FOUNDATIONS OF MANAGEMENT

DR. DAVID CABABARO BUENO

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FOUNDATIONS OF MANAGEMENT

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DAVID CABABARO BUENO

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 Preface

This book is designed and structured to present flexibility and easy use for
students and practitioners. Each chapter contains performance standards and
learning competencies that serve as a guide in studying management's essential
concepts and principles. Summative assessments in worksheets are prepared at
the end of each chapter to determine the students' degree of completion and
understanding of the presented concepts and applications.

It is designed to familiarize the students with the basic concepts, principles, and
processes related to business organization and the functional areas of
management. Specific emphasis is made on studying management functions like
planning, organizing, leading, and controlling. Moreover, it orients the student on
the importance of these functions and the role of each area in entrepreneurship.

The book is composed of various chapters. Chapter 1. The nature and Scope of
Management; Chapter 2. The Firm and its Environment; Chapter 3. Planning
Function; Chapter 4. Organizing Function; Chapter 5. Staffing Function; Chapter
6. Leading Function; Chapter 7. Controlling Function; Chapter 8. Introduction to
Various Functional Areas in Management; and Chapter 9. Special Topics in
Management.

The contents, performance standards, and learning competencies are lifted

from the contents of the sample syllabus appended in the CMO for Business
Administration by the Commission on Higher Education.

The Author

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 Chapter 1
NATURE AND CONCEPT OF
MANAGEMENT

Performance Standard: The learners shall be able to apply the management

theories and concepts in solving business cases.

Learning Competencies: The learners…

➢ discuss the meaning and functions of management;

➢ explain the various types of management theories;
➢ explain the functions, roles and skills of a manager; and
➢ draw generalization on the basic concepts and theories of management.

Management

Management is a process of designing and maintaining an environment in which

individuals work together in groups to efficiently accomplish selected aims (Weihrich and
Koontz, 1993).
This basic definition needs to be expanded in the following ways:
1. As managers, people are employed to carry out specific functions. These
functions, commonly referred to as managerial, are planning, organizing, staffing, leading,
and controlling.
2. Management applies to any organization. Management is not restricted to any
particular organization. Any organization, as long as human and other resources are
there, calls for management.
3. Management is essential to any level in an organization. Whatever position you
find yourself in an organization, you will feel the presence of management.
4. The aim of all managers, whether a senior manager or a junior one, is the
same. It is to make a profit. They are making profit demands that the right decisions are
made so that the resources available to an organization are used without wastage.
5. Managing is concerned with productivity. This demands creating something
that is of value to the customers. But the higher the volume of production, the better for
the organization. This is because, with increased volume, the unit cost of the product is
going to be lower.
Furthermore, Sir Reynolds defined management as getting things done through
the efforts of others. This means:

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 1. The manager is different from other employees. The manager has a group of
subordinates or the doers or operatives reporting to him. They are the ones that perform
the routine, day-to-day activities while the manager performs the managerial functions.
2. Management permeates the entire organization. The definition has established
a criterion through which one can determine who a manager is. The criterion is that
anybody with a group of workers reporting to him automatically qualifies as a manager.

Historical Development of Management

The need to handle human efforts. The development of management

thought goes back to the days when people started to accomplish goals by working
together in groups. However, the urge to develop management as a body of organized
knowledge has come in the past more than half a century. This is due to the recognition
that one missing link in attaining an effective organizational system is the effective
handling of human efforts. It has been recognized that human beings play critical roles in
doing the organization's work and work as a system. This means that an organization
consists of different parts, such as the production, marketing, finance, and personnel
departments. Each of the areas does not operate in isolation. It must co-operate and
work in harmony with other parts. As a result, if one part is not working well, it will
affect other parts. Also, the decision of one part will affect other parts. As an example,
the marketing department notices greater demand for the products or an organization.
This means that there is going to be an increase in production. However, increasing
production is not the job of the marketing department. The production department may
request more workers to cope with an additional volume of work. The personnel
department is called forth to assist in employing extra hands. These extra workers will
have to be compensated by paying them salaries or wages. The finance department will
look into this. You can see then that the simple decision of meeting the increase in
demand has affected the whole department in the organization.
The effects of the Second World War. In addition to the need to handle
human efforts to work correctly as a system, the Second World War and the effects it
created also stressed the importance of management as an organized body. This again
created the mistaken idea that management started during the Second World War. The
effects of the Second World War are essential to management development in several
ways:
The war created the need for extensive programs necessary to fight the war
successfully. Such programs involved the manufacture of weapons of mass destruction as
well as space programs. The atomic bomb, you might have read or heard, was produced
during the war. The emphasis for these programs was on production with the least cost.
It is only through proper management that this could happen. The importance of
management after the war was further increased. It was noticed that many young men
were sent to the war front. This created a shortage of workforce, which required sound
management to get the best from them. Again the technical advances which were made
during the war must be managed appropriately.
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 The emergence of stiff competition. The stiff competition among companies
and the rivalry for markets, power, and prestige necessitated good management to
sustain. The competition has arisen because of: (1) The worldwide spread of knowledge
concerning areas of the world which were not known before the world war. This made
business organizations utilize the new knowledge as a basis for more outstanding market
share. (2) There was also the spread of technical knowledge. As soon as the war was over,
the technical knowledge on an improved production method started applying in
industries and commerce. (3) There was free trade because barriers to stop international
trade, such as tariffs, were reduced. Tariffs are the money paid to import or export
something from or to another country. (4) Due to improved production and distribution,
there were so many goods that consumers could choose from. Buyers have a wide array
of goods from different organizations to buy, and the organizations must compete for
their patronage.
All the above factors have placed a heavy management burden, and the burden
has kept increasing since the Second World War.
Management in antiquity. If management did not start during the Second
World War, then when did it start. We had already stated that the history of management
started when people started working in groups. This means that management started in
ancient times.
Management in early Egypt. History tells us that civilization started in Egypt.
This was as far back as 1300 B.C. Some historians have made interpretations of Egyptian
papyri (plural); the singular is papyrus which is the form of writing of ancient Egyptians.
The interpretations showed the recognition of the importance of organization and
administration in Egypt. This necessitated the use of formal rules and procedures to
accomplish objectives. Such objectives included the construction of the famous Egyptian
pyramids, which are still standing today.
Management in ancient China. The analysis of ancient philosophers' parables
indicates the existence of practical management in China. Confucius, for example (a
Chinese sage), made parables. These parables include practical suggestions for public
administrations. There are also guides in the form of admonitions to choose honest,
unselfish, and capable officers. All these still find relevance in modern personnel
management. They have a bearing on recruitment, selection, and placement which are
essential duties concerning staffing.
Management in Greece. In ancient Greece, there existed Athenian
commonwealth. The commonwealth consisted of councils, popular courts, administrative
officials, and a board of generals. Each of these had its set of functions to perform.
Moreover, to be able to carry out these duties required management planning. So also is
organizing and other management functions. Socrates, a Greek philosopher, defined
management as a skill to be practiced differently from technical skill and experience. This
definition is remarkably close to our current understanding of management.
Management in ancient Rome. The details of the administrative job in ancient
Rome demanded numerous management techniques. There was the existence of the

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Roman magistrates. These magistrates had functional areas. That is, each magistrate had
its specialized cases to treat. Besides their functional areas, they had degrees of authority.
This means that not all magistrates have equal authority. There were those with lower
authority and also those with higher authority. All these were shown in the type of cases
being treated. All these fantastic arrangements took place in ancient times, and we have a
similar system in our judicial system.
Management in the military. Finally, the practice of management has been
emphasized in the military right from ancient times till now. Essential principles and
practices of modern business principles and practices of modern business management
may be traced to military organizations.
These include the following:
Authority relationships: This can hardly be over-emphasized in the military as
the junior in a rank report to the senior officers for directives, which must be complied
with. The levels or hierarchies have been created to ensure smooth authority
relationships. All these have made it possible to carry out military assignments.
Techniques of leadership: The military has a variety of stages and techniques
of leadership depending on the circumstance and situation. These include autocratic style,
which means barking out orders, and the men must comply by implementing and
following the orders, participating in leadership techniques which involve some elements
of consultation with the subordinates that is the officer consulting the men before taking
the final decision, and the style which involves a combination of autocracy and
participating techniques. All these styles/techniques are still being applied in present
organizations.
The use of staff devices: This practice is expected in the military and civilian
business organizations. It is a technique that ensures that the line commanders should be
busy prosecuting the battles while concerns for uniform, caps, boots, medicine, treatment
for the injured, accommodation, logistics supplies should be in the hands of specialists.
Some of these specialists also offer valuable information concerning war efforts.

Principles of Management

The contributions of some of the key players in the development of

management as a discipline are the following:
Frederick Taylor’s Principles of Management. Taylor’s management
principles aimed to achieve harmonious and corporative group relationships, develop the
full potentials of the employees and organizations to work for maximum output, and
replace the rule of thumb with an organized body of knowledge. Jones and George
(2003) summarized Taylor’s principles of management into four (4).
They are further summarized as follows:
1. Improvement in Tasks Performance. Taylor emphasized that there is every
need to study the way tasks are performed by workers, gathering all the informal job
knowledge that they possess and experimenting with ways of improving how they
perform tasks.
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 2. Codification of new methods of performance into written rules and
standard operating procedures and processes. When best procedures or methods
were identified, Frederick Taylor recommended their recording and stipulation as
standard procedures to be taught and applied to all employees performing similar tasks.
In other words, that became the standard mode of operation for that task. Taylor
believed that could help ensure efficiency throughout the entire organization.
3. Selection and training of employees with unique abilities to carry on
tasks according to established patterns. Taylor posited that workers were pressing to
understand their tasks thoroughly via training to perform such tasks at required minimum
levels to increase specialization and efficiency. This meant that those who could not
attend such required minimum levels needed to be posted to other sections until such
minimum acceptable levels of performance were attained.
4. Developing a good system of remuneration for workers that excel. Being
a manager with a flair for productivity, Taylor recommended a bonus pay system and
some percentage for hard-working employees who exceeded the required minimum
acceptable performance levels. This invariably meant putting a reward system for
Workers who performed above the accepted minimum levels stipulated by management.
Max Weber’s Principles of Management. Weber was a German academic
with much interest in developing a formalized system of organization and administration
to enhance effectiveness and efficiency in operations. He placed much interest in the
authority structure of organizations and developed the principle of bureaucracy. He
emphasized that hierarch, authority, and bureaucracy were necessary ingredients for the
success of all social systems (Agbaeze, 2006).
In their analysis of Weber’s theory of bureaucracy, Jones and George (2003)
summarized the principles of management from Weber’s perspective as follows:
1. A manager’s formal authority emanates from the position being held.
Every manager is capable of commanding obedience and respect as a result of the
position he/she occupies, and that this permits the manager to control and direct
compliance of the subordinates,
2. Occupation of position is derived from a manager’s performance. This
implies that job-related skills should determine the kinds of positions managers occupy.
3. specified extent of authority, responsibility, and relationship to other
positions in the enterprise. This principle warrants every employee to know what is
expected of him/her and what is expected from others. This permits accountability.
4. Hierarchical arrangement of positions. This permits who reports to an
employee and to whom such employee is to report.
5. Effective control of organizational members’ behavior. Weber opined
that this could be achieved where well-defined rules, standard operation procedures, and
norms are created. These provide behavioral guidelines and dictate best practices that can
enhance improvements in accomplishing organizational tasks.
Fayol’s Principles of Management. Henri Fayol, a notable guru in
management, identified fourteen (14) principles of management that he believed are

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essentially fundamental in the drive towards enhancing efficiency in managing
enterprises. These principles form the foundation of contemporary management theory
and practice.
1. Division of Labor. This involves the separation of skill areas into functional
areas based on specialization. According to him, this will eliminate any uncertainty in the
organization. Division of labor also involves the specialization of the workforce, thereby
creating specific personal and professional development within the labor force, which
entails increasing productivity and leads to increases in the efficiency of labor. By
separating a small part of work, the speed and accuracy in the workforce’s performance
increases. This principle applies to the employees at both the technical as well as
managerial levels.
2. Authority and Responsibility. Henri Fayol postulated that authority and
responsibility are necessary due to a manager’s position and other forms of informal
authority emanating from personal expertise, technical knowledge, leadership abilities,
etc. Fayol opines that where there is a clear division of the levels of authority and
responsibility, uncertainty in organizations will be reduced or even eliminated. This
reduces the tendency of any manager to usurp another person’s authority.
3. Unity of Command. The principle of unity of command emphasizes that
each organizational member should have only a single superior whom he/she reports to.
Proponents of this concept believe it lessens conflict, confusion, chaos within the
organizational hierarchy and creates greater personal responsibility for results or
accomplished tasks. Although, the possibility of dual command exists in many because
this practice is often inevitable. The chief problem with the dual command is, however,
the difficulty in appraising the
responsibility and authority of organization managers.
4. Line of Authority. The byline of authority refers to the chain of command
from the top to the bottom of an organizational structure. The efficiency of
communication in organizations is greatly influenced by the length of the chain of
command. An organization with a flatter structure (lesser levels) will disseminate
information at a faster pace. Also, its planning and
controlling functions will be carried on much quicker too. This is because there are fewer
interactions which invariably mean quicker decision making too.
5. Centralization. This refers to concentrating power and authority at the top
hierarchy of an organization. Fayol opines that authority should not be so much
concentrated at the top managerial hierarchy. This is so since centralization entails that
only managers at the top hierarchy are charged with making critical decisions. This
indicates danger as the lower-level managers or subordinates have little or nothing at
stake or are not participants in decision-making. However, its chief advantage is that it
permits the top hierarchy to have reasonable control over the enterprise's affairs, which
means prompt and appropriate response to problems and issues within the enterprise.
6. Unity of Direction. This refers to having a single guiding plan. This principle
means that tasks with the same aim need to come under a single head and a typical guide.

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The rationale behind this principle is to be focused and avoid controversies that will arise
with organization members working at cross purposes.
7. Discipline. This refers to respect for organizational members to ensure
reliability and hard work needed to achieve organizational goals. In specific terms,
discipline entails obedience, proper conduct about others, and respect for authority.
Discipline is virtually essential for the smooth functioning of all organizations.
8. Equity. Where subordinates are loyal and committed to their duties, it is quite
normal for top management to treat them with respect, fairness, impartiality, etc. When
this occurs, the workforce is encouraged and motivated to attain higher levels of
performance.
9. Order. Here, the emphasis is on the arrangement of organizational resources–
human and material. Fayol’s concern was with orderliness that could result in efficiency
and resourcefulness in organizations. Hence, he recommended the use of organizational
charts. Order will also enhance proper career planning and development along career
paths.
10. Subordination of Individual Interests to the Common Interest. The
concern here is because there is diversity in the interests of organization members. The
principle emphasizes the superiority of the organization's interest over and above
individuals and groups if the organization is to survive.
11. Initiative. The initiative means the possibility of subordinates exercising
creativity without direction or control from superiors. The initiative is a critical ingredient
in the ability to survive in any keenly competitive environment. Utilizing employees'
initiative can add strength and new ideas to organizations because the initiative is a source
of strength for the organization. After all, it provides new and better ideas.
12. Remuneration. Fayol posited that the remuneration system must be fair
enough to encourage efficiency and productivity with significant implications. He
proposed bonus and profit-sharing plans as a system of rewarding employees.
13. Stability of Tenure. Fayol argued that high labor turnover in organizations
results from poor or bad management. He, therefore, recommended long-term
employment. He believed this to be a factor that can develop skills that can improve
organizational sense for proper utilization of resources. The tenure of service should not
be too short, and employees should not be moved from positions frequently.
14. Esprit De Corps. This is a French word meaning “in unity there is
strength.” It emphasizes the feelings of commitment or devotion to a common cause
among members of an organization or group, or team. This team spirit is usually is a
catalyst that helps develop an atmosphere of mutual trust and understanding and can be
used to initiate and aid the processes of management functions.

Managerial Thoughts and Theories

The practice of management is not a recent phenomenon as several activities or

events indicate management principles were employed in executing them. For example,

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the Biblical story of Moses and his father-in-law on delegation of authority to ease work,
the building of the Egyptian Pyramids, the great Chinese walls, the early Greek and
Roman Army, etc. potent that management as a practice is an old phenomenon.
However, the striking influence of management was perhaps the industrial
revolution that began in Great Britain in the seventeenth and eighteenth centuries, where
machine power virtually replaced human power. This resulted in mass production and
rapid expansions. These propelled the emergence of large corporations. These
developments necessitated formal management practices to guide managers, which led to
the emergence of management theories.

Scientific Management Theory. The scientific management theory seeks

scientific methods to find the “best way” of performing a task or job. Stoner, Freeman,
and Gilbert (1995:34) assert that this theory arose partly from the need to increase
productivity since skilled labor was in short supply at the introduction of this theory. Its
proponents thought that the only way to expand productive capacity was to raise the
efficiency of workers. The proponents of the theory are quite numerous. The notable
ones include Frederick Taylor (1856-1915). Taylor used the time to study as his base,
broke each job down into its components, and designed the quickest and best methods
for performing each component. He firmly believed that if the amount of time and effort
that each worker expended in producing a unit of output were reduced by increasing
specialization and division of labor, the production process would become more
efficient. He opined that such best ways could be devised through scientific management
techniques rather than intuition or other informal methods. His concern was with
management at the shop level – a supervisory job. The application of the scientific
approach led to an unprecedented production ‘miracle’ (faster than Taylor expected). In
addition, workers feared that the dramatic increases in productivity and higher pay would
exhaust available work and cause layoffs. This made unions become suspicious of the
theory leading to mistrust and strained labor-management relations for a long time. Thus,
scientific management theories center on studying personal task mix to increase
efficiency in organizations.

Administrative Management Theory. The proponents of this school of

thought (theory) believe in studying the entire organization by developing more general
theories of what managers do and what constitutes good management (Robbins and
Coulter, 1996). The theory grew out of the desire to find appropriate guidelines for
managing large and complex enterprises. The two prominent proponents of this theory
are:
Henri Fayol (1841 -1925). Unlike Taylor, Fayol’s concern was directed at the
activities of managers in general since management is an activity common to all humans.
In pursuance of this, he postulated or identified 14 principles that he opined are essential
to increasing the management process's efficiency. Fayol’s management concept could be
taught once its underlying principles are understood since managerial tasks can be

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identified and analyzed. This implies that managerial skills are learned just like any other.
This disposition led to the overthrow of the hitherto posture that “managers are born,
not made.”

Max Weber (1864-1920). Weber’s concern was the development of carefully

contracted regulations of the activities of organizations since they are composed of a
large number of people. According to Leavitt (1978), Weber developed a theory of
bureaucratic management that stresses the need for a strictly defined hierarchy governed
by clearly defined regulations and lines of authority. This is so because Weber considered
an idea of an organization to be a bureaucracy whose activities and objectives are
rationally thought out and explicitly spelled out. The concern of Weber was to improve
the performance of organizations by making predictable and productive operations.
Thus, he opined that technical competence is emphasized and that performance
evaluations be made purely based on merit Weber’s construct of bureaucracy
characterized by division of labor explicitly defined hierarchies, detailed rules, regulations,
and formal relationships. An ideal bureaucracy does not exist in the real sense but is
merely a basis for postulating a theory about work and how it could be performed in
large organizations.

Behavioral Management Theory. Proponents of this theory opined that the

best approach to work and productivity understands the worker and the workplace. It
follows that managers need to be equipped with social sciences to understand better the
employee and job performance (Udoh and Akpa, 2007). Significant contributors to this
theory include Chester Bernard, Herbert Simon, Mary Parker Follett, Abraham, Maslow,
etc. The behavioral theorists studied a vast array of characteristics or factors in the work
setting to find ways of improving or increasing efficiency. One such study is the
Hawthorne study which found out that a manager’s behavior or leadership approach can
affect workers' level of performance. This shifted emphasis to managerial behavior and
leadership.

Management Science Theory. This theory, to some extent, is a contemporary

extension of scientific management theory since it also has a quantitative approach to
management in raising productivity. This school of management thought began when a
mixed team of experts from relevant, diverse disciplines was called upon to analyze a
problem and propose a course of action to management (Jones and George, 2003). The
team would rely on mathematical models that showed all the relevant factors in the
problem and their interrelationships in symbolic terms to solve this problem. By varying
the values of these factors and analyzing the equations, the effects of each changed
situation could be determined. This scenario helps present management with an objective
basis for making decisions. With mathematical modeling and IT or computers,
forecasting became much more accessible than previous theories could handle. It could
be deduced that this theory emphasized people and relationships; instead, it emphasizes

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aspects of the organization that can be captured numerically. This school of thought is
often called operations research (OR). The quantitative technique applicable to
management includes statistics, optimization models, information models, computer
simulation, linear programming, work scheduling analysis, etc. Management science was
first initiated in solving warfare solutions during World War II. After the war, the military
officers who joined business organizations employed OR techniques in solving business
problems to improve decision-making.

Organizational Environment Theory. The earlier theories looked at

organizations’ problems as how managers may influence behaviors within the
organization only. The organization environment theory is an attempt to view how
managers relate to the external environment. Two of the views that are important here
are the systems and contingency theories.

The Systems Theory. This theory holds that an organization is a diverse and
unified system composed of numerous interrelated parts. Thus, an organization is looked
at as a whole and as an integral part of the larger external environment. This situation
means that the activity of any sub-system of the larger environment affects the activities
of all other segments in diverse ways. The theory opines that managers of each segment
must make decisions only after identifying the impact of such decisions on other sub-
systems and the entire system. This presupposes that the various parts must work
together to promote efficiency and effectiveness, i.e., an organizational system must
create synergy (the whole is greater than the sum of parts) and thus increase efficiency
and effectiveness. Synergy implies that units or segments that work together are more
productive than if they operated independently.

Contingency Theory. This theory is often called a situational theory. It was

developed when researchers tried to apply the concepts of the major theories to real-life
situations. It was discovered that specific methods were highly influential in certain
settings but highly ineffective in others. Their logical conclusion was that results differ
because situations differ (Stoner, Freeman, and Gilbert, 1995). An effective and efficient
manager identifies which method will, in a given situation, under a particular
circumstance, and at a given time will best contribute to achieving organizational goals. In
other words, the organizational structures and control systems that a manager chooses
are contingent on the characteristic of the external environment in which the enterprise is
operating. Therefore, managers may either use a mechanical structure where the
environment is stable or an organic structure where the environment is rapidly changing.

Functions of Manager

The task of management involves the use of resources to achieve set goals.
Managers help accomplish this by performing several managerial functions.

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 The Planning Function. Managers need to identify and choose appropriate
goals for any meaningful progress and determine the courses of action to take. In this
regard, Jones and George (2003) posit that planning involves identifying and selecting
appropriate goals. Similarly, Robbins and Coulter (1996) opine that planning involves
defining an organization’s goals, establishing an overall strategy for achieving these goals,
and developing a comprehensive hierarchy of plans to integrate and coordinate activities.
The Organizing Function. There abound vast volumes of duties and tasks to
be accomplished in every organization. These duties need to be organized appropriately
to avoid confusion and duplication or waste. Organizing involves the assignment of
responsibilities and authority to individuals or groups in establishments. Jones and
George (2003) define it as the process of structuring working relationships that permit
organizational members to interact and cooperate reasonably to achieve organizational
goals. The resultant effect of organizing has organizational structures that specify tasks
and reporting relationships that help coordinate organization members.
The Leading Function. Leading implies influencing or guiding someone to act
in desired ways. When managers are effective, they can motivate their subordinates to be
efficient, effective, and high-performing. Yukl (1989) asserts that leadership is the process
by which a supervisor exerts influence over subordinates and inquires, motivates, and
directs their activities to help attain group or organizational goals.
The Controlling Function. The function of controlling helps in ensuring that
plans are implemented accordingly. This is why Ball, McCulloch, Frantz, Geringer, and
Minor (2004) attest that controls help put plans into effect, evaluate their effectiveness,
make desirable corrections and evaluate and reward or correct executive performance. In
management, control means a system of monitoring and evaluating whether an
organization’s strategy and structure are performing what they were intended to, how
they could be improved and how they might be changed where possible. The purpose of
control is to ensure the efficient utilization of the organization’s resources.

Roles of the Manager

The manager performs many roles in the process of managing. These roles arise
because of his position as a manager in an organization. Furthermore, the roles are many.
We are going to take each of these roles one after the other.
Figurehead Role. Managers head the different positions created in organizing;
they head the organization as the Managing Director or General Manager. They are also
found in the departments as functional managers and units as supervisors. Because of
this position as the headman of the organization or head of a department or unit, he
performs ceremonial duties and is responsible for all actions taken. The supervisor may
have to attend to a machine operator who is injured while performing his duties. The
marketing/sales manager may receive a vital customer whose purchase from the
organization may be substantial. Such a customer may be taken out for lunch and

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entertained. The personnel manager may receive students from the tertiary institutions on
excursion visits. These are all ceremonial duties.
Liaison Role. Managers do not associate only with their superiors and
subordinates but also with their peers and people outside the organization. There is
horizontal communication in an organization involving communication with others of
the same level in the same organization. This is sometimes referred to as peer
communication. The marketing manager can communicate with the production or with
the finance manager and so on. These forms of communication involve some form of
liaison role of the manager. He is liaising with the other manager to seek information that
will be relevant to his department. Associating with superiors and subordinates and
outsiders or liaising with outsiders, the information likely to be obtained will not only be
for the entire organization.
Monitoring Role. The monitoring role is related to the liaison role of the
manager. As a result, through his liaison contacts with his superiors, peers, outsiders, and
customers, he collects vital information through hearsay, gossips, and grapevines, among
other sources. However, the monitoring is specific to some issues pending in the
organization. So while the liaison role is more general in the search for and collection of
information, the manager monitors the environment for specific information. Through
the liaison and monitoring roles of the manager, each information will be made available,
guiding the manager in making decisions. Remember that no manager can decide without
information, and the higher the quality of the information, the higher the quality of the
decision. This is why some organizations sponsor their managers to join clubs.
Dissemination Role. Through the liaison role and monitoring role of the
manager, he collects information. The pieces of information are not collected for
collection's sake; they must be disseminated; that is, they have to be passed to the
appropriate places where they will be needed for decision making. The manager uses
some of the information while others are passed to the superior managers, peer
managers, and the subordinates, as the case may be.
Spokesman Role. Depending on the level of the manager, he speaks, and he
should speak well. As the managing director, he speaks for the whole organization; as a
manager in a department, he speaks on behalf. As the manager for a unit or section, he is
responsible for, he speaks for that unit. So, what the manager is saying, the importance of
what he is saying, and the effect of what he says depends on the level he finds himself at
and the nature of that information. The supervisor may suggest product modifications
along with the advice of the marketing manager. The Production manager may seek a
better service condition for the employees in his department and so on. Information can
also be sent to people outside the organization. An increase or reduction in the prices of
goods and services, sales promotion either during Christmas or any festive period, and so
on is the information passed to the customers who are definitely outside the
organization.
Resource Allocation Role. This is another role that the manager has to
perform. He is to decide who gets what in the organization or the department, or the

15
unit. Exercising this role confers on the manager some form of power popularly called
economic power or resource power. We shall be discussing this form of power when we
start treating authority, power, and influence in our future units. However, for the
manager to be able to perform this role, there are some conditions. The first condition is
that he possesses the authority to allocate this resource and not just possess the resource.
In other words, the prospective recipients should see the manager as having the authority
to disburse the resource. If the power lies elsewhere, even when the manager has the
resource, his role has been weakened. This is because it is only when he is authorized to
release the resource that he can do so. The second condition is that the prospective
recipients must desire the resource and the need for the resource. If this is not the case,
again, the performance of this role is weakened.
Entrepreneurial Role. To perform this role, the manager relies on the
monitoring and liaison roles. The information he collects from these roles and the
processing of the information are relevant to the performance of the entrepreneurial role.
In the performance of this role, the manager has to be constantly on the lookout for
ways to improve his organization or the department or the unit as the case may be. He
has to adapt it to the changing condition around and within. This is more so regarding
the external environmental factors where the manager has little or no control. He
searches for fresh ideas, which he brings to the organization. Such ideas may include:
fresh market to enter and sell his product and service, sources of funds at a cheap rate of
interest, new product development, and innovation, among other areas. As soon as a new
idea is found, the manager switches to his entrepreneurial role. He initiates studies and
projects aimed at taking advantage of such new ideas.
Disturbance Handler Role. Managers spend much time in disturbance
handling roles, reacting to day-to-day crises involving suppliers, strikes, plant inspection,
etc. Conflicts do arise too between the workers. These should be expected because these
workers come from different backgrounds and with conflicting interests and orientations.
It is sometimes said that if you have 100 employees, you should expect 100 different
forms of behavior. The manager's responsibility is to reconcile these conflicting interests
so that the group or organization members can work in harmony and the same direction.
Crises, as much as possible, should be nipped in the bud.
Negotiator Role. The manager spends much time in negotiation. This occurs in
several ways with different dimensions. The supervisor might argue a grievance problem
with union representatives. The sales manager may be involved with a negotiation that
involves a contract with an important customer. While these negotiations are between
one manager or more than one person, as with union representatives, some other
negotiations will involve teamwork. For example, in the industrial purchase, a team of
managers might be involved, comprising the purchasing manager, the marketing
manager, the accountant, and other stakeholders and the suppliers on the other hand.
The idea is to get the best bargain and ensure that what is to be supplied meets the
organization's technical specifications.

