Encyclopedia Of Management 5th Edition by ideazkhuram

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									5th Edition
5th Edition




Edited by Marilyn M. Helms, D.B.A.
                                                      Encyclopedia of Management, 5th ed.
                                                                Marilyn M. Helms, D.B.A., Editor


Project Editor                                         Editorial                                           Composition and Electronic Prepress
Julie A. Gough                                         Virgil Burton                                       Evi Seoud
                                                       Miranda Ferrara
                                                                                                           Manufacturing
                                                       Linda Hall
                                                                                                           Wendy Blurton
                                                       Lynn Pearce
                                                       Holly Selden




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                                               LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

                                        Encyclopedia of management / edited by Marilyn M. Helms.—5th ed.
                                            p. cm.
                                            Includes bibliographical references and index.
                                            ISBN 0-7876-6556-8 (hardcover : alk. paper)
                                          1. Industrial management—Encyclopedias. I. Helms, Marilyn M., 1962-

                                         HD30.15.E49 2006
                                         658'.003—dc22                                                  2005018546




                                                        This title is also available as an e-book.
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                                                                                             HIGHLIGHTS


     The fifth edition of the Encyclopedia of              The Encyclopedia of Management’s essays offer
Management presents a completely refreshed look at   a unique starting point for individuals seeking com-
the vast and continually evolving field of manage-    prehensive information that can’t be adequately con-
ment. Through 303 essays, readers will encounter     veyed through brief dictionary-like definitions. Placed
thousands of terms, issues, and concepts such as:    into context, and enhanced by background data as well
                                                     as graphics and statistics, the topics covered in this
  • Aggregate Planning
                                                     volume are of both current and enduring interest.
  • Apprenticeship Programs
  • Balanced Scorecard
                                                     ADDITIONAL FEATURES
  • Benchmarking
                                                        • Contents are arranged alphabetically from A
  • Coalition Building                                    to Z in one volume
  • Ethics                                              • One comprehensive tiered index simplifies
  • Globalization                                         accessibility
  • Hypothesis Testing                                  • Cross-references abound to help readers
                                                          locate information
  • Inventory Management
                                                        • Many essays written by acclaimed experts in
  • Japanese Management                                   their fields
  • Lean Manufacturing and Just-in-Time Production      • “Further Reading” sections provide source
  • Management Awards                                     suggestions for further study
  • Mission and Vision Statements                       • Graphs, charts, and tables
  • Organization Theory                                 • Math formulas illustrate concepts and models
  • Outsourcing and Offshoring                            Composed by subject matter specialists and busi-
  • Pioneers of Management                           ness writers, under the guidance of an expert advisory
                                                     panel headed by Dr. Marilyn M. Helms of Dalton State
  • Project Management                               College, EoM represents a substantial contribution to
  • Quality of Work Life                             business and management reference. Students, schol-
                                                     ars, and business practitioners alike will find a wealth
  • Time-Based Competition
                                                     of information in this fully revised source.
  • Virtual Organizations
  • Women and Minorities in Management
  • World-Class Manufacturer
  • Zero-Sum Game


                                                                                                               v
                                                     E N C Y C L O P E D I A     O F   M A N A G E M E N T
                                                                                                                   TABLE OF CONTENTS


PREFACE AND USER’S GUIDE . . . . . . . . . . .xi                              Case Method of Analysis . . . . . . . . . . . . . . . . . . . .67
EDITOR AND ADVISORS . . . . . . . . . . . . . . .xv                           Cash Flow Analysis and Statement . . . . . . . . . . . .70
CONTRIBUTORS . . . . . . . . . . . . . . . . . . . . . .xix                   Cellular Manufacturing . . . . . . . . . . . . . . . . . . . . .73
GUIDE TO FUNCTIONAL-                                                          Census—Economic . . . . . . . . . . . . . . . . . . . . . . . .77
AREA READINGS . . . . . . . . . . . . . . . . . . . . .xxi                    Chain of Command Principle . . . . . . . . . . . . . . . .77
                                                                              Change—Managing . . . . . . . . . . . . . . . . . . . . . . . .78
ESSAY TITLES, A - Z
                                                                              Change—Reactive vs. Proactive . . . . . . . . . . . . . .78
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
                                                                              Change—Trends in Organizations . . . . . . . . . . . .78
Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . .1
                                                                              Chaos Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
Affirmative Action . . . . . . . . . . . . . . . . . . . . . . . . .3
                                                                              Closed Systems . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Aggregate Planning . . . . . . . . . . . . . . . . . . . . . . . . .4
                                                                              Coalition Building . . . . . . . . . . . . . . . . . . . . . . . . .82
Angels and Venture Capitalists . . . . . . . . . . . . . . . .9
                                                                              Communication . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Apprenticeship Programs . . . . . . . . . . . . . . . . . . .11
                                                                              Competitive Advantage . . . . . . . . . . . . . . . . . . . .89
The Art and Science of Management . . . . . . . . . .14
                                                                              Competitive Intelligence . . . . . . . . . . . . . . . . . . . .92
Artificial Intelligence . . . . . . . . . . . . . . . . . . . . . .18
                                                                              Complexity Theory . . . . . . . . . . . . . . . . . . . . . . . .95
Assessment Centers . . . . . . . . . . . . . . . . . . . . . . . .21
                                                                              Computer-Aided Design and Manufacturing . . . .98
Attribution Theory . . . . . . . . . . . . . . . . . . . . . . . .22
                                                                              Computer-Aided Manufacturing . . . . . . . . . . . . .101
Autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
                                                                              Computer-Integrated Manufacturing . . . . . . . . .101
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
                                                                              Computer Networks . . . . . . . . . . . . . . . . . . . . . .104
Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . . .30
                                                                              Computer Security . . . . . . . . . . . . . . . . . . . . . . . .108
Bar Coding and Radio Frequency Identification . .35
                                                                              Concurrent Engineering . . . . . . . . . . . . . . . . . . .112
Bases of Power . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
                                                                              Conflict Management and Negotiation . . . . . . .115
Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
                                                                              Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120
Body Language . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
                                                                              Consumer Behavior . . . . . . . . . . . . . . . . . . . . . . .121
Brainstorming . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
                                                                              Contingency Approach to Management . . . . . .125
Break-Even Point . . . . . . . . . . . . . . . . . . . . . . . . . .45
                                                                              Contingent Workers . . . . . . . . . . . . . . . . . . . . . .126
Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
                                                                              Continuing Education and Lifelong
Bundled Goods and Services . . . . . . . . . . . . . . . . .50
                                                                                  Learning Trends . . . . . . . . . . . . . . . . . . . . . .128
Business Continuity Planning . . . . . . . . . . . . . . . .52
                                                                              Continuous Improvement . . . . . . . . . . . . . . . . . .132
Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
                                                                              Corporate Governance . . . . . . . . . . . . . . . . . . . .134
Business Process Reengineering . . . . . . . . . . . . . . .58
                                                                              Corporate Social Responsibility . . . . . . . . . . . . .137
Business Structure . . . . . . . . . . . . . . . . . . . . . . . . .61
                                                                              Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . .141
Cafeteria Plan—Flexible Benefits . . . . . . . . . . . . .65
                                                                              Cost Accounting . . . . . . . . . . . . . . . . . . . . . . . . .144
Capacity Planning . . . . . . . . . . . . . . . . . . . . . . . . .66

                                                                                                                                                          vii
                                                                              E N C Y C L O P E D I A              O F      M A N A G E M E N T
         Cover Letter Trends . . . . . . . . . . . . . . . . . . . . . . .149            European Union . . . . . . . . . . . . . . . . . . . . . . . . .265
         Creativity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149     Executive Compensation . . . . . . . . . . . . . . . . . . .271
         Critical Path Method . . . . . . . . . . . . . . . . . . . . .150               Executive Development . . . . . . . . . . . . . . . . . . .273
         Culture—International Differences . . . . . . . . . .150                        Expatriates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .274
         Culture—Organizational . . . . . . . . . . . . . . . . . . .150                 Experience and Learning Curves . . . . . . . . . . . . .276
         Customer Relationship Management . . . . . . . . .150                           Expert Systems . . . . . . . . . . . . . . . . . . . . . . . . . . .279
         Cycle Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152       Exporting and Importing . . . . . . . . . . . . . . . . . . .281
         Data Processing and Data Management . . . . . . .155                            Facilitator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .287
         Debt vs. Equity Financing . . . . . . . . . . . . . . . . . .159                Family-Friendly Business Practices . . . . . . . . . . .288
         Decision Making . . . . . . . . . . . . . . . . . . . . . . . . .160            Feedback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .288
         Decision Rules and Decision Analysis . . . . . . . .164                         Financial Issues for Managers . . . . . . . . . . . . . . .289
         Decision Support Systems . . . . . . . . . . . . . . . . . .170                 Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . .292
         Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174       First-Mover Advantage . . . . . . . . . . . . . . . . . . . .297
         Deregulation . . . . . . . . . . . . . . . . . . . . . . . . . . . .177         Five S Framework . . . . . . . . . . . . . . . . . . . . . . . .299
         Dictionary of Occupational Titles . . . . . . . . . . . .179                    Flexible Benefits . . . . . . . . . . . . . . . . . . . . . . . . . .300
         Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . .179         Flexible Manufacturing . . . . . . . . . . . . . . . . . . . .300
         Distribution and Distribution Requirements                                      Flexible Spending Accounts . . . . . . . . . . . . . . . .303
              Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . .184        Focused Factory . . . . . . . . . . . . . . . . . . . . . . . . . .305
         Diversification Strategy . . . . . . . . . . . . . . . . . . . .187              Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .307
         Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191    Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .311
         Divestment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193       Free Trade Agreements and Trading Blocs . . . . .314
         Domestic Management Societies                                                   Futuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .315
              and Associations . . . . . . . . . . . . . . . . . . . . .194              Gap Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .319
         Downsizing and Rightsizing . . . . . . . . . . . . . . . . .197                 Generic Competitive Strategies . . . . . . . . . . . . .321
         Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . .200          Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . .325
         E-Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . .203           Goals and Goal Setting . . . . . . . . . . . . . . . . . . . .331
         EAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203    Government-University-Industry
         Economic Census . . . . . . . . . . . . . . . . . . . . . . . . .203                 Partnerships . . . . . . . . . . . . . . . . . . . . . . . . .335
         Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205        Group Decision Making . . . . . . . . . . . . . . . . . . .341
         Economies of Scale and Economies of Scope . . .209                              Group Dynamics . . . . . . . . . . . . . . . . . . . . . . . . .343
         Effectiveness and Efficiency . . . . . . . . . . . . . . . . .211                Handheld Computers . . . . . . . . . . . . . . . . . . . . .349
         Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214      Health Savings Accounts . . . . . . . . . . . . . . . . . .350
         Electronic Commerce . . . . . . . . . . . . . . . . . . . . .214                Human Resource Information Systems . . . . . . . .351
         Electronic Data Interchange                                                     Human Resource Management . . . . . . . . . . . . . .357
              and Electronic Funds Transfer . . . . . . . . . . .218                     Hypothesis Testing . . . . . . . . . . . . . . . . . . . . . . . .364
         Electronic Funds Transfer . . . . . . . . . . . . . . . . . .220                IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .367
         Empathy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220      Importing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .367
         Employee Assistance Programs . . . . . . . . . . . . . .221                     Income Statements . . . . . . . . . . . . . . . . . . . . . . .367
         Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . .223             Industrial Relations . . . . . . . . . . . . . . . . . . . . . . .371
         Employee Compensation . . . . . . . . . . . . . . . . . . .226                  Industry Life Cycle . . . . . . . . . . . . . . . . . . . . . . . .373
         Employee Evaluation and Performance                                             Initial Public Offering . . . . . . . . . . . . . . . . . . . . .373
              Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . .231        Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .374
         Employee Handbook and Orientation . . . . . . . .236                            Instant Messaging . . . . . . . . . . . . . . . . . . . . . . . .376
         Employee Recruitment Planning . . . . . . . . . . . . .241                      Intellectual Property Rights . . . . . . . . . . . . . . . . .377
         Employee Screening and Selection . . . . . . . . . . .243                       Internal Auditing . . . . . . . . . . . . . . . . . . . . . . . . .379
         Employment Law and Compliance . . . . . . . . . . .248                          International Business . . . . . . . . . . . . . . . . . . . . .381
         Empowerment . . . . . . . . . . . . . . . . . . . . . . . . . . .253            International Cultural Differences . . . . . . . . . . .385
         Enterprise Resource Planning . . . . . . . . . . . . . . .256                   International Management . . . . . . . . . . . . . . . . .387
         Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . .258           International Management Societies
         Ergonomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .259            and Associations . . . . . . . . . . . . . . . . . . . . .393
         Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .261   International Monetary Fund . . . . . . . . . . . . . . .396


