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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
Key Points
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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.
Key Points
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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
1/14/2019 Classical Versus Behavioral Perspectives
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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
All links to external sites were verified at the �me of publica�on. UMUC is not responsible for the validity or integrity of
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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
Key Points
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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‑
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Chris Argyris. Provided by: Wikipedia. Located at: h�p://en.wikipedia.org/wiki/Chris_Argyris
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Single‑closed‑loop version of the square knot of prac�cal knot‑tying.. Provided by: Wikimedia. Located
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(h�p://upload.wikimedia.org/wikipedia/commons/6/69/Math‑square‑knot‑6crossings.svg). License: CC
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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
Key Points
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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
Key Points
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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.
Key Points
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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
Key Points
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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
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originally published by Boundless.com, is available under a Crea�ve Commons A�ribu�on‑
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has modified this work and it is available under the original license.
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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
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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
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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
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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
Key Points
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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
Key Points
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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.
References
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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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1/14/2019 Trends in Organizational Diversity
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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
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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
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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
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informa�on located at external sites.
1/14/2019 Core Requirements of Successful Managers
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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
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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Sheet16
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
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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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
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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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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Sheet16
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
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 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
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Sheet11
Sheet12
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Sheet15
Sheet16
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.
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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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© 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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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
- eBook Resource_ Leadership vs Management
- eBook Resource_ Adapting and Innovating
- eBook Resource_ Technology and Innovation
- eBook Resource_ Managing Change for Organizations
- eBook Resource_ Managing Change for Employees
- eBook Resource_ Porters Competitive Strategies
- eBook Resource_ Creating Strategy_ Common Approaches
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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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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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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
1/28/2019 What is Strategy?
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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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