led to a personal ri�

between Taylor and the Gilbreths, which, a�er Taylor’s death, turned into a feud between the

Gilbreths and Taylor’s followers.

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Scien�fic management con�nues to make significant contribu�ons to management theory

today. With the advancement of sta�s�cal methods used in scien�fic management, quality

assurance and quality control began in the 1920s and 1930s. During the 1940s and 1950s,

scien�fic management evolved into opera�ons management, opera�ons research, and

management cyberne�cs. In the 1980s, total quality management became widely popular, and

in the 1990s reengineering became increasingly popular. One could validly argue that

Taylorism laid the groundwork for these influen�al fields prac�ced today.

Bureaucra�c Organiza�ons: Weber

Weber’s bureaucracy focused on crea�ng rules and regula�ons to simplify complex procedures

in socie�es and workplaces.

Max Weber was a member of the classical school of management,

and his wri�ng contributed to the field’s scien�fic school of thought.

He wrote about the importance of bureaucracy in society.

Weberian bureaucracy is characterized by hierarchical organiza�on,

ac�on taken on the basis of (and recorded in) wri�en rules, and

bureaucra�c officials requiring expert training. Career advancement

depends on technical qualifica�ons judged by an organiza�on, not

individuals.

Weber’s ideas on bureaucracy stemmed from society during the

Industrial Revolu�on. As Weber understood it, society was being

driven by the passage of ra�onal ideas into culture, which, in turn,

transformed society into an increasingly bureaucra�c en�ty.

Key Terms

bureaucracy—a complex means of managing life in social ins�tu�ons

that includes rules and regula�ons, pa�erns, and procedures

designed to simplify the func�oning of complex organiza�ons

iron cage—Weber’s theory that a bureaucra�c society would make it

impossible to avoid bureaucracy and, thus, society would become

increasingly more ra�onal

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bureaucra�c control—se�ng standards, measuring actual

performance, and taking correc�ve ac�on through administra�ve or

hierarchical techniques like crea�ng policies

Max Weber was a German sociologist, poli�cal economist, and administra�ve scholar who

contributed to the study of bureaucracy and administra�ve literature during the late 1800s

and early 1900s. He was a member of the classical school of management, and his wri�ng

contributed to the field’s scien�fic school of thought. Weber’s ideas on bureaucracy stemmed

from society during the Industrial Revolu�on. As Weber understood it, par�cularly during the

Industrial Revolu�on of the late nineteenth century, society was being driven by the passage

of ra�onal ideas into culture, which in turn transformed society increasingly into a

bureaucracy.

Bureaucracy Defined

Bureaucracy is a means of managing life in social ins�tu�ons that includes rules and

regula�ons, pa�erns, and procedures designed to simplify the func�oning of complex

organiza�ons. Income‑tax forms are an example of a bureaucra�c tool. Specific informa�on

and procedures are required to fill them out, and many laws and regula�ons dictate what can

and cannot be included. Bureaucracy simplifies the process of paying taxes by pu�ng the

process into a formulaic structure, but the rules and regula�ons simultaneously complicate the

process.

Bureaucracy in the Workplace

Weber’s theories on bureaucracy include topics such as specializa�on of the workforce, the

merit system, standardized principles, and structure and hierarchy in the workplace. In his

wri�ngs, Weber focused on the idea of a bureaucracy, which differs from a tradi�onal

managerial organiza�on because workers are judged by impersonal, rule‑based ac�vity, and

promo�on is based on merit and performance rather than on immeasurable quali�es.

Weberian bureaucracy is also characterized by hierarchical organiza�on, delineated lines of

authority in a fixed area of ac�vity, ac�on taken on the basis of (and recorded in) wri�en rules,

and bureaucra�c officials requiring expert training.

In a bureaucracy, career advancement depends on technical qualifica�ons judged by an

organiza�on, not individuals. Weber’s studies of bureaucracy contributed to classical

management theory by sugges�ng that clear guidelines and authority need to be set to

encourage an effec�ve workplace. Weber did not see any alterna�ve to bureaucracy and

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predicted that this would lead to an “iron cage,” or a situa�on in which people would not be

able to avoid bureaucracy, and society would thus become increasingly more ra�onal. Weber

viewed this as a bleak outcome that would affect individuals’ happiness, forcing them into a

highly ra�onal society—with rigid rules and norms—that they wouldn’t be able to change. Of

course, with the behavior management movement that arose in the 1920s, this bleak situa�on

did not come to pass.

Administra�ve Management: Fayol’s Principles

Fayol’s approach differed from scien�fic management in that it focused on efficiency through

management training and behavioral characteris�cs.

Fayol took a top‑down approach to management by focusing on

managerial prac�ces to increase efficiency in organiza�ons. His

wri�ng provided guidance to managers on how to accomplish their

du�es and the prac�ces they should engage in.

The major difference between Fayol and Taylor is Fayol’s concern

with the human and behavioral characteris�cs of employees, rather

than individual workers’ efficiency, and his focus on training

management.

Fayol stressed the importance and prac�ce of forecas�ng and

planning in order to train management and improve workplace

produc�vity.

Fayol is also famous for his 14 principles of management and 5

elements that cons�tute managerial responsibili�es.

Key Terms

top‑down—Fayol’s approach that looked at the organiza�on from the

perspec�ve of the senior managers and not the workers as Taylor did

Fayolism—an organiza�onal approach that emphasizes effec�ve

leadership from the top and that management is fundamentally about

people

Key Points

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Henri Fayol

Fayol was a classical management theorist, widely regarded as the father of modern

opera�onal management theory. His ideas are fundamental to modern management concepts.

Comparisons with Taylorism

Fayol is o�en compared to Frederick Winslow Taylor, who developed scien�fic management.

However, Fayol differed from Taylor in his focus and developed his ideas independently. Taylor

was concerned with task �me and improving worker efficiency, while Fayol was concerned

with management, especially its human and behavioral elements.

Another major difference between Taylor and Fayol’s theories is that while Taylor viewed

management improvements as happening from the bo�om up, Fayol emphasized a top‑down

perspec�ve that was focused on educa�ng management on improving processes first and then

moving to workers. Fayol believed that by focusing on managerial prac�ces, organiza�ons

could minimize misunderstandings and increase efficiency.

His wri�ngs guided managers on how to accomplish their managerial du�es and on the

prac�ces in which they should engage. In General and Industrial Management (1949) Fayol

outlined his theory of general management, which he believed could be applied to the

administra�on of myriad industries. As a result of his concern for workers, Fayol is considered

one of the early fathers of the human rela�ons movement.

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Henri Fayol

Henri Fayol is considered a founder of

the human rela�ons movement.

Fayol’s 14 Principles of Management

Fayol developed 14 principles of management to help managers be more effec�ve. They are

s�ll used today but o�en interpreted differently. The principles are as follows:

1. division of work

2. delega�on of authority

3. discipline

4. chain of command

5. congenial workplace

6. interrela�on between individual interests and common organiza�onal goals

7. compensa�on package

8. centraliza�on

9. scalar chains

10. order

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11. equity

12. job guarantee

13. ini�a�ves

14. team spirit

Fayol’s Five Elements of Management

Fayol is also famous for his five elements of management, which outline the key

responsibili�es of good managers:

1. Planning. Managers should dra� strategies and objec�ves to determine the stages of a

plan and the technology needed to implement it.

2. Organizing. Managers must organize and provide the resources necessary to execute a

plan, including raw materials, tools, capital, and human resources.

3. Command. Managers must use their authority and a thorough understanding of long‑

term goals to delegate tasks and make decisions for the be�erment of the organiza�on.

4. Coordina�on. High‑level managers must work to integrate all ac�vi�es to facilitate

organiza�onal success. Communica�on is key to success in this component.

5. Monitoring. Managers must compare the ac�vi�es of personnel to the plan of ac�on.

This is the evalua�on component of management.

Flaws in the Classical Approach

The classical approach to management is o�en cri�cized for viewing a worker merely as a tool

to improve efficiency.

Under Taylorism, work effort increased in intensity, but eventually

workers became dissa�sfied with the work environment and became

angry, decreasing overall work ethic and produc�vity.

Taylorism’s nega�ve effects on worker morale only added fuel to the

fire of exis�ng labor‑management conflict and inevitably contributed

to the strengthening of labor unions.

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The cri�cisms of classical management theory opened doors for

theorists such as George Elton Mayo and Abraham Maslow, who

emphasized the human and behavioral aspects of management.

The scien�fic management approach comes up short when applied to

larger, more opera�onally complex organiza�ons. Managerial efficacy

and the empowerment of employees are more important to overall

produc�vity when tasks are not simple and homogeneous.

Key Term

Taylorism—scien�fic management, an early twen�eth‑century theory

of management that analyzed workflows in order to improve

efficiency.

The Downside of Efficiency

The classical view of management tends to focus on the efficiency and produc�vity of workers

rather than on their human needs. Generally the classical view is associated with Taylorism and

scien�fic management, which are largely cri�cized for viewing the worker as a cog in a

machine, rather than an individual. Under Taylorism workers’ effort increased in intensity, but

eventually workers became dissa�sfied and angry with the work environment, which affected

their overall work ethic. This dissa�sfac�on undoes the value captured via increased efficiency.

Taylorism’s nega�ve effects on worker morale only added fuel to the fire of exis�ng labor‑

management conflict, which frequently raged out of control between the mid‑nineteenth and

mid‑twen�eth centuries (when Taylorism was most influen�al), and thus inevitably contributed

to stronger labor unions. That outcome neutralized most or all of the benefit of any

produc�vity gains that Taylorism had achieved. The net benefit to owners and management

ended up being small or nega�ve. It would take new efforts, borrowing some ideas from

Taylorism but mixing them with others, to produce more successful formulas.

Factory workers

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Taylorism and classical

management styles nega�vely

affected the morale of workers,

which created a nega�ve

rela�onship between workers

and managers.

Scien�fic management also led to other pressures that made workers unhappy. Offshoring and

automa�on are two pressures that have led to the erosion of employment. Both were made

possible by the de‑skilling of jobs, which arose because of the knowledge transfer that

scien�fic management achieved. Knowledge was transferred to cheaper workers, and from

workers to tools.

The Human Factor

To summarize, the underlying weakness of the classical view of management is that it views

employees first as resources rather than people. This cri�cism opened doors for theorists such

as George Elton Mayo and Abraham Maslow, who emphasized the human and behavioral

aspects of management. A�er all, what value is wealth if the individual loses the sense of self‑

worth and happiness required to enjoy it? The behavioral approach to management took an

en�rely different approach and focused on managing morale, leadership, and other behavioral

factors to encourage produc�vity, rather than solely managing the �me and efficiency of

workers.

Corporate Growth

Another disadvantage of the classical perspec�ve arises from the growing size and complexity

of the modern organiza�on. Using metrics to examine specific employee behavior may be

feasible in a smaller organiza�on pursuing homogeneous tasks, but it becomes more difficult in

an organiza�on that has hundreds of employees pursuing various complex func�ons. In the 

situa�on with more complexity, it may be more beneficial to use tac�cs that are less focused

on the individual employee and more on improving overall produc�vity. This will involve less

micromanaging and more trust that employees will do the right thing in the workplace. The

onus of enabling efficiency, therefore, shi�s from workers to managers.

References

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Fayol, H. (1949). General and industrial management (C. Storrs, trans.). London: Sir Isaac

Pitman & Sons.

Licenses and A�ribu�ons

Classical Versus Behavioral Perspec�ves (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/classical‑perspec�ves/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on‑ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑

sa/4.0/deed.en) license. UMUC has modified this work and it is available under the original

license. 

© 2019 University of Maryland University College

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Behavioral Perspec�ves

The Behavioral Science Approach 

Behavioral science uses research and the scien�fic method to determine and understand behavior in the

workplace.

Behavioral science draws from a number of different fields and theories, primarily

those of psychology, social neuroscience, and cogni�ve science.

One applica�on of the behavioral science approach can be seen in a field called

organiza�onal development—an ongoing, systema�c process of implemen�ng

effec�ve organiza�onal change.

Behavioral sciences include rela�onal sciences, which deal with rela�onships,

interac�on, communica�on networks, associa�ons, and rela�onal strategies.

The behavioral science approach is broadly about understanding individual and

group behavioral dynamics to ini�ate meaningful organiza�onal development.

Key Term 

organiza�onal development—an ongoing, systema�c process of implemen�ng

effec�ve organiza�onal change using theories from behavioral sciences 

Behavioral science draws from a number of different fields and theories, primarily those of psychology, social

neuroscience, and cogni�ve science. Behavioral science uses research and the scien�fic method to determine

and understand behavior in the workplace. Many of the theories in the behavioral perspec�ve are included in

the behavioral science approach to management. For example, the Hawthorne studies used the scien�fic

method and are considered to be a part of the behavioral science approach. 

Behavioral science within the business management environment is a specific applica�on of this field, and

employs a number of specific types of behavioral observa�ons. This includes concepts such as informa�on

processing, rela�onships and mo�va�on, and organiza�onal development. 

Learning Resource

Key Points

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Informa�on Processing

Informa�on processing involves determining how people process s�muli in their environment. This field deals

with the processing of s�muli from the social environment by cogni�ve en��es in order to engage in decision

making, social judgment, and social percep�on. The field is par�cularly concerned with how people [or living

things] process informa�on and use it to func�on and survive in social environments.

The Organiza�onal Culture

Structure, process, and people all play a role in an organiza�on’s culture. 

Rela�onships

Behavioral sciences also include sciences that deal with rela�onships, interac�on, communica�on networks,

associa�ons, and rela�onal strategies or dynamics between organisms or cogni�ve en��es in a social system.

The emphasis on using quan�ta�ve data and qualita�ve research methods to determine how people process

informa�on and understand social rela�onships is important to helping managers be�er understand the

proven methods for increasing employee mo�va�on and produc�vity. The behavioral science approach and

the myriad fields it encompasses is the most common area of management science today.

Organiza�onal Development

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The behavioral science approach is applied primarily in the field of organiza�onal development. Organiza�onal

development is an ongoing, systema�c process of implemen�ng effec�ve organiza�onal change.

Organiza�onal development is considered both a field of applied behavioral science that focuses on

understanding and managing organiza�onal change and a field of scien�fic study and inquiry. It uses

components of behavioral sciences and studies in the fields of sociology, psychology, and theories of

mo�va�on, learning, and personality to implement effec�ve organiza�onal change and facilitate employee

development.

The behavioral science approach is broadly about understanding individual and group behavioral dynamics to

ini�ate meaningful organiza�onal development. The study of human behavior in the context of organiza�onal

change is integral to empowering organiza�ons to grow, adapt, and learn to capture compe��ve advantage.

Behaviorism: Folle�, Munsterberg, and Mayo

Behaviorism ini�ated a focus on the psychological and human factors influencing workers.

Mary Parker Folle�, Hugo Munsterberg, and Elton Mayo are all considered pioneers

and founders of the behaviorism movement in management theory. They wrote

about the importance of considering behavioral aspects of workers in addi�on to

workers’ efficiency.

Mary Parker Folle� was an American social worker, management consultant, and

pioneer in the fields of organiza�onal theory and organiza�onal behavior.

Hugo Munsterberg was a pioneer of applied psychology, extending his research and

theories to industrial/organiza�onal (I/O), legal, medical, clinical, educa�onal, and

business se�ngs.

Elton Mayo is known as the founder of the human rela�ons movement. His research

includes the Hawthorne studies and his book The Human Problems of an

Industrialized Civiliza�on.

Key Term 

industrial psychology—a field of study focused on topics such as hiring workers with

the personali�es and mental abili�es best suited to certain types of voca�ons

Mary Parker Folle�, Hugo Munsterberg, and Elton Mayo are all considered pioneers and founders of the

industrial/organiza�onal psychology and behaviorism movements in management theory. They wrote about

the importance of considering behavioral aspects of workers in addi�on to workers’ efficiency. This was in

many ways a con�nua�on of the scien�fic method, with the cri�cal difference of incorpora�ng the human

factors involved in effec�ve management. 

Key Points

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Folle�

Mary Parker Folle� was an American social worker, management consultant, and pioneer in the fields of

organiza�onal theory and organiza�onal behavior in the late nineteenth and early twen�eth centuries. She

cri�cized the overmanagement of employees, a process now known as micromanaging. Folle� was known for

the concept of reciprocal rela�onships and the idea that authority is inferior to integra�ve collabora�on.

Managers should enable, not dictate, she believed.

Folle� was sought out by President Theodore Roosevelt to be his personal consultant on managing not‑for‑

profit, nongovernmental, and voluntary organiza�ons. As a management theorist, she pioneered the

understanding of lateral processes within hierarchical organiza�ons. Her contribu�ons helped the behaviorism

movement get started by recognizing the worker as different from a machine.

Mary Parker Folle�

defined management as

“the art of ge�ng

things done through

people.” 

Munsterberg

Hugo Munsterberg, who prac�ced around the same �me as Folle�, was a German‑American psychologist. He

was one of the pioneers of applied psychology, extending his research and theories to

industrial/organiza�onal (I/O), legal, medical, clinical, educa�onal, and business se�ngs. Munsterberg’s

wri�ngs are considered the genesis of the industrial psychology field.

Industrial psychology, according to Munsterberg, focuses on topics like hiring workers with the personali�es

and mental abili�es suited to certain types of voca�ons, as well as on increasing mo�va�on, performance, and

worker reten�on. Munsterberg suggested that psychology could be used in many different industrial

applica�ons, including management, voca�onal decisions, adver�sing, job performance, and employee

mo�va�on. Many of Munsterberg’s ideas, especially matching an individual’s personality with the correct job

set and skills, are common in the use of I/O psychology today.

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Hugo Munsterberg

Munsterberg is considered the father of industrial/organiza�onal psychology. 

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Mayo

George Elton Mayo was an Australian psychologist, sociologist, and organiza�on theorist. Mayo is known as

the founder of the human rela�ons movement. His research includes the Hawthorne studies and his book

(1933).

The Hawthorne studies of the 1930s showed the importance of groups in affec�ng the behavior of individuals

at work. Mayo’s employees Roethlisberger and Dickson conducted the prac�cal experiments. Mayo made

deduc�ons about how managers should behave. He concluded that people’s work performance depends on

both social issues and job content. He suggested a tension between workers’ “logic of sen�ment” and

managers’ “logic of cost and efficiency” that could lead to conflict within organiza�ons. Mayo’s studies

contributed to the behaviorism movement in management, as managers became more aware of the “so�

skills” that are important to successful management.

Folle�, Munsterberg, and Mayo each introduced important components and ideas into the behaviorism

perspec�ve of management. They all believed that successful management comes from understanding how to

treat employees, mo�vate them, and help them succeed and become as efficient as possible in their jobs.

The Human Side: Hawthorne

The Hawthorne studies found that workers were more responsive to group involvement and managerial

a�en�on than to financial incen�ves.

The Hawthorne studies, conducted by Elton Mayo and Fritz Roethlisberger in the

1920s with the workers at the Hawthorne plant of the Western Electric Company,

were part of an emphasis on sociopsychological aspects of human behavior in

organiza�ons.

Hawthorne researchers hypothesized that choosing one’s own coworkers, working

as a group, being treated as special, and having a sympathe�c supervisor were

reasons for increases in worker produc�vity.

The Hawthorne studies found that monetary incen�ves and good working

condi�ons are generally less important in improving employee produc�vity than

mee�ng employees’ need and desire to belong to a group, and be included in

decision making and work.

Key Term

Hawthorne studies—series of inves�ga�ons conducted in the 1920s emphasizing

the sociopsychological aspects of human behavior in organiza�ons

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The Hawthorne studies were conducted with the workers at the Hawthorne plant of the Western Electric

Company by Elton Mayo and Fritz Roethlisberger in the 1920s. The Hawthorne studies were part of a refocus

on managerial strategy incorpora�ng the sociopsychological aspects of human behavior in organiza�ons. 

Site of the Hawthorne Studies

Western Electric Company factory near Chicago

The studies suggested that employees have social and psychological needs—as well as economic and financial

ones—that must be met in order to be mo�vated to complete their assigned tasks. The human rela�ons

movement is concerned with morale, leadership, and factors that help workers cooperate. 

This theory of management was a by‑product of the issues that arose from the classical scien�fic perspec�ves

on management (i.e., Taylorism). The simplest explana�on of the hypothesis inves�gated is quite intui�ve.

Employees (i.e., human resources) are not merely mo�vated by financial gain, and produc�vity is not simply a

by‑product of incen�ves and op�mized working spaces. People are mo�vated by inclusion, construc�ve

feedback, interest, autonomy, and a wide variety of other factors aside from money and other tangible

resources. 

Results of the Hawthorne Studies

The studies originally looked into whether workers were more responsive and worked more efficiently under

certain environmental condi�ons, such as improved ligh�ng. The results were surprising, as Mayo and

Roethlisberger found that workers were more responsive to social factors—such as the people they worked

with on a team and the amount of interest their manager had in their work—than the factors (ligh�ng, etc.) the

researchers had gone in to inspect.

The Hawthorne studies indicated that workers were highly responsive to addi�onal a�en�on from their

managers and the feeling that their managers actually cared about, and were interested in, their work. The

studies also concluded that although financial mo�ves are important, social factors are equally important to

worker produc�vity.

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There were a number of other experiments conducted in the Hawthorne studies, including one in which two

women were chosen as test subjects and were then asked to choose four other workers to join the test group.

Together, the women worked assembling telephone relays in a separate room over the course of five years

(1927–1932), and their output was measured. 

The measuring began in secret. It started two weeks before moving the women to an experiment room and

con�nued throughout the study. In the experiment room, they had a supervisor who discussed changes with

them and, at �mes, used their sugges�ons. The researchers then spent five years measuring how different

variables impacted both the group’s and the individuals’ produc�vity. Some of the variables included giving

two five‑minute breaks (a�er a discussion with the group on the best length of �me), and then changing to

two 10‑minute breaks (not the preference of the group). 

Intangible Mo�vators

Changing a variable usually increased produc�vity, even if the variable was just a change back to the original

condi�on. Researchers concluded that the employees worked harder because they thought they were being

monitored individually. They hypothesized that choosing one’s own coworkers, working as a group, being

treated as special (by working in a separate room, as in the experiment), and having a sympathe�c supervisor

were the real reasons for the produc�vity increase.

The Hawthorne studies showed that people’s work performance depends on social issues and job sa�sfac�on.

Further, the studies helped demonstrate that monetary incen�ves and good working condi�ons are generally

less important in improving employee produc�vity than mee�ng people’s desire to belong to a group and be

included in decision making and work.

Managerial Assump�on: McGregor

McGregor introduced theories X and Y, which summarize and compare the classical management and

behavioral management perspec�ves.

Douglas McGregor was a management professor at the MIT Sloan School of

Management. He wrote The Human Side of Management (1960), which suggested

mo�va�ng employees through authorita�ve direc�on and employee self‑control,

respec�vely called theory X and theory Y.

Theory X, based more on classical management theory, assumes that workers need a

high amount of supervision because people are inherently lazy. It assumes that

managers need to mo�vate through coercion and punishment.

Theory Y assumes that employees are ambi�ous, self‑mo�vated, exercise self‑

control, and generally enjoy mental and physical work du�es. Theory Y is in line with

behavioral management theories.

Key Points

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Theories X and Y relate to Maslow’s hierarchy of needs in that they see human

behavior and mo�va�on as the main priority in maximizing output in the workplace.

Key Terms 

Theory X—Employees are inherently lazy and irresponsible and will tend to avoid

work unless closely supervised and given incen�ves. 

Theory Y—Employees are capable of being ambi�ous and self‑mo�vated under

suitable condi�ons.

Douglas McGregor was a management professor at the MIT Sloan School of Management. He suggested

mo�va�ng employees through authorita�ve direc�on and employee self‑control (1960). McGregor’s book was

voted the fourth most influen�al management book of the twen�eth century in a poll of the Fellows of the

Academy of Management.

McGregor’s main theory comprises theory X and theory Y. Theory X, based more on classical management

theory, assumes that workers need a high amount of supervision because people are inherently lazy. Theory Y

assumes that employees are ambi�ous, self‑mo�vated, exercise self‑control, and generally enjoy mental and

physical work du�es. Theory Y is in line with behavioral management theories. O�en, how managers act is

affected by the theory they subscribe to. 

Theory X

In theory X, managers tend to micromanage and closely supervise employees. Complex hierarchical structures

are needed in order to offer a narrow span of control at every level of the organiza�on. Employees show li�le

ambi�on without an incen�ve program and avoid responsibility whenever possible. Managers who believe

theory X rely more heavily on punishment, fear, and coercion—and less on rewards—to mo�vate employees.

Manager‑employee rela�onships are generally not rewarding in this environment of mistrust. Usually

managers in these situa�ons believe that the sole purpose of the employee’s interest in his or her job is

money. 

Theory Y

Theory Y managers generally believe the opposite. They believe that given the proper condi�ons, employees

will learn to seek and accept responsibility and to be self‑directed in accomplishing objec�ves, that most

people will want to do well at work, and that the sa�sfac�on of doing a good job is a strong mo�vator. Many

people interpret theory Y as a posi�ve set of beliefs about workers.

McGregor thinks that theory Y managers are more likely than theory X managers to develop a climate of trust

with employees—a required condi�on for human‑resource development. This type of human‑resource

development is much more in line with how Maslow’s hierarchy of needs operates and with the Hawthorne

studies’ findings than with any of the classical theories of management.

Theory X or Theory Y?

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Theories X and Y relate to Maslow’s hierarchy of needs in that they see human behavior and mo�va�on as the

main priori�es in maximizing output. Both McGregor and Maslow would say that in order to help employees

achieve maximum efficiency and happiness in their work, a theory Y manager would need to promote

morality, crea�vity, problem solving, and a lack of prejudice. McGregor was a life�me proponent of theory Y. 

Modern organiza�ons in developed countries generally side with McGregor, in that they believe theory Y is

superior in ge�ng posi�ve results from employees (and job sa�sfac�on for employees). However, both

theories are s�ll prominent in the workplace, where many managers treat their employees as if they are lazy

and likely to perform poorly without stringent rules and supervision. In management, just as everywhere else,

it is difficult to effect social change in the face of human nature, even when the benefits are established. 

Produc�vity: Argyris

Argyris’s theory of single‑ and double‑loop learning has been applied to management theory to suggest the

best ways for employees to learn.

Argyris studied how humans design and decide on their ac�ons under difficult or

stressful situa�ons. He believed that human ac�ons are controlled by environmental

variables, which determine the key differences between single‑loop learning and

double‑loop learning.

In single‑loop learning, individuals, groups, and organiza�ons modify their ac�ons

according to the difference between expected and obtained outcomes.

In double‑loop learning, individuals, groups, and organiza�ons ques�on the values,

assump�ons, and policies that led to the ac�ons in the first place.

Argyris’s theory of single‑ and double‑loop learning has been applied to management

theory to suggest the best way for employees to learn and think about new goals

and strategies for an organiza�on.

Key Terms 

double‑loop learning—a theory in which an organiza�on or individual ques�ons the

values, assump�ons, and policies that led to a given situa�on 

learning organiza�on—a company that facilitates the learning of its members and

con�nuously transforms itself

single‑loop learning—a theory that individuals, groups, or organiza�ons modify their

ac�ons according to the difference between expected and obtained outcomes

Key Points

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Chris Argyris (July 16, 1923 to November 16, 2013) was an American business theorist, professor at Harvard

Business School, and a thought leader at Monitor Group, a consul�ng firm. He is known for his work on

learning theories within learning organiza�ons. 

Argyris conducted a series of research studies in ac�on science, which studies how humans design and decide

on their ac�ons under difficult or stressful situa�ons. Argyris believed that human ac�ons are controlled by

environmental variables that determine the key differences between single‑loop and double‑loop learning. 

Single‑Loop Learning

In single‑loop learning, en��es (such as individuals, groups, or organiza�ons) modify their ac�ons according to

the difference between expected and obtained outcomes. This essen�ally means that learning is through

experience and direct reflec�on on outcomes, where the ends jus�fy the means, and dictate the fulcrum of

the discussion and learning outcomes.

In many ways, this is a reac�onary approach. Individuals must iden�fy successes and failures, and pursue

formulas for maximizing the former and minimizing the la�er. While this type of learning, and the broader

behaviors, are extremely common in the real world, it is not the ideal method for learning that can be adapted

to the broader organiza�on. It tends to be simple, short‑term, and not always conducive to sustainability.

Double‑Loop Learning

In double‑loop learning, the en��es ques�on the values, assump�ons, and policies that lead to ac�ons. If the

en��es can discern and modify the values, then second‑order or double‑loop learning has taken place. This is

a more integra�ve, process‑oriented, and collabora�ve approach. It is also much more complex, difficult, and

sensi�ve, as the core values and strategies in place must be analyzed, ques�oned, and defended (or

discarded).

The simple truth is that people fear change, ac�vely avoid conflict, and generally preserve the status quo.

Double‑loop learning requires the bravery to challenge what is established organiza�onally, iden�fy broader

systemic issues, and fix problems at their source. 

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Chris Argyris wrote about the theories of single‑ and double‑loop learning, which determine

how people make decisions in difficult situa�ons.

For example, a company facing a problem with its management strategy may decide to focus on how to

improve or implement the strategy in different ways. In this situa�on, the company is using single‑loop

learning: Management is focused on making changes without reconsidering the fundamental standard or

strategy itself. However, if the company were to en�rely reconsider the problema�c strategy and start from

scratch, this would exemplify double‑loop learning. Double‑loop learning may lead to a change in the original

strategy or even the goals the company had that led to its strategy. 

Argyris’s theory of single‑ and double‑loop learning has been applied to management theory to suggest the

best way for employees to learn and think about new goals and strategies for an organiza�on. 

References

Mayo, E. (1933). Human problems of an industrial civiliza�on. New York, NY: Macmillan.

McGregor, D. (1960). The human side of enterprise. New York, NY: McGraw‑Hill.

Licenses and A�ribu�ons

Behavioral Perspec�ves (h�ps://courses.lumenlearning.com/boundless‑management/chapter/behavioral‑

perspec�ves/) from Boundless Management by Lumen Learning, originally published by Boundless.com, is

available under a Crea�ve Commons A�ribu�on‑ShareAlike 4.0 Interna�onal

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(h�ps://crea�vecommons.org/licenses/by‑sa/4.0/) license. UMUC has modified this work and it is available

under the original license.

Behavioral Perspec�ves (h�ps://courses.lumenlearning.com/boundless‑management/chapter/behavioral‑

perspec�ves/) from Boundless Management by Lumen Learning, originally published by Boundless.com, is

available under a Crea�ve Commons A�ribu�on‑ShareAlike 4.0 Interna�onal

(h�ps://crea�vecommons.org/licenses/by‑sa/4.0/) license. UMUC has modified this work and it is available

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Organiza�on Triangle. Provided by: WikiPedia. Located

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Double loop learning. Provided by: Wikipedia. Located

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Double loop learning. Provided by: Wikipedia. Located

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License: CC BY: A�ribu�on (h�ps://crea�vecommons.org/licenses/by/4.0/)

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BY: A�ribu�on (h�ps://crea�vecommons.org/licenses/by/4.0/)

 

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of informa�on located at

external sites.

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Modern Thinking

Quan�ta�ve and Analy�cal Management Tools 

Quan�ta�ve tools are used by management to determine where a company is doing well or

struggling compared with its industry and compe�tors.

Many quan�ta�ve and analy�c tools are available for managers to

be�er understand workflow processes, financial management, and

employee efficiency.

A decision tree is a decision support tool that uses a tree‑like graph

or model of decisions and their possible consequences, including

chance event outcomes, resource costs, and u�lity.

Simula�on is the imita�on of a real‑world process or system over

�me.

Trend charts are o�en used in management to display data over �me

to explore any poten�al trends, either posi�ve or nega�ve, that

require addi�onal a�en�on by management. It is important to use

sta�s�cal confidence intervals when u�lizing this type of forecast.

Benchmarking allows a manager to see how different aspects of a

business are performing compared to na�onal, regional, and industry

standards. It also allows management to explore how the company is

performing compared to its compe�tors.

Financial projec�ons and net‑present‑value (NPV) analyses are also

commonplace when deciding upon new opera�ons quan�ta�vely—

where the company predicts profitability in today’s dollars.

Learning Resource

Key Points

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Key Terms

decision tree—a graphic visualiza�on—resembling a tree—of a

complex decision‑making situa�on and likely outcomes from

choosing different op�ons 

benchmarking—technique allowing a manager to compare metrics

like quality, �me, and cost, across an industry and against

compe�tors

Managers can use many different quan�ta�ve and analy�c tools to be�er understand

workflow processes, financial management, and employee efficiency. These tools, such as

decision trees, simula�on, trend charts, benchmarking, and financial projec�ons, help

managers improve their decision‑making abili�es, determine how their business is performing

rela�ve to compe�tors, and discover opportuni�es for improvement. Using these tools to

create quan�ta�ve and measurable metrics helps an organiza�on see exactly where it is

performing well and where it is performing poorly.

Decision Tree

A decision tree is a branching graph, or model of decisions and their possible consequences,

including chance‑event outcomes, resource costs, and u�lity. Decision trees are commonly

used in opera�ons research (specifically in decision analysis) to help iden�fy a strategy most

likely to reach a specified goal. They can also be used to map out a thought process or the

possible consequences of a decision. A manager may use this tool when deciding between

different projects or investments.

Example of a Decision Tree

A decision tree to determine the consequences and poten�al outcomes (money lost or

gained at each step) along mul�ple poten�al paths of ac�on. The path resul�ng in the

highest financial gain by the end is generally the one that should be chosen.

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Simula�on

Simula�on is the imita�on of a real‑world process or system over �me. The act of simula�ng

something first requires that a model be developed represen�ng the key characteris�cs or

behaviors of a physical or abstract system or process. A simula�on could be used to study

investment decisions by ac�vely playing out the outcomes of specific situa�ons.

Trend Charts

Trend charts are o�en used to display data over �me to explore poten�al trends (either

posi�ve or nega�ve) that require addi�onal management a�en�on. Many metrics—including

employee produc�vity, financial metrics, opera�onal efficiency, and comparisons between

compe�tors—are analyzed using trend charts. Trends are only ever in the past, however, and

using confidence intervals in projec�ng trends is cri�cal to their effec�veness.

This chart of US defense spending from 2000 to 2011 shows that overall spending increased

from $300 billion to $700 billion due to increases in both the Department of Defense (DOD)

budget and overseas (war‑related) spending. 

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Benchmarking

Benchmarking allows managers to see how different aspects of their business (usually quality,

�me, and cost) are performing compared to na�onal, regional, and industry standards. It also

allows a manager to explore how the company is performing compared to compe�tors. In the

process of benchmarking, management iden�fies the best firms in the industry, or in another

industry where similar processes exist, and compares the results and processes of the target

firms to management’s own results and processes. In this way, management learns how well

the targets perform and, more importantly, the business processes that explain why these

firms are successful.

Financial Projec�ons

Managers can also use financial analysis as a management tool. When inves�ng in a project or

an acquisi�on of any kind, a manager will always want to know how quickly the investment

will turn a profit. For example, when a company invests in a new building, management will

calculate how long it will take for the building to generate enough income to cover the upfront

costs. This calcula�on is some�mes called a payback period. All else being equal, shorter

payback periods are preferable to longer ones. This is o�en referred to as NPV, or net present

value, where the company calculates the future value of the project in today’s dollars. It is

cri�cal to remember that a dollar today and a dollar tomorrow have different values.

Opera�ons Management Tools

Six Sigma and Lean are two popular opera�ons‑management theories that help managers

improve the efficiency of their produc�on processes.

The main tools of opera�ons management come from two popular

theories of organizing business: Six Sigma and Lean.

Six Sigma relies on par�cular quality‑management methods, such as

sta�s�cal analy�cs, and incorporates designa�ons like black belt and

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green belt to indicate those within an organiza�on who are experts in

these methods.

Lean is a produc�on theory that deems any expenditure of resources

that doesn’t create value for customers wasteful—and a target for

elimina�on.

By leveraging opera�onal paradigms constructed to deliberately

capture value through maximizing efficiency, managers can lower

costs for companies and prices for consumers.

Key Terms 

six sigma—process improvement that focuses on using sta�s�cal

methods to reduce the number of defects 

lean—a produc�on strategy focused on elimina�ng all unnecessary

waste

Opera�ons management is a type of management that oversees, designs (or redesigns), and

controls a company’s produc�on processes and business opera�ons. Opera�ons managers are

responsible for ensuring that business opera�ons are efficient, both in conserving resources

and mee�ng customer requirements. They manage the process that converts inputs (materials,

labor, and energy) into outputs (goods and services). In order to accomplish this task, managers

use various tools, including Six Sigma and Lean—the two most influen�al ones. 

Six Sigma

Six Sigma is a strategy designed to improve the quality of process outputs. It accomplishes this

by iden�fying and removing the causes of defects and errors, and by minimizing variability in

manufacturing and business processes.

The strategy relies on quality management methods like sta�s�cal analy�cs, and incorporates

designa�ons like black belt and green belt to indicate those within an organiza�on who are

experts in these methods. Each Six Sigma project in an organiza�on follows a defined

sequence of steps with quan�fied financial targets such as reducing costs or increasing profits.

Among the tools used in Six Sigma are process mapping, trending charts, calcula�ons of

poten�al defects, ra�os, and sta�s�cs. Six Sigma also includes best prac�ces for working

within a team.

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Six Sigma Symbol

Six Sigma is a tool many managers use to reduce the

number of defects created by their processes. 