viii
       E N C Y C L O P E D I A               O F      M A N A G E M E N T
International Organization for Standardization .399                            Meeting Management . . . . . . . . . . . . . . . . . . . . .540
The Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . .402        Mentoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .545
Intrapreneurship . . . . . . . . . . . . . . . . . . . . . . . . .407          Mergers and Acquisitions . . . . . . . . . . . . . . . . . .548
Inventory Management . . . . . . . . . . . . . . . . . . . .408                Microeconomics . . . . . . . . . . . . . . . . . . . . . . . . . .551
Inventory Types . . . . . . . . . . . . . . . . . . . . . . . . . .412         Miles and Snow Typology . . . . . . . . . . . . . . . . . .551
Japanese Management . . . . . . . . . . . . . . . . . . . . .417               Mission and Vision Statements . . . . . . . . . . . . . .553
Job Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . .423      Models and Modeling . . . . . . . . . . . . . . . . . . . . .557
Joint Ventures and Strategic Alliances . . . . . . . .427                      Morale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .562
Just-in-Time Production . . . . . . . . . . . . . . . . . . .430               Motivation and Motivation Theory . . . . . . . . . .563
Knowledge Management . . . . . . . . . . . . . . . . . . .431                  Multimedia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .566
Knowledge Workers . . . . . . . . . . . . . . . . . . . . . . .432             Multinational Corporations . . . . . . . . . . . . . . . .568
Layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .439    Multiple-Criteria Decision Making . . . . . . . . . . .571
Leadership Styles and Bases of Power . . . . . . . . .442                      NAICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .577
Leadership Theories and Studies . . . . . . . . . . . . .445                   Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .577
Lean Manufacturing and Just-in-Time                                            Nepotism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .577
     Production . . . . . . . . . . . . . . . . . . . . . . . . . .450         New Product Development . . . . . . . . . . . . . . . . .579
Leveraged Buyouts . . . . . . . . . . . . . . . . . . . . . . . .454           Non-Compete Agreements . . . . . . . . . . . . . . . . .583
Licensing and Licensing Agreements . . . . . . . . .455                        Nonprofit Organizations . . . . . . . . . . . . . . . . . . .585
Lifelong Learning Trends . . . . . . . . . . . . . . . . . . .457              North American Industry Classification
Line-and-Staff Organizations . . . . . . . . . . . . . . .457                       System . . . . . . . . . . . . . . . . . . . . . . . . . . . . .589
Listening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .459     O*NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .593
Location Strategy . . . . . . . . . . . . . . . . . . . . . . . . .462         Object-Oriented Programming . . . . . . . . . . . . . .593
Logistics and Transportation . . . . . . . . . . . . . . . .464                Occupational Information Network . . . . . . . . . .595
Longitudinal Scenarios . . . . . . . . . . . . . . . . . . . .467              Offshoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .596
MIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .469   Open and Closed Systems . . . . . . . . . . . . . . . . . .596
Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . .469            Operant Conditioning . . . . . . . . . . . . . . . . . . . . .598
Macroenvironmental Forces . . . . . . . . . . . . . . . .469                   Operating Systems . . . . . . . . . . . . . . . . . . . . . . . .600
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . .474         Operations Management . . . . . . . . . . . . . . . . . . .602
Make-or-Buy Decisions . . . . . . . . . . . . . . . . . . . .479               Operations Scheduling . . . . . . . . . . . . . . . . . . . .603
Management: Art vs. Science . . . . . . . . . . . . . . .481                   Operations Strategy . . . . . . . . . . . . . . . . . . . . . . .606
Management Audit . . . . . . . . . . . . . . . . . . . . . . .481              Opportunity Cost . . . . . . . . . . . . . . . . . . . . . . . . .610
Management Awards . . . . . . . . . . . . . . . . . . . . . .483               Order-Qualifying Criteria . . . . . . . . . . . . . . . . . .611
Management Control . . . . . . . . . . . . . . . . . . . . .490                Order-Winning and Order-Qualifying
Management Functions . . . . . . . . . . . . . . . . . . . .493                     Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . .611
Management Information Systems . . . . . . . . . . .496                        Organic Organizations . . . . . . . . . . . . . . . . . . . . .613
Management Levels . . . . . . . . . . . . . . . . . . . . . . .498             Organization Theory . . . . . . . . . . . . . . . . . . . . . .615
Management Science . . . . . . . . . . . . . . . . . . . . .503                Organizational Analysis
Management Societies and Associations:                                              and Planning . . . . . . . . . . . . . . . . . . . . . . . .617
     Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .508         Organizational Behavior . . . . . . . . . . . . . . . . . . .620
Management Societies and Associations:                                         Organizational Chart . . . . . . . . . . . . . . . . . . . . . .621
     International . . . . . . . . . . . . . . . . . . . . . . . .508          Organizational Culture . . . . . . . . . . . . . . . . . . . .624
Management Styles . . . . . . . . . . . . . . . . . . . . . . .508             Organizational Development . . . . . . . . . . . . . . .626
Management Thought . . . . . . . . . . . . . . . . . . . . .511                Organizational Learning . . . . . . . . . . . . . . . . . . .628
Management and Executive Development . . . . .515                              Organizational Structure . . . . . . . . . . . . . . . . . . .629
Managing Change . . . . . . . . . . . . . . . . . . . . . . . .519             Organizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .635
Manufacturing Resources Planning . . . . . . . . . . .523                      Outsourcing and Offshoring . . . . . . . . . . . . . . . .637
Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . .526        Participative Management . . . . . . . . . . . . . . . . .639
Marketing Communication . . . . . . . . . . . . . . . . .527                   Patents and Trademarks . . . . . . . . . . . . . . . . . . . .641
Marketing Concept and Philosophy . . . . . . . . . .532                        Performance Appraisals . . . . . . . . . . . . . . . . . . . .643
Marketing Research . . . . . . . . . . . . . . . . . . . . . . .535            Performance Measurement . . . . . . . . . . . . . . . . .644
Mechanistic Organizations . . . . . . . . . . . . . . . . .539                 Personality and Personality Tests . . . . . . . . . . . .646


                                                                                                                                                             ix
                                                                               E N C Y C L O P E D I A                O F     M A N A G E M E N T
      Pioneers of Management . . . . . . . . . . . . . . . . . . .650                 Strategic Alliances . . . . . . . . . . . . . . . . . . . . . . . .825
      Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .657     Strategic Partnerships . . . . . . . . . . . . . . . . . . . . .825
      Poison Pill Strategies . . . . . . . . . . . . . . . . . . . . . .660           Strategic Planning Failure . . . . . . . . . . . . . . . . . .825
      Poka-Yoke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .662        Strategic Planning Tools . . . . . . . . . . . . . . . . . . .831
      Popular Press Management Books . . . . . . . . . . . .667                       Strategy Formulation . . . . . . . . . . . . . . . . . . . . . .837
      Porter’s 5-Forces Model . . . . . . . . . . . . . . . . . . . .670              Strategy Implementation . . . . . . . . . . . . . . . . . . .845
      Pricing Policy and Strategy . . . . . . . . . . . . . . . . .673                Strategy Levels . . . . . . . . . . . . . . . . . . . . . . . . . . .851
      Problem Solving . . . . . . . . . . . . . . . . . . . . . . . . .676            Strategy in the Global Environment . . . . . . . . . .858
      Process Management . . . . . . . . . . . . . . . . . . . . . .680               Stress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .863
      Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .685        Succession Planning . . . . . . . . . . . . . . . . . . . . . .867
      Product-Process Matrix . . . . . . . . . . . . . . . . . . . .686               Supply Chain Management . . . . . . . . . . . . . . . . .870
      Product Design . . . . . . . . . . . . . . . . . . . . . . . . . . .690         Sweatshops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .873
      Product Life Cycle and Industry Life Cycle . . . .694                           Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .876
      Production Planning and Scheduling . . . . . . . . .699                         Systems Analysis . . . . . . . . . . . . . . . . . . . . . . . . .877
      Productivity Concepts and Measures . . . . . . . . .700                         Systems Design . . . . . . . . . . . . . . . . . . . . . . . . . .880
      Professional Readings for Managers . . . . . . . . . .704                       Task Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .885
      Profit Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . .707        Teams and Teamwork . . . . . . . . . . . . . . . . . . . . .887
      Program Evaluation and Review Technique                                         Technological Forecasting . . . . . . . . . . . . . . . . . .891
           and Critical Path Method . . . . . . . . . . . . . .709                    Technology Management . . . . . . . . . . . . . . . . . .892
      Project Management . . . . . . . . . . . . . . . . . . . . . .714               Technology Transfer . . . . . . . . . . . . . . . . . . . . . .900
      Purchasing and Procurement . . . . . . . . . . . . . . . .719                   Telecommunications . . . . . . . . . . . . . . . . . . . . . .905
      Quality Gurus . . . . . . . . . . . . . . . . . . . . . . . . . . .725          Theory X and Theory Y . . . . . . . . . . . . . . . . . . . .911
      Quality and Total Quality Management . . . . . . .735                           Theory Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .914
      Quality of Work Life . . . . . . . . . . . . . . . . . . . . . .741             Theory of Constraints . . . . . . . . . . . . . . . . . . . . .916
      Radio Frequency Identification . . . . . . . . . . . . . .745                    Time-Based Competition . . . . . . . . . . . . . . . . . . .920
      Reactive vs. Proactive Change . . . . . . . . . . . . . .745                    Time Management . . . . . . . . . . . . . . . . . . . . . . . .924
      Reinforcement Theory . . . . . . . . . . . . . . . . . . . .749                 Total Quality Management . . . . . . . . . . . . . . . . .928
      Research Methods and Processes . . . . . . . . . . . . .751                     Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .928
      Resumes and Cover Letter Trends . . . . . . . . . . . .757                      Trading Blocs . . . . . . . . . . . . . . . . . . . . . . . . . . . .928
      Reverse Supply Chain Logistics . . . . . . . . . . . . .761                     Training Delivery Methods . . . . . . . . . . . . . . . . .928
      Rightsizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .764      Transnational Organization . . . . . . . . . . . . . . . . .935
      Risk Management . . . . . . . . . . . . . . . . . . . . . . . .764              Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . .936
      Robotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .767     Trends in Organizational Change . . . . . . . . . . . .937
      SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . .771            Uniform Commercial Code . . . . . . . . . . . . . . . . .943
      Safety in the Workplace . . . . . . . . . . . . . . . . . . .773                Utility Theory . . . . . . . . . . . . . . . . . . . . . . . . . . .944
      Sales Management . . . . . . . . . . . . . . . . . . . . . . . .778             Value-Added Tax . . . . . . . . . . . . . . . . . . . . . . . . .947
      Scenario Planning . . . . . . . . . . . . . . . . . . . . . . . .782            Value Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . .950
      Securities and Exchange Commission . . . . . . . . .783                         Value Chain Management . . . . . . . . . . . . . . . . . .953
      Sensitivity Training . . . . . . . . . . . . . . . . . . . . . . .786           Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . .955
      Service Factory . . . . . . . . . . . . . . . . . . . . . . . . . .789          Vendor Rating . . . . . . . . . . . . . . . . . . . . . . . . . . .956
      Service Industry . . . . . . . . . . . . . . . . . . . . . . . . . .790         Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . .959
      Service Operations . . . . . . . . . . . . . . . . . . . . . . .795             Videoconferencing . . . . . . . . . . . . . . . . . . . . . . . .960
      Service Process Matrix . . . . . . . . . . . . . . . . . . . . .799             Virtual Organizations . . . . . . . . . . . . . . . . . . . . . .963
      Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .801         Vision Statements . . . . . . . . . . . . . . . . . . . . . . . .967
      Simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .806       Warehousing and Warehouse Management . . . .969
      Six Sigma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .809      Women and Minorities in Management . . . . . . .971
      Span of Control . . . . . . . . . . . . . . . . . . . . . . . . . .809          Work-Life Balance . . . . . . . . . . . . . . . . . . . . . . . .976
      Spirituality in Leadership . . . . . . . . . . . . . . . . . .811               World-Class Manufacturer . . . . . . . . . . . . . . . . .980
      Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .813       Zero-Based Budgeting . . . . . . . . . . . . . . . . . . . . .985
      Statistical Process Control and Six Sigma . . . . .816                          Zero Sum Game . . . . . . . . . . . . . . . . . . . . . . . . . .987
      Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .821   INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .991


x
    E N C Y C L O P E D I A               O F      M A N A G E M E N T
                                                                               PREFACE AND USER’S GUIDE


PREFACE                                                     the physical and social sciences, particularly mathe-
      The Encyclopedia of Management, 5th Edition is        matics, philosophy, sociology, and psychology. Within
an alphabetical reference book covering a comprehen-        business, the field of management includes terms and
sive slate of management concepts. Last published in        ideas also common to marketing, economics, finance,
2000, this fully revised work represents the latest man-    insurance, transportation, accounting, computer tech-
agement theories and practices. Each essay has been         nologies, information systems, engineering, and busi-
revised and new essays have been added to reflect the        ness law.
current state of management. The Encyclopedia’s                  Management has applications in a wide variety of
essays represent an authoritative treatment of the          settings and is not limited to business domains.
entire field of management, encompassing all the             Management tools, as well as the art and science of
current theories and functional areas of this vast and      management, find applications wherever any effort
growing discipline. For the management student,             must be planned, organized, or controlled on a signif-
manager, business practitioner, reference librarian, or     icant scale. This includes applications in government,
anyone interested in a better understanding of a busi-      the cultural arts, sports, the military, medicine, educa-
ness management term or concept, the Encyclopedia           tion, scientific research, religion, not-for-profit agen-
should be a first-stop for general information as well       cies, and in the wide variety of for-profit pursuits of
as a link to other management concepts, related terms,      service and manufacturing. Management takes appro-
references, and electronic databases and information        priate advantage of technical developments in all the
sources. It is designed to be a desk reference for every-   fields it serves.
day business management needs.                                    The growth of the discipline of management has
     Still another use of the Encyclopedia is in a          also led to specialization or compartmentalization of
deeper understanding of one or more key functional          the field. These specialties of management make learn-
areas of management. By using the book as a system-         ing and study easier, but at the same time make broad
atic or a programmed reading of entries in selected         understanding of management more difficult. It is par-
categories or cluster areas, the reader can obtain a        ticularly challenging to the entrepreneur and the small
more thorough, in-depth understanding of key func-          business owner to master the subject areas, yet this
tional areas of management. By reading all the essays       group is compelled to excel at all management func-
for the terms under each heading in the “Guide to           tions to further their businesses’ success. Management
Functional-Area Readings”, individuals with a limited       specialties have grown to such an extent it is difficult
business background, a specialty in another manage-         for any single manager to fully know what manage-
ment functional area, or a liberal arts education back-     ment is all about. So rapid have been the strides in
ground can gain a broad, general familiarity with the       recent years in such subjects as decision making, tech-
entire scope of the management discipline today in          nology, the behavioral sciences, management informa-
one easy-to-use reference source.                           tion systems, and the like, to say nothing of proliferating
                                                            legislative and governmental regulations affecting
     The field of management is an extremely broad
                                                            business, that constant study and education is required
discipline that draws upon concepts and ideas from
                                                            of all managers just to keep current on the latest trends