16
Social Responsibilities of the Manager

Social responsibility can be regarded as the obligation of managers to pursue

those policies, make those decisions, or follow those lines of actions that are desirable
concerning the objectives and values of our society. Consequently, the actions of the
manager which emanate from the objectives of the organization should be in harmony
with the objectives and values existing in the society. They provide the standards through
organizations' activities that can be measured and evaluated. The social responsibilities of
the manager can be seen on several fronts, and we are going to consider this one after the
other.

Responsibility to the Community: Here, the manager is expected to discharge

his responsibility to the community along the following lines:
1. Avoiding or community. A water treatment plant can be put in place for this
purpose. This is necessary because water is used for a variety of purposes. For farming,
bathing, cooking, washing, etc. The manager has to ensure that the water meant for every
community member is free of waste.
2. Provision of Scholarship. They depend upon the resources available, and
scholarships can be provided for the poor students in controlling water pollution meant
for the community members who cannot pay for themselves. The recipients can be in
secondary or tertiary institutions.
3. Provision of funds for development. Projects can be a part of the
responsibility to the community. The projects can be the sinking of the bore hole,
constructing access roads, and so on. Alternatively, the organization can execute the
projects directly.
4. Support for games is another area. Some organizations are already taking
the initiative along the line. Sports over the use have been seen as a unifying factor.
Organizations can contribute to unity by supporting sports.
5. Provision of goods/services. This is an essential responsibility of the
manager, which justifies the organization's existence in the first place. The goods and
services beyond being of good quality must also be at affordable prices.
6. Employment Opportunities. Members of the community who are qualified
and are interested in working for the organization can be allowed to do so. The
government calls this employment to the catchment area.
7. Conforming to the local norms. As much as possible, the manager should
carry out his roles and functions by the norms of the society, which are part of the
culture. An example is the production of a product that is readily accepted by the
community.

Responsibility to the employees: The manager has another set of

responsibilities to the employees in the following ways:
1. Payment of reasonable wages and salaries plus other fringe benefits. A
situation where the manager exploits the employees should not be encouraged. Living
17
wages should be paid to the employees and regularly too. This will keep the workers on
the job beyond making them happy.
2. Ensuring that the working environment is safe. This can be achieved by
obeying safety standards, installing fire extinguishers at strategic places, covering
dangerous machines, having staff clinics, and so on.
3. Taking care of welfare matters and job security. The welfare of the staff
should be of paramount importance to management. This is necessary to make the
employees happy and readily identify with the organization, committed to, and readily do
things that will always enhance the organization's success.
4. Provision of training facilities. We have noted earlier the importance of
education and training. Among other reasons, the environment is constantly changing.
Skills that were useful yesterday can become outdated today. The manager should ensure
that workers are exposed to training and re-training to be acquainted with current skills.
This will be of value to the employees and the organization as they are expected to apply
their know-how in their different jobs, making them practical and efficient.

Responsibility to the Shareholders: The responsibilities of the manager to the

shareholders who are the owners of the business are in the following specific ways:
1. Payment of dividends and insurance of bonus shares:
The shareholder should be paid dividends. This is necessary because he has taken a risk
by investing his money by purchasing shares. As a way to justify the decision, dividends
declared from the profits made should be paid promptly to the owners of the business.
Also, bonus shares can be given to the owners to increase their equity shares. This will
further boost their confidence in the organization.
2. Efficient performance of the business. The resources of the organization
must be used efficiently; this minimizes waste. Moreover, this is necessary for profit-
making. Remember that profit and cost run in the opposite direction. If you want to
make a profit, there has to be a reduction in waste and cost. It is the difference between
cost and revenue that brings profit. That is when the revenue is greater than the cost.
3. Holding Regular annual general meetings. Annual general meetings
should be held regularly and on time. This is because; it is during the annual general
meetings that essential decisions concerning the business are taken. Such decisions
include: the election of board members, considering the audit report, declaring dividends
for the shareholders, among other important decisions.

Responsibility to the Government: The responsibility of the manager to the

government are:
1. Payment of taxes. The manager should pay taxes regularly and the correct
amount too to the government. This can hardly be over-emphasized since government
uses the money for developmental purposes. Falsification of the exact amount to be paid
should as much as possible be avoided. Delay too in the payment of corporate tax for
whatever reason should be avoided.

18
 2. Employing citizens of the Country. Organizations contribute to
unemployment reduction by employing the citizens of a country. This should be
encouraged because an idle hand/mind is a devil's workshop. Consequently, when
citizens are offered employment, it does not only help to reduce unemployment but also
assists in developing the country.
3. Complying with Government rules and regulations. The necessary rules
and regulations affecting the business should be complied with, such as registering the
business under the companies and aimed matters. Managers should, at all times, be law-
abiding and be seen to be law-abiding.

Responsibility to the Customers: In respect of the customers, the manager

has the following as his social responsibility to them:
1. Producing safe and quality goods. Goods produced for the
consumers/customers must be safe for human consumption. The quality should also be
there to meet the needs of the consumers. This is because a customer is buying a
product. After all, he has a need. Moreover, only when the product or service satisfies his
needs will he make a repeat purchase when the need arises in the future. These products
and services should be sold too at affordable prices.
2. Proper Education. The manager must carry out proper education of the
consumer on the proper use of the product. This is necessary so that the product can
perform the function it is supposed to perform. Misuse of the product might be harmful
to the consumer. This has to be avoided.
3. Avoiding fake and misleading advertisements. Managers should also give
accurate descriptions of their products and the actual work the products can perform.
This is emphasized particularly in the advertisement. The awareness being created should
not be a misleading
one.
4. Attending to customers' complaints. Customers are seen as supreme. The
supremacy of the customers should always be taking into consideration in business
decisions. That is why whenever the customer brings a complaint, such complaint should
be adequately investigated and the necessary answer supplied. It has to be emphasized
that customers satisfaction is vital to the continued survival and profitability of the
business. This must not be overlooked.

Managerial Skills

For a manager to perform well and be seen to be performing creditably, he needs

some skills which must be brought to bear in his functions. These skills are Technical
Skills. Technical skills form the knowledge of and proficiency in activities involving
methods, procedures, and processes. They involve working with tools and techniques.
For example, the mechanics work with tools, and their supervisors should teach them
how to use them. Also, accountants require specific techniques based on principles on

19
how to do accounting work. Human Skills. These are the ability to work with people.
They involve cooperating as a team by creating an environment when people feel secured
and free to express their opinions. Conceptual Skill. This is the ability to see the big
picture of the end in view (objective) of where you are going. It also demands that you
should be able to see those activities that are necessary to realize the big picture. The
picture must be clear, capable of excitement. Remember, the scripture says people perish
for lack of vision. We should be able to see the picture of what we want. It is a skill that
must be learned. Design Skill. This is the ability to solve problems in ways that will
benefit the organization. This is done by working out practical solutions to identified
problems.

How to Be a Successful Manager

1. Keep abreast of developments. To ensure that his competitors do not take

advantage of him, the manager must keep abreast with the change occurring everywhere.
This he can do through education, training, and retraining; he is kept abreast of the
development, especially in his chosen field. Because the manager is knowledgeable and
possesses the necessary skills he has demonstrated -previously and currently, whenever
there is an existing vacancy, he is likely to be promoted.
2. Seeking higher responsibilities. A manager who contends doing one thing
repeatedly and does not want additional responsibility should go for counseling. It is not
enough to wait for responsibilities; the manager must meaningfully look for
responsibilities. This is not to say that a manager should encroach on the work of other
managers or his subordinates unless he is invited and the level of assistance must be
indicated; otherwise, the manager's action becomes an invitation and nuisance. However,
whenever there is a task to be performed, the manager should indicate a keen interest. He
must not run away from assignments not because of the financial reward but the urge to
contribute something worthwhile to attain the organizational objectives. We learn by
doing; this is experience. Knowledge acquired through education and training must be
brought to bear on tasks.
3. The need to make sound and timely decisions. A manager makes the
decision; that is his job, and the art of making a decision is a point of the manager's job.
He has to show competence here because faulty decisions have implications for the
survival of the organization. We had noted when we were treating the management
function of planning that the steps in planning are the same as the steps in the decision.
Consequently, while planning, some decision is being made among the alternatives
established in the planning process. Nevertheless, the manager must make sound and
timely decisions by attacking any problem that comes his way, whether minor or
significant.
4. Avoid wasting time on the work that belongs to subordinates. A
successful manager will not waste time seeing every detail that bothers the work of his
subordinates; that is why a manager must select the appropriate candidate for delegation.
Apart from this condition, the expected result must be clearly stated right from the onset.
20
The subordinate knows precisely what he is expected to do, can do it, and the resources
are available on time. Once work has been delegated to a subordinate, there should be
enough confidence in him that he will perform. The confidence must be a genuine one to
breed mutual trust between the manager and the subordinate.
5. Assess your performance. It is every time that the manager assesses the
work of his subordinates. Periodically too, he has to carry out a realistic assessment of his
efforts. When he is succeeding, he needs to ask himself why he is succeeding. It may be
due to some factors that he has not initiated and has no control. For example, it may
result from favorable government policy, and when such policy is withdrawn, it is left
high and dried. Similarly, if the manager is not succeeding, he does not mean his fat and
looks sad. He should be able to identify why he has been less successful, take a realistic
look at the factors and take the corresponding action to correct the situation.
6. The manager should be respected. The manager needs to be respected,
especially for his decisions and manner of carrying out his job. To do this successfully, he
needs to plan thoroughly and organize the elements of his job. In his interpersonal
relations with his subordinates, he should direct and supervise the work of others placed
under him. He should also be able to provide the necessary leadership for the group to
excel.

21
 Worksheet #1

1. In your own words, discuss the meaning and functions of management.

2. Explain at least three types of management theories.

3. Without referring back to the previous lesson, explain the functions, roles, and skills.

4. In five to ten sentences, draw a generalization on the basic concepts and theories of
management.

5. Go back to the organization(s) you have been visiting since you started taking the
first course in the ABM. Find out their responsibility to Customers; Government;
Shareholders or owners of the business, The community; and The employees. Cite
also some cases/ problems and provide recommendations to eliminate these
problems. (use extra sheet/s for your answer)
6. List the factors that will enhance the success of a manager. Show why the manager
should make timely decisions?

7. Explain the rationale that all managers, despite the variations in levels, equally require
human skills.

8. There are three levels of management: top, middle and low levels. Show clearly how
management skills are reflected in each level.

9. You are required to study your environment—list five profit-making organizations

where management is practiced.

10. There are several decisions that the manager can take in the process of managing the
organization. Try as much as you can to identify these decisions.

22
 Chapter 2
THE FIRM AND ITS ENVIRONMENT

Performance Standard: The learners shall be able to analyze the various

environmental forces affecting the firm and summarize these using Political Economic
Social and Technological Analysis (PESTA) and Strengths, Weaknesses, Opportunities
and Treats (SWOT) Analysis frameworks.

Learning Competencies: The learners…

➢ identify various forces/ elements of the firm’s environment;

➢ summarize these forces using PEST and SWOT Analysis;
➢ describe the local and international business environment;
➢ explain the role of business in relation to economy;
➢ discuss the various phases of economic growth; and
➢ differentiate the various forms of business organization.

Nature of the Business Environment

The business environment is a set of forces and conditions outside the

organization’s boundaries that can affect how the organization operates. These forces
and conditions change from time to time. The business environment presents
opportunities that organizations can take advantage of and threats that the organization
should avoid. For example, changes in the environment, such as introducing new
technology or opening global markets, create opportunities for managers to obtain
resources or enter new markets and strengthen their organizations. In contrast, the rise of
new competitors, a global economic recession, or an oil shortage poses a threat that can
devastate an organization if managers cannot obtain resources or sell the organization’s
goods and services. The quality of managers’ understanding of organizational
environmental forces and their ability to respond appropriately to those forces are critical
factors affecting organizational performance.
The general environment consists of legal, economic, political, socio-cultural,
technological, and ethical factors that affect business organizations' operations and
emanate from local, national, and international sources.
An organization’s internal environment consists of conditions and forces: the
owners, board of directors, employees, the organization’s culture, the physical work
environment, and the various departments that make up the organization (the
organizational structure). Let us briefly discuss these factors.
23
 Owners. The owners of the business are those who have legal property rights to
the business. Owners can be a single individual who establishes and runs a small
business, partners who jointly own the business, Individual investors who buy stock in a
corporation, or other organizations. These people have a stake in the business and are
mindful of how the business is being managed.
Board of Directors. The stockholders elect a corporate board of directors. It is
charged with overseeing the firm's general management to ensure that it is being run to
serve the stockholder's interest best. Some boards are relatively passive. They perform a
general oversight function but seldom get actively involved in how the company is being
run. Nevertheless, this trend is changing. However, as more and more boards are more
carefully scrutinizing the firms, they oversee and exert more influence on managing them.
Employees/Managers. An organization’s employees are also a significant
element of its internal environment. The employees are the workers who perform the
organization's day-to-day operations and ensure that work is being accomplished to
achieve the organization’s desired goals. These sets of people are being supervised and
managed by the managers of an organization. Managers are responsible for combining
and coordinating an organization's resources, including the workers, for ensuring that
organizations achieve their goals.

Organizational Structure

Business organizations are characterized by a division of labor that allows

employees to specialize in particular roles and occupy designated positions to pursue
organizational objectives. The resulting pattern of relationships between individuals and
roles constitutes what is known as organizational structure and represents how the
purpose and work of the organization are carried out.

The Task Environment

The task environment, also called the immediate or operational environment,

profoundly impacts a firm's operations. It includes suppliers, competitors, distributors,
customers, labor markets, and financial institutions.
Suppliers. Suppliers are individuals and companies that provide an organization
with the input resources (such as raw materials, parts, or employees) needed to produce
goods and services. In return, the supplier receives compensation for those goods and
services. An essential aspect of a manager’s job is to ensure a reliable supply of input
resources. An organization may need some resources, which makes it dependent to a
large degree on the suppliers of those resources, some of whom operate in markets that
are structured to a considerable extent.
Distributors. Distributors are organizations that help other organizations sell
their goods or services to customers. The decisions that managers make about
distributing products to customers can have essential effects on organizational

24
performance. The changing nature of distributors and distribution methods can bring
opportunities and threats for managers. Suppose distributors become so large and
powerful that they can control customers’ access to a particular organization’s goods and
services. In that case, they can threaten the organization by demanding that it reduce the
price of its goods and services.
Customers. Customers are individuals and groups that buy the goods and
services of an organization. A customer may be an individual, an institution such as a
school, hospital, or other organizations or government agencies. Customers are essential
to all organizations. The ability to identify and meet customers’ needs is the main reason
for the survival and prosperity of an organization. Customers are often regarded as the
most critical stakeholder group since if a company attracts them to buy its products, it
cannot stay in business. Organizations must work towards achieving customer
satisfaction and attract new ones.
Competitors. Competitors are organizations that produce similar goods and
services to an organization. In other words, competitors are organizations that compete
for the same customers. For example, Dell’s competitors include other PC manufacturers
such as Apple, Compaq, Sony, and Toshiba. In the Philippine communication industry,
Globe Telecom competes with other communication firms such as Smart or PLDT.
Both direct and indirect, competition is an integral part of the environmental context in
which firms operate. How firms respond to competitive forces affects their market share
and their overall performance. The rivalry between competitors is potentially the most
threatening force that organizations must deal with. An intense rivalry often results in
price competition, and fallen prices reduce access to resources and lower profits.

Features of the Business Environment

These can be identified as:

1. The rate of change of the environment is static, dynamic, and turbulent
environments.
2. Effect of the environment, that is, opportunities and threats.
3. Extent of control, for example, controllable or uncontrollable environment.

Generally, environmental factors can be classified as:

Internal Environment: This comprises the forces that affect a business as a

separate entity. It is sometimes called the internal working system or organizational
climate and consists of people's functions and structures, generally regarded as
controllable environmental factors.
Task Environment: This is the immediate external environment consisting of
individuals or groups that are customers, financial institution suppliers, labor
organizations, government agencies, and local communities.

25
 Indirect Environment Factors: These comprise the forces that affect a
business as well as other business organizations. They include:
1. Socio-Cultural Variables: The way of life of the people. These are made up
of attitudes, desires, expectations, beliefs, degrees of education, and customs. All other
environmental factors are affected by the social structure of the society. The attitude of
society to a business also depends on whether the firms have been responsive to the
needs and aspirations of the society.
2. Technological Environment: This comprises innovations and
improvements in methods, machines, and materials. Technology can be acquired through
indigenous technology or the transfer of technology. The former transfers technology
from one generation to another, while the latter refers to the technology importation
through multinational, international organizations, public agencies, multilateral and
intergovernmental agreements. Technology has a considerable impact on business by
enhancing the competitive provision of various products, production efficiency,
mechanization, and automation of the organizational system, and improving the
planning, scheduling, and controlling of the industrial system.
3. Economic Environment: The general pattern of the economy can be viewed
from three dimensions: the economic system, the general business cycle, and economic
policies. The main economic effects on business organizations today are usually classified
as fiscal and monetary policies. Fiscal policies deal with the use of government spending
and taxation to improve the position of the economy. Monetary policies refer to
monetary instruments through the Central Bank of the Philippines to influence the
money in circulation. For example, the tight monetary control measures implemented by
the government as part of the national economic development strategy have a
considerable impact on business.
4. Political Legal Environment: This environment is primarily concerned with
complex laws, regulations, and government agencies and their actions which affect all
kinds of enterprises in varying degrees. In improving society's standard of living, the
government uses the resources within which the company is endowed to play three
primary roles of participants, facilitators, and regulators of business activities.
5. Physical Environment: This involves the availability of land, nature of the
climate, weather conditions, mineral resources, water, and infrastructural facilities.
6. International Environment: this is the environment of the foreign countries.
It consists of the socio-cultural, political, economic, and technological environment of
countries where a business operates. The growth of multinational corporations, the need
for comparative advantage, foreign market, investment, information technology, human
resources, etc., have led to the growing need for knowledge about the international
environment.

26
The Levels of Business Environment

Within the context of an organization's operations, there are two levels of

organization such as micro and macro levels.
Micro-Level. This refers to the intra-organizational context, that is, the system
as it is. Within this system are various other subsystems. These are exemplified
structurally by departments, divisions, sections, etc., and humanistically by relationships
among individuals or groups of individuals, all operating symbiotically for the
organization's good. Among the individuals or groups, we have superior-subordinate,
peers, subordinates-subordinate, and superior-superior relationships.
Macro–Level. This refers to the extra organizational context, that is, the
organizational environment. It takes the entire organization as a unit. It is perceived from
the point of view of its technical and social component as well as the behavior of the
organization about the larger society. The core is that every organization wants to
survive, and its survival depends on how it copes with its environment. Thus, when we
say that organizations have boundaries, they are not closed but are porous.

Organizational Approach to Environmental Challenges

Oliver (1980) elaborated a theoretical framework that posits organizational

responsiveness to institutional pressures as a strategic choice. Five alternatives that range
between passivity and increasing active resistance were offered such as:
Acquiescence: When organizations fully conform to institutional pressure.
Compromise: When organizations make partial compliance with intuitional
pressure.
Avoidance: Diplomatic avoidance of institutional pressure through concealing,
nonconformity, responding symbolically, etc., by organizations.
Defiance: When organizations actively reject institutional norms.
Manipulations: When organizations attempt to change or exert power over
institutional pressures actively. Strategic choice of response will be dependent on:
Cause: Underlying rationale or expectation associated with the pressure, e.g., if it
enhances legitimacy, motivation to conform will be there.
Constituents: Characteristics of constituent groups.
Content: If content conflicts with organizational goals or may hinder the
achievement of goals, resistance is more likely.
The nature of the control: Legal coercion may result in little resistance, while
voluntary diffusion creates resistance.
Environmental context: High environmental uncertainly may result in
acquiescing to institutional pressures.

27
Environmental Forces and Environmental Scanning

The dictionary defines environment as the work ‘enveron’, which means to

surround or encircle. Environment, therefore, means surroundings or conditions that
influence development or growth. By organization and its environment, therefore, we
mean the interactions between an organization and its environment. The notion that the
environment has any form of an organization is a recent development. It is now generally
accepted that an organization's very nature, purpose, activities, structure, and behavior
are determined or modified by the environment's social, cultural, economic, political,
legal, historical, and technological factors. Indeed, it is a mutual process because the
environment is also modified by similar variables of the organization such as its people,
culture, and output.
Furthermore, within the environment, the clients establish costs for the goods
and services produced by the organization. Similarly, within the environment, the
consequences or behaviors of an organization are to be judged right or wrong.

Environmental Analysis

Modern organizations are experiencing rapidly changing environments and, in

particular, are increasingly subject to sudden irregularities. Hence, there is a need for a
method to sing out critical developments and relate them to a plan for a business
organization’s situational analysis. That method is known as SWOT Analysis, an acronym
for Strengths, Weaknesses, Opportunities, and Threats. The purpose of situational
analysis is to determine the features in a company’s internal/external environment that
will most directly affect its strategic options and opportunities. In a single business
strategic analysis, the two primary situational considerations are industry and competitive
conditions and the company’s internal situations and competitive position.

Framework for Analyzing the Industry. According to Newman, Logan, and

Hergarty (1987), the future of every industry depends upon 1. continuing demand for its
output; 2. conditions affecting the supply of their goods and services; and 3. the
competitive conditions within the industry. The nature of each of these is briefly
discussed below.

Demand for Products or Services of the Industry:

1. Long-range Growth or Decline: This depends on product characteristics,

possible uses of the product, potential customers, and determination of the annual
growth rate of the
industry.
2. Stability of Demand for Products: This involves questions like: Is the
demand steady and predictable or volatile and uncertain? Factors affecting the stability

28
are the availability of a close substitute, durability products, and whether the product is a
necessity or a luxury.
3. State of Product Life Cycle: Products pass through a life cycle classified as
introductory, growth, maturity, and decline. At each of these stages, products exhibit
some characteristics that bear on critical factors for success.

Supply of Products or Services:

The issues to be addressed here include:

(1) Capacity of the Industry: Is the industry faced with excess or inadequate
capacity? Inadequate capacity will make most companies enjoy profitable operations.
Excess capacity will have a depressing influence on the outlook of the industry.
(2) Volatility of the Technology: The rate at which new technologies and, thus,
products are introduced. The more the dynamics of technology, the more they need
managers to give close attention to research and development.
(3) Availability of Needed Resources: Are the required resources available at
affordable prices? The consideration here is the ability to influence the price of materials,
availability of labor, and costs.
(4) Social Constraints: The ability of the companies to meet the various social
norms will affect the industry’s outlook. Companies must act in a socially responsible
manner or face all sorts of delay and harassment.
(5) Inflation Vulnerability: Increasing selling costs may cause a dislocation of
sales volume.

Competitive Conditions. Competition in the industry will be affected by:

(1) Government Support and Regulation: Government support, through

subsidies, protections, or regulations, i.e., laws, policies, etc., affect competitive
conditions. To qualify for the benefits, a company must conform to some stipulations
and regulations.
(2) Structure of the Industry: The attitude of the companies in an industry.
Some managers may adhere strictly to an acceptable code of business ethics; salespeople
like to engage in any activity that might give them an immediate profit. This attitude
affects the future outlook of the industry. The extent of competition within the industry,
for example, salesmanship versus the dog-eat-dog competition, is affected by the mobility
of competitors in and out of the industry and the relative bargaining power of key players
in the industry.

Assessing a Company’s Competitive Strength:

Matching opportunities with strengths achieve success. The industry’s analysis

will offer an array of opportunities and threats. Then, the strengths and weaknesses of a

29
company willing to grasp these opportunities must be examined. To assist in relating a
company’s outlook to an industry’s outlook, the following framework has been suggested
by Newman, Longan, and Hergarty (1987). The position of a company within the
industry can be explained taking into consideration the following:

(a) Market Position of the Company

1. Relation of the company sales to total industry, to the leading

competition: A Company’s share of its target market typically is closely related to its
profitability.
2. Strengths of the company in major markets: The reputation of a company
depends on the ability of the company to be known for good services at a reasonable
price and for fair dealings.
3. Relative appeal of the company’s products: A company's market position
is strongly influenced by the quality and distinctiveness of its major markets.

(b) Supply Position of the Company

The position of a firm in its industry depends upon its ability to deal with supply
factors and demand. The main issues relating to the supply positions are:
1. Comparative access to resources: Ready and inexpensive raw materials,
labor, location close to the market must be analyzed and compared with significant
competitors.
2. Unique productivity advantage: Experience, they say, is a great teacher.
Going by the experience curve theory, a company with the most cumulative experience
should have the lowest costs.
3. Research and development strength: Availability of adequate personnel
and facilities also contributes to a company's competitive status.
4. Special competitive consideration: In addition to market and supply
factors, the following factors must be considered:

• Relative financial strength: Adequacy of capital. The ability of a company

to secure funds when needed will add to its competitive advantage.
• Government and community relations: Companies differ in their ability to
work with the government. Also, the attitude of a community where a business is located
will affect the business.
• Ability and Values of Company Managers: The skill, aptitude, knowledge,
and style of its managers and staff will also affect its competitive position.

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Why conduct Environmental Analysis/Scanning?