Lean

Lean is similar to Six Sigma, but slightly less focused on defect rate and more on elimina�ng

the amount of waste and excessive steps in an opera�on. Lean is a produc�on theory that

deems any expenditure of resources that doesn’t create value for customers wasteful—and a

target for elimina�on. Beginning from the perspec�ve of the consumer of a product or service,

value is defined as any ac�on or process that a customer would be willing to pay for. Lean

employs tools to evaluate produc�on workflow and determine where there is waste. Examples

of waste include excess mo�on, inventory, and overproduc�on.

Examples of Six Sigma and Lean

In many ways, lean manufacturing and Six Sigma are reminiscent of Henry Ford’s focus on

systema�c process improvements. The overarching theme is simply to minimize the �me

employees spend on tasks and maximize output with the same amount of input. Toyota, using

the Japanese concept of kaizen, exemplifies lean manufacturing and just‑in‑�me (JIT)

inventory management. Toyota became famous for �ming each specific element of the

manufacturing process to ensure minimal warehousing, delivering each component precisely

when and where it was needed. This created a process flow that minimized space usage, which

lowered costs, op�mized �ming, and created widespread consistency of opera�onal flow.

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Lean and Six Sigma are the two main strategies for opera�ons management. Both offer

managers an extensive toolbox to analyze the efficiency of their produc�on. These tools

analyze workflow, uncover where and why there is waste, and decrease defects in products or

services, all of which make a company more efficient.

The Systems Viewpoint

Systems thinking is an approach to problem solving that considers the overall system instead

of focusing on its specific parts.

Systems thinking is an approach to problem solving that views

problems as part of an overall system. It is different from problem‑

solving strategies that only focus on specific parts or outcomes of a

problem.

Systems thinking approaches problems as a set of habits or prac�ces

within a framework. It is based on the belief that the component

parts of a system are best understood in the context of their

rela�onships with each other rather than in isola�on.

Systems thinking is opposed to fragmented thinking, which involves

thinking about specific problems without considering the context,

environment, and effects of similar problems.

Key Term

fragmented thinking—looking at problems as isolated events instead

of considering the system as a whole 

It is the process of understanding how people and situa�ons influence one another within a

closed system. As in nature, where the air, water, movement, plants, and animals interact with

one another—and survive or perish in rela�onship with each other; in business, management

also involves rela�onships and interac�ons.

Organiza�onal Systems

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Organiza�onal systems consist of people, structures, and processes working together to make

an organiza�on healthy or unhealthy. The end product of effec�ve systems management is

synergy, in which the whole is greater than the sum of its parts. Systems generally contain the

following:

inputs, such as people, �me, energy, and informa�on

processes or reac�ons, including tools, so�ware, and analyses

outputs, like products, reports, and plans

feedback mechanisms, including informa�on and reports

Systems thinking: Just as gears

work together, problems in one

area of a business can affect other

areas. 

Problem Solving

When problem solving, advocates of systems thinking consider specific problems within an

overall system, rather than reac�ng to specific issues or outcomes. In systems thinking,

problems are conceptualized as a set of habits or prac�ces that exist within a framework.

Prac��oners of systems thinking believe that the component parts of a system can best be

understood and analyzed in the context of how the parts of a system are interrelated.

Systems thinking rejects a reduc�ve framework that a�empts to focus on a single problem

without considering the context, environment, or impact of similar problems. Fragmented

thinking o�en results in solu�ons that cannot be applied in other situa�ons, so they lose their

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relevance over �me. With root causes le� unaddressed, management is con�nually pu�ng out

fires in a reac�ve mode.

Example

Imagine that the Human Resources department is beset with problems in workflow and

efficiency. A manager who uses systems thinking to fix the problem looks at Human

Resources in the context of all of the workflow in the company to see whether the

“Human Resources problem” could actually be a company‑wide issue. Only a systems‑

thinking approach can lead to this realiza�on because systems thinking provides insight

into how problems that manifest in a specific loca�on can spring from distant, seemingly

unrelated places. With a more accurate understanding of a problem, managers can

formulate a more effec�ve and las�ng solu�on.

The Con�ngency Viewpoint

The con�ngency viewpoint of management proposes that there is no standard for

management; instead, management depends on the situa�on.

The con�ngency viewpoint is a more recent development in

organiza�onal theory that a�empts to integrate a variety of

management approaches, proposing that there is no one best way to

organize a corpora�on or lead a company.

Deba�ng which one of the previous approaches to management is

“best” is irrelevant in con�ngency theory, since the heart of the

con�ngency approach is that there is no one best way for managing

and leading an organiza�on.

The con�ngency viewpoint focuses on management’s ability to

achieve alignment and a good fit between employees and

circumstances by considering mul�ple solu�ons to determine the

best one for each par�cular problem.

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The focal point, and modern relevance, of this perspec�ve is the

concept of adaptability. Technology and globaliza�on evolve the

business environment so rapidly that adaptable strategies are more

appropriate than sta�c ones, making con�ngencies key to success.

Key Term

con�ngency viewpoint—a management theory that proposes that

there is no standard for management prac�ce; instead, management

depends on the situa�on. 

The con�ngency viewpoint is a more recent development of organiza�onal theory that

a�empts to integrate a variety of management approaches by proposing that there is not one

best way to organize a corpora�on or lead a company. Instead, the op�mal course of ac�on is

con�ngent, or dependent upon internal and external contexts.

Perspec�ve on Previous Theories

The con�ngency approach claims that past theories, such as Max Weber’s bureaucracy theory

and Taylor’s scien�fic management, are no longer prac�ced because they fail to recognize that

management style and organiza�onal structure are influenced by various aspects of the

environment known as con�ngency factors. Deba�ng which one of the previous approaches

to management is the best one is irrelevant, since the heart of con�ngency theory is that there

is not one best way to manage and lead an organiza�on.

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The basic premise of con�ngency theory is that there are limitless possibili�es that companies

must be prepared to adapt strategically. 

An Outline of Con�ngency Theory

By its nature, con�ngency theory avoids sta�c rules. There are, however, common

con�ngencies that businesses must react to, including technology, compe��on, governments,

unions, consumer interest groups, new markets and consumers, and economic factors. Fred

Fiedler iden�fied three leadership styles and empirical situa�on measurements to assess the

degree of favorability a given con�ngency offers:

the leader‑member rela�onship, which is the most important variable in determining the

situa�on’s favorableness

the degree of task structure, which is the second most important input into the

favorableness of the situa�on

the leader’s posi�on power obtained through formal authority

In other words, leadership needs to be able to assess a situa�on, determine the task structure,

and obtain a posi�on of formal authority to adequately manage a con�ngency situa�on.

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Example

Imagine a manager with an employee who regularly is late for work. He or she could

have a wri�en protocol that includes only one op�on: Reprimand the employee. Under

the con�ngency viewpoint, however, the manager may decide, by talking to the

employee, to find out why he or she comes to work late. Perhaps there are extenua�ng

circumstances that can be easy to work around. In this case, the con�ngency approach

allows the employee to keep the job and saves the manager the �me and trouble of

termina�on and hiring someone else.

A leader’s ability to manage under the con�ngency viewpoint depends largely on the nature of

the environment and how the organiza�on relates to the environment. Therefore, the

organiza�onal structure is a major component of the approach that management may take in

resolving problems under con�ngency theory.

Quality Assurance and Control

Quality assurance and quality control are intended to ensure that products are created with

the fewest number of defects possible.

Quality assurance (QA) refers to planned and systema�c ac�vi�es

implemented in a quality system to fulfill the quality requirements for

a product or service.

Quality control (QC) is a process by which products are tested to

uncover defects and the results are reported to management, which

makes the decision to allow or deny product release.

Quality control and quality assurance work together to make sure

that a company’s products have the lowest possible error rate.

As global markets expand, and as outsourcing becomes common

prac�ce, QC and QA are increasingly important. When companies do

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not control their manufacturing process, they must invest in

controlling the quality of their vendors.

Key Term

failure tes�ng—stress tes�ng to determine the point at which a

product will fail 

Quality assurance and quality control are two methods of planning and implemen�ng

structured methods in a work process to ensure that products are created with the highest

possible quality and the smallest number of defects or problems. 

Quality Assurance

QA refers to the planned and systema�c ac�vi�es implemented in a quality system to fulfill

the quality requirements for a product or service. It is a systema�c measurement compared to

a set standard, with process monitoring used to prevent errors. This can be contrasted with

quality control, which is focused on process outputs. There are two key principles of QA:

Fit for purpose. The product should be suitable for its intended purpose.

Right the first �me. Mistakes should be eliminated.

QA includes managing the quality of raw materials, assemblies, products, components, services

related to produc�on, management processes, produc�on processes, and inspec�on

processes. QA equates to process observa�ons.

Quality assurance is measured through failure tes�ng and sta�s�cal control. Failure tes�ng

determines the stress levels under which a product will fail by exposing it to unan�cipated

stresses, like intense vibra�on, temperature, and humidity. Stress tes�ng uncovers problems

that can be fixed with simple changes. Sta�s�cal controls ensure that an organiza�on is

producing quality products at the lowest possible defect rate. Many organiza�ons use Six

Sigma levels of quality, so the likelihood of an unexpected failure is less than four in one

million.

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Assembly line and quality control: Many processes, such as assembly lines, help ensure quality

assurance and control by streamlining produc�on. 

Quality Control

QC is the process of tes�ng finished products to uncover defects and repor�ng the results, so

management can decide whether to allow or deny product release. It differs from quality

assurance, which a�empts to improve, stabilize, and eliminate flaws from a product during

produc�on.

Controls also include product inspec�on: Every product is examined visually before being sold.

Inspectors receive lists and descrip�ons of unacceptable product defects, such as cracks or

surface blemishes. Efficient quality control depends on top‑notch visual examina�on of

products, employee training, and organiza�onal culture.

Quality control and quality assurance work together to ensure that companies produce

products that have the lowest possible error rate, so there will be fewer customer complaints

and no need for rework.

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Outsourcing

Because they depend so much on vendors, many corpora�ons find their manufacturing

processes are conducted outside of their organiza�on. This can lead to difficul�es in

maintaining process quality. Therefore, a corpora�on needs to invest in QC professionals to

maintain organiza�onal standards. QC is not simply an internal concern for many businesses,

but a criteria for selec�ng vendors.

Evidence‑Based Management

Evidence‑based management emphasizes the importance of managers using the scien�fic

method to make decisions.

Evidence‑based management is an emerging movement to base

managerial decisions and organiza�onal prac�ces on the best

available scien�fic evidence and explicitly use current best prac�ces.

It is an outgrowth of evidence‑based medicine.

While there is a rich body of academic literature pertaining to tried‑

and‑true managerial strategies, real‑world applica�on is rare.

Promo�ng evidence‑based management is challenging because it can

conflict with tradi�onal defini�ons and expecta�ons of management.

Li�le shared terminology exists between managers of different

companies, making it difficult for managers to discuss evidence‑based

prac�ces, so the adop�on of evidence‑based prac�ces is likely to be

organiza�on‑specific.

Key Term

evidence‑based management—management decisions that are based

on a combina�on of cri�cal thinking and the best available evidence

(informa�on, facts, or data that support or contradict a claim,

assump�on, or hypothesis) 

Key Points

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Evidence‑based management (EBM) is an emerging movement that explicitly uses current best

prac�ces in managerial decision making. It is rooted in evidence‑based medicine—the rigorous

sta�s�cal and experimental process that new pharmaceu�cals go through before they are

deemed safe. The intended result is treatments that are as effec�ve and safe as possible for

pa�ents. Applying EBM to business simply means u�lizing the scien�fic method, which

integrates rigorous and objec�ve hypothesis tes�ng to iden�fy best prac�ces.

Evidence‑based management, like

evidence‑based medicine, emphasizes

scien�fic research to inform decision

making. 

The Scien�fic Method

Evidence‑based management informs managerial decisions and organiza�onal prac�ces using

the best available scien�fic evidence. Prac�cing EBM requires managers to collect data, run

tests, generate hypotheses, and objec�vely interpret findings to create an accurate depic�on

of the efficacy of a given managerial style or decision. Because management is much less

tangible or measurable than many other scien�fic disciplines, this can be a challenge.

Imagine a group of managers considering how to improve job sa�sfac�on in their organiza�on.

They could conduct a comprehensive and objec�ve survey across a large number of

organiza�ons to collect data on compensa�on, employee sa�sfac�on, and company culture to

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determine if a posi�ve company culture is more relevant to job sa�sfac�on than pay. A�er

collec�ng n number of responses, the data could be assessed to determine a confidence

interval, revealing whether the conclusion is significant for future management decisions.

Integra�on with Organiza�ons

While there is a rich body of academic literature pertaining to tested and true managerial

strategies, real‑world applica�on is rela�vely rare. MBAs and degree holders in business have

some exposure to the literature, but they rarely move it from the theore�cal realm to prac�ce.

Mo�va�ng real‑life applica�ons of the studies for management could prove advantageous for

companies looking to improve their managerial effec�veness.

Licenses and A�ribu�ons

Modern Thinking (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/modern‑thinking/) from Boundless Management by Lumen Learning,

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Modern Thinking (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/modern‑thinking/) from Boundless Management by Lumen Learning,

originally published by Boundless.com, is available under a Crea�ve Commons A�ribu�on‑

1/14/2019 Modern Thinking

https://learn.umuc.edu/d2l/le/content/348372/viewContent/14274057/View 24/24

ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑sa/4.0/) license. UMUC

has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

1/14/2019 Evolving Organizations

https://learn.umuc.edu/d2l/le/content/348372/viewContent/14274058/View 1/8

Evolving Organiza�ons

Knowledge Management and Behavior Modifica�on

Knowledge management and behavior modifica�on are tac�cs employers use to ensure

organiza�onal growth and adaptability.

Knowledge management is an organiza�onal concept that takes the

best knowledge from individual employees and organizes it into a

func�onal learning and educa�on system that all employees can learn

from.

Typically, a company’s informa�on technology department—via

electronic collec�on of specific components of employee exper�se,

crea�on of online learning modules, and redistribu�on of the

modules throughout the company—is responsible for knowledge

management.

Behavioral modifica�on includes altering an individual’s behavior

through data collec�on and posi�ve and/or nega�ve reinforcement.

In an organiza�on, behavior modifica�on is typically studied to

examine how employees perceive their performance in rela�on to

rewards. At a high level, it is used to develop strategies for improving

performance and behavior.

Key Term

knowledge management—collec�ng employees’ specialized

knowledge, and organizing, redistribu�ng, and sharing it throughout

Learning Resource

Key Points

1/14/2019 Evolving Organizations

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the company

Knowledge management (KM), and behavior modifica�on using organiza�onal knowledge, are

central to an organiza�on’s ability to grow and adapt. The value of knowledge management

from the organiza�on’s perspec�ve is that it can help employees learn and improve their skills

—and allow the organiza�on to evolve and achieve higher efficiency. Knowledge is a resource

that organiza�ons can collect and document through experience over �me. Documen�ng and

dissemina�ng knowledge is a way to avoid repea�ng mistakes while improving current

strategies.

Knowledge Management

The fields of business administra�on, informa�on systems, management, and library and

informa�on sciences include knowledge management. Other fields contribu�ng to KM

research include informa�on and media, computer science, public health, and public policy.

Knowledge management is the range of strategies and prac�ces an organiza�on uses to

iden�fy, create, represent, distribute, and enable the adop�on of employee insights and

experiences. These insights and experiences cons�tute the company’s knowledge embodied in

individuals or embedded as the organiza�on’s processes or prac�ces. 

Knowledge management also focuses on organiza�onal objec�ves including improved

performance, compe��ve advantage, innova�on, and con�nuous improvement. KM is similar

to organiza�onal learning but focused more on knowledge as a strategic asset of a company’s

employees. It encourages sharing knowledge to further the company’s success. 

Many organiza�ons include resources dedicated to knowledge management in their business

strategy, informa�on technology, or human resource management departments. They also may

hire consul�ng firms that specialize in knowledge management. 

Another approach to KM is taking the best knowledge from individual employees and

organizing it into func�onal learning and educa�on systems that all employees can learn from.

Sharing knowledge is the most important component of knowledge management and is

essen�al to helping an organiza�on evolve and grow. 

A company’s IT department can facilitate this by collec�ng and dissemina�ng employee

knowledge through learning modules.

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B. F. Skinner

B. F. Skinner introduced the

study of behavior modifica�on,

and his theories are s�ll used

in behavior modifica�on today. 

Behavior Modifica�on

Behavior modifica�on was first introduced in psychology as a collec�on of techniques to

increase or decrease the frequency of behaviors. B. F. Skinner popularized behavior

modifica�on, analyzing the triggers and rewards for certain behaviors in a series of

experiments using animals. Behavioral modifica�on techniques include both posi�ve and

nega�ve reinforcement.

In an organiza�on, behavior modifica�on is typically studied to examine how employees

perceive their performance in rela�on to rewards. The process of behavioral modifica�on in

the workplace focuses on iden�fying the frequency of performance‑related behaviors and

determining the triggers for them. Once a trigger is iden�fied, management can determine

whether to develop a different trigger to change performance or sustain the current

performance through rewards and appraisal.

Behavior modifica�on is generally used on a broader scale to determine how best to develop

employee performance to move an organiza�on in a desired direc�on. Knowledge

management can help this movement by providing employees with adequate training and

skills, and making sure they know that they are valuable members of the organiza�on who

deserve investment and empowerment. Training employees and improving their knowledge,

skills, and behavioral approaches to work help an organiza�on evolve and improve.

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Example

Consider an employee who is par�cularly knowledgeable about a certain computer

system. He or she might be asked to write a training manual or presenta�on for

coworkers. 

Accelerated Change and Adapta�on

Change management facilitates employee adapta�on to organiza�onal change.

Change is essen�al to organiza�onal growth and development, but it

can cause discomfort, par�cularly when it affects employees’ daily

work.

Some�mes an organiza�on faces accelerated change—from a�empts

to change its overall mission, for example, or to implement a

disrup�ve technology. In these situa�ons employees must be able to

adapt quickly.

Change management strategies such as communica�on, employee

alignment with expecta�ons, training, and transparency of

management can help employees more quickly adapt to change.

Key Term 

change management—using strategies like communica�on, training,

and transparency to help employees adapt to organiza�onal change 

Managing Change and Adapta�on

Key Points

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Change is essen�al to organiza�onal growth and development, but employees don’t always

embrace change, par�cularly when it upsets their rou�nes or the status quo. Employees can

view change as a threat: It may impact their daily tasks, training, or their jobs. Change

management is an approach to shi�ing and transi�oning individuals, teams, and organiza�ons

from a current state to a desired future state. It is an organiza�onal process aimed at helping

stakeholders accept and embrace change in their business environment.

Drivers of change that demand rapid adapta�on are numerous. One of the most relevant to

modern organiza�ons is technology. As the smartphone became increasingly popular,

companies in the phone industry had to react rapidly to switch their opera�onal focus to smart

phones, data plans, app stores, and mul�ple device integra�on. Companies that could not react

and adapt quickly enough to the disrup�ve technology were le� in the dust.

Some�mes an organiza�on faces accelerated change in a�emp�ng to change its overall

mission and refocus its vision. During the Great Recession, a number of organiza�ons

determined the best way to survive was to rebrand or reorganize their business strategy as a

whole. Changing a company’s brand or overarching strategy (i.e., from high‑cost to low‑cost, or

vice versa) is a massive overhaul that will undoubtedly upset people internally and externally.

Responsible change is a complex process.

Organiza�onal Change and Employees

Major changes to an organiza�on will force employees to adapt if they want to keep their jobs,

even if they don’t approve of the change. The likely result is tension between what the

employees want and what is occurring in the organiza�on. Change management helps

employees adapt to accelerated organiza�onal change by using strategies to ease their

suspicions, lessen resistance, and relax the tension created by the organiza�on’s new direc�on.

Change management uses basic structures and tools to control an organiza�onal change effort.

These structures and tools primarily revolve around ensuring that all stakeholders are aware of

what’s going on and involving them in the strategic process. Managerial transparency—about

what is happening and why—is cri�cal to employee buy‑in. Communica�ng effec�vely and

comprehensively, and listening to employees express their fears, cri�cisms, and sugges�ons

are integral to everyone moving forward in the same direc�on. When changing an organiza�on

is a prerequisite to remaining profitable, employees will understand the need to embrace

change to maintain the relevancy of their jobs.

The Role of the Manager in an Evolving Organiza�on

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Managers play a number of roles in evolving organiza�ons, including leader, nego�ator,

figurehead, liaison, and communicator.

A manager needs to be a good leader. While a manager organizes and plans, she or he must

also inspire employees with a vision for the organiza�on. A manager needs to be an effec�ve

nego�ator. When organiza�ons are developing or undergoing change, the manager is o�en

required to nego�ate with compe�tors, contractors, suppliers, and employees.

A manager must be a figurehead who reinforces the mission and

vision of an organiza�on to employees, customers, and other

stakeholders.

A manager needs to be an effec�ve communicator, and a liaison

between employees, customers, and other managers.

Key Term 

leader—one who inspires and mo�vates 

Managers play an integral part in an organiza�on’s growth and evolu�on. Organiza�onal

growth is a complex process, par�cularly in larger organiza�ons with more iner�a.

Organiza�ons are essen�ally a compila�on of moving parts. Mo�va�ng each individual, with

unique talents and different levels of drive, to move in the same direc�on simultaneously is

extremely challenging. It requires highly effec�ve managers with well‑developed

communica�on skills.

Managers must do more than accept change; they must facilitate the evolu�onary process. In

these situa�ons, organiza�ons need a manager who can fulfill several roles, including leader,

nego�ator, figurehead, and communicator. In each of these roles, the manager’s goal is to help

employees through the change with the fewest conflicts possible.

The Role of a Manager During Organiza�onal Change

Leader

Key Points

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To effect change, a manager needs to be a good leader. He or she must not only organize and

plan the change, but use leadership skills to inspire employees to embrace it. Leadership is a

complex and intangible quality that involves many roles. It requires excep�onal communica�on

skills and a vision that will inspire others.

Nego�ator

When organiza�ons are developing or undergoing change, the manager is o�en required to

nego�ate with compe�tors, contractors, suppliers, and employees. A manager needs to be able

to nego�ate with all of these stakeholders to serve the best interests of the organiza�on.

Figurehead

A manager also needs to act as a figurehead. In par�cular, upper management is responsible

for crea�ng and reinforcing the mission and vision of an organiza�on with employees,

customers, and other stakeholders. Employee engagement requires an understanding of where

the organiza�on is headed as well as its ul�mate goals. In some cases, the figurehead becomes

synonymous with the organiza�on in the minds of customers. The manager who builds a

posi�ve rapport with both customers and employees alike is an organiza�onal asset.

Liaison and Communicator

When managers effec�vely communicate their vision for the organiza�on, employees are more

likely to engage with their work and exert themselves to further the organiza�onal mission.

Communica�on is the core of managing change effec�vely. Transparency and empathy are

integral to making employees aware of and comfortable with the changes taking place.

Managers in an evolving organiza�on must stay in constant contact with their direct reports to

ensure that everything is running smoothly and that all stakeholders are educated and on

board.

Licenses and A�ribu�ons

Evolving Organiza�ons (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/evolving‑organiza�ons/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on‑ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑

sa/4.0/deed.en) license. UMUC has modified this work and it is available under the original

license.

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© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Introduc�on to Management: Current Challenges in Management

PESTEL: A Framework for Considering Challenges 

The PESTEL framework highlights six cri�cal factors for management to consider regarding the

general business environment. 

Poli�cs plays a role in business, as free markets and systems of

control interact.

Economic factors are metrics for measuring and assessing the health

of a given economic region or environment.

Social and demographic factors include the mentality of the

individuals and consumers within a given market.

Recognizing the technologies available to op�mize internal efficiency

and preven�ng a product or service from becoming obsolete are

significant management challenges.

Consumers and governments penalize companies that nega�vely

impact the environment and reward those with a posi�ve impact.

Understanding the laws and regula�ons within specific regions is

cri�cal to avoid unnecessary legal costs.

Key Terms

Learning Resource

Key Points

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an�trust laws—laws to ensure that no company dominates an

industry (e.g., by crea�ng a monopoly) 

macro environment—the condi�on of the economy as a whole, which

affects business

gross domes�c product (GDP)—fiscal measure of an en�re region’s

economic produc�on over a specific �me frame

 

Organiza�ons face a variety of external factors, including both opportuni�es and threats, that

affect short‑term and long‑term success in a given environment. PESTEL is an acronym for

factors that are part of the macro environment. It represents the poli�cal, economic, social,

technological, environmental, and legal influences a business encounters as it pursues its

objec�ves. 

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PESTEL Factors

This chart illustrates the PESTEL factors that impact organiza�ons. 

Although analyzing the macro environment is a task, understanding the framework of basic

influences allows for an organized and strategic approach to isola�ng each opportunity or

threat. It is common to conduct a PESTEL assessment before making significant decisions or

undertaking large projects. Understanding PESTEL factors is the first step toward addressing

them properly.

Poli�cal

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Poli�cs plays a role in business, as free markets and systems of control interact. Poli�cal

factors affec�ng business specifically revolve around taxes, import and export tariffs,

environmental and labor laws, subsidies, and the stability of a given region of opera�ons. As

global economics now supersedes domes�c economics for many businesses, companies must

consider a number of opportuni�es and threats when expanding into new regions or

iden�fying op�mal areas for produc�on, sales, or corporate headquarters.

Economic

Economic factors are metrics for measuring and assessing the health of a given economic

microcosm within the en�re global economy. These factors include exchange rates, gross

domes�c product (GDP), consumer purchasing indices, interest rates, infla�on, and other

indicators of economic health or direc�on. These indicators can reveal when condi�ons are

posi�ve for borrowing, whether an economy will be friendly to an industry, where businesses

fluctuate substan�ally with GDP, consumer spending power, and other insights.

Social

Social factors could loosely be defined as demographic analysis—looking at the preferences or

tendencies of consumers that an organiza�on can leverage or that threaten its plans. For

example, in the United States, consumers are becoming more health‑conscious. This trend

affords the food industry opportuni�es to create products to sa�sfy the desire for healthier

op�ons by diversifying their product lines or improving the nutri�onal value of exis�ng

products. The “green” movement is another trend that provides a macro‑environmental

opportunity and poses a poten�al threat to organiza�ons.

Technological

Technology plays a growing role each year, and will con�nue to do so as research and

development drive new innova�ons. Recognizing the poten�al technologies available to

op�mize internal efficiency is a powerful asset in management. Technology also presents a

number of threats, as CD player manufacturers and Blockbuster stores can a�est. These

companies were hurt by “disrup�ve innova�ons” such as the MP3 player and Ne�lix. Keeping

pace with and adap�ng to technology are important strategies to sidestep threats and

embrace opportuni�es.

Environmental

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The impact of business on the environment is a growing concern, and companies must

consider both the social and poli�cal aspects of PESTEL in conjunc�on with environmental

factors. Both consumers and governments penalize companies that adversely affect the

environment: Governments levy fines on companies that don’t meet pollu�on‑reduc�on

mandates, and consumers switch brands when they perceive that a business is ignoring its

environmental responsibili�es. The environment can also benefit companies, by providing

running water for a hydropower plant, for example.

Legal

The final factor in PESTEL concerns legal elements, which can relate to the poli�cal

framework. Issues such as affirma�ve ac�on, patent infringement (e.g., Apple v. Samsung),

an�trust laws (e.g., United States v. Microso�), and health and safety regula�ons can all

significantly affect companies. Understanding the legal landscape is important for businesses

that want to avoid pi�alls and operate responsibly.

The Challenge of Globaliza�on

Globaliza�on is the interna�onal integra�on of intercultural ideas, perspec�ves, culture,

technology, and products and services.

Globaliza�on highlights the growing interdependence between

countries and the need for managers to address it appropriately

within their strategies.

The speed of modern globaliza�on is o�en a�ributed to

technological developments in communica�on and transporta�on

that require managers to appropriately leverage these technologies

internally.

Mul�na�onal companies cumula�vely employ nearly half of the

world’s popula�on, crea�ng a need for managers with a strong

interna�onal awareness.

Managers must understand that some processes can be performed

universally and interna�onally, while others must be done in a

localized fashion, adhering to specific regions’ tastes and customs.

Key Points

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Cri�cs of globaliza�on object to the ways it mo�vates interna�onal

over domes�c culture, and the nega�ve environmental effects of

business expansion.

Seeing the poten�al opportuni�es in a global economy, knowing how

to localize, and being able to avoid the nega�ve aspects of an

interna�onal marketplace can capture large value for effec�ve

managers.

Key Terms 

localizing—the act of altering a product or service to be�er fit a local

environment 

intercultural—represen�ng many different cultures simultaneously

mul�na�onal enterprise—a business that operates in more than one

country.

 

Globaliza�on is a hot topic in the business world today, garnering enormous a�en�on as

imports and exports con�nue to rise and companies con�nue to expand across geographic,

poli�cal, and cultural boundaries. By understanding the basic overview of the global economy,

modern managers gain useful insights they can apply to their managerial responsibili�es and to

their organiza�ons.

In general terms, globaliza�on is the interna�onal integra�on of intercultural ideas,

perspec�ves, products/services, culture, and technology. This has resulted in countries

becoming interdependent. Specializa�on—arguably the root cause of globaliza�on—allows

specific regions to leverage their natural resources and abili�es to efficiently produce specific

products and services that they can trade for goods and services that other countries

specialize in producing. Specializa�on has enabled a higher standard of living across the globe

through higher efficiency, lower costs, be�er quality, and a more innova�ve and dynamic

workforce.

Growth of Globaliza�on

Rapid technological developments in transporta�on and communica�on have helped pave the

way for modern globaliza�on. They form the central system of interna�onal exchange,

allowing businesses to create meaningful rela�onships worldwide with minimal �me

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investment and costs. Management is tasked with ensuring these resources are available to

employees and properly leveraged to op�mize the geographic reach of a business’s opera�ons.

This has led to many mul�na�onal enterprises (MNEs) arguing that survival in the newly

globalized economy requires interna�onal sourcing of raw materials, services, produc�on, and

labor.

From a managerial perspec�ve, the global workplace implies an enormous amount of diversity

management. Es�mates of the world labor pool in 2005 noted that mul�na�onal companies

employed a stunning 3 billion workers cumula�vely, which was nearly half of the world’s

popula�on. Diversity management means developing a globally aware perspec�ve that

increases understanding of how specific geographic needs, values, and customs influence

management decisions and the business. This is a powerful managerial skill.

Challenges of Globaliza�on

Managers should also be aware of how to approach global demographics from a business‑to‑

consumer perspec�ve—taking an interna�onal product or service and localizing it successfully.

This is a significant challenge that requires considering different tastes and branding strategies

during implementa�on. The Globaliza�on Process flowchart below illustrates a step‑by‑step

path and shows the produc�on elements that can be universally applied, compared to

elements that need to be localized.

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This flowchart shows that interna�onaliza�on includes product design,

development, and QA, while localiza�on tailors and markets the product

to a specific area. 

Managers must also be par�cularly aware of the current cri�cisms of a globalized society,

par�cularly ethical and environmental considera�ons. A global economy is, in many ways,

enforcing a global culture, which is o�en cri�cized for replacing established domes�c cultures

(and mo�va�ng consumerism). Therefore, managers should carefully consider how to best

localize products to respect cultural iden�ty. Environmental concerns are important as well:

The constant energy usage required for this interchange pollutes the environment and

consumes large quan��es of resources to create energy. Minimizing the environmental

damage and offse�ng it to the degree possible through philanthropic giving is not only a wise

marke�ng move but also a cri�cal ethical considera�on.

Conclusion

Our globalized society presents enormous opportunity for businesses. Intercultural

marketplaces open up more demographics, offer larger market poten�al, present a more

diverse customer base (and therefore require more diverse product offerings), and include a

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highly valuable human resource poten�al. On the other end of the bargain, managers are

tasked with localizing products and services effec�vely to minimize the adverse cultural and

environmental effects of rapid global expansion to maintain an ethical opera�on.

The Challenge of Ethics and Governance

Ethics is at the core of corporate governance, and managers must be accountable for their

ac�ons within a global community.

Business itself cannot be ethical: Only its managers and corporate

strategists can implement ethics within the framework of the

business strategy.

Corporate ethics and shareholder desires for profitability are not

always aligned, and it is execu�ve management’s responsibility to

ensure that ethics supersedes profitability.

In its simplest form, corporate ethics is a legal ma�er. Abiding by

laws protec�ng workers’ rights and offering appropriate

compensa�on are management priori�es.

Corporate governance and ethics become more difficult with the

indirect implica�ons of par�cular prac�ces. It is important to assess

how certain opera�ons may adversely affect the community at large.

Managers are the primary decision makers, and therefore must hold

themselves accountable for how a business operates and affects

stakeholders, shareholders, employees, and the community at large.

Key Terms 

profitability—the capacity to generate capital

accountability—individuals’ responsibility for their own work and

acceptance of the repercussions of their ac�ons

 

Key Points

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Accountability

First and foremost in corporate governance is the strict adherence to business ethics on a

professional level. Accountability is of par�cular significance. Understanding the rules and

regula�ons in place, along with societal and personal expecta�ons of ethical ac�ons, is an

absolutely cri�cal and fundamental concern for all managers. The complexi�es and

responsibili�es of running a business and managing employees is the first priority for

managers, as it has the highest poten�al for repercussions—both personal and fiscal.

Economist Milton Friedman stated, “… the only en��es who can have responsibili�es are

individuals … A business cannot have responsibili�es.” Although this sounds like common

sense, it is o�en overlooked that the only par�es capable of ac�ng ethically are those in

charge. Furthermore, ethics o�en contrasts with the basic premise of capitalism and the

demands of shareholders: profitability. Therefore, the most difficult decisions in corporate

governance—those at the ethical level—must be made through the more complex assessment

of societal, corporate, and personal values.

Legal Founda�ons

At its most basic, ethical behavior can first be derived from the laws, rules, and regula�ons of

the country in which a business operates. In the United States, workers have very specific

rights regarding risks, work hours, breaks, and benefits. Managers are responsible for ensuring

that employees receive these equitably and legally. When working more than 40 hours a week,

hourly employees are en�tled to over�me pay. When working long shi�s, they  are en�tled to

breaks. In dangerous condi�ons, employees are en�tled to protec�ve gear and training.

These regula�ons illustrate the fundamental dissonance between profit‑maximizing behavior

and noneconomic concerns. It is exacerbated by the global economy, in which businesses

operate within communi�es they may not feel a direct connec�on to. Asking, “What does this

prac�ce mean for the people in the area in which we operate?” is crucial to pu�ng

communi�es first.

The 2008 Financial Collapse

Complexi�es arise as the the ethical implica�ons within an economic system become more

subtle. The 2008 financial collapse exemplifies what can go wrong, and why corporate

governance and ethics are so important to business and society. Prac�ces that contributed to

the housing bubble and failure of mortgage‑backed securi�es exemplify how businesses

priori�zed profitability over people. Banks and government regulators eliminated rules and

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relaxed standards, enabling mortgages that were unlikely to be paid. These risky loans were

packaged and sold to investors, who lost value when homeowners couldn’t pay back their

loans. This chain of events is one example of how managers at many levels ignored the core

responsibility of ensuring ethical standards in lieu of capital gains. Management is at fault for

this oversight; it was a failure in corporate governance.

The Great Recession is a powerful reminder for managers that while the primary goal of their

shareholders may be to maximize profits, managers also have a responsibility to minimize

adverse effects on communi�es. Managing employees responsibly and pu�ng their well‑being

first is an important step in this process, as is considering the wider implica�ons of opening a

new factory that pollutes or selling harmful products. Managers must be responsible because

businesses as a whole cannot be, and this responsibility for integrity lies at the heart of

management.

The Challenge of Diversity

Globaliza�on demands a diverse workforce, and assimila�ng varying cultures, genders, ages,

and disposi�ons is of high value.

In the 1960s, the United States begin iden�fying trends in workplace

diversity and addressing them with legisla�on. This evolved into a

societal change that embraces diversity as both valuable and ethical.

Diversity poses various challenges in communica�on, from

differences in language to differences in culture. Understanding these

cultural differences and what they communicate is cri�cal to

improving communica�on.

Majority cultures tend to create a homogenous environment, possibly

limi�ng the poten�al diverse opinions can provide.

Groupthink is a threat for managers to be aware of, par�cularly in

mee�ngs where dominant opinions steal most of the spotlight.

Different perspec�ves are where the highest value can be captured in

diverse environments.

The ability to manage diversity, and refine ac�ons to communicate

accurately and inten�onally, are valuable and necessary for effec�ve

Key Points

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management.

Key Terms 

hegemony—the dominance of one social group over another 

groupthink—decision making that is o�en characterized by a high

degree of conformity

The Value of Diversity

Globaliza�on has resulted in enormous cross‑cultural rela�onships, along with high

percentages of domes�c diversity. As globaliza�on creates higher poten�al value in

approaching diverse markets and demographics, understanding how to manage a diverse

community internally is a management priority.

Through crea�ng a more interna�onal community and increasing variety among workforces,

companies stand to benefit enormously from meaningful diversity in opinions and

perspec�ves. This opportunity, if not properly u�lized, becomes a threat as the compe��on

grows more effec�ve at leveraging diversity to create synergy. Therefore, staying compe��ve

requires a diverse and effec�ve workforce.

Ethnic Diversity Across the World

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This map illustrates the level of ethnic diversity worldwide. Areas like sub‑Saharan Africa tend

to be more heterogeneous than European countries. 

In the 1960s, the concept of equality and fair distribu�on of opportunity became a domes�c

focus in the United States. As the decades passed, the focus shi�ed from a legal requirement

to a social expecta�on. Finally the idea of equality became a societal norm that recognizes

both the importance and the value of diversity. This evolving outlook on a diverse workplace

has ul�mately resulted in the recogni�on and implementa�on of diversity management and

intercultural understanding within organiza�ons, crea�ng stronger and more ethical business

prac�ces.