                                                                                                                          xi
                                                            E N C Y C L O P E D I A       O F    M A N A G E M E N T
        and techniques. Thus, managers and executives need a       immediate question or concise background informa-
        comprehensive management desktop reference source          tion on any aspect of the field of management. As a
        to keep up-to-date. Having the management essays in        handy desktop reference, the information is readily
        one comprehensive encyclopedia saves valuable              accessible. Second, and of more lasting importance,
        research time in locating the information.                 as a planned reading program for in-depth pursuit of
             In the growing age of specialists, there is a grow-   any of the functional areas of management—the
        ing lack of generalists. Typically, a business manager     reader’s own M.B.A., if you will. This program is set
        spends a large percentage of their career developing a     forth in the “Guide to Functional-Area Readings”
        great familiarity and proficiency in a specialized field,    located at the end of the frontmatter.
        such as sales, production, procurement, or accounting.
        The manager develops a very specialized knowledge          CROSS-REFERENCING AND SPECIAL FEATURES.            The
        in this area but may develop only a peripheral knowl-      arrangement of the essays on a strictly alphabetical
        edge of advances in other areas of management. Yet         basis, rather than by subject categories, makes for
        as these individuals are promoted from a specialist-       extremely rapid and convenient information retrieval.
        type position up the organizational chart to a more        At the same time, the extensive cross-referencing
        administrative or generalist supervisory or leadership     makes it easy to pursue a major area of interest in any
        position, the person with newly enlarged responsibili-     depth of study desired. “See-title” cross-references
        ties suddenly finds that their horizon must extend          serve to guide the reader directly toward the location
        beyond the given specialty. It must now include more       of essays that may be recognized by more than one
        than just a once-superficial understanding of all aspects   commonly used term. (For example, upon turning to
        of managing, including purchasing, manufacturing,          “E-commerce” the see-title cross-reference would
        advertising and selling, international management,         direct the reader to turn to “Electronic Commerce”.)
        quantitative techniques, human resources manage-
                                                                        Special features found within the essays include
        ment, public relations, research and development,
                                                                   the following:
        strategic planning, and management information sys-
        tems. The need for broader management understand-             • “See Also” references, included at the end
        ing and comprehension continues to increase as                  of many essays, refer the reader to further
        individuals are promoted.                                       topics of closely related interest.
             The Encyclopedia of Management has had, as its           • Charts, graphs, tables, and formulae are
        goal, to bridge this gap in understanding and to offer          included as illustrative examples whenever
        every executive, executive-aspirant, management con-            appropriate.
        sultant, and educator and student of management, both
                                                                      • Further Reading sections are included at
        comprehensive and authoritative information on all
                                                                        the end of most entries. The bibliographic
        the theories, concepts, and techniques that directly
                                                                        and URL citations point the reader toward a
        impact the job of management. Building on the solid
                                                                        variety of suggested sources for further
        reputation established in prior editions, this thor-
                                                                        study and research.
        oughly updated reference source strives to make spe-
        cialists aware of the other functional areas of the
        management discipline and to give the top manager or       INDEX.    Supporting the easy-to-use, extensive system
        administrator who occupies the general manager             of cross-references, is a comprehensive index at the
        position new insights into the work of the specialists     back of the Encyclopedia. The Index contains alpha-
        whom he or she must manage or draw upon in the             betical references to the following as mentioned in the
        successful management of others. In addition, the          essays: important or unusual terms; names of compa-
        Encyclopedia proposes to make all practitioners            nies, institutions, organizations, and associations; key
        aware of the advances in management science and in         governmental agencies; specific legislation; relevant
        the behavioral sciences. These disciplines touch upon      court cases; names of prominent or historical individ-
        all areas of specialization because they concern the       uals; titles of groundbreaking literature; and signifi-
        pervasive problems of decision-making and interper-        cant studies.
        sonal relations.
                                                                   COMPREHENSIVE COVERAGE AND COMPILATION
                                                                   METHOD.     Every effort has been made to achieve
        USER’S GUIDE AND COMPILATION                               comprehensiveness in choice and coverage of subject
                                                                   matter. The 303 essays frequently go far beyond mere
        REFERENCE, PLUS A PLANNED READING PROGRAM.
                                                                   definitions and referrals to other sources. They are in-
        The information in the Encyclopedia is accessible in
                                                                   depth treatments, discussing background, subject
        two forms. First, through the traditional A-to-Z com-
                                                                   areas, current applications, and schools of thought. In
        pilation, the reader readily has the quick answer to an
                                                                   addition, information may be provided about the kinds


xii
      E N C Y C L O P E D I A     O F   M A N A G E M E N T
of specialists who use the term in a given organiza-       an initial overview of the topic followed by informa-
tion, the degree of current acceptance, and the possi-     tion on the variety of management problems the
bilities for the future as the subject undergoes further   information can be used to solve. Thus, if the reader
development and refinement. Longer essays frequently        has little knowledge of a term, after referring to the
provide charts, graphs, or examples to aid in under-       Encyclopedia of Management, 5th Ed., he or she will
standing the topic.                                        be in possession of the basics of the subject—objective,
     All essays were written by recognized scholars,       scope, implementation, current usage in practice, and
practitioners, and authorities in the field, including      expected future usage. With this information, the
business management professors, other business pro-        reader will then be in a position to ask the right kind
fessors, M.B.A. and doctoral research students,            of questions of specialists and technicians to make
researchers, practitioners, reference librarians, and      sure that the firm (or department, or unit, or agency,
professional business writers. Additionally, all essays    etc.) is taking full advantage of the opportunity the
were vetted by the editor for accuracy, originality,       term presents.
and currency. The authors of all essays followed the                                               Marilyn M. Helms
                                                                                                D.B.A., CFPIM, CIRM
editorial process specified for providing the reader




                                                                                                                      xiii
                                                           E N C Y C L O P E D I A      O F   M A N A G E M E N T
                                                                                    EDITOR AND ADVISORS


ABOUT THE EDITOR                                          Chapter of APICS. Dr. Helms is a Certified Quality
AND ADVISORY BOARD                                        Manager certified by the American Society for
     At the heart of the Encyclopedia of Management’s     Quality.
editorial process was the Advisory Board. The Board            She has published over 200 articles in periodicals
team included a management professor, business ref-       including the Production and Inventory Management
erence librarians, and a freelance business writer and    Journal; Transportation Quarterly; European Business
entrepreneur. This team of scholars and specialists, in   Review; Journal of Information Systems Education;
addition to their teaching, research, writing and serv-   International Journal of Benchmarking for Quality
ice work, found time to devote their expertise to the     Management and Technology; The TQM Magazine;
EoM. Their work began in developing and defining           Industrial Management; Quality Progress; Industrial
the list of management topics essential for inclusion.    Management; and the Operations Management Review.
In addition to authoring a number of essays, they also
                                                               Dr. Helms is a frequent manuscript and book
assisted in selecting other qualified writers to con-
                                                          reviewer, writes business cases and authors ancillaries
tribute in their areas of management expertise. A brief
                                                          and study guides for production and operations man-
biography of the editor and advisory board members
                                                          agement textbooks. She also writes a business column
is presented below.
                                                          for the Sunday Dalton Daily Citizen newspaper. She
                                                          has received grants from the U.S. Department of
DR. MARILYN M. HELMS         is the Sesquicentennial
                                                          Education, the Coleman Foundation, and the Southern
Endowed Chair and a Professor of Management at
                                                          Regional Education Board to develop new curricula
Dalton State College (DSC), Dalton, Georgia. She
                                                          and outreach programs. She serves on the editorial
works closely with the area business community on
                                                          board of several academic peer-reviewed journals.
research projects, seminars, and training programs.
Helms teaches production and operations manage-               Dr. Helms has also directed and taught study
ment classes as well as classes in quality management     abroad programs in Tokyo, Japan; Manchester
and entrepreneurship. She held the UC Foundation          Business School and at Kings College-Kensington
and George Lester Nation Professor of Management          (London); Cairns and Sydney, Australia; Monterrey,
at the University of Tennessee at Chattanooga from        Mexico; Dublin and Galway, Ireland; and Moscow
1987 to 2000 where she also directed the Institute for    and St. Petersburg, Russia. She was awarded the
Women as Entrepreneurs.                                   Fulbright Teaching and Research Award and taught at
                                                          the University of Coimbra, Portugal from April to
      Helms holds a Doctorate of Business Adminis-
                                                          June 2000.
tration Degree from the University of Memphis (TN).
She is a Certified Fellow in Production and Inventory            She is a member of numerous professional organi-
Management (CFPIM) and a Certified Integrated              zations including the Academy of Management, the
Resources Manager (CIRM) of the American Production       Academy of Entrepreneurship, the Decision Sciences
and Inventory Control Society (APICS). She also           Institute, the American Society for Competitiveness, and
teaches certification review courses for APICS and         the American Production and Inventory Control Society.
serves as Educational Director for the local Tri-State    Her current research interests include entrepreneurship

                                                                                                                     xv
                                                          E N C Y C L O P E D I A      O F   M A N A G E M E N T
        by women, manufacturing strategy, and supply chain         Journal of Operations and Production Management,
        management.                                                and Production Planning and Control. He has served
             Helms has local and regional consulting experi-       on the editorial boards of Production & Inventory
        ence and has spoken to international and national          Management Journal, Production Planning and
        groups including the Decision Sciences Institute, the      Control, and Southern Business and Economic Journal.
        American Production and Inventory Control Society,              Dr. Inman is a Certified Fellow in Production and
        and the Academy of Management. Her current                 Inventory Management (CFPIM) through the
        research interests include women entrepreneurs, inter-     American Production and Inventory Control Society
        national competitiveness issues, corporate boards and      (APICS). He is also an Academic Jonah as recognized
        leadership.                                                by the Goldratt Institute. He was ranked 17th nationally
                                                                   in the article “POM Research Productivity in U.S.
            Dr. Helms comments on the EoM:
                                                                   Business Schools,” by S.T. Young, B.C. Baird, and
            Even though the computer is always on and              M.E. Pullman, as published in the Journal of Operations
            I can search the Internet for any topic, the           Management volume 14 no.1, March 1996. He is a
            most efficient way to find business manage-              recipient of the Shingo Prize for Excellence in Manu-
            ment information is to start with the EoM. If          facturing: Shingo Prize Research Award for 1993, for
            a colleague mentions a business manage-                “Determining the Critical Elements of Just-In-Time
            ment term I need to be more familiar with,             Implementation,” in Decision Sciences volume 23
            I consult the EoM and encourage my stu-                no.1, January/February 1992. He was recently given
            dents to do the same. Even in the Internet             the Louisiana Tech University Foundation Professor
            age, I use a number of encyclopedias for               Award for 2005.
            their ease of use and comprehensive nature.
                                                                       Dr. Inman comments on the EOM:
            You can be up-to-date on a subject in just a
            few minutes. It’s the most effective way to                Even as one of the authors, I continually find
            start a research project. The essays in the                the Encyclopedia of Management to be a
            EoM are also helpful to managers studying                  helpful tool for those times when I need to
            for certification and credentialing examina-                quickly “brush up” on a topic. It should be
            tions. They offer a quick review. I am espe-               even more useful for students and practition-
            cially proud of the readings guide by subject              ers. I frequently recommend it to students
            area. I’d encourage all readers to read the                who need an understandable overview of a
            Emerging Topics in Management selection                    difficult subject. My biggest problem in
            of essays.                                                 using the book is in finding it (I’m not sure
                                                                       where it is at this moment), as it is constantly
        DR. R. ANTHONY (TONY) INMAN holds a Doctorate                  on loan.
        in Business Administration in Management from                  The addition of current topics and the dele-
        the University of Memphis (1988), an M.B.A. from               tion of obsolete ones required a thorough
        the University of North Alabama (1983), and a                  analysis by a number of management experts.
        Bachelor’s degree from the University of Mississippi           New entries plus the updating of the retained
        (1973).                                                        topics challenged us to find not only those
             Dr. Inman is the Ruston Building and Loan                 most knowledgeable in their fields but those
        Professor of Management at Louisiana Tech University.          with the ability to convey their knowledge in
        Before assuming this professorship in 1997 he was an           a brief but thorough and understandable
        Associate Professor of Management at Louisiana                 manner. I think we have succeeded quite well!
        Tech. Dr. Inman has taught courses in graduate and
        undergraduate Production/Operations Management,            JUDITH (JUDY) NIXON is a librarian at the Krannert
        undergraduate Total Quality Management and under-          Library of Management and Economics at Purdue
        graduate Purchasing. He has been a member of gradu-        University in West Lafayette, Indiana. Judith has a
        ate faculty since 1990.                                    B.S. degree from Valparaiso University in Indiana and
                                                                   a M.L.S. from the University of Iowa. Prior to working
            Dr. Inman has business experience as a former
                                                                   at the Krannert Library she worked at the University
        Materials Supervisor for Intex Plastics, as a Production
                                                                   of Arizona as a business librarian, and a librarian at
        Control Supervisor for Spun Steel, and as an Inventory
                                                                   the Consumer and Family Sciences Library at Purdue.
        Analyst for ITT Telecommunications.
                                                                   Nixon is a frequent advisor on business reference
            Widely published in his field, his articles have        sources. Her published articles have appeared in peri-
        appeared in journals such as Production & Inventory        odicals such as the Journal of Business and Finance
        Management Journal, Decision Sciences, International       Librarianship. As a librarian, Judith is both the head
        Journal of Production Research, International              of the free-standing business library and leads a team


xvi
      E N C Y C L O P E D I A     O F   M A N A G E M E N T
of three business reference librarians as well as six       LAURIE COLLIER HILLSTROM is a noted freelance
support staff. She assists undergraduates through           writer with the Northern Lights Writers Group. Laurie
Ph.D.-level graduate students with their research proj-     received an MBA from the University of Michigan and
ects as well as answers a broad range of business ques-     is co-founder of Northern Lights Writers Group, an edi-
tions from data source needs to beginning search            torial services firm based in Michigan. She has authored
strategies and techniques. She works closely with a         or edited award-winning reference books on a wide
number of business faculty members including the tax        range of subjects, including business and industry, biog-
law area. She instructs upper level accounting students     raphy, American history, and international environmen-
in the use of the online tax service. She teaches classes   tal issues. Publications include Encyclopedia of Small
on library use for a number of business groups. In          Business (2001), The World’s Environments (2003), War
addition, her library assists with business research        in the Persian Gulf Reference Library (2004), and The
needs for the entire Purdue University, and technology      Industrial Revolution in America (2005).
students in particular. Her research interests include:
                                                                 Laurie comments on the EOM:
using data to evaluate collection needs, team building,
and economic collection. She also manages the                    This completely updated edition of the
Krannert Special Collection of historic economic                 Encyclopedia of Management features new
books.                                                           entries on topics that managers must under-
                                                                 stand to succeed in business today. From the
     Judith shares her thoughts about the EOM, 5th
                                                                 latest developments in Affirmative Action
edition:
                                                                 legislation to the intricacies of Flexible
     The Encyclopedia of Management is a valu-                   Spending Accounts, and from the emerging
     able first stop for research on the broad range              technology of Radio-Frequency Identification
     of topics in the field of management. The                    to the time-saving potential of Handheld
     essays are concise, accurate and readable. In               Computers and Instant Messaging, EoM pro-
     addition, each essay has a very concise list                vides managers with up-to-date information
     of the most useful books, articles and web-                 on a wide variety of current business issues.
     sites so the reader can get a quick start on the
                                                                 The editor would also like to thank Julie Gough,
     research process. This new edition, the first
                                                            editorial coordinator of the EoM at Thomson Gale for
     since 2000, will be welcomed by librarians
                                                            her effort in coordinating this project and offering her
     and researchers. We keep it at the reference
                                                            expertise and guidance.
     desk and use it frequently.