’Environmental analysis is the of scanning the environment to identify changes

or trends that have the potential to generate opportunities and threats to the
organization’s current or future intended strategies' (Worthington and Britton, 2009). The
way this environmental scanning may be put into operations depends on the firm and can
be undertaken informally or using quite sophisticated analytical tools and techniques that
require significant employment of an organization’s resources. It involves gathering
information about the events and their relationships within an organization’s internal and
external environment. It is the gathering, reviewing, and evaluating whatever information
about internal and external environments can be obtained from several distinct sources
regularly and interpreting them in the light of the organization’s business sensing the
pulse of environmental threats and opportunities. Environmental scanning will help
organizations to identify early signals of potential changes in the environment.
Informal scanning of the business environment is the process of gathering
information about, and from, the organization’s customers, suppliers, distributors, and
competitors through questionnaires, interview observations, or feedback from the
organization’s sales and customer service staff and using such information to the
advantage of the firm. On the other hand, an organization may prefer a more systematic
and formal means for scanning and analyzing the environment. Generally speaking, this
is a more deliberate approach to environmental analysis and focuses on the firm’s
external environment. Falley and King 1977 in Oyedijo (2004) identified three types of
environmental scanning as follows:
1. Irregular scanning systems consist primarily of Adhoc environmental
studies. They emphasize a short-run reaction to the environmental crisis with little
attention to future environmental events.
2. Regular scanning systems. These systems revolve around a regular review
of the environment or significant environmental components. The focus of this scanning
system is primarily retrospective, but some thought is given to future conditions assumed
to be evolving within the environment.
3. Continuous scanning systems. Here, the components of the organizational
environment are constantly monitored. The scanning is an ongoing activity for an
established segment of the organizational structure. Continuous scanning tends to be
more proactive or future-oriented than either irregular or regular systems. The use of a
continuous scanning system generally reflects a serious and sustained commitment to
environmental analysis
In an attempt to scan the Environmental, managers usually ask the following
questions:

• Who are our current competitors?

• Are there few or many entry barriers to our industry?
• What substitutes exist for our product or service?

31
 • Is the company too dependent on powerful suppliers?

Answers to these questions help managers develop competitive intelligence, the

information necessary to decide how best to manage the competitive potential of
different environments.

Techniques for Analyzing the Business Environment

Many techniques are available to organizations for the analysis of the business
environment. These techniques discussed below include scenario development,
forecasting, benchmarking, trend extrapolation, expert opinion, cross-impact matrices,
SWOT, or TOWS.
Scenario planning. When organizations try to determine the effect of
environmental forces on their operations, they frequently develop a future scenario.
Scenario planning is the formulation of multiple forecasts of future conditions followed
by an analysis of how to respond effectively to each of those conditions. It can also be
called contingency planning. In scenario planning, organizations may generate between
two or four generically different possible futures as an outcome of the scenario planning
process. This technique often focuses on the ‘’best case’’ or ‘’worst-case’’ scenarios.
Scenario planning seeks to consider the possible effects of various external
environmental forces on an organization's future.
Forecasting. Forecasting is another method used by organizations to analyze
their environments. Forecasting is predicting what will happen in the future, considering
the interplay of some environmental variables. For example, in making capital
investments, firms may try to forecast how interest rates will change. In deciding to
expand or downsize a business, firms may try to forecast the demand for goods and
services or forecast the supply and demand of labor they probably would use.
Forecasting is more useful when the future trends in the environment are more
dynamic. The best advice for using forecasting as offered by Bateman and Snell (2009),
might include the following:
• Use multiple forecasts, and perhaps average their predictions
• Remember that accuracy decreases the further into the future you are trying to
predict.
• Forecasts are no better than the data used to construct them.
• Use simple forecasts (rather than complicated ones) where possible.
• Keep in mind that essential events often are surprises and represent a
departure from predictions.

SWOT or TOWS Analysis. The whole meaning of SWOT is that S is strengths,

W is weaknesses, O is for Opportunities, and T is for Threats. These are factors found
within the business environment in which the organization operates. SWOT analysis is a
systematic identification of these factors and the strategy that reflects the best
32
combinations of these factors. The best practice is to maximize a firm’s strengths and
opportunities effectively and, at the same time, minimize the weaknesses and threats
found in the business environment. This framework can be used to choose and design an
effective strategy that can assist an organization to compete in its business environment.
A firm can start its SWOT analysis by reviewing its internal strengths and
weaknesses. This can be done by the management or by external consultants who can
help to provide a more objective view. The identified factors are listed and given scores
to indicate their importance, with the most critical issues receiving the highest scores.
Using this approach, the firm can design strategies that reflect its ability to operate in its
business environment. The resultant strategies should enable the firm to attain its
objectives by taking advantage of its strengths, opportunities, minimizing its weaknesses,
and avoiding threats.
Benchmarking. Benchmarking is yet another tool in which a firm can use to
analyze its environment. Benchmarking is when an organization undertakes to compare
its practices and technologies with those of other organizations. In practice, a firm would
identify the best performing company in a given area, such as product quality or
customer service, and then compare the processes with theirs to see the areas where
improvements can be made to meet or even exceed the best practice. To achieve this, a
team would collect information on its company operations and those of the firm to
determine gaps. The gaps would serve as a point of entry to know the underlying causes
of performance differences.

Local and International Business Environment

Organizations around the world are going international. Indeed most prominent
companies today are either international or multinational companies.

International Business. International or global Business is any business that is

carried out in more than one country. Daft (1997) maintains that the fundamental tasks
of business management, including financing, production, and distribution of products
and services, do not change in any substantive way when a company goes international.
The primary management functions of planning, organizing, leading, and controlling are
the same whether a company operates domestically or internationally. However,
managers will experience more significant difficulties and risks when performing these
management functions internationally.
Williams (2005) described Global business as the buying and selling goods and
services by people in different countries. In other words, we can say that global business
involves a company operating in more than one country. International businesses engage
in transactions across national boundaries. These transactions include the transfer of
goods, services, technology, managerial knowledge, and capital to other countries.
Indeed, there are many forms and levels of international business. While the lines
that distinguish one from another are perhaps arbitrary, we can identify four general

33
levels of international activity that differentiate organizations. According to Griffin
(2002), these levels are as follows: A domestic business acquires all its resources
essentially and sells all its products or services within a single country. Most small
businesses are domestic, as are many banks, retailers, agricultural enterprises, and service
firms. An international business is primarily based in a single country but acquires some
meaningful share of its resources or revenue or both from other countries.
On the other hand, a multinational business has a worldwide marketplace from
which it buys raw materials, borrows money, manufactures its products, and subsequently
sells its products. A global business transcends national boundaries and is not committed
to a single home country. Although no business has genuinely achieved this level of
international involvement, a few are edging closer and closer.

Stages of International Business. International managers must decide on the

best means of going international. One way of going international is to seek cheaper
sources of supply offshore, which is called outsourcing. Other basic ways are exporting,
licensing, franchising, entering into a joint venture with a host country company, and
setting up a wholly-owned subsidiary in the host country.
Outsourcing. Global outsourcing, sometimes called global sourcing, means
engaging in the international division of labor so that manufacturing can be done in
countries with the cheapest sources of labor and supplies. A company may take a
contract from a domestic supplier and place it with a company in the far East, several
miles away. With advances in telecommunications, service providers can outsource as
well. For example, Citibank taps low-cost skilled labor in the Philippines, India, Hong
Kong, Australia, and Singapore to manage data and develop products for global financial
services.
Importing and Exporting. Importing or exporting is usually the first type of
international business in which a firm gets involved. Exporting is making a product or
service in its domestic marketplace and selling it in another country. On the other hand,
importing brings a good, service, or capital into the home country abroad. One of such
advantages is that it is the easiest way of entering a market with a small outlay of capital.
Furthermore, the products can be sold without further processing, and there
may be no need to adapt the product to local conditions. More also, little risk is
associated with this method. However, there are some disadvantages; for example,
imports and export are subject to taxes, tariffs, and higher transportation expenses.
Licensing and Franchising. A company may prefer to arrange for a foreign
company to manufacture or market its products under a licensing agreement. Licensing,
therefore, involves a company giving another the authority to produce its product under
an agreement that will benefit both companies. Licensing and franchising are similar
approaches. Both involve giving another organization the right to use its brand name,
technology, or product specifications in return for the lump-sum payment or a fee usually
based on sales. The only difference is that manufacturing organizations primarily use
licensing while service organizations use franchising.

34
 Strategic Alliances. A strategic alliance involves two or more firms jointly
cooperate for mutual gain. It involves a partnership between an organization and a
foreign company in which both share resources and knowledge in developing new
products or building production facilities. The partners also share the risks and rewards
of the alliance. For example, IBM of the United States, Toshiba of Japan, and Siemens of
Germany formed a partnership to develop a new generation of computer chips. Another
example was when Kodak and Fuji collaborated with three major Japanese camera
manufacturers to develop a new film cartridge. This collaboration allowed Kodak and
Fuji to share developmental costs, prevented an advertisement war had it been that two
firms developed different cartridges.
Joint Venture. A joint venture is a specific strategic alliance in which partners
agree to form a separate, independent organization for some business purpose. In other
words, a joint venture occurs when two existing companies collaborate to form a third
company. The two founding companies remain intact and unchanged, except they now
own the newly created joint venture. An example of a global joint venture is Fuji-Xerox,
a joint venture between Fuji photo film of Japan and Xerox corporation based in the
United States, which makes copiers and automated office systems. One of the advantages
of the joint venture is that it provides a fast and less expensive way for companies to
compete globally than doing it on an individual basis. Global joint ventures are
advantageous to smaller local partners that link up with larger, more experienced foreign
firms that can bring advanced management, resources, and business skills to the venture.
Another advantage is that global joint ventures like licensing and franchising helps
companies avoid tariff and nontariff barriers to entry. Furthermore, companies
participating in joint ventures bear only part of the costs and the risks of that business.
However, the global joint has some disadvantages as companies in global joint
ventures share costs and risks to share profits. Sharing of profits could create some
problems among the companies. Managing global joint ventures can also be difficult
because they represent a merger of four cultures; the country and organizational cultures
of the first partner and the country and the organizational cultures of the second partner.
Wholly Owned Affiliates (Build or Buy). It is estimated that one-third of
multinational companies enter foreign markets through wholly-owned affiliates. Unlike
licensing, franchising, or joint ventures, wholly-owned affiliates are 100 percent owned by
the parent company that formed them. For example, Honda motors of America in
Maryville, Ohio, is 100 percent owned by Honda Motors of Japan. Ford motor of
Germany in Cologne is 100 percent owned by the Ford Motor Company in Detroit,
Michigan, United States. Wholly owned affiliates have some advantages. One of such
advantages is that the parent company receives all the profits and has complete control
over foreign facilities. A disadvantage is a considerable expense involved in building new
operations or buying existing businesses.

35
Environmental Challenges of International Business

The international economic environment. We can identify three aspects of

the economic environment that are useful to managers operating internationally. These
shall be discussed under the economic system, natural resources, and infrastructure.
Economic System. Today, most countries are moving toward a market
economy; the key element here is freedom of choice. Consumers are free to decide on
what products and services they prefer to purchase. Firms are also free to decide on what
products or services to provide. It, therefore, follows that as long as both the consumers
and the producers are free to decide on what products or services to buy or produce in
the market, then supply and demand to determine which firms and what products will be
available. Another fundamental characteristic of market economies which is also related
to the above factor is concerned with property ownership. There are two distinctive
types, which are entirely private ownership and complete public ownership. In private
ownership, individuals and organizations own and operate companies that carry out
business activities. In systems with public ownership, the government directly owns the
companies that manufacture and sell products. Few countries have pure systems of
private ownership or pure systems of public ownership. Most countries tend toward one
extreme or the other, but a mix of public and private ownerships usually exists.
Natural Resources. Natural Resources are another aspect of the economic
environment. A broad range of resources is available in different countries, which helps
to promote economic activities. The United States has a lot of natural resources such as
crude oil, natural gas, coal, iron ore, copper, uranium, and other metals and materials that
are important to the economic development of a modern economy. Japan, on the other
hand very few resources on their own and have to depend on the importation of most of
the resources needed for industrial activities. One of the vital natural resources in the
modern global economy is crude oil. Some of these countries have attracted many
international businesses into their country because of this essential natural resource.
Infrastructure. Infrastructure is also an essential aspect of the economic
environment that is of relevance to international business management. The
infrastructure consists of physical things such as roads, railways, schools, hospitals,
communication systems, electricity, airports, etc. The poor electricity supply may
discourage many international organizations from investing in the country. In some cases,
interested companies may have to build infrastructure such as houses, schools, hospitals,
and others to attract an international workforce.
The Political/Legal Environment. A second environmental challenge facing
the international manager is the political/legal environment in which he or she will do
business. Four other essential aspects of international management's political/legal
environment are government stability, incentives for multinational trade, controls on
international trade, and the influence of economic communities on international trade.
Government Stability. Stability can be viewed in two ways- as the ability to be
given government to stay in power against other opposing factors in the country and the
permanence of government policies toward business. A stable country in both respects is
36
preferable because managers have a higher probability of successfully predicting how the
government will affect their business. The civil war in countries has made it virtually
impossible for international managers to predict what the government policies are likely
to be and whether the government will guarantee the safety of international workers.
Consequently, international firms have been very reluctant to invest in the country.
Incentives for International Trade. Another facet of the political
environment is incentives to attract foreign business. Such incentives can take a variety of
forms. Some of the most common include reduced interest rates on loans, construction
subsidies, and tax incentives. Less developed countries tend to offer different incentives
and the raw materials and equipment, market protection through limitations on other
importers, and the right to take profits out of the country. They may also have to correct
deficiencies in their infrastructures.
Controls on International Trade. A third element of the political environment
that managers need to consider is the extent to which there are controls on international
trade. In some instances, the government of a country may decide that foreign
competition is hurting domestic trade. To protect domestic business, such governments
may enact barriers to international trade.

These barriers include tariffs, quotas, export restraint agreements, and “buy
national” laws.
A tariff is a tax collected on goods shipped across national boundaries. Some
countries impose heavy tariffs to discourage foreign goods from being imported into
their countries. Tariffs can also be levied, usually by less developed countries, to raise
money for the government.
Quota is a limit on the number or value of goods that can be traded. Quotas are
the most common form of trade restriction. The quota amount is typically designed to
ensure that domestic competitors will maintain a particular market share.
Export restrict agreements. These are agreements reached by governments in
which countries voluntarily limit the volume or value of goods they export and import
from one another. They are designed to convince other governments to limit voluntarily
the volume or value of goods exported to a particular country.

The Cultural Environment. Another global environmental challenge of

international business is the cultural environment. There are cultural differences between
nations. As organizations have different cultures, so do countries have their own cultures.
National culture is the values and attitudes shared by individuals from a specific country
that shape their behavior and beliefs about what is essential. The question is which is
more critical- national culture or organizational culture? For example, is an IBM facility in
Germany more likely to reflect German culture or IBM’s corporate culture? Research
indicates that National culture has a more significant effect on employees than does their
organization’s culture. German employees at an IBM facility in Munich will be influenced

37
more by German culture than IBM. This means that as influential as organizational
culture may be on managerial practice, national culture is even more influential.

Management Processes in a Global environment

Planning in a Global Environment. Planning in a global environment entails

the same process, just as in a domestic environment. However, the international manager
must have a broad understanding of environmental and competitive issues applicable to
its organization. To plan successfully, the international manager needs to understand
both the local and international market conditions that will affect its operations.
Managers, while planning in an international environment, need a great deal of
information to function effectively. They need to understand what markets are growing
or shrinking, what the local and foreign competitors are doing in each market. Critical
issues to contend with while planning includes understanding environmental
circumstances, the role of goals and planning in a global organization, and how decision-
making affects the global organization.
Organizing in a Global Environment. Managers in international business
must also attend to various organizing issues. For example, General Electric has
operations scattered around the globe. The firm has decided to give local managers a
great deal of responsibility for running their business. In contrast, many Japanese firms
give managers to their foreign operations relatively little responsibility. As a result, those
managers must frequently travel back to Japan to present problems or approve decisions.
Managers in an international business must address the fundamental issues of
organizational structure and design, managing change, and dealing with human resources.
Leading in a Global Environment. We noted earlier some of the cultural
factors that affect international organizations. Individual managers must be prepared to
deal with these and other factors as they interact with people from different cultural
backgrounds. Supervising a group of five managers, each from a different state in the
United States, is likely to be much simpler than supervising a group of five managers,
each of whom is from a different culture. Managers must understand how cultural factors
affect individuals, how motivational processes vary across cultures, the role of leadership
in different cultures, how communication varies across cultures, and the nature of
interpersonal and group processes.
Controlling in a Global Environment. Finally, managers in international
organizations must also be concerned with control. Distance, time zone differences, and
cultural factors all play a role in control. For example, in some cultures, close supervision
is seen as appropriate, and in others, it is not. Likewise, executives in the United States
and Japan may find it challenging to communicate vital information to one another
because of the time zones differences. Fundamental control issues for the international
manager revolve around operations management, productivity, quality, technology, and
information systems.

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Phases of Economic Development

It is possible to identify all societies, in their economic dimensions, as lying

within one of five categories: the traditional society, the preconditions for take-off, the
take-off, the drive to maturity, and the age of high mass consumption.

Rostow’s Stages of Economic Growth: Modernization Theory

Stage 1 Traditional Society. The economy is dominated by subsistence activity.
Producers consume output; it is not traded. Trade is a barter where goods are exchanged
directly for other goods. Agriculture is the most critical industry. Production is labor-
intensive, using only limited quantities of capital. Technology is limited, and resource
allocation is determined very much by traditional methods of production.
Stage 2 Transitional Stage (Preconditions for Takeoff). Increased
specialization generates surpluses for trading. There is an emergence of a transport
infrastructure to support trade. Entrepreneurs emerge as incomes, savings, and
investment growth. External trade also occurs, concentrating on primary products. A
solid central government encourages private enterprise.
Stage 3 Take Off. Industrialization increases with workers switching from the
agricultural sector to the manufacturing sector. Growth is concentrated in a few regions
of the country and within one or two manufacturing industries. People save money. The
economic transitions are accompanied by the evolution of new political and social
institutions that support industrialization. The growth is self-sustaining as investment
leads to increasing incomes, generating more savings to finance further investment.
Stage 4 Drive to Maturity. The economy is diversifying into new areas.
Technological innovation provides a diverse range of investment opportunities. The
economy produces a wide range of goods and services, and there is less reliance on
imports.
Stage 5 High Mass Consumption. The economy is geared towards mass
consumption, and the level of economic activity is very high. Technology is extensively
used, but its expansion slows. The service sector has become increasingly dominant.
Now, multinationals emerge. Income for large numbers of persons transcends basic
food, shelter, and clothing. Increased interest in social welfare

Forms of Business Organizations

Brown et al. (1997) say Business is all of the activities of an individual or group
of individuals in producing and distributing goods and services to customers. Business
wants to know your needs, wants, goals, values, etc. before selling their goods to you.
Business, therefore, is involved in the following activities.

Producing Goods and Services. The business provides goods and services to
you. In today’s business, goods and services are many. Examples:
Goods – Handset, Cloth, Computer, Radio, House, etc
39
 Services- Education, Doctor attending to you, Traveling by air, Lodging in a
hotel

Resources Business Use

Resources that the business will use include human resources to include
salespeople, accountants, managers, and materials such as building offices, stores, raw
materials for production. The business decides how to combine their resources and many
more every day to achieve their aim.

Characteristics of Business

The business has some of all of these characteristics:

1. Exchange sale or transfer of goods and services. For every business, there
must be an exchange of goods and services for money.
2. Profit motive. For every business activity, it is for profit-making. However,
profitable organizations and some corporation they are established to provide services.
3. Dealing with goods and services. Every business-oriented organization
must produce goods and services.
4. Uncertainty and risk-bearing. Every business undertaking must take a risk,
and there is always uncertainty. Uncertainty may arise as a result of competition, wrong
decisions unethical.
5. Continuity and regularity. A business undertaking must always be in
business and not on and off.

Objectives of Business

1. Profit. An organization aims to make a profit.

2. Survival. Every business must have a goal to continue to survive or exist.
3. Growth. A business must not only survive, but it must have a goal to be the
biggest.
4. Market share. Every business concern must carry out its market share to
control and aid the sale of its product.
5. Productivity. It must continue to produce.
6. Innovation. Businesses must try to see that it is the first and best to bring up
new ideas.
7. Employee’s welfare. Businesses must maximally want to take care of their
workers.
8. Service to the consumer. Consumers are well satisfied as another objective
of any business concern.

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 9. Social responsibility. Apart from doing 1-8, it must do other things that
people around the business must benefit from.

Who Benefits from a Business?

1. Business Owners. Business owners are proud to be their owners of the

business. There is the satisfaction of being their boss. Income comes into the business
owner’s hands. There is equally an opportunity to grow.
2. Employees. Workers are paid salaries. Therefore, it means you earn an
income that enables you to attend to your problems like building a house or buying a car.
It enables you as a worker to choose what to buy. Employees benefit from business
training opportunities. The business enables you to gain on-the-job experience about the
job. Employees gain from business other benefits like health insurance, retirement plan,
sick and vacation leave, etc.
3. Government. The essential thing that the government gains from business
are tax. A business pays various taxes to the government, enabling the government to
provide other services to the general public.
4. General Society. Whether you patronize a business or not these days, you
are likely to benefit from the business. The business provides to the general public what
we call social responsibility. Businesses build schools in some countries to operate on.
The general public has started benefiting from businesses producing friendly products. In
the US, it is referred to as a Green product, also known as an environmentally friendly
product (non-toxic and non-polluting clean products. Ozone layer friendly product).

Forms of Business

A. Sole Trader (Sole Proprietorship)

A sole trader is a person who enters business working for him/herself. He/she
puts in the capital to start the enterprise, works either on his/her own or with employees,
and, as a reward, receives the profit. Carol (1993). A sole trader is a form of business
enterprise in which one man owns and manages the business. Denedo (2004). A sole
trader goes with other names as “one-man business,” “sole proprietor.” Sole trading is
mainly found in the retailing business. The sole trader starts his business with his capital
and labor (sometimes, he may borrow money from friends or relatives assisted with labor
by the same people). He organizes the business himself and takes all the profit or loss
that arises. The sole trader, therefore, represents many things at the same time. He is a
capitalist because he alone owns the business and receives the profit. He is a laborer
because he performs most or all the work in the business; he is an entrepreneur because
he takes on his stride the risk of financial loss. He is also a manager because he takes
decisions and controls the operation of the business.

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Features of a Sole Trader

1. Ownership: A sole trader, as the name implies, is own by one person.

2. Liability: The liability of the one-person business is unlimited. If the owner
is indebted, the business asset and asset can be sold to offset the debt.
3. Sources of Capital or Finance: The capital outlay is provided by the owner.
This source of funds could be through personal savings, intended capital, credit,
borrowing from relatives or banks, etc.
4. Legal Entity: It is not a legal entity. By law, the business and the owner are
regarded as one person. Unlike corporate businesses, they are no different; a company is
a legal entity, different from the owners.
5. Motive: It is believed that a sole trader is into business to make a profit.
6. Method of Withdrawing Capital: The owner can withdraw his capital
anytime without consulting with anybody.
7. No Board of Directors: Because he is the owner, no board of directors, he
performs everything.
8. Its Nature: It is the simplest and the most common type of business unit
you can think of.

Sources of Funds of a Sole Trader

The possible sources of funds are personal savings, borrowing particularly from
friends and relatives, credit purchases from manufacturers or wholesalers, and donations.

Advantages of a Sole Trader

1. It requires small capital. It can be established quickly and easily with small
cash, there are no organization fees, and the services of lawyers to draw up terms are not
generally required. It is the most standard and cheapest form of business organization.
2. Easy to establish: This is because it requires no formalities and legal
processes attached to establishing the business and is subject to very few government
regulations as no business of balance sheet to the registrar of companies is required.
3. Ownership of all profit: The sole trader does not share the profit of the
business with anyone.
4. Quick decision-making: The sole trader can make quick decisions since he
has no parties to consult or a boss to get permission. He takes action when circumstances
arise or when he conceives an idea; such flexibility could be vital to his success.
5. Easy to withdraw his assets: Proprietorship can be liquidated as quickly as it
is begun. All he needs to do is to stop doing business. All his assets, liabilities, and
receivables are still his.
6. Single-handedly formulates all policies: He determines the firms’ policies
and goals that guide the business internally and externally and works towards them. He

42
enjoys the advantage of independence of actions and personal freedom in directing their
affairs.
7. Boss: He is free and his boss but at the same time continues to satisfy his
customers.
8. It is flexible: The owner can combine two or more types of occupation due
to the flexibility of his business, e.g., a barber can also be selling mineral and musical
records.
9. Personal Satisfaction: There is a great joy in knowing that a
person is his own master. The sole trader has a great deal of that. He also knew that the
success and failure of the business lie entirely with him. This gives him the incentive to
make his business as efficient as possible.
10. Cordial Relationship with workers and customers: Because the sole
trader is usually small, the owner can have a very close relationship with his workers to
the extent that domestic/personal issues can be discussed and addressed. He also knows
firsthand from customers what their wants are. It also enables him to know which of the
customer’s credits are worthy. This kind of relationship is usually beneficial to all the
parties.
11. Tax saving: Unlike in companies, the profits of the sole trader are not
taxed. The owner only pays his income tax.
12. Privacy: The sole trader is not under any legal obligation to publish his
accounts for public consumption as in joint-stock companies.
Disadvantages of a Sole Trader

1. Bear All Losses and Risks Alone. Business is full of risks and uncertainties.
Unlike other forms of business organizations where risks and losses are shared among
partners, the one-person business owner does not share these risks and losses with
anybody as it does not share the business's profits with anybody.
2. Limited Financial Resources. The most significant single cause for the
abandonment of the one-person business form is the desire for expansion and the
resultant need for additional capital, which is not forthcoming because the capital used in
running the business comes from only one man and is limited to the extent of his
fortune. His inability to raise more capital limits its plan of expansion.
3. Unlimited Liability. Unlimited liability means that in the event of failure of
the business, the personal assets of a person can be claimed to pay debts of the business.
For a sole trader, it means that everything he owns is subject to liquidation to set the
business's ability if the business fails.
4. Lack of Continuity. When the sole proprietors retire or dies, the business
may end like that. Though his children or relatives may attempt to continue with the
business, most often than not, they lack the zeal and or the ability to operate efficiently.
The imprisonment or bankruptcy of the sole proprietor spells similar doom for the
business.

43
 5. Absence of Specialization. As stated earlier, the sole proprietor does so
many things by himself. As a result of this, he may not handle aspects of the work
efficiently. This negatively affects the prospects of the business.
6. Limitation on Expansion. Because of limited capital, the sole proprietor
may not be able to increase the size of his business no matter how ingénue he is. As
enumerated earlier, the sole proprietor has few sources of capital. Except for banks, he
may not get any substantial capital for expansion frantically; his ability to borrow from
banks depends on his collateral which may not be enough for bank find.

B. Partnership

Denedo (2004) says the partnership is an association of two to twenty persons

carrying on a business in common with the view of making a profit. The partners
contribute both funds and efforts to set up and manage the business sharing profit (or
loss) on an agreed basis. A partnership can also be defined as the relationship that exists
when two or more persons contribute little money or money is worth to establish, own
and manage a business organization with the sole aim of making a profit. The partnership
is an association of 2-20 persons or 2-10 persons, as in the case of a bank, to carry on as
co-owners of a business for profit. They also share the losses that arise from such
businesses.

Features of Partnership

1. Ownership: It is formed by between 2-10 people and between 2-10 people in

the case of banks.
2. Capital: The initial capital is contributed by partners.
3. Liability: Their liability is unlimited except for limited partners.
4. Formation motives: They are formed for profit reasons.
5. Sources of capital: contribution from the partners investing back profit,
loans from banks
6. Method of Withdrawal: The method of withdrawing capital must be
approved by other partners as laid down in their partnership deed.
7. It has no separate legal entity
8. It has no board of directors.

Types of Partnership

We have principally two types of partnership, namely, ordinary and limited

partnership.
1. Ordinary Partnership. All members or partners take an active part in the
business management and are generally liable to any loss or risk. All partners have equal

44
responsibility and bear all the risks of the business equally. All the partners have equal
powers, unlimited liabilities, an active part, and profits.
2. Limited Partnership. Any member in this category's debts are restricted to
the amount of money contributed in running the business. Not all partners take an equal
part in the management of their business. However, a member must bear the risk and
take an active part in the business activities.