Challenges of Diversity

Despite this successful trajectory, challenges to diversity naturally occur as a result of

communica�on (different languages and values), majority hegemony, and groupthink.

Communica�on

Communica�on is at the heart of diversity management, but not necessarily for obvious

reasons. Linguis�c differences, while certainly a challenge, are tangible and straigh�orward.

Learning new languages or transla�ng materials is a reasonably effec�ve approach to

addressing these difficul�es.

The more difficult challenge than the words used is the cultural expecta�ons embedded in

communica�on. Different cultures not only speak different languages; they adhere to different

values, draw different assump�ons, and define ac�ons as appropriate or inappropriate.

Overlooking these cultural differences can result in miscommunica�on that may go

unrecognized. For example, in China the concept of guanxi, or face, is cri�cal in paying respect

to guests or superiors. Overlooking this custom, or others, sends uninten�onal messages that

can do irreversible damage.

Majority Hegemony

Employees strongly influence company culture, and the tendency of majori�es to create a

homogenous culture in businesses is a substan�al threat. This can result in a business crea�ng

and promo�ng a par�cular culture over others uninten�onally, as a result of numbers. This

hegemony can create tension between different groups, ul�mately resul�ng in the smaller

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groups moving towards the culture of the larger ones to close the dissonance, a prac�ce called

assimila�on. However, assimila�on should be a shared responsibility, not one assumed only by

those in a minority group.

Groupthink

The most substan�al threat these communica�on barriers and homogenous tendencies create

could loosely be defined as groupthink. Groupthink is when many people within the same

organiza�on begin to adopt similar perspec�ves, usually to simplify mee�ngs and minimize

discord. On the surface, this consensus sounds like a good thing. However, as the global

economy requires businesses to understand varying perspec�ves, it also requires cul�va�ng

these diverse perspec�ves internally. Groupthink will o�en result in the assimila�on of

dissen�ng perspec�ves. The opportunity cost is precisely these different viewpoints. Without

differences in perspec�ve, companies have li�le room to expand into new demographics or

innovate new solu�ons.

The Role of Management

Different cultural norms offer an interes�ng study in diversity management. E�que�e for

receiving a business card in China requires accep�ng it with both hands and taking a full

moment to read it. Following this, recipients place the card face up on the table in front of

them during a mee�ng, referring to it when necessary. In the United States, a strong

handshake and self‑introduc�on is a polite start to a mee�ng. Conversely, in Japan, it is

appropriate to wait to be introduced and then bow following the gree�ng.

Managers not only must be aware of diversity in the workplace but also open‑minded and

empathe�c to others’ perspec�ves. Effec�ve managers in diverse situa�ons have a highly

developed degree of cultural competence that empowers them to use careful observa�on

skills to determine what gestures, phrases, customs, and values would be most appropriate in a

given circumstance. Adroit managers also work ac�vely against groupthink, empowering

everyone not only to speak but to take risks by going against the majority opinion. The goal for

management is to ensure everyone is working on assimila�on in a balanced and effec�ve

manner that harvests differences rather than glossing over them.

Example

Different cultural norms offer an interes�ng study in diversity management. E�que�e for

receiving a business card in China requires accep�ng it with both hands and taking a full

moment to read it. Following this, recipients place the card face up on the table in front

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of them during the mee�ng, referring to it when necessary. In the United States, a strong

handshake and self‑introduc�on is a polite start to a mee�ng. Conversely, in Japan, it is

appropriate to wait to be introduced and then to bow following the gree�ng 

The Challenge of Technology

Technology management is crucial in offse�ng the risks of new technology while acquiring the

opera�onal benefits it provides.

Managing new technology requires a thorough understanding of

business technology management, which consists of four general

parts.

Managers must understand how to achieve internal efficiency by

applying new technology to opera�onal processes.

Businesses should create strategic business units focused solely on

managing a company’s technological strategy.

Keeping pace technologically requires extensive research and

strategic analysis of the poten�al value of acquiring innova�ons.

Implemen�ng new technology requires retraining staff and

elimina�ng the natural fric�on that results from making opera�onal

changes.

Managers should be aware of the value in research, development,

and forecas�ng future technological innova�ons to keep ahead of the

compe��on.

Key Terms 

evolve—constantly change and develop

synergy—a concept that the whole is more valuable than the sum of

its parts

Key Points

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compe��ve advantage—something that places a company or a

person ahead of a compe�tor

Technology and Management

Managing technology is an intrinsic part of managing a business, and effec�vely balancing

resources to op�mize efficiency is an important opera�onal objec�ve for all managers. There

are various perspec�ves and strategies in technology management, but all revolve around a

few simple needs being filled to move a business toward gaining a compe��ve advantage. The

reason behind the priori�za�on of technology management is that new disrup�ve technology

constantly threatens to give compe�tors an advantage. On the other hand, effec�vely

managed technology affords businesses the opportunity to outpace the compe��on (see graph

below).

Disrup�ve Technology and Compe��ve Advantage

Technology advancement is both a constant opportunity and a

constant threat. 

Business Technology Management

Generally, business technology management (BTM) focuses on understanding how technology

fits into an organiza�on‘s processes and structure. It provides the opportunity to streamline

opera�ons and produce more quality informa�on. BTM can be divided into four elements:

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Process. Businesses, whether they provide products or services, always have a set of

processes that define how deliverables are generated. These processes need to be

assessed for efficiency and effec�veness, par�cularly how they enable the op�mal

poten�al of modern technology.

Organiza�on. Businesses are constructed under the assump�on of synergy. Each

strategic business unit (SBU), or facet of the organiza�on, complements the others to

create a greater ability than any SBU could accomplish on its own. Establishing an

informa�on technology (IT) department that func�ons with upper management and

throughout the ranks allows for proper BTM.

Informa�on. Technology evolves exponen�ally, o�en changing faster than businesses

can easily monitor. Research and analysis of the current technological environment

generates the highest return on the (o�en expensive) investments demanded to keep

pace technologically.

Implementa�on. A�er a business organiza�on has a mature IT department that

understands its company processes, IT can work to upgrade technology and implement

these innova�ons. Implementa�on includes training employees, monitoring the return on

investment, maintaining new technology, and elimina�ng fric�on created by opera�onal

changes. Change is always complicated, and businesses benefit greatly by adop�ng

change‑management techniques when integra�ng new technology.

Keeping up with Technological Progress

While managers focus on these four aspects of BTM, they must also keep future growth and

technology scaling in mind. As innova�on con�nues to demand a central role in businesses,

research and development will con�nue to be cri�cal for organiza�onal health. Appropriately

funding research ini�a�ves that not only keep track of innova�on but ac�vely seek out

strategic solu�ons crea�vely is a survival tool in the global marketplace.

Managers must also realize the importance of acquiring technology talent that keeps pace with

the environment. This is important for two reasons:

the poten�al to uncover new compe��ve advantages through internal development

the capacity to forecast up‑and‑coming technologies to construct an investment road

map that always keeps the compe��on a technological step behind

Developing new technologies in‑house is par�cularly relevant to industries on the cu�ng edge

(e.g., semiconductors, green energy, TV), while forecas�ng is cri�cal in considering the user or

consumer.

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Combining BTM with research and development will ensure managers are properly equipped

to tackle the challenges of modern‑day innova�ons, leverage these capabili�es as a

differen�ator from the compe��on, and derive stronger margins. Managers across the board

must be aware of the importance of these technological developments, as well as the

opera�onal challenges in researching and implemen�ng them.

The Challenge of Compe��on

Managers must understand a company’s compe��ve advantage and build a strategy that takes

into account the compe��ve landscape.

Managers must know their business’s strengths and integrate them

into the appropriate strategy to remain compe��ve.

Using a low‑cost strategy is selling a product or service at the lowest

possible price point to stay compe��ve.

Differen�a�on is an alterna�ve strategy to low cost in which

companies fill a specific need that is not being filled or generate a

brand image that increases their value‑added proposi�on.

High quality is the an�thesis of low cost; instead of efficiency, the

strategy focuses on effec�veness, crea�ng the best possible product

to capture market share.

Companies also compete internally, either developing naturally

compe��ve products or ba�ling for funding based on unit success.

Managers must understand all of these compe��ve strategies and

align them with their perceived strategic advantage to stay

compe��ve.

Key Terms 

compe��ve advantage—an asset that places a company or a person

ahead of compe�ng businesses 

differen�a�on—a strategy focused on crea�ng a dis�nct product for

a specific popula�on

Key Points

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branding—a business’s ability to communicate a specific image,

generally one that will en�ce consumers or add value

Compe��ve Strategies

From a managerial perspec�ve, compe��on generally falls into the external environment,

although it can also take shape in the internal environment through rivalry between strategic

business units (SBUs). For managers, understanding the external compe��ve landscape is a

cri�cal factor in assessing company strategies and benchmarking appropriately to ensure the

compe��veness of the firm. Businesses that fail to keep pace with their rivals eventually will

be overpowered and o�en forced to develop an exit strategy.

Avoiding the risks of compe��ve factors demands a strong understanding of opera�onal

efficiency (low cost), quality produc�on, differen�a�on, and compe��ve advantage—or who

you target and whether or not you have a cost or quality advantage (see Cost vs. Quality figure

below).

Cost vs. Quality

Companies generally achieve either a cost or a quality advantage or, very rarely, both. In panel

A, both companies’ products have the same cost, but Company I’s product has higher value. In

panel B, both companies’ products have the same value, but Company I’s product has lower

cost. In panel C, Company I’s product has both higher value and lower cost (the rarest

situa�on). 

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Low Cost and Branding

The simplest perspec�ve on compe��on is in industries where products are homogeneous (or

very similar). In these situa�ons, companies compete directly. For example, bo�led‑water

producers adopt either low cost or branding as their strategy.

Low‑cost suppliers find ways to op�mize their produc�on and distribu�on to offer consumers

the lowest possible price for a bo�le of water. Low‑cost suppliers o�en benefit largely from

economies of scale. Branding, on the other hand, aims to convince the consumer that a higher

price point is worth paying for based upon the company’s name, reputa�on, or other

dis�nguishing characteris�c. For example, Dasani brand water costs more than generic store‑

brand water, despite being essen�ally the same product. Commercials, aesthe�c presenta�on,

goodwill, and factors other than price may influence a consumer’s purchasing decision.

Differen�a�on

Most products and services are not homogenous, however, so companies can use various

compe��ve strategies. Differen�a�on is a compe��ve tac�c wherein companies approach

certain niche needs within an industry to capture a segment of market share.

Cereals provide examples of differen�a�on. There are hundreds of kinds. The need being filled

is sustenance: People have to eat. Cereal producers use differen�a�on to capture a share of

the cereal market: Some brands focus on being organic, others on their sugary appeal, and

others on being “cool.” Branding plays an important role here as well, though assessing niche

consumer needs and filling them is the principal focus.

Quality

Finally, there is the poten�al to compete externally based on quality. Toyota makes both the

Corolla and Lexus, thereby targe�ng consumers at both ends of the income spectrum. Quality

compe��ve strategies, while related to branding, provide a par�cular level of quality to

capture a specific income or interest demographic. The opportunity cost of efficiency is

associated with quality, which generally sees higher price points. Quality is therefore a strong

an�thesis to the low‑cost strategy.

Internal Compe��on

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Businesses also compete internally, which is intrinsically complex. On the surface, internal

compe��on involves either direct product subs�tutes or funding compe��on (among different

business units). An example of internal compe��on is PepsiCo. Pepsi makes both colas and

sports drinks, which sit adjacent on store shelves. When a customer sees the sports drink and

chooses it over the cola, the cola has lost a sale to an internal compe�tor. Pepsi, however, did

not lose a sale; it merely lost one segment of the business while gaining another.

With these points in mind, managers must thoroughly understand the products they are

pitching and which strategy will help them avoid going toe‑to‑toe with other businesses they

cannot compete against. Star�ng up a car manufacturing business to compete with Hyundai in

the low‑cost market is extremely difficult, as Hyundai has economies of scale that will almost

always beat smaller compe��on on a low‑cost strategy. This example illustrates an extremely

important point in business: to rely on your strengths. Managers must understand their own

compe��ve advantage (what they do be�er than the compe��on) so they can adopt the

appropriate compe��ve strategy to gain market share and remain profitable.

Licenses and A�ribu�ons

Current Challenges in Management (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/current‑challenges‑in‑management/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on‑ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Organiza�onal Structure: Trends in Organiza�ons

Fla�ening Hierarchies 

Fla�ening hierarchies can benefit smaller organiza�ons by increasing employee empowerment, par�cipa�on, and efficiency.

A hierarchy can link en��es either directly or indirectly; it can also link en��es either ver�cally or horizontally. The

only direct links in a hierarchy are to a person’s immediate superior or subordinates.

The flat organiza�on model essen�ally “fla�ens” 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 produc�ve when they are directly

involved in the decision‑making process rather than closely supervised by many layers of management.

Flat organiza�ons are most relevant in specific scenarios—most notably small organiza�ons that are dependent

upon crea�vity, freedom of ac�on, and high‑powered employees.

Key Term

hierarchy—an arrangement in which items are represented above, below, or at the same level as other items

Links within Hierarchies

Hierarchies can be linked in several ways. A hierarchy can link en��es directly or indirectly, and ver�cally 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 ver�cally 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 rela�ve amount of authority in the organiza�on. 

Flat Hierarchies

Flat (or horizontal) organiza�onal structures have few or no levels of intervening management between staff and managers. This “fla�ened”

hierarchy promotes employee involvement through a decentralized decision‑making process. The idea is that well‑trained workers will be

more produc�ve when they are directly involved in the decision‑making process rather than closely supervised by many layers of

management.

Learning Resource

Key Points

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A Flat Organiza�on

In a flat organiza�on there is no lower or mid‑level management—just one

manager and the rest of the staff.

Advantages of Fla�ened Hierarchies

Flat structures empower each individual within the company to be involved in decision‑making processes. This allows for a great deal of

crea�ve discussion and opera�onal diversity, and tends to create great variance in new ideas. By eleva�ng the level of responsibility of

baseline employees and elimina�ng layers of middle management, comments and feedback can quickly reach everyone involved in

decisions. Response to customer feedback can be carried out more rapidly.

This type of structure generally works best in smaller organiza�ons or individual units within larger organiza�ons. Start‑up companies,

“mom and pop shops,” and other small independent businesses are the most common examples of a flat structure.

Disadvantages of Fla�ened Hierarchies

Flat organiza�ons are difficult to maintain as companies grow larger and more complex. When organiza�ons reach a cri�cal size, they can

retain a streamlined structure; however, they cannot keep a completely flat manager‑to‑staff hierarchy without impac�ng produc�vity.

Certain financial responsibili�es may also require a tradi�onal hierarchical structure. While the flat structure can foster employee

empowerment, involvement, and crea�vity, it can also create inefficiency in decision‑making processes. Some theorize that flat

organiza�ons become more tradi�onally hierarchical when they gear themselves more toward produc�vity. 

Because the interac�on between workers is more frequent, this organiza�onal structure generally depends on a more personal rela�onship

between workers and managers. As a result, the structure can be more �me‑consuming to build than a tradi�onal hierarchical model. 

Decentralizing Responsibility

In decentralized structures, responsibility for decision making is broadly dispersed down to the lower levels of an organiza�on. 

Decentraliza�on is the process of dispersing decision‑making authority among people, ci�zens, employees, or

others in an organiza�on or sector.

A decentralized organiza�on shows fewer �ers in the organiza�onal structure, a wider span of control, and a

bo�om‑to‑top flow of ideas and decision making.

The bo�om‑to‑top informa�on flow allows lower‑level employees to be�er inform officials in the organiza�on

during decision‑making processes.

When companies decentralize authority, however, there can be confusion about how final decisions are made.

Key Terms 

mechanis�c organiza�on—a bureaucra�c structure 

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governance—accountability for consistent and cohesive policies, processes, and decision rights

authority—the power to enforce rules or give orders

Decentraliza�on is the process of dispersing decision‑making authority among the people, ci�zens, employees, or others in an organiza�on

or sector. In decentralized structures, responsibility for decision making and accountability are broadly dispersed at lower levels of an

organiza�on. This dispersion can be inten�onal or uninten�onal. A decentralized organiza�on tends to show fewer �ers in its organiza�onal

structure (less hierarchy ), a wider span of control, and a bo�om‑to‑top or horizontal flow of decision making and ideas.

Top‑Down vs. Decentralized

The management structure in a decentralized organiza�on changes from a top‑down approach

to more of a peer‑to‑peer approach.

Contras�ng Centralized and Decentralized Structures

In a centralized organiza�on, decisions are made by top execu�ves on the basis of current policies. These decisions or policies are then

enforced through several �ers of hierarchy within the organiza�on, gradually broadening the span of control un�l they reach the bo�om

�er.

In a decentralized organiza�on, the top execu�ves delegate much of their decision making authority to lower �ers of the organiza�onal

structure. This type of structure tends to be seen in organiza�ons that run on less rigid policies and wider spans of control among each

officer of the organiza�on. The wider spans of control also reduce the number of �ers within the organiza�on, giving its structure a flat

appearance.

Decentralized Organiza�on Chart

This image illustrates a decentralized, or flat, organiza�onal chart. There is one manager over

the rest of the staff. Each staff member had more responsibility and autonomy than in a top‑

down model.

Advantages of Decentraliza�on

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One advantage of this structure—if the correct controls are in place—is the bo�om‑up flow of informa�on. This flow allows lower‑level

employees to be�er inform their supervisors during decision‑making processes. For example, if an experienced technician at the lowest �er

of an organiza�on knows how to increase the efficiency of the produc�on, the bo�om‑to‑top flow of informa�on can allow this knowledge

to pass up to the execu�ve officers.

Disadvantages of Decentraliza�on

On the other hand, when companies decentralize authority there can be confusion about how final decisions are made. It can be difficult to

empower mul�ple people without some decisions nega�vely impac�ng other decisions. Decentralized organiza�ons must be mindful of the

risk of going in too many direc�ons at once. Because of this, decentraliza�on is most effec�ve in organiza�ons that have transparent

strategies, a strong mission, and a clear vision.

Increasing Empowerment

Modern organiza�ons are more aware of the value of empowered employees and ac�vely strive to structurally increase empowerment.

Empowerment is a process that enables individuals and groups to fully access their personal and collec�ve power,

authority, and influence, and to employ this power when engaging with other people, other ins�tu�ons, or society.

Leaders within an organiza�on can play a strong role in encouraging employees to prac�ce empowerment.

To enable empowerment, managers can share informa�on, 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. Having

more decision makers means more discussion about how to accomplish a process and more moving parts within

the organiza�on, increasing complexity.

Key Term 

empowerment—the accessing and employment of poli�cal, social, or economic power by an individual or group 

Defining Empowerment

Empowerment enables individuals and groups to fully access personal and collec�ve power and employ it when engaging with other people,

other ins�tu�ons, or society. Empowerment does not give people power; rather, it helps them to release and express the power they

already have.

Empowerment encourages people to gain the skills and knowledge to overcome obstacles in life and work. This will ul�mately enable

personal development and a deeper sense of professional fulfillment. Empowering people in organiza�ons can encourage more confident,

capable, and mo�vated employees. Organiza�ons are increasingly aware that empowerment o�en leads to be�er performance and higher

opera�onal efficiency. There is a general trend toward structuring organiza�ons for empowerment.

Empowerment Within the Organiza�on

Empowering employees in the workplace means providing them with opportuni�es to make decisions related to their tasks. This can be

both powerful and posi�ve, enabling checks and balances in decision‑making processes.

Empowerment in organiza�ons includes

making decisions about personal and collec�ve circumstances

accessing informa�on and resources for decision‑making

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considering a range of op�ons from which to choose (and understanding the op�ons rather than just deciding yes or no)

exercising asser�veness in collec�ve decision‑making

employing posi�ve thoughts toward the ability to make change 

learning and assessing skills for improving personal and collec�ve circumstances

informing others’ percep�ons through exchange, educa�on, and engagement

Though empowerment can produce very successful results, there are certain risks involved. When turning responsibility over to others, it is

important to keep in mind that dispersing power creates more discussion and conflict that can slow down the decision‑making process. As

organiza�ons move more people toward higher levels of empowerment, protocols should be put in place to mi�gate failure and improve

decision‑making efficiency.

Centralized vs. Decentralized

Decisions

No�ce how the centralized

organiza�on is an asterisk with

many spokes, whereas the

decentralized organiza�on is many

smaller interconnected asterisks.

Leaders within an organiza�on can encourage employees to prac�ce empowerment in several ways. For leaders to tap into the possibili�es

of an empowerment‑based company, they must have confidence in employees. Employees should have opportuni�es to make their own

decisions and succeed. For an empowerment‑based organiza�on, 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 organiza�on:

Share informa�on with everyone. Allowing all employees to view company informa�on helps to build trust between employers and

employees. It also provides important background perspec�ve for decision making.

Create autonomy through boundaries. Opening communica�on through informa�on sharing creates space for feedback and dialogue

about what interferes with people feeling empowered. Minimizing micromanagement is cri�cal so that employees who are specialists

in their func�ons can set the tone for how a par�cular task is accomplished.

Replace the old hierarchy with self‑managed teams. By replacing the old hierarchy with self‑managed teams, more responsibility is on

unique and self‑managed teams. This can lead to be�er communica�on, diversity of strategies, and higher performance.

The success of the modern organiza�on relies heavily on understanding the complexity of a diverse global market. Leveraging employee

knowledge and enabling autonomy is increasingly important in capturing value and a�aining compe��ve advantages in this complex

business environment.

Increasing Adapta�on

In order to succeed, modern organiza�ons must constantly adapt to evolving technologies and expanding global markets.

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Technological advances, global market expansion, and the poten�al for constant (some�mes disrup�ve) innova�on

all point to the need for organiza�ons to be adap�ve.

Blockbuster and Ne�lix provide examples. Blockbuster was simply too slow to adapt to the demand for live‑

streaming videos.

If an organiza�on takes on the iden�ty of a growing, adap�ng, and learning organiza�on, these quali�es become

part of the fabric of how it operates.

Implemen�ng an adaptable strategy may have a ripple effect across an organiza�on. Minimizing disrup�on can

reduce costs and save �me.

Resistance to change is considered a major obstacle to crea�ng effec�ve adaptability in an organiza�on.

Integra�ng changes step‑by‑step, and using focus groups and training sessions can improve the efficacy of

adapta�on.

Key Term 

adapta�on—adjustment to extant condi�ons, modifying one or more parts to help something be�er fit the current

environment

The Importance of Adapta�on

Organiza�onal adapta�on is becoming increasingly relevant to both strategy and structure in the rapidly changing business environment.

Technological innova�ons, global market expansions, and the poten�al for constant (some�mes disrup�ve) innova�on all point to the need

for organiza�ons to be adap�ve. 

There are a number of examples of organiza�ons adap�ng to new technologies or global compe��on, and others failing to adapt. For

example, Ne�lix embraced the demand for live‑streaming videos and gained enormous value. In contrast, Blockbuster was too slow to

adapt to the demand for live‑streaming videos. 

Benefits of Adapta�on

Strategic management largely pertains to adap�ng an organiza�on to its business environment. The greatest agent for organiza�onal

change is the socializa�on aspect of culture, which can be empowered structurally. If an organiza�on takes on the iden�ty of a growing,

adap�ng, and learning organiza�on, these quali�es become part of the fabric of how it operates. Understanding and being able to increase

this adaptability is important to organiza�onal success.

Implemen�ng a strategy of adapta�on may have effects that ripple across an organiza�on. Increasing its ability to adapt to change and

minimize disrup�on can reduce costs and save �me. One approach for increasing adapta�on is to appoint an individual to champion the

changes, address and eventually enlist opponents, and proac�vely iden�fy and mi�gate problems.

Challenges in Adapta�on

Resistance to change is considered a major obstacle to crea�ng effec�ve adaptability in an organiza�on. Organiza�onal change can lead to

loss of stability and—if the instability becomes great enough—loss of organiza�onal effec�veness.

Loss of Effec�veness

Key Points

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Organiza�onal loss of effec�veness (LOE) emerges when a number of symptoms, which are

predictable and measurable, are present simultaneously (Grady, 2005).

The following methods can be employed to help an organiza�on and its staff cope with change:

Share informa�on with everyone. Allowing all employees to view company informa�on helps to build trust between employers and

employees. It also provides important background perspec�ve for decision making.

Provide training. Providing training for staff on new processes or structures can help to increase staff competence and reduce

resistance to change.

Implement changes step‑by‑step. Involving small groups first—such as several departments or sec�ons—and then widening the scope

of implementa�on can help expose problems, and provide management with enough �me to solve them before rolling out changes

across the organiza�on.

Flexible Work Schedules

Employers can offer flexible working arrangements like flex�me and telecommu�ng.

Companies have begun recognizing how important a healthy work‑life balance is to employee produc�vity and

crea�vity. Integra�ng new technologies for flexible schedules is a great opportunity to capture this value.

Flex�me and telecommu�ng (telework) are popular strategies that enable employees to set their own schedules

and work where it is most convenient for them.

In addi�on to suppor�ng the required technology, a well‑func�oning telework organiza�on needs a management

system that is at least as effec�ve as that of a tradi�onal organiza�on.

 Management teams face addi�onal issues such as how to supervise employees who are o�en out of the office,

how to monitor staff produc�vity with less personal interac�on, how to build a strong virtual team, and how to

maintain rela�onships between remote employees.

Key Term 

telecommute—work from home, also known as telework, using the internet or another connec�on to the

employer’s network 

Companies have begun to recognize how important a healthy work‑life balance is to the produc�vity and crea�vity of their employees.

Kenexa Research Ins�tute (2007) showed that employees who were more favorable toward their organiza�on’s efforts to support work‑life

balance also indicated they were less likely to leave the organiza�on, had higher overall job sa�sfac�on and greater pride in their

organiza�on, and were willing to recommend the organiza�on to others.

Employers can offer a range of ini�a�ves that support work‑life balance. Flexible working arrangements including flex�me and

telecommu�ng are increasingly popular ones. Employers can also be proac�ve with compulsory leave, maximum hours, and discouraging

a�er‑hours work. 

Telecommu�ng

Telecommu�ng (or telework) is a work arrangement in which employees do not go to a central place of work. Many telecommuters work

from home. Others—some�mes called “nomad workers”—use mobile technology to work from coffee shops or other loca�ons. This allows

employees the flexibility of adap�ng their work schedule to their living situa�on. Being able to work from anywhere with an internet

connec�on is a modern luxury that adaptable companies should understand.

Key Points

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An office designed for telecommu�ng

Flex�me

Flex�me is a variable work schedule. 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 work day is considered flexible, so

employees can choose when they work. Employees are s�ll required to complete their work and achieve total daily, weekly, or monthly

hours according to what the employer expects.

A flex�me policy allows staff to determine when they will work, and a telework policy allows staff to determine where. These strategies

allow employees to adapt their work hours based on public transport schedules, child‑care responsibili�es, rush‑hour traffic, and other

concerns.

Establishing a Telework Organiza�on

In addi�on to suppor�ng the required technology, a well‑func�oning telework organiza�on needs a management system that is at least as

effec�ve as a tradi�onal organiza�on’s. Management teams in flexible work environments face challenges like how to supervise employees

who are o�en out of the office, how to monitor staff produc�vity with less personal interac�on, how to build a strong virtual team, and how

to maintain rela�onships between remote employees.

Some suggested best prac�ces for maintaining a successful telework organiza�on include:

Develop a daily schedule. Se�ng 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 ac�vi�es and can lead to increased produc�vity.

Establish milestone dates. Milestone dates help keep projects on track and make it easier to spot problems while there is �me to

effec�vely 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 sa�sfac�on and encourage reten�on of top talent.

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Address problems immediately. Respond to problems immediately, even if it’s 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 for accountability of in‑office staff as well.

Start workdays by holding a five‑minute team videoconference. This helps supervisors to maintain a regular check‑in rou�ne and

employees to catch up on their teams’ work progress and feel connected to the whole organiza�on.

Manage by observa�on. A successful telework or telecommu�ng program requires a management style that is results‑oriented, rather

than task‑oriented. It is management by objec�ves, rather than management by observa�on.

Increasing Coordina�on

Increasing coordina�on helps organiza�ons maintain efficient opera�ons through communica�on and control.

Coordina�on is a managerial func�on in which different business ac�vi�es are properly adjusted and interlinked.

The management team must pay special a�en�on to issues related to coordina�on and governance, and be able to

improve upon coordina�on through effec�ve management.

Managers should strengthen communica�on across all facets of the organiza�on to increase the level of

integra�on between each moving part.

If there is a lack of coordina�on, there is a risk that responsibility will become dispersed and tasks will be

unclaimed. Organizing accountability for every task helps to ensure that efforts are tangibly coordinated.

Key Terms 

division—sec�on of a large company 

margin—permissible difference, freedom to move within limits

centraliza�on—the act or process of combining or reducing several parts into a whole

Defining Coordina�on

Coordina�on is the act of organizing and enabling different people to work together to achieve an organiza�on’s goals. It is a managerial

func�on in which different ac�vi�es of the business are properly adjusted and interlinked.

Employees within the func�onal divisions of an organiza�on tend to perform a specialized set of tasks, such as engineering. This leads to

opera�onal efficiency within that group. However, it can also lead to a lack of communica�on between various func�onal groups within an

organiza�on, rendering the organiza�on slow and inflexible.

Key Points

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This is an example of an organiza�onal structure. At a high level are mul�ple func�onal

groups, or “modules”—technical, marke�ng, and intellectual property. The linked working

groups (e.g., data coding workgroup, security workgroup, and audio and video compression

workgroup) within the technical func�onal group likely have coordinated func�ons.

Increasing Coordina�on

Coordina�on is simply the managerial ability to maintain opera�ons and ensure they are properly integrated with one another; therefore,

increasing coordina�on is closely related to improving managerial skills. The management team must pay special a�en�on to issues related

to coordina�on and governance, and be able to improve upon coordina�on through effec�ve management.

Increasing coordina�on internally can be accomplished by keeping all moving parts of the organiza�on on the same page. There are a

number of ways to improve upon the coordina�on of different departments, work groups, teams, or func�onal specialists. These include

crea�ng a well‑communicated and accurate mission statement; clearly defining strategic objec�ves; monitoring and evalua�ng each

func�onal group; providing company‑wide updates and communica�ons from each department; and, wherever possible, promo�ng cross‑

departmental mee�ngs and projects. While this list is long and complex, the underlying concept is rela�vely simple: Managers should

strengthen communica�on across all facets of the organiza�on to increase the level of integra�on between each moving part.

Structural Implica�ons

In prac�ce, coordina�on involves a delicate balance between centraliza�on and decentraliza�on. However, maintaining coordina�on does

not necessarily imply that decision‑making processes are centralized or that ac�ons 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 coordina�on, there is a risk that responsibility will become dispersed and tasks will be le� unclaimed. Organizing

accountability for every task helps to ensure that efforts are tangibly coordinated and provides structure to opera�onal expecta�ons.

Structure is a central determinant of effec�ve coordina�on across an organiza�on as it enables communica�ons, underlines responsibili�es,

and provides concrete authority in decision making.

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1/14/2019 Organizational Structure: Trends in Organizations

https://learn.umuc.edu/d2l/le/content/348372/viewContent/14274060/View 11/15

Kenexa Hiring and Reten�on. (2007, July 25). Kenexa Research Ins�tute finds that when it comes to work/life balance, men and women are

not created equal. Retrieved from h�p://www.kenexa.com/en/AboutUs/Press/2007/07JUL25.aspx

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(h�p://commons.wikimedia.org/wiki/File:LOEIndexfigure1.jpg). License: CC BY: A�ribu�on

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All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of informa�on located at external sites.

1/14/2019 Trends in Organizational Diversity

https://learn.umuc.edu/d2l/le/content/348372/viewContent/14274061/View 1/4

Trends in Organiza�onal Diversity

To capitalize on ethical and economic benefits, businesses are promo�ng increased diversity in

the workplace.

Diversity in the workplace creates both ethical and economic value,

resul�ng in trends toward a more equal‑opportunity workplace. 

In the 1960s, the United States implemented affirma�ve‑ac�on

policies to enforce equal opportunity in the workplace.

Following the implementa�on of various affirma�ve‑ac�on policies,

social jus�ce developed as an ethical norm (as opposed to a legal

s�pula�on). This development resulted in more inclusive measures

for a larger variety of groups.

Empirical evidence of the trend toward diversity is well illustrated by

gender wage gaps between males and females, which have been

consistently narrowing since the early 1970s.

In addi�on to its ethical bases, diversity in an increasingly global

marketplace is substan�ally more effec�ve and produc�ve, allowing

for more synergy.

Key Terms 

affirma�ve ac�on—advantages for tradi�onally discriminated against

minority groups, with the aim of crea�ng a more equal society

through preferen�al access to educa�on, employment, health care,

social welfare 

Learning Resource

Key Points

1/14/2019 Trends in Organizational Diversity

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homogeneous—having a uniform makeup, or the same composi�on

throughout

diversity—the state of being different; achieving variability

Diversity within the workplace is a broad topic, incorpora�ng both the need for social jus�ce

and the high poten�al value of employing a workforce diverse enough to compete in an

increasingly global economic environment.

As a result, the workplace has undergone a number of trends that promote diversity and

minimize group biases, as the ethical and economic importance of diversity is well‑established.

Analyzing trends in equality and value in diversity is useful for managers seeking to

incorporate both. 

Equality of Opportunity

Affirma�ve Ac�on

The early stages of pursuing equality in the workplace arose in the 1960s, most notably with

the concept of affirma�ve ac�on. Affirma�ve ac�on essen�ally establishes legal quotas—set by

the US government—for the number or percentage of minority popula�ons represented in a

company’s hiring prac�ces.

Minority popula�ons are generally defined according to race, ethnicity, or gender. One

difficulty with affirma�ve ac�on is that it can encourage employers to fill quotas rather than

avoid bias, poten�ally mo�va�ng some employers to hire specifically by race, ethnicity, or

gender. Hiring based upon any of these characteris�cs is illegal. 

Social Jus�ce

As a result of this cri�cism, the equal‑opportunity movement has evolved toward a model

based more on social jus�ce. This perspec�ve s�ll promotes ac�vely seeking diversity in the

workplace, primarily based on the intrinsic value of employees with different backgrounds and

skill sets. 

The social‑jus�ce trend also meant a shi� from a more limited viewpoint of what cons�tutes a

minority toward a more comprehensive one that places age, physical ability, and sexual

orienta�on alongside tradi�onal categories of race and gender. The social jus�ce model of

1/14/2019 Trends in Organizational Diversity

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diversity is dis�nct from the older affirma�ve‑ac�on model in that it focuses less on employing

minori�es and more on the value of a diverse workforce. 

Gender differences offer a strong sta�s�cal example of this trend, as male and female wage

equality has been consistently trending towards equilibrium. Wage equality shows dis�nct

improvement as a result of equal‑opportunity ethics, a trend that supporters of equality hope

con�nues toward equilibrium.

Women’s and Men’s Earnings

This graph illustrates that while gender wage inequality

is diminishing, further efforts are necessary to promote

parity. 

Value of Diversity 

The ethics of diversity in the workplace are rightly emphasized. The natural value achieved

through varying perspec�ves in the workplace complements social jus�ce well. Organiza�ons

that lack a culture inclusive of any and all poten�al groups generally have lower produc�vity

and higher turnover. Promo�ng an environment conducive to a global and interna�onalized

economy through diverse hiring and management prac�ces poten�ally results in increased

produc�vity. 

A homogeneous workforce has a much lower capacity to achieve synergy. Upper management,

recognizing the strategic value of diversity, con�nues to pursue the knowledge and skills

necessary for a truly inclusive workplace.

Licenses and A�ribu�ons

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Trends in Organiza�onal Diversity (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/diversity‑in‑organiza�ons/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on‑ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by‑sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Core Requirements of Successful Managers

The Importance of Accountability 

Being accountable simply means being responsible for decisions made, ac�ons taken, and

assignments completed.

Accountability in business is cri�cal, as the concept enhances the

ethics of managers.

Being accountable means standing by decisions, ac�ons, and the

overall status of projects.

Accountability is also a management process that ensures employees

answer to their superiors and supervisors also behave responsibly.

Accountability addresses both the organiza�on’s expecta�on of the

employee and the employee’s expecta�on of the organiza�on.

Accountable employees help to increase performance of business as

a whole and to maintain a posi�ve company culture, vision, and

ethics.

Accountability on a global scale, par�cularly in the case of NGOs, is

complicated by the fact that different countries have varying

legisla�ve perspec�ves when it comes to accountability.

Key Terms

accountability—being responsible for one’s own work and answering

for the repercussions of one’s own ac�ons

Learning Resource

Key Points

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paradigma�c—pertaining to a given template, context or model

 

Introduc�on

In organiza�ons, accountability is a management control process in which responses are given

for a person’s ac�ons. They can be posi�ve or nega�ve. Depending on the response, the

person might need to correct his or her error. In other words, accountability refers to individual

responsibility for the work performed, and answering to peers and superiors for performance.

Accountability is o�en used synonymously with responsibility, blameworthiness, and liability.

As an aspect of governance, accountability has been central to discussions related to problems

in the public, nonprofit, and corporate sectors. 

In leadership roles, accountability is the acknowledgment and assump�on of responsibility for

ac�ons, products, decisions, and policies, including the administra�on, governance, and

implementa�on within the scope of the role or employee posi�on. Accountability also

encompasses the obliga�on to report, explain, and answer for resul�ng consequences. As

leaders o�en make decisions with far‑reaching consequences, accountability has a substan�al

ethical component.