                                                                                                                        xvii
                                                            E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                                                                                   CONTRIBUTORS


John Alvis, Ph.D., CPA                                      Dawn Malone Gaymer, M.B.A.
George M. Clark Professor of Accounting                     Assistant Dean of Graduate Programs, College of Business
University of Tennessee at Chattanooga                      Eastern Michigan University
Tim Barnett, D.B.A., SPHR                                   Evangelos Grigoroudis, Ph.D.
Professor of Management, Department of Management           Lecturer, Department of Production Engineering
   and Information Systems                                     and Management
Mississippi State University                                Technical University of Crete, Greece
Rebecca Bennett, D.B.A.
                                                            Debbie Hausler
Associate Professor of Management, Department
                                                            President
   of Management and Information Systems
                                                            Debsway Inc., Farmington, MI
Louisiana Tech University
James J. Cochran, Ph.D.                                     Marilyn Helms, D.B.A., CFPIM, CIRM
Assistant Professor, Department of Marketing and Analysis   Sesquicentennial Endowed Chair and Professor
Louisiana Tech University                                      of Management
                                                            Dalton (GA) State College
Sheila Delacroix, M.L.S.
Reference and Instruction Librarian                         Laurie Collier Hillstrom
University of Tennessee at Chattanooga                      Freelance Writer
Michael Doumpos, Ph.D.                                      Northern Lights Writers Group
Lecturer, Department of Production Engineering
                                                            R. Anthony Inman, D.B.A.
   and Management
                                                            Ruston Building & Loan Professor of Management,
Technical University of Crete, Greece
                                                               Department of Management and Information Systems
Scott Droege, Ph.D.                                         Louisiana Tech University
Assistant Professor of Management
Western Kentucky University                                 Hal P. Kirkwood, Jr., M.L.S.
                                                            Associate Professor, Coordinator of Instruction, Management
Debbie D. DuFrene, Ed.D.                                       and Economics Library
Professor, Department of General Business                   Purdue University
Stephen F. Austin State University
                                                            Kriaki Kosmidou, Ph.D.
Badie Farah, Ph.D.
                                                            Adjunct Professor, Department of Production Engineering
Professor of Computer Information Systems and M.S.I.S.
                                                               and Management
   Program Advisor
                                                            Technical University of Crete, Greece
Eastern Michigan University
J. Bryan Fuller, Ph.D.                                      Patricia A. Lanier, D.B.A.
Assistant Professor, Department of Management               Assistant Professor of Management, Department
    and Information Systems                                    of Management
Louisiana Tech University                                   University of Louisiana at Lafayette

Diane Franz, Ph.D., CPA                                     Theresa Liedtka, M.L.S.
Professor and Chair, Department of Accounting               Dean, Lupton Library
University of Toledo                                        University of Tennessee, Chattanooga



                                                                                                                          xix
                                                            E N C Y C L O P E D I A         O F    M A N A G E M E N T
       Laura E. Marler, M.B.A.                                      Charalambos Spathis, Ph.D.
       Research Assistant, Department of Management                 Assistant Professor of Economics
          and Information Systems, College of Administration        Aristotle University of Thessaloniki, Greece
          and Business
       Louisiana Tech University                                    Joo-Seng Tan, Ph.D.
                                                                    Visiting Scholar, Cornell University, School of Hotel
       Wendy Mason
                                                                        Administration and Associate Professor of Business
       Freelance Writer
                                                                    Associate Professor of Management and Director of Programs,
       Farmington Hills, MI
                                                                        Center for Cultural Intelligence, Nanyang Technological
       Judith M. Nixon, M.L.S.                                          University, Singapore
       Professor of Libraries and Librarian, Management
          & Economics Library                                       G. Steve Taylor, Ph.D.
       Purdue University                                            Professor of Management, Department of Management and
       Eugenia Petridou, Ph.D.                                         Information Systems, College of Business and Industry
       Associate Professor of Management, Department of Economics   Mississippi State University
       Aristotle University of Thessaloniki, Greece
                                                                    Joe G. Thomas, Ph.D.
       Gerhard Plenert, Ph.D., CPIM                                 Professor of Management, Management and Marketing
       President, Institute of World Class Management                  Department
       Carmichael, CA                                               Middle Tennessee State University
       Bill Prince, M.L.S., M.A.T. History
       Associate Professor and Head of Reference Service,           Monica C. Turner, M.L.S.
           Lupton Library                                           Reference Assistant, Management & Economics Library
       University of Tennessee at Chattanooga                       Purdue University
       Nancy Ryan Prince, Ed.D.
                                                                    Mark Vonderembse, Ph.D.
       Adjunct Professor of Education
                                                                    Professor of Information Operations and Technology
       University of Tennessee at Chattanooga
                                                                       Management
       Mildred Golden Pryor, Ph.D.                                  University of Toledo (OH)
       Professor of Management
       Texas A & M University-Commerce                              Fraya Wagner-Marsh, D.B.A., SPHR
       Betty Jane Punnett, Ph.D.                                    Professor and Department Head, Management Department
       Professor of International Business and Management,          Eastern Michigan University
          Department of Management Studies
       University of the West Indies, Cave Hill Campus, Barbados    Bruce A. Walters, Ph.D.
                                                                    Assistant Professor of Management, Department
       Matthew Ross, M.B.A.                                            of Management and Information Systems
       Associate Marketing Manager                                  Louisiana Tech University
       Playcore Inc., Chattanooga TN
       Marcia J. Simmering, Ph.D.                                   Rhoda Wilburn
       Assistant Professor of Management, Department                Freelance Writer
          of Management and Information Systems                     Pinckney, MI
       College of Administration and Business
       Louisiana Tech University                                    Diana J. Wong-MingJi, Ph.D.
                                                                    Associate Professor of Management
       Andrea Anderson Schurr, M.L.S.
                                                                    Eastern Michigan University
       Assistant Professor and Head of Access Services,
          Lupton Library                                            Constantin Zopounidis, Ph.D.
       University of Tennessee, Chattanooga                         Professor of Financial Management and Operations Research,
       Joanie Sompayrac, M.B.A., CPA                                   Director of the Financial Engineering Laboratory
       UC Foundation Associate Professor of Accounting,                and Department Chair, Department of Production
          and Assistant Director, University Honors                    Engineering and Management
       University of Tennessee, Chattanooga                         Technical University of Crete, Greece




xx
     E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                                            GUIDE TO FUNCTIONAL-AREA READINGS


     Eighteen functional-area reading curricula are      Open and Closed Systems
outlined below. Items listed beneath each heading rep-   Operations Strategy
resent titles of specific essays in the EoM.              Opportunity Cost
                                                         Order-Winning and Order-Qualifying Criteria
                                                         Porter’s 5-Forces Model
1. CORPORATE PLANNING                                    Product Life Cycle and Industry Life Cycle
AND STRATEGIC MANAGEMENT                                 Production Planning and Scheduling
Aggregate Planning                                       Strategic Planning Failure
Brainstorming                                            Strategic Planning Tools
Business Continuity Planning                             Strategy Formulation
Business Plan                                            Strategy Implementation
Capacity Planning                                        Strategy in the Global Environment
Decision Making                                          Strategy Levels
Decision Rules and Decision Analysis                     SWOT Analysis
Decision Support Systems                                 Synergy
Diversification Strategy                                  Zero-Based Budgeting
Divestment
Downsizing and Rightsizing
Economies of Scale and Economies of Scope                2. EMERGING TOPICS IN MANAGEMENT
Exporting and Importing                                  Activity-Based Costing
Franchising                                              Affirmative Action
Free Trade Agreements and Trading Blocs                  Angels and Venture Capitalists
Futuring                                                 Artificial Intelligence
Gap Analysis                                             Assessment Centers
Generic Competitive Strategies                           Balanced Scorecard
Globalization                                            Bar Coding and Radio Frequency Identification
Goals and Goal Setting                                   Business Continuity Planning
Group Decision Making                                    Business Process Reengineering
Location Strategy                                        Cafeteria Plan—Flexible Benefits
Macroenvironmental Forces                                Cellular Manufacturing
Make-or-Buy Decisions                                    Chaos Theory
Manufacturing Resources Planning                         Coalition Building
Market Share                                             Complexity Theory
Mergers and Acquisitions                                 Concurrent Engineering
Miles and Snow Typology                                  Consulting
Multiple-Criteria Decision Making                        Contingency Approach to Management
New Product Development                                  Contingent Workers

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                                                         E N C Y C L O P E D I A   O F   M A N A G E M E N T
         Continuing Education and Lifelong Learning Trends   Cost Accounting
         Corporate Governance                                Creativity
         Corporate Social Responsibility                     Customer Relationship Management
         Creativity                                          Diversification Strategy
         Customer Relationship Management                    Domestic Management Societies and Associations
         Decision Support Systems                            Due Diligence
         Diversity                                           Economics
         Electronic Commerce                                 Economies of Scale and Economies of Scope
         Electronic Data Interchange and Electronic          Effectiveness and Efficiency
              Funds Transfer                                 Financial Issues for Managers
         Empathy                                             Financial Ratios
         Empowerment                                         First-Mover Advantage
         Enterprise Resource Planning                        Futuring
         Entrepreneurship                                    Gap Analysis
         Ergonomics                                          Generic Competitive Strategies
         Ethics                                              Income Statements
         Expatriates                                         Initial Public Offering
         Expert Systems                                      Innovation
         Five S Framework                                    Intellectual Property Rights
         Flexible Spending Accounts                          International Business
         Futuring                                            International Management Societies and Associations
         Government-University-Industry Partnerships         Intrapreneurship
         Handheld Computers                                  Inventory Management
         Health Savings Accounts                             Joint Ventures and Strategic Alliances
         Human Resource Information Systems                  Knowledge Management
         Innovation                                          Knowledge Workers
         Instant Messaging                                   Leveraged Buyouts
         Intellectual Property Rights                        Licensing and Licensing Agreements
         Intrapreneurship                                    Location Strategy
         Longitudinal Scenarios                              Macroenvironmental Forces
         Multiple-Criteria Decision Making                   Make-or-Buy Decisions
         Non-Compete Agreements                              Market Share
         Outsourcing and Offshoring                          Marketing Concept and Philosophy
         Popular Press Management Books                      Marketing Research
         Quality of Work Life                                Miles and Snow Typology
         Robotics                                            Mission and Vision Statements
         Spirituality in Leadership                          New Product Development
         Succession Planning                                 Non-Compete Agreements
         Telecommunications                                  Organizational Development
         Vendor Rating                                       Outsourcing and Offshoring
         Women and Minorities in Management                  Patents and Trademarks
         Work-Life Balance                                   Planning
                                                             Poison Pill Strategies
                                                             Popular Press Management Books
         3. ENTREPRENEURSHIP                                 Porter’s 5-Forces Model
         Angels and Venture Capitalists                      Pricing Policy and Strategy
         Balance Sheets                                      Problem Solving
         Brainstorming                                       Process Management
         Break-Even Point                                    Product Design
         Budgeting                                           Product Life Cycle and Industry Life Cycle
         Business Plan                                       Profit Sharing
         Business Structure                                  Research Methods and Processes
         Cafeteria Plan—Flexible Benefits                     Resumes and Cover Letter Trends
         Case Method of Analysis                             Scenario Planning
         Cash Flow Analysis and Statements                   Securities and Exchange Commission
         Competitive Advantage                               Shareholders
         Consumer Behavior                                   Stakeholders



xxii
       E N C Y C L O P E D I A   O F   M A N A G E M E N T
Strategic Planning Tools                         Succession Planning
Strategy Levels                                  Venture Capital
Succession Planning                              Zero-Based Budgeting
SWOT Analysis
Synergy
Technology Transfer                              5. GENERAL MANAGEMENT
Value Creation                                   Aggregate Planning
Venture Capital                                  The Art and Science of Management
Virtual Organizations                            Autonomy
                                                 Balanced Scorecard
                                                 Brainstorming
4. FINANCIAL MANAGEMENT                          Budgeting
AND ACCOUNTING ISSUES                            Business Plan
Activity-Based Costing                           Business Structure
Angels and Venture Capitalists                   Chain of Command Principle
Balance Sheets                                   Communication
Balanced Scorecard                               Competitive Advantage
Break-Even Point                                 Competitive Intelligence
Budgeting                                        Contingency Approach to Management
Business Continuity Planning                     Contingent Workers
Capacity Planning                                Continuous Improvement
Cash Flow Analysis and Statements                Corporate Governance
Corporate Social Responsibility                  Corporate Social Responsibility
Cost Accounting                                  Creativity
Cost-Volume-Profit Analysis                       Decision Making
Debt vs. Equity Financing                        Delegation
Domestic Management Societies and Associations   Diversity
Due Diligence                                    Divestment
Economics                                        Downsizing and Rightsizing
Electronic Data Interchange and Electronic       Economics
      Funds Transfer                             Effectiveness and Efficiency
Employee Benefits                                 Electronic Commerce
Employee Compensation                            Empowerment
Executive Compensation                           Financial Issues for Managers
Financial Issues for Managers                    Financial Ratios
Financial Ratios                                 Forecasting
Flexible Spending Accounts                       Generic Competitive Strategies
Health Savings Accounts                          Globalization
Income Statements                                Goals and Goal Setting
Initial Public Offering                          Human Resource Management
Internal Auditing                                Innovation
International Management Societies               International Cultural Differences
      and Associations                           International Management
International Monetary Fund                      Knowledge Management
Inventory Types                                  Leadership Styles and Bases of Power
Leveraged Buyouts                                Leadership Theories and Studies
Licensing and Licensing Agreements               Line-and-Staff Organizations
Make-or-Buy Decisions                            Logistics and Transportation
Management Control                               Management Control
Nonprofit Organizations                           Management Functions
Opportunity Cost                                 Management Information Systems
Patents and Trademarks                           Management Science
Profit Sharing                                    Management Styles
Purchasing and Procurement                       Management Thought
Risk Management                                  Managing Change
Securities and Exchange Commission               Mission and Vision Statements
Stakeholders                                     Motivation and Motivation Theory