Kinds of Partners

We have five types of partners, and they include:

1. Active Partner: This is the partner(s) who take an active part in the
business's formation, financing, and management. They receive a salary for their role as a
manager, managing director, or director of the business, as spelled out in the partnership
deed.
2. Dormant/Sleeping Partner: This partner contributes only the money
needed to form or run the business. He is not involved in managing the business and
does not receive a salary. He is only entitled to profit sharing and losses as it is agreed
upon before formation.
3. Normal/Passive Partner: A regular partner is not a partner but allows his
name to be used in the partnership or gives the public the impression that he is a partner
even though he may not share in the business's profit. This is a partner appointed
because of his experience, fame, or wealth position. These members may include retired
army generals, politicians, civil servants, successful businessmen.
4. Silent Partners: A silent partner is an individual known to the public as a
partner but who does not participate in the firm's management.
5. Secret Partner: A secret partner is active in the affairs of the business but
not known to the public as a partner.

Sources of Funds for Partnership

A partner could use the following method to fund their business: contribution
from members, investing back profits, borrowing from the bank, and enjoying credit
facilities

Article of Partnership or Deed of Partnership

This is the document that regulates the activities of the partnership business. It is
the “constitution of the partnership business aimed at guiding against or resolving
disagreements. A solicitor draws typically it for the partners. The partners agree and sign
the document. The deed of partnership is not legally required. It is essential. The style
and contents of the deed of partnership vary from partnership to partnership. They
include all or some of the following:-
45
 • Name of the firm
• Name of the partners
• The place of business
• The description of the nature of business
• The amount of capital that each part is to contribute,
• The role of each partner in the business
• The method of profits and losses sharing,
• The compensation, if any, the partners are to receive for services rendered to
the business
• The right of partners in the business
• How long the business shall last
• Partner’s rights in the business
• How matters shall be determined either by majority vote or not
• Provision for the admission of new members
• The arrangements concerning withdrawals or additional investment
• Arrangement for the dissolution of the firm in the event of death,
incompetence, or other causes of withdrawal of one or more of its members.

Once each partner agrees to sign this document, it becomes a legal document
enforceable in a court of law.
Advantages of Partnership

The following are the advantages of partnership.

1. Greater financial resources: Unlike a one-man, a business between two and

twenty persons forms the partnership. It translates into more capital for such a business
compared to a one-person business. By doing so, the ability to borrow from the bank and
be approved is higher and better than one man. The benefits of expansion are higher
because more funds are available.
2. Combined Abilities and Skills: In partnership, various partners with
various ideas, i.e., accountants, marketers, bankers, historians, managers, etc., may form a
business. They will use various talents to advance the company more than a one-person
business, the only talent.
3. Greater Continuity: Relative to the sole proprietorship, the partnership has
an excellent tendency for continuity, even in death. The death of a partner may bring
about a re-organization of the partnership. However, the remaining members are likely to
have some knowledge to continue with the business.
4. Ease of Formation: Like-one-man business, the partnership is relatively easy
to organize as few governmental regulations govern the formation of partnerships. The
investments duties, privileges, liabilities, and other relationships of the partners are

46
mutually agreed upon. As soon as the new members and materials have been brought
together, the business is ready to function.
5. Joint and better decision: Two good heads are better than one, and this
applies to partnership businesses where joint and better decisions are taken.
6. Creation of employment opportunities: The extensive partnership is in a
vantage position to employ more in its business because of its substantial financial
resources.
7. Employment of valued employees: To secure the advice and experience of
esteemed employees. They are made partners in the firm. This is a way of enhancing their
work as well as that of the firm.
8. Tax advantage: Partnership enjoys tax advantage. Taxes are, therefore,
levied upon the individual owners rather than upon the firm as it is not recognized as a
legal entity.
9. Application of Division of Labor: This is applicable in its managerial and
administrative hierarchy.
10. Privacy: As the sole proprietorship, partnerships are not under any legal
obligation to publish their books of accounts for public consumption.

Disadvantages of Partnership

1. Unlimited Liability: If the business fails in the process, assets will be sold to
offset its liabilities. If the assets cannot pay for the debt, the owners’ personal belongings
could be sold to offset such debts.
2. The business is not a legal entity: Most of the partnership business has no
legal backing.
3. Disagreement and Resignation: The death of a partner can lead to the
death of a business, especially the active partner. Most of the partnership ends with
disagreement. Disagreements because of action or opinion lead to a resignation which
could lead to total death.
4. The decline in pride of ownership: Since at least two people own the
partnership, the pride and joy associated with ownership are reduced, unlike in sole
proprietorship, where the owner enjoys tremendous pride in his business.
5. Bureaucracy leads to slow decision and policymaking: A meeting that
requires a quorum may not always be formed.
6. Risk of mandatory dissolution: Where a member withdraws his
membership or admission of a new partner becomes necessary, the partnership will be
dissolved and another agreement reached to admit such member. The rigors involve in
this are tedious, which may be a problem for such an act.
7. Limited capital: This partnership cannot get more capital through shares
except through members.

47
 8. Restriction on sale of interest: There is a difficulty in affecting the transfer
of ownership. The interest of operation is not transferable without the consent of other
partners.

C. Joint Stock Company (Corporation).

A company is an association of individuals who agreed to and jointly pooled

their capital to establish and own a business venture distinct from others. They are
regarded as the owners of the company. A joint-stock company could be a private limited
company or a public limited company.

Kinds of Companies

1. Unlimited Liability Companies: These liabilities do not end on the money

contributed to the business; their personal belongings could be sold to recover money
from them in case of indebtedness.
2. Limited Liability Company by Guarantee: This business promotes
science, religion, arts, education, and not-for-profit making. They source their fund from
members. Their liabilities are limited by promise or guarantee.
3. Limited Liability Companies by Shares: Liability is limited to the amount
they contributed to the formation and management of the company. If a company is
liquidated, they lose only the shares they have in the company.

Types of Limited Liability Companies

1. Private Limited Liability Company: This Company, when formed, has a

minimum number of two people and a maximum of fifty. The number includes
employees of the company.
2. Public Limited Liability Company: Minimum number of people that can
form this company are seven, while the maximum is not stated. The owners are shares
holders; people are free to come in and sell off their shares.
Method of Formation

The document used for registration includes:

1. Memorandum of Association. It states how the company will relate to the

outside world. It will state the name, location, and objectives of the company.
Memorandum of the association includes the name of the company with “limited” as the
last word; location of the company; objectives of the company; the amount of the
registered capital proposed; and liability of the company’s shareholders (statement).
2. Article of Association. It tells you about the regulation that is laid down for
the internal rules and regulations of the government organization and management of the
company. They may include: The duties, rights, and position of each member of the

48
company; The method of the appointment of the directors; How dividends are to be
shared; How general meetings are to be held and the procedure; Method of electing
directors and the voting rights at such election; and Method of auditing the company’s
account.
3. The Prospectus. This is a document of notice, circular, advertisement, or
other invitation offering the public subscription or purchase of shares or debentures of a
company.
4. Certificate of Incorporation. This certificate is issued by the registrar of
companies and cooperate affairs commission Abuja to show that a business is legally
incorporated and recognize by the government.
5. Certificate of Trading It is issued to a public limited liability company. He
can start a business and exercises borrowing powers.

Features of a Private Company

1. Membership: a minimum of 2 and a maximum of 50.

2. Issuance of Shares: cannot sell shares to the public.
3. Transferability of Shares: can only be transferred with the consent of other
shareholders
4. Quotation: private companies are not quoted on the floor of the stock
exchange.
5. Publication of Accounts: not required to publish annual accounts.
However, they must send a copy of their audited account to the registrar of companies
each year.
6. Limited Liability: each shareholder possesses limited liability.

Features of a Public Company

1. Membership: Minimum of seven and no maximum, but article of

association could specify maximum.
2. Issuance of Shares: can sell the share to the public
3. Transferability of Shares: shares can be transferred without the consent of
other shareholders.
4. Quotation as Public Companies: are quoted on the floor of the stock
exchange
5. Publication of Accounts: required by law to publish an account and send a
copy of the audited account to the registrar of companies each year.
6. Limited Liability: each shareholder possess limited liability

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Advantages of a Private Company

1. Limited Liability: Liability is limited to the amount of money you put into
the business. In case of liquidation, your personal properties are not touched.
2. Privacy: Just like a public company, it is not compulsory to publish its
account yearly. As such, the company has the advantage of keeping its secret.
3. Continuity: The minimum number of the holder of a company is two, and
the maximum is fifty. If, for instance, you have forty members and two dies the company
will continue, compared to a one-person business
4. More Capital: Compared to partnership business, the chances of sourcing
for funds to be granted, i.e., from banks, is higher.
5. Legal Entity: The Company is a legal entity. As such, it can sue and be
sued.

Disadvantages of a Private Company

1. Taxes: Most companies pay corporate tax compared to a sole trader or

partnership that pays personal income tax; the tax may be so heavy that it may burden
the company.
2. Share: Unfortunately, the company's shares are not publicly subscribed; all
members must be notified even in exchanging shares. A new member may be rejected.
The shares of private limited companies are not quoted on the floor of the stock
exchange.

Advantages of Public Limited Company

1. Legal Entity: It is a corporate body; it can sue and be sued.

2. Limited Liability: The liabilities of the owners is limited to the shares
brought into the organization
3. Ease of Raising Additional Capital: A large number of owners makes it
easy to raise funds from their contributions or sell shares or bonds.
4. Expansion is Unlimited: There is no limit to expanding the company to
provide significant capital.
5. Continuity: This company's life is long; even if a hundred members die at a
time, the chances of its survival are still there. Even in a period of resignation, disability,
etc., the company is not threatened.
6. Adaptability: It is adaptable to small, medium, and large scale companies
according to the fund available to the firm.
7. Capital Transfer: you can transfer your capital at will if you are not satisfied
with the company.
8. Flexibility: for the fact that we have many members as shareholders,
members of the board, managers, etc., with diverse experience and knowledge, the

50
running of the company will be perfect using the verse of experienced personnel, thereby
giving room for flexibility.
9. Enjoyment of Large Scale Production unlike One-Man Business:
Because of the number of owners, finances, flexibility, etc., a company has a better
advantage of producing goods in a large quantity.
10. Share Holders Interest is Safeguarded: Because there is no secrecy, the
shareholders have nothing to fear.
11. No managerial Responsibility: You can be a shareholder, yet you are not
part of the management. It means that others are managing the business for you.
12. Employees may become Co-owners: Employees will become owners
either by deliberate action of the management of the companies or by buying shares.
13. Democratic Management: The Company is run democratically; the election
of the board of directors is by vote. In the meeting, if no quorum is formed, there will
not be a meeting.

Disadvantages of Public Limited Company

1. Double Taxation: Most corporations are faced with double taxation. For
example, state and local governments may charge companies different taxes.
2. Hard to Establish: Methods of establishment and finance needed for such
a business are high and require a large capital outlay, which may scare many investors.
3. No Privacy: Company and allied matter decree expect this type of company
to publish its account annually, making it public affairs.
4. Non-Flexibility: It is hard to switch businesses because the papers for
registration state what they are to do. If you change condition, it means you are to form
another company entirely.
5. Exceptional performance must be sought from the government to transact
business outside the location you were registered.
6. Cooperation is Non Existence: Most companies have problems of
misunderstanding between managers or workers; it may be because of their extensive
nature.
7. Owners are Separate from Managers: Therefore, the managers tend not
to run it well since they are not the owners.
8. Huge capital is required for its formation; therefore, it becomes more
complex to manage than a one-person business.
9. Delay in policy and decision-making.
10. Suppression of individual initiatives.

51
 Worksheet #2

1. Explain the various forces of the firm’s environment.

2. Describe the local and international business environment.

3. Explain the role of business in the economy.

4. Discuss the various phases of economic growth.

5. Differentiate the various forms of business organization.

6. What is environmental scanning? Discuss the usefulness of SWOT analysis in

environmental scanning. Cite examples.

7. Specific examples explain the micro and macro levels of the environment.

8. The parent company jointly owns multinational corporations. Are they socially
responsible to their owners? Why. Suggest ways of ensuring that these enterprises
operate in a socially responsible manner.

9. What do you understand by the word international business, and what alternative
operational strategies are available to a company wishing to go international?

10. If you are to start your own business as a sole trader, where will you source funds?

52
 Chapter 3
FORECASTING AND PLANNING

Performance Standard: The learners shall be able to formulate effective plans for a
specific business endeavor.

Learning Competencies: The learners…

➢ discuss the nature of planning;

➢ compare and contrast the different types of plans;
➢ describe planning at different levels in the firm;
➢ apply appropriate planning techniques and tools; and
➢ formulate a decision from several alternatives.

Nature of Forecasting and Planning

Forecasting. This is a management function that reduces areas of uncertainty

that surround management decisions. Such decisions can be on sales, costing, profit,
workforce, among others. Forecasting is aimed at calculating or predicting what is likely
going to happen in the future. That is, the events or conditions are predicted in advance.
By so doing, forecasting gives management the basis for expecting the desired outcome
arising from management decisions. Through forecasting, a manager has alternatives. Out
of the alternatives, he selects the one that can maximize his objective(s).
Planning. This is another futuristic management function. It goes together with
another management function of forecasting. It involves deciding in advance what to do,
how to do it, when to do it, and who is to do it. Consequently, planning has to do with
the conscious choice of influence patterns on the manager to make decisions. For
planning to be effective, there must be the establishment of an objective. Planning is also
defined as the design of the desired future and an effective and efficient way of bringing
it about.

Features of Planning

1. Planning involves design. Remember to design is to create, which is one of

the skills of management. This means that before any other management function can
occur, there must be, first of all, planning. Consequently, planning precedes action in
respect of other management functions.
2. Planning attempts to bring necessary actions and fit them together to
something we want to make sense of before it happens. This means that before we

53
realize an objective, there must be a series of actions that must be well fitted together
logically.
3. Planning is focused on the need to achieve stated and well-defined
objectives. This means that the end-product of planning is the realization of
organizational objectives.
4. Planning is also a conscious, deliberate response to the negative belief that
unless something is done, a desired future state will not occur, and to the optimistic belief
that we can do things to improve our chances of achieving the desired state.

Advantages of Planning

1. Planning focuses on objectives. This is important so as not to commit the

limited resources of the organization into unprofitable actions.
2. It offsets uncertainties by making the manager develop some confidence,
enabling him to make decisions with some degree of certainty.
3. It minimizes waste before careful analysis would have been made concerning
the critical activities that need to be performed to realize the objective or solve the
problem. All unwanted activities are isolated and thrown away.
4. Planning also ensures control through measurement and feedback. This is
important to avoid unnecessary expenditure of resources.

Disadvantages of Planning

1. The effectiveness of planning depends on the quality of data gathered and the
assumptions made from them. If the quality is poor and assumptions not correct. They
can adversely affect the future of the results.
2. Planning is expensive as it involves a considerable amount of time and
money.
3. Planning delays action because it is only when the plan is completed that the
desired action can occur.

Benefits of Planning

1. It helps identify opportunities for the organization planning requires an

organization to look for opportunities; to earn profit or provide a service that otherwise
may not exist. If opportunities are identified, steps can be taken to capitalize on the
essentials.
2. It helps identify a possible problem; the analysis involved in planning can
reveal a situation that could threaten the organization. If such potentials hazards are
noticed or anticipated, steps can be taken to minimize their impact.

54
 3. It forces managers to set objectives; the planning process demands that
managers decide what objective to pursue. Once these objectives are set, employees have
a clearer idea of how their work helps achieve their goals.
4. It forces managers to set the standard; as part of the planning process,
managers must decide what performance standards are necessary to reach the objectives.
These standards convey to employees what they must do; they also help managers fulfill
the controlling function.
5. It coordinates organizational activity plans for the whole organization, and
each of its significant components assists individuals in seeing how their particular work
fits in with the work of others. This understanding can reduce wasted actions and
increase organizational efficiency.

Problems in Planning

1. Lack of support from top management; if top management is nonchalant

about planning, lower-level managers will conclude that planning is unimportant.
2. Poor performance is a critical element of planning, and if poor quality
information is used as the basis for plans, good plans cannot be developed.
3. Resistance to change; planning may result in a decision to change
organizations' practice. These changes can cause resistance in people who have become
accustomed to specific ways of behaving.
4. Over or under commitment in plans; if managers spend a lot of time and
energy implementing plans, they may become emotionally attached. Once that happens,
they may be unable that is the article of the plan.
5. Managers are not involved in the planning process; If objectives are imposed
from above, lower-level managers will lack time motivation to achieve them.
6. Lack of competence in planning; Some managers lack the experience,
motivation, or aptitude for systematic planning. Deficiencies in experience and
motivation can be overcome, but an inability to plan cannot be an ineffective manager.

Planning at Different Levels in the Firm

Plans must be developed for all levels of management. However, other focus will
differ at different levels of management, below the planning activities of top managers
and low-level managers, which reveal four principal differences.
Top Managers Low-Level Managers
1. Develop organizational objectives and the overall Develop plans that will fit the overall objectives set
plants to achieve. by top management.
2. Spend a large proportion of their time on the Spend a much smaller preparation their time on the
planning function planning function.
3. The time frame for planning activities is large, The time frame for planning activities is short,
about one year. often week to week.
4. Focus on both internal and external factors when Focus mainly on internal organization factors.
planning.

55
Types of Plans

There are a variety of ways in which we can categorize plans. In this lesson, the
learner is exposed to categorization based on the breadth, time frame, specificity, and
frequency of use.

1. Breadth. Under this subdivision, we have two types, namely, strategic and
operational plans. Strategic plans generally apply to the entire enterprise, establish its
overall objectives, and place the organization in its environment. In contrast, operational
plans specify the details required to achieve the overall objectives, i.e., they define ways to
attain the objectives. It follows that strategic plans cover a more extended period than
operational plans. Operational plans also deal with specifics as opposed to broader
strategic plans.
2. Time frame. Here we may have short time plans (plans within less than one
year), intermediate plans (the period between 1-5 years), and long-term plans (plan
exceeding five years).
3. Specificity. Plans may be specific or directional. Specific plans are usually
explicit and clearly defined objectives, for example, “we want to attain 10% sales volume
within the first quarter of 2009”. It follows clear procedures, budget allocations,
schedules of activities that must be designed to achieve this target. This represents a
specific plan. On the other hand, Directional plans merely give general guidelines, for
example, providing focus or direction with no specific objectives. This kind of plan is
flexible and provides for misinterpretations.
4. Frequency of use. Here, we have single-use plans and standing plans.
Standing plans, by their nature, are to guide events that are repetitive in an enterprise, for
example, the national policy on gender mainstreaming. Single-use plans, on the other
hand, are
those that are planned precisely to meet unique needs. They are created in response to
non-programmed decisions since managers may not repeat such plans.

The Planning Process

1. Managers at all levels proceed through these steps when they carry out the
planning functions.
2. The planning process takes place within an organization, but factors outside
the organization influence it.
3. The planning process is not as neat and orderly as the model implies; some
steps may be repeated several times.
4. Contingencies planning is necessary to take into account unexpected even
A plan can play a vital role in helping to avoid mistakes or recognize hidden
opportunities; preparing a satisfactory plan for the organization is essential. The planners
know the business, and they have thought through its development in terms of products
and managing finances, and most important, markets and competition, planning helps in
56
forecasting the future, makes the future visible to some extent, it bridges between where
we are and where we want to go.

Planning Techniques and Tools

The basic techniques in planning are:

1. Readiness to engage in planning. The organization must be ready to

engage in planning; otherwise, it is an effort in futility. This step is to help clarify the
organization’s beliefs.
2. Creating a vision. This means a statement of purpose and function. This
means defining the organization’s preferred future.
3. Stocktaking. This implies a vivid understanding of the organization’s
current status, and it involves an exhaustive examination of both the internal and external
context within which the enterprise’s situation.
4. Goals and objectives setting. Goals are simply a more explicit statement
of the visions which specify what is to be accomplished so that the vision becomes real.
Objectives are only more precise statements of the specific activities that are required to
achieve set goals.
5. Build a communication plan. A successful plan requires much of a sound
communication campaign from the onset to create awareness and acceptance.

In utilizing these techniques, managers use a variety of planning tools. These are:

1. Environmental scanning. An in-depth analysis or screening of volumes of

information to detect emerging trends and create scenarios.
2. Forecasting. From the environmental scanning, forecasts (predictions of
future outcomes) are made.

3. Benchmarking. This means searching for the best practices among

competing or non-competing firms, leading to their superiority in such industries. The
idea behind this practice is that it can improve quality by analyzing and copying the
methods of leaders in different fields.

Application of Planning Tools and Techniques

1. Establish and define clearly the central and overall objectives of the
organization. A well-defined objective can make the difference between the success and
failure of an enterprise. It clearly defines the product or service as well as the purpose of
the company. Along with the company's overall mission, it is also necessary to establish
specific objectives and goals. For example, the overall objective of a hospital is to provide
quality healthcare.

57
 2. Determine your current position relative to your objectives. Assess your
strengths and weaknesses. This will show the distance the company has to cover before
reaching its goals. The analysis of current strengths and weaknesses would determine if
the goals are realistic and achievable and whether they need to be reevaluated and
modified.
3. Develop forecasts and future conditions. To effectively plan, it is
necessary to forecast the future trends that will affect its standing and operations as
accurately as possible. The forecast factors will include general economic conditions,
changes in consumer attributes, new technology, product developments, possible
competitive strategies, and any adverse legal developments.
4. Preparation of derivative plans. Once an overall plan has been adopted, it
is necessary to develop other derivative plans for each company segment to support the
formal plan. Derivative or sectional plans are developed in each area of the business but
within the framework of the preliminary plan to coordinate and integrate programs and
policies of all enterprise sections.
5. Implement a plan and evaluate its results. The success of the plan would
depend upon how effectively the plan is implemented. This implementation is going to
require a combination of all skills and coordination of all factors. Also, in this ever-
changing dynamic environment, keeping the plan open to evaluation and modification is
necessary. The plans should be periodically re-evaluated to measure their progress and
effectiveness so that any deviations can be corrected and any adjustments can be made.

The Six P’s of Planning

1. Purpose. An effective planning system requires a clear understanding of the

organization’s purpose. What are the reasons for the organization’s existence? Is it to
increase profit, increase market share, generate more employment, introduce more
products, etc.? This purpose must be clear and elaborate.
2. Philosophy. Philosophy incorporates the fundamental beliefs as to how the
organization’s purpose is to be achieved. For long-term survival and growth, a
philosophy of ethical conduct must be adopted. For example, General Motors’
philosophy is based upon profitability through quality, service, and ethical behavior.
IBM’s philosophy was to elevate the level of the salesman to an executive, etc.
3. Premise. This involves the strengths and weaknesses of the organization and
its knowledge and assumptions about its environment. By forecasting and other methods,
the management can make some conclusions about the environmental trends. Knowing
its strengths and weaknesses, it can deal with the changing environment more
intelligently.
4. Policies. Policies are general guidelines or constraints that aid in managerial
thinking and action. In a typical organization, there are production policies, financial
policies, accounting policies, marketing policies, personnel policies, then the philosophy
and form a basis for planning and necessary operational actions.

58
 5. Plans. Plans represent specific objectives and action statements. Objectives
are the goals to be met, and the action statements are the means to achieve these ends.
These plans guide us step by step as to how to reach the objectives and also at what stage
the progress is at a given time.
6. Priorities. A particular organizational goal must be given a particular priority.
Limited resources of time, finances, materials, etc., must be proportionally allotted to
goals of priority. The priorities will determine an appropriate allocation of resources.
Goal priorities would determine what is relatively more important. A goal of higher
priority would receive more attention and more resources. For example, a research-
oriented organization will get different priorities and resources than a profit-oriented
organization. The priorities of goals would be established based on the philosophy and
premises of the organization as well as social, political, and economic measures and value
conflicts. In any case, such priorities would affect the planning process.

Decision-Making

In the process of planning in an organization, the decision is being made. This is

because decision-making is that activity that chooses which activity is to be carried from
different activities. This means that there must be alternative or different ways to do
something before a decision can be made. Out of these ways, there must be an action to
pick one alternative out of the several alternatives. A decision is therefore regarded as a
commitment to action. This is why a plan is useless unless it is committed to concrete
action.

Steps in Decision-Making

The following shows the relevant steps in planning. These steps are also the
steps in decision-making, and we are going to consider them, though briefly, one after the
other.
1. Define problem/issue. This is the first step in planning/decision-making.
The objective has been set, and there is an obstacle toward the realization of the
objective. As a result, before a problem exists and becomes an issue, there must be an
objective that the problem is threatening. That problem must be identified and isolated.
Care must be taken here so as not to confuse the symptom of a problem with the
problem at stake. For example, there can be smoke in the factory but what is causing the
smoke is the fire. Attacking the smoke is a sheer waste of time because the fire will
continue to produce fresh smoke. The only way to end the smoke is to quench the fire by
a suitable means or a combination of means.
2. Collect relevant data. Planning and decision-making cannot take place
unless there is data. However, the data should be meaningful to the problem already
identified. This is where the information gathered in the management function of
forecasting will be helpful. The assumptions made will be further subjected to analysis to

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determine the relevance to the problem at stake. Company records are also part of the
data which have to be processed.
3. Develop alternative solutions. With the data having been assembled, the
next stage is for management to work out possible solutions. The solution can never be
one because if it is so, then there can be no choice. The idea of choice suggests that at
least there must be two solutions to the existing problem. Out of these solutions, there
can be a choice.
4. Assess the consequences. However, before there can be a choice,
consequences must be carefully considered regarding the problem threatening the
objective. The manager should determine the required resources needed in selecting an
option. He should find out if such resources exist and be put to alternative use to bring
better benefits. He must also be sure that the organization can handle the option that is
eventually capable of tackling the problem effectively.
5. Select the Optimum Solution. The solutions having been worked out and
ranked in order of preference, and the next stage is to choose. Furthermore, the choice
should be the most feasible one after taking several factors into consideration vis-à-vis
the objective and the problem at stake.
6. Implement Solution. Once the choice has been, management should go-
ahead to implement it. While implementing, there should be a built-in motivational
system that will enable the problem to be tackled satisfactorily. A job plan should be
developed spelling out the necessary activities to be done, who is to do them, how they
will be done, and at what time.
7. Measure result. While implementing, there must be control and feedback.
To achieve this, there should be regular performance reports. The reports should then be
compared with the objective. If there is a deviation, this means that there is no practical
solution yet to the problem. Such deviation should be quickly corrected.

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 Worksheet #3

1. In your own words, discuss the nature of planning.

2. Compare and contrast the different types of plans.

3. Describe planning at different levels in the firm.

4. Cite a specific situation where you can apply appropriate planning techniques and
tools. Prepare a simple plan for that specific situation.

5. Illustrate and formulate a decision from several alternatives. Give a concrete example
where you can apply such a decision.

6. How does planning benefit an organization? What potential problems exist in

planning?

7. Explain some of the reasons for planning. Are there “good plans” and “bad plans”?
Describe some of the characteristics of good planning.

8. Assuming you want to buy a car to ease your transportation problem of going to
work and other places. Show how you will use the model to make a decision and
solve the problem.

9. List the steps in Planning. Describe any five.

10. Explain the advantages and disadvantages of planning

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 Chapter 4
ORGANIZING

Performance Standard: The learners shall be able to design an appropriate

organization structure for a specific business.

Learning Competencies: The learners…

➢ discuss the nature of organizations;

➢ distinguish the various types of organization structures;
➢ apply organization theories in solving business cases;
➢ identify the different elements of delegation; and
➢ differentiate formal from informal organization.