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Accountability and Expecta�ons

Accountability has a strong connec�on to expecta�ons. Employees who do not meet the

expecta�ons of their supervisor are held accountable for their ac�ons and must answer for

their inability to do so.

Accountability is crucial to ensuring high performance within an organiza�on. However,

managers must clearly communicate their expecta�ons to the person responsible for a

specified ac�on or task. Clear communica�on of expecta�ons and well‑defined goals are very

effec�ve tools for enhancing performance at every level of organiza�on.

Without defined goals, employees lack a frame of reference for their performance. In many

organiza�ons, the management team and board of directors create goals for themselves and

the general manager, the general manager creates goals for department managers, and the

department managers create goals for entry‑level employees.

Both subordinates and supervisors should have a clear idea of how their projects should be

handled and delivered. A clear expecta�on level and the understanding that all employees are

accountable for their performance boosts employee morale and produc�vity in the workplace.

However, because different individuals in large organiza�ons contribute in various ways to a

company’s decisions and policies, it is o�en difficult to iden�fy who should be accountable for

the results.

Global Accountability

Recently, accountability has become an important topic in the discussion about the legi�macy

of interna�onal ins�tu�ons. Because there is no global, democra�cally elected body to which

organiza�ons must report, global organiza�ons are o�en cri�cized as having large

accountability gaps.

One issue in the global context is how the effec�veness of ins�tu�ons such as the World Bank

and the Interna�onal Monetary Fund, founded and supported by wealthy na�ons to provide

grants and loans to developing na�ons should be measured. The ques�on persists as to

whether these ins�tu�ons should be accountable to their founders and investors or to the

people and na�ons they help.

In the debate over global jus�ce and wealth distribu�on, those in highly developed, heavily

populated areas tend to advocate greater accountability to tradi�onally marginalized

popula�ons and developing na�ons. On the other hand, those who adopt a more na�onalis�c

or provincial view deny the tenets of moral universalism; they argue that beneficiaries of global

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development ini�a�ves have no substan�ve en�tlement to call interna�onal ins�tu�ons to

account. The One World Trust Global Accountability Report, published in a first full cycle from

2006 to 2008, is one a�empt to measure the capability of global organiza�ons to be

accountable to all stakeholders.

Example 1

The US Department of Organiza�on provides specific guidelines

about accountability of managers. Managers are responsible for

the quality and �meliness of program performance, increasing

produc�vity, controlling costs, mi�ga�ng adverse impacts of

agency opera�ons, and assuring that programs are managed with

integrity and comply with the law.

Example 2

At Enron, the ac�ons of a few unethical individuals caused great

harm to the broader corpora�on and all its stakeholders. The

individuals involved were held accountable to reduce the

likelihood similar things will happen again in the future.

The Importance of Leverage

Management roles are defined by the capacity to mo�vate and leverage human capital in the

organiza�on to achieve efficiency in opera�ons.

Key Points

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While there are different ways to view the concept of gaining

leverage as a manager, the underlying principle should be one of

synergy.

Managers are responsible for planning, organizing, staffing, direc�ng,

monitoring, and mo�va�ng employees to create leverage in an

opera�onal system. Leverage primarily revolves around effec�ve

delega�on and mo�va�on.

Effec�ve managers must have a thorough understanding of each

employee’s strengths and weaknesses, as well as their aspira�ons and

mo�vators, to appropriately carry out essen�al tasks.

Through combining delega�on and mo�va�on skills, managers

effec�vely leverage human capital to achieve high levels of efficiency

and employee sa�sfac�on.

Key Terms

incen�ves—ways to promote a desired ac�on

leverage—technique used to mul�ply gain or loss

synergy—benefits resul�ng from combining two different groups,

people, objects, or processes

Why Leverage Ma�ers

Management roles are defined by the capacity of the manager to mo�vate and leverage human

resources in an organiza�on to achieve efficiency in opera�ons. As a result, effec�ve managers

can op�mize the �me and effort of employees to a�ain the highest possible value.

Op�miza�on requires a thorough understanding of basic managerial func�ons and how

incen�ves can be applied according to mo�va�onal theories in the workplace.

Although there are different ways of understanding the concept of gaining leverage as a

manager, the underlying principle should be one of synergy. The concept of synergy

emphasizes that one addi�onal employee’s output is greater than an arithme�c expecta�on.

More simply put, synergy means that 1 + 1 > 2. A common adage in is that the synergy

equa�on is 1 + 1 = 3. Leverage, therefore, is about ge�ng more out of a system than the

combined inputs, resul�ng in value added.

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Design Management

Design management: Teams can create solu�ons through integra�on, giving the manager the

ability to solve problems more complex than one individual can handle. 

Managerial Func�ons and Leverage

Managers are responsible for planning, organizing, staffing, direc�ng, monitoring, and

mo�va�ng employees through the use of highly developed decision‑making and interpersonal

skills.

Delega�on

Planning, organizing, and staffing are the preliminary steps to carry out a project, set

schedules, and construct a team with the appropriate skills to execute the project effec�vely.

This half of managerial responsibili�es falls largely within the decision‑making realm, which

correlates to a manager’s ability to organize tasks and delegate them effec�vely to gain

leverage.

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The concept of delega�on enables managers to minimize their own �me commitment to

specific elements of a process, as well as improve quality and efficiency through the use of

specialists (managers are typically generalists). Delega�on therefore allows managers to

op�mize team structures and skill‑set distribu�on to encourage synergy. Effec�ve managers

are able to juggle a number of teams of specialists, empowering their autonomy and

controlling the workflow so it aligns with organiza�onal objec�ves. Delega�on is easy on

paper, but it requires a number of intrinsic skills such as communica�on, organiza�on,

mul�tasking, and the ability to “zoom out” and observe the bigger picture, and iden�fy the

cri�cal components.

Mo�va�on

Planning, organizing, and staffing are followed by the more interpersonal elements of

management: direc�ng, monitoring, and mo�va�ng the staff. At this point, managers face the

challenging task of assessing the skills of employees, assigning relevant tasks, monitoring

progress, and providing incen�ves to drive produc�vity. Managers must have a thorough

understanding of each employee’s strengths and weaknesses, as well as aspira�ons and

mo�vators, to appropriately carry out these tasks. As a result, understanding mo�va�onal

theories is at the heart of effec�vely managing employees.

Mo�va�ng employees to leverage the human resources within an organiza�on is central to a

manager’s responsibili�es. It is achieved by understanding what drives produc�vity. Generally,

posi�ve incen�ves far outweigh nega�ve ones in leveraging employees. To gain leverage,

managers must ascertain what opportuni�es will drive the highest level of produc�vity in their

work groups.

By effec�vely combining this mo�va�onal understanding with the expecta�ons and

responsibili�es of managing employees, managers effec�vely leverage human capital to

achieve high levels of efficiency and employee sa�sfac�on.

Example

A business with high liquid capital may invest in informa�on infrastructure to increase

automa�on and reduce the cost of produc�on. These changes will ul�mately achieve a

higher produc�vity.

The Importance of Performance Targets

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Performance standards mo�vate employees and management to use their �me efficiently by

se�ng achievable objec�ves.

A key performance indicator ( KPI ) sets a performance standard for

an organiza�on, a business unit, or an employee.

Goal se�ng means establishing what a person or an organiza�on

wants to achieve. Goals should be specific, measurable, achievable,

realis�c, and �me‑targeted (SMART).

Mo�va�on is the key component to effec�ve goal se�ng.

Organiza�ons must consider performance targets within the context

of crea�ng mo�vated employees, who will in turn perform more

effec�vely.

Performance targets are par�cularly useful because they can be

quan�fied, allowing the measurement of outcomes and assessment

of opera�ons.

Key Terms

KPI—Key Performance Indicator; a tool to measure performance

mo�va�on—willingness to perform an ac�on, especially a behavior;

an incen�ve or reason for doing something

Managerial effec�veness is o�en assessed on the ability to achieve performance targets. Three

basic concepts are involved in communica�ng and achieving targets: key performance

indicators, goal se�ng, and mo�va�on.

Performance Indicators

A key performance indicator is a tool for performance measurement used by organiza�ons. It

is used to set a performance standard for an organiza�on, a business unit, or an employee. It is

also used to evaluate the overall success of the organiza�on and the success of a specific

ac�vity in the organiza�on.

Key Points

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Success can be defined as progress toward strategic or opera�onal goals like zero defects,

percentage of customer sa�sfac�on (or reten�on), or profitability margins. KPIs are usually

understandable, meaningful, and measurable. For the employee to achieve them, objec�ves

should be clear and simple to understand.

Goal Se�ng

Goal se�ng is an effec�ve tool for progressive organiza�ons, because it provides a sense of

direc�on and purpose. Employees benefit greatly from understanding expecta�ons of them

and how they can measure this success (or lack thereof). A clear concept of achievement leads

to independent personal development, and goal se�ng can improve the organiza�on’s

performance. Challenging goals tend to result in higher performance.

Goal se�ng means establishing what a person or an organiza�on wants to achieve. In se�ng

objec�ves, managers must ensure the goals are both understandable and achievable to meet

performance targets. The SMART (specific, measurable, achievable, realis�c, and �me‑

targeted) model is a good framework for genera�ng goals and objec�ves.

SMART Criteria

Specific  Goal must be specific enough to avoid confusion. Answer what, who, when, where, and why when se�ng goals. 

Measurable  Goals need benchmarks and degrees of success to be useful. Including a scale of assessment is integral to a good goal. 

Achievable  Objec�ves should always be within the grasp of the individual for whom they are assigned. Unreachable goals ul�mately lead to frustra�on. 

Relevant  Objec�ves should be relevant to the broader organiza�onal mission, and this relevance should be communicated. 

Time‑ bound 

Goals should also be confined by set period of �me for comple�on. 

Source: Wikipedia Crea�ve Commons Content (h�p://en.wikipedia.org/wiki/SMART_criteria)

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The SMARTER framework adds that objec�ves should be evaluated and reviewed consistently.

Mo�va�on

Mo�va�on elicits, controls, and sustains certain goal‑directed behaviors. There are a number

of approaches to mo�va�on: physiological, behavioral, cogni�ve, and social. Mo�vated

employees are also more quality oriented and produc�ve.

Financial Rewards for Managers

Career success and fulfillment hinge on effec�ve human‑resource management and

empowering employees with the necessary tools and skills.

Understanding an employee’s needs and future objec�ves is cri�cal

in assigning them responsibili�es that align with their goals and that

will serve to develop their skill set in a desired direc�on. 

When assigning tasks, managers must keep career success and

development in mind. It is beneficial to plan and implement employee

objec�ves based upon career aspira�ons and skills.

Managers are also tasked with monitoring and reviewing employee

outcomes with an eye for improvement opportuni�es. Performance

monitoring allows for ac�ve skill development through construc�ve

feedback.

Managers may employ numerous tools in developing employees in a

meaningful and fulfilling way to ensure their future success. These

tools include case studies, consulta�on, mentoring, and technical

assistance.

Key Term

empower—to give someone the strength or the means to accomplish

a goal

Key Points

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From a human‑resources framework, managers are largely responsible for the well‑being of

their employees with regard to opportuni�es for career development and personal fulfillment.

Understanding an employee’s needs and future objec�ves is cri�cal in assigning them

responsibili�es that align with their goals and that will serve to develop their skill set in a

desired direc�on. A manager is also a leader, and leadership is a complex facet of the

managerial process. Leading employees in an empowering way and enabling career success

and fulfillment are central to improving employee outcomes and crea�ng more value for the

organiza�on.

When assigning tasks, managers must keep career success and development in mind. A

reasonable rule of thumb is the plan‑implement‑monitor‑review model illustrated in the figure

below. Planning (based on employee objec�ves) and implemen�ng (based upon shared

exper�se) provide a framework to move the employee in the direc�on of success. Monitoring

progress and reviewing it will allow the employee to remain meaningfully engaged, working

toward the common goal of success while gaining experience and skills from managerial

exper�se.

Employee Development Model

Facilita�ng employee success: By employing these steps, a

manager can help their employees be successful. 

Combining this model for success with a working understanding of a given employee’s

objec�ves and fulfillment needs helps to ensure that employees remain mo�vated and

sa�sfied with their current roles. Empowering employees in a developmental direc�on and

providing them with challenges that stretch their abili�es are substan�al mo�vators. These are

important developmental tools companies can use to obtain the highest possible value from

their human resource investments.

Strategies for Promo�ng Employee Success

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Promo�ng career success for employees and managers involves crea�ng developmental goals

that build stronger skills and aim toward fulfillment. Goal crea�on is generally achieved using

varying approaches and experiences. These may include coaching, higher educa�on,

mentoring, reflec�ve supervision, technical training, and consulta�on. Knowing when to apply

which par�cular approach is the primary responsibility of a manager, as is assessing employees’

progress and trajectory toward comple�ng their personal career objec�ves. Following are a

few tools managers can use to op�mize returns on career development:

Case study method. Case studies are an excellent way to drive employee experience in a

realis�c and meaningful way. These incorporate situa�ons that have occurred in the past

as a method for prac�cing decision making and assessing performance. Conclusions can

then be drawn by the employee or manager assuming the role of decision maker.

Consulta�on. Consul�ng assesses employee abili�es by observing performance,

reflec�ng upon observa�ons, and sugges�ng methods for improvement. This process is

an important responsibility of any manager.

Mentoring. Mentoring is an excellent approach to enhance career success. A manager

matches two employees of different experience levels to learn from one another.

Mentoring is usually accomplished by allowing an outside observer to evaluate and

suggest improvements for newer employees who have had less �me to develop in a

par�cular role.

Technical assistance. Helping employees implement new technologies and acquire

modern skill sets is a growing field in career development. Technical training is provided

to enable employees to be more effec�ve with newer methodologies, tools, and

equipment. This approach can be par�cularly important to career development for older

demographics that may have extensive experience in more tradi�onal methods.

Licenses and A�ribu�ons

Core Requirements of Successful Managers (h�ps://courses.lumenlearning.com/boundless‑

management/chapter/core‑requirements‑of‑successful‑managers/) from Boundless

Management by Lumen Learning, originally published by Boundless.com, is available under

a Crea�ve Commons A�ribu�on‑ShareAlike 4.0 Interna�onal

(h�ps://crea�vecommons.org/licenses/by‑sa/4.0/) license. UMUC has modified this work and

it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Product Costing and Cost Accumulation in a Batch Production Environment

Chapter 3

Copyright © 2014

by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Reviewer (R) - Slide 1 NN Added the title of the chapter.

Reviewer (R) - CHAPTER 3 CORRECTIONS REQUIRED Note that pagination of the slides is inconsistent. Some slides have a slide number (bottom right), while other slides have no slide number.

Chapter 3: Product Costing and Cost Accumulation in a Batch Production Environment

Product and Service Costing

Financial Accounting

Product costs are used to value inventory on the balance sheet and to compute cost of
goods sold on the income statement.

Managerial Accounting and Cost Management

Product costs are used for planning, control, directing, and management decision making.

3-*

Other Interested Organizations

There is an ever increasing need to use data in external organizations as well.

Product costing is the assignment of production costs to all output of the organization. A product-costing system accumulates the costs incurred in a production process and assigns those costs to the organization’s outputs. Product costing produces data that are needed for a variety of purposes in financial accounting, managerial accounting, and cost management.

Use in Financial Accounting – Products costs are used to value inventory on the balance sheet and to compute the cost of goods sold on the income statement.

Use in Managerial Accounting - Product costs are needed to help management plan, control, and direct operations. In addition, they are needed to help with management decision making.

Use in Reporting to Interested Organizations – There is an ever-growing need for product cost information in relationships between firms and outside organizations. (LO 3-1)

Flow of Costs in Manufacturing Firm

3-*

Manufacturing costs consist of direct material, direct labor, and manufacturing overhead. As production takes place, all manufacturing costs are added to the Work-in-Process Inventory (WIP) account with a debit. As soon as products are completed, their product costs are transferred from Work-in-Process Inventory to Finished-Goods Inventory with a credit to Work in Process and a debit to Finished Goods. During the time period when products are sold, the product cost of the inventory sold is removed from Finished Goods and added to Cost of Goods Sold, which is an expense of the period in which the sale occurred. A credit to Finished Goods and a debit to Cost of Goods Sold completes this step. Cost of Goods Sold is closed into the Income Summary account at the end of the accounting period, along with all other expenses and revenues of the period. We will look at this in more detail and go through each journal entry recorded as the costs progress through the accounting system. (LO 3-2)

Sheet1

Work-in-Process Inventory Finished Goods Inventory
Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished
Cost of Goods Sold Income Summary
Expense closed into
Income Summary at end
of accounting period

Sheet2

Sheet3

Process
Costing

Job-Order
Costing

Types of Product-Costing Systems

3-*

  • Used for production of large, unique, high-cost items.
  • Built to order rather than mass produced.
  • Many costs can be directly traced to each job.
  • TWO TYPES:
  • Job-shop operations
  • Products manufactured in very low volumes or one at

a time.

  • Batch-production operations
  • Multiple products in batches of relatively small

quantity.

Reviewer (R) - Slide 7 NN First paragraph, first sentence: Changed the words 'Job-order costing' to bold font.

Job-order costing is used by companies with job-shop operations or batch-production operations. In a job-shop environment, products are manufactured in very low volumes or one at a time. In job-order costing, each distinct batch of production is called a job or job order. The cost-accounting procedures are designed to assign costs to each job. Then the total costs assigned to each job are divided by the units of production in the job to obtain an average cost per unit. Examples of job-shop environments include film production, custom home building, and aircraft manufacturing.

In a batch-production environment, multiple products are produced in batches of relatively small quantity. Examples include furniture manufacture, printing, agricultural equipment, and pleasure boat production. (LO 3-3)

Process
Costing

Job-Order
Costing

Types of Product-Costing Systems

3-*

  • Used for production of small, identical, low cost

items.

  • Mass produced in automated continuous

production process.

  • Costs cannot be directly traced to each unit of

product.

  • Typical process cost applications:
  • Petrochemical refinery
  • Paint manufacturer
  • Paper mill

Process costing is used by companies that produce large numbers of identical units. A process-costing system accumulates all the production costs for a large number of units of output, and then these costs are averaged over all of the units.

Firms that produce chemicals, microchips, gasoline, beer, fertilizer, textiles, processed food, and electricity are among those using process costing. In these kinds of firms, there is no need to trace costs to specific batches of production because the products in the different batches are identical. (LO 3-3)

The primary document for tracking the costs associated with a given job is the

job-cost record.

Accumulating Costs in a
Job-Order Costing System

3-*

In a job-order costing system, costs of direct material, direct labor, and manufacturing overhead are assigned to each production job. These costs comprise the inputs of the product-costing system. As costs are incurred, they are added to the Work-in-Process Inventory account in the ledger. To keep track of the manufacturing costs assigned to each job, a subsidiary ledger is maintained. The subsidiary ledger account assigned to each job is a document called a job-cost record. (LO 3-3)

Job-Order Cost Accounting

3-*

Three major sections on the job-cost record are used to accumulate the costs of direct material, direct labor, and manufacturing overhead assigned to the job. The other two sections are used to record the total cost and average unit cost for the job, and to keep track of units shipped to customers. A job-cost record may be a paper document upon which the entries for direct material, direct labor, and manufacturing overhead are written. Increasingly, it is a computer file where entries are made using a computer. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

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Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Job-Order Cost Accounting

3-*

Let’s see one

A materials requisition form is used to authorize the use of materials on a job.

As raw materials are needed for the production process, they are transferred from the warehouse to the production department. To authorize the release of materials, the production department supervisor completes a material requisition form and presents it to the warehouse supervisor. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

Sheet1

Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Timothy Williams

Job-Order Cost Accounting

3-*

A copy of the material requisition form goes to the cost accounting department. (LO 3-3)

Sheet1

RoseCo Materials Requisition Form
Requisition No. 352 Date 11/1/x1
Job Number to Be Charged F16 Dept. Painting
Department Supervisor Timothy Williams
Item Quantity Unit Cost Amount
Aluminum 7,200 sq ft $ 2.50 $ 18,000.00
Authorized
Signature
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Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

Let’s see one

Job-Order Cost Accounting

3-*

The assignment of direct-labor costs to jobs is based on time records filled out by employees. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

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Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Employee Time Ticket

3-*

A time record is a form that records the amount of time an employee spends on each production job. (LO 3-3)

Sheet1

Employee Ron Bradley Date 11/5/20x1
Employee Number 12 Department Painting
Station
Time Started Time Stopped Job Number
8:00 11:30 F16
11:30 12:00 Shop cleanup
1:00 5:00 A26
Totals 8.00 $ 11.00 $ 88.00 A-143
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Apply manufacturing overhead to jobs using a
predetermined overhead rate based on direct labor hours (DLH).

Let’s do it

Job-Order Cost Accounting

3-*

Manufacturing overhead is a pool of indirect production costs, such as indirect material, indirect labor, utility costs, and depreciation. These costs often bear no obvious relationship to individual jobs or units of product, but they must be incurred for production to take place. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various dates Various time cards 600 $20 $12,000
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

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Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Job-Order Cost Accounting

3-*

Therefore, it is necessary to assign manufacturing-overhead costs to jobs in order to have a complete picture of product costs. This process of assigning manufacturing-overhead costs to production jobs is called overhead application. A predetermined overhead rate is used to apply overhead on the job-cost record. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various dates Various time cards 600 $20 $12,000
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000
Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost
Unit cost
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

Sheet1

Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Overhead is applied to jobs using a predetermined overhead rate based on estimates made at the beginning of the accounting period.

Overhead applied = Rate × Actual activity

Based on estimates, and determined before the period begins

Actual amount of the allocation base, such as direct labor hours, incurred during the period

Manufacturing Overhead Costs

3-*

Predetermined

Rate =

Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

The accounting department chooses some measure of productive activity to use as the basis for overhead application. In traditional product-costing systems, this measure is usually some volume-based cost driver (or activity base), such as direct-labor hours, direct-labor cost, or machine hours. An estimate is made of (1) the amount of manufacturing overhead that will be incurred during a specified period of time and (2) the amount of the cost driver (or activity base) that will be used or incurred during the same time period. (LO 3-4)

Job-Order Cost Accounting

3-*

Reviewer (R) - Slide 19 NN First sentence: Added a comma after the word 'costs' (total direct labor costs).

Once manufacturing overhead has been applied, the cost summary can be completed. Total direct material costs, total direct labor costs, and total manufacturing overhead costs are added together to determine total costs. These costs are divided by the number of units completed to arrive at the unit cost. (LO 3-3)

Sheet1

Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material Cost of goods completed Cost of goods sold
Direct labor Two Sequential Production Departments
Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory
overhead finished goods Production Department A Production Department B
Direct material Cost of goods completed in department A and Cost of goods completed
Direct labor
Applied manufacturing transferred to and transferred to
overhead department B finished goods
Direct material
Direct labor
Applied manufacturing
overhead
Finished Goods Inventory Cost of Goods Sold
Cost of goods sold
during current period
One Production Department
Work-in-Process Inventory Finished Goods Inventory
Direct material Cost of goods completed Cost of goods completed
Direct labor
Applied manufacturing and transferred to and transferred to
overhead Finished goods finished goods
Direct material
Direct labor
Applied manufacturing
overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31
Direct Material: Direct Material: Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion: Convserion: Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700
Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit $ 366,840
Costs remaining in work-in-process in Stitching Dept. on March 31
Direct Material:
20,000 equivalent units x $7.028 per equivalent unit $ 140,560
Convserion:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for $ 596,500

Sheet4

Conversion
Physical Physical Percentage Transferred Direct
Units Units Completion In Material Conversion
Work in process, March 1 10,000 Work in process, March 1 10,000 20%
Units transferred in during March 40,000 Units transferred in during March 40,000
Total units to account for 50,000 Total units to account for 50,000
Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000
Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000
Total units accounted for 50,000 Total units accounted for 50,000
Total equivalent units 50,000 30,000 48,000
Physical
Units
Work in process, March 1 10,000
Units transferred in during March 40,000
Total units to account for 50,000
Units completed and transferred out during March 30,000
Work in process, March 31 20,000
Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:
Transferred Direct Cutting Department Stitching Department
In Material Conversion Total Direct material Cost of goods Transferred-
completed and in costs
Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out
Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material
Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing
overhead Conversion:
Equivalent units 50,000 30,000 48,000 Direct labor
Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing
overhead
$351,400 $7,500 $237,600 $ 7.028
50,000 30,000 48,000 + $.25
+ $4.95

Sheet6

MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

Sheet7

JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various dates Various time cards 600 $20 $12,000
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000
Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600
Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance
11/30 60 20 $12,000

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

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Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for $ 340,700
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Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.

$360,000 / 40,000 hours = $9 per machine hour

Overhead applied = Hours on Job = 30 X $9 per hour = $270

Manufacturing Overhead Costs

3-*

Rate =

Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Reviewer (R) - Slide 23 Bottom text box: Added a space after the value '30.'

So if we assume that the company has budgeted manufacturing overhead for the period of $360,000 and they expect to use a total of 40,000 machine hours over that same period, then the pre-determined rate would be computed by taking the estimated overhead of $360,000 and dividing it by the number of machine hours to be used over that same period – in this case 40,000 hours. This equates to a rate of $9 per machine hour that will be used to charge overhead to all of the jobs. If one specific job took 30 machine hours to complete, then a total of $270 or 30 hours multiplied by 9 per hour would be charged to the job. (LO 3-4)

Production Order for Job

The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead.

Material Requisition

The production order for the job authorizes the start of the production process.

Labor Time Records

Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.

Actual Cost Driver (or Activity Base)

X

Predetermined Overhead Rate

Apply Manufacturing Overhead

Job-Order Costing
Document Flow Summary

3-*

The production order for the job authorizes the start of the production process. The materials requisition form identifies the amount of direct material to add to the job-cost records and the amount of indirect materials to add to the manufacturing overhead account.

The employee time tickets identity the amount of direct labor to add to the job-cost records and the amount of indirect labor to add to the manufacturing overhead account.

Overhead is applied to the job-cost records using some cost driver or activity base and a predetermined overhead rate.

Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials. (LO 3-5)

Journal Entry
Purchases of Raw Materials

A company worked on two jobs during the accounting cycle. One of the jobs involved making 80 deluxe models and another job involved making 80 standard models. During the month, the company purchased, on account, $38,000 worth of materials and parts to be used in the manufacturing operation. The journal entry to record the purchase of the materials on account is shown. (LO 3-5)

Journal Entry
Use of Direct Materials

During the month, materials were requisitioned for use to manufacture the products. One job (Job D42) requisitioned $34,000 of direct materials and the second job (Job S116) requisitioned $28,000 of direct materials. The journal entries record the release of the materials requested into production. (LO 3-5)

Journal Entry
Use of Indirect Materials

Reviewer (R) - Slide 29 NN First sentence: Added a comma after the word 'month.'

During the month, indirect materials were requisitioned into use. These materials are used on all types of jobs and the cost incurred is relatively small. Since the amounts cannot be easily traced to specific jobs, the company makes the decision to charge the amounts to the Manufacturing Overhead account. (An example of such a material would be epoxy or glue products.) (LO 3-5)

Journal Entry
Use of Direct Labor

Reviewer (R) - Slide 32 & Slide 32 NN CORRECTION REQUIRED This slide and the narration notes does not make sense. The slide shows $31,000, while the narration notes discusses $28,000 ($16,000 + $12,000).

The cost accounting department uses the labor time records filed during the month to determine the following direct labor costs of all jobs. One job (Job D42) used $16,000 worth of direct labor costs and the other job (Job S116) used $12,000 of direct labor costs. The journal entry to record these costs is shown. (LO 3-5)

Journal Entry
Use of Indirect Labor

The analysis of labor time records also revealed that the company incurred $14,000 of labor costs that were not charged out to any particular job. This labor cost comprises some production supervisor time and wages of various employees who spent some of their time on maintenance and general clean up of the factory. This journal entry records the indirect labor costs to manufacturing overhead. (LO 3-5)

Journal Entry
Manufacturing Costs Incurred

The company incurred various overhead costs or indirect production costs provided during the month. After analyzing the costs, the compound entry is made to record these overhead costs. (LO 3-5)

  • Direct
    Labor

Mfg. Overhead

  • Indirect
    Material
  • Direct
    Material
  • Overhead
    Applied to Work in
    Process

Actual and applied manufacturing overhead are usually not equal so a year-end adjustment is required. We will look at the procedure to accomplish this later.

  • Indirect
    Labor
  • Direct
    Labor
  • Overhead
    Applied
  • Indirect
    Labor

Wages Payable

Work in Process
(Job-Cost Record)

Job-Order System Cost Flows

3-*

In a previous slide, we saw how overhead costs were incurred or accumulated on the debit side of the manufacturing overhead account. Overhead must be applied to each job-cost record based on the predetermined overhead rate and the actual activity for that job. The overhead applied is also recorded in the work-in-process account with a debit. The manufacturing overhead account is decreased by the amount of overhead applied with a credit. The actual overhead cost incurred and the amount of applied overhead rarely will match. This is caused by errors in the estimates of overhead and activity used to compute the predetermined overhead rate. Let’s see how overhead is applied through the journal entry process. (LO 3-5)


Application of Overhead

Actual use of machine hours for the two jobs were as follows:

Reviewer (R) - Slide 36 NN Second paragraph, third sentence: Changed the value '1800' to read '1,800.'

Recall that we discussed the pre-determined overhead rate earlier. The rate was computed by taking the company’s estimated manufacturing overhead and dividing by the total budgeted machine hours. We computed the rate per machine hour to be $9.00.

The company reviewed factory machine usage records that indicated that the actual machine usage was as shown. Now let’s make a journal entry to reflect the application of the overhead costs to the jobs. Job number D42 used 1,800 machine hours and so that job will be charged with $16,200 in overhead costs. Job S116 used 2,000 machine hours and so that job will be charged with $18,000 in overhead costs. The journal entry to show how the overhead is applied will be shown next. (LO 3-5)

Journal Entry
Application of Manufacturing Overhead

The journal entry to add applied manufacturing overhead to Work-In-Process using the previous computations includes a debit to WIP and a credit to Manufacturing Overhead. (LO 3-5)

Journal Entry
Selling and Administrative Costs

Actual Costs Incurred

Journal Entry to record the costs

During the month the company incurred some typical selling and administrative costs as shown. Remember that these costs are period costs, not product costs. They are NOT manufacturing costs and so they do NOT go through the WIP account. They are instead treated as expenses of the accounting period in which they are incurred. Take a moment to review the costs incurred and the resulting journal entry. (LO 3-5)

Journal Entry
Completion of a Production Job

Job Number S116 was completed during the period, whereas Job umber D42 remained in process at the end of the period. As the job cost record (or Cost Summary) for Job S116 indicates, the total cost of job S116 was $48,000. Since this job was completed, the cost of $48,000 is transferred out of the WIP account and into Finished-Goods. (LO 3-5)

Journal Entry
Sale of Goods

Sixty of the standard product in job number S116 were sold for $900 each during the period. The cost of each unit sold was $600 as shown in the job record. The following journal entries are made. The first one for $54,000 records the revenue generated by the sale and can be computed by taking the sixty units sold multiplied by the selling price of $900 each. Next, the per unit cost associated with the sale was $600 each. So the $36,000 or $600 multiplied by 60 units was taken out of the Finished Goods inventory and charged to Cost of Goods Sold. The remaining unsold units are still in Finished Goods account and will remain there until the units are sold. (LO 3-5)

Underapplied and Overapplied Overhead

Remember that the company incurred actual manufacturing overhead of $34,450, but only applied $34,200 to the jobs in Work-In-Process. The amount by which the actual overhead exceeded the applied overhead was $250 as shown. This is referred to as underapplied overhead. This means that the pre-determined overhead rate was underestimated by just a small amount. If the actual overhead had been less than the applied overhead, then we would have overapplied overhead. If the amount is immaterial, you can close it to cost of goods sold. In this case, the $250 would be disposed of by the journal entry shown. (LO 3-5)

Overapplied and Underapplied Manufacturing Overhead - Summary

3-*

This table summarizes the disposition of underapplied or overapplied overhead. (LO 3-5)

Sheet: Sheet1

Sheet: Sheet2

Sheet: Sheet3

Sheet: Sheet4

Sheet: Sheet5

Sheet: Sheet6

Sheet: Sheet7

Sheet: Sheet8

Sheet: Sheet9

Sheet: Sheet10

Sheet: Sheet11

Sheet: Sheet12

Sheet: Sheet13

Sheet: Sheet14

Sheet: Sheet15

Sheet: Sheet16

Alternative 1

Alternative 2

If Manufacturing

Close to Cost

Overhead is . . .

Allocation

of Goods Sold

UNDERAPPLIED

INCREASE

INCREASE

Work in Process

Cost of Goods Sold

(Applied OH is less

Finished Goods

than actual OH)

Cost of Goods Sold

OVERAPPLIED

DECREASE

DECREASE

Work in Process

Cost of Goods Sold

(Applied OH is greater

Finished Goods

than actual OH)

Cost of Goods Sold

Schedule of Cost of Goods Manufactured

3-*

The schedule of cost of goods manufactured details the costs of direct material, direct labor, and manufacturing overhead applied to work in process during the period and shows the change in Work-in-Process Inventory. It is basically a summary of what went into and out of the Work-In-Process account. The cost of goods manufactured is shown in the last line of the schedule. This is the amount transferred from Work-in-Process Inventory to Finished-Goods Inventory during the period. (LO 3-6)

Sheet1

Work-in-Process Inventory Finished Goods Inventory
Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished
Cost of Goods Sold Income Summary
Expense closed into
Income Summary at end
of accounting period

Sheet2

Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx
Direct labor xxx
Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx
Total manufacturing costs $xxx
Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx

Sheet3

Schedule of Cost of Goods Sold

3-*

This schedule shows the cost of goods sold for the period and details the changes in Finished-Goods Inventory during the month. The adjusted cost of goods sold appears as an expense on the income statement. (LO 3-6)

Sheet1

Work-in-Process Inventory Finished Goods Inventory
Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished
Cost of Goods Sold Income Summary
Expense closed into
Income Summary at end
of accounting period

Sheet2

Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx
Direct labor xxx
Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx
Total manufacturing costs $xxx
Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx
Schedule of Cost of Goods Sold
Finished goods inventory, beginning $xxx
Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
xxx
Cost of goods sold (adjusted) $xxx
* From Cost of Goods Manufactured Schedule

Sheet3

The Income Statement

Reviewer (R) - Slide 50 NN Added the LO '(LO 3-6).'

This is an example of an income statement. The Cost of Goods Sold line item would have been transferred over from the schedule of cost of goods sold. (LO 3-6)

Direct material costProduct cost transferred

Direct labor cost

Manufacturing overheadwhen product is finished

Expense closed into

Income Summary at end

of accounting period

Work-in-Process InventoryFinished Goods Inventory

Cost of Goods SoldIncome Summary

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

DateQuantityCost

DateQuantityCost

DateCost Balance

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

Direct Labor

Requisition NumberUnit Price

80 deluxe alum. fishing boats

Nov. 22, 20x1

Manufacturing Overhead

Requisition NumberUnit Price

Cost Item

Total direct material

Amount

Cost Summary

Total direct labor

Total manufacturing overhead

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

DateQuantityCost

DateQuantityCost

DateCost Balance

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

Direct Labor

Requisition NumberUnit Price

80 deluxe alum. fishing boats

Nov. 22, 20x1

Manufacturing Overhead

Requisition NumberUnit Price

Cost Item

Total direct material

Amount

Cost Summary

Total direct labor

Total manufacturing overhead

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Requisition No. 352Date 11/1/x1

Job Number to Be Charged F16Dept. Painting

Department Supervisor Timothy Williams

ItemQuantityUnit CostAmount

Aluminum7,200 sq ft2.50$ 18,000.00$

Authorized

Signature

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

11/17,200 sq ft$18,000

DateQuantityCost

DateQuantityCost

DateCost Balance

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

$2.50

Direct Labor

Requisition NumberUnit Price

80 deluxe alum. fishing boats

Nov. 22, 20x1

Manufacturing Overhead

Requisition NumberUnit Price

803

Cost Item

Total direct material

Amount

Cost Summary

$18,000

Total direct labor

Total manufacturing overhead

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

EmployeeRon Bradley Date 11/5/20x1

Employee Number 12 Department Painting

Station

Shop cleanup

A26

11:30

1:00

12:00

5:00

Time StartedTime StoppedJob Number

8:00F1611:30

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

11/17,200 sq ft$18,000

DateQuantityCost

Various

dates600$12,000

DateQuantityCost

DateCost Balance

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

$2.50

Direct Labor

Requisition NumberUnit Price

80 deluxe alum. fishing boats

Nov. 22, 20x1

Various time cards$20

Manufacturing Overhead

Requisition NumberUnit Price

803

Cost Item

Total direct material

Amount

Cost Summary

$18,000

Total direct labor

Total manufacturing overhead

12,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

11/17,200 sq ft$18,000

DateQuantityCost

Various

dates600$12,000

DateQuantityCost

11/30600$18,000

DateCost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor

Total manufacturing overhead

12,000

18,000

Cost Item

Total direct material

Amount

Cost Summary

$18,000

Direct Labor Hours$30.00

80 deluxe alum. fishing boats

Nov. 22, 20x1

Various time cards$20

Manufacturing Overhead

Requisition NumberUnit Price

803$2.50

Direct Labor

Requisition NumberUnit Price

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

Job Number F16Description

Date Started Nov. 1, 20x1Date Completed

Number of Units Completed80

DateQuantityCost

11/17,200 sq ft$18,000

DateQuantityCost

Various

dates600$12,000

DateQuantityCost

11/30600$18,000

DateCost Balance

11/30$12,000

Shipping Summary

Units Shipped

Units Remaining

in Inventory

6020

Total cost $48,000

Unit cost $600

Total direct labor

Total manufacturing overhead

12,000

18,000

Cost Item

Total direct material

Amount

Cost Summary

$18,000

Direct Labor Hours$30.00

80 deluxe alum. fishing boats

Nov. 22, 20x1

Various time cards$20

Manufacturing Overhead

Requisition NumberUnit Price

803$2.50

Direct Labor

Requisition NumberUnit Price

JOB-COST RECORD

Direct Material

Requisition NumberUnit Price

Alternative 1

Alternative 2

If Manufacturing

Close to Cost

Overhead is . . .