                                                                                                       xxiii
                                                 E N C Y C L O P E D I A   O F   M A N A G E M E N T
         Operations Management                               Executive Compensation
         Organization Theory                                 Flexible Spending Accounts
         Organizational Analysis and Planning                Group Dynamics
         Organizational Behavior                             Health Savings Accounts
         Organizational Chart                                Human Resource Information Systems
         Organizational Culture                              Human Resource Management
         Organizational Learning                             International Cultural Differences
         Organizational Structure                            Japanese Management
         Organizational Development                          Job Analysis
         Organizing                                          Knowledge Workers
         Participative Management                            Listening
         Patents and Trademarks                              Meeting Management
         Pioneers of Management                              Mentoring
         Planning                                            Morale
         Process Management                                  Motivation and Motivation Theory
         Quality and Total Quality Management                Nepotism
         Reactive vs. Proactive Change                       Non-Compete Agreements
         Strategy Formulation                                Organizational Behavior
         Strategy Implementation                             Organizational Chart
         Strategy in the Global Environment                  Organizational Culture
         Strategy Levels                                     Performance Measurement
         Succession Planning                                 Personality and Personality Tests
         Training Delivery Methods                           Professional Readings for Managers
         Trends in Organizational Change                     Quality of Work Life
                                                             Reinforcement Theory
                                                             Resumes and Cover Letter Trends
         6. HUMAN RESOURCES MANAGEMENT                       Safety in the Workplace
         Affirmative Action                                   Sensitivity Training
         Apprenticeship Programs                             Stress
         Artificial Intelligence                              Succession Planning
         Assessment Centers                                  Sweatshops
         Attribution Theory                                  Task Analysis
         Autonomy                                            Teams and Teamwork
         Body Language                                       Theory X and Theory Y
         Brainstorming                                       Theory Z
         Cafeteria Plan—Flexible Benefits                     Time Management
         Chain of Command Principle                          Training Delivery Methods
         Coalition Building                                  Videoconferencing
         Communication                                       Virtual Organizations
         Contingent Workers                                  Women and Minorities in Management
         Continuing Education and Lifelong Learning Trends   Work-Life Balance
         Creativity
         Discrimination
         Diversity                                           7. INNOVATION AND TECHNOLOGY
         Downsizing and Rightsizing                          Artificial Intelligence
         Electronic Data Interchange and Electronic          Bar Coding and Radio Frequency Identification
              Funds Transfer                                 Communication
         Empathy                                             Competitive Intelligence
         Employee Assistance Programs                        Complexity Theory
         Employee Benefits                                    Computer Networks
         Employee Compensation                               Computer Security
         Employee Evaluation and Performance Appraisals      Computer-Aided Design and Manufacturing
         Employee Handbook and Orientation                   Computer-Integrated Manufacturing
         Employee Recruitment                                Data Processing and Data Management
         Employee Screening and Selection                    Decision Making
         Employment Law and Compliance                       Decision Rules and Decision Analysis
         Empowerment                                         Decision Support Systems
         Ergonomics                                          Delegation


xxiv
       E N C Y C L O P E D I A   O F   M A N A G E M E N T
Electronic Commerce                                   Virtual Organizations
Electronic Data Interchange and Electronic            World-Class Manufacturer
     Funds Transfer
Experience and Learning Curves
Expert Systems                                        9. LEADERSHIP
Forecasting                                           The Art and Science of Management
Handheld Computers                                    Assessment Centers
Innovation                                            Attribution Theory
The Internet                                          Business Continuity Planning
Knowledge Management                                  Communication
Knowledge Workers                                     Contingency Approach to Management
Management Information Systems                        Corporate Governance
Product Design                                        Corporate Social Responsibility
Program Evaluation and Review Technique               Delegation
     and Critical Path Method                         Domestic Management Societies and Associations
Project Management                                    Entrepreneurship
Robotics                                              Executive Compensation
Technological Forecasting                             Expert Systems
Technology Management                                 Goals and Goal Setting
Technology Transfer                                   Human Resource Management
Telecommunications                                    International Management Societies and Associations
Virtual Organizations                                 Japanese Management
                                                      Job Analysis
                                                      Joint Ventures and Strategic Alliances
8. INTERNATIONAL/GLOBAL                               Knowledge Management
MANAGEMENT                                            Knowledge Workers
Apprenticeship Programs                               Leadership Styles and Bases of Power
Competitive Advantage                                 Leadership Theories and Studies
Contingent Workers                                    Line-and-Staff Organizations
Diversity                                             Listening
European Union                                        Management and Executive Development
Expatriates                                           Management Functions
Exporting and Importing                               Management Levels
First-Mover Advantage                                 Management Styles
Franchising                                           Management Thought
Free Trade Agreements and Trading Blocs               Managing Change
Futuring                                              Mechanistic Organizations
Globalization                                         Mentoring
International Business                                Mission and Vision Statements
International Cultural Differences                    Morale
International Management                              Motivation and Motivation Theory
International Management Societies and Associations   Open and Closed Systems
International Monetary Fund                           Operant Conditioning
International Organization for Standards              Organizational Culture
Japanese Management                                   Participative Management
Licensing and Licensing Agreements                    Personality and Personality Tests
Location Strategy                                     Pioneers of Management
Macroenvironmental Forces                             Problem Solving
Outsourcing and Offshoring                            Reinforcement Theory
Patents and Trademarks                                Sensitivity Training
Popular Press Management Books                        Span of Control
Professional Readings for Managers                    Spirituality in Leadership
Profit Sharing                                         Strategy Formulation
Strategy in the Global Environment                    Succession Planning
Sweatshops                                            Teams and Teamwork
Transnational Organization                            Theory X and Theory Y
Value-Added Tax                                       Theory Z
Vendor Rating                                         Women and Minorities in Management


                                                                                                             xxv
                                                      E N C Y C L O P E D I A    O F   M A N A G E M E N T
         10. LEGAL ISSUES                                      Electronic Commerce
         Affirmative Action                                     Electronic Data Interchange and Electronic Funds
         Business Continuity Planning                               Transfer
         Cafeteria Plan—Flexible Benefits                       Handheld Computers
         Computer Networks                                     Human Resource Information Systems
         Computer Security                                     The Internet
         Contingent Workers                                    Management Information Systems
         Corporate Governance                                  Management Science
         Corporate Social Responsibility                       Manufacturing Resources Planning
         Discrimination                                        Models and Modeling
         Diversity                                             Multiple-Criteria Decision Making
         Downsizing and Rightsizing                            Object-Oriented Programming
         Due Diligence                                         Operating System
         Electronic Data Interchange and Electronic            Operations Management
              Funds Transfer                                   Operations Scheduling
         Employee Assistance Programs                          Scenario Planning
         Employee Benefits                                      Statistical Process Control and Six Sigma
         Employee Compensation                                 Systems Design, Development, and Implementation
         Employee Evaluation and Performance Appraisals        Technological Forecasting
         Employee Recruitment                                  Technology Management
         Employee Screening and Selection                      Technology Transfer
         Employment Law and Compliance
         Ethics
                                                               12. MANAGEMENT SCIENCE
         Executive Compensation
         Human Resource Management
                                                               AND OPERATIONS RESEARCH
         Intellectual Property Rights                          Bar Coding and Radio Frequency Identification
         Job Analysis                                          Business Process Reengineering
         Leveraged Buyouts                                     Computer-Aided Design and Manufacturing
         Management Audit                                      Concurrent Engineering
         Management Control                                    Decision Rules and Decision Analysis
         Mergers and Acquisitions                              Decision Support Systems
         Nepotism                                              Distribution and Distribution Requirements Planning
         Non-Compete Agreements                                Expert Systems
         Patents and Trademarks                                Location Strategy
         Personality and Personality Tests                     Logistics and Transportation
         Quality of Work Life                                  Maintenance
         Risk Management                                       Make-or-Buy Decisions
         Safety in the Workplace                               Manufacturing Resources Planning
         Stress                                                Models and Modeling
         Succession Planning                                   Multiple-Criteria Decision Making
         Sweatshops                                            New Product Development
         Technology Transfer                                   Operating System
         Women and Minorities in Management                    Operations Management
                                                               Operations Scheduling
                                                               Operations Strategy
         11. MANAGEMENT INFORMATION                            Product Design
         SYSTEMS                                               Production Planning and Scheduling
         Balanced Scorecard                                    Productivity Concepts and Measures
         Bar Coding and Radio Frequency Identification          Product-Process Matrix
         Complexity Theory                                     Program Evaluation and Review Technique and
         Computer Networks                                          Critical Path Method
         Computer Security                                     Project Management
         Computer-Aided Design and Manufacturing               Purchasing and Procurement
         Computer-Integrated Manufacturing                     Quality and Total Quality Management
         Data Processing and Data Management                   Research Methods and Processes
         Decision Rules and Decision Analysis                  Reverse Supply Chain Logistics
         Decision Support Systems                              Scenario Planning
         Distribution and Distribution Requirements Planning   Service Operations


xxvi
       E N C Y C L O P E D I A   O F   M A N A G E M E N T
Service Process Matrix                            Coalition Building
Simulation                                        Communication
Statistical Process Control and Six Sigma         Consulting
Statistics                                        Contingency Approach to Management
Systems Analysis                                  Continuing Education and Lifelong Learning Trends
Systems Design, Development, and Implementation   Continuous Improvement
Technology Transfer                               Creativity
Warehousing and Warehouse Management              Customer Relationship Management
World-Class Manufacturer                          Delegation
                                                  Diversity
                                                  Empathy
13. PERFORMANCE MEASURES                          Employee Assistance Programs
AND ASSESSMENT                                    Empowerment
Activity-Based Costing                            Entrepreneurship
Balance Sheets                                    Facilitator
Balanced Scorecard                                Feedback
Benchmarking                                      Goals and Goal Setting
Break-Even Point                                  Group Dynamics
Budgeting                                         Intrapreneurship
Cash Flow Analysis and Statements                 Knowledge Workers
Continuous Improvement                            Leadership Styles and Bases of Power
Cost Accounting                                   Listening
Cost-Volume-Profit Analysis                        Managing Change
Cycle Time                                        Meeting Management
Debt vs. Equity Financing                         Mentoring
Due Diligence                                     Morale
Effectiveness and Efficiency                       Motivation and Motivation Theory
Executive Compensation                            Multimedia
Financial Issues for Managers                     Organizing
Financial Ratios                                  Participative Management
Forecasting                                       Personality and Personality Tests
Gap Analysis                                      Planning
Goals and Goal Setting                            Popular Press Management Books
Management Audit                                  Problem Solving
Management Control                                Professional Readings for Managers
Management Information Systems                    Profit Sharing
Market Share                                      Reactive vs. Proactive Change
Multiple-Criteria Decision Making                 Resumes and Cover Letter Trends
Nepotism                                          Safety in the Workplace
Order-Winning and Order-Qualifying Criteria       Sensitivity Training
Performance Measurement                           Spirituality in Leadership
Pricing Policy and Strategy                       Strategic Planning Tools
Profit Sharing                                     Stress
Simulation                                        Succession Planning
Stakeholders                                      SWOT Analysis
Value Analysis                                    Teams and Teamwork
Value Chain Management                            Time Management
Value Creation                                    Trends in Organizational Change
Vendor Rating                                     Value Creation
Zero-Based Budgeting
Zero Sum Game
                                                  15. PRODUCTION AND OPERATIONS
                                                  MANAGEMENT
14. PERSONAL GROWTH AND                           Activity-Based Costing
DEVELOPMENT FOR MANAGERS                          Aggregate Planning
The Art and Science of Management                 Bar Coding and Radio Frequency Identification
Body Language                                     Benchmarking
Brainstorming                                     Break-Even Point