Nature of Organizing

Organizing is one of the functions of management where the manager is

expected to bring his creativity to bear. He has to be original and innovative in the
discharge of this function. It can be recalled that we treated business objectives and the
necessary skills a manager needs to perform his functions; design skill satisfactorily is one
of those skills, and design skill is very much needed in the function of organizing.
Organizing has many areas to cover. As a result, we shall be starting with the nature of
organizations, types of organizations, and organizing activities. Organizing can be
thought of as:
1. identification and classification of required activities necessary for the
accomplishment of the objectives of the organization;
2. the grouping of the activities identified;
3. the assignment of the activities which have been grouped (each group of
activities) to a manager;
4. provision of commensurate authority to the manager so that he can be able
to supervise the group of activities that have been assigned to him, and
5. Coordination ensures that the group of activities assigned to a manager links
with other activities assigned to other managers in the organization.

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Advantages of Organizing

Having explained briefly what organizing is, you can quickly see some of the
advantages associated with it. By creating the different roles that make up the structure of
an organization arises some definite
advantages.
1. The environment, that is, the internal environment, is made clear.
There is a focus on the objective and the need to contribute one's quota toward realizing
the objective.
2. Organizing makes it possible to determine who is to do what. Through
organizing, the marketing manager knows he will perform marketing activities such as
market and marketing research, segmentation, pricing, promotion, etc. He is not
employed to do engineering work because that aspect of the organizational role belongs
to another manager entirely.
3. Organizing again makes it possible to identify who is responsible for
what result. Even though the marketing department has to perform marketing activities,
it is the marketing manager that is accountable to a higher manager for all issues relating
to marketing. Below the marketing manager, other employees are reporting to him. These
other employees must also account for the marketing manager and another manager
outside the marketing department.
4. Removes obstacles: Through proper organizing, all obstacles are removed.
They are obstacles because they do not allow doing a good performance. The obstacles
arise due to confusion and uncertainties which arise because of improper or faulty
organizing. These problems in the forms of confusion, anger, frustrations, and
uncertainties are drastically reduced through the management function of organizing.
5. It makes it possible for a smooth decision-making network. We have
said earlier that a manager takes decisions. However, he cannot decide if confusion and
uncertainty surround the environment under which he is managing. He may not know
what he will decide on and the importance of his decisions to the organization.
Nevertheless, with proper organizing, a conducive environment would have been created
under which the manager has to make decisions.
6. Presence of communication network. In an organization, nothing would
be done without communication. Decision-making involves communication; forecasting
and planning cannot be done in the absence of communication. No management
function can be performed in the absence of communication which can be oral or
written, or nonverbal. Communication exists between managers, managers, and
subordinates, managers and their superior officers, etc.

What is Organization?

The term "Organization" is one word that people use loosely. In one sense,
some people look at the word as including all the behaviors of the people that work in an

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establishment. Some other people regard the organization as the total system of social
and cultural relationships. Still, others equate an organization with an enterprise.

Meaning of Organization Structure

According to Mullins (2000), the structure is the pattern of relationships and

positions in the organization and among members. The purpose of the structure is the
division of work among members of the organization and the coordination of their
activities, so they are directed towards achieving the goals and objectives of the
organization. The structure defines tasks and responsibilities, work roles and
relationships, and channels of communication.
Structure makes possible the application of the management process and creates
a framework of order and command through which the organization's activities can be
planned, organized, directed, and controlled.

Drucker (1989) suggests that the organization structure should satisfy three
requirements. These requirements are as follows:
1. It must be organized for business performance. The more direct the
structure, the more efficient it is because minor change is needed in the individual
activities directed to business performance and results. The structure should not rest on
past achievements but be geared to future demands and growth of the organization.
2. The structure should contain the least possible number of management
levels. The chain of command should be as short as possible. Every additional level
makes for difficulties in direction and mutual understanding, distorts objectives, sets up
additional stresses, creates inertia and slack, and increases the difficulties of the
development of future managers moving up through the chain. The number of levels will
tend to grow by themselves without the application of sound principles of organization.
3. Organization structure must make possible the training and testing of
future top management. In addition to their training, future managers should be tested
before they reach the top. They should be given autonomy in positions of actual
managerial responsibility while still young enough to benefit from the new experience.
They should also have the opportunity to observe the operation of the business as a
whole and not be narrowed by too long an experience in the position of a functional
specialist.

Drucker suggests that to satisfy these three requirements, the organization

structure must be based preferably on the principle of regional decentralization, with
activities integrated into independent product businesses with their product and market
and with responsibility for their profit and loss. According to Drucker, if regional
decentralization is not possible, the organization structure should be based on functional
decentralization with integrated units having the full responsibility for primary and
distinct stages of the business process.

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Objectives of Organizational Structure

The objectives of organizational Structure, according to Knight (1977), are as

follows:
1. the economical and efficient performance of the organization and the level
of resource utilization;
2. monitoring the activities of the organization;
3. accountability for areas of work undertaken by groups and individual
members of the organization;
4. coordination of different parts of the organization and different areas of
work;
5. flexibility to respond to future demands and developments, and adapt to
changing environmental influences; and
6. the social satisfaction of members working in the organization.

Types of Organization Structures

There are various types of organizational structures. The basic ones are
functional, product/market, geographic, and matrix types.

1. Functional organizational structure. This structure makes use of expertise

since members engage in one functional activity, e.g., production. It is the most basic
structure. Here, supervision is made more accessible. Here also, there is a grouping of
diverse tasks into seemingly similar roles. For example:

Marketing Manager

Sales Advertising Product Purchasing

Manager Manager Manager Manager

2. Product/Market Structure. In this type, all those involved in the

production or marketing of one or related product are brought under one division. This
explains why it is often called organization by division. This system is practiced mainly by
organizations have large size and diverse products whole make functional structuring
unwise. These divisions represent separate business units since the divisional heads focus
primarily on their divisions, as illustrated below:

65
 Marketing Manager

General General General General

Manager Manager Manager Manager
Foods household pharmaceutical personal
products care
products
3. Matrix structure. This is a hybrid type since it simultaneously combines the
other types disused earlier. As a result, it utilizes the merits inherent in both as well as
relaxes their drawbacks. It follows that employees have in effect two superiors, with one
chain of command (functional or divisional) and the other is horizontal, which combines
people from various functional departments into a project team or a business team under
a project or group manager (Stoner, Freeman, and Gilbert, 1995). Much complexity is
seen in Matrix organizational structures. Here, there may be a product manager as well as
a national manager. It follows that the same employee may report to the product
manager and the national manager where the need arises.

Dimensions of Organizational Structure

Organizational structure can be analyzed along several dimensions:

formalization, centralization, complexity, and specialization, which are briefly explained
below:
1. Formalization. Formalization refers to the number of written job
descriptions, rules, policies, and procedures that guide employee behavior. In small firms,
formalization is low, and most of the direction that employees secure is oral. In contrast,
large organizations, mainly those are highly bureaucratic.
2. Centralization. Centralization deals with the issue of how much authority is
held at the various management levels in the organizational hierarchy. In a centralized
organization, top management makes decisions for most areas of operation. Workers at
lower levels are allowed to make a decision and initiate action only in limited areas.
3. Complexity. Complexity concerns the number of distinct job titles and
departments in an organization with many different departments, and job titles are more
complex than organizations with only a few job titles and departments.
4. Specialization. Specialization means breaking a complex task into simple
parts so that the individual or group performing the task can focus on specific parts of it.
Specialization is widely used in modern organizations for both managerial and operative
jobs.

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Advantages and Disadvantages of Specialization of Labor

Advantages Disadvantages
1. Workers became very efficient when 1. Workers fare to develop any sense of pride
doing the same portion of a carped task in the product and service that they are
repeatedly. producing.
2. One manager can supervise large numbers 2. Motivation among workers erodes, and a
of workers doing identical tasks. sense of alienation from work may develop.
3. Workers can learn specialized jobs much 3. Workers may feel that they are not using
faster than jobs requiring many different valued skills to do their work.
skills.
4. Quantity may improve because workers 4. Boredom, absenteeism, and turnover
know their job excellently. among workers may cause quality to decline.
5. The coordination of many specific tasks 5. Workers may be unaware of how their area
may be the only way for the organization to of specialization fits into the overall goal of
achieve its complex overall goals. the
Organization.

Composition and Members in the Organizational Structure

The structure is essential because it shows the duties to be performed to reach

the goals and objectives. The structure of an organization is basically of three layers. The
first layer is the Board of Directors, the second layer is the office of the Managing
Director, and the third and last layer is what is commonly referred to as a complex layer
consisting of the functional managers and their subordinates.
Board of Directors. This is the first layer of a typical business organization.
Members of the board are drawn from the shareholders. Even though he is in charge of
the organization's day-to-day activities, the Managing Director is also a member of the
board. The board provides a leader, and that is why whoever is going to be elected or
appointed to the board must be a mature individual capable of contributing
constructively to the board's leadership role. Nevertheless, beyond leader guidance to an
organization, there are still other functions of the board which must be performed. These
functions include the following:
1. Determination of Organizational Policy. It is the responsibility of the
board to fashion out what should be the policy of an organization. The policy is essential
because it gives a guide to action. It provides the framework through which all other
activities are carried. If this is not, there will be no unity of purpose as every member will
be doing things accordingly to the way he/she likes. Such action, of course, will create
waste, apart from the confusion. It will result because action demands the expenditure of
organizational resources. However, this expenditure can only be worthwhile if it is to
carry out the organization's objectives in line with the policy framework.
For this reason, the primary task of the bound is to work out what will be
regarded as the correct policy framework that the members will use to assess their
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activities. The corporate policy affects the entire organization. However, the department
and sections can also have their policies which must, of course, support the corporate
policy and never contradicting it.
2. Determination of Organization Objectives. The board also determines the
organization's corporate objectives, which also provides the guidelines for each
department to set its objectives. Again, the departmental objectives should not conflict
with the corporate objectives. If there is any contradiction, the corporate objectives will
be upheld because the corporate objectives are superior to the organization's
departmental or any other objectives.
3. Carrying out Appraisal on the Organization. The board has to carry out
particularly the economic appraisal of the organization regularly. It is not just enough to
firm corporate policy and provide guidelines for sub-policies regarding the departments.
The policies must be implemented. The board will review at the appropriate period the
extent to which policies earlier formulated are being implemented. The board also
reviews the projects that have been approved for implementation. The review and
appraisal are essential to determine the implementation level, the conformity in the
implementation process to existing guidelines, and if there are problems associated with
the implementation. Any problem detected is then investigated, and remedial action is
taken. Detailed programs concerning how the projects are being implemented need to be
reviewed. All the 3ps (policy, projects, and programs) are therefore regularly appraised to
ensure the economic viability of the organization.
4. Determination and Provision of Adequate funds. The board does two
things here. The first is to find out the amount of money needed for the projects and
programs they have approved based on corporate or organizational policy courses. Also,
it is the board's responsibility to distribute the net profit, that is, how much will be given
to shareholders as dividends, how much will go into reserves to improve performance,
among other important decisions. Again, if the organization borrows money from the
bank to finance its operation, the board will give the go-ahead.
5. Providing Schemes of Control. It is only the policy, projects, and programs
of an organization that the board controls. Even though the board does not manage the
organization's day-to-day activities, the members work out appropriate methods and
guidelines through which the activities of employees control to ensure that they work
towards attaining organizational objectives. All these are reflected in the organizational
manual.
6. Appointment of the Managing Director. The board also appoints the
Managing Director, who is also the Chief Executive Officer of the organization. In
appointing the Chief Executive, they fix his salary plus other benefits associated with that
position. In some organizations, the Managing Director is a member of the Board of
Directors and sometimes serves as the Chairman of the Board of Directors.

The Managing Director. The office of the Managing Director is the next layer.
He occupies a dual office as a board member; he shares in the board's duties that are in

68
the corporate responsibilities with the other board members. Also, by his unique position
as the Chief Executive Officer, he acts as a link between the board and the rest of the
organizations. The duties of the Managing Director or the General Manager include the
following:
1. He presents organizational objectives. This is one of the primary duties of
the Managing Director. It is not the wish of members of the organization to be on the
board; it is not allowed. That is why they have to be represented by their Managing
Director. Nevertheless, they need to know the objectives(s) of the organization because
that is why the organization exists in the first place, and these objectives must be sold to
them so that they can be committed to them and regard them as their own ”baby.” The
person to do that is the Managing Director. At the initial stage of gathering data
necessary for objective formulation by the board, the Managing Director encourages
other organization members to make contributions that are corrected to the board by the
Managing Director for consideration.
2. The Managing Director issues appropriate instructions. It is the
responsibility of the Managing Director to issue out the necessary directives that will set
the organization to work. This is directing. Nevertheless, whatever director that issued
must be clear and devoid of any word capable of double interaction. Of course, the
directives can be oral or written, or a combination of the two. There are still other forms
of communication, but these are the popular ones.
3. He maintains Coordination. The Managing Director ensures a high level of
coordination. We will be discussing this management function in detail in the later stage
of this course. However, coordination involves logically linking an organization’s activity
with another activity so that the entire organization works as a system. Effective
coordination among the activities of the organization’s members (employees) will create a
high will to work.
4. He creates and sustains morale in the process of directing and leading the
other members of the organization. There should be high morale, enthusiasm, vim, rigor,
and total commitment to the organization's objectives. All these are achieved through
team spirit, appropriate motivation such as good salaries and wages tied to productivity,
recognition, challenging tasks to perform, promotion, good pension scheme, awards, and
other motivation techniques.

The Operating Executives (complete layer). This layer is a complex one, and
it consists of the functional managers (the financial, production marketing, and personnel
managers) and the subordinates working under each of them. They perform a variety of
tasks.

1. The Financial Department. The following functions are performed:

• they carry out costing
• financial accounting
• records

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 • budget and budgeting control, among others.

2. The Marketing Department. Here functions such as the following are

performed.
• market and marketing resources
• market information
• segmentation
• product valuation
• buying and selling
• pricing
• distribution, etc

3. The Production Department. The production Department performs:

• planning for and measuring production progress
• engineering
• methods and standards
• manufacturing, among others

4. The Personnel Department. Functions that are performed here include:

• recruitment
• selection or interview
• placement
• salaries and wages administration
• promotion
• training, among others

Organization Theories and Application

Organizational theory can be explained as a rational edifice or prescriptions built

by people to explain human behavior in the organization. In other words, it implies the
body of knowledge and principles which provide the touchstone for effective
administrative action in organizations. More succinctly, organizational theory enables
people to describe, explain, and predict a wide range of human behavior within
organizations.
Several theories on organization have emerged, all to explain that no
organization operates in a vacuum. According to Scott and Mitchell (1972), the origins of
the organizational theory are traceable to Europe. Fredrick Winslow Taylor, Henri Fayol,
Max Weber, Henry Gantt, Frank, and Lillian Gilbreth contributed to organization theory.
The various organizational theories proposed by these individuals were based on their

70
experiences in the organizations where they worked. According to Hills (1980, 21), the
main features of Greenfield’s organizational theory are as follows:
• The function of organizational theory is to describe and not to prescribe.
• The organizational theory aims to explain and enlighten.
• The data for the theory can only be obtained from within the specific
organization.
• Scientists who study human beings cannot make statements about the
structure of human behavior in every context.
• The organizational theory concerns what is explained and to whom it is
explained, and by what means.
• The organizational theory provides insight into human behavior.
• Organizational theories are as diverse as the individuals within an organization.
• No universal theory about organization exists.

Relevance of Organization

The organization is a predominant concept, and every aspect of the human race
is closely associated with the organization. The production of goods and services are all
essential aspects of organizations. Organization can be the wealth of nations and has the
following features; goal, attainment, coordination, planning, and procedures.
Organization, since it is the embodiment of common purpose and unity, which offers
workers to work together and achieve plans agreed upon by all the stakeholders towards
the realization of the corporate goals, makes organization as a concept fundamental to
the administration. In the organization, are two essential elements, these are human
resource and material resource. The former includes the skilled, the semi-skilled, and the
unskilled. The combination of these elements and personalities makes up the strength of
organizations (Akinwale, 1999). However, the latter comprises the physical as well as the
financial aspects. The two elements (human and material) can produce effective
administration and management of an organization.
The organization also provides the basis that attracts people to work together to
realize their individual and corporate goals.

Elements of Good Organization

The following are the elements of good organization. In good

organization:
• Definite and clear-cut responsibilities should be assigned to each executive to
prevent frictions.
• Responsibility should always be accompanied by corresponding authority.
• No change should be made in the scope of responsibilities of a position
without a solid understanding of that effect on the part of all concerned.

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 • No executive or employee occupying a single position in the organization
should be subject to definite order from more than one source.
• The order should never be given to a subordinate without the prior knowledge
of his immediate executive head. Rather than do this, the officer in question should be
supported.
• Criticisms of subordinates should, whenever possible, be made privately, and
in no case should subordinate be criticized in the presence of executives or employees of
equal or lower rank.
• No dispute or difference between executive or employees as to authority or
responsibility for prompt and careful adjudication.
• Promotions, wage changes, and disciplinary actions should always be approved
by the executive immediately superior to the one directly responsible.
• No executive or employee should be the accuser and the judge of another at
the same time.

The rationale for Studying Organizations

Organizations are studied because of the following reasons:

Social Transformation. No doubt, the significant social transformations in

history have been essentially organizational-based. For instance, the government's current
reforms in education, economy, health, etc., bring about social transformations that are
compelled by global challenges.
Major Investment Decisions. Major and rational investment decisions cannot
be made without studying the organization in question. For instance, investors constantly
assess how business firms are doing and buy and sell stocks accordingly.
Organizational Analysis. Organization analysis does occur at all levels of
management. The job of organizational management is to assess the state of the
organization. Every level of the organization should be analyzed to determine the level(s)
that default(s) in realizing the corporate goals.
Examination of Outcomes. Organizations are studied. They have outcomes
that may be good or evil because they can spread hatred or save lives because they can
wage war or bring peace. We, therefore, study organizations to assess their outcomes.
Consolidation and Growth. There is a need for the study of organizations
towards consolidation and achievement of growth. For instance, organizations recording
successes have strong tendencies to become larger and larger through growth or merger.
Organizational Concepts. There are some concepts or terms commonly used
about the organization. A clear understanding of these concepts will help those working
in the organization system be well equipped with the organization's principles,
procedures, and theories. These concepts/terms are organizational climates, goals,
culture, organization, and methods (O&M), group cohesiveness, organizational behavior,
development, power, authority, etc.
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 Organizational Climate. According to Hodgetts and Altman (1979),
organizational climate implies “a set of properties of the work environment perceived by
individuals who work there and which serve as a major force in influencing their job
behavior.” Organizational climate is also referred to as the organization's internal
working environment or situation as perceived by the workers or members. Essentially,
varying characteristics make organizations differ in several respects: organization
structure, leadership style, rules and regulations, size, communication network, goals,
objectives, nature, interpersonal, or intergroup.
Organizational Goals. Organizational goals are said to be the mission and
predetermined objectives of the organization. They refer to the future target of the
organization. Every organization must set its goals before it commences operation. In
other words, goal setting is an essential aspect of organizational life and existence, which
gives direction for a specific time.
Organization Culture. Organizational culture is the dominant pattern of shared
beliefs and values (Cole, 1996). Morgan (1986) sees organizational culture from a
sociologist’s perspective and describes it as; “shared meaning shared understanding and
shared sense-making’’. The structure of an organization is essentially influenced by the
cultural disposition of such an organization.
Organization and Methods (O&M). The concept relates to administrative and
office work. Organizations and methods seek to have the most effective management
structure, to improve efficiency and effectiveness of working.
Group Cohesiveness. Group cohesiveness refers to the attractiveness or
drawing power for the members of the group. Groups vary widely from one to another
in the extent of their cohesiveness. The cohesiveness of a group is the determination of
group members to be the best means available for meeting the individual’s needs.
Cohesiveness is important because it affects the power of a group. Group develop norms
or standards of behavior, and it has been found that “the more cohesive the group, the
more effectively it can influence its members”
Organizational Behavior. According to Amold and Feldman (1986),
organizational behavior is concerned with the way organizations influence the thoughts,
feelings, and actions of their members to create a healthier and more productive
environment. Organizational behavior is also concerned with understanding how the
behavior and performance of individual organization members influence the
performance and effectiveness of the organization as a whole.
Organization Development (OD). This term implies a systematic process to
improve organizational effectiveness based on behavioral science knowledge; typical
stages in an organization development program include analysis, diagnosis, action plans,
and review. An external third party assists in the process (Cole, 1996).

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Delegation

Another essential aspect of organizing is the issue of delegation of authority. We

have repeatedly mentioned that a manager should not be given responsibility without the
necessary authority; neither should authority be given without responsibility. That is to
say that both authority and responsibility should go hand in hand. Centralization of
authority is a rare case because absolute centralization means that there is no
organization.
Delegation of Authority. Authority and responsibility always go together, and
they cannot be separated. If, for any reason, there is a separation, the work will suffer.
The manager with authority but no responsibility becomes a director and a tyrant. It is
dangerous because the outcome of their actions will not be in the organization's interest.
On the other hand, the manager with responsibility but no authority cannot
make decisions; neither will he use organizational resources. It is a frustrating situation.
That is why designing the environment must be conductive. Moreover, one way to make
it conducive is to equate authority with responsibility.
Definition of Delegation of Authority. Delegation of authority means granting
rights and approval from a superior source to a subordinate to function within prescribed
limits. It enables the subordinate to receive the authority to accomplish tasks assigned to
him. However, a delegation of authority is being given to the subordinate; the excellent
source at the same time still retains his original authority. This means that total delegation
cannot be done, for this will remove one’s responsibility. Again, no one can delegate the
authority he does not possess. Before delegation of authority is made, that authority must
first and foremost be seen in you even though it is only a part of it that you are
delegating. The entire concept of delegation starts with the assignment of tasks to
subordinates. The provision of the requisite authority follows this to accomplish the
tasks. There should also be a demand for responsibility. This means that there is
accountability in the delegation.

The Advantages/benefits of Delegation. The recognized advantages of the

delegation are :
1. It reduces the manager’s burden since a manager generally has responsibility
for more tasks than he can perform. Delegation thus relieves the manager from
performing duties of routine nature. He concentrates on more pressing things.
2. The subordinate to whom the tasks are delegated is being developed. This is
because we learn by doing, and it has often been said that experience is the best teacher.
There are also benefits of participation in various executive programs, seminars,
workshops, among others. All these and more would not have materialized if delegation
was not affected.
3. It provides continuity by making sure that once an employee leaves, another
one takes over his position and performs the necessary tasks since he has been trained
previously through delegation.

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 4. It makes it possible for the organization to expand because there will be a
ready pool of tested officers (subordinates) posted to man the new positions and roles
that the organization has created. Through this, there will be no hasty arrangements for
training to fill the new position. Neither will the organization fail to create critical new
roles simply because there are no subordinates to occupy the new positions and perform
the new roles.
5. Delegation of authority is also a source of motivation because subordinates
are being developed through challenging tasks. Success completion of the tasks creates a
sense of fulfillment and pride.

Limitations of Delegation of Authority. There are also recognized

disadvantages of delegations of authority.
1. Some managers will prefer to perform all activities by making all decisions.
They want to be seen as the live-wire of the organization, and nothing works without
training, and preparing subordinates for higher responsibility is not their priority. Such
managers are the type that gives assignments but no commensurate authority.
2. Another disadvantageous problem is the desire by some managers to
dominate and make their presence felt on every issue. They like to work under pressure,
keep themselves busy with appointments, and insist that subordinates approach them
with every matter for approval.
3. Some managers fail to delegate because they feel that the subordinates will
make better decisions than those they would have made without delegation.
4. Delegation is retrieved again by the unwillingness of some managers to accept
risks that will occur if subordinates should make decisions. They fear that the subordinate
may make the wrong decisions. They fear that the subordinate may make the wrong
decision.
5. Again another problem area of delegation is the reluctance of some
subordinates to take higher responsibility because of fear of criticism, the feeling of
inadequacy, and other negative attitudes.

Conditions for Delegation. There are necessary and sufficient conditions on

the ground before a delegation of authority can work. These conditions are the following:
1. Delegate by expected results: This means that the assignments must be
defined by breaking them into specific activities. Then authority is provided in the
height of the work that has to be done and the expected results. The authority must
therefore be granted to the extent that will help the subordinates to achieve.
2. Selecting an appropriate subordinate for delegation. We have just noted
that some subordinates feel reluctant o accept higher responsibilities. Such persons
should not be forced to do anything, susceptible tasks. The appropriate subordinate
should be selected. As a result, the qualifications of the person concerned may influence
the nature of delegation.

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 3. Maintaining parity of authority and responsibility. We have been
stressing this point over and over. We are re-emphasizing it here again, for it is vital to
successful delegation. Authority should be given that is commensurate with the task.
4. Ensure that each subordinate receives directives from one boss. He
must be accountable to the boss. This is to avoid confession and friction. We call this
unity of command, and we shall be discussing them in future units.
5. There should be a good flow of communication if the delegation
is going to walk. Nothing works in an organization without communication;
delegation of authority is no exception. Communication spells out what to be and the
expected result. It is also vital to decision-making.
6. There should be appropriate control in the process of delegation. This
is necessary to ensure that the desired result is what is being received. Any negative
derivation should be promptly investigated to correct it before it is too late.
7. There must also be a climate of confidence. This can be done by ensuring
that the subordinate is mentally free from fear and confident that delegation is an
opportunity for self-development and growth.
8. The manager must also have a strong belief in the delegation by
stressing the need for and belief in the principle of delegation. Therefore, he must
be willing to accommodate mistakes when they occur, although he should be stricter in
the event of frequent occurrence.
9. Assist the subordinate from time to time in the process of accomplishing
the task before him.

Formal and Informal Organizations

In management, there are two types of organizations. These types of

organizations are simply called formal organizations and informal organizations.

Formal Organization. A formal organization that is a social system has its roles
deliberately created to achieve its objectives. Consequently, there features that are
associated with formal organizations are:
1. There must be policies and objectives. These policies must be
consciously created. Moreover, there must be verifiable objectives that are formulated
considering the policies. These objectives are not only for the entire organization but also
for the departments and sections.
2. The activities of individuals in a formal organization are coordinated.
This means that one activity must be linked up with another activity. Through this
process, the entire activities being carried out in the organization move in the same
direction.
3. The persons in a formal organization must be able to communicate
with one another through the appropriate channels which have been created.

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Consequently, the issue of keeping malice with a fellow worker(s) is ruled out because
nothing works in a formal organization without communication taking place.
4. The employees in a formal organization must share a purpose. The
purpose is the reason why the organization is in existence. Such purpose is usually
reflected in the mission statement of the organization.
5. On receiving a necessary directive from their manager, the workers in a
formal organization must be willing to act. Nevertheless, it should not be on an
individual level; the workers must cooperate in their actions.

Informal Organization. The informal organization is a network of personal

and social relations not established or required by the formal organization but arising
spontaneously as people associate or come together. That is why informal organizations
exist in a formal organization. The features of an informal organization are:
1. The association exists merely as social interactions.
2. There is no standard or consciously coordinated common purpose among
members even though they contribute to the joint result.
3. Compatibility is a significant criterion for such grouping. Since the informal
groups exist in a formal group, they can assist or interfere with the enterprise interests.
4. The form of punishment that the informal group members can give to a
member is to ostracize him. This means that members of the informal group will refrain
from talking and interacting with the member under punishment until he turns a "new
leaf."