Allocation

of Goods Sold

UNDERAPPLIED

INCREASE

INCREASE

Work in Process

Cost of Goods Sold

(Applied OH is less

Finished Goods

than actual OH)

Cost of Goods Sold

OVERAPPLIED

DECREASE

DECREASE

Work in Process

Cost of Goods Sold

(Applied OH is greater

Finished Goods

than actual OH)

Cost of Goods Sold

Schedule of Cost of Goods Manufactured

Direct material:

Raw material inventory, beginning$xxx

Add: Raw material purchasesxxx

Raw material available for use$xxx

Deduct: Raw material, endingxxx

Raw material used$xxx

Direct laborxxx

Manufacturing overhead

Indirect material$xxx

Indirect laborxxx

Other actual overhead chargesxxx

Total actual manufacturing overhead$xxx

Add: Overapplied overhead

orDeduct: Underapplied overheadxxx

Overhead applied to work-in-processxxx

Total manufacturing costs$xxx

Add: Work-in-process inventory, beginningxxx

Subtotal$xxx

Deduct: Work-in-process inventory, endingxxx

Cost of goods manufactured$xxx

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxx

Cost of goods available for sale $xxx

Deduct: Finished goods inventory, ending xxx

Cost of goods sold $xxx

Add: Underapplied overhead

or Deduct: Overapplied overhead

xxx

Cost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

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Principles of Management

Defining Management

Management is the act of engaging with an organiza�on’s human talent and other resources to

accomplish desired goals and objec�ves.

Management comprises planning, organizing, staffing, leading and

direc�ng, and controlling an organiza�on (a group of one or more

people or en��es) or effort to accomplish a goal.

In for-profit work, the primary func�on of management is mee�ng

the needs of various stakeholders, such as customers, debtors, and

owners.

In representa�ve democracies, voters elect poli�cians to public

office, who then hire managers and administrators to oversee the

everyday responsibili�es of public-sector organiza�ons.

Since an organiza�on can be viewed as a type of system, managers

provide the human ac�on needed for the organiza�onal system to

produce planned outcomes or goals that the stakeholders desire.

Key Terms

stakeholders—persons or organiza�ons with a legi�mate interest in a

given situa�on, ac�on, or enterprise that are directly affected by the

organiza�on’s ac�ons

Learning Resource

Key Points

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theore�cal—of or rela�ng to the underlying principles or methods of

a given technical skill, art, etc., as opposed to its prac�ce

shareholder—the real owner (through stock holdings) of a publicly

traded business that is run by management

Overview

Management is the act of engaging with an organiza�on’s human talent and using the physical

resources at a manager’s disposal to accomplish desired goals and objec�ves efficiently and

effec�vely. Management comprises planning, organizing, staffing, leading, direc�ng, and

controlling an organiza�on (a group of one or more people or en��es) or effort to accomplish

a goal.

One of the most important du�es for a manager is effec�vely using an organiza�on’s

resources. This duty involves deploying and manipula�ng human resources (or human capital),

as well as efficiently alloca�ng the organiza�on’s financial, technological, and natural

resources.

Since organiza�ons can be viewed as systems, management can also be defined as human

ac�on, such as product design, that enables the system to produce useful outcomes. This view

suggests that we must manage ourselves as a prerequisite to a�emp�ng to manage others.

Theore�cal Scope

Management may be considered as a type of func�on, one which measures financial metrics,

adjusts strategic plans, and meets organiza�onal goals. This applies even in situa�ons where

planning does not take place. From this perspec�ve, Henri Fayol (1841–1925) considers

management to consist of six func�ons: forecas�ng, planning, organizing, commanding,

coordina�ng, and controlling. He was one of the most influen�al contributors to modern

concepts of management.

In another way of thinking, Mary Parker Folle� (1868–1933) defined management as “the art

of ge�ng things done through people.” She described management as philosophy. Some

people, however, find this defini�on useful but far too narrow. The phrase “management is

what managers do” occurs widely, sugges�ng the difficulty of defining management, the

shi�ing nature of defini�ons, and the connec�on of managerial prac�ces with the existence of

a managerial cadre or class.

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Another perspec�ve regards management as equivalent to “business administra�on” and thus

excludes management in places outside of commerce, for example in chari�es and in the

public sector. More realis�cally, however, every organiza�on must manage its work, people,

processes, technology, and other resources to maximize their effec�veness and accomplish its

goals.

Nature of Managerial Work

In the for-profit environment, management’s role is primarily to meet the needs of a range of

stakeholders. This typically involves making a profit (for the shareholders), crea�ng valued

products at a reasonable cost (for customers), and providing rewarding employment

opportuni�es (for employees). Nonprofit management has the added responsibility to a�ract

and retain donors.

In most models of management and governance, shareholders choose the board of directors

by vo�ng, and the board then hires senior management. Some organiza�ons have

experimented with other methods (such as employee-vo�ng models) of selec�ng or reviewing

managers, but this occurs only very rarely. In representa�ve democracies, voters elect

poli�cians to public office and the poli�cians hire managers and administrators to run

organiza�ons in the public sector.

Several historical shi�s in management have occurred throughout the ages. Toward the end of

the twen�eth century, business management came to consist of six separate branches:

human resource management

opera�ons or produc�on management

strategic management

marke�ng management

Basic Func�ons

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Mary Parker Folle�

defined management as

“the art of ge�ng

things done through

people.”

Management operates through various func�ons, such as planning, organizing, staffing,

leading/direc�ng, controlling/monitoring, and mo�va�ng:

Planning. Deciding what needs to happen in the future (today, next week, next month,

next year, over the next five years, etc.) and genera�ng plans for ac�on.

Organizing. Implemen�ng a pa�ern of rela�onships among workers and making op�mum

use of the resources required to enable the successful execu�on of plans.

Staffing. Job analysis, recruitment, and hiring of people with the necessary skills for

appropriate jobs. Providing or facilita�ng ongoing training, if necessary, to keep skills

current.

Leading and direc�ng. Determining what needs to be done and ge�ng people to do it.

Controlling and monitoring. Checking current outcomes against forecast plans and

making adjustments as needed so that goals are achieved.

Mo�va�ng. Mo�va�on is a basic func�on of management because without mo�va�on,

employees may feel disconnected from their work and the organiza�on, which can lead

to ineffec�ve performance. If managers do not mo�vate their employees, the workers

may not feel their work is contribu�ng to the overall goals of the organiza�on, which are

usually set by top-level management.

Fulfilling the Organizing Func�on

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Management organizes by crea�ng pa�erns of rela�onships among workers and op�mizing

use of resources to accomplish business objec�ves.

The organizing func�on typically follows the planning stage. Specific

organizing du�es involve assigning tasks, grouping tasks into

departments, assigning authority, and alloca�ng resources across the

organiza�on.

Authority is a manager’s formal and legi�mate right to make

decisions, issue orders, and allocate resources to achieve the

organiza�on’s objec�ves. Types of authority include line, func�onal,

and staff.

Organiza�ons will use different structural strategies, which

significantly affects the chain of command and decision-making

process within an organiza�on. These structures include centralized,

decentralized, tall, and flat.

When approaching an organiza�on within a company or ins�tu�on, it

is important to understand the implica�ons of different structures as

they pertain to the strategy and opera�ons of the company.

Key Terms

capital expenditure—funds a company spends to acquire or upgrade

a long-term asset

controller—a person who audits and manages the financial affairs of

a company or government; comptroller

delega�on—the act of commi�ng a task to someone, especially a

subordinate

organize—to cons�tute in parts, each having a special func�on, act,

office, or rela�on

Key Points

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Management and Organiza�on

Management operates through various func�ons, o�en classified as planning, organizing,

staffing, leading and direc�ng, controlling and monitoring, and mo�va�ng. The organizing

func�on creates the pa�ern of rela�onships among workers and makes op�mal use of

resources to enable the accomplishment of business plans and objec�ves.

The organizing func�on typically follows the planning stage. Specific organizing du�es involve

the assignment of tasks, grouping tasks into departments, and assigning authority and

alloca�ng resources across the organiza�on.

The Management Process

The management process involves planning, organizing,

direc�ng, and controlling.

Structure

Structure is the framework for how tasks are divided, resources are deployed, and

departments are coordinated. It is a set of formal tasks assigned to individuals and

departments. Formal repor�ng rela�onships include lines of authority, decision responsibility,

number of hierarchical levels, and the spans of managers’ control. Structure is also the design

of systems to ensure effec�ve coordina�on of employees across departments.

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Authority and Chain of Command

Authority is a manager’s formal and legi�mate right to make decisions, issue orders, and

allocate resources to achieve desired organiza�onal outcomes. Responsibility is an employee’s

duty to perform assigned tasks or ac�vi�es. Accountability means that those with authority

and responsibility must report and jus�fy task outcomes to those above them in the chain of

command.

Through delega�on, managers transfer authority and responsibility to their subordinates.

Organiza�ons today tend to encourage delega�on from the highest to the lowest possible

levels. Delega�on can improve flexibility to meet customers’ needs and adapt to compe��ve

environments. Managers may find delega�on difficult, since control over the task assigned

(and eventual outcome) is relinquished.

One cri�cal risk of command chains is micromanagement, where managers fail to delegate

effec�vely and exercise excessive control over their subordinates’ projects. Micromanagement

reduces efficiency and limits autonomy, thus limi�ng the adaptability of a given organiza�on.

Effec�ve chains of command must allow for flexibility and efficient delega�on.

Types of Authority and Responsibility

There are three types of authority:

Line authority. Managers have the formal power to direct and control immediate

subordinates execu�ng specific tasks within a chain of command, usually within a

specific department. The superior issues orders and is responsible for the result, and the

subordinate obeys, assuming responsibility only for execu�ng the order according to

instruc�ons.

Func�onal authority. Managers have formal power over a specific subset of ac�vi�es

that include outside departments. For instance, a produc�on manager may have the line

authority to decide whether and when a new machine is needed, but a controller with

func�onal authority requires that a capital expenditure proposal be submi�ed first,

showing that the investment in a new machine will yield a minimum return. The legal

department may also have func�onal authority to interfere in any ac�vity that could

have legal consequences. For example, a purchase contract for a new machine cannot be

approved without a review of the machine’s safety standards.

Staff authority. Staff specialists manage opera�ons in their areas of exper�se. Staff

authority is not real authority because a staff manager does not order or instruct; he or

she instead advises, recommends, and counsels within his or her area of exper�se. Staff

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authority represents a communica�on rela�onship with management. Its influence

comes indirectly through the line authority at a higher level.

Organiza�onal Structure and Control/Decision Making

There are four basic structures related to decision-making authority:

Tall structure. A management structure characterized by an overall narrow span of

management, a rela�vely large number of hierarchical levels, �ght control, and reduced

communica�on overhead. Decision making can be rapid if it occurs from the top down.

Flat structure. A management structure characterized by a wide span of control and

rela�vely few hierarchical levels, loose control, and ease of delega�on. Decision making

is o�en slower, as it involves a high degree of integra�on across the company.

Centraliza�on. The loca�on of decision-making authority near top organiza�onal levels.

Similar to a tall structure, this expedites decision making from the top down.

Decentraliza�on. The loca�on of decision-making authority is rela�vely evenly dispersed

across the company. This works well when crea�vity and independent opera�ons create

value for the organiza�on.

As each structure creates a different organiza�onal approach to opera�ons, it is cri�cal to

consider how the selec�on of a structure will affect the business process. Enabling crea�vity

and minimizing control o�en has costs of speed and efficiency, and vice versa.

Fulfilling the Controlling Func�on

Management control can be defined as a systema�c effort to compare performance to

predetermined standards and address deficiencies.

Control is a con�nuous and forward-looking process designed to

objec�vely benchmark opera�ons with the projected plan or

projec�ons.

The four basic elements in a control system are: the characteris�c or

condi�on to be controlled, the sensor, the comparator, and the

ac�vator.

Key Points

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Control is a con�nuous process.

Control is a con�nuous and forward-looking process designed to

benchmark opera�ons with the projected plan or projec�ons.

Key Terms

systema�c—methodical, regular, and orderly

control—influence or authority over

hierarchy—arrangement of items in which the items are represented

as being above, below, or at the same level as the others

Defini�on of Control

In 1916, Henri Fayol formulated one of the first defini�ons of control as it pertains to

management: “Control consists of verifying whether everything occurs in conformity with the

plan adopted, the instruc�ons issued, and principles established. Its object is to point out

weaknesses and errors in order to rec�fy [them] and prevent recurrence.”

Management control can be defined as a systema�c effort by business management to

compare performance to predetermined standards, plans, or objec�ves in order to determine

whether performance meets these standards. It is also used to determine if any remedial

ac�on is required to ensure that human and other corporate resources are being used in the

most effec�ve and efficient ways to achieve corporate objec�ves.

Control can also be defined as “that func�on of the system that adjusts opera�ons as needed

to achieve the plan, or to maintain varia�ons from system objec�ves within allowable limits.”

The control subsystem func�ons in close harmony with the opera�ng system. The degree to

which they interact depends on the nature of the opera�ng system and its objec�ves. Stability

concerns a system’s ability to maintain a pa�ern of output without wide fluctua�ons. Rapidity

of response pertains to the speed with which a system can correct varia�ons and return to

expected output.

These defini�ons show that there is a close link between planning and controlling. Planning is

a process by which an organiza�on's objec�ves and the methods to achieve them are

established, and controlling is a process that measures and directs the performance against the

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organiza�on’s planned goals. Therefore, goals and objec�ves are closely �ed: The managerial

func�on and the correc�on of performance help to ensure that enterprise objec�ves and the

goals devised to a�ain them are accomplished.

Characteris�cs of Control

Control has several characteris�cs:

a con�nuous process

a management process

embedded in each level of organiza�onal hierarchy

forward looking

closely linked with planning

a tool for achieving organiza�onal ac�vi�es

an end process

Sequence of Control

A sequence of four basic elements comprise a control system:

1. The characteris�c or condi�on to be controlled. We select a specific characteris�c

because there is a correla�on between the characteris�c and how the system is

performing. The characteris�c may be system output during any stage of processing or a

condi�on that is the result of the system. For example, in an elementary school system,

the hours a teacher works and the knowledge students gain on a na�onal exam are

characteris�cs that may be selected for measurement or control.

2. The sensor. This is the means for measuring the characteris�c or condi�on. For example,

in a home-hea�ng system, the sensor would be the thermostat. In a quality control

system, the measurement might be performed by visual inspec�on.

3. The comparator. This determines the need for correc�on by comparing what is occurring

to the plan. Some devia�on from the plan is usual and expected, but when varia�ons are

beyond those considered acceptable, correc�ve ac�on is required. It involves a sort of

preventa�ve ac�on to indicate that control is being achieved.

4. The ac�vator. This is the correc�ve ac�on taken to return the system to expected

output. The actual person, device, or method used to direct correc�ve inputs into the

opera�ng system may take a variety of forms. It may be a hydraulic controller posi�oned

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by a solenoid or electric motor in response to an electronic error signal, an employee

directed to rework parts that failed to pass quality inspec�on, or a school principal who

decides to buy more books to provide for an increased number of students. As long as a

plan is performed within allowable limits, correc�ve ac�on is not necessary; however,

this seldom occurs in prac�ce.

These occur in the same order and maintain a consistent rela�onship to each other in every

system.

Fulfilling the Leading Func�on

Managers lead their organiza�ons and can vary their style and approach to achieve the desired

outcome.

Leaders who demonstrate persistence, tenacity, determina�on, and

synergis�c communica�on skills will bring out the same quali�es in

their groups.

Leadership can be viewed as either individualis�c or group-based

and can be considered “transac�onal” (i.e., procedures, rewards,

incen�ves) or “transforma�onal” (i.e., charisma, crea�vity, personal

rela�onships).

A leadership style is o�en determined by context, whereas the

degree of control (autocra�c or democra�c) may alter based upon a

situa�on or process.

Posi�ve reinforcement is an example of a leadership technique. It

occurs through a posi�ve s�mulus in response to a behavior, to

increase the likelihood of that behavior in the future.

Key Term

laissez-faire—in business, an environment in which an organiza�on’s

employees are free from excessive oversight or management, with

sufficient control only to ensure organiza�onal goals are met

Key Points

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Defining Leadership

Over the years the philosophical terms “management ” and “leadership” have been used both

as synonyms and with clearly differen�ated meanings. Debate is fairly common about whether

these terms should be restricted, reflec�ng an awareness of the dis�nc�on made by Burns

(1978) between “transac�onal” leadership (characterized by emphasis on procedures,

con�ngent reward, management by excep�on) and “transforma�onal” leadership

(characterized by charisma, personal rela�onships, crea�vity). Management is o�en associated

with the former and leadership with the la�er.

Leaders who demonstrate persistence, tenacity, determina�on, and synergis�c communica�on

skills will bring out the same quali�es in their groups. Good leaders use their own inner

mentors to energize their teams and organiza�ons, and lead their teams to achieve success.

Group Leadership

In contrast to individual leadership, some organiza�ons have adopted a group leadership

model. As the term suggests, with group leadership more than one person provides direc�on

for a group. Some organiza�ons have taken this approach in hopes of increasing crea�vity,

reducing costs, or downsizing. Others may see the tradi�onal leadership of a boss as too

costly to team performance. In some situa�ons, team members best able to handle any given

phase of a project become its temporary leaders. Staff may experience more energy and

success when each team member has access to elevated levels of empowerment.

Leadership Styles

A leadership style is a leader’s approach to providing direc�on, implemen�ng plans, and

mo�va�ng people. It is the result of the philosophy, personality, and experience of the leader.

Rhetoric specialists have also developed models for understanding leadership (Hariman, 1995)

(Salazar, 2009).

Different situa�ons call for different leadership styles. In an emergency, when there is li�le

�me to reach an agreement and where a designated authority has significantly more

experience or exper�se than the rest of the team, an autocra�c leadership style may be most

effec�ve. However, in a highly mo�vated and aligned team, with a homogeneous level of

exper�se, a more democra�c or laissez-faire style may be more effec�ve. The leadership style

adopted should be the one that will achieve the objec�ves of the group while balancing the

interests of its individual members.

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Posi�ve Reinforcement

Anyone thinking about managing a team must consider posi�ve reinforcement. B. F. Skinner,

the father of behavior modifica�on, developed this concept. Posi�ve reinforcement occurs

when a posi�ve s�mulus is presented in response to a behavior, increasing the likelihood of

that behavior in the future.

The following is an example of how posi�ve reinforcement can be used in a business se�ng.

Assume praise is a posi�ve reinforcement for a par�cular employee. The employee is o�en

late for work. The manager of the employee decides to praise the employee for showing up on

�me when the employee actually does so. As a result, the employee comes to work on �me

more o�en because the employee likes to be praised. In this example, praise (the s�mulus) is a

posi�ve reinforcement for this employee because the employee arrives at work on �me (the

behavior) more frequently a�er being praised for it.

The use of posi�ve reinforcement is a successful and growing technique used by leaders to

mo�vate and a�ain desired behaviors from subordinates. Organiza�ons including Frito-Lay

and 3M have used posi�ve reinforcement to increase produc�vity. Praise is an inexpensive

way to poten�ally increase performance and employee sa�sfac�on.

Fulfilling the Planning Func�on

Planning is the process of thinking about and organizing the ac�vi�es required to achieve

strategic objec�ves.

Planning involves the maintenance and organiza�onal approach of

achieving strategic objec�ves.

Business plans and marke�ng plans are examples of plans managers

may develop to meet objec�ves.

Strategic planning is an organiza�on’s process of defining its strategy

or direc�on and deciding how to allocate resources to pursue the

strategy.

When pursuing strategic planning, organiza�ons should ask

themselves what they do, for whom, and how they can excel (or

Key Points

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differen�ate from) compe�tors.

Execu�ng the planning func�on requires a comprehensive

understanding (or genera�on of) a vision, mission, set of values, and

general strategy.

Key Terms

strategy—plan of ac�on intended to accomplish a specific goal

alloca�ng—the act of distribu�ng a given set of resources according

to a plan.

forecas�ng—the act of es�ma�ng future outcomes

Planning

Planning is the process of thinking about and organizing the ac�vi�es required to achieve a

desired goal. It involves crea�ng and maintaining a given organiza�onal opera�on. This

thought process is essen�al to refining objec�ves and integra�ng with other plans. Planning

combines forecas�ng of developments with preparing scenarios for how to react to those

developments. It is important to keep in mind that forecas�ng predicts what the future will

look like, whereas planning predicts what the future should look like.

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Research Planning

Planning involves both forecas�ng and prepara�on.

John Fedele/Ge�y Images

Planning is also a management process, concerned with defining goals for a company’s future

direc�on, and determining the missions and resources to achieve those targets. To meet

objec�ves, managers may develop plans—such as business or marke�ng plans—to achieve

specific goals or targets. Planning revolves largely around iden�fying the resources available

for a given project and using them to achieve the best outcomes.

Strategic Planning

Strategic planning is an organiza�on’s process for defining its direc�on and making decisions

about resource alloca�on to pursue its strategy. To determine the direc�on of the

organiza�on, it is necessary to understand the organiza�on’s current posi�on and the possible

avenues for pursuing a par�cular course of ac�on. Generally, strategic planning deals with at

least one of three key ques�ons:

What do we do?

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For whom do we do it?

How do we excel?

The key components of strategic planning include an understanding of the firm’s vision,

mission, values, and strategies. (O�en there is a vision statement as well as a mission

statement.) Following are explana�ons for these four elements:

1. Vision. The vision outlines what the organiza�on wants to be or how it wants the world

in which it operates to be (an “idealized” view of the world). It is a future-focused, long-

term view. It can be emo�ve and a source of inspira�on. For example, a charity working

with the poor might have a vision statement that reads “A World Without Poverty.”

2. Mission. The fundamental purpose of an organiza�on or an enterprise, is succinctly

described in its mission. Why does it exist? What does it do to achieve its vision? For

example, the charity above might state that its mission is “providing jobs for the

homeless and unemployed.”

3. Values. These are beliefs shared among the stakeholders of an organiza�on. Values drive

an organiza�on’s culture and priori�es, and provide a framework for decision making. For

example, “Knowledge and skills are the keys to success,” or “Give a man bread and feed

him for a day, but teach him to farm and feed him for life.” These examples of values

place long-term development and self-sufficiency over immediate gra�fica�on.

4. Strategy. Strategy, narrowly defined, is “the art of the general”—a combina�on of the

ends (goals) for which the firm is striving and the means (policies) by which it is seeking

to get there. A strategy is some�mes called a roadmap—the path chosen to move toward

the end vision. The most important part of implemen�ng the strategy is ensuring the

company is going in the right direc�on, which is toward the end vision.

Tools and Approaches

There are many approaches to strategic planning, but typically one of the following is used:

Situa�on-Target-Proposal. Situa�on: Evaluate the current situa�on and how it came

about. Target: Define goals and/or objec�ves (some�mes called ideal state).

Path/Proposal: Map a possible route to achieve the goals/objec�ves.

Draw-See-Think-Plan. Draw: What is the ideal image or the desired end state? See:

What is today’s situa�on? What is the gap from ideal and why? Think: What specific

ac�ons must be taken to close the gap between today’s situa�on and the ideal state?

Plan: What resources are required to execute the ac�vi�es?

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Among the most useful tools for strategic planning is a SWOT analysis (strengths, weaknesses,

opportuni�es, and threats). The main objec�ve of this tool is to analyze internal strategic

factors (strengths and weaknesses a�ributed to the organiza�on) and external factors beyond

control of the organiza�on, such as opportuni�es and threats.

References

Hariman, R. (1995, October). Poli�cal style: The ar�stry of power. University of Chicago Press.

Salazar, P. (2009). L’Hyperpoli�que. Technologies poli�ques De La Domina�on, Paris.

Reference retrieved from h�ps://en.wikipedia.org/wiki/Entrepreneurial_leadership#cite_note-

20

Licenses and A�ribu�ons

Principles of Management (h�ps://courses.lumenlearning.com/boundless-

management/chapter/principles-of-management/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Leadership vs. Management

Though they have traits in common, leadership and management both have unique

responsibili�es that do not necessarily overlap.

Many view leaders as those who direct the organiza�on through

vision and inspira�on, whereas managers are results-oriented and

more focused on task organiza�on and efficiency.

Managers sustain current systems and processes for accomplishing

work, while leaders challenge the status quo and make change

happen.

Such dis�nc�ons may create a nega�ve concept of managers. Leader

brings to mind heroic figures rallying people together for a cause,

while manager suggests less charisma�c individuals focusing solely

on efficiency.

Key Terms

leadership—a process of social influence in which one person enlists

the aid and support of others in accomplishing a common task

management—the act of ge�ng people together to accomplish

desired goals and objec�ves using available resources efficiently and

effec�vely

Learning Resource

Key Points

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Tasks vs. Vision

The terms management and leadership have been used interchangeably, yet there are clear

similari�es and differences between them. Both terms suggest direc�ng the ac�vi�es of

others. In one defini�on, managers do so by focusing on the organiza�on and performance of

tasks, and by aiming at efficiency, while leaders engage others by inspiring a shared vision and

effec�veness. Managerial work tends to be more transac�onal, emphasizing processes,

coordina�on, and mo�va�on, while leadership has an emo�onal appeal, is based on

rela�onships with followers, and seeks to transform.

One tradi�onal way of understanding the differences between managers and leaders is that

people manage things but lead other people. More concretely, managers administer and

maintain the systems and processes by which work gets done. This includes planning,

organizing, staffing, leading, direc�ng, and controlling the ac�vi�es of individuals, teams, or

organiza�ons to accomplish a goal. Basically, managers are results-oriented problem-solvers

responsible for day-to-day func�ons. They focus on the immediate, short-term needs of an

organiza�on.

In contrast, leaders take the long-term view and are responsible for where a team or

organiza�on is heading and what it achieves. They challenge the status quo, make change

happen, and work to develop the capabili�es of people to contribute to achieving their shared

goals. Addi�onally, leaders act as figureheads for their teams and organiza�ons by

represen�ng their vision and values to outsiders. This defini�on of leadership may create a

nega�ve bias against managers as less noble or less important: Leader suggests a heroic figure,

rallying people to unite under a common cause, while manager calls to mind less charisma�c

individuals who are focused solely on ge�ng things done.

Licenses and A�ribu�ons

Defining Leadership (h�ps://courses.lumenlearning.com/boundless-

management/chapter/defining-leadership/) from Boundless Management by Lumen Learning,

originally published by Boundless.com, is available under a Crea�ve Commons A�ribu�on-

ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/) license. UMUC

has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Adap�ng and Innova�ng

Benefits of Innova�on

Innova�on may be linked to posi�ve changes in efficiency, produc�vity, quality,

compe��veness, and market share, among other factors.

Innova�on is the development of customer value through solu�ons

that meet new needs, unar�culated needs, or exis�ng market needs

in unique ways.

Innova�ve employees increase produc�vity by crea�ng and

execu�ng new processes that may increase compe��ve advantage

and provide meaningful differen�a�on.

Managers who promote an innova�ve environment can see value

through increased employee mo�va�on, crea�vity, and autonomy;

stronger teams; and strategic recommenda�ons from the bo�om up.

Clarity about and understanding of roles, increased responsibili�es,

strategic partnerships, senior management support, organiza�onal

restructuring, and investment in human resources can all enrich

organiza�onal culture and innova�on.

Key Terms

efficiency—the extent to which a resource, such as electricity, is used

for the intended purpose; the ra�o of useful work to energy

expended

Learning Resource

Key Points

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produc�vity—the rate at which goods or services are produced by a

standard popula�on of workers

innova�on—change in customs; something new and contrary to

established customs, manners, or rites

Defining Innova�on

Innova�on is the development of customer value through solu�ons that meet new, undefined,

or exis�ng market needs in unique ways. Solu�ons may include new or more effec�ve

products, processes, services, technologies, or ideas that are more readily available to markets,

governments, and society.

Innova�on is some�mes confused with inven�on or improvement. They are, however,

different. Innova�on is coming up with a be�er idea or method, or integra�ng a new approach

within a contextual model, while inven�on is about crea�ng something new. Innova�on refers

to finding new ways to do things, while improvement is about doing the same thing more

effec�vely.

Organiza�onal Benefits of Innova�on

From an organiza�onal perspec�ve, managers encourage innova�on because of the value it

can capture. Innova�ve employees increase produc�vity by crea�ng and execu�ng new

processes, which in turn may increase compe��ve advantage and provide meaningful

differen�a�on. Innova�ve organiza�ons are inherently more adaptable to the external

environment; this allows them to react faster and more effec�vely to avoid risk and capture

opportuni�es.

From a managerial perspec�ve, innova�ve employees tend to be more mo�vated and involved

in the organiza�on. Empowering employees to innovate and improve their work processes

provides a sense of autonomy that boosts job sa�sfac�on. From a broader perspec�ve,

empowering employees to engage in organiza�on-wide innova�on creates a strong sense of

teamwork and community, and ensures that employees are ac�vely aware of and invested in

organiza�onal objec�ves and strategy. Managers who promote an innova�ve environment can

see value through increased employee mo�va�on, crea�vity, and autonomy; stronger teams;

and strategic recommenda�ons from the bo�om up.

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Managers can accomplish this by being clear about employees’ roles and responsibili�es and

providing top-down support, while allowing individuals freedom to pursue their assignments

as they see fit. Suppor�ng the HR and IT departments so that they can provide training and

tools for higher employee efficiency can contribute substan�ally to a culture of internal

innova�on. This requires open-minded and mo�va�onal leaders in managerial posi�ons. They

must be able to steer employee efforts without diminishing employee crea�vity.

Characteris�cs of Innova�ve Organiza�ons

According to recent research, companies that make a commitment to innova�on are

excep�onal performers in their respec�ve industries.

Being recep�ve to new business ideas means being recep�ve to the

idea that mistakes are a necessary part of the process.

Everyone in the business needs to keep an open mind and develop

the capacity to look at things with fresh eyes.

It is likely that some successful innova�ons will result from chance

discoveries.

Managers must understand that employees too mired in rou�ne

work and too cri�cized for trying new methods will inherently fail to

create innova�ons that may drive organiza�onal growth.

Many business experts argue that companies that make a substan�al commitment to

innova�on and entrench it deeply throughout their culture will perform excep�onally well. But

how can innova�on be facilitated within the organiza�onal framework? The following are

some examples of characteris�cs that lead to successful innova�on.

Accept Mistakes as Part of the Process

A 3M researcher was looking for ways to improve the adhesives used in tape. At first, it

seemed as though his work was a failure. However, the adhesive he discovered in this process

was later used on Post-it notes—a great innova�on and business success for the company.

Key Points

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Being recep�ve to new business ideas means being recep�ve to mistakes as a necessary, and

some�mes even crucial, part of the process.

Keep an Open Mind and Think Laterally

Possibili�es for innova�on exist everywhere. To realize them, everyone in the business needs

to keep an open mind and develop the capacity to look at things with fresh eyes.

A drama�c example of company transforma�on through lateral thinking is the Finnish

company Nokia. Its core business was originally wood pulp and logging. But when communism

collapsed, it opened new markets for Russia’s seemingly limitless supply of wood forests,

making it more difficult for Nokia to compete. Nokia’s management concluded that the only

real compe��ve advantage they retained was their very efficient communica�ons system

developed in the 1970s to help managers keep in touch with remote logging opera�ons. That

single realiza�on transformed the company into one of the world’s most successful vendors of

communica�ons equipment.

Nokia successfully transformed itself from a logging company to an electronic-

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communica�ons company through innova�on.

Managerial Implica�ons

As is usually the case, these principles are easier said than done. Managers must carefully

consider what type of work environment they project for their subordinates. Managers must

understand that employees too mired in rou�ne work and who are cri�cized for trying new

methods will inherently fail to create innova�ons that may drive organiza�onal growth. There

is therefore a balancing act between enabling employees to try new things and take risks vs.

ensuring that tasks are completed on �me with reasonable success.

Types of Innova�on

There are three main modes of innova�on: entrepreneurial value-based, technology-based,

and strategic-reflexive.

The entrepreneurial method of innova�on is one in which change is

ini�ated by an individual’s ac�ons and drive to create a business

venture of adapta�on.

technology-based func�onal innova�on occurs when the

development of new technology drives innova�on.

The strategic-reflexive mode describes innova�on that springs from

individuals’ interac�ons with their organiza�on’s common values and

goals.

Other types of innova�on include: incremental, architectural,

genera�onal, manufacturing, financial, and cumula�ve.

In business and economics, innova�on is the catalyst to growth. Fuglsang and Sundbo (2005)

suggest that there are three modes of innova�on. The first is an entrepreneurial value-based

method where change is ini�ated by an individual’s ac�ons. The second is a technology-based

func�onal mode in which the development of new technology drives innova�on. The third is a

Key Points

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strategic-reflexive mode in which innova�on results from individuals’ interac�ons with their

organiza�on’s set of common values and goals. The following graphic provides an example of

the innova�on process.

Innova�on process: Innova�on involves con�nuous improvement throughout phases of a

development program. Phases can be itera�ve and recursive (meaning that they do not

proceed linearly from one to the next; rather, earlier phases can be returned to for further

improvement as needed). Such phases include market analysis and consumer research, which

progress to design and prototyping, then naming and packaging design, and ul�mately retail

and produc�on support.

Entrepreneurial Innova�on

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The innova�on dimension of entrepreneurship refers to the pursuit of crea�ve or novel

solu�ons to challenges confron�ng a firm. These challenges can include developing new

products and services or new administra�ve techniques and technologies for performing

organiza�onal func�ons (e.g., produc�on, marke�ng, and sales and distribu�on).

Technological Innova�on

Technological innova�on takes place when companies try to gain a compe��ve advantage

either by reducing costs or introducing a new technology. Technological innova�on has been a

hot topic in recent years, par�cularly when coupled with the concept of disrup�ve innova�on.

Disrup�ve innova�on is usually a technological advancement that renders previous

products/services (or even en�re industries) irrelevant. For example, the smartphone disrupted

landlines, Ne�lix made Blockbuster obsolete, and MP3s have marginalized CD players.

Strategic Innova�on

The strategic-reflexive mode of innova�on is the most effec�ve mode for change and

innova�on. While technological innova�on is clear and easy to define, strategic innova�on is

inherently intangible and organiza�onal in nature. Strategic innova�on pertains to processes:

how things are done as opposed to what the end product is. Strategic changes can be

disrup�ve but are more o�en incremental. Incremental innova�on is the idea that small

changes, when effected in large volume, can rapidly transform the broader organiza�on.

Walmart’s “Hub and Spoke” distribu�on model is a classic example of strategic innova�on.

Walmart succeeded thanks to process efficiency enabled via innova�ve opera�onal paradigms

and distribu�on strategies. By u�lizing a maximum efficiency warehousing and distribu�on

model, refined over and over again incrementally for improvement, Walmart has sustained a

compe��ve advantage for decades.

Other Applica�ons of Innova�on

Genera�onal innova�on involves changes in subsystems linked together with exis�ng

linking mechanisms.

Architectural innova�on involves changes in linkages between exis�ng subsystems.

Incremental innova�ons improve price/performance advancement at a rate consistent

with the exis�ng technical trajectory. Radical innova�ons advance the price/performance

fron�er by much more than the exis�ng rate of progress.

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Manufacturing process innova�on refers to all the ac�vi�es required to invent and

implement a new manufacturing process.

Cumula�ve innova�on is any instance of something new being created from more than

one source. Remixing music is a direct example of cumula�ve innova�on.

Financial innova�on has brought many new financial instruments with payoffs or values

depending on the prices of stocks. Examples include exchange-traded funds (ETFs) and

equity swaps.

Speed of Innova�on

Companies compete to adapt their products and services to incorporate new innova�ons first.

Speed of innova�on can pose a major challenge for organiza�ons

responding to external change.

Profits depend on speed of innova�on and the ability to a�ract

customers. Big corpora�ons used to dominate, but now industry

leaders are o�en small, highly flexible groups that come up with

great ideas, build trustworthy branding for themselves and their

products, and market them effec�vely.

A first-mover in a given innova�on captures the obvious advantage

of tapping into a new market before the compe��on. This can also

allow the first-mover to capture the new technology for its own

brand.

First-movers encounter high fiscal risks in integra�ng a new product

or service into their distribu�on, and failure o�en means sunk costs.

Latecomers to the game can simply observe the success or failure of

other compe�tors and make a more informed (and less risky)

decision.

Key Term

cannibaliza�on—the reduc�on of sales or market share for one of

your own products by introducing another

Key Points

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The best ideas should be implemented as quickly as possible—not just by the idea generator

but also by others who have a different viewpoint. It is impera�ve that the idea is honed and

refined while it is s�ll fresh. For example, an idea for a new product might start out as a crude

model built from polystyrene, foam, or cardboard that will evolve quickly into a more

professional prototype.

Innova�on involves con�nuous improvement throughout phases of a development program.

Phases can be itera�ve and recursive (meaning that they do not proceed linearly from one to

the next; rather, earlier phases can be returned to for further improvement as needed). Phases

include market analysis and consumer research, which progress to design and prototyping,

then naming and packaging design, and ul�mately retail and produc�on support.