                                                                                                        xxvii
                                                  E N C Y C L O P E D I A   O F   M A N A G E M E N T
           Bundled Goods and Services                            Simulation
           Business Process Reengineering                        Statistical Process Control and Six Sigma
           Cellular Manufacturing                                Statistics
           Computer-Aided Design and Manufacturing               Supply Chain Management
           Computer-Integrated Manufacturing                     Synergy
           Concurrent Engineering                                Teams and Teamwork
           Continuous Improvement                                Technological Forecasting
           Cost-Volume-Profit Analysis                            Technology Management
           Decision Rules and Decision Analysis                  Technology Transfer
           Decision Support Systems                              Theory of Constraints
           Distribution and Distribution Requirements Planning   Time-Based Competition
           Domestic Management Societies and Associations        Warehousing and Warehouse Management
           Economic Census                                       World-Class Manufacturer
           Five S Framework
           Flexible Manufacturing
           Focused Factory                                       16. QUALITY MANAGEMENT AND TOTAL
           Forecasting                                           QUALITY MANAGEMENT
           Government-University-Industry Partnerships           Communication
           Industrial Relations                                  Customer Relationship Management
           International Management Societies and Associations   Domestic Management Societies and Associations
           Inventory Management                                  Five S Framework
           Inventory Types                                       Gap Analysis
           Japanese Management                                   Goals and Goal Setting
           Layout                                                Innovation
           Lean Manufacturing and Just-in-Time Production        International Management Societies and Associations
           Location Strategy                                     Japanese Management
           Logistics and Transportation                          Management Awards
           Maintenance                                           Manufacturing Resources Planning
           Make-or-Buy Decisions                                 Marketing Research
           Management Awards                                     Operations Strategy
           Manufacturing Resources Planning                      Opportunity Cost
           Market Share                                          Order-Winning and Order-Qualifying Criteria
           New Product Development                               Outsourcing and Offshoring
           Operations Management                                 Participative Management
           Operations Scheduling                                 Popular Press Management Books
           Operations Strategy                                   Productivity Concepts and Measures
           Order-Winning and Order-Qualifying Criteria           Professional Readings for Managers
           Outsourcing and Offshoring                            Quality and Total Quality Management
           Participative Management                              Quality Gurus
           Poka-Yoke                                             Quality of Work Life
           Popular Press Management Books                        Statistical Process Control and Six Sigma
           Porter’s 5-Forces Model                               Strategic Planning Tools
           Production Planning and Scheduling                    Teams and Teamwork
           Productivity Concepts and Measures                    Value Analysis
           Product-Process Matrix                                Value Creation
           Program Evaluation and Review Technique               Vendor Rating
                and Critical Path Method                         World-Class Manufacturer
           Project Management
           Purchasing and Procurement
           Quality and Total Quality Management                  17. SUPPLY CHAIN MANAGEMENT
           Quality Gurus                                         Activity-Based Costing
           Reverse Supply Chain Logistics                        Business Process Reengineering
           Robotics                                              Capacity Planning
           Safety in the Workplace                               Cellular Manufacturing
           Service Factory                                       Coalition Building
           Service Industry                                      Communication
           Service Operations                                    Competitive Advantage
           Service Process Matrix                                Competitive Intelligence


xxviii
         E N C Y C L O P E D I A   O F   M A N A G E M E N T
Computer Networks                                     Business Continuity Planning
Computer-Integrated Manufacturing                     Concurrent Engineering
Conflict Management and Negotiation                    Conflict Management and Negotiation
Customer Relationship Management                      Consulting
Cycle Time                                            Contingency Approach to Management
Decision Support Systems                              Continuing Education and Lifelong Learning Trends
Distribution and Distribution Requirements Planning   Continuous Improvement
Economies of Scale and Economies of Scope             Corporate Social Responsibility
Effectiveness and Efficiency                           Creativity
Electronic Commerce                                   Delegation
Electronic Data Interchange and Electronic            Domestic Management Societies and Associations
     Funds Transfer                                   Downsizing and Rightsizing
Enterprise Resource Planning                          Employee Evaluation and Performance Appraisals
Expert Systems                                        Employee Handbook and Orientation
Group Dynamics                                        Goals and Goal Setting
Industrial Relations                                  Government-University-Industry Partnerships
Inventory Management                                  Group Decision Making
Inventory Types                                       Human Resource Management
Joint Ventures and Strategic Alliances                Innovation
Lean Manufacturing and Just-in-Time Production        Instant Messaging
Location Strategy                                     International Cultural Differences
Logistics and Transportation                          International Management Societies and Associations
Make-or-Buy Decisions                                 Job Analysis
Manufacturing Resources Planning                      Knowledge Management
Market Share                                          Knowledge Workers
Multiple-Criteria Decision Making                     Listening
New Product Development                               Management and Executive Development
Operations Management                                 Management Audit
Operations Scheduling                                 Marketing Communication
Operations Strategy                                   Meeting Management
Organic Organizations                                 Mission and Vision Statements
Organizing                                            Morale
Poka-Yoke                                             Motivation and Motivation Theory
Problem Solving                                       Multimedia
Process Management                                    Multiple-Criteria Decision Making
Product Design                                        Organizational Culture
Product Life Cycle and Industry Life Cycle            Organizational Learning
Production Planning and Scheduling                    Organizing
Productivity Concepts and Measures                    Participative Management
Product-Process Matrix                                Personality and Personality Tests
Purchasing and Procurement                            Popular Press Management Books
Quality and Total Quality Management                  Problem Solving
Reverse Supply Chain Logistics                        Professional Readings for Managers
Risk Management                                       Project Management
Span of Control                                       Safety in the Workplace
Stakeholders                                          Sensitivity Training
Teams and Teamwork                                    Simulation
Vendor Rating                                         Stress
Warehousing and Warehouse Management                  Succession Planning
                                                      SWOT Analysis
                                                      Teams and Teamwork
18. TRAINING AND DEVELOPMENT                          Training Delivery Methods
Apprenticeship Programs                               Videoconferencing
Artificial Intelligence                                Virtual Organizations
Assessment Centers                                    Women and Minorities in Management
Autonomy                                              Work-Life Balance




                                                                                                            xxix
                                                      E N C Y C L O P E D I A   O F   M A N A G E M E N T
                                                      A

                                                             WHAT IS ACTIVITY-BASED COSTING?
                                                                   In contrast to traditional cost-accounting systems,
 ACQUISITIONS
                                                             ABC systems first accumulate overhead costs for each
SEE:       Mergers and Acquisitions
                                                             organizational activity, and then assign the costs of the
                                                             activities to the products, services, or customers (cost
                                                             objects) causing that activity. As one might expect, the
                                                             most critical aspect of ABC is activity analysis.
                                                             Activity analysis is the processes of identifying appro-
                                                             priate output measures of activities and resources (cost
                                                             drivers) and their effects on the costs of making a
 ACTIVITY-BASED COSTING                                      product or providing a service. Significantly, as dis-
                                                             cussed in the next section, activity analysis provides
     To support compliance with financial reporting           the foundation for remedying the distortions inherent
requirements, a company’s traditional cost-accounting        in traditional cost-accounting systems.
system is often articulated with its general ledger
system. In essence, this linkage is grounded in cost
allocation. Typically, costs are allocated for either val-
                                                             TRADITIONAL COST-ACCOUNTING
uation purposes (i.e., financial statements for external
                                                             SYSTEMS VERSUS ABC
uses) or decision-making purposes (i.e., internal uses)
or both. However, in certain instances costs also are             Geared toward compliance with financial report-
allocated for cost-reimbursement purposes (e.g., hos-        ing requirements, traditional cost-accounting systems
pitals and defense contractors).                             often allocate costs based on single-volume measures
     The traditional approach to cost-allocation con-        such as direct-labor hours, direct-labor costs, or
sists of three basic steps: accumulate costs within a        machine hours. While using a single volume measure
production or nonproduction department; allocate             as an overall cost driver seldom meets the cause-and-
nonproduction department costs to production depart-         effect criterion desired in cost allocation, it provides a
ments; and allocate the resulting (revised) production       relatively cheap and convenient means of complying
department costs to various products, services, or cus-      with financial reporting requirements.
tomers. Costs derived from this traditional allocation            In contrast to traditional cost-accounting systems,
approach suffer from several defects that can result in      ABC systems are not inherently constrained by the
distorted costs for decision-making purposes. For            tenets of financial reporting requirements. Rather,
example, the traditional approach allocates the cost of      ABC systems have the inherent flexibility to provide
idle capacity to products. Accordingly, such products        special reports to facilitate management decisions
are charged for resources that they did not use.             regarding the costs of activities undertaken to design,
Seeking to remedy such distortions, many companies           produce, sell, and deliver a company’s products or
have adopted a different cost-allocation approach            services. At the heart of this flexibility is the fact that
called activity-based costing (ABC).                         ABC systems focus on accumulating costs via several

                                                                                                                          1
                                                             E N C Y C L O P E D I A       O F   M A N A G E M E N T
                               key activities, whereas traditional cost allocation                 company’s shared costs (i.e., indirect costs) are




    ACTIVITY-BASED COSTING
                               focuses on accumulating costs via organizational                    becoming the most significant portion of total
                               units. By focusing on specific activities, ABC systems               cost.
                               provide superior cost allocation information—espe-
                               cially when costs are caused by non-volume-based                2. Since the rapid pace of technological change
                               cost drivers. Even so, traditional cost-accounting sys-            continues to reduce product life cycles, com-
                               tems will continue to be used to satisfy conventional              panies do not have time to make price or cost
                               financial reporting requirements. ABC systems will                  adjustments once costing errors are detected.
                               continue to supplement, rather than replace, tradi-             3. Companies with inaccurate cost measure-
                               tional cost-accounting systems.                                    ments tend to lose bids due to over-costed
                                                                                                  products, incur hidden losses due to under-
                                                                                                  costed products, and fail to detect activities
                               IMPLEMENTATION                                                     that are not cost-effective.

                                    In most cases, a company’s traditional cost-               4. Since computer technology costs are decreas-
                               accounting system adequately measures the direct                   ing, the price of developing and operating
                               costs of products and services, such as material and               ABC systems also has decreased.
                               labor. As a result, ABC implementation typically
                                                                                                   In 2004 John Karolefski cited the following ben-
                               focuses on indirect costs, such as manufacturing over-
                                                                                              efits realized by foodservice distributors and restau-
                               head and selling, general, and administrative costs.
                                                                                              rants that have converted to activity-based costing
                               Given this focus, the primary goal of ABC implemen-
                                                                                              practices:
                               tation is to reclassify most, if not all, indirect costs (as
                               specified by the traditional cost-accounting system) as          1. Understanding the true costs and productiv-
                               direct costs. As a result of these reclassifications, the           ity of capital equipment
                               accuracy of the costs is greatly increased.
                                                                                               2. Understanding which products are most
                                   According to Ray H. Garrison and Eric W.                       profitable and where to focus sales efforts
                               Noreen, there are six basic steps required to imple-            3. More accurate pricing and determination of
                               ment an ABC system:                                                minimum order size
                                1. Identify and define activities and activity                  4. Less time, money, and effort spent on the
                                   pools                                                          wrong products
                                2. Directly trace costs to activities (to the extent                Implementation costs are an obstacle to some,
                                   feasible)                                                  who feel that ABC is just a fad or will show little ben-
                                                                                              efit. According to Karolefski, “ABC works better if
                                3. Assign costs to activity cost pools                        it’s kept simple” (2004, pp. 18). Nevertheless, when
                                4. Calculate activity rates                                   implemented properly ABC yields benefits to the
                                                                                              company, its business partners, and to consumers.
                                5. Assign costs to cost objects using the activ-
                                   ity rates and activity measures previously
                                   determined                                                 ACTIVITY-BASED MANAGEMENT
                                6. Prepare and distribute management reports                       In order to manage costs, a manager should focus
                                                                                              on the activities that give rise to such costs. Accordingly,
                                                                                              given the activity focus of ABC, managers should
                               COSTS AND BENEFITS                                             implement ABC systems in order to facilitate cost
                                                                                              management. Using ABC systems to improve finan-
                                    While ABC systems are rather complex and                  cial management is called activity-based management
                               costly to implement, Charles T. Horngren, Gary L.              (ABM). The goal of ABM is to improve the value
                               Sundem, and William O. Stratton suggest that many              received by customers and, in doing so, to improve
                               companies, in both manufacturing and nonmanufac-               profits.
                               turing industries, are adopting ABC systems for a
                                                                                                   The key to ABM success is distinguishing
                               variety of reasons:
                                                                                              between value-added costs and non-value-added costs.
                                1. Margin accuracy for individual products and                A value-added cost is the cost of an activity that cannot
                                   services, as well as customer classifications, is           be eliminated without affecting a product’s value to the
                                   becoming increasingly difficult to achieve                  customer. In contrast, a non-value-added cost is the
                                   given that direct labor is rapidly being replaced          cost of an activity that can be eliminated without
                                   with automated equipment. Accordingly, a                   diminishing value. Some value-added costs are always


2
                             E N C Y C L O P E D I A       O F    M A N A G E M E N T
necessary, as long as the activity that drives such costs         and African Americans. Affirmative action plans exist