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 Worksheet #4

1. In your own words, discuss the nature of organizations.

2. Illustrate the various types of organizational structures.

3. Cite a specific business case and apply the organization theories in making a solution
or decision.

4. Discuss the different elements of delegation. Cite specific applications.

5. Differentiate formal from informal organization.

6. Identify the merits and demerits of functional organizational structures,

organizational product structure, and Matrix organizational structures. Why do firms
organize?

7. A cleaner was so hardworking that the manager decided to make him the head
cleaner. What are the decisions he has to make in exercising his authority as the head
cleaner from time to time?

8. Why do organizations adopt specialization? List the organizing process. What are the
advantages and disadvantages of the specialization of labor?

9. List the necessary conditions that should be present for an occupant of a position in
an organization to perform his role. Cite specific position.

10. Design and illustrate a specific organizational structure for a business and discuss the
functional job description.

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 Chapter 5
STAFFING

Performance Standard: The learners shall be able to conduct and prepare job
analysis.

Learning Competencies: The learners…

➢ discuss the nature of staffing;

➢ explain the steps in the recruitment and selection process;
➢ recognize the different training programs;
➢ identify the policy guidelines on compensation and performance evaluation;
➢ discuss the importance of employee relations;
➢ differentiate various employee movements; and
➢ adopt effective rewards system.

Nature of Staffing

The management function of staffing is defined as filling and keeping filled

positions created in the organization structure. This is done by identifying workforce
requirements, inventorying, selecting, placing, promoting, appraising, or developing job
holders or candidates so that they can be able to accomplish their tasks effectively.
Consequently, staffing is involved in human resources management, and it is utilized
effectively by employees' talents to attain organizational objectives. For all this to be
possible, there are specific duties that have to be performed.

Staffing Duties. The management function of staffing necessitates the

performance of several duties necessary for the employees to work better. These duties
we are going to discuss below:

1. Personnel Policy. The policy is an action guide. It provides the basis for
organizational activities. Regarding human resource management, all issues relating to
staffing must be reflected in the organization's personnel policy. Such issues include
appropriate methods of calculating the salaries and wages of the employees, training,
promotion, among others. Once the policy framework has been provided, there should
be no deviation from it. It has to be followed religiously.
2. Recruitment. Recruitment is announcing to the general public the existence
of vacancies in an organization from suitably qualified candidates. Once the applications

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are received and short-listed, that is the end of recruitment. Shortlisting applications
means picking those that the organization thinks have the prospect of being employed.
There are bases for recruitment which the manager has to consider.

Recruitment

Applicant recruitment and employee selection form a significant part of an

organization’s overall resourcing strategies, identifying and securing people needed to
survive and succeed in the short-to-medium term. Recruitment activities need to be
responsive to the increasingly competitive market to secure suitably qualified and capable
recruits at all levels. To be effective, these initiatives need to include how and when to
source the best recruits, internally or externally. Familiar with either's a success is well-
defined organizational structures with sound job design, robust task and person
specification and versatile selection processes, reward, reemployment relations, and
human resource policies, underpinned by a commitment for strong employer branding
and employee engagement and onboarding strategies. Internal recruitment can provide
the most cost-effective source for recruits if the potential of the existing pool of
employees has been enhanced through training, development, and other performance-
enhancing activities such as performance appraisal, succession planning, and
development centers to review performance and assess employee development needs,
and promotional potential. Increasingly, securing the best quality candidates for almost all
organizations relies, at least occasionally if not substantially, on external recruitment
methods. Rapidly changing business models demand skills and experience that cannot be
sourced or rapidly enough developed from the existing employee base. It is from third-
party dedicated recruitment firms. This may involve a range of support services, such as
providing CVs or resumes, identifying recruitment media, advertisement design, media
placement for job vacancies, candidate response handling and shortlisting, conducting
aptitude testing, preliminary interviews, or reference and qualification verification.
Typically, small organizations may not have in-house resources or, in common with
larger organizations, may not possess the particular skill-set required to undertake a
specific recruitment assignment. These are referred on an Adhoc basis to government job
centers or commercially-run employment agencies where requirements arise.

Bases for Recruitment

1. Job analysis means the breaking down of the main content of a job. Those
are the primary activities that need to be performed by whosoever is going to occupy that
position.
2. Job description: The job description involves a written report which is based
on job analysis. In describing the job, the manager talks about the expected outcome
when the activities identified in the job analysis are carried out. Job title must also be
given to the job because every position must have a job title. Again job description will
entrant showing what mental and physical skills will be needed to do the job.
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 3. Job Classification: Job classifications involve grouping several positions into
a single class and assigning expected rates and benefits to all. For example, supervisors in
the personnel, marketing, and finance departments can be grouped into one class and
assigned the same rate.
4. As the name implies, job specification specifies what manner a man or
woman can reasonably perform the task that has been analyzed and described. It points
out, among others, the unique attributes that will be required to do the job successfully.

Selection

Interview/Selection. The interview is used interchangeably with selection. If

you are going through some textbooks, you may get a selection instead of an interview.
We have said that recruitment ends when applications having been received must be
shortlisted, and the short-listed ones are invited for an interview. The essence of
interviewing candidates is to verify what they claim to possess in their application letter
or application form or application blank (Application blank is the same as the application
form). There is always a panel consisting of panel members of interviewers. As much as
possible, the applicant or the interviewer, the person looking for the job, must be seated
and put at ease. As much as possible, the atmosphere must be cordial and friendly. The
interview can be oral and written. An interview may also need the demonstration of
practical skills or knowledge depending on the job in question. While going for an
interview, the candidates bring the original of the credentials he claims to possess. Any
alteration on the credentials is suspicious and should be investigated. The panel members
also look for considerations in the statements of the candidates/the applicant.

Placement

Candidates judged to meet the recruitment of the job are selected and placed on
the job they have applied for. As much as possible, the right candidate should be picked
so that placement will not be a problem. In placement, the candidate or the new
employee is now matched against the job. It is assumed that the job he is going to
perform, he possesses a flair for it. That is, he is naturally gifted to do the task. You can
not place an engineer to do the work of an accountant. The engineer may not have a flair
for accounting, and as a result, he may not perform.

Training and Development

There may be a need for training, not only for the new employees but also for
existing jobholders. Training is supposed to make up for any deficiency in skills. Training
is designed to make a new employee familiar with his new work environment; this is
orientation training. In addition to being oriented to his new environment, training is also
calculated to detect the new employee's exceptional talent and which will be helpful for
the organization. That is why the new employee may be exposed to marketing, finance,
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personnel, and even engineering. Older employees can also benefit from training through
updating of skills. This is important because the skills and knowledge of today may
become outdated tomorrow.

There are different types of training:

1. On-the-job training is where an employee is put through on a specific
assignment by an older employee.
2. Off-the-job training where the employee leaves the organization to undergo
the training.
3. Apprenticeship training: This is where a person learns some technical skills
within a defined period. He serves as an apprentice within that period.
4. Technical training: Here, the trainee learns theoretical knowledge and
practical skills necessary to perform a job.
5. Supervisory training is necessary for human relations skills apart from
technical training.
6. Executive training: This is important for managers to be prepared for top-
level management jobs. Human skills, design skills, and conceptual skills are emphasized.
There is less emphasis on technical skills.
7. Simulated training: This is a type of training that makes use of models made
exactly like real-life objects or environments. For example, those who go to the moon are
trained using this kind of training. The moon environment is reproduced exactly here on
earth. Only when they are thriving here on earth can they think of going to the moon.
The essence is to minimize making mistakes that can be fatal for the equipment and
machines, and lives.

Performance Appraisal

This is a system of measuring workers' output or productivity, or efficiency

either qualitatively or quantitatively. Through this technique, the activities of workers are
monitored and measured to accord reward or some form of motivation. It is also a
method of accountability and corrections for improvement. An appraisal is a process of
review by employees, department heads, other senior employees of the individual staff
competencies, performance, and professional needs. Performance appraisal is imperative
in an organization because as the organization grows and expands, it becomes large and
complex so much that the managerial functions of the head become very cumbersome
and challenging.
Development

A successful Human Resources Development program prepares the individual to

undertake a higher level of work, “organized learning over a given period, to provide the
possibility of performance change” (Nadler 1984). Human Resources Development is the
framework that focuses on the organization’s competencies at the first stage, training,
and then developing the employee, through education, to satisfy the organization’s long-
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term need and the individual’s career goals and employee value to their present and
future employers.

Employee Movement-Promotion and Transfer

This is another function that is performed under understaffing. Promotion,

generally, means shifting an employee to a new position in which his status, salaries, and
responsibilities are increased. This is vertical promotion. There is also horizontal
promotion here an employee gets more salary (annual salary increment ) without
necessarily being shifted up to a new position, length of service, performance, personal
qualities, qualifications, among others should be considered when carrying out promotion
exercise. Promotion should be on merit, and the best-qualified candidate should be
promoted. The department may initiate the transfer as a disciplinary action following a
behavior problem or weakening personal relationships among employees, changes in
work organization, promotion, or the need to maintain well-balanced staff in every
department. Transfers can be requested by staff themselves because of a desire to work
in a new department, personal friction in the present place of work, a desire to work near
home, a desire for advancement in status, or promotion terms.

Remuneration/Salaries and Wages Administration

Adequate salaries and wages should be given as part of the remuneration package
to the employees due to sentiments and emotions commonly attached to salaries and
wages. Consequently, trade union members are involved in working out a living wage for
the employees. Remuneration can be worked out through hourly rate, piece rate, or a
combination of the two or any other acceptance basis. Whichever method is employed,
the outcome should be fair and similar to what is paid to other employees in similar
organizations.

Staff Welfare

This is ensured by maintaining all safety regulations and factory rules as well as
official rules. Safety is also ensured by retaining the services of a medical doctor for quick
reference and attention to the sick. There is also the need for social welfare, which
involves providing recreational facilities and meal subsidies.

Employee Relations

The types of labor-management relationships and the techniques utilized to

regulate this relationship are influenced by the employer's beliefs (frame of reference). In
the search for effective employee relations, and a shared commitment to the
organization's goals, consideration should be given. The contrasting approaches that

83
present two significant ways of perceiving work organization — the unitary and
pluralistic perspectives.
The Unitary Perspective. Unitarians believe that all members of an
organization have the same interest, that is to say, that the firm is viewed as an integrated
and harmonious whole, with managers and staff sharing common interests and
objectives. There is an image of the organization as a team, with a common source of
loyalty, one focus of effort, one acceptable leader, and a source of authority. Conflict is
perceived as disruptive and unnatural and can be explained by poor communication,
personality clashes, or the work of agitators. Trade Unions are seen as an unnecessary evil
and restrictive practice, outmoded or sponsored by trouble makers. The unitary
perspective views the company and trade union loyalty as mutually exclusive. This raises
the question of human resource management as a reformation of a unitarist managerial
ideology Developments in HRM seeking to optimize cooperation. Organizational loyalty
can be seen as imposing new forms of the labor-management control system.
The Pluralistic Perspective. The pluralistic perspective views the organization
as powerful and competing sub-groups with legitimate loyalties, objectives, and leaders
(Fox, 1966). From this perspective, conflict in an organization is seen as inevitable and
induced, in part, by the very structure of organizations. Conflict is not necessarily a bad
thing. The unitary employer is more likely to resist unionization, and pluralist employers
are likely to accept unionization more readily. Unionization implies the existence of
different sets of interests and the will to set up strategies and mechanisms for managing
conflicts. Unitarians expect everyone to have the same goals. There should be no
conflict, and therefore no need to have a mechanism for representing different points of
view and resolving conflicts. These are essential points to bear in mind as we talk about
industrial relations1n in a workplace.

Reward System

Having the right people in the right jobs at the right time is only one part of
management’s responsibility to develop and maintain effective personnel policies.
Employees and managers and the organization in which they work are also vitally
interested in the conditions of employment. These affect every working hour. Nobody is
surprised to find that employees expect payment for the services they render. Each
organization must make several interrelated decisions concerning the relative magnitude
of its wages and salaries (compared with those in other organizations) and the relative
rates for different jobs within the organization. The cost of employee compensation is
not limited exclusively to wages and salaries. Another source of employee remuneration
is known as “fringe benefits.”

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Trans-national Labor Mobility

An essential controversy regarding labor mobility illustrates the broader

philosophical issue with the phrase “human resources.” Developing nations often regard
developed nations that encourage immigration or “guest workers” as appropriating
human capital that is more rightfully part of the developing nation and required to
further its economic growth. Over time, the United Nations have come to support the
developing nations’ point of view more generally. They have requested significant
offsetting “foreign aid” contributions so that a developing nation losing human capital
does not lose the capacity to continue to train new people in trades, professions, and the
arts.

Ethical Human Resource Management

In the very narrow context of corporate “human resources” management, there

is a contrasting pull to reflect and require workplace diversity that echoes the diversity of
a global customer base. Such programs require foreign language and culture skills,
ingenuity, humor, and careful listening. These indicate a general shift through the human
capital point of view to an acknowledgment that human beings contribute more to a
product more to a productive enterprise than just “work”: they bring their character,
ethics, creativity, social connection, and, in some cases, pets and children, and alter the
character of a workplace. The term corporate culture is used to characterize such
processes at the organizational level.

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 Worksheet #5

1. In your own words, discuss the nature of staffing.

2. Explain the steps in the recruitment and selection process.

3. Discuss the different training programs.

4. Discuss some policy guidelines on compensation and performance evaluation. Cite

specific organizations.

5. Expound the importance of employee relations.

6. Differentiate various employee movements.

7. Proposed an effective rewards system for a specific private organization.

8. Conduct job analysis and prepare job specifications and job descriptions.

9. You have been studying the organizational structures of some business organizations
as a result of previous exercises. Study the charts carefully and write out: the duties of
management in each department and the duties of operatives or doers in each
department.

10. You are going to take national newspapers, preferably Daily Inquirer. Look for the
advertisements for existing vacancies from various organizations. Can you identify
titles of the jobs, positions, job descriptions, job analysis, salaries, and other features
of what we have discussed under recruitment?

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 Chapter 6
LEADING

Performance Standard: The learners shall be able to demonstrate knowledge in

motivation, leadership, and communication by solving business cases.

Learning Competencies: The learners…

➢ discuss the nature of directing;

➢ differentiate leading to managing;
➢ identify the various theories of motivation;
➢ differentiate styles of leadership;
➢ value the role communication in directing people;
➢ explain the management of change and diversity in the workplace; and
➢ recognize the interrelationship of various cultures.

Scope of Directing and Leading

Directing and leading is another management function we are going to consider

in this chapter. Directing and leading are the interpersonal relations of managers and
their subordinates. It concerns those interactions that managers need to have with their
subordinates. Subordinates must be given guidance through good communication and
my ability to lead. This is because dealing with subordinates involves complex patterns of
behaviors that must be analyzed and understood. That is why superior offices must
understand themselves thoroughly well.

Leadership

The managerial function of leading is simply influencing people to contribute to

the organization's goals. To lead is to influence, to guide, and to motivate. The leader
encourages people to develop a willingness to work and a willingness to work with zeal
and confidence. A leader ensures the development of all these and more. He stands at the
forefront before the group as he facilitates progress and inspires the group to accomplish
goals.

Qualities of a Good Leader

The qualities of a good leader can be summarized in the following ways:

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 1. A leader must possess’ energy. A lazy and weak person cannot be a
meaningful leader. The energy is not only physical energy but also mental energy as well
as spiritual energy too.
2. Emotional Stability. This is important because it enables the leader to act
with self-confidence. He avoids anger, resentment, fear, and other negative emotions and
reactions. All this is necessary so that he can be able to lead the subordinates with
understanding.
3. The leader has a good knowledge of human relations. Human relations
demand a good understanding of human behaviors and construction reactions to these
behaviors.
4. Empathy. The leader has to put him in the position of the subordinates. He
must not take decisions solely at his level. He must assess the impact of an intending
decision on his followers. He has to look at things objectively from the subordinate’s
point of view.
5. Personal motivation. The leader wants to start something new. He has
initiative. He has ideas which he wants to put into practice.
6. Communication skill is the ability to write and talk forcefully. The
leader's message is always clear and to the point. He uses other forms of nonverbal
communication, such as smiles and gesticulations, to convey his message to the audience.
7. Teaching and loading ability enables the leader to develop and inspire his
subordinates.
8. Social skill: This enables the leader to understand people and know their
strengths and weaknesses. All these make him friendly and approachable.
9. A technical skill that provides him with practical knowledge and insights of
the work operations under his guidance and previsions.

Motivation

It is important to note that motivation is not the only influence on personnel

performance level. The other factors that influence how well a person performs in a
given situation are the individual’s abilities and understanding of what behaviors are
necessary to achieve high performance, called role perceptions.
The relationships of all three factors to performance can be shown by the
following equation.

Performance = (Motivation, ability role perception)

If any one factor has a low-value performance level is likely to be low, even if the
other factors are high.

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Ways of Looking at Motivation

It will be helpful to review some of the primary ways of looking at and

classifying motivation theories since each of the various theoretical perspectives will shed
light on how motivation influences work performance. One distinction can be made
between content theories, which focus on the “what” of motivation, and process
theories, which focus on the “how” of motivation.
Reinforcement theories represent a third approach that emphasizes how
behavior is learned. Here the approach is introduced and indicates other basic similarities
and differences. The content perspective stresses the importance of understanding the
factors within individuals that cause them to act in a certain way. It attempts to answer
such questions as; what needs do people try to satisfy? What impels them towards action?
In this view, individuals have inner needs-driven, pressured, or motivated to reduce or
fulfill. For example, they may be motivated by the need for food, sex, security,
achievement, or self-fulfillment. The particular need they have will determine the action
which they take. That is, individuals will act or behave in ways that will lead to the
satisfaction of their needs. For example, an employee who has a strong achievement need
may be motivated to work extra hours to complete a difficult task on
time, an employee with a strong need for self-esteem might be motivated to work very
carefully to produce work of high quality.
Process theories. Rather than emphasizing the content of needs and the driving
nature of those needs, the process approach emphasizes how and by what goals motivate
individuals. In this view, needs are just one element in how individuals decide how to
behave. For example, individuals might see the strong possibility of receiving some
reward (say a salary increased) if they act in a certain way (say by working hard). This
reward will become an incentive or motive for their behavior. Basic to process theories
on motivation is the notion of expectancy. That is what the individual believes is likely to
occur as a result of his or her behavior. For instance, if the individual expects that
meeting deadline will earn praise from superiors and meeting deadlines will earn
disapproval, and if that individual prefer praise, then the individual will be motivated to
meet
deadline.
Reinforcement Theories. Reinforcement theories are associated with B. FSK's
inner operant conditioning and behavior modification. These theories do not utilize the
concept of motive or a process of motivation. Instead, they deal with how the
consequences of a past action influence future action in a cyclical learning process. In this
view, people behave the way they do because, in past circumstances, they learned that
certain behaviors were associated with pleasant outcomes and that other behaviors were
associated with unpleasant outcomes. After all, people generally prefer pleasant
outcomes; they are likely to repeat behaviors that they have learned will have pleasant
consequences.

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 System view of motivation in Organization. Motivation is a complex issue
that has been the subject of several conflicting theories and views. Layman pattern and
Raymond miles have suggested that a system perspective on motivation will be most
helpful to managers. By “system perspective,” they mean that there are three significant
variables in organizations that affect motivation and that it is the relationship among
these variables that ultimately determine the degree of motivation an employee will feel.
They argue that it is necessary to consider the “system,” or whole, of the forces operating
on the employees before the employee’s motivation can be adequately understood. The
three variables that pattern and miles identifying as affecting motivation in the
organization are individual, job, and work situation characteristics.
Individual characteristics refer to the interests’ attitude and need that an
individual brings to the work situation. It is obvious those individuals differ in their
characteristics and that their motivations will therefore differ. For example, one
individual might desire prestige and be motivated by a job with an impressive title.
Another individual might desire money and so might be motivated by a car or a high
salary.
Job characteristics refer to the attributes of the employee tasks. These
characteristics include the amount of responsibility the individual is given. The variety of
tasks the individual can perform and the extent to which the job itself is satisfying.
Presumably, an intrinsically satisfying job will be more motivating for many individuals
than a job that is not.
Work situation characteristics refer to what happens to the individual in his or
her work environment. Do colleagues encourage the individuals to perform a high
standard, or do they encourage low productivity? Do superiors reward high performance,
or do they ignore it? Does the organization itself manifest a concern for employees
through attractive fringe benefits and a genuinely informal and cooperative atmosphere,
for example – or does the organization seem indifferent to employees? These
characteristics too can affect the motivation of employees.

Characteristics of the Individual

Each individual brings his or her interest, attitudes, and needs to the work
situation. We will discuss some of the contributions of writers such as Maslow,
McGregor, and McClelland to our understanding of needs and motivation.
The Hierarchy of Human Needs: Maslow's hierarchy of needs was probably
received more attention applied to the organizational environment than any other theory
of motivation. One of the reasons for this is that Maslow provides a theory that
conveniently classifies human needs and has direct implications for managing human
behavior in an organization. Maslow views human motivation in terms of the hierarchy
of five needs which may be categorized as follows:

1. Physiological needs, which include the need for air, water, food, and sex.

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 2. Security need, which includes the need for safety order and freedom from
fear or thread.
3. Belongingness and love needs (or social needs) include love, affection,
feelings of belonging, and human contact.
4. Esteem needs include the need for self-respect, self-esteem, achievement,
and respect from others.
5. The need for self-actualization includes the need to grow, feel self–fulfilled,
and realize one’s potential.

According to Maslow, individuals will be motivated to fulfill the need that

proponents or is most powerful for them at a given time. The prepotency of a need will
depend on the individual’s current situation and recent experiences, starting with the
most basic physiological needs; each need must be at least partially satisfied by the
individual before he or she makes up the hierarchy the next stage.
The practical implications of this theory for motivation in organizations are
many. For example, unless employees are provided with the means to gratify their basics,
physiological needs with a wage sufficient to feed, shelter, and protect their families
satisfactorily. With a safe working environment, managers will get a little result from
incentives designed to provide employees with esteems, feelings of belonging or
opportunity to grow and where their essential body needs we taken care of employees
still must have their safety needs we took care of employees must have that safety needs
gratified with job security and freedom from coercion or feelings of arbitrary treatment.
According to Maslow, when all these have been adequately met, employees will
become motivated by the desire for self-actualization. Employees motivated by self-
actualization need to find measuring and personal gratitude in their work and actively
seek new responsibilities.
Douglass McGregor related Maslow’s hierarchy to the management of
workgroups. He pointed out that managers often regard informal workgroups as hostile
and a threat to the organization. They, therefore, try to over-direct and over-central
employees and try to discourage the formation of information groups. As a result
suggests McGregor, the social needs of employees are thwarted, causing the employees to
feel uncooperative and resentful. In addition, the employees are unlikely to move beyond
the belongingness level in the need hierarchy. They so will not be motivated to contribute
more to their aim and the organization's goal.

Types of Reinforcement

There are various types of reinforcement or techniques that managers can use to
modify the behavior of subordinates.
Positive reinforcement: By definition, a positively reinforcing consequence
makes it more likely to review a given behavior. Reinforcers may be either primary or
secondary. Primary reinforces consist of biological satisfiers such as water and food. They

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are rewarding, regardless of a person's experience. Secondary reinforcers are those that
are rewarding because of an individual’s past experiences. Common secondary
reinforcers are praise,
promotion, and money. Most individuals regard these are pleasant and are therefore likely
to repeat those behaviors that earn these rewards.
Avoidance learning: Avoidance learning or negative reinforcement occurs
when individuals learn to behave in ways that help them avoid or expect unpleasant
consequences. In the workplace, avoidance learning has usually occurred when peers or
supervision criticize an individual’s actions.
Extinction: Extinction and punishment are designed to reduce undesired
behavior rather than reinforce desired behavior; extinction is the withstanding of reward
for undesired behavior so that the behavior will eventually disappear.
Punishment: Through punishment, managers try to change the behavior of
subordinates by making sure that undesirable behavior leads to negative consequences.
Giving harsh criticism, denying privileges, demoting, and reducing an individual’s
freedom to do his or her job are common forms of punishment in the workplace.

Leadership Theories

Leadership is “organizing a group of people to achieve a common goal.” The

leader may not have any formal authority. Students of leadership have produced theories
involving traits, situation interaction, and intelligence, among others. A leader is a person
capable of inspiring and associate others with a dream. It is therefore essential that
organizations have a visionary mission; since it is a powerful way to strengthen the
leadership of their directors.
Early History. The search for the characteristics or traits of leaders has been
going for centuries. Philosophical writings from Plato’s Republic have explained what
qualifies or distinguishes an
individual as a leader? “Underlying this search was the early recognition of the
importance and the assumption that leadership is rated in the characteristics that specific
individuals possess. This idea that leadership is based on individual attributes is known as
the trait theory of leadership.
The trait theory was explained at length in several works in the previous century.
Most notable once are Thomas Carlyle, whose works have prompted decades of research.
In Herres and Heroworship (1941), Carlyle identified men's talents, skills, and physical
characteristics who rose to power. In Galton’s (1869) Hereditary Genius, he examines
leadership qualities in the families of powerful men. After sharing that the numbers of
eminent relatives dropped off when making from first-degree to second-degree relatives,
Galton concluded that leadership was inherited. In other words, leaders were born, not
developed. Both of these notable works lent great initial supports for the notion that
leadership is rated in characteristics of the leader.
Rise of alternating theories. In the late 1940s and early 1950s, however, a
series of qualitative reviews of these studies, for example, Bird 1940, Stogdill, 1948, and
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Mann 1959, prompted researchers to take a drastically different view of the driven forces
behind leadership. Stogdill and Mann found that while some traits were
common across several studies, the overall evidence suggested that leaders in one
situation may not necessarily be leaders in other situations. Subsequently, leadership was
no longer an enduring individual trait as situational approaches posited that individuals
could be influential in certain situations but not others.
While the trait theory of leadership has undoubtedly regard popularity, its
reemergence has not been accompanied by a corresponding increase in the sophisticated
conceptual framework. Specifically, Zaccard 2007 noted that trait theories still.

• Focus on a small set of individual attributes, such as the big five personality
traits, to neglect cognitive abilities.
• Fail to consider the pattern of integrations of multiple attributes.
• Do not distinguish between those leaders’ attributes that are generally not
malleable over time and those that are shaped by, and bound to, situational influences.
• Do not consider how stable leader attributes account for the behavioral
diversity necessary for effective leadership.

Behavioral and Style Theories. In response to the early criticisms of the trait,
approach theorists began to research leadership as a set of behaviors evaluating the
behavior of “successful” leaders, determining a behavior taxonomy, and identifying
broad leadership styles.
According to David McClelland, for example, leadership takes a strange
personality with a well-developed positive ego. Not so much as a pattern of motives, but
a set of traits is crucial. To lead, self-confidence and high self-esteem are useful, perhaps
essential B.F Skinner is the father of behavior modification and developed the concept of
positive reinforcement. Positive reinforcement occurs when a positive stimulus is
presented in response to behaviors, increasing the likelihood of that behavior in the
future. The following is an example of how positive reinforcement can be used in a
business setting. Assume praise is positive reinforcement for a particular employee. This
employee does not show up to work at any time every day. The manager of this
employee decides to praise the employee for showing up on time every day the employee
shows up to work on time. As a result, the employee causes to work on time more often
because the employee likes to be praised. In this example, praise (stimulus) is positive
reinforcement for this employee because the employee arrives (behavior) to work on time
more frequently after being praised for showing up to work on time.
The use of positive reinforcement is a successful and growing technique used by
leaders to motivate and attain desired behavior from subordinates’. Organizations such as
Frito-lay, Goodrich, Michigan, etc., used reinforcement to increase productivity.
Situational and Contingency Theories. Situational theory also appeared as a
reaction to the trait theory of leadership. Social scientists argued that history was more
than the result of the intervention of great men, as Calyle suggests. Herbert Spencer

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(1884) said that time produces the person and not the other way round. This theory
assumes that different situations call for different characteristics. According to this group
of theories, no single optimal psychographic profile of a leader exists. According to the
theory, “what an individual does when acting as a leader is highly dependent upon
characteristics of the situation in which he functions.
Some theorists started to synthesize the trait and situational approaches. Building
upon the research of Lewin et al., academics began to develop descriptive models of
leadership climates defining three leadership styles and identifying which situation each
style works better in. the authoritarian leadership styles, for example, is approved in
periods of crisis but fares to win the “hearts and minds of other followers in the day-to-
day management. The democratic leadership style is more adequate in situations that
require consensus building.
Finally, the Laissez-faire leadership style is appreciated by the degree of freedom
it provides. However, as the leader does not “take charge,” he can be perceived as a
failure in protracted or sharing organizational problems.