Robert Reich observes that profits in the old economy came from economies of scale, i.e., long

runs of almost iden�cal products. Thus, we had factories, assembly lines, and industries.

Today, profits come from speed of innova�on and the ability to a�ract and keep customers.

Therefore, while the big winners in the old economy were big corpora�ons, today’s big

winners are o�en small, highly flexible groups that devise great ideas, develop trustworthy

branding for themselves and their products, and market these effec�vely. The winning

compe�tors are those first to provide lower prices and higher value through intermediaries of

trustworthy brands. To keep the lead, however, these companies have to keep innova�ng lest

they fall behind the compe��on.

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The Benefit of Moving First

Speed of innova�on poses a major challenge for organiza�ons responding to external change.

A high rate of change can be seen in the shortening of product life cycles, increased

technological change, increased speed of innova�on, and increased speed of diffusion of

innova�ons. These are key challenges for organiza�ons, as the profit genera�on of new ideas

must fit into a slimmer chronological window—thus underlining the great value of being a first-

mover.

A first-mover in a given innova�on captures the obvious advantage of tapping into a new

market before its compe�tors. This also some�mes allows the first mover to iden�fy its brand

with the new technology (i.e., saying you’re going to “Google” something as shorthand

meaning search for it online, or calling any MP3 player an iPod). These branding hurdles must

be tackled by any compe�tor following in the footsteps of the first-mover.

However, speed is not everything. First-movers encounter serious disadvantages, the most

notable being freeloaders. First-movers also encounter high financial risks in integra�ng a new

product or services into their distribu�on, and failure o�en means sunk costs. Latecomers to

the game can simply observe the success or failure of other compe�tors and make more

informed (and less risky) decisions about entering the market segment. Similarly, first-movers

must carefully consider cannibaliza�on—where their new innova�ve products steal sales from

their older products s�ll on store shelves. Speedy innova�on and moving first requires great

foresight, planning, and managerial skill to execute effec�vely and minimize risks.

Sustainability Innova�on

Sustainability innova�on combines sustainability (endurance through renewal, maintenance,

and sustenance) with innova�on.

Sustainopreneurship is using crea�ve organizing to solve problems

related to sustainability and in turn create social and environmental

sustainability as a strategic objec�ve and purpose.

Solving sustainability-related problems is the be-all and end-all of

sustainability entrepreneurship.

Key Points

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Passively heated houses, solar cells, organic food, fair trade products,

hybrid cars, and car sharing are all examples of sustainability

innova�ons.

Key Term

sustainability—configuring human ac�vity so that socie�es are able

to meet current needs while preserving biodiversity and natural

ecosystems for future genera�ons

Sustainability is the capacity to endure through renewal, maintenance, and sustenance (or

nourishment), which is different than durability (the capacity to endure through resistance to

change). Innova�on is the crea�on of new value through the use of solu�ons that meet new,

previously unknown, or exis�ng needs in new ways. Innova�on should be pursued with

sustainability in mind as a cri�cal strategic objec�ve, as the integra�on of new business ideas

with the broader community and environment is central to long-term success.

Sustainability Entrepreneurship

Sustainopreneurship is using crea�ve business organizing to solve problems related to

sustainability to create social and environmental sustainability as a strategic objec�ve and

purpose, with an understanding that markets are embedded as part of the socio-sphere that is

part of the biosphere. It is “business with a cause,” where the world’s problems are turned into

business opportuni�es for deploying sustainability innova�ons. Sustainopreneurship is

entrepreneurship and innova�on for sustainability.

This defini�on has three dis�nguishing dimensions. The first is oriented toward why, or a

company’s purpose and mo�ve in adop�ng sustainable entrepreneurship. The second and

third reflect how the process is carried out.

Entrepreneurship consciously sets out to find or create innova�ons to solve

sustainability-related problems.

Entrepreneurship moves solu�ons to market through crea�ve organizing.

Entrepreneurship adds sustainability value while respec�ng the systems which support

life.

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Solving sustainability-related problems from the organiza�onal framework is the be-all and

end-all of sustainability entrepreneurship. This means that all three dimensions are

simultaneously present in the process.

Example

Sustainability is the core opera�ng mission and vision of Interface Global, which

produces modular carpe�ng. Through greening their supply chain, minimizing water use,

cu�ng electric costs, reducing fuel costs through be�er distribu�on, and a number of

other innova�ve process improvements, the company produces high quality carpets at a

lower cost with a smaller environmental footprint. The company created a sustainable

business strategy through innova�ve thinking.

Social Innova�on

Social innova�on refers to new strategies, concepts, ideas, and organiza�ons that meet

societal needs.

Social innova�on can refer to social processes of innova�on, such as

open-source methods and techniques.

Social innova�on can also refer to innova�ons that have a social

purpose, like microcredit or distance learning. It can be related to

social entrepreneurship.

Social innova�on can take place within the government, for-profit,

and nonprofit sectors, or in the spaces between them.

Key Terms

social—of or rela�ng to society

social capital—the value created by interpersonal rela�onships with

expected returns in the marketplace

Key Points

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Social innova�on refers to new strategies, concepts, ideas, and organiza�ons that extend and

strengthen civil society or meet societal needs of all kinds—from working condi�ons and

educa�on to community development and health.

Organiza�ons, both for for-profit and nonprofit, benefit enormously from incorpora�ng social

innova�on into their opera�ons. Giving back to the community and empowering the

individuals you work with and sell to (i.e., stakeholders) improves employee morale, grows

wealth for poten�al customers, builds a strong brand, and underlines social responsibility and

high ethical standards as central to the organiza�onal character.

Health Fair in India

A health fair conducted through a partnership of the Max India Founda�on and the SOIL social

innova�on program

The term social innova�on has overlapping meanings. Some�mes it refers to social processes

of innova�on like open-source methods and techniques. Other �mes it refers to innova�ons

that have a social purpose, like microcredit or distance learning. The concept can also be

related to social entrepreneurship (entrepreneurship is not necessarily innova�ve, but it can be

a means of innova�on). On occasion, it also overlaps with innova�on in public policy and

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governance. Social innova�on can take place within the government sector, the for-profit

sector, the nonprofit sector, or in the spaces between them. Research has focused on the

types of pla�orms needed to facilitate collabora�ve cross-sector social innova�on.

The Process of Social Innova�on

Social innova�on is o�en an effort of mental crea�vity that involves fluency and flexibility

across a wide range of disciplines. The act of social innova�on in a sector encompasses diverse

disciplines within society. The social innova�on theory of connected difference emphasizes

three key dimensions of social innova�on:

It usually produces new combina�ons or hybrids of exis�ng elements, rather than

something completely new.

It cuts across organiza�onal or disciplinary boundaries.

It creates compelling new rela�onships between previously separate individuals and

groups. Social innova�on is currently gaining visibility within academia.

Examples of Social Innova�on

There are many examples of social innova�on making a meaningful difference across the globe

—from huge organiza�ons like the Bill and Melinda Gates Founda�on funding mul�na�onal

ini�a�ves to small groups of community leaders collec�ng money to help buy new high school

textbooks. Specific examples include the following:

The University of Chicago sought to develop social innova�ons that would address and

ameliorate the immense problems caused by poverty in a largely immigrant city around

the turn of the twen�eth century.

Prominent social innovators include Bangladeshi Muhammad Yunus, the founder of

Grameen Bank, who pioneered the concept of microcredit for suppor�ng innovators in

mul�ple developing countries in Asia, Africa, and La�n America.

Stephen Goldsmith, former Indianapolis mayor, engaged the private sector in providing

many city services.

Commercializing Innova�ve Products

Commercializa�on is the process or cycle of introducing a new product or produc�on method

into the market.

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The launch of a new product is the final stage of new product

development. This is when the most money is spent for adver�sing,

sales promo�on, and other marke�ng efforts.

It is important to emphasize that the commercializa�on strategy and

feasibility should have been considered and approved long before

the actual execu�on of commercializa�on—as the �me, efforts, and

development costs have already largely been incurred.

Organiza�ons must consider who they are selling to and where they

are selling when determining the most effec�ve process for

commercializa�on.

The primary target consumer group includes innovators, early

adopters, heavy users, and opinion leaders. Their buy-in will ensure

adop�on by other consumers in the marketplace during the product

growth period.

Key Terms

commercializa�on—the act of posi�oning a product to make a profit

early adopter—a person who begins using a product or service at or

around the �me it becomes available

Commercializa�on is o�en confused with sales, marke�ng, or business development. In the

context of innova�on, commercializa�on is the process of introducing a new product or

service to the public market. Innova�ons are defined as new products or services that improve

upon their predecessors, and the process of integra�ng them into the current market is a

cri�cal component of successfully bringing them to market. Because of poor planning, great

innova�ons are not always brought to market due to a lack of feasibility or poor planning.

Long-term planning is crucial in the commercializa�on process because this is when the most

money will be spent—on adver�sing, sales promo�ons, and other marke�ng efforts a�er the

launch of a new product.

The Commercializa�on Process

Key Points

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The commercializa�on process has three key aspects:

carefully selec�ng, based upon comprehensive market research, which products can be

sustained financially in which markets for long-term success

planning for various phases in the commercializa�on process, and considering

geographic distribu�on, demographics, and other relevant factors

iden�fying and involving key stakeholders, including consumers, early in the process

Key Strategic Ques�ons

When bringing a product to market, a number of strategic ques�ons must be answered long

before substan�al costs are incurred for commercializa�on. These ques�ons are simple to ask

but complex to answer, and business analysts and market researchers will spend a

considerable amount of �me approaching them via research models and careful financial

considera�on.

When? The company has to �me product introduc�on perfectly. If there is a risk of

cannibalizing the sales of the company’s other products, if the product could benefit

from further development, or if the economy is forecasted to improve in the near future,

the product’s launch should be delayed. Similarly, many products (e.g., in the fashion

industry) are seasonal, so they must be �med appropriately to maximize revenue.

Where? The company has to decide where to launch its products. This can be in a single

loca�on, in one or several larger regions, or in a na�onal or interna�onal market. The

decision will be strongly influenced by the company’s resources: Larger companies can

reach broader geographic audiences. It is important to keep in mind where the early

adopters will be and where compe��ve gaps may exist. In the global marketplace, this

ques�on is increasingly complex.

To whom? The primary target consumer group will have been iden�fied earlier through

research and test marke�ng. This group will include innovators, early adopters, heavy

users, and opinion leaders. Their buy-in will ensure adop�on by other consumers in the

marketplace during the product growth period.

How? The company has to decide on an ac�on plan for introducing the product,that will

apply the answers to the previous three ques�ons. It has to develop a viable marke�ng

mix and create a marke�ng budget.

While these ques�ons are key considera�ons in commercializa�on, they should have been

answered long before the commercializa�on stage. A�er all, if the need is not sufficiently

widespread or the market not sufficiently developed, there is li�le reason to pursue an

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innova�on in the first place.

Fostering Innova�on

Offering employees challenges, freedom, resources, encouragement, and support can help

them to innovate.

People perform best when they are driven by inspira�on and are

encouraged to push their boundaries and think outside the box.

Teamwork enhances people’s strengths and lessens their individual

weaknesses.

One of the most powerful tools for promo�ng employee crea�vity

and innova�on is recogni�on.

Ul�mately, in developing a culture of innova�on you want employees

to feel comfortable experimen�ng and offering sugges�ons without

fear of cri�cism or punishment for mistakes.

Strategies capable of producing innova�on require resources and energy. Therefore, a

business plan should include a discussion of the organiza�onal structures and prac�ces that

will be put in place to encourage and support innova�on. Amabile (1998) points to six general

categories of management prac�ce that affect crea�vity:

challenge

freedom

resources

work groups

encouragement from supervisors

organiza�onal support

Create a Culture of Innova�on

Key Points

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You will likely find that you need to generate hundreds of ideas to find ten good ones that will

create value for your organiza�on. This is part of the crea�ve brainstorming process, and it

should be encouraged. It is every staff member’s responsibility to generate ideas, not just top

leadership's. Following are sugges�ons to encourage the flow of ideas:

Encourage Crea�vity

Encouraging crea�vity helps keep staff happy. If they think something is important and has the

poten�al to create a financial payoff for the company, let them follow their idea. People

perform best when they are driven by inspira�on, and encouraged to push boundaries and

think outside the box. Micromanagement discourages crea�vity, while independence

encourages employees to own their innova�ve thinking and pursue the ideas they are

passionate about. If management fosters a crea�ve and open environment, innova�on will

happen naturally.

Encourage Par�cipa�on

Teamwork enhances people’s strengths and mi�gates individual weaknesses. Effec�ve

teamwork promotes awareness that it is in everyone’s best interests to keep the business

growing and improving. Crea�ng a par�cipa�on-based environment means crea�ng smart

teams, encouraging open dialogue, and minimizing authority. Cri�cism is produc�ve and

should be encouraged, but it must be used construc�vely.

Provide Recogni�on and Rewards

One of the most powerful tools for promo�ng employee crea�vity and innova�on is

recogni�on. People want to be recognized and rewarded for their ideas and ini�a�ves, and it is

a prac�ce that can have tremendous payoff for the organiza�on. Some�mes the recogni�on

required may be as simple as men�oning a person’s effort in a newsle�er. If a staff member

comes forward with a crea�ve idea, recognize them in the company newsle�er or at a staff

mee�ng even if their idea can’t be implemented immediately. Make it clear that compensa�on

and promo�ons are �ed to innova�ve thinking.

Enable Employee Innova�on

You may have an innova�ve culture in your organiza�on, but you also need to familiarize staff

with some of the hallmarks of con�nuing innova�on. For example, you could educate

employees at regular training sessions on topics such as crea�vity, entrepreneurship, and

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teamwork. Each session might conclude by assigning an exercise to be performed over a few

weeks that will consolidate lessons learned. Your aim here is to give employees a taste of

innova�on so they will embrace the process.

Other Mo�vators

Profit-sharing and bonuses

Days off

Extra vaca�on �me

Encourage employees to take advantage of coffee breaks, lunch breaks, and taxi rides. O�en

great ideas that can lead to innova�on will happen where we least expect them. If it’s hard to

get staff together for common informal breaks, consider taking them out for an informal meal

where you can encourage crea�ve discussion about work. Also be sure to encourage laughter

at mee�ngs because laughter is an effec�ve measure of how comfortable people feel about

expressing themselves.

References

Amabile, T. M. (1998, September–October). How to kill crea�vity. Harvard Business Review,

77–87.

Fuglsang, L., & Sundbo, J. (2005). The organiza�onal innova�on system: Three modes. Journal

of Change Management, 5, 3, 329–344. doi: 10.1080/14697010500258056

Licenses and A�ribu�ons

Adap�ng and Innova�ng (h�ps://courses.lumenlearning.com/boundless-

management/chapter/adap�ng-and-innova�ng/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Technology and Innova�on

A Powerful Driver and an Enabler

Technology is a powerful driver of both the evolu�on and prolifera�on of innova�on.

Innova�on is a primary source of compe��ve advantage for

companies in essen�ally all industries and environments. It drives

efficiency, produc�vity, and differen�a�on to fill a variety of needs.

Technology builds upon itself, enabling innova�ve approaches within

the evolu�on of technology.

Technological hubs such as Silicon Valley provide powerful resources

that entrepreneurs and businesses can leverage in pursuing

innova�on.

Technological advances, par�cularly in communica�on and

transporta�on, further innova�on.

India, China, and the United States are all strong representa�ons of

how embracing technology leads to innova�on, which in turn leads

to economic growth.

Key Terms

innova�on—the introduc�on of something new; the development of

an original idea

scalable—capable of expansion

Learning Resource

Key Points

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Innova�on is a primary source of compe��ve advantage for companies in essen�ally all

industries and environments, and drives forward efficiency, higher produc�vity, and

differen�a�on to fill a wide variety of needs. One par�cular perspec�ve on economics isolates

innova�on as a core driving force, alongside knowledge, technology, and entrepreneurship.

This theory of innova�on economics notes that the neoclassical approach (monetary

accumula�on driving growth) overlooks the cri�cal aspect of appropriate knowledge and

technological capabili�es.

Scaling Technology

Technology is a powerful driving force in innova�ve capacity, par�cularly as it pertains to both

the evolu�on of innova�ons and the way they proliferate. Technology is innately scalable,

demonstra�ng a consistent trend toward new innova�ons as a result of improving upon

current ones. During a product's life cycle economic returns go through a steep exponen�al

growth phase and an eventual evening out, which mo�vates businesses to leverage

technology to produce new innova�ons.

Technology Innova�on Trajectory

Note the overlapping trajectories of technologies: While an

emerging product may start lower on the graph, its steep

upward trajectory eventually overtakes current technology,

domina�ng the market as both the technology and product

produc�on are refined and improved.

Technology Hubs

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The prolifera�on of innova�on pertains to two important factors of technology driving

innova�on: the crea�on of geographic hubs for technology, and empowerment of knowledge

exchange through communica�on and transporta�on. Places like California’s Silicon Valley and

Baden-Wür�emberg, Germany, are examples of the value of technological hubs. The close

proximity of various resources and collaborators in each hub s�mulates a higher degree of

innova�ve capacity.

Communica�on and cumula�ve knowledge in these technology hubs allow for innova�ons to

spread via technology, and be adopted across the globe quicky. This spread of ideas can be

built upon quickly and universally, crea�ng the ability for innova�on to be further expanded

globally. Collabora�on on a global scale as a result of technological progress has allowed

exponen�al levels of innova�on.

Correla�ons Between Technology, Innova�on, and Growth

Empirical evidence generates a posi�ve correla�on between technological innova�on and

economic performance. Between 1981 and 2004, India and China developed a Na�onal

Innova�on System designed to invest heavily in research and development (R&D) with a

par�cular focus on patents, high-tech, and service exports. During this �me frame, both

countries experienced extremely high levels of GDP growth by linking the science sector with

the business sector, impor�ng technology, and crea�ng incen�ves for innova�on.

Addi�onally, the Council on Foreign Rela�ons asserted that the United States’ large share of

the global market in the 1970s was likely a result of its aggressive investment in new

technologies. These technological innova�ons are hypothesized to be a central force driving

steady US economic expansion, allowing it to maintain its place as the world’s largest

economy.

The Technology Life Cycle

The technology life cycle describes the costs and profits of a product from technological

development, to market maturity, to decline.

The technology life cycle seeks to predict the adop�on, acceptance,

and eventual decline of new technological innova�ons.

Key Points

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Understanding and effec�vely es�ma�ng technology life cycle allows

for a more accurate reading of whether, and when, research and

development costs will be offset by profits.

The technology life cycle has four dis�nct stages: research and

development, ascent, maturity, and decline.

The adop�on of these technologies also has a life cycle with five

chronological demographics: innovators, early adopters, early

majority, late majority, and laggards.

By leveraging these models, businesses and ins�tu�ons can exercise

foresight in ascertaining return on investment as their technologies

mature.

Key Terms

foresight—the ability to accurately es�mate future outcomes

demographic—a characteris�c that iden�fies popula�ons within a

sta�s�cal framework

The technology life cycle (TLC) describes the costs and profits of a product, from the

technological development phase, to market maturity, to eventual decline. R&D costs must be

offset by profits once a product comes to market. Varying product lifespans mean that

businesses must understand and accurately project returns on their R&D investments based

on poten�al product longevity in the market.

Due to rapidly increasing rates of innova�on, products such as electronics and

pharmaceu�cals, in par�cular, are vulnerable to shorter life cycles (when considered against

such benchmarks as steel or paper). Thus, TLC is focused primarily on the �me and cost of

development as it relates to the projected profits. TLC can be described as having four dis�nct

stages:

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This graph illustrates the stages in the technological life cycle.

Research and development. During this stage, risks are taken to invest in technological

innova�ons. By strategically direc�ng R&D toward the most promising projects,

companies and research ins�tu�ons slowly work their way toward beta versions of new

technologies.

Ascent. This phase covers the �me frame from product inven�on to the point at which

out-of-pocket costs are fully recovered. At that point the goal is to see to the rapid

growth and distribu�on of the inven�on and leverage the compe��ve advantage of

having the newest and most effec�ve product.

Maturity. As a new innova�on becomes accepted by the general popula�on and

compe�tors enter the market, supply begins to outstrip demand. During this stage,

returns begin to slow as the concept becomes normalized.

Decline. The final phase is when the u�lity and poten�al value to be captured in

producing and selling the product begins dipping. This decline eventually reaches the

point of a zero-sum game, where margins are no longer procured.

Product development and capitalizing on the new inven�on covers the business side of these

R&D investments in technology. The other important considera�on is the differen�a�on in

consumer adop�on of new technological innova�ons. These have also been distributed into

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phases which effec�vely summarize the demographic groups presented during each stage of

TLC:

Technology Adop�on Life Cycle

This adop�on chart highlights the way in which consumers embrace new products and

services.

Innovators. These are risk-oriented, leading-edge minded individuals who are extremely

interested in technological developments (o�en within a par�cular industry). Innovators

are a frac�onal segment of the overall consumer popula�on.

Early adopters. A larger but s�ll rela�vely small demographic, these individuals are

generally risk-oriented and highly adaptable to new technology. Early adopters follow

innovators in embracing new products. They tend to be young and well-educated.

Early majority. Much larger and more careful than the previous two groups, the early

majority is open to new ideas but generally waits to see how they are received before

inves�ng.

Late majority. Slightly conserva�ve and risk-averse, the late majority is a large group of

poten�al customers who need convincing before inves�ng in something new.

Laggards. Extremely frugal, conserva�ve, and o�en technology-averse, laggards are a

small popula�on of usually older and uneducated individuals who avoid risks and only

invest in new ideas once they are extremely well-established.

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Taking these two models into considera�on, a business unit with a new product or service

must consider the scale of investment in R&D, the projected life cycle the technology will

likely maintain, and how customers will adopt the product. By leveraging these models,

businesses and ins�tu�ons can ascertain the returns on investment as their technologies

mature.

Assessing an Organiza�on’s Technological Needs

Assessing the internal technological assets and future needs of an organiza�on prepares

management for successful technology integra�on.

Companies must priori�ze the ability to assess their technological

needs, par�cularly those related to achieving op�mal efficiency and

produc�vity.

Companies looking to stay ahead of the compe��on should gather

data internally and externally to facilitate forecas�ng and help cra�

technology implementa�on strategies.

The assessment process requires that companies work internally to

isolate their technological strengths and weaknesses.

Key Terms

introspec�on—self-assessment, or an individual's or company's

looking inward to measure strengths and weaknesses

forecas�ng—es�ma�ng how a condi�on will be in the future

produc�vity—the rate at which products and services are produced

rela�ve to a par�cular workforce

Remaining compe��ve and technologically vigilant are virtually synonymous in business

development today. Companies must priori�ze their ability to assess their technological needs,

par�cularly as they relate to achieving op�mal efficiency and produc�vity. The following

concepts are relevant to this needs assessment:

Key Points

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technology strategy—iden�fying the logic or role of technology within the company

technology forecas�ng—iden�fying applicable technologies for the company, poten�ally

through scou�ng

technology roadmapping—ascertaining the trajectories of technological advancement,

and applying business or market needs to the assessment

technology por�olios—accumula�on of all technologies relevant to products or

opera�ons to determine which are ideal for internal implementa�on

All four concepts involve informa�on gathering as well as introspec�on into business

opera�ons and processes. All four can be improved upon through technological advances.

Integrated planning in pursuit of op�miza�on through new technologies keeps efficiency at or

above compe��ve levels. This internal technology assessment also includes no�ng when and

whether it is necessary to construct employee training programs for new technology.

Innova�on Adop�on Life Cycle

As successive groups of consumers adopt new technology a bell curve emerges: This is called

the innova�on adop�on life cycle. It is represented by the blue line on the graph. The

percentages on the horizontal axis indicate the size of the popula�ons (rela�ve to the en�re

consumer group for a given good) in each segment. By keeping pace with technological

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innova�on, and offering products early enough to capture the majority of the market,

businesses can gain compe��ve advantage. If a business is too late to enter a newly emerged

technological market, market share has o�en been claimed by others, as the yellow line on the

graph indicates.

Understanding Current Trends in Technology

Understanding current technologies and trends allows a company to align and synchronize

opera�ons to op�mize returns on innova�on.

Business technology management (BTM) provides a bridge between

previously established tools and standards within a business

environment and the newer, more opera�onally efficient tools and

standards technological progress provides.

Aligning technologies with current business ini�a�ves and strategies

is the most basic way for a business to remain compe��ve in the

current technological climate.

Companies that can improve on alignment to synchronize their

internal technological landscape (researching and developing

innova�ons in-house) can achieve foresight and long-term benefits

by forecas�ng future technological needs.

BTM has four dimensions: process, organiza�on, informa�on, and

technology.

Effec�vely employing these four dimensions of BTM provides

companies the poten�al to project technological trends, and

synchronize them with their strategies.

Key Terms

alignment—the process of adjus�ng a mechanism (or business) so

that its parts act in concert

synchroniza�on—the process of aligning all inputs to op�mize

output

Key Points

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SBUs—strategic business units, or separate elements of a company

organized by similar processes and objec�ves

Businesses have the ongoing responsibility of keeping up with evolving technology trends to

stay compe��ve. Trends in technology extend out like the branches of a tree: Each innova�on

creates the possibility for more new ones. The field of business technology management

(BTM) arose to provide businesses with the best approaches for assessing and implemen�ng

technological advances in their strategies.

BTM

Alignment

BTM provides a bridge between previously established tools and standards within a business

environment and newer, more opera�onally efficient tools and standards in technology. BTM

does this by crea�ng a set of principles and guidelines for companies to follow as they pursue

alignment. Alignment, in this respect, can be defined as how an ins�tu�on’s technology

supports and enables technology, while avoiding constraints related to company strategies,

objec�ves, and compe��on. When companies accomplish this in any given technological

environment, they have a�ained BTM maturity within a par�cular �me frame and industry.

Synchroniza�on

Alignment is only the first step. The next step is synchroniza�on. Like alignment,

synchroniza�on enables execu�on, but it also helps companies develop the capacity to

an�cipate and adapt future business models and strategies. This is generally accomplished by

inves�ng in R&D and staying ahead of the standard technologies by an�cipa�ng or even

innova�ng past them. This business technology leadership role is long-term oriented and very

effec�ve in maintaining compe��ve advantages in a given industry, but it is par�cularly

important for industries in the tech sectors.

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R&D Cycle

The cycle of research and development moves through theorizing, to hypothesizing, design,

implementa�on, scale-up and study, and back to theorizing to begin the cycle again.

Companies use four specific dimensions of BTM to achieve understanding of current

technologies and trends:

Process. Companies must execute a set of fluid and repeatable processes that can be

consistently scaled up through evalua�on.

Organiza�on. U�lizing an organized business structure or corporate framework, o�en

through strategic business units ( SBUs ), provides substan�al value in centralizing

processes and assessing needs.

Informa�on. Scou�ng and assessing the current technological environment through

extensive research teams is necessary to make the appropriate decisions.

Technology. Finally, improving upon these processes within SBUs via leveraging the

appropriate data and informa�on will drive strategic acquisi�on of beneficial

technological improvements based upon current trends.

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Taken together, these four dimensions applied to alignment and synchroniza�on of new

technology can help businesses keep up with or stay ahead of current technologies and

trends. Companies can benefit from the intrinsic opportuni�es technological progress provides

while offse�ng the intrinsic risks of external technological development.

Sourcing Technology

Technology sourcing involves isola�ng and implemen�ng new innova�ons within an exis�ng

business framework.

Sourcing new technology involves the scou�ng and researching of

new technological poten�al and the eventual transfer of new

technologies to a company.

Technology scou�ng includes iden�fying new technologies,

organizing and channeling data on them, and assessing the ease and

value of implemen�ng them.

Companies capitalize on the successful scou�ng of a new technology

by sourcing it from the appropriate party for their own use.

Tech transfer drawbacks primarily involve the cost of licensing

patents and training employees to effec�vely use the new

technology.

Some organiza�ons, such as Sourceforge, Wikipedia, and Boundless,

provide knowledge and technology for free in an open-source

strategy.

Key Terms

patent—legal right to a par�cular innova�on, protec�ng it from being

copied or employed by another without consent or license

sourcing—obtaining the resources needed by a par�cular company or

individual

Key Points

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scou�ng—the act of seeking or searching

Technology Sourcing Strategies

Technology sourcing, or the pursuit of implemen�ng new technologies within a business’s

strategic framework, involves isola�ng and applying new technologies to current models.

Technology can be developed internally, or isolated through technology scou�ng and then

implemented through technology transfer. In deciding which approach is op�mal for them,

organiza�ons must consider factors such as as the advantage of being first to market, R&D

costs and capabili�es, and market-research and data-gathering costs. Therefore the strategies

behind sourcing technology can be complex, varying by industry, company size, economic

strength, and the availability of easily implemented technology.

Technology Scou�ng

Technology Readiness Levels (TRL)

Stages of technology development

include basic technology research,

research to prove feasibility,

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technology development,

technology demonstra�on,

system/subsystem development, and

system test, launch, and opera�ons.

Technology scou�ng is essen�ally forecas�ng technological developments through

informa�on gathering. Technology scouts can either be internal employees or external

consultants specifically designated to the task of researching developments in a par�cular

technological field. This can be loosely referred to as a three-step process:

1. Iden�fy emerging technologies.

2. Channel and organize new technological data within an organiza�on.

3. Provide a corporate context to support or refute the acquisi�on of technology.

When technology scou�ng isolates new developments that could poten�ally provide

advantages for an incumbent, strategies to acquire or source the technology become a focal

point. Technology transfer, and the commercializa�on of technological abili�es, is an

enormous market both in the United States and abroad. Though governments, universi�es,

and open-source websites o�en provide knowledge and technological know-how free of

charge, most o�en technology is not free.

Technology Sourcing Pros and Cons

In the Informa�on Age knowledge is power, and more than ever companies are trying to

protect their knowledge from compe�tors or freeloaders by using patents and trade secrets.

Transfer of technology is therefore expensive, from licensing the patented technology to

reques�ng training in new technological advances for staff.

Despite the dis�nct advantages of staying ahead of the curve, there are some drawbacks to

tech transfer. Investors must accept the inherent risk of the new technology, presen�ng

significant hurdles to op�mizing perceived poten�al or effec�ve implementa�on. Early

adopters and innovators suffer the risk of employing a new technology that has not been fully

debugged, minimizing what should have been strong returns on investment (ROI). Technology

scouts should therefore be highly circumspect and me�culous in their research processes,

ensuring that new technological innova�ons will indeed provide what they promise.

Licenses and A�ribu�ons

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Technology and Innova�on (h�ps://courses.lumenlearning.com/boundless-

management/chapter/technology-and-innova�on/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Managing Change for Organiza�ons

Managers as Leaders of Change

Leaders are in the unique role of not only designing change ini�a�ves but also enac�ng and

communica�ng them.

Managing change requires more than simple planning. Resistance to

change, a human tendency, is significant. It must be addressed to

ensure success.

Leaders must define change strategy and communicate it effec�vely

to shareholders, empower and support employees, and mi�gate

resistance to the change ini�a�ve.

Conner iden�fies six dis�nct leadership styles related to change:

an�-change, ra�onal, panacea, bolt-on, integrated, and con�nuous.

Each leadership style represents a unique set of percep�ons,

a�tudes, and behaviors regarding how organiza�onal disrup�on

should be addressed.

Conner also posited that the six leadership styles are related to two

different types of organiza�onal change: first-order change and

second-order change. Different leadership styles are more effec�ve

in different situa�ons.

Key Terms

a�ribute—a characteris�c or quality of a something

Learning Resource

Key Points

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lead—to conduct or direct with authority

Managing change requires strong leadership and an understanding of how organiza�onal

change occurs. Leaders are in the unique posi�on not only of designing change ini�a�ves but

also enac�ng and communica�ng them to subordinates. Managing change requires more than

simple planning: Resistance to change, a natural human tendency, needs to be addressed to

ensure success.

Leadership Strategies for Change

The following six components of change are the responsibility of management:

Create a definable strategy. Define measurable stakeholder goals and objec�ves, create

a business case for them and update it con�nuously; and monitor assump�ons, risks,

dependencies, costs, return on investment, and cultural issues affec�ng work progress.

Communicate effec�vely. Explain to stakeholders why the change is being made, the

benefits of successful implementa�on, and how the change is being rolled out.

Empower employees. Devise an effec�ve organiza�on-wide plan for educa�on, training,

and other means for upgrading skills.

Counter resistance. Iden�fy employee issues and align them to the overall strategic

direc�on of the organiza�on. Adapt the change ini�a�ve as needed to mi�gate

discontent.

Support employees. Provide personal counseling as needed to alleviate change-related

fears.

Track progress. Monitor and fine-tune implementa�on along the way.

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Reengineering

This flowchart shows the reciprocal rela�onships involved in each step of

change management, some�mes referred to as reengineering.

Six Leadership Styles for Change

Conner (1998) iden�fied six dis�nct leadership styles related to change: an�-change, ra�onal,

panacea, bolt-on, integrated, and con�nuous. Each style “represents a unique set of

percep�ons, a�tudes, and behaviors regarding how organiza�onal disrup�on should be

addressed.” Stopper (1999) described Conner’s six leadership styles as follows:

The an�-change leader. A leader embracing this style seeks to avoid change as much as

possible. The message is, “Stay the course. Keep adjustments small. No need to change

in any major way.”

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The ra�onal leader. This leader focuses on how to constrain and control change with

logical planning and clearly defined steps.

The panacea leader. The panacea leader believes that the way to respond to pressure for

change is to communicate and mo�vate. These leaders understand resistance to change

as well as the inevitability of change as organiza�ons evolve. They tend to focus on

fostering enthusiasm for change.

The bolt-on leader. This leader strives to regain control of a changing situa�on by

a�aching (bol�ng on) change-management techniques to ad-hoc projects that are

created in response to pressure for change. This manager is more concerned about

helping others change than crea�ng a strategy for the change itself.

The integrated leader. The integrated leader searches for ways to use the structure and

discipline that Harding and Rouse (2007) called “human due diligence” (the leadership

prac�ce of understanding the culture of an organiza�on and the roles, capabili�es, and

a�tudes of its people) as individual change projects are created and implemented. The

concept is simply to combine, or integrate, human and cultural concerns with the

strategy itself.

The con�nuous leader. The con�nuous leader works to create an agile and quick-

response organiza�on that can an�cipate threats and seize opportuni�es rapidly as

change ini�a�ves are designed and implemented. Con�nuous leaders believe that

disrup�on is con�nuous, and adaptability is a necessary organiza�onal competency.

Conner says that the six leadership styles are related to two different types of organiza�onal

change: first-order change and second-order change. First-order change is incremental,

piecemeal change. Second-order change is “nonlinear in nature and reflects movement that is

fundamentally different from anything seen before within the exis�ng framework.” He

iden�fies the first four leadership styles as appropriate for managing first-order change. When

an organiza�on is engaging in discon�nuous, transforma�onal change, however, integrated

and con�nuous leadership styles are more appropriate.

Types of Organiza�onal Change

There are three main categories of change: business process reengineering, technological

change, and incremental change.

Key Points

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Business process reengineering focuses on the analysis and design of

workflows and processes within an organiza�on.

Technological change refers to the process of inven�on, innova�on,

and diffusion of technology or processes.

incremental change means introducing many small, gradual changes

to a project instead of a few large, rapid changes.

Key Terms

devise—to use one’s intellect to plan or design something

incremental model—method of product development where the

model is designed, implemented, and tested in a series of small steps

un�l the product is finished

Change management is an approach to shi�ing or transi�oning individuals, teams, and

organiza�ons from their current state to a desired future state. It is an organiza�onal process

aimed at helping stakeholders accept and embrace change in their business environment. In

some project management contexts, change management refers to a project management

process wherein changes to a project are formally introduced and approved.

Ko�er defines change management as the u�liza�on of basic structures and tools to control

any organiza�onal change effort. Change management’s goal is to maximize organiza�onal

benefit, minimize impacts on workers, and avoid distrac�ons. There are different types of

change an organiza�on can face.

Business Process Reengineering

Business process reengineering (BPR) is a business management strategy first pioneered in the

early 1990s. It focuses on the analysis and design of workflows and processes within an

organiza�on. BPR aims to help organiza�ons fundamentally rethink how they do their work in

order to drama�cally improve customer service, cut opera�onal costs, and become world-class

compe�tors. In the mid-1990s, as many as 60 percent of the Fortune 500 companies claimed

to have either ini�ated reengineering efforts or begun planning for them.

BPR helps companies radically restructure their organiza�ons by focusing on their business

processes from the ground up. A business process is a set of logically related tasks performed

to achieve a defined business outcome. Reengineering emphasizes a holis�c focus on business

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objec�ves and how processes relate to them, encouraging full-scale recrea�on of processes

rather than itera�ve op�miza�on of sub-processes.

Business process reengineering is also known as business process redesign, business

transforma�on, and business process change management.

Incremental Change

Incremental change is a method of introducing many small, gradual (and o�en unplanned)

changes to a project instead of a few large, rapid (and extensively planned) changes. Wikipedia

illustrates the concept—an encyclopedia built bit by bit. Another example of incremental

change is a manufacturing company making hundreds of small components that go into a

larger product, like a car. Improving the manufacturing process of each of these integral

components one at a �me to cut costs and improve process efficiency overall is incremental

change.

Technological Change

Technological change (TC) describes the overall process of inven�on, innova�on, and diffusion

of technology or processes. The term is synonymous with technological development,

technological achievement, and technological progress. In essence, TC is the inven�on of a

technology (or a process), the con�nuous process of improving a technology (which o�en

makes it cheaper), and its diffusion throughout industry or society. In short, technological

change is based on both be�er and more technology integrated into the framework of exis�ng

opera�onal processes.