                                                                                                                             AFFIRMATIVE ACTION
is performed efficiently. However, non-value-added                 in the private and public sectors and involve the hiring
costs should always be minimized because they are                 of job applicants, the selection of contractors for gov-
assumed to be unnecessary. Examples of non-valued-                ernment projects, and the admission of students to
added activities include storing and handling invento-            undergraduate and graduate educational institutions.
ries; transporting raw materials or partly finished                Some employers, educational institutions, and gov-
products, such as work-in-process inventory items,                ernment agencies are legally required by executive
from one part of the plant to another; and redundan-              order to have affirmative action plans. Others may be
cies in production-line configurations or other activi-            ordered to develop affirmative action plans as part of a
ties. Oftentimes, such non-value activities can be                court finding that they have discriminated against indi-
reduced or eliminated by careful redesign of the plant            viduals or groups. Still others voluntarily develop such
layout and the production process.                                plans because they believe it is good public policy, or
                                                                  that it provides them with a competitive advantage.
SEE ALSO: Cost Accounting; Inventory Management; Inventory
          Types; Process Management; Quality and Total
          Quality Management; Time-Based Competition
                                                                  ORIGINS AND DEVELOPMENT
                                            Michael S. Luehlfing   OF AFFIRMATIVE ACTION
                                    Revised by Wendy H. Mason
                                                                       Although the roots of affirmative action in the
                                                                  United States go back to the nineteenth century,
FURTHER READING:                                                  modern affirmative action plans originated with exec-
                                                                  utive orders issued by Presidents John F. Kennedy,
Brimson, James A. Activity Accounting: An Activity-Based          Lyndon B. Johnson, and Richard M. Nixon in the
Costing Approach. New York: Wiley, 1997.
                                                                  1960s. Executive Order 11246, signed by President
Cokins, Gary. “ABC Can Spell a Simpler, Coherent View of          Johnson in 1965, required government agencies, con-
Costs.” Computing Canada 24, no. 32 (September 1998): 34–35.      tractors, and subcontractors to undertake affirmative
Cokins, Gary. “Why Is Traditional Accounting Failing              action to remedy past discrimination in education,
Managers?” Hospital Material Management Quarterly 20, no. 2       training, and employment. In 1969 President Nixon
(November 1998): 72–80.                                           further strengthened affirmative action through
Daly, John L. Pricing for Profitability: Activity-Based Pricing    Executive Order 11478, which required government
for Competitive Advantage. New York: Wiley, 2001.                 contractors to develop goals for increasing the repre-
Dolan, Pat, and Karen I. Schreiber. “Getting Started With ABC.”   sentation of historically disadvantaged groups and
Supply House Times 40, no. 4 (June 1997): 41–52.                  timetables for achieving them.
Garrison, Ray H., and Eric W. Noreen. Managerial Accounting.           As amended in subsequent years, these executive
9th ed. Boston: Irwin McGraw-Hill, 1999.                          orders eventually required all government agencies
Hicks, Douglas T. Activity-Based Costing: Making It Work for      and contractors with annual contracts of $10,000 or
Small and Mid-Sized Companies. 2nd ed. New York: Wiley,           more to undertake affirmative action. They also
2002.                                                             required agencies and contractors with 50 employees
Horngren, Charles T., Gary L. Sundem, and William O. Stratton.    and government business of $50,000 or more to have
Introduction to Management Accounting. 11th ed. Upper Saddle      written affirmative action plans. These written plans
River, NJ: Prentice Hall, 1999.                                   must include a utilization analysis, which compares
Karolefski, John. “Time Is Money: How Much Are Your
                                                                  the composition of the entity’s workforce to the pro-
Customers Costing You?” Food Logistics 15 June 2004, 18.          portion of women and minorities in the available labor
                                                                  market. If underutilization is found, the agency or con-
Lindahl, Frederick W. “Activity-Based Costing Implementation
                                                                  tractor must set specific goals and timetables for rem-
and Adaptation.” Human Resource Planning 20, no. 2 (1997):
62–66.                                                            edying the “imbalance” and develop specific plans for
                                                                  how this will be done. The use of affirmative action
                                                                  plans expanded greatly in the twenty years after the
                                                                  executive orders. Because most educational institu-
                                                                  tions and large organizations receive money and/or do
                                                                  business with the government, affirmative action plans
                                                                  are very common.
 AFFIRMATIVE ACTION
                                                                  TYPES OF AFFIRMATIVE ACTION
     Affirmative action is a descriptive phrase for poli-
cies and programs designed to correct the effects of                  In the employment context, affirmative action
past discrimination and increase the representation of            plans should be distinguished from equal employment
historically disadvantaged groups, including women                opportunity (EEO) programs. EEO efforts focus on


                                                                                                                                                  3
                                                                  E N C Y C L O P E D I A      O F   M A N A G E M E N T
                           the process involved in hiring and promoting employ-          Naff, Katherine C. “From Bakke to Grutter and Gratz: The




    AGGREGATE PLANNING
                           ees and attempt to ensure that there is a level playing       Supreme Court as a Policymaking Institution.” The Review of
                                                                                         Policy Research 21, no. 3 (2004): 405–427.
                           field for all involved. Conversely, affirmative action
                           programs focus on the outcomes of recruiting, hiring,         Office of Federal Contract Compliance Programs. U.S. Depart-
                           and promotion processes, and involve additional               ment of Labor, Employment Standards Administration, Office of
                           efforts to increase the proportion of women and               Federal Contract Compliance Programs. Available from <http://
                                                                                         www.dol.gov/esa/ofccp>.
                           minorities that are hired and promoted.
                                There are various types of affirmative action
                           plans. Some plans simply try to increase the number
                           of applicants from underrepresented groups. Such
                           plans, which are sometimes called “pure” plans or
                           “opportunity enhancement” plans, involve proactive
                           efforts to locate and recruit a larger number of indi-         AGGREGATE PLANNING
                           viduals from the affected groups. Other affirmative
                           action plans can be termed “limited preference” or                 Aggregate planning is the process of developing,
                           “tiebreak” plans. They go a step further than pure affir-      analyzing, and maintaining a preliminary, approxi-
                           mative action plans by considering race or gender as a        mate schedule of the overall operations of an organi-
                           “plus” factor when evaluating the qualifications of            zation. The aggregate plan generally contains targeted
                           applicants who essentially are equally qualified.              sales forecasts, production levels, inventory levels,
                           Finally, the most aggressive affirmative action plans          and customer backlogs. This schedule is intended to
                           are “strong preferential treatment” or “quota” plans.         satisfy the demand forecast at a minimum cost.
                           In these plans, qualified members of a disadvantaged           Properly done, aggregate planning should minimize
                           group may be preferred to more highly qualified indi-          the effects of shortsighted, day-to-day scheduling, in
                           viduals who are not in the affected group. Generally          which small amounts of material may be ordered one
                           speaking, the more aggressive the affirmative action           week, with an accompanying layoff of workers, fol-
                           strategy employed, the more likely it is to generate          lowed by ordering larger amounts and rehiring work-
                           challenges and the more difficult it is to defend legally.     ers the next week. This longer-term perspective on
                                                                                         resource use can help minimize short-term require-
                                Affirmative action plans are quite controversial
                                                                                         ments changes with a resulting cost savings.
                           and have been the subject of hundreds of lawsuits, sev-
                           eral of which have gone to the U.S. Supreme Court.                  In simple terms, aggregate planning is an attempt
                           Lawsuits filed by those who believe they have been             to balance capacity and demand in such a way that
                           unfairly treated by affirmative action plans usually are       costs are minimized. The term “aggregate” is used
                           called “reverse discrimination” lawsuits. Although the        because planning at this level includes all resources
                           courts generally have agreed that affirmative action is        “in the aggregate;” for example, as a product line or
                           legal if it meets certain criteria, court decisions in the    family. Aggregate resources could be total number of
                           1990s and early 2000s seemed to reflect a trend toward         workers, hours of machine time, or tons of raw mate-
                           restricting the more aggressive types of affirmative           rials. Aggregate units of output could include gallons,
                           action programs, which may include preferences                feet, pounds of output, as well as aggregate units
                           based on race or gender. Affirmative action is certain         appearing in service industries such as hours of serv-
                           to be a contentious issue for years to come.                  ice delivered, number of patients seen, etc.
                                                                                              Aggregate planning does not distinguish among
                           SEE ALSO: Discrimination; Diversity
                                                                                         sizes, colors, features, and so forth. For example, with
                                                                           Tim Barnett   automobile manufacturing, aggregate planning would
                                                                                         consider the total number of cars planned for not the
                           FURTHER READING:                                              individual models, colors, or options. When units of
                                                                                         aggregation are difficult to determine (for example,
                           Gomez-Mejia, Luis R., David B. Balkin, and Robert L. Cardy.
                                                                                         when the variation in output is extreme) equivalent
                           Managing Human Resources. 4th ed. Upper Saddle River, NJ:
                           Pearson/Prentice Hall, 2004.
                                                                                         units are usually determined. These equivalent units
                                                                                         could be based on value, cost, worker hours, or some
                           Heilman, M. E., McCullough, W. F., & Gilbert, D. “The Other   similar measure.
                           Side of Affirmative Action: Reactions of Nonbeneficiaries to
                           Sex-Based Preferential Selection.” Journal of Applied              Aggregate planning is considered to be
                           Psychology 81, no. 4 (1996): 346–357.                         intermediate-term (as opposed to long- or short-term)
                           Kovach, Kenneth A., David A. Kravitz, and Allen A. Hughes.
                                                                                         in nature. Hence, most aggregate plans cover a period
                           “Affirmative Action: How Can We Be So Lost When We Don’t       of three to 18 months. Aggregate plans serve as a foun-
                           Even Know Where We Are Going?” Labor Law Journal 55, no. 1    dation for future short-range type planning, such as
                           (2004): 53–62.                                                production scheduling, sequencing, and loading.


4
                         E N C Y C L O P E D I A       O F   M A N A G E M E N T
The master production schedule (MPS) used in mate-             week, firms can create a temporary increase




                                                                                                                     AGGREGATE PLANNING
rial requirements planning (MRP) has been described            in capacity without the added expense of
as the aggregate plan “disaggregated.”                         hiring additional workers.
     Steps taken to produce an aggregate plan begin         3. Part-time or casual labor. By utilizing tem-
with the determination of demand and the determina-            porary workers or casual labor (workers who
tion of current capacity. Capacity is expressed as total       are considered permanent but only work
number of units per time period that can be produced           when needed, on an on-call basis, and typi-
(this requires that an average number of units be com-         cally without the benefits given to full-time
puted since the total may include a product mix utiliz-        workers).
ing distinctly different production times). Demand is       4. Inventory. Finished-goods inventory can be
expressed as total number of units needed. If the two          built up in periods of slack demand and then
are not in balance (equal), the firm must decide                used to fill demand during periods of high
whether to increase or decrease capacity to meet               demand. In this way no new workers have to
demand or increase or decrease demand to meet                  be hired, no temporary or casual labor is
capacity. In order to accomplish this, a number of             needed, and no overtime is incurred.
options are available.
                                                            5. Subcontracting. Frequently firms choose to
     Options for situations in which demand needs to
                                                               allow another manufacturer or service
be increased in order to match capacity include:
                                                               provider to provide the product or service to
 1. Pricing. Varying pricing to increase demand                the subcontracting firm’s customers. By sub-
    in periods when demand is less than peak.                  contracting work to an alternative source,
    For example, matinee prices for movie the-                 additional capacity is temporarily obtained.
    aters, off-season rates for hotels, weekend             6. Cross-training. Cross-trained employees
    rates for telephone service, and pricing for               may be able to perform tasks in several oper-
    items that experience seasonal demand.                     ations, creating some flexibility when sched-
 2. Promotion. Advertising, direct marketing,                  uling capacity.
    and other forms of promotion are used to                7. Other methods. While varying workforce
    shift demand.                                              size and utilization, inventory buildup/back-
 3. Back ordering. By postponing delivery on                   logging, and subcontracting are well-known
    current orders demand is shifted to period                 alternatives, there are other, more novel
    when capacity is not fully utilized. This is               ways that find use in industry. Among these
    really just a form of smoothing demand.                    options are sharing employees with counter-
    Service industries are able to smooth                      cyclical companies and attempting to find
    demand by taking reservations or by making                 interesting and meaningful projects for
    appointments in an attempt to avoid walk-in                employees to do during slack times.
    customers. Some refer to this as “partitioning”
    demand.
                                                           AGGREGATE PLANNING STRATEGIES
 4. New demand creation. A new, but comple-
    mentary demand is created for a product or                  There are two pure planning strategies available
    service. When restaurant customers have to             to the aggregate planner: a level strategy and a chase
    wait, they are frequently diverted into a com-         strategy. Firms may choose to utilize one of the pure
    plementary (but not complimentary) service,            strategies in isolation, or they may opt for a strategy
    the bar. Other examples include the addition           that combines the two.
    of video arcades within movie theaters, and
                                                           LEVEL STRATEGY.     A level strategy seeks to produce
    the expansion of services at convenience
                                                           an aggregate plan that maintains a steady production
    stores.
                                                           rate and/or a steady employment level. In order to sat-
    Options which can be used to increase or               isfy changes in customer demand, the firm must raise
decrease capacity to match current demand include:         or lower inventory levels in anticipation of increased
                                                           or decreased levels of forecast demand. The firm
 1. Hire/lay off. By hiring additional workers as          maintains a level workforce and a steady rate of output
    needed or by laying off workers not cur-               when demand is somewhat low. This allows the firm
    rently required to meet demand, firms can               to establish higher inventory levels than are currently
    maintain a balance between capacity and                needed. As demand increases, the firm is able to con-
    demand.                                                tinue a steady production rate/steady employment
 2. Overtime. By asking or requiring workers               level, while allowing the inventory surplus to absorb
    to work extra hours a day or an extra day per          the increased demand.


                                                                                                                                          5
                                                           E N C Y C L O P E D I A     O F   M A N A G E M E N T
                                A second alternative would be to use a backlog or           maintaining a certain safety stock level,




    AGGREGATE PLANNING
                           backorder. A backorder is simply a promise to deliver            maintaining a reasonably stable workforce,
                           the product at a later date when it is more readily avail-       backorder policies, overtime policies, inven-
                           able, usually when capacity begins to catch up with              tory level policies, and other less explicit
                           diminishing demand. In essence, the backorder is a               rules such as the nature of employment with
                           device for moving demand from one period to another,             the individual industry, the possibility of a
                           preferably one in which demand is lower, thereby                 bad image, and the loss of goodwill.
                           smoothing demand requirements over time.                      4. Determine unit costs for units produced.
                                A level strategy allows a firm to maintain a con-            These costs typically include the basic pro-
                           stant level of output and still meet demand. This is             duction costs (fixed and variable costs as well
                           desirable from an employee relations standpoint.                 as direct and indirect labor costs). Also
                           Negative results of the level strategy would include             included are the costs associated with making
                           the cost of excess inventory, subcontracting or over-            changes in capacity. Inventory holding costs
                           time costs, and backorder costs, which typically are             must also be considered, as should storage,
                           the cost of expediting orders and the loss of customer           insurance, taxes, spoilage, and obsolescence
                           goodwill.                                                        costs. Finally, backorder costs must be com-
                                                                                            puted. While difficult to measure, this gener-
                           CHASE STRATEGY.      A chase strategy implies matching           ally includes expediting costs, loss of customer
                           demand and capacity period by period. This could                 goodwill, and revenue loss from cancelled
                           result in a considerable amount of hiring, firing or              orders.
                           laying off of employees; insecure and unhappy                 5. Develop alternative plans and compute the
                           employees; increased inventory carrying costs; prob-             cost for each.
                           lems with labor unions; and erratic utilization of plant
                           and equipment. It also implies a great deal of flexibil-       6. If satisfactory plans emerge, select the one
                           ity on the firm’s part. The major advantage of a chase            that best satisfies objectives. Frequently, this
                           strategy is that it allows inventory to be held to the           is the plan with the least cost. Otherwise,
                           lowest level possible, and for some firms this is a con-          return to step 5.
                           siderable savings. Most firms embracing the just-in-               An example of a completed informal aggregate
                           time production concept utilize a chase strategy             plan can be seen in Figure 1. This plan is an example
                           approach to aggregate planning.                              of a plan determined utilizing a level strategy. Notice
                                Most firms find it advantageous to utilize a com-         that employment levels and output levels remain con-
                           bination of the level and chase strategy. A combina-         stant while inventory is allowed to build up in earlier
                           tion strategy (sometimes called a hybrid or mixed            periods only to be drawn back down in later periods as
                           strategy) can be found to better meet organizational         demand increases. Also, note that backorders are uti-
                           goals and policies and achieve lower costs than either       lized in order to avoid overtime or subcontracting. The
                           of the pure strategies used independently.                   computed costs for the individual variables of the plan
                                                                                        are as follows:
                                                                                            Output costs:
                           TECHNIQUES FOR AGGREGATE                                               Regular time = $5 per unit
                                                                                                  Overtime = $8 per unit
                           PLANNING
                                                                                                  Subcontracted = $12 per unit
                                Techniques for aggregate planning range from                Other costs:
                                                                                                  Inventory carrying cost = $3 per unit per period applied
                           informal trial-and-error approaches, which usually uti-                to average inventory
                           lize simple tables or graphs, to more formalized and                   Backorders = $10 per unit per period
                           advanced mathematical techniques. William Stevenson’s            Cost of aggregate plan utilizing a level strategy:
                           textbook Production/Operations Management contains               Output costs:
                           an informal but useful trial-and-error process for aggre-              Regular time = $5 × 1,500 = $7,500
                                                                                                  Overtime = $8 × 0 = 0
                           gate planning presented in outline form. This general                  Subcontracted = $10 × 0 = 0
                           procedure consists of the following steps:                       Other costs:
                                                                                                  Inventory carrying cost = $3 × 850 = $2,400
                            1. Determine demand for each period.                                  Backorders = $10 × 100 = $1,000
                            2. Determine capacity for each period. This                           Total cost = $10,900
                               capacity should match demand, which means                     A second example, shown in Figure 2, presents
                               it may require the inclusion of overtime or              the same scenario as in Figure 1 but demonstrates the
                               subcontracting.                                          use of a combination strategy (i.e., a combination of
                            3. Identify company, departmental, or union                 level and chase) to meet demand and seek to minimize
                               policies that are pertinent. For example,                costs. For this example, let’s assume that company


6
                         E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                                                                                                                     AGGREGATE PLANNING
                                                                  Figure 1

    Period                                  1             2                  3           4             5               6
    Forecast                               100           150              300           300           500             150
    Output
                   Regular                 250           250              250           250           250             250
                   Overtime
                   Subcontract
    Output-                                150           100              -50           -50          -250             100
    forecast
    Inventory
                   Beginning                    0        150              250           200           150                  0
                   Ending                  150           250              200           150                0          100
                   Average                  75           200              225           175            75              50
    Backlog              0                      0             0                  0           0        100                  0

    Cost of aggregate plan utilizing a level strategy:

    Output:
              Regular time       =   $ 5   X 1500 = $7500
              Overtime           =   $ 8   X    0 =     0
              Subcontracted      =   $10   X    0 =     0
    Inventory carrying cost      =   $ 3   X 850 = 2550
    Backorders                   =   $10   X 100 = 1000

    Total Cost                                       $11050




policy prevents us from utilizing backorders and limits                Model can be used to obtain aggregate plans that
our plan to no more than 50 units of overtime per                      would allow balanced capacity and demand and the
period. Notice that the regular output level is constant,              minimization of costs. However, few real-world
implying a level workforce, while overtime and sub-                    aggregate planning decisions are compatible with the
contracting are used to meet demand on a period by                     linear assumptions of linear programming. Supply
period basis (chase strategy). One will notice that the                Chain Management: Strategy, Planning and Operation,
cost of the combination plan is slightly lower than the                by Sunil Chopra and Peter Meindl, provides an excel-
cost of the level plan.                                                lent example of the use of linear programming in
                                                                       aggregate planning.
     Output costs:
          Regular time = $5 × 1,200 = $6,000
                                                                       MIXED-INTEGER PROGRAMMING. For aggregate plans
          Overtime = $8 × 100 = 800
          Subcontracted = $12 × 250 = 2,500                            that are prepared on a product family basis, where the
     Other costs:                                                      plan is essentially the summation of the plans for indi-
          Inventory carrying cost = $3 × 325 = 975                     vidual product lines, mixed-integer programming may
          Backorders = $10 × 0 = 0                                     prove to be useful. Mixed-integer programming can
          Total cost = $10,275
                                                                       provide a method for determining the number of units
                                                                       to be produced in each product family.

                                                                       LINEAR DECISION RULE.          Linear decision rule is
MATHEMATICAL APPROACHES
TO AGGREGATE PLANNING                                                  another optimizing technique. It seeks to minimize total
                                                                       production costs (labor, overtime, hiring/lay off, inven-
    The following are some of the better known                         tory carrying cost) using a set of cost-approximating
mathematical techniques that can be used in more                       functions (three of which are quadratic) to obtain a
complex aggregate planning applications.                               single quadratic equation. Then, by using calculus, two
                                                                       linear equations can be derived from the quadratic equa-
LINEAR PROGRAMMING. Linear programming is an
                                                                       tion, one to be used to plan the output for each period
optimization technique that allows the user to find a                   and the other for planning the workforce for each period.
maximum profit or revenue or a minimum cost based
on the availability of limited resources and certain                   MANAGEMENT COEFFICIENTS MODEL.           The manage-
limitations known as constraints. A special type of                    ment coefficients model, formulated by E.H. Bowman,
linear programming known as the Transportation                         is based on the suggestion that the production rate for


                                                                                                                                                          7
                                                                       E N C Y C L O P E D I A      O F        M A N A G E M E N T
    AGGREGATE PLANNING
                                                                                                  Figure 2

                               Period                                   1                 2                  3           4             5             6
                               Forecast                                100               150              300           300           500           150
                               Output
                                               Regular                 200               200              200           200           200           200
                                               Overtime                                                                  50            50
                                               Subcontract                                                                           250
                               Output-                                 100                50             -100           -50                0         50
                               forecast
                               Inventory
                                               Beginning                    0            100              150            50                0             0
                                               Ending                  100               150                 50              0             0         50
                                               Average                  50               125              100            25                0         25
                               Backlog               0                      0                 0                  0           0             0             0


                               Output:
                                         Regular time        =   $ 5   X 1200 = $6000
                                         Overtime            =   $ 8   X 100 =    800
                                         Subcontracted       =   $12   X 250 = 3000
                               Inventory carrying cost       =   $ 3   X 325 =    975
                               Backorders                    =   $10   X    0 =     0

                               Total Cost                                             $10775




                           any period would be set by this general decision                            can also be incorporated into a decision support system,
                           rule:                                                                       which can aid in planning and evaluating alternative
                                          Pt = aWt−1 − bI t−1 + cFt+1 + K, where                       control policies. These models can integrate the multi-
                                                                                                       ple conflicting objectives inherent in manufacturing
                               Pt = the production rate set for period t
                               Wt−1 = the workforce in the previous period
                                                                                                       strategy by using different quantitative measures of
                               I t−1 = the ending inventory for the previous period                    productivity, customer service, and flexibility.
                               Ft+1 = the forecast of demand for the next period
                               a, b, c, and K are constants                                            FUNCTIONAL OBJECTIVE SEARCH APPROACH. The
                                                                                                       functional objective search (FOS) system is a comput-
                                It then uses regression analysis to estimate the
                                                                                                       erized aggregate planning system that incorporates a
                           values of a, b, c, and K. The end result is a decision
                                                                                                       broad range of actual planning conditions. It is capa-
                           rule based on past managerial behavior without any
                                                                                                       ble of realistic, low-cost operating schedules that pro-
                           explicit cost functions, the assumption being that man-
                                                                                                       vide options for attaining different planning goals. The
                           agers know what is important, even if they cannot
                                                                                                       system works by comparing the planning load with
                           readily state explicit costs. Essentially, this method
                                                                                                       available capacity. After management has chosen its
                           supplements the application of experienced judgment.
                                                                                                       desired actions and associated planning objectives for
                           SEARCH DECISION RULE. The search decision rule                              specific load conditions, the system weights each
                           methodology overcomes some of the limitations of                            planning goal to reflect the functional emphasis
                           the linear cost assumptions of linear programming.                          behind its achievement at a certain load condition. The
                           The search decision rule allows the user to state cost                      computer then uses a computer search to output a plan
                           data inputs in very general terms. It requires that a                       that minimizes costs and meets delivery deadlines.
                           computer program be constructed that will unambigu-
                                                                                                       AGGREGATE PLANNING IN SERVICES.          For manufac-
                           ously evaluate any production plan’s cost. It then
                                                                                                       turing firms the luxury of building up inventories
                           searches among alternative plans for the one with the
                                                                                                       during periods of slack demand allows coverage of an
                           minimum cost. However, unlike linear programming,
                                                                                                       anticipated time when demand will exceed capacity.
                           there is no assurance of optimality.
                                                                                                       Services cannot be stockpiled or inventoried so they
                           SIMULATION. A number of simulation models can be                            do not have this option. Also, since services are con-
                           used for aggregate planning. By developing an aggre-                        sidered “perishable,” any capacity that goes unused is
                           gate plan within the environment of a simulation                            essentially wasted. An empty hotel room or an empty
                           model, it can be tested under a variety of conditions to                    seat on a flight cannot be held and sold later, as can a
                           find acceptable plans for consideration. These models                        manufactured item held in inventory.


8
                         E N C Y C L O P E D I A           O F     M A N A G E M E N T
     Service capacity can also be very difficult to           SEE ALSO: Capacity Planning; Planning; Simulation




                                                                                                                             ANGELS AND VENTURE CAPITALISTS
measure. When capacity is dictated somewhat by                                                           R. Anthony Inman
machine capability, reasonably accurate measures of
capacity are not extremely difficult to develop.
However, services generally have variable processing         FURTHER READING:
requirements that make it difficult to establish a suit-
able measure of capacity.                                    Chopra, Sunil and Peter Meindl. Supply Chain Management:
                                                             Strategy, Planning, and Operation. Upper Saddle River, NJ:
     Historically, services are much more labor              Pearson Prentice Hall, 2004.
intensive than manufacturing, where labor averages
10 percent (or less) of total cost. This labor intensity     Dejonckheere, J., S.M. Disney, M. Lambrecht, and D.R. Towill.
                                                             “The Dynamics of Aggregate Planning.” Production Planning &
can actually be an advantage because of the variety
                                                             Control 14, no. 6, (2003): 497–516.
of service requirements an individual can handle.
This can provide quite a degree of flexibility that can       Finch, Byron J. Operations Now. Boston: McGraw-Hill Irwin,
make aggregate planning easier for services than             2004.
manufacturing.                                               Hung, Rudy. “Annualized Hours and Aggregate Planning.”
                                                             Production and Inventory Management Journal 38, no. 4 (1997).
WHAT’S NEW IN AGGREGATE PLANNING. Rudy Hung, in
his Production and Inventory Management Journal arti-        Iyer, Ananth V., Vinayak Deshpande, and Zhengping Wu. “A
cle entitled “Annualized Hours and Aggregate Planning,”      Postponement Model for Demand Management.” Management
                                                             Science 49, no. 8, (2003): 983–1002.
presents a new, useful idea for aggregate planning called
Annualized Hours (AH). Under AH, employees are con-          Stevenson, William J. Production Operations Management.
tracted to work for a certain number of hours (say 1,800     Boston: McGraw-Hill Irwin, 2004.
hours) per year, for a certain sum of money. Employees
can be asked to put in more hours during busy periods
and fewer hours in slow periods. Typically, employees
receive equal monthly or weekly payments so that hourly
workers in effect have gained salaried status. Overtime is
paid only when employees have worked beyond their
annual hours.                                                 ANGELS AND VENTURE CAPITALISTS
      AH is also known as flexiyear, as it can be seen as
                                                             SMALL BUSINESS FINANCE
an extension of flextime, in which employees can vary
their work hours within limits. This concept is used              The United States Small Business Administration
almost exclusively in Europe, particularly in the            (SBA) estimates that, as of 2003, there were approxi-
United Kingdom. The Scandinavian pulp and paper              mately 23.7 million small businesses in the United
industries pioneered AH in the mid-1970s. Around             States. The SBA defines a small business as “an inde-
that time, some West German firms, particularly those         pendent business having fewer than 500 employees.”
in the retail industry, also used AH.                        Small businesses represent over 99 percent of all
     AH gives employers much flexibility. AH serves           employers, and they employ more than half of all pri-
to cut labor costs by offering employees an annual           vate sector employees. Moreover, small businesses
sum less than their previous annual earnings with            employ about 40 percent of all high-tech personnel
overtime. Even though their total earnings may fall,         such as scientists, computer workers and engineers.
their average earnings per hour would remain the             These firms create anywhere from 60 percent to
same or even rise. Effective earnings could rise even        80 percent of net new jobs each year, and they represent
more so if the employer is unable to consume all con-        97 percent of all exporters of goods. Small business
tracted hours. Employees have greater income secu-           create more than 50 percent of the private gross domes-
rity with no worries about layoffs. There is also            tic product, and they pay about 45 percent of the