Leadership Function

Adair (1984) notes that leadership functions include planning, initiating,

controlling, supporting, informing, and evaluating activities. Kotter (2001) sums up
leadership function under three broad categories, these are:
1. Leadership is about coping with change and setting the direction of change.
That direction setting creates vision and strategies;
2. Leadership is aligning people – it involves credibility getting people to
believe the message;
3. They motivate and inspire, keeping people moving in the right direction
despite significant obstacles to change by appealing to basic untapped needs, values, and
emotions. The more that change characterizes the environment, the more the leaders
must motivate people to provide leadership.

Sherlekar (2001) notes that managerial leadership performs two vital functions.
These (1) guidance and motivation and (2) understanding problems and feelings of
subordinates.
Guidance and Motivation: accomplishing goals requires guidance and
motivation from subordinates by the leader. This will reflect the impact of leaders on
subordinates. It also represents downward communication.
Understanding problems and a feeling of subordination refers to empathy
and stimulating the subordinate's feelings and attitude of the subordinates. This will
involve both a downward and upward communication process.
There are several theories of leadership, ranging from those that have the leader
as the focus, those that have subordinates as the point of focus, and those that are
focused on task/situation. It is to be noted that several research studies have been

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conducted and reported the varying approaches to the study of leadership. We shall here
discuss a few of them, namely: Fiedler’s leader-match theory; Vroom’s contingency
theory; Hersey and Blanchard’s situational leadership theory; House and Mitchell’s path-
goal theory and Agris’s model I and II on leader behavior.
Let us briefly examine each of these sets of theories of leadership.
Fielder’s Leader-Match Theory-Focus on Leader Match. For many years,
the fielder at the University of Illinois has been studying the relationship between
leadership patterns and group effectiveness in a variety of types of groups, tasks, and
situations first developed a measure of the leader’s basic orientation, called LPC (Least
Preference
Worker). The leader is asked to think of the people with whom he or she has worked and
think of the person with whom he or she “could work least well.” The leader then
describes the person on 18 bipolar dimensions such as “pleasant-unpleasant,” trusty
untrustworthy.” The adjectives are scored in terms of the degree to which the leader sees
the preferred co-worker (LPC) as showing negative or positive characteristics. A low LPC
(mainly negative rating) is seen as primarily task-oriented, and a high LPC leader is seen
as primarily relationship-oriented.
Fiedler considers low LPC leaders to be concerned about task performance
because they perceive anyone who contributes to poor performance in very negative
terms. High LPC leaders are considered relationship-oriented because even their most
petite preferred co-worker is seen as a worthwhile person. In his early studies, Fielder
attempted to show that absolute LPC scores correlated with team performance, but the
correlation tended to be very low (Schein 1983).
In situational factors related to leadership “Fielder, (1971) reviews his research
and develops a model to integrate in terms of the group-task-situation, or “job
environments” within which leaders have to operate. The factors he considers are leader-
member relations, task structure, and position power. The findings lead to the
provocative view that knowledge of these situational factors may provide some basis for
modifying jobs to fit an individual’s leadership patterns with situations ranging from
favorable to unfavorable.
Schein (1983) observed that Fielder’s LPC construct is a leader trait, orientation,
or value that is relatively stable and produces consistent biases in how the leader behaves.
He also noted that in as much as LPC is an orientation that is supposed to be relatively
stable, this theory implies that leaders should discover their orientation and then seek
situations optimally matched to this style.
Low LPC leaders should seek highly favorable or unfavorable situations or work
to change situations into the degree of favorableness that produces the best results for
them. Similarly, high LPC relationship-oriented leaders should seek moderately favorable
situations or develop them. On the practical side, Fielder, Chemers, and Mahar (1976)
developed a self-administered training booklet that allows the leader to test and score
himself or herself on LPC. The booklet asks the person to diagnose situation
favorableness regarding leader-member relation, task structure and position power, and a

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match between the person and situation. If the match is poor, the program offers
guidelines on how to create a more favorable situation.
Schein (1983) states that the strength of this model is that it gives explicit
attention to each of the necessary components: - the leaders, the subordinates, and the
task. The weaknesses of the model are:
1. That the diagnostic categories are complex and often difficult to assess.
2. Little attention is devoted to the diagnostic categories of subordinates.
3. The technical competence of the leader receives no attention.
4. The correlation evidence for matching concepts is relatively weak.
5. The concept of LPC itself is vague, and the characteristics of high and low
LPC people are only gradually beginning to be understood.

Vroom’s Contingency Theory: Focus on Tasks/Situation: Vroom has been

more concerned with tasks and subordinates, in contrast with Fielders’ theory which
began with a measurement of leaders (LPC). Vroom (1960) showed that subordinates
with certain personalities and working on specific tasks preferred autocratic leaders. He
asserted that leaders could vary their behavior along a scale from highly autocratic to
highly participative. Thus leadership problems can be examined by developing relevant
criteria that would help leaders decide in which situation to use which kind of behavior
(Schein 1983).

Vroom listed five points, each reflecting behavioral options for leaders (Vroom
and Yelton 1973). They are decision dimensions as shown below:

Types of Management Decision Styles

• You solve the problem or make the decision yourself using the information
available to you at that time.
• You obtain the necessary information from your subordinates and then
decide on the solution to the problem yourself. The role played by your subordinates in
making the decision is one of providing the necessary information to you rather than
generating or evaluating an alternative solution
• You share the problem with subordinates individually, getting their ideas
without bringing them together as a group. Then you make a decision that may not
reflect subordinates' influence.
• You share the problem with your subordinate as a group, collectively
obtaining their ideas and suggestions. Then you make the decision that may or may not
reflect subordinates' influence.
• You share the problem with your subordinates as a group. Together you
generate, and evaluate alternatives and attempt to reach an agreement on a solution. Your
role is much like that of a chairperson. You do not try to influence the group to accept

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your solution. You are willing to accept and implement any solution which has the
support of the entire group.
It is to be observed that this decision dimension is similar to the continuum of
leadership behavior first proposed by Tannenbuam and Schmidt (1958). However, it also
suggests specific ways of analyzing problems using eight ordered criterion questions that
the leader can ask himself or herself and a set of decision rules put in the form of the
decision tree, which leads to the most desirable option to be employed (Schein 1983).
The seven questions are arranged so that the leader can analyze his or her
immediate problem situation and arrive at feasible decision alternatives by answering yes
or no to each. Schein (1983) noted that for many paths through the decision tree, the
answer generated may still reflect a viable choice between an essentially autocratic or
essentially participative alternative.

Hersey and Blanchard’s Situational Leadership Theory-Focus on

Subordinates. Another major leadership research program started beginning in the
1940s at Ohio State University, where researchers sought to define precisely what kind of
behaviors I
exhibited by leaders. The fundamental problems in this area are:
1. The identification of meaningful leadership patterns; and
2. The development of methods to ensure these patterns.
The Ohio State University leadership studies made these problems primary
research objectives. Focusing on the kinds of behavior engaged in by people in leadership
roles, these investigators, Hemphill (1950), Stogdill and Coons (1957), developed over
1,800 items (for example; he calls the group together to talk things over. He knows about
it when something goes wrong), descriptive of what supervisors do in their leadership
roles. These items were then classified into ten categories of leader behavior (initiation,
domination, evaluation, communication).
These were labeled, consideration, and initiating structure.
Consideration: includes behavior indicating mutual trust, respect, and a certain
warmth and rapport between the leader and his group (basically relationship orientation)
Initiating Structure: includes behavior in which the leader organizes and
defines group activities and his relation to the group (basically task orientation).
Hersey and Blanchard (1977) begin their work by rejecting the idea that there is
one ideal managerial style because all of the research on the various dimensions of
leadership indicates that productive and satisfied group can be found under virtually any
kind of leadership behavior; for example the work of Fleishman (1973) in a complex
industrial setting; and that of (Larson, Hunt and Osborn 1975).
House and Mitchell’s Path-Goal Theory of Leadership. House and Mitchell
(1974) stated that their theory is an integrated body of conjecture by leadership students.
According to the theory, leaders are influential because of their impact on subordinates'
motivation, ability to perform effectively, and satisfaction. It is called path-goal because
its primary concern is how the leader influences the subordinates’ perception of their

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work goals, personal goals, and paths to goal attainment. The theory suggests that leader
behavior motivates or satisfies to the degree that the behavior increases subordinate goal
attainment and clarifies the paths to these goals. The path-goal theory has its roots in the
more general motivation theory called expectancy theory (Mitchell 1974).

Leadership Styles

If the influencing function is to be effective, subordinates should accept their

leaders. This is where leadership style comes in, in three categories, autocratic,
democratic, and free rein and transactional and transformational leadership.
Autocratic. Autocratic leadership reflects a narrow span of management, high
supervision, and a high degree of centralization. Those who utilize the autocratic style
tend to be repressive and withhold communication other than necessary for doing the
job. They unilaterally decide with little if any participative rights in the group. This style
tends to minimize the degree of involvement of groups and individuals in the job
decision-making process.
Democratic. Democratic leadership emphasizes a non pressure orientation that
maximizes group and individual participation in the decision. A free flow of
communication is encouraged among all department members to build a climate of
understanding based on honesty and trust. The democratic style is associated with a
decentralized organization and a wide span of management.
Free Rein. Under the free rein of the Laissez-faire style of leadership, the
organizational climate is such that people are assumed to be self-motivated to their work
virtually without supervision. The individual with authority leaves the group to its devices
and provides little specific direction. The leader is available in a consultative capacity to
help if requested.
Transactional and Transformation Leadership. Leadership researchers and
theories have evolved through various stages. They have departed from leadership as a
trait through style and contingency models. The studies did not depart markedly from the
task and relationship-oriented behavior dimensions until the coming up of the new
leadership studies (Richards, Chen, and Monger, 2001).
The new leadership approach is marked by an emphasis on transformational
leadership (Brgman, 1996). In transformational leadership, Richard, Chen, and Monger
(2001), the leader tends to be inspirational, relying on personal charisma and gaining trust
in the leader’s abilities. It also involves empowering team members who act out of self-
generated enthusiasm and interest.
Closely related to transformational leadership is transactional leadership. This
style is by which the leader keeps the team focused on tasks necessary for success, using
implicit and explicit instrumental rewards as motivation and control mechanisms.

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Leadership Development

Any leadership development program has to consider improvement in the four

fundamental behavioral skills, namely: delegation of authority, interpretational relations,
decision making, and communication (Ekpo Ufot, 1979). For any leadership government
to be effective, it has to be organized based on these behavior skills as a target for
improvement.
The critical leadership functions include:
1. Planning is concerned with, among others seeking information, defining
group tasks, purpose, and goals, and making a workable plan (Adair 1984)
2. Initiating; briefing group on aims and plans, allocating group members and
setting group standards.
3. Controlling; maintaining group standards influencing group, directing
action towards objectives.
4. Supporting; expressing acceptance of persons and their contributions,
encouraging group and individuals, disciplining group and individual, creating team spirit,
relieving tension, reconciling disagreement.
5. Information: clarifying tasks and plans, giving new information to the
group, receiving information from the group, summarizing, suggestions and ideas
coherently.
6. Evaluating: checking the feasibility of ideas testing the consequence of
proposed solution evaluating group performance against standards.

Looking at the functions performed by those in the leadership position listed

above, it could be seen that any meaningful and effective leadership development
program will have to be centered on the four fundamental behavioral skills listed below.
Adair (1984) states that leadership provides the necessary functions for the
group to achieve its tasks and be held together as a working team. He noted that
leadership development programs should concentrate on the action and awareness
necessary to improve leadership performance. These functions of leaders capable of
being learned and developed improve managers’ performance in maximizing their human
resources. Both the awareness and skills that combine to produce this ability can be
developed and need to be refreshed from time to time (Adair, 1984).
Thus any development program on leadership should be focused, apart from the
functional areas on:

a. Awareness of self: leaders should be aware of their impact upon those they
lead.
b. Confidence: leaders who lack confidence would have difficulty in diagnosing
different situations and coping adequately with these situations and
c. Ability to communicate; the leader who fails to communicate with
subordinates may become ineffective as in the influence of others.

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Communication

The management function of directing and reading is impossible without

communication between persons. In his relationships with his subordinates, the manager
shows his influence (authority) only by conveying ideas, feelings, and decisions to his
followers. The subordinate, in turn, have to communicate with the leader or manager for
him to be able to appreciate their responses to his actions and personal feelings and
problems.
Definition of Communication. Communication transfers ideas, feelings,
intentions, etc., from a source through channel(s) to the receiver. It includes face-to-face
discussions, memos, telephone calls, reports, letters, and any other form by which
information is passed along or exchanged. We must realize that every organizational
member is involved in the communication process of receiving information, placing
value on the information received, and distributing information received. Effective
communication means that the message has a similar meaning to both sender and
receiver.

Communication Process

Communication, as a process, has components that are linked together; they do

not operate separately.
Sender. This is the individual or organization that has a thought or an idea that
is then put together (encoded) in a way that can be understood by both himself and the
receiver. The message may be oral or written and transmitted over a channel that links
the sender with the receiver. Such channels include memos, computer systems,
telephone, telegram, radio, television, and newsletter. Two or more channels may be
used.
Receiver. The receiver of the message has to be ready for the message so that it
can be broken down (decoded) into thought-form to understand it and act on it.
Noise. Noise is anything that hinders communication, whether in the sender,
the transmission, or the receiver. It can take several forms such as:
• Noisy environment (shouting, crying, and so on).
• Using unfamiliar words can make encoding not to be precise.
• Transmission may be affected by static noise in the channel, such as the one
experienced in radio during rainfall or passing under high tension electric wire.
• Inaccurate reception may be caused by a lack of attention on the part of the
receiver.
• Decoding may be faulty because of the wrong meaning attached to words and
other symbols by the receiver.
Feedback. Feedback is essential in checking the effectiveness of
communication. Feedback shows whether a message has been effectively encoded,

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transmitted, decoded, and understood. Again, feedback indicates whether individual or
organizational change has taken place as a result of communication.

Reasons for Communication

There are reasons why we carry out communication; some of the reasons are
Reducing Uncertainty. When people are faced with unusual and unexpected
events, they frequently seek out additional information. The information serves to reduce
anxiety and uncertainty about the situation on the ground.
Problem Solving. Problem-solving and decision-making involve
communication. Managers have to decide to remedy problems when they occur.
Control of Situation. People communicate simply because it is expected of
them due to their position or want to influence what is going on. They wish to contribute
to and have a part in the ongoing activity. The degree to which it is expected that people
will have control affects the frequency
of communication.
Feedback. Communication is also started by the need to respond to someone
else's communication. When we are asked a question or information is sought by others,
which we have or are expected to have, the tendency is that we usually reply.

Importance of Communication

The importance of communication can be seen from the following:

• Communication is how people are linked together in an organization. We had
already stressed this point when we were treating co-coordinating. Can you still recollect
what we said there?
• Arising from the first point we have just said, communication enables people
to achieve an organization’s objectives. Without communication, you are helpless and
may know what to do. You may not even know the objectives of the organization and
how to go about achieving them.
• Communication makes it possible for changes to happen through the
formulation and execution of plans. As a result, planning is impossible without
communication.
• Through communication, it is possible to organize human and material
resources most effectively and efficiently.
• Communication makes it possible to select, develop, appraise members of
staff in an organization.
• Through communication, the manager can lead, direct, motivate, and create a
climate in which people will want to contribute.
• To control performance so that the objectives have already been set is
impossible without a sound communication system.

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The Communication Flow

Downward Communication. This is the flow of communication from higher

levels to those at lower levels in the organization hierarchy or position levels. The media
used here includes speeches, meetings, the telephone, loudspeakers, memos, letters,
handbooks, policy statements, etc.
Upward Communication. Here, communication travels from subordinates to
superiors and continues up the organization hierarchy. This type of communication is
often hindered by managers in the communication chain, who filter the message and do
not transmit all the information. Besides the chain of command, the principal means of
communication are suggestion systems, appeal and grievance procedures, complaint
systems, counseling sessions, group meetings, interviews, etc. Effective upward
communication can only occur in an environment where subordinates are free to
communicate.
CrossWise Communication. This is the horizontal flow of information
between people on the same or similar levels and diagonal flow between persons at
different levels. The organization's environment provides many occasions for oral
communication, ranging from informal meetings during lunch to more formal
conferences and committees. This type of communication also occurs in project teams,
between the staff and line personnel, among others.

Types of Communication

There are various types of communication with distinctive advantages and

disadvantages.
Written Communication provides records and references which can be
retrieved in the future, analyzed, and formed the basis for decision making. The message
in written communication can be carefully prepared and sent to a large audience. Written
communication promotes uniform policy and procedure. However, it may create a
mountain of papers. Apart from the cost involved in purchasing them, there is also the
issue of storage, inexperienced writers may express messages in a poor form which will
create different meanings in the minds of the receivers, and written communication may
not provide immediate feedback.
Oral Communication. This can occur in a face-to-face meeting of two people
or when a message addresses a large audience. It can be formal or informal, planned or
accidental. It can quickly interchange ideas with immediate feedback; people can ask
questions and clarify points. The effects of face-to-face communication can be noted,
which may necessitate the sender to go on with the message or to modify the message.
Meeting with the superior made possible through face-to-face communication gives the
subordinate a feeling of importance.
Non-Verbal Communication. This type of communication gives strength to
oral and written communication. It is expressed in various ways, such as facial

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expressions and body gestures. Nonverbal communication may contradict verbal
communication, giving rise to the saying that action speaks louder than words. For
example, a manager says he has an open-door policy, but the secretary screens everyone
to see him.

Communication Barriers

These can take various ways too: Badly expressed messages which include:
poorly chosen words, empty words and phrases, careless omission, lack of coherence,
lack of clarity, and so on.
Faulty translation. Since managers receive and transmit messages from
superiors, peers, and subordinates and translate information meant for subordinates,
peers, and superiors into language suitable to each other, it is often not enough to pass
on a communication word for word. However, it must be put in the appropriate way that
can be meaningful to the receiver.
Loss of Transmission. When messages are transmitted from one level to the
other and from there upwards may have a decreasing accuracy. That is why large
organizations rely on oral transmission can be dangerous from one level to another.
Inattention. This bather must deal with failure to read bulletins, notices,
minutes, circulars, and reports.

Minimizing Barriers

The communication barriers can be minimized through the following ways:

Principle of Clarity: This is achieved by ensuring that a message is expressed in
a language and transmitted so that the receiver understands.
Principle of Integrity: This emphasizes the purpose of managerial
communication, which is to support understanding by individuals as they achieve and
maintain the cooperation necessary to achieve the goals and objectives of the
organization. Consequently, the appropriate channel should be followed when sending
information by superiors; otherwise, subordinates whose positions are bypassed may feel
slighted.
Using the Informal Group. The leaders of informal groups could have access
to information which they can convincingly transmit to their members.
Management of Change and Diversity

Change management is a structured approach to transitioning individuals, teams,

and organizations from a current state to a desired future state, to fulfill or implement a
vision and strategy. It is an organizational process aimed at empowering employees to
accept and embrace changes in their current environment.
Change Management: As a Systematic Process. Change management is the
formal process for organizational change, including a systematic approach and
application of knowledge. Change management means defining and adopting corporate
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strategies, structures, procedures, and technologies to deal with change stemming from
internal and external conditions.
Change Management: As a Means of Transitioning People. Change
management is a critical part of any project that leads, manages, and enables people to
accept new processes, technologies, systems, structures, and values. The set of activities
helps people transition from their present way of working to the desired way of working.
Change management is the continuous process of aligning an organization with its
marketplace—and doing so more responsively and effectively than competitors.

Leader’s Role for Managing Change

Given the obstacles noted, leaders have a critical role to play in managing
change. The following chart provides an overview of how your role can impact the
change obstacle.

Change Leader’s Role

Obstacles
• Leverage your relationship with your team to
Employee address employee concerns on a personal level.
Resistance • Ask for their feedback and respond to their
concerns honestly and openly.
Communication • Communicate critical information to employees
breakdown on an ongoing and consistent basis.
• Engage your team by involving them in the
Staff turnover initiative.
• Coach, Mentor, and enrich their roles.

Eight Errors Common to Organizational Change Efforts and Their Consequences

Error #1: Allowing too much complacency

Error #2: Failing to garner leadership support
Error #3: Underestimating the power of vision
Error #4: Undercommunicating the vision
Error #5: Permitting obstacles to block the new vision
Error #6 Failing to create short-term wins
Error #7: Declaring victory too soon
Error #8: Neglecting to anchor changes firmly in the culture

Consequences
• New strategies are not implemented well
• Reengineering takes too long
• Quality programs do not deliver hoped-for results
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Roles and Responsibilities for Change

Understanding the roles and responsibilities that you and others play in the
change effort is essential. They will provide clarity on the expectations, project scope, and
responsibility for each contributor. Typically, there are four key roles: the Sponsor
(Senior Leaders), Champion (Leader), Change Agent (Human Resources), and
Stakeholder (Employees).

The Sponsor is usually the Director in the department and:

• Has the overall responsibility for the department or faculty.

• Is the person who has authority over the project and over the individuals who
will implement the change.
• Provides funding, resolves issues and scope changes.
• Approves significant deliverables and provides high-level direction.
• Has a clear vision, identified goals, and measurable outcomes for the change
initiative.

The Champion is usually the Senior Manager in the department that:

• Has the overall day-to-day authority.

• Provides the Sponsor with information about the issues and challenges.
• Engages and involves the right people on the ground.
• Brings the change vision to life.
• Encourages (and sometimes enforces) new and desired behaviors.

The Change Agent is the person or group that assists the department/faculty in
implementing the proposed change, such as Human Resources. Their role is to advise
and guide the Champion and Sponsor throughout the change initiative and:

• Focus on assisting, advising, and coaching the Sponsor and Champion in the
change effort.
• May act in several roles – data gatherer, educator, advisor, facilitator, or coach.
• Has no direct-line authority to or over the Sponsor or Stakeholders.
• Act as subject-matter experts in the change management process.

Stakeholders are those employees whom the change will impact. They must be
involved in the process and understand how the change initiative will impact their current
state.

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Steps to Effective Change Management

Step one: Increase Urgency. Raising a feeling of urgency is the first and most
critical step in a successful change effort. With low urgency and complacency, the change
effort cannot get off the ground.
Step two: Build the Guiding Team. It is essential to get the right people in
place who are fully committed to the change initiative, well-respected within the
organization, and have power and influence to drive the change effort at their levels.
Step three: Get the Vision Right. While creating a shared need and urgency
for change may push people into action, the vision will steer them in the new direction.
Step four: Communicate for Buy-In. Once a vision and strategy have been
developed, they must be communicated to the organization to gain understanding and
buy-in. Sending clear, credible, and heartfelt messages about the direction of change
establishes genuine gut-level buy-in, which sets the stage for the following step: getting
people to act.
Step five: Empower Action. Empowering action should be seen as removing
barriers to those whom we want to assist in pushing the change effort. Removing
obstacles should inspire, promote optimism and build confidence around the change
effort.
Step six: CreateShort–Term Wins. Short-term wins nourish faith in the
change effort, emotionally reward the hard workers, keep the critics at bay, and build
momentum. By creating short-term wins and being honest with feedback, progress is
achieved, and people are inspired.
Step seven: Do not Let Up. In successful efforts, people build on this
momentum to make the vision a reality by keeping urgency up, eliminating unnecessary,
exhausting work, and not declaring victory prematurely.
Step eight: Make Change Stick. By creating a new, supportive, and sufficiently
strong organizational culture, the change should remain. A supportive culture provides
roots for the new ways of operating.

Techniques of Human Relations for Change Management

A good leader in the exercise of his qualities ensures good human relations. He
knows that not much can be accomplished individually, but a lot can be done in groups.
He makes th3 employees work purposefully as a team through adequate motivation. The
techniques commonly employed for this purpose are following:
Friendliness and approval: The leader has to be friendly with
Those are working with him as well as outsiders. The depth of friendship should be well
rooted insincerely the desire to get along with everyone. The subordinates expect this
because they depend on the leader/manager for many things. They want to be accepted.
They also want approval from their leader over constructive behaviors’. Mistakes should

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be corrected with understanding, and good performance rewarded adequately. The
subordinates want to know that the boss values him and approves of him.
Consistency and Fairness: Inconsistent behavior by a leader or manager can
be a source of anxiety and imitation. If it goes on, the subordinates might get frustrated
with the entire job. This is why consistent behavior from the leader makes the
subordinates develop confidence since they know what the leader wants and how they
can respond to his demands.
Support subordinates: Support can come in various forms, such as seeking
their promotions, assisting when they alls sick, and settling disputes to maintain peace
and harmony.
Use of Participation: This is used primarily as a tool for a better decision. That
is why both the manager and subordinates should always come together and decide on
what to do. The subordinates will be committed to such decisions because they
contributed to their making.
The closeness of Supervision: Once the assignment has been defined and the
time to accomplish it has been agreed upon, subordinates should be left alone to
perform. The leader only needs to monitor progress through reports. However, if the
work is sensitive and complex and, as a result, the subordinate call for closer supervision,
it can be extended to him.
Settlement of Grievances: Conflicts and grievances are bound to occupy a
group. This is because members of a group have complex backgrounds and conflicting
interests. However, the leader should quickly intervene and reconcile the parties involved
whenever conflicts and grievances arise, whether a major or minor one.
Two-way Communication: There should always be two-way communication.
While the leader sends out messages, he must listen for feedback. Similarly, under certain
circumstances, the subordinates can initiate communication. In this instance, they are the
senders of messages while the leader is the receiver.

Filipino and Foreign Cultures: A Leadership Challenge

“The ear of the leader must ring with the voices of the people.”-Woodrow
Wilson. With the march of globalization and internationalization growing louder and
more robust, few successful businesses can now escape the need to work across cultures.
Today’s leaders need to be adept at leading and managing people of different cultures;
they need to listen to the „voices of the people‟ and understand what those voices may
be telling them. This, in essence, is the crux of the challenge; when people perceive the
world, communicate and view their leaders in different ways, the leader’s ears may be
ringing with misunderstood messages. The leader will come across cultural issues in many
different guises.