Inside and Outside Forces for Organiza�onal Change

Inside forces include strategic and human resource changes, while outside forces include

macroeconomic and technological changes.

Change management is an approach to shi�ing individuals, teams,

and organiza�ons to a desired future state. Strategic, opera�onal,

and technological change are examples that can come from inside or

outside the organiza�on.

Key Points

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Outside forces for change include macroeconomics, technological

evolu�on, globaliza�on, new legisla�on, and compe��ve dynamics.

Inside forces for change include intrapreneurship, new management,

and restructuring.

The first step in effec�ve change management is being prepared, in a

�mely and knowledgeable fashion, for internal and external

poten�ali�es that may force organiza�onal adapta�on.

Key Term

macroeconomic—rela�ng to the en�re economy, including the

growth rate, money and credit, exchange rates, the total amount of

goods and services produced, and other broad economic concerns

Change management is an approach to shi�ing or transi�oning individuals, teams, and

organiza�ons from their exis�ng state to a desired future state. Examples of organiza�onal

change can include strategic, opera�onal, and technological changes coming from inside or

outside the organiza�on. Understanding key internal and external change catalysts is cri�cal

to successful change management for organiza�onal leaders.

Outside Forces

While there are seemingly endless external considera�ons that can mo�vate an organiza�on

to change, a few common considera�ons should be constantly monitored. These include

economic factors, compe��ve dynamics, new technology, globaliza�on, and legisla�ve

changes:

Economics. The 2008 economic collapse is a strong example of why adaptability is

important. As consumers �ghtened their belts, organiza�ons had to either do the same—

lowering supply to match lower demand, or en�ce consumers with other goods.

Migra�ng from one volume to another can be financially challenging, but change

strategies like crea�ng new affordable product lines or more efficient opera�onal

paradigms are key to success.

Compe��on. Changes in the compe��ve landscape, such as new incumbents, mergers

and acquisi�ons, new product offerings, and bankruptcies, can substan�ally impact a

company’s strategy and opera�ons. For example, if a compe�tor releases a new product

that threatens to steal market share, an organiza�on must be ready to change and adapt

to retain its customer base.

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Technology. Technological changes are a constant threat, and embracing new

technologies ahead of the compe��on requires adaptability. When media went digital,

adaptable companies found ways to evolve their opera�ons to stay compe��ve. Many

companies that could not evolve quickly failed.

Globaliza�on. Capturing new global markets requires product, cultural, and

communica�ve adaptability. Catering to new demographics and iden�fying opportuni�es

and threats as they appear in the global market is integral to adap�ng for op�mal value.

Legisla�on. New laws can drama�cally change opera�ons. Companies in industries that

impact the environment must constantly strive to adapt to cleaner and more socially

responsible opera�ng methodologies. Failure to keep pace can result in substan�al fines

and other financial consequences, as well as nega�ve branding.

Inside Forces

There are many inside forces to keep in mind too, ranging from employee changes, to cultural

reform, to opera�onal challenges. Understanding where change is coming from is the first step

toward �mely and appropriate change management.

Management change. New CEOs or other execu�ve players can significantly impact

strategy and corporate culture. Understanding the risks associated with hiring (or

promo�ng) new upper management is key to making good decisions on the person who

will be the best fit.

Organiza�onal restructuring. Organiza�ons may have to significantly alter their exis�ng

structure to adapt to the development of new strategic business units, new product

lines, or global expansion. Changing structure means disrup�ng hierarchies and

communica�ons, which must then be reintegrated. Employees must be trained on

change and its implica�ons for their everyday opera�ons.

Intrapreneurship. New ideas come from inside as well as outside the organiza�on, and

capitalizing on a great new idea will likely require some internal reconsidera�on.

Integra�ng a new idea may require realloca�on of resources, new hires and talent

management, and new branding.

Common Targets of Organiza�onal Change

Change management can be implemented to change an organiza�on’s mission, strategy,

structure, technology, or culture.

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Organiza�onal change management should begin with a systema�c

diagnosis of the current situa�on in order to determine the

organiza�on‘s need for and ability to change.

Prior to a cultural change ini�a�ve, a needs assessment should

examine the current organiza�onal culture and opera�ons. The goal

is a careful and objec�ve considera�on of what is working and what

is not.

Areas of change include mission, strategy, opera�ons, technology,

culture, branding, employees, and workflows.

Change management should also make use of performance metrics,

such as financial results, opera�onal efficiency, leadership

commitment, communica�on effec�veness, and the perceived need

for change.

Key Terms

change management—the controlled implementa�on of required

changes to a system, with version control and planned fallback

organiza�on—a group of people or legal en�ty with an explicit

purpose and wri�en rules

When an organiza�on requires changes to address counterproduc�ve aspects of its culture,

the process can be daun�ng. Cultural change is usually necessary to reduce employee

turnover, influence employee behavior, make improvements to the company, refocus company

objec�ves, rescale the organiza�on, provide be�er customer service, or achieve other specific

company goals and results. Many elements can impact cultural change, including the external

environment and industry compe�tors, changes in industry standards, technology changes, the

size and nature of the workforce, and the organiza�on’s history and management.

Assessing Change Needs

Key Points

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Prior to launching a cultural change ini�a�ve, a company should carry out a needs assessment

to examine the exis�ng organiza�onal culture and opera�ons. Careful and objec�ve

considera�on of what is working and what is not, as well as what is consistent with broader

organiza�onal objec�ves and what is not, are cri�cal to success.

Areas that need to change can be iden�fied through interviews, focus groups, observa�on,

and other methods of internal and external research. A company must clearly iden�fy the

exis�ng culture and then design a change process to implement it.

Common Areas of Change

Common areas of organiza�onal change include

mission

strategy

opera�onal changes, including structure and hierarchies

technology

culture

employees and/or management

workflows (par�cularly relevant in manufacturing)

branding

Organiza�onal change management should begin with a systema�c diagnosis of the exis�ng

situa�on to determine the organiza�on’s need for and ability to change. The change

management plan should specify the objec�ves, content, and process for change.

Change management processes can benefit from crea�ve marke�ng to facilitate

communica�on between change audiences and a deep social understanding of leadership

styles and group dynamics. To track transforma�on projects, organiza�onal change

management should include alignment of group expecta�ons, communica�on, integra�on of

teams, and training. To make the change in organiza�onal culture as smooth and efficient as

possible, change management should also use metrics to measure important indicators like

financial results, opera�onal efficiency, leadership commitment, communica�on effec�veness,

and percep�ons about the need for change.

Organiza�onal Development

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Organiza�onal development is a deliberately planned effort to increase an organiza�on’s

relevance and viability.

Organiza�onal development (OD) is an ongoing, systema�c process

of implemen�ng effec�ve organiza�onal change.

The purpose of organiza�onal development is to address the

evolving needs of successful organiza�ons.

Organiza�onal development is o�en facilitated with the assistance of

a “catalyst ” or “change agent,” such as an effec�ve or influen�al

leader.

An important role of a leader is to analyze and assess the

effec�veness of the developmental process and mo�vate the

organiza�on to its targets.

Key Terms

viability—the ability to live or succeed

catalyst—a person or other agent of progress or change

OD is a deliberately planned effort to increase an organiza�on’s relevance and viability. This

process helps the organiza�on to be�er absorb disrup�ve technologies, market opportuni�es,

and ensuing challenges and chaos. Essen�ally, organiza�onal development is the framework

for a change process that is designed to produce desirable and posi�ve results for all

stakeholders and the environment.

The Nature of Organiza�onal Development

Organiza�onal development is a lifelong, built-in mechanism to improve an organiza�on

internally. This is o�en done with the assistance of a change agent, a catalyst who enables the

applica�on of theories and techniques from applied behavioral sciences, anthropology,

sociology, and phenomenology. The terms change agent and catalyst suggest a leader who is

engaged in transforma�onal leadership as opposed to management, which is a more

incremental or efficiency-based change methodology.

Key Points

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Although behavioral science provided the basic founda�on for the study and prac�ce of OD,

new and emerging fields of study have made their presence felt. Experts in systems thinking

and organiza�onal learning have also emerged as OD catalysts. These emergent perspec�ves

view the organiza�on as the holis�c interplay of a number of systems that impact the

processes and outputs of the en�re organiza�on.

Applica�ons of Organiza�onal Development

Twenty-first century management concepts such as system thinking are impac�ng the way we

view the development of the organiza�on today. The purpose of OD is to address the evolving

needs of successful organiza�ons. It involves concerted collabora�on to discover the

processes an organiza�on can use to become more effec�ve.

Organiza�onal development aims to improve an organiza�on’s capacity to handle its internal

and external func�oning and rela�onships. This includes improving interpersonal and group

processes, communica�on, the organiza�on’s ability to cope with problems, decision-making

processes, leadership styles, conflict and trust, and coopera�on among organiza�onal

members.

Weisbord

Weisbord presents a six-box model for understanding, and thereby changing and improving an

organiza�on:

1. Purposes. Are employees clear about the organiza�on’s mission, purpose, and goals? Do

they support the organiza�on’s purpose?

2. Structure. How is the organiza�on’s work divided? Is there an adequate fit between the

purpose and the internal structure?

3. Rela�onships. What are the rela�onships between individuals, units, or departments that

perform different tasks? What are the rela�onships between the people and the

requirements of their jobs?

4. Rewards. For what ac�ons does the organiza�on formally reward or punish its members?

5. Leadership. Does leadership watch for “blips” among the other areas and maintain

balance among them?

6. Helpful mechanisms. Do planning, control, budge�ng, and other informa�on systems

help organiza�on members accomplish their goal?

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Lewin

Lewin’s descrip�on of the change process involves three steps:

1. Unfreezing. Faced with a dilemma or issue, the individual or group becomes aware of a

need to change.

2. Changing. The situa�on is diagnosed and new models of behavior are explored and

tested.

3. Refreezing. Applica�on of new behavior is evaluated, and if it proves to be reinforcing,

the behavior is adopted.

Effec�veness of Organiza�onal Development

The efficacy of organiza�onal development is predicated on the adaptability of the

organiza�on and the overall successful integra�on of new ideas and strategies within an

exis�ng framework. Resistance to change is a fundamental organiza�onal problem, as all

organiza�ons have a degree of general iner�a. This is further complicated by the difficulty in

quan�ta�vely measuring changes in areas that are generally intangible, like culture.

To remedy this, organiza�ons pursuing OD must set clear and measurable objec�ves prior to

commi�ng to a change ini�a�ve. An important role of the leader is to analyze and assess the

effec�veness of this developmental process and mo�vate the organiza�on to achieve

developmental targets.

References

Conner, D. R. (1998). Leading at the edge of chaos. New York, NY: John Wiley & Sons Inc.

Harding, D. & Rouse, T. (2007, April). Human due diligence. Harvard Business Review.

Retrieved from h�ps://hbr.org/2007/04/human-due-diligence

Stopper, W. G. (1999, June 1). Hiring to build change capacity: The human resource role.

Human Resource Planning, 1–6.

Licenses and A�ribu�ons

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Managing Change for Organiza�ons (h�ps://courses.lumenlearning.com/boundless-

management/chapter/managing-change-for-organiza�ons/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve

Commons A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-

sa/4.0/) license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Managing Change for Employees

Phases of Organiza�onal Change: Lewin

Kurt Lewin’s phases of change (unfreezing, change, and freezing) describe how people react

and adapt to change.

Kurt Lewin described change as a three-stage process that includes

unfreezing, change, and freezing. Lewin emphasizes that change is

not a series of individual processes but rather a con�nuous flow from

one process to the next.

The first stage (unfreezing) involves overcoming iner�a and

dismantling the exis�ng mind-set. This involves overcoming the

ini�al defense mechanisms that people exhibit to avoid making a

change.

In the second stage, the actual change occurs. This is typically a

period of confusion and transi�on. People are unsure about the

change and what may happen in the future.

In the third stage (freezing), the new mind-set of the change is

becoming the standard, and people’s comfort levels return to normal.

Although some managers s�ll use Lewin’s model, its most important

contribu�on is the idea that change should be thought of as a

process instead of as individual stages.

Key Terms

Learning Resource

Key Points

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organiza�onal psychology—the scien�fic study of employees,

workplaces, and organiza�ons

defense mechanisms—psychological strategies (such as denial,

repression, or ra�onaliza�on) for avoiding or adjus�ng to

uncomfortable situa�ons

Change is a fundamental component to the con�nuous improvement and evolu�on of any

organiza�on. A few researchers and academics have determined how to best model and

present methods of change for managing employees. Kurt Lewin, a leader in organiza�onal

psychology, was one of these academics.

Kurt Lewin

Lewin was an influen�al behavioral

and organiza�onal psychologist who

proposed the Phases of Change

model.

The Three Phases of Change

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This early model developed by Lewin describes change as a three-stage process of unfreezing,

change, and freezing. In this Phases of Change model, Lewin emphasizes that change is not a

series of individual processes; rather, change flows from one process to the next.

The first stage, unfreezing, involves overcoming iner�a and dismantling the exis�ng mind-set.

It involves people ge�ng over the ini�al defense mechanisms they exhibit to avoid making a

change. People eventually realize that change is necessary and urgent, and this realiza�on

allows them to move on to the next stage.

In the second stage, the change occurs. This is typically a period of confusion and transi�on:

People are unsure about the change and what may happen in the future. They know that the

old ways are being challenged, but they do not yet have a clear picture of what will replace

them. During this stage, an organiza�on’s leaders need to focus on clearly communica�ng to

employees the reasons for change and the steps needed to achieve it.

Lewin labeled the third and final stage freezing, though it may be useful to think of this stage

as refreezing. During this stage, the new mind-set of the change begins to become the

standard, and people’s comfort levels return to normal. Many people cri�cize this component

of Lewin’s model, arguing that there is never �me for people to comfortably adapt to change

in today’s fast-paced world.

Although some managers s�ll use Lewin’s model, its most important contribu�on is the idea

that change should be thought of as a process instead of individual stages. This is important

for understanding how employees may react to change in the workplace and why some may

adapt more quickly to change than others.

Strategies for Successful Organiza�onal Change

To implement a successful change, managers should focus on communica�on, training,

monitoring, and counseling for their workforce.

Organiza�onal change o�en elicits concern and discomfort among

employees. Change is a human effort as much as a strategic one.

During an organiza�onal change, managers must communicate the

reasons for the change as well as the process needed to make the

Key Points

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change. This should include clear objec�ves and strategic

implica�ons.

Effec�ve educa�on and training are essen�al for employees to

understand and adapt to a change in the workplace.

One of the most important steps in managing change is monitoring

its effects in the organiza�on. Quan�ta�ve tools can be used to

measure and assess effec�veness.

Key Terms

proac�ve change—the shi�ing or transi�oning of individuals, teams,

and organiza�ons from a current state to a desired future state

before an event provokes change

reac�ve change—the shi�ing or transi�oning of individuals, teams,

and organiza�ons from a current state to a desired future state in

response to an event

Understanding Change Management

There is o�en internal resistance to organiza�onal change. This resistance o�en stems from

people’s fear—of change in the work itself, change in the process for comple�ng work, or the

possibility that change may result in job loss. As a result, managers and organiza�onal leaders

should have a strategic approach to enabling change while preserving organiza�onal

effec�veness.

Change management is the study of how to integrate changes without damaging an

organiza�on’s culture or efficiency. It is about knowing strategically what to change and how

to manage the human element of the change process. Four elements comprise the change

process:

recognizing changes in the broader business environment

developing the adjustments required to meet the company’s needs

training employees on the changes

winning employee support for the changes

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Note that training and suppor�ng employees is an important facet of change management.

This is a cri�cal managerial responsibility to enable successful change.

Key Enablers of Change

Transparency and Effec�ve Communica�on

During an organiza�onal change, it is essen�al for managers to communicate the reasons for

the change as well as the process needed to make the change. For example, if management

wants to implement a procedure that will help to improve the produc�vity of the workforce,

but the procedure requires more labor to get the new procedure up and running, they should

communicate why the change in procedure is necessary. Staff understanding of why the

change is taking place helps foster agreement with the implementa�on, because the staff can

see the benefit.

Effec�ve Educa�on and Training

Educa�on and training are essen�al for employees to understand and adapt to a change in the

workplace. Employees will likely be unfamiliar with a new process being introduced, and with

how it will fit into their daily workflow. Training is necessary to help employees become

familiar with the change and be�er adapt to it.

Personal Counseling

When a major change happens in the workplace, some employees may feel very

uncomfortable with it—especially those who are most affected by the change. For these

employees it may be useful to have a program, most likely through human resources, that will

help them adapt to the change.

Monitoring the Implementa�on

One of the most important steps in managing a successful change is monitoring how the

change is playing out in the organiza�on. This can be accomplished by looking at historical

data and examining how employees are performing in the changed environment compared to

how they performed in the past. Management will want to monitor how the change is

affec�ng the overall produc�on process. If, a�er the ini�al implementa�on, the change has not

improved the process, managers may want to fine-tune the process to make sure the change is

successful.

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Steps to Smooth Organiza�onal Change: Ko�er

Ko�er’s model details a process where managers may ini�ate, direct, implement, and foster

organiza�onal change via employee engagement.

John Paul Ko�er is a former professor at the Harvard Business

School who is regarded as an authority on leadership and change.

The eight stages of Ko�er’s change model include: increase urgency,

build the guiding team, get the vision right, communicate for buy-in,

empower ac�on, create short-term wins, don’t let up, and make

change s�ck.

By following Ko�er’s eight steps, managers can implement change

and make it an integral part of the organiza�on’s culture. This is

accomplished by making sure that change remains a part of the

culture and becomes an expecta�on for con�nued development of

the organiza�on.

Key Terms

vision—clear, dis�nc�ve, and specific vision of the future, usually

connected with a leader’s strategic advances for the organiza�on.

buy-in—support, agreement, approval; a sense of belief in the

poten�al outcomes achieved through a group process

John Paul Ko�er

John Paul Ko�er was a professor at the Harvard Business School, an acclaimed author, and

chief innova�on officer at Ko�er Interna�onal. He is regarded as an authority on leadership

and change. Ko�er created the Eight Steps to Change model, currently the most widely used

framework for managing organiza�onal change. Through observa�on, Ko�er concluded that

the organiza�ons that are the most successful in implemen�ng change go through the

following eight steps.

Key Points

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The Eight Steps

1. Increase urgency. Managers must inspire people to move, make objec�ves real and

relevant, and further employees’ desire to make change happen. Ge�ng momentum for

change is key.

2. Build the guiding team. The company must get the right leaders in place—those with the

right emo�onal commitment and understanding, and the right mix of skills and levels.

3. Get the vision right. Managers must encourage the team to establish a simple vision and

strategy, and then focus on the emo�onal and crea�ve aspects necessary to drive

service and efficiency.

4. Communicate for buy-in. Involving as many people as possible, managers must

communicate the essen�als, and appeal and respond to people’s needs. Addi�onally,

they must remove clu�er and streamline communica�ons, making change efficient rather

than overwhelming for employees.

5. Empower ac�on. This step focuses on removing obstacles, enabling construc�ve

feedback, and garnering support from leaders—complete with rewards that mo�vate

people, and recognize progress and achievements.

6. Create short-term wins. Managers must set goals that can be broken down into

manageable objec�ves. They must also manage a number of ini�a�ves taking place

simultaneously, and finish current stages before star�ng new ones.

7. Don’t let up. Managers must foster and encourage determina�on, persistence, and

ongoing progress repor�ng. This can be done by highligh�ng achieved and future

milestones.

8. Make change s�ck. This step reinforces the value of successful change via recruitment,

promo�on, and new change leadership. The company should change a fundamental part

of the culture during this step, so people do not consider change as foreign.

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A step in Ko�er’s model of change is to celebrate short-term wins while

working toward an overall goal of change.

By following these eight steps to successful change, managers can work to mi�gate the risks

associated with changes that employees do not like. In order to reduce poten�al

organiza�onal obstacles, managers have to make sure that all of their employees are on board

and willing to help make change.

Licenses and A�ribu�ons

Managing Change for Employees (h�ps://courses.lumenlearning.com/boundless-

management/chapter/managing-change-for-employees/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve

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Commons A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-

sa/4.0/) license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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Porter's Compe��ve Strategies

Michael Porter classifies compe��ve strategies as cost leadership, differen�a�on, or market

segmenta�on.

Michael Porter defines three strategy types that can a�ain

compe��ve advantage. They are cost leadership, differen�a�on, and

market segmenta�on (or focus).

Cost leadership is about achieving scale economies and using them

to produce high volume at a low cost. Margins may be narrower but

quan�ty is larger, enabling high revenue streams.

Differen�a�on is crea�ng a unique service or product offering, either

through good branding or strong internal skills. This strategy aims to

offer something that is difficult to copy. The strategy is strongly

associated with an organiza�on's brand.

Both cost leadership and differen�a�on are rela�vely broad in

market scope, and can encompass both strategic advantages on a

smaller scale.

Porter warns that companies that try to accomplish both cost

leadership and differen�a�on may fall into the “hole in the middle.”

He notes that specializing is the ideal strategic approach.

Market segmenta�on strategy is narrower in scope than both cost

leadership and differen�a�on.

Key Term

Learning Resource

Key Points

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market share—percentage of a specific market held by a company

Strategic Scope and Strategic Strength

Michael Porter described a category scheme with three general types of strategies commonly

used by businesses to achieve and maintain compe��ve advantage. These three strategies are

defined along two dimensions: strategic scope and strategic strength. Strategic scope is a

demand-side dimension and considers the size and composi�on of the market the business

intends to target. Strategic strength is a supply-side dimension and looks at the strength or

core competency of the firm.

Porter iden�fies two competencies as most important: product differen�a�on and product

cost (efficiency). He originally ranked each of the three dimensions (level of differen�a�on,

rela�ve product cost, and scope of target market) as either low, medium, or high, and

juxtaposed them in a three-dimensional matrix. That is, the category scheme was displayed as

a 3 × 3 × 3 cube; however, most of the 27 combina�ons were not viable.

Cost Leadership, Differen�a�on, and Market Segmenta�on

Porter simplified the scheme by reducing it to the three most effec�ve strategies: cost

leadership, differen�a�on, and market segmenta�on (or focus). He characterizes each as the

following:

Cost leadership. A firm that creates economies of scale though extremely efficient

opera�ons that produce a large volume is exercising a cost leadership strategy. Cost

leaders include companies like Procter & Gamble, Walmart, McDonald’s, and other large

firms genera�ng a high volume of goods that are distributed at a rela�vely low cost

(compared to the compe��on).

Differen�a�on. Less tangible or easily defined is the differen�a�on strategy, which can

be extremely effec�ve when properly executed. Differen�a�on refers to a firm’s ability

to create a good that is difficult to replicate, thereby fulfilling a niche. The strategy can

include crea�ng a powerful brand image, which allows the organiza�on to sell its

products or services at a premium. Coach handbags are a good example of

differen�a�on; the company’s margins are high due to the markup on each bag, which

mostly covers marke�ng costs, not produc�on.

Market segmenta�on. This strategy is narrow in scope compared to the broader scope

of both the cost leadership and differen�a�on strategies. Segmenta�on seeks out

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specific segments of the market that are not otherwise tapped by larger firms.

Porter’s compe��ve strategies: Porter’s three

strategies can be defined along two dimensions:

strategic scope and strategic strength.

Avoiding the “Hole in the Middle”

Empirical research on the profit impact of marke�ng strategy indicates that firms with a high

market share are o�en quite profitable, as are many with low market share. The least

profitable firms are those with moderate market share. This is some�mes referred to as the

“hole-in-the-middle” problem. Porter explains that firms with high market share are successful

because they pursue a cost-leadership strategy, and firms with low market share are

successful because they employ market segmenta�on or differen�a�on to focus on a small but

profitable market niche. Firms in the middle are less profitable because of the lack of a viable

generic strategy.

Licenses and A�ribu�ons

Internal Analysis Inputs to Strategy (h�ps://courses.lumenlearning.com/boundless-

management/chapter/internal-analysis-inputs-to-strategy/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve

Commons A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-

sa/4.0/) license. UMUC has modified this work and it is available under the original license.

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Crea�ng Strategy: Common Approaches

Strategic Management

Strategic management entails five steps: analysis, forma�on, goal se�ng, structure, and

feedback.

Strategic management analyzes the major ini�a�ves, involving

resources and performance in external environments, that a

company’s top management takes on behalf of owners.

The first three steps in the strategic management process are part of

the strategy formula�on phase. These include analysis, strategy

formula�on, and goal se�ng.

The final two steps in strategic management cons�tute

implementa�on. These steps include crea�ng the structure (internal

environment) and obtaining feedback from the process.

By integra�ng these steps into the strategic management process,

upper management can ensure resource alloca�on and processes

align with broader organiza�onal purpose and values.

Key Terms

objec�ves—the goals of an organiza�on

implementa�on—the process of moving an idea from concept to

reality. In business, engineering, and other fields, implementa�on

refers to the building process rather than the design process.

Learning Resource

Key Points

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Strategic management analyzes the major ini�a�ves involving resources and performance in

external environments that a company’s top management takes on behalf of owners. It entails

specifying the organiza�on‘s mission, vision, and objec�ves, as well as developing policies and

plans that allocate resources to drive growth and profitability. Strategy, in short, is the

overarching methodology behind the business opera�ons.

The five steps of management include: (1) analysis (internal and external), (2) strategy

forma�on (diagnosis and decision making), (3) goal se�ng (objec�ves and measurement), (4)

structure (leadership and ini�a�ves), and (5) control and feedback (budgets and incen�ves).

Five Steps of Strategic Management

As strategic management is a large, complex, and ever-evolving endeavor, it is useful to divide

it into a series of concrete steps to illustrate the process of strategic management. While many

management models pertaining to strategy deriva�on are in use, most general frameworks

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include five steps embedded in two general stages, formula�on and implementa�on:

Formula�on

1. Analysis. Strategic analysis is a �me-consuming process, involving comprehensive market

research on the external and compe��ve environments as well as extensive internal

assessments. The process involves conduc�ng Porter’s Five Forces, SWOT, PESTEL, and

value chain analyses and gathering experts in each industry rela�ng to the strategy.

2. Strategy forma�on. Following the analysis phase, the organiza�on selects a generic

strategy (for example, low-cost, differen�a�on, etc.) based upon the value-chain

implica�ons for core competence and poten�al compe��ve advantage. Risk assessments

and con�ngency plans are also developed based upon external forecas�ng. Brand

posi�oning and image should be solidified.

3. Goal se�ng. With the defined strategy in mind, management iden�fies and

communicates goals and objec�ves that correlate to the predicted outcomes, strengths,

and opportuni�es. These objec�ves include quan�ta�ve ways to measure the success or

failure of the goals, along with corresponding organiza�onal policy. Goal se�ng is the

final phase before implementa�on begins.

Implementa�on

1. Structure. The implementa�on phase begins with the strategy in place, and the business

solidifies its organiza�onal structure and leadership (making changes if necessary).

Leaders allocate resources to specific projects and enact any necessary strategic

partnerships.

2. Feedback. During the final stage of strategy, all budgetary figures are submi�ed for

evalua�on. Financial ra�os should be calculated and performance reviews delivered to

relevant personnel and departments. This informa�on will be used to restart the

planning process, or reinforce the success of the previous strategy.

Combining Internal and External Analyses

Using combined internal and external analyses, companies are able to generate strategies in

pursuit of compe��ve advantage.

Key Points

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Organiza�ons must carefully consider what internal assets are

available that will differen�ate them from the compe��on within the

same compe��ve environment.

Similarly, organiza�ons must understand the context in which they

operate if they aspire to acquire compe��ve advantage over other

incumbents.

By understanding how internal and external factors relate,

companies can piece together the ideal way in which their strengths

can capture opportuni�es while offse�ng threats and rec�fying

weaknesses.

Implemen�ng strategies that take into account both the internal and

external environments will likely achieve compe��ve advantage and

improve an organiza�on’s ability to adapt. This is profit-genera�ng

strategic thinking.

Key Terms

internal—concerned with the non-public affairs of a company or

other organiza�on

external—concerned with the public affairs of a company or other

organiza�on

Organiza�ons must carefully consider what internal assets will differen�ate them from the

compe��on within the same compe��ve environment. This internal analysis requires careful

considera�on of the following models and factors:

core mission

overall strategy

Porter’s compe��ve strategies

SWOT analysis

forecasts

resource-based view

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The SWOT analysis matrix includes strengths,

weaknesses, opportuni�es, and threats.

Similarly, organiza�ons must understand the context in which they operate if they aspire to

acquire compe��ve advantage over other incumbents. Models such as the following outline

these concerns effec�vely:

Porter’s five forces (and limita�ons)

PESTEL and SCP (structure-conduct-performance)

compe��ve dynamics

Merging Analyses for Compe��ve Advantage

These inputs generally outline each of the specific analyses a company should conduct to

understand its internal and external environments. Combining these two cons�tutes context

analysis, which is a method of analyzing the environment in which a business operates.

Environmental scanning focuses mainly on the macro-environment of a business. Context

analysis considers the en�re environment of a business, both internal and external.

Using context analysis, alongside the necessary external and internal inputs, companies are

able to generate strategies that ac�vely capitalize on this knowledge in pursuit of compe��ve

advantage. This strategic development requires companies to understand the opportuni�es

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and threats in the external environment and benchmark them against the strengths and

weaknesses of their internal environment. By understanding how internal and external factors

relate, companies can piece together the ideal way to use their strengths to capture

opportuni�es while offse�ng threats and rec�fying weaknesses.

This melding of internal and external factors in pursuit of compe��ve advantage is an ongoing

process, as the company must evolve and change in concert with the environment. As a result,

strategic management is the process of constantly assessing both environments to ensure that

the company retains a unique compe��ve posi�on in which to generate value for stakeholders

and customers. This implementa�on of strategies that takes into account both the internal and

external environments eventually achieves dynamic capabili�es for the companies involved.

Change is costly, so firms must develop processes to find minor changes that will not have the

same financial implica�ons that major changes will. The ability to change depends on the

ability to scan the environment, evaluate markets, and quickly accomplish reconfigura�on and

transforma�on ahead of the compe��on. These ac�ons can be supported by decentralized

structures, local autonomy, and strategic alliances.

Implemen�ng Strategy

Strategic planning involves managing the implementa�on process, which translates plans into

ac�on.

Implementa�on requires establishing or modifying the organiza�onal

hierarchy, alloca�on of resources, accountability, and control

processes.

Depending on industry and geographic loca�on, implementa�on

o�en requires integra�ng an organiza�on with other firms via

strategic partnerships (suppliers, joint ventures, acquisi�ons, etc.).

To implement a strategy requires moving beyond the theore�cal and

research-based view. This demands prac�cal pragma�sm on the part

of senior strategists.

Ac�on plans that describe the way processes are transformed into

tangible opera�ons are a cri�cal success factor and o�en a point of

Key Points

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difficulty for conceptual strategists.

Key Terms

hierarchy—an arrangement in which items are represented as above,

below, or at the same level as one another

implementa�on—the process of moving an idea from concept to

reality. In business, engineering, and other fields, implementa�on

refers to the building process rather than the design process.

execute—to carry out; to put into effect

The implementa�on process requires establishing or modifying an organiza�onal hierarchy so

the company can achieve its objec�ves. The following stages cons�tute the strategic

implementa�on process:

Alloca�ng and managing sufficient resources (financial, personnel, opera�onal support,

�me, technology support)

Establishing a chain of command or some alterna�ve structure (such as cross-func�onal

teams)

Assigning responsibility of specific tasks or processes to specific individuals or groups.

Accountability is cri�cal to the ac�on plan process.

Crea�ng a feedback loop for control processes

Strategy implementa�on also involves managing the overall process. It comprises monitoring

results, measuring benchmarks, following best prac�ces, evalua�ng the efficacy and efficiency

of the process, controlling for variances, and adjus�ng the process as necessary. When an

organiza�on implements specific programs, it must acquire the requisite resources, develop

the process, train, and perform process tes�ng, documenta�on, and integra�on with legacy

processes.

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The Strategy Management Process

The strategic management process never ends. The process restarts a�er a plan ends, when

the company reviews the results and reevaluates its posi�on.

Businesses must consider precisely how they will implement a strategy, including:

alliances with other firms to fill capability, technology, resource and legal needs

investment in internal development

mergers, acquisi�ons, or both, including products or companies, to reduce �me to market

business with protec�onist countries like India and China, which require companies

entering their markets to operate via partnerships with local firms

Execu�ng a Strategic Plan

One of the core goals in dra�ing a strategic plan is to develop it so that it is easily translated

into ac�on plans. Most strategic plans address high-level ini�a�ves and overarching goals but

are not always translated into the day-to-day projects and tasks required to achieve the plan.

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Poor terminology or word choice and the wrong level of wri�ng are both examples of ways to

fail to translate a strategic plan so that it makes sense and is executable. O�en, plans are filled

with conceptual terms that do not connect to day-to-day reali�es for the staff that is expected

to carry out the plans. Strategists need to be pragma�c in devising a strategy, so that it can be

carried out.

Put simply, walking the talk is easy to say and difficult to accomplish. Strategy formula�on

must always consider implementa�on as the primary framework. Ac�on plans that describe

how processes are transformed into tangible opera�ons are cri�cal for success, but o�en a

point of difficulty for conceptual strategists.

Maintaining Control

Controlling requires taking an aerial view of opera�onal processes, and iden�fying gaps and

weaknesses to improve efficiency.

There is o�en dissonance between the way a company ideally wants

to operate strategically, and how it actually operates.

Planning and controlling are closely linked. Planning is the

benchmark which controlling uses to outline devia�ons. In this sense,

they are two sides of the same strategic process of improvement.

Once a company designs a strategic plan parallel with the corporate

mission and vision, implementa�on requires both control and

planning to ensure it is appropriately communicated and executed.

Managers must ensure that the organiza�onal processes reflect the

mission statement and vision as closely as possible, controlling

aspects of the opera�ons in pursuit of this goal.

Key Terms

planning—the act of formula�ng a course of ac�on or drawing up

plans

control—to exercise influence over; to suggest or dictate behavior

Key Points

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Controlling is a primary theore�cal managerial func�on (alongside planning, organizing,

staffing, and direc�ng). Maintaining control is about iden�fying devia�ons from intended

results and improving the process to achieve desired outcomes. According to modern

concepts, control is a foreseeing ac�on, in contrast to earlier concepts of control as chiefly

error detec�on.

Control in management means se�ng standards, measuring performance, and taking

correc�ve ac�on. Control thus comprises three main ques�ons: Where are we now? Where

did we plan to be? How can we bridge the gap between the two? Control is inherently cyclical.

Measurement, Evalua�on, Correc�on

Monitoring and controlling project ac�vi�es:

These steps are involved in management

control of project ac�vi�es.

Robert J. Mockler on Control

Management expert and author Robert J. Mockler presented a more comprehensive defini�on

of managerial control. He defined it as a systema�c effort by business management to

compare performance to predetermined standards, plans, or objec�ves; to assess whether

performance is in line with these standards; and, presumably, to take any remedial ac�on

required. According to Mockler, the purpose of control is to ensure that human and other

corporate resources are being used in the most effec�ve and efficient way possible in

achieving corporate objec�ves.

Rela�onship Between Planning and Controlling

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Mockler’s defini�on shows the close link between planning and controlling. Planning is a

process that establishes an organiza�on‘s objec�ves and the methods to achieve them.

Controlling is a process that measures and directs the actual performance against the planned

goals of the organiza�on. Thus, goals and objec�ves are o�en strongly linked to manage and

correct performance, so that enterprise objec�ves and the goals designed to a�ain them are

accomplished.

Applica�on to Strategy

Control defines the la�er stage of overall strategy. Once a company designs a strategic

overview parallel with its corporate mission and vision, implementa�on requires control to

ensure that strategy is appropriately communicated and executed. The direc�on of

organiza�onal control derives from the strategic plan of the organiza�on.

Control is an ac�ve process that evaluates current performance against this strategic backdrop

to ascertain how closely a company’s opera�ons resemble the desired model of func�oning.

There is o�en dissonance between the way a company operates and the ideal of opera�on

from a strategic perspec�ve. This is where control comes into play. A manager’s job is to

ensure that the organiza�onal processes reflect the mission statement and vision as closely as

possible, controlling aspects of the opera�ons in pursuit of this goal. As a result, maintaining

control is a constant responsibility that keeps the business as close as possible to its core

strategies.

Licenses and A�ribu�ons

Crea�ng Strategy: Common Approaches (h�ps://courses.lumenlearning.com/boundless-

management/chapter/crea�ng-strategy-common-approaches/) from Boundless Management

by Lumen Learning, originally published by Boundless.com, is available under a Crea�ve

Commons A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-

sa/4.0/) license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

  • eBook Resource_ Defining Management
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The Mission Statement

A mission statement defines the fundamental purpose of an organiza�on or enterprise.

A mission statement’s purpose is to retain consistency in overall

strategy and to communicate core organiza�onal goals to all

stakeholders.

The business owners and upper managers develop the mission

statement and uphold it as a standard across the organiza�on. It

provides a strategic framework for running the organiza�on.

In a best-case scenario, an organiza�on conducts internal and

external assessments to ensure the mission statement is being

upheld.

A mission statement contains informa�on about the key market,

contribu�on, and dis�nc�on of an organiza�on. It describes what the

organiza�on does, why, and how it excels at what it does.

Key Terms

mission—set of tasks that fulfills a purpose or duty; an assignment

set by an employer

stakeholder—person or organiza�on with a legi�mate interest in a

given situa�on, ac�on, or enterprise

Learning Resource

Key Points

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A mission statement defines the purpose of a company or organiza�on. The mission statement

guides the organiza�on’s ac�ons, spells out overall goals, and guides decision making. The

mission statement is generated to retain consistency in overall strategy and to communicate

core organiza�onal goals to all stakeholders. The business owners and upper managers

develop the mission statement and uphold it as a standard across the organiza�on. It provides

a strategic framework the organiza�on is expected to abide by.

Mission Statement

An example of a mission statement, which includes the organiza�on’s aims and stakeholders,

and how it provides value to these stakeholders.

In a best-case scenario, an organiza�on conducts internal and external assessments rela�ve to

the mission statement. The internal assessment should focus on how members inside the

organiza�on interpret the mission statement. The external assessment, which includes the

business’s stakeholders, is also valuable since it offers a different perspec�ve. Discrepancies

between these two assessments can provide insight into the effec�veness of the

organiza�on’s mission statement.

Contents

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Effec�ve mission statements start by ar�cula�ng the organiza�on’s purpose. Mission

statements o�en include the following informa�on:

aim(s) of the organiza�on

the organiza�on’s primary stakeholders, such as clients or customers, shareholders,

congrega�on, donors, students, etc.

how the organiza�on provides value to its stakeholders; that is, by offering specific types

of products or services

declara�on of the organiza�on’s core purpose

According to business professor Christopher Bart, the commercial mission statement consists

of three essen�al components:

1. Key market: Who is your target client/customer? ( generalize if necessary)

2. Contribu�on: What product or service do you provide to that client?

3. Dis�nc�on: What makes your product or service so unique that the client should choose

you?

Assimila�on

To be truly effec�ve, an organiza�onal mission statement must be assimilated into the

organiza�on’s culture. Leaders have the responsibility of communica�ng the vision regularly,

crea�ng narra�ves that illustrate the vision, ac�ng as role models by embodying the vision,

crea�ng short-term objec�ves compa�ble with the vision, and encouraging employees to cra�

their own personal vision that is compa�ble with the organiza�on’s overall vision.

Licenses and A�ribu�ons

Internal Analysis Inputs to Strategy (h�ps://courses.lumenlearning.com/boundless-

management/chapter/internal-analysis-inputs-to-strategy/) from Boundless Management by

Lumen Learning, originally published by Boundless.com, is available under a Crea�ve

Commons A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-

sa/4.0/) license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

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Management Tools

Mission and Vision Statements Along with strategic planning, mission and vision statements are among the most widely used tools, and consistently rank above average in satisfaction.

April 02, 2018 • min read

A Mission Statement defines the company’s business, its objectives

and its approach to reach those objectives. A Vision Statement

describes the desired future position of the company. Elements of

Mission and Vision Statements are often combined to provide a

statement of the company’s purposes, goals and values. However,

sometimes the two terms are used interchangeably.

Usage and satisfaction among survey respondents

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;">

How Mission and Vision Statements work:

Typically, senior managers will write the company’s overall

Mission and Vision Statements. Other managers at different levels

may write statements for their particular divisions or business

units. The development process requires managers to:

RELATED TOPICS HOW BAIN CAN HELP

Clearly identify the corporate culture, values, strategy and view

of the future by interviewing employees, suppliers and customers

Address the commitment the firm has to its key stakeholders,

including customers, employees, shareholders and communities

Ensure that the objectives are measurable, the approach is

actionable and the vision is achievable

Communicate the message in clear, simple and precise language•

Develop buy-in and support throughout the organization•

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• Corporate Values Statements

• Cultural Transformation

• Strategic Planning

• Strategy

• Results Delivery

• Bain Behavior Change Approach

Companies use Mission and Vision Statements to:

Internally

Externally

®

Guide management’s thinking on strategic issues, especially

during times of significant change

Help define performance standards•

Inspire employees to work more productively by providing focus

and common goals

Guide employee decision making•

Help establish a framework for ethical behavior•

Enlist external support•

Create closer linkages and better communication with customers,

suppliers and alliance partners

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Selected references

Abrahams, Jeffrey. The Mission Statement Book: 301 Corporate

Mission Statements from America’s Top Companies. Ten Speed

Press, 2004.

Collins, Jim, and Jerry I. Porras. “Building Your Company’s

Vision.” Harvard Business Review, September/October 1996, pp.

65–77.

Collins, Jim, and Jerry I. Porras. Built to Last: Successful Habits of

Visionary Companies. HarperBusiness, 2004.

Jones, Patricia, and Larry Kahaner. Say It and Live It: The 50

Corporate Mission Statements That Hit the Mark. Crown Business,

1995.

Kirkpatrick, Shelley A. Build a Better Vision Statement: Extending

Research with Practical Advice. Lexington Books, 2016.

Kotter, John P. “Leading Change: Why Transformation Efforts

Fail.” Harvard Business Review, March/April 1995, pp. 59–67.

Kotter, John P., and James L. Heskett. Corporate Culture and

Performance. 1992. Reprint. Free Press, 2011.

Nanus, Burt. Visionary Leadership. Jossey-Bass, 1995.

Serve as a public relations tool•

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O’Hallaron, Richard, and David O’Hallaron. The Mission Primer:

Four Steps to an Effective Mission Statement. Mission Incorporated,

2000.

Raynor, Michael E. “That Vision Thing: Do We Need It?” Long

Range Planning, June 1998, pp. 368–376.

Wall, Bob, Mark R. Sobol, and Robert S. Solum. The Mission-Driven

Organization. Prima Publishing, 1999.

TAGS

Bain Behavior Change Approach Management Tools & Trends Results Delivery®

Strategy

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What is Strategy?

A strategy is a plan of ac�on designed to achieve a specific goal or series of goals within an

organiza�onal framework.

Strategic management is the process of building capabili�es that

allow a firm to create value for customers, shareholders, and society,

while opera�ng in compe��ve markets.

Strategy entails specifying the organiza�on's mission, vision, and

objec�ves; developing policies and plans to execute the vision; and

alloca�ng resources to implement those policies and plans.

Strategy is largely about using internal assets to create a value-added

proposi�on. This helps to capture opportuni�es in the compe��ve

environment while avoiding threats.

Experts in the field of strategy define the poten�al components of

strategy and the different forms strategy can take.

Key Terms

strategic management—the art and science of formula�ng,

implemen�ng, and evalua�ng cross-func�onal decisions that will

enable an organiza�on to achieve its objec�ves

balanced scorecard—strategic performance management tool used

by managers to track the execu�on of ac�vi�es within their control

and monitor the consequences of those ac�ons

strategy—a plan of ac�on intended to accomplish a specific goal

Learning Resource

Key Points

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Strategy involves the ac�on plan of a company for building compe��ve advantage and

increasing its triple bo�om line over the long term. The ac�on plan relates to achieving the

economic, social, and environmental performance objec�ves; in essence, it helps bridge the

gap between the long-term vision and short-term decisions.

Strategic Management

Strategic management is the process of building capabili�es that allow a firm to create value

for customers, shareholders, and society, while opera�ng in compe��ve markets (Nag,

Hambrick, & Chen, 2006). It entails the analysis of internal and external environments of firms

to maximize the use of resources in rela�on to objec�ves (Bracker, 1980). Strategic

management can depend upon the size of an organiza�on and the proclivity to change the

organiza�on’s business environment.

The process of strategic management entails:

Specifying the organiza�on’s mission, vision, and objec�ves

Developing policies and plans that are designed to achieve these objec�ves

Alloca�ng resources to implement these policies and plans

As an example, let’s take a company that wants to expand its current opera�ons to produce

widgets. The company’s strategy may involve analyzing the widget industry along with other

businesses producing widgets. Through this analysis, the company can develop a goal for how

to enter the market while differen�a�ng from compe�tors’ products. It could then establish a

plan to determine if the approach is successful.

Keeping Score

A balanced scorecard is a tool some�mes used to evaluate a business’s overall performance.

From the execu�ve level, the primary star�ng point will be stakeholder needs and

expecta�ons (i.e., financiers, customers, owners, etc.). Following this, inputs such as

objec�ves, opera�ons, and internal processes will be developed to achieve these expecta�ons.

Another way to keep score for a strategy is to use a strategy map. Strategy maps help to

illustrate how various goals are linked and provide trajectories for achieving them.

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Strategy Map for a Public-Sector Organiza�on

Various goals are linked and there are trajectories for achieving them.

Common Approaches to Strategy

Richard Rumelt

In 2011, Professor Richard P. Rumelt described strategy as a type of problem solving. He

outlined a perspec�ve on the components of strategy, which include the following:

Diagnosis. What is the problem being addressed? How do the mission and objec�ves

imply ac�on?

Guiding Policy. What framework will be used to approach the opera�ons? (This, in many

ways, should be the decision of a given compe��ve advantage rela�ve to the

compe��on.)

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Ac�on Plans. What will the opera�ons look like (in detail)? How will the processes be

enacted to align with the guiding policy and address the issue in the diagnosis?

Michael Porter

In 1980, Michael Porter wrote that formula�on of compe��ve strategy includes the

considera�on of four key elements:

company strengths and weaknesses

personal values of the key implementers (i.e., management or the board)

industry opportuni�es and threats

broader societal expecta�ons

Henry Mintzberg

Henry Mintzberg stated that there are prescrip�ve approaches (what should be) and

descrip�ve approaches (what is) to strategic management. Prescrip�ve schools are “one size

fits all” approaches that designate best prac�ces, while descrip�ve schools describe how

strategy is implemented in specific contexts. No single strategic managerial method

dominates, and the choice between managerial styles remains a subjec�ve and context-

dependent process. As a result, Mintzberg hypothesized five strategic types:

strategy as plan—a directed course of ac�on to achieve an intended set of goals, similar

to the strategic planning concept

strategy as pa�ern—a consistent pa�ern of past behavior with a strategy realized over

�me rather than planned or intended. (Where the realized pa�ern was different from the

intent, Mintzberg referred to the strategy as emergent.)

strategy as posi�on—loca�ng brands, products, or companies within the market based

on the conceptual framework of consumers or other stakeholders; a strategy determined

primarily by factors outside the firm

strategy as ploy—a specific maneuver intended to outwit a compe�tor

strategy as perspec�ve—execu�ng strategy based on a “theory of the business,” or a

natural extension of the mindset or ideological perspec�ve of the organiza�on

Example

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A company wants to expand its current opera�ons to produce widgets. The company’s

strategy may involve analyzing the widget industry along with other businesses

producing widgets. Through this analysis, the company can develop a goal for how to

enter the market while differen�a�ng from compe�tors’ products. It could then establish

a plan to determine if the approach is successful.

References

Bracker, J. (1980). The historical development of the strategic management concept. Academy

of Management Review, 5(2), 219–224.

Nag, R., Hambrick, D. C., & Chen, M. (2007). What is strategic management, really? Induc�ve

deriva�on of a consensus defini�on of the field. Strategic Management Journal. 28(9): 935–

955. doi:10.1002/smj.615. Retrieved October 22, 2012

Licenses and A�ribu�ons

Strategic Management (h�ps://courses.lumenlearning.com/boundless-

management/chapter/strategic-management/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Crea�ve Commons

A�ribu�on-ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/)

license. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

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The Role of Vision

A clear and well-communicated vision is essen�al for a leader to gain support and for

followers to understand a leader’s goals.

Vision is defined as a clear, dis�nc�ve, and specific view of the future

that is usually connected with strategic decisions for the

organiza�on.

A thriving organiza�on will have a vision that is succinct,

understandable, and indica�ve of the direc�on that the company

wants to head in the future.

Leaders are essen�al for communica�ng the vision of the

organiza�on and promo�ng it through the decisions they make and

the strategies they pursue.

Key Term

vision—a clear, dis�nc�ve, and specific view of the future that is

usually connected with a leader’s strategic advances for the

organiza�on

A vision is defined as a clear, dis�nc�ve, and specific view of the future, and is usually

connected with strategic advances for the organiza�on. Effec�ve leaders clearly define a

vision and communicate it in a way that fosters enthusiasm and commitment throughout the

Learning Resource

Key Points

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organiza�on. This ability to express a vision and use it to inspire others differen�ates a leader

from a manager.

Many researchers believe that vision is an essen�al quality of effec�ve leaders—as important

as the abili�es to communicate and to build trust. Effec�ve leaders clearly communicate their

vision of the organiza�on. Their decisions and strategies reflect their view of what an

enterprise can be rather than what it currently is. A strong leader builds trust in the vision by

ac�ng in ways that are consistent with it and by demonstra�ng to others what it takes to make

the vision a reality.

Vision is an essen�al component of an organiza�on’s success. A thriving organiza�on will have

a vision that is succinct, indicates the direc�on the company is heading, and widely

understood throughout all levels of the organiza�on. The more employees are aware of,

understand, and believe in the vision, the more useful it is in direc�ng their daily behavior.

Vision and mission are some�mes used interchangeably, but there is a useful dis�nc�on

between the two. A vision describes an organiza�on’s direc�on, while its mission defines its

purpose. By focusing on the value an organiza�on creates, the mission helps priori�ze

ac�vi�es and provides a framework for decision-making.

Vision also plays a significant role in a leader’s strategy for the organiza�on. By se�ng the

direc�on, a vision underscores the necessity of all areas of a business working toward the

same goal. This unity of purpose o�en involves changing what is done and how, and aligning

the ac�vi�es and behavior of people. A vision reduces ambiguity and provides focus—two

benefits that are especially valuable in turbulent or rapidly changing �mes.

Licenses and A�ribu�ons

Defining Leadership (h�ps://courses.lumenlearning.com/boundless-

management/chapter/defining-leadership/) from Boundless Management by Lumen Learning,

originally published by Boundless.com, is available under a Crea�ve Commons A�ribu�on-

ShareAlike 4.0 Interna�onal (h�ps://crea�vecommons.org/licenses/by-sa/4.0/) license. UMUC

has modified this work and it is available under the original license.

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© 2019 University of Maryland University College

All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of

informa�on located at external sites.

  • eResource_ The Mission Statement
  • Article_ Mission and Vision Statements
  • eBook Resource_ What Is Strategy
  • eBook Resource_ Defining Leadership_ The Role of Vision

Week 3: Exercise 2

This is the second of three exercises that you will be completing.

This exercise represents very little research from the Internet so you will be focusing on the course material to complete this exercise.

Scenarios:

With the selection of a new Executive Director for Infant Formula Division within Biotech, it is time for to look at how the new division will function within Biotech. There will be many factors for the Director to consider while planning the future, to include both short and long term plans. Biotech will need to begin the process of establishing a strategy for the division specifying goals and objectives to follow to succeed early in the project. However, Biotech needs to understand that nothing is possible without the proper personnel in place to see this strategy to fruition.

Expert Foods Consultants has been retained to continue its partnership with Biotech working on the Infant Formula Division but instead of working with Melanie, will now assist the new Director. As the team lead, you will be traveling extensively with the new Director to the other major divisions spending time directly with the directors and getting to know their strategies for maintaining a well-oiled group while meeting the mission and vision.

Getting to know Biotech’s leadership teams will be critical as well as doing so will allow the Expert Foods consultants to help with the vetting of potential leaders. The new Infant Formula Director has asked you to help identify the types of leadership qualities the organization will need to have in place to help the new division align with the mission and vision of the organization as well as Melanie’s desire for a more sustainable future by being an environmentally and human friendly company.

There are several elements that result from the planning stage, one of which is the development of long-term goals. Long-term goals are set by the owners, leaders or upper management depending on the structure, size or type of organization. Long-term goals reflect the big-picture goals and objectives are directly related to the purpose and vision that the leaders and owners develop. In today’s change-dominated business environment long-term goals are set to be accomplished in 2-3 years’ time as opposed to the previous century’s 5-10 years.

Long-term goals are often created through planning and strategizing. The process begins with the vision and mission of the business. To understand the concepts of vision and mission and role of each in the planning process, you will take the role of the leader and formulate the vision and mission of an organization.

 With the addition of a new division and, more importantly, a new product line senior leadership has determined that the current Mission and Vision statements

may not be as relevant as they once were. Max has tasked you as the team lead from Expert Foods Consultants to present a more relevant Mission and Vision statement to reflect Biotech’s growing presence but also its desire to be a leader in sustainability and green products.

Current Company Vision: To help provide everyone with the healthiest life possible in the most natural of ways.

Current Mission: To develop products that are safe, effective, affordable and natural with the customer’s health always their primary goal.

Exercise Instructions:

For this exercise, you will act as the group lead from Expert Foods Consultants, assigned to Biotech’s. You will put together a preliminary document so your team can review prior to passing along to Biotech. The preliminary document is a detailed Word document or rft document that presents your ideas and explains your ideas and reasoning that will use the course material to supporting the ideas and reasoning. You will be using the course material to support your ideas.

Due Date: Week 3 - Saturday 11:59 p.m. eastern time.

Leadership Elements

Write one paragraph for each statement below:

 Define leadership and explain the difference between leading and managing. Support the reasoning with the course material.

 Explain what leadership styles will best fit with the new director’s style of leadership; a multi-cultural workforce; and the goal of having a sustainable, green, and human friendly product line on the forefront of innovation within the infant formula industry. Remember, to use the course material to support the ideas and reasoning. You will not be using external source materials.

Mission and Vision Statements

 Construct a more relevant Mission statement and Vision statement to reflect Biotech’s growing presence but also its desire to be a leader in sustainability and green products.

 In a separate paragraph, explain the reasoning for the changes made to the mission statement and vision statement. Use the course material to support the reason. Do not use external source material.

How to Set Up the Exercise

Create a Word or Rich Text Format (RTF) document, which requires double spacing. Use Arial, 12-point font. You will cite within the document and provide a reference list on a separate page.

Provide a title page and a reference list on a separate page.

Create an introductory paragraph explaining what you had put together so your team has a clear understanding of what you have done and why you have done so.

**Do not copy the question and present in a question/answer format.

Submit the Exercise in the Assignment Folder (The assignment submitted to the Assignment Folder will be considered the student's final product and therefore ready for grading by the instructor. It is incumbent upon the student to verify the assignment is the correct submission. No exceptions will be considered by the instructor).

Completing the Exercise

In order to complete this Exercise, you will want to first read the module, Learn How to Support What You Write, as this assignment requires you to use the course readings and research to support what you write. Also,

 Read and use the grading rubric while completing the exercise to ensure all requirements are met that will lead to the highest possible grade.

 Third person writing is required. Third person means that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link: http://www.quickanddirtytips.com/education/grammar/first-second-and- third-person.

 Contractions are not used in business writing, so do not use them.

 Paraphrase and do not use direct quotation marks. Paraphrase means you do not use more than four consecutive words from a source document. Instead put a passage from a source document into your own words and attribute the passage to the source document. Not using direct quotation marks means that there should be no passages with quotation marks and instead the source material is paraphrased as stated above. Note that a reference within a reference list cannot exist without an associated in-text citation and vice versa. You may not use more than four consecutive words from a source document, as doing so would require direct quotation marks. Changing words from a passage does not exclude the passage from having quotation marks. If more than four consecutive words are used from source documents, this material

will not be included in the grade and could lead to allegations of academic dishonesty.

 You are expected to use the case scenarios and weekly course material to develop the analysis and support the reasoning. There should be a robust use of the course material along with thorough analysis of potential location information. Material used from a source document must be cited and referenced. A reference within a reference list cannot exist without an associated in-text citation and vice versa. Changing words from a passage does not exclude the passage from having quotation marks. If more than four consecutive words are used from source documents, this material will not be included in the grade and could lead to allegations of academic dishonesty.

 Use in-text citations and provide a reference list that contains the reference associated with each in-text citation.

 You may not use books in completing this exercise unless part of the course material. Also, do not use a dictionary or Wikipedia.

 Provide the page or paragraph number in every in-text citation presented. If the eBook does not have pages, provide the chapter title and topic heading. If using a video, provide the minutes and second of the cited material.

Self-Plagiarism: Self-plagiarism is the act of reusing significant, identical or nearly identical portions of one's own work. You cannot re-use any portion of a paper or other graded work that was submitted to another class even if you are retaking this course. You also will not reuse any portion of previously submitted work in this class. A zero will be assigned to the assignment if self-plagiarized. Faculty do not have the discretion to accept self-plagiarized work.

Grading Rubric

Above Average Sufficient Developing Needs Improvement

Failure

Leading and

Managing

1.19 points

Thoroughly

and correctly

defines

1.0115 points

Correctly

defines

leadership and

0.8925 points

Attempts to

define

leadership and

0.7735 points

Incorrectly define

leadership

0 points

Little to no attempt to

define

leadership and

the difference

between

leading and

managing

using the

course material

to support the

ideas,

reasoning and

conclusions

made.

(1.071 - 1.19)

explain the

difference

between

leading and

managing

using course

material to

support the

reasoning and

conclusions

made; needs

clarity or some

development;

not thorough

enough.

(0.952 - 1.070)

explain the

difference

between

leading and

managing. and

attempts to use

course material

to support the

reasoning and

conclusions

but significant

clarity or

development is

needed.

(0.833 - 0.951)

and attempts to

differentiate between

leading and managing using the course

material to support the reasoning

and conclusions; missing key information making a

weak presentation.

(0.714 - 0.832)

leadership or does not

differentiate between

leading and managing.

(0 - 0.713)

Leadership

Styles

1.33 points

Thoroughly

and correctly

explains what

leadership

styles will best

fit the new

director's style

of leadership;

a multi-

cultural

workforce,

and the goal of

having a

sustainable,

green, and

human-

friendly

product line

1.1305 points

Correctly

explains what leadership styles will best fit the new director's style of leadership; a multi- cultural workforce, and the goal of having a sustainable, green, and human- friendly product line on the

0.9975 points

Attempts to

explains what leadership styles will best fit the new director's style of leadership; a multi-cultural workforce, and the goal of having a sustainable, green, and human-friendly product line on the forefront of innovation in the infant

0.8645 points

Incorrectly explains what

leadership styles will best

fit the new director's style of leadership; a multi-cultural workforce, and

the goal of having a

sustainable, green, and

human-friendly product line on the forefront of innovation in

the infant

0 points

Little to no attempt to

explains what leadership styles will best fit the

new director's style of

leadership; a multi-cultural workforce,

and the goal of having a sustainable, green, and

human- friendly

product line

on the

forefront of

innovation in

the infant

formula

industry using

case scenario

facts and

course

material to

support

reasoning and

conclusions.

(1.197 - 1.33)

forefront of innovation in the infant formula industry using case scenario

facts, company

profile and

course material

to support the

reasoning and

conclusions

made; needs

clarity or some

development;

not thorough

enough.

(1.064 - 1.197)

formula industry and attempts to use

case scenario

factsm and

course material

to support the

reasoning and

conclusions but

significant clarity

or

development is

needed.

(0.931 - 1.064)

formula industry or

does not use the case

scenario facts, OR course material to support the

reasoning and conclusions; missing key information

making a weak presentation.

(0.798 - 0.931)

on the forefront of

innovation in the infant formula industry

(0 - 0.797)

Mission

and Vision

Statements

1.33 points

Effectively

constructs a

more relevant

Mission

statement and

Vision

statement to

reflect

Biotech’s

growing

presence but

also its desire

to be a leader

in

sustainability

and green

products that

reflects what

a vision

1.1305 points

Constructs a

more relevant

Mission

statement and

Vision

statement to

reflect

Biotech’s

growing

presence but

also its desire

to be a leader

in

sustainability

and green

products

reflective of what a vision statement

0.9975 points

Attempts to

constructs a

more relevant

Mission

statement and

Vision

statement to

reflect

Biotech’s

growing

presence but

also its desire

to be a leader

in

sustainability

and green

products but

one of the

statement

0.8645 points

Incorrectly constructs a more relevant

Mission statement and Vision statement

to reflect Biotech’s growing presence but also its desire to be a

leader in sustainability and

green products or the statements both need

significant development.

(0.798 - 0.931)

0 points

Little to no attempt to

constructs a more

relevant Mission

statement and Vision

statement to reflect

Biotech’s growing

presence but also its

desire to be a leader in

sustainability

statement and

mission

statement

should

convey.

(1.197 - 1.33)

and mission statement should convey but needs some development or change.

(1.064 - 1.197)

needs

significant

development

or both

statements

fail to reflect

what a vision

statement and

mission

statement

should

convey.

(0.931 - 1.064)

and green products.

(0 - 0.797)

Mission

and

Vision

Statement

s

Reasoning

1.33 points

Thoroughly

and

correctly

constructs a

more

relevant

Mission

statement

and Vision

statement to

reflect

Biotech’s

growing

presence but

also its

desire to be

a leader in

sustainabilit

y and green

products

using case

scenario

facts

company

1.1305 points

Correctly construc

ts a more relevant

Mission statement

and Vision

statement to reflect

Biotech’s growing

presence but also

its desire to be a

leader in

sustainability and

green products

using case

scenario facts,

company profile

and course

material to support

the reasoning and

conclusions made;

needs clarity or

some

development; not

thorough enough.

0.9975 points

Attempts

to constructs a

more relevant

Mission

statement and

Vision

statement to

reflect

Biotech’s

growing

presence but

also its desire

to be a leader

in

sustainability

and green

products and

attempts to

use case

scenario facts,

company

profile and

course

material to

0.8645 points

Incorrectly construct s a more relevant Mission statement

and Vision statement to reflect Biotech’s growing presence but also its desire to be a

leader in sustainability and green products or does not use the

case scenario facts, company profile,

OR course material to support the reasoning and conclusions; missing key

information making a weak

presentation.

0 points

Little to no attempt to

constructs a more

relevant Mission

statement and Vision statement to reflect Biotech’s growing

presence but also its desire to be a leader in

sustainabilit y and green

products

(0 - 0.797)

profile and

course

material to

support

reasoning

and

conclusions.

(1.197 -

1.33)

(1.064 - 1.197)

support the

reasoning and

conclusions

but significant

clarity or

development i

s needed.

(0.931 - 1.064)

(0.798 - 0.931)

Attention to

Instructions

0.7 points

The paper contains

completion of all major assignment

tasks including writing the

report. The paper also includes

completion of all minor aspects of the assignment

such as third person writing, required use of

course readings, outside sources if

needed, and assignment

format.

(0.63 - 0.7)

0.595 points

The paper contains

completion of all major assignment

tasks including writing the

report. The paper missed 1 minor aspect of the

assignment such as third person writing, required use of course

readings, outside sources if

needed, and assignment

format.

(0.56 - 0.62)

0.525 points

The paper missed 1 major

assignment task (including

writing the report) or 2

minor aspects of the

assignment.

(0.49 - 0.55)

0.455 points

The paper missed 2 major

assignment tasks (including

writing the report) or 3

minor aspects of the

assignments.

(0.42 - 0.48)

0 points

The paper missed 3 or more major assignment

tasks (including writing the

report) or four or more minor aspects of the assignment.

(0 - 0.41)

Writing

Mechanics

0.7 points

Strictly adheres to standard

usage rules of written English

using paragraphs

0.595 points

Excellently adheres to standard usage of

mechanics: conventions

of written

0.525 points

Satisfactorily adheres to standard

usage rules of mechanics: conventions of English,

0.455 points

Minimally adheres to standard

usage rules of mechanics: conventions

of written

0 points

Does not adhere to standard usage

rules of mechanics:

conventions of written English

largely incomprehensible;

and sentences rather than

bullets, including but not limited to capitalization, punctuation,

run-on sentences, missing or

extra words, stylistic errors, spelling and grammatical errors. No

contractions or jargon used. 0

to 2 errors noted.

(0.63 - 0.7)

English, including

capitalization, punctuation, and spelling. 3 to 6 errors

noted.

(0.56 - 0.62)

including capitalization, punctuation, and spelling. 7 to 10 errors

noted.

(0.49 - 0.55)

English, including

capitalization, punctuation, and spelling. More than 10 errors

found.

(0.42 - 0.48)

or errors are too plentiful to count.

(0 – 0.41)

APA

Style

(6th

ed.)

0.42 points

1 - 2 APA style or usage errors; Proper citation

of source material is used

throughout paper;

Reference titles follow APA with

only the first word, the first word after a colon and

proper nouns capitalized.

(0.378 - 0.42)

0.357 points

Attempts in- text citations

and reference list but 3 -

4 APA style errors noted or

fails to use APA citations

when appropriate 1 -

2 times.

(0.336 - 0.377)

0.315 points

Attempts in- text citations

and reference lists; APA style

errors are noted

throughout document; Fails to use

APA citations when

appropriate 3 times in

document.

(0.294 - 0.335)

0.273 points

Attempts in-text

citations and

reference lists; Fails

to use APA citation

when appropriate 5 -

6 times; Fails to use

APA citations when

appropriate 5 -

6 times in document

or presents a total of 1

- 2 in-text citations

and reference list in a

paper when requires

APA citations are

needed throughout the

document.

(0.252 – 0.293)

0 points

No attempt at APA style; or attempts either in-

text citations or reference

list but omits the

other.

(0 – 0.251)

Biotech Health and Life Products

Company Profile

Welcome to Biotech!

The assessment projects for this class will examine different facets of the leadership of

Biotech Health and Life Products, Inc. You will be exploring leadership within Biotech

with the driving question of “what skills does a Biotech leader need to lead the company

now and in the future?”

History

Wilford Barney was a young apprentice working for Peter Ulan, owner of a small apothecary shop in Yonkers, New York. During his apprenticeship, Barney created a general energy elixir that was based on a home remedy of his mother’s back in Ireland. The elixir was produced specifically for many of Ulan’s special customers. Made of all natural ingredients the elixir provided B12 and other vitamins to promote a healthy immune system. The energy boost was noticeable after only a week’s use. The reputation of the elixir grew.

In 1922, Barney took over Ulan’s apothecary shop renaming the business, Barney’s Apothecary. At that time, Barney decided to bottle his elixir and sell the formula to everyone rather than selected customers. Barney also gave bottles of the elixir to local peddlers who sold the product along with their wares receiving a commission on each bottle they sold. By 1929, the product was well known in Yonkers. Encouraged by the success in Yonkers Barney decided to branch out to New York City.

In 1932, Barney built a small manufacturing plant near the store where he mixed and bottled the elixir for sale. By 1934, Barney expanded sales by putting the elixir in a quarter of the apothecary shops in New York City. Sales were booming and customers inquired about other products that Barney’s had.

In 1936, Barney started a new product called Night Relief, another of his mother’s recipes. This product offered relief from night sweats and anxiety caused by menopausal symptoms or nerves. When this product proved a “secret success” with the ladies, Barney decided to bring his mother, Irene, from Ireland, and put her to work making new natural products. With his mother’s help, Barney grew the business into a small but successful manufacturer of natural “life products”. Barney coined “life products” because the products tracked natural life events in the human body and attempted to improve the customer’s discomfort in dealing with them.

The name of the company was changed to Barney’s Elixir and Life Products. The business continued to grow and with his mother’s death in 1938 the company had a gross revenue of $178,000 a year. The depression took a toll on company profits but people

still needed the boosts to their health and were able to afford Barney’s products as opposed to the medicine offered by doctors and hospitals. During World War II the company supplied the troops with a natural caffeine (Stay Clear) product that would keep soldiers awake for long periods of time and heighten their mental alertness. Government contracts derived from Stay Clear boosted the revenue of the company considerably and ushered in a new wave of interest of natural products.

By 1950 Barney turned over the reins of the daily operations of the business to his children but remained on the Board of his family owned company. By this time, the company had expanded its manufacturing plants and sales nationally to include Detroit, Michigan, Los Lunas, New Mexico, Chicago, Illinois and Atlanta, Georgia. The revenue of the company was now close to 2.5 million dollars.

In the 1960’s the social climate in America had changed and pharmaceutical companies took on greater importance in the treatment of people’s health. The discovery of new drugs and better health care shifted the confidence in the American perspective away from natural products to traditional western medicine. Although the counter culture of America still supported natural supplements, popularity for Barney’s products waned.

In 1965, Wilford’s granddaughter, Geraldine, took over the Research and Development Department (R&D) after receiving a degree in chemistry from Harvard. She had been trained as a child by her grandmother, Wilford’s mother, and knew how the recipes should look. However, she had new ideas and with the approach of the 1970’s, was ready to join the “Anjolie perfume commercial” lifestyle depiction of a 70’s women that “they could bring home the bacon and fry it up too.”

Due to the downturn in sales by 1970, the company turned to other countries for its sales base. Starting in Germany and other European countries where natural products are highly credible, Barney began to license the sale of the company’s products to local manufacturers. The name recognition grew and by the 1980’s the company was grossing over 4 million dollars in gross sales. The company moved to overseas operations and manufactured in Germany. Wilford Barney died in 1981 shortly after seeing his first grandchild, Maximillian Barney, take over the President’s positon of the company.

Studying the trends in the 1990’s about the resurgence of natural health products “Max” as he liked to be called, decided it was time for Barney’s to focus on the new interest in homeopathic and natural products especially at home in America where sales were static. In 1996, Max, wanting to get a sleeker and more modern feel to the company’s products changed the company name and logo. No longer was Barney’s a mom and pop operation but is an international business. Barney’s Elixir and Life Products was now Biotech Health and Life Products. While the products would continue to show the old Barney logo, for name recognition the new logo would take prominence on the packaging.

By 2000 the company was grossing about 1.1 billion in sales with an increase in market share. By 2012, Biotech had a 20% market share of the supplement business with

Approximately $25 billion in sales. The company is interested in expanding into infant formula.

. Currently sales for the company are at $45 billion. Maximillian Barney is still President and CEO. The stock is still held by the family and all senior management positions are held by family members.

Current Company Vision: To help provide everyone with the healthiest life possible in the most natural of ways.

Current Mission: To develop products that are safe, effective, affordable and natural with the customer’s health always their primary goal.

Current Fact Sheet

Headquarters Yonkers, New York Worldwide web address www.biotechlife.com President Maximillian Barney 2016 Gross Sales US$ 45 billion Employees 38,000 in 6 countries worldwide

Manufacturer Operations

United States Battle Creek, Michigan, Albuquerque, New Mexico,

Elkton, Maryland, Peoria, Illinois and Atlanta, Georgia

Europe England, France, Netherlands

Asia Sapporo, Japan

South and Central America and Caribbean Salvador, Brazil

Canada Product

Lines

Major Competitors

Calgary, Canada

Protein and Fitness; Personal Care, Vitamins and Food Supplements, Infant Formula (Pending)

Protein and Fitness-GNC,

Personal Care- Nestle Skin Care- Galderma, SA; Glaxo, Merke, General Mills.

Vitamins and Food Supplements- GNC, Natures Plus, Natrol, Nature’s Way, Nature’s Bounty, Hain Celestial Group, Inc, Schiff Nutrition International, Nestle

Current Business Philosophy

Biotech has determined its long-term goal planning pattern should be no longer than three years. Three years seems more flexible than the seven year planning pattern previously used as change in the business climate is making it imperative to be more flexible. The need for innovation and competitive advantage ideas are the main focus for the next two years along with the company’s commitment to becoming a triple bottom line company. Sustainability both for profit and planet is foremost in the minds of the leadership. The development of a triple bottom line company is in the best interest of the company because of the need to keep a strong natural product image link to the community and the desire for the company to be socially responsible. Protection of the suppliers and control over product quality is critical to the development of a sound “life product.”

Current Growth Plans Business and Sales Biotech is looking to expand and is exploring the opening of a new manufacturing, sales, and distribution facility in the next year. Currently, products are sold through t h e U S a n d i t s European division but there is a great demand for its current product in Malaysia and China as well as in the United States. It was decided by senior leadership to explore a potential manufacturing and sales presence in these three areas, which would potentially increase sales and would fall under the control of a new Executive Director. As in keeping with the all-natural products, the company wants to bring a greener footprint to its new facility going beyond what many competitors have in place. This as an opportunity to gain market share; and introduce a new product line. This effort would provide a good test case for new products that would position Biotech as a leaders in innovative technology. Product Development Biotech is looking to develop an infant food line. The company has recently expanded and is now interested in pursuing infant formula.

Current Eco Sustainability Commitments Currently, Biotech has current commitments to build housing for several communities in Brazil and India where natural pharmaceutical ingredients are produced. The program reflects the company’s strong commitment to making the company a triple bottom line company by the year 2021.

Innovation and Adaptability

Development of organizational structure and culture changes are being made to introduce more collaborative decision making as well as bringing the divisions closer together in the area of shared resources and communication. The emphasis is to encourage the exchange of ideas, create an environment that fosters new ideas and makes change easier in implementation of initiatives. Biotech is concerned that the stateside organization is driving the other overseas divisions and that new ideas are being encouraged because of the cultural differences in staff. Customer innovation

workshops run by the various divisions have highlighted that R&D in Europe and Australia see differences in consumer preferences from US consumer preferences, and Biotech would like to incorporate this knowledge in its future facility. It is believed that US controlled resources are ignoring these product preferences and are thus impeding overseas sales. Corporate leaders are trying to examine how to answer this cultural gap.

Current Corporate Culture Being a family owned business, Barney’s new image has made the family a little less cohesive since it seeks to be a sleeker less clan like organization. Still the family leaders are committed to keeping the family history as a symbol for the company. It is believed that the family cultural connection gives support to collaborative decision making something the Company has been successful in promoting throughout the organization. It is also seen by the owners that their family and employees makes up the company’s customers. The family wants to encourage a customer centric culture, one that allows employees to see everything through the perspective of the customer and to make decisions with the customer’s view always paramount. Furthermore, there would be a companywide accountability to the customer in all departments. The owner wants a workforce that gives an extraordinary customer experience in every product it makes.

Current Organizational Structure

This company has a geographical division structure. However, within each division is a functional structure with production and sales at the hub. R&D, HR, IT and Finance have small staff in each division whose primary job is to liaison with headquarters to implement the decisions made by them.

Above all the Divisions is the President and CEO Maximillian Barney Housed in headquarters is the R&D, HR, IT, and Finance Divisions

Executive

Director North American Division

Executive Director European Division

Executive Director N e w D i v i s i o n (Infant Formula)

Executive

Director South America Division

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