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Intercultural Management

Today's businesses are complex entities. However, one fundamental principle of

success remains constant- the need for communication. Communication manifests in
various forms, both verbal and non-verbal. One area of increasing concern for businesses
is how to nurture and maintain effective intercultural communication between
employees. As workforces become increasingly multicultural and businesses continue to
expand overseas, the homogenous workforce has become a thing of the past. The
cultural diversity of businesses necessitates that internal communication now takes note
of the intercultural element if it is to be truly effective. Management today has to ensure
that they are understanding and being understood across
cultural boundaries. The following ten tips on intercultural management provide a
starting point for managers dealing with culturally diverse teams.
Business Card Etiquette. When doing business abroad, it is essential to
understand the local culture. Culture includes norms, values, behaviors, food,
architecture, fashion, and art. However, one area of culture that is important for the
international business person is etiquette. Understanding business etiquette allows you to
feel comfortable dealing with foreign friends, colleagues, customers, or clients. Knowing
what to do and say in the right places will help build trust and open lines of
communication. One aspect of etiquette that is of great importance internationally is the
exchanging of business cards. Unlike in North America or Europe, where the business
card has little meaning other than a convenient form of capturing essential personal
details, the business card has very different meanings in other parts of the world.
Business Lunch Etiquette. Business lunches are very common in many
countries and cultures. The food itself is one of the most visible manifestations of a
culture and is something people are proud of and like to share with guests to their
country. However, just as the food changes from culture to culture, so does the lunch's
intention and etiquette. In some cultures, the business lunch is a time for chit-chat and
building relationships. In others simply a fuel stop, people continue to talk about
business, known as the "working lunch." For the international globe-trotter, it is always
beneficial to appreciate and understand local culture and any etiquette or protocol.
Cross-Cultural Business Blunders, These are some examples of how cultural
ignorance can lead to negative (and much of the time humorous) consequences. The
following cultural blunders are presented to illustrate how crucial cultural awareness is in
international business today.

1. Managers at one American company were startled when they discovered that
the brand name of the cooking oil they were marketing in a Latin American country
translated into Spanish as "Jackass Oil."
2. American Motors tried to market its new car, the Matador, based on the image
of courage and strength. However, in Puerto Rico, the name means "killer" and was not
popular on the hazardous roads in the country.

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 3. A US telephone company tried to market its products and services to Latinos
by showing a commercial in which a Latino wife tells her husband to call a friend, telling
her they would be late for dinner. The commercial bombed since Latino women do not
order their husbands around, and their time use would not require a call about lateness.
4. A cologne for men pictured a pastoral scene with a man and his dog. It failed
in Islamic countries. Dogs are considered unclean.
5. Proctor & Gamble used a television commercial in Japan that was popular in
Europe. The ad showed a woman bathing, her husband entering the bathroom, and
touching her. The Japanese considered this ad an invasion of privacy, inappropriate
behavior, and bad taste.
6. An American businessperson refused an offer of a cup of coffee from a Saudi
businessman. Such a rejection is considered very rude, and the business negotiations
became stalled.
7. A Japanese manager in an American company was told to give critical
feedback to a subordinate during a performance evaluation. Japanese use high-context
language and are uncomfortable giving direct feedback. It took the manager five tries
before he could be direct enough to discuss the poor performance so that the American
understood.
8. One company printed the "OK" finger sign on each page of its catalog. In
many parts of Latin America, that is considered an obscene gesture. Six months of work
were lost because they had to reprint all the catalogs.

Culture on Global Teams

The homogenous team is a thing of the past in most international organizations

and companies. More and more teams are made up of people with different nationalities
and therefore different cultures, languages, ideas, behaviors, and ways of doing things.
Some would argue that the ‘international language of business’ negates any
communication issues within such a cross-cultural team; however, those with hands-on
experience in such teams would disagree. When people of different cultural backgrounds
come together in any setting, there will always be issues in terms of interaction. This is
because they bring their cultural baggage regarding how they do things and expect things
to be done. Cross-cultural issues will not always be a hindrance. They can often be a
force for positive creativity, but it has a negative impact when a clash of cultures occurs,
especially within a team.

Stages of Culture Shock

“Culture shock” describes the emotional rollercoaster that someone experiences

when living in a new country. Anyone that has worked and lived in a foreign country will
experience culture shock of some sort. Culture shock affects anyone from business
personnel and their families to teachers to sports stars. Recognizing culture shock is an

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essential way of being able to deal with it. Dealing with it helps minimize the risk of
becoming disillusioned with a new country and the possibility of deciding that a quick
return 'home' is the only solution. Experts agree that culture shock has stages and all
agree that once people get beyond the initial and most difficult stages, life in a new
country becomes a lot better.

Outlined below is an example of the stages people go through with culture

shock:
Stage 1 – Excitement. The individual experiences a holiday or 'honeymoon'
period with their new surroundings. They:
✓ Feel very optimistic about the culture
✓ Are overwhelmed with impressions
✓ Find the new culture exotic and are fascinated
✓ They are passive, meaning they have little experience of the culture
Stage 2 – Withdrawal. The individual now has more face-to-face experience of
the culture and finds things different, strange, and frustrating. They:
✓ Find the behavior of the people unusual and unpredictable
✓ Begin to dislike the culture and react negatively to the behavior
✓ Feel anxious
✓ Start to withdraw
✓ Begin to criticize, mock or show animosity to the people
Stage 3 – Adjustment. The individual now has a routine, feels more settled, and
is more confident in dealing with the new culture. They:
✓ Understand and accept the behavior of the people
✓ Feel less isolated
✓ Regains their sense of humor
Stage 4 – Enthusiasm. The individual now feels 'at at home'. They:
✓ Enjoy being in the culture
✓ Functions well in the culture
✓ Prefer certain cultural traits of the new culture rather than their own
✓ Adopt certain behaviors from the new culture

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 Worksheet #6

1. Discuss the nature of directing.

2. Differentiate leading to managing.

3. Identify and explain the various theories of motivation.

4. Differentiate styles of leadership. Cite examples.

5. Justify the value of communication in directing people.

6. Explain the management of change and diversity in the workplace.

7. Discuss the interrelationship of various cultures.

8. What do you understand by Transactional and transformational leadership? Several

factors condition leadership emergence: provide the most important ones known to
you.

9. You have just seen the definition and nature of leadership. Look around your
immediate community; can you see individuals whom you can call leaders? What
about your state and the Philippines? Can you name them? What are the reasons for
picking them as leaders?

10. Communication, as we have pointed out, is an ongoing process. Anything we are

doing, we are communicating. Can you see situations where you acted as senders of
messages? Can you identify the channels used? Who were the receivers of the
messages? Were there obstacles to the flow of communication? Recollect if there
were noises.

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 Chapter 7
CONTROLLING

Performance Standard: The learners shall be able to apply appropriate control

measures for a specific business situation.

Learning Competencies: The learners…

➢ discuss the nature of controlling;

➢ describe the link between planning and controlling;
➢ distinguish control methods and systems;
➢ apply management control in accounting and marketing concepts and techniques; and
➢ prepare a budget plan.

Nature of Management Control

Controlling. After planning and organizing, controlling tales place. It is the

process that measures current performance and guides it toward the accomplishment of
some objective. The essence of control lies in checking existing actions against some
desired results determined in the planning process.
We can summarize all this by saying that the two significant parts of the control
are measuring performance against the plan; and taking corrective action when needed.
This is why controlling requires plans. The clearer, more complete, and more packaged
the plans are, the more effective controls are. Measuring is the reserve of planning. These
are the plans which come out of planning become the standards by which desired results
are measured.
Control. It is one of the managerial functions like planning, organizing, staffing,
and directing. It is essential because it helps to check the errors and take corrective action
so the deviation from standards is minimized and the organization's stated goals are
achieved in the desired manner. According to the modern concept, control is a foreseeing
action, whereas the earlier concept of control was used only when errors were detected.
Control in management means meeting standards, measuring actual performance, and
taking corrective action.

Characteristics of Control
• Control is a continuous process
• Control is a management process
• Control is embedded in each level of organizational hierarchy
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 • Control is forward-looking
• Control is closely linked with planning
• Control is a tool for achieving organizational activities

The Elements of Control

The four essential elements in a control system are:

• The characteristic or condition to be controlled;
• The sensor;
• The comparator; and
• The activator – occurs in the same sequence and maintains a consistent
relationship in every system.

The first element is the characteristic or condition of the operating system,

which is to be measured. We select a specific characteristic because a correlation exists
between it and how the system is performing. The characteristic may be the system's
output during any processing stage, or it may be a condition resulting from the system's
output. For example, it may be the heat energy produced by the heating system or the
temperature in the room which has changed because of the heat generated by the heating
system. In a school system, the hours a teacher works or the gain in knowledge
demonstrated by the students on a national examination are characteristics that may be
selected for measurement or control.
The second element of control, the Sensor, is a means for measuring the
characteristics or conditions. The control subsystem must be designed to include a
sensory device or method of measurement. In a home heating system, this device would
be the thermostat, and in a quality-control system, this measurement might be performed
by a visual inspection of the product.
The third element of control, the comparator, determines the need for
correction by comparing what is occurring with what has been planned. Some deviation
from the plan is usual and expected, but when variations are beyond those considered
acceptable, corrective action is required. It is often possible to identify performance
trends and take action before an unacceptable variation from the norm occurs. This sort
of preventative action indicates that reasonable control is being achieved.
The activator's fourth control element is the corrective action taken to return the
system to the expected output. The actual person, device, or method used to direct
corrective inputs into the operating system may take various forms. It may be a hydraulic
controller positioned by a solenoid or electric motor in response to an electronic error
signal, an employee directed to rework the parts that failed to pass quality inspection, or a
school principal who buys additional books to provide for an increased number of
students. As long as a plan is performed within allowable limits, corrective action is not
necessary; this seldom occurs in practice, however.

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 Information is the medium of control because the flow of sensory data and
corrective information allows a system's characteristics or condition to be controlled. To
illustrate how information flow facilitates control, let us review the element of control in
the context of information.

Requirements for Effective Control

Some requirements must exist for effective control to take place.

• Control should be tailored to plans. This means that control should focus on
the result.
• The control must provide valuable and understandable information.
Misunderstood controls will not be appropriately applied. The system must be clear and
straightforward.
• Control should report deviation quickly. This is the necessary effect of
deviation.
• The control must be tailored to positions. This is necessary so that the right
persons will monitor activities in their fields. The accounting checking activities in the
finance department, the marketing manager, the marketing department, etc.
• Control should be directed to strategic points. The strategic points are those
susceptible areas.
• Control should be economically realistic. This means that the cost of
implementing the control system must be less than the benefits derived from the system.
• Control should be flexible. This is important because of changes. Flexible
control can adjust for uncertainties.
• The Control system should indicate and lead to corrective action. Simply
uncovering and measuring deviation is not enough. The Control system should point out
correcting action immediately.
• The control must be simple but challenging to manipulate.
• Controls must be acceptable to all members of the organization.

Signs Showing that Control is Inadequate or Ineffective

There are outward signs which indicate that controls are inadequate and
ineffective. Management should be aware of them.

These are the following:

• Late correction. When problems, unfavorable deviation, or shortfalls are
discovered too late, correcting them is medicine after death.
• Taking unnecessary corrective action. When the manager finds himself
taking corrective action, which could have been avoided.

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 • Unnecessary Excuses. When subordinates are frequently explaining, giving
excuses, and apologizing for their actions on decisions. When too much time is focused
on control instead of the results to be obtained.
• Trying to circulate control. When subordinates direct the efforts and
energies toward circulating control, i.e., trying to take control not to work indicates that
the control is not practical.
• Constantly checking subordinates' work. When the manager always
mends a great deal of time checking and monitoring the work of the subordinates.

The Link between Planning and Controlling

Planning and control are concerned with reconciling what the market requires
and what the operation’s resources can deliver. Planning and control activities provide
the systems, procedures, and decisions that bring together different aspects of supply and
demand. The purpose is always the same – to connect supply and demand to ensure that
the operation’s processes run effectively and efficiently and produce products and
services as required by customers.
Planning is a formalization of what is intended to happen in the future.
However, a plan does not guarantee that an event will happen. Customers change their
minds about what they want and when they want it. Suppliers may not always deliver on
time, machines may fail, or staff may be absent through illness. Control is the process of
coping with changes. It may mean that plans need to be redrawn. It may also mean that
an ‘intervention’ will need to be made in operation to bring it back ‘on track,’ for
example, finding a new supplier that can deliver quickly, repairing the machine which
failed, or moving staff from another part of the operation to cover for the absentees.
Control makes the adjustments that allow the operator to achieve the plan's objectives,
even when the assumptions on which the plan was based do not hold.

Control Methods and Systems

According to Henri Fayol, control of an undertaking consists of seeing that

everything is being carried out by the plan adopted or given and the principle lay down.
Its objective is to point out mistakes so that they may be rectified and prevented from
recurring.
According to EFL Breach, control checks current performance against pre-
determined standards contained in the plans to ensure adequate progress and satisfactory
performance.
According to Harold Koontz, controlling is the measurement and correction of
performance to ensure that enterprise objectives and the plans devised to attain them are
accomplished.
According to Stafford Beer, Management is the profession of control.

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 In 1916, Henri Fayol formulated one of the first definitions of control about
management: Controls consist of verifying whether everything occurs in conformity with
the plan adapted to the instructions issued and principles established. Its objective is to
point out weaknesses and errors to rectify them and prevent a recurrence.
Robert J. Meckler presented a more comprehensive definition of managerial
control: Management control can be defined as a systematic effort by business
management to compare performance to predetermined standards plans or objectives to
determine whether performance is in line with these standards and presumably to take
any remedial action required to see that human and other corporate resources are being
used most effectively and efficiently possible in achieving corporate objectives.
Also, control can be defined as “that function of the system that adjusts
operations as needed, to achieve the plan, or to maintain variation from system objectives
within allowable limits” The controls subsystem functions in close harmony with the
operating system. The degree to which they interact depends on the nature of the
operating system and its objectives. Stability concerns a system’s ability to maintain a
pattern of output without wide fluctuations. The rapidity of response pertains to how a
system can correct variations and return to the expected output.
A political election can illustrate the concept of control and the importance of
feedback. Each party organizes a campaign to get its candidates selected and outlines a
plan to inform the public about both the candidate’s credentials and the party’s platform.
As the election nears, opinion polls furnish feedback about the campaign's effectiveness
and about each candidate’s chances to win. Depending on the nature of this feedback,
certain adjustments in strategy and tactics can be made to achieve the desired result.
From these definitions, it can be stated that there is a close link between
planning and controlling. Planning is a process by which an organization’s objectives and
the methods to achieve the objectives are established, and controlling is a process that
measures and directs the actual performance against the organization's planned
objectives.
Thus planning and control are often referred to as Siamese twins of
management. Controlling is the managerial function of management and performance
correction to ensure that enterprises' objectives and the plans devised to attain them are
accomplished.

Process of Controlling
• Setting performance standards
• Measurement of actual performance
• Comparing actual performance with standards
• Analyzing deviations
• Correcting deviations

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Kinds of Control

Control may be grouped according to three general classifications

• The nature of the information flow designed into the system (that is, open –or
closed-loop control)
• A load of components includes in the design (that is, man or machine control
systems)
• The relationship of control to the decision process (that is, organizational or
operational control).

Open-And Closed –Loop Control

A Street- lighting system controlled by a timing device is an example of an open-

loop system. At a specific time each evening, a mechanical device closes the circuit, and
energy flows through the electric lines to light the lamps. Note, however, that the timing
mechanism is an independent unit and does not measure the lighting system's objective
function. If the light were needed on a dark, stormy day, the timing device would not
recognize this need and therefore would not activate energy inputs. Correctives
properties may sometimes be built into the controller (for example, to modify the time
the lights are turned on as the days grow shorter or longer), but this would close the loop.
In another instance, an individual who is not part of the system; for example, the light
may be turned on by someone who happens to pass by and recognizes the need for
additional light.
If control is exercised due to the operation rather than outside or predetermined
arrangements, it is a closed-loop system. The home thermostat is the classic example of a
control device in a closed-loop system. When the room temperature drops below the
desired point, the control mechanism closes the circuit to start the finance and rises. The
heating system – activating circuit is turned off systems, and an open-loop system is that
the control device is an element of the system it serves and measures the performance of
the systems. In other words, all four control elements are integral to the specific system.
An essential part of a closed-loop system is feedback. The system's output is
measured continually through the item controlled, and the input is modified to reduce
and difference or error toward zero. Many of the patterns of information flow in
organizations are found to have the nature of clued loops that use feedback. The reason
for such a condition is apparent when one recognizes that any system, if it is to achieve a
predetermined goal, must have available to it all times an indication of its degree of
attainment. In general, every goal-seeking system employs feedback.

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Man and Machine Control

Control elements are easy to identify in machine systems; for example, the
control characteristic might be some variable like speed or temperature, and the sensing
device could be a speedometer or thermometer. An expectation of precision exists
because the characteristic is quantifiable, and the standard and the regular variation to be
expected can be described in exact terms. In automatic machine systems, information
inputs are used in continual adjustment to achieve output specifications. When even a
small variation from the standard occurs, the correction process begins.
The automatic system is highly structured and designed to accept particular
input, produce specific output, and regulate the transformation of inputs within a narrow
range of variation. For an illustration of mechanical control, as the load on a steam
engine increases and the engine starts to slow down, the regulator reacts by opening a
valve that releases additional inputs of steam energy.
This new input returns the engine to the desired number of revolutions per
minute. This type of mechanical control is crude compared to the more sophisticated
electronic control systems in everyday use. Consider the complex missile–guidance
systems that measure the course according to predetermined mathematical calculations
and make almost instantaneous corrections to direct the missiles to their target.
Machine systems can be complex because of the sophisticated technology,
whereas in control systems, the relationship between objectives and associated
characteristics is often vague; the measurement of the characteristic may be highly
subjective; the expected standard is difficult to define, and the amount of new inputs
required is impossible to quantify. To illustrate, let us refer to a formalized social system
in which deviant behavior is controlled through a process of observed violation of the
existing law (sensing) court hearing and trial (comparison with a standard). Incarceration,
when the accused is found guilty (correction) and released from custody after
rehabilitation of the prisoner, has occurred.
The speed limit established for freeway driving is one standard of performance
that is quantifiable. However, even in this instance, the degree of permissible variation
and the amount of the actual variation is often a subject of disagreement between the
patrolman and the suspected violator. The complexity of our society is reflected in many
of our laws and regulations, which establish the general standards for economic, political,
and social operations. A citizen may not know or understand the law and consequently
would not know whether or not he was guilty of a violation.
Most organized systems combine man and machine: some standards may be
precisely structured, whereas others may be little more than general guidelines with wide
variations expected in output. Man must act as the controller when the measurement is
subjective, and judgment is required. Machines such as computers are incapable of
making exceptions from the specified control criteria regardless of how much a particular
case might warrant special consideration. A pilot acts in conjunction with computers and

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automatic pilots to fly large jets. In unexpected weather changes or possible collision with
another plane, he must intercede and assume direct control.

Organizational and Operational Control

The concept of organizational control is implicit in the bureaucratic theory of

Max Weber. Associated with this theory are such concepts as “span of control,” the
closeness of supervision,” and “hierarchical authority.” Weber’s view tends to include all
levels or types of administrative control as being the same. More recently, writers have
tended to differentiate the control process between that which emphasized the nature of
the organizational or systems design and that which deals with daily operations. To
illustrate the differences, we “evaluate” the performance of a system to see how effective
and efficient the design proved to be or discover why it failed.
In contrast, we operate and “control” the system with respect o the daily inputs
of material, information, and energy. In both instances, the feedback elements are
present. However, administrative control tends to review and evaluate the system's nature
and arrangement of components, whereas operational control tends to adjust the daily
inputs.
The direction for organization control comes from the goals and strategic plans
of the organization. General plans are translated into specific performance measures such
as market share, earnings, return on investment, and budgets. The process of
administrative control is to review and evaluate the system's performance against these
established norms; rewards for meeting or exceeding standards may range from special
recognition to salary increases or promotions. On the other hand, a failure to meet
expectations may signal the need to reorganize or redesign.
In administrative control, the approach used in the review and evaluation
program depends on the reason for the evaluation. Is it because the system is not
effective (accomplishing its objectives)? Is the system failing to achieve an expected
standard of efficiency? Is the evaluation being conducted because of a breakdown or
failure in operations? Merely a periodic audit–and–review process?
When a system has failed or is in great difficulty, special diagnostic techniques
may be required to isolate the trouble areas and identify the causes of those difficulties. It
is appropriate to investigate areas that have been troublesome before or areas where
some measure of performance can be quickly identified. For example, suppose an
organization’s output backlog builds rapidly. In that case, it is logical to check first to see
if the problem is due to such readily obtainable measures as increased demand or a drop
in available person-hours. When a more detailed analysis is necessary, systematic
procedures should be followed.
In contrast to organizational control, operational control regulates the day-to-day
output relative to schedules, specifications, and costs. Is the output of the product or
service the sound quality, and is it available as scheduled? Are inventories of raw
materials, goods-in-process, and finished products being purchased and produced in the

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desired quantities? Are the costs associated with the process available in the proper form
and at the right time? Is the energy resource being utilized efficiently?
The most challenging task of management concerns monitoring the behavior of
individuals, comparing performance to some standard, and providing rewards or
punishment as indicated. Sometimes this control over people relates entirely to their
output. For example, a manager might not be concerned with the behavior of a salesman
as long as sales are as high as expected. In other instances, close supervision of the
salesman as long as the salesman might be appropriate if achieving customer satisfaction
was one of the sales organizations. The larger the unit, the more likely the control
characteristics will be related to some output goal. It also follows that if it is difficult or
impossible to identify the actual output of individuals, it is better to measure the entire
group's performance. This means that individuals’ motivation levels and their
performance measurements become subjective judgments made by the supervisor.
Controlling output also suggests the difficulty of controlling individuals’ performance and
relating this to the total system’s objectives.

Role of Budget Application in Management Control

Types of Control. Budgeting is the word to formulate plans for a given future
period expressed in quantitative terms. Budgets can be stated in financial terms, such as
capital and revenue expenditure budgets, or in nonfinancial terms, e.g., production units.
Purpose of Budgeting. Taking the organization's structure into consideration,
one then breaks down the numerical statements of plans into constituents’ parts; this
enables the budgets to correlate planning and allows the authority to be delegated
without loss of control.
The plan is reduced to specific figures showing where many are giving or
physical input and output. With this knowledge, a manager can delegate authority more
quickly to make plans within the budget limit.

Budgeting Control. Standards of performance need to be set to act as

guidelines to reach the budget plan successfully. The annual plan is divided into shorter
periods, month or week, for control
purposes. For each period, the budget is compared with the actual, and reasons for any
deviation are noted. Any corrective action needed is thereby taken. Monitoring a shorter
period plan aims to see what steps must be taken so that land term objectives are still
possible.
Similarly, budgetary control is geared towards the achievement of the long-range
plan. Budgetary control concerns itself with the total costs for each department. If the
plan is to be fulfilled, the responsibility for doing this must be assigned to the person
responsible, e.g., supervisors and managers of sections. Each manager must feel that the
budget for his section is realistic and relevant and not imposed upon him.

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 Non Budgetary Control. There are many devices for control that are not
directly connected with budgets. Brief consideration will be given to ratio analysis, break-
even charts, and statistical data.
Ratio Analysis: this term is used to describe significant relationships between
various figures shown in the accounts. Ratio analysis can serve many purposes.

• They provide a means of showing interrelationships between groups of

figures and can be used to measure efficiency.
• They enable a large volume of data to be conveniently summarized.
• They can be used in forecasting and planning.
• They can serve as an aid to communication, as people can more easily see
changes in a business.
• They can be used to assess solvency, ever trading, and profitability.
Break-Even Point Analysis: the break-even point coincides with the volume of
output at which neither profit nor loss appears in a relationship of sales and expenses. At
a volume where revenues exactly cover expenses. At a lower volume, losses occurred,
and at the higher value, a profit. Problems that may be solved by break-even analysis.
• The determination of the price gives the desired break-even point and profit.
• The volume of sales needed to cover return on capital employed, dividends,
and reserves.
• The calculation of costs and revenues for all possible volumes of output and
variable cost per unit.

Control by Audit

External Audit: The role of the external audit is traditional, the independent
appraisal of an organization's financial records and statements. Assets and liabilities are
verified by qualified accounting personnel employed by external accountancy firms. The
purpose of the audit is to verify that the organization in preparing its financial statements
has followed acceptable accounting principles and has correctly applied them. The
external audit checks against fraud within the organization and provides people in
financial and other institutions (bankers and potential investors with evidence that
statements have been prepared honestly and consistently. The external audit is not very
helpful in controlling an organization's everyday operations as it concentrates upon a
limited number of statements and transactions. It is, however, a deterrent to fraud.
Internal Audit: is an effective tool of managerial control. The term is often
limited to the auditing of accounts. It should be considered in the broader aspect,
involving the appraisal of all operations, for example, appraisal of policies, procedures,
quality of management. The concept of internal auditing could be broadened as there is
no reason why management's actions should not be audited.

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 The Term Management Audit: can be regarded as a procedure for
systematically examining and appraising a management’s overall performance. The object
is to determine the present position of
the business by assessing the results of its operation in specified areas, about accepted
standards imperfection found can be remedied.
Accounting: According to Glautier and Hinded own book, accounting theory
and practices, Pitman 1986. It is defined as the process of identifying, measuring, and
communicating socio-economic information to permit informed judgments and decisions
by the users of the information. Accounting is not only concerned with keeping records,
preparing budgets and final accounts. The changing environment has extended the
boundaries of accounting. Accounting is concerned with collecting data on the activities
of an enterprise and the use of its resources. It also analyses the data for decision making
and helps to control” the use of resources.
An accountant must draw upon a range of disciplines, for example:
Economics; concepts of income, capital, pricing, foreign currency fluctuation,
and inflation.
Low; all operations are within a framework of regulation, e.g., the requirement
of company low.
Organizational Behavior: how people in an organization may respond to
information and control.
Data Processing Systems: for the efficient manipulation of data.
Quantitative Technique: to assist analysis of data in planning.

Uses of Accounting as an Information System

The accountant selects raw data by the conventions of accounting. Selected data
forms the input to the accounting system. Once raw data is selected, it becomes input
data processing the information (output) is used by management and passed to users.
Persons interested in the output of accounting information systems are;
Equity Investor Group- shareholders and investors, are concerned with the
value of their investment and the nay income they expect from shareholdings.
Loan Creditor Group- long-term investors who have committed or may be
prepared to commit funds to the company through debentures or other loan stock. The
ability of the company to repay borrowings if it went into liquidation is of interest to all
creditors.
The Employee Group- this includes trade unions who act on their behalf.
Reports may indicate prospects of the company and its ability to pay increase wages.
Analyst Advisor Group- this includes members of the financial press and
others advising on the purchase of company security.
The Government- the accounts of an organization, are used to decide the
amount of taxation to be paid and regulatory aspects on mergers of companies that might
create monopolies. The accounts give an indication also of the state of the economy.

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 The Public: this includes any member of the community who may interact in
some with the company, for example, taxpayers, ratepayers, consumers’ political parties,
and environmental protection societies.

The Accounting Process

Glautier and Underdown define accounting as being concerned with the process
of;-
• Identifying and selecting information that intended users will need,
• Evaluating the information in the manner which is most beneficial to
intended users.
• Communicating the information selected and processed in the form most
appropriate to the requirements of its user.

The nature and methods of financial accounting are determined to a large extent
by accounting conventions. The rules regarding the selection, measurement, and
communication of information to external users must all be the same conventions that
provide uniformity and comparability.

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 Worksheet #7

1. Discuss the nature of control.

2. Describe the link between planning and controlling.

3. Differentiate control methods and systems.

4. Cite specific organizations where you can apply management control in accounting
and marketing concepts and techniques.

5. Prepare a simple plan for a specific business project.

6. Look around you. It can be your home or any organization or association like clubs.
See if you can notice any or some of the signs that control is inadequate or
ineffective. Advise the manager or whoever is in charge accordingly.

7. List the characteristics of control and explain how control can be implemented in
man and machine.

8. Define control and enumerate why control is necessary for every organization.

9. List and explain the prominent persons requiring information from an accounting
system.

10. What are the problems of control and explain how to measure output in control. Cite
a concrete example.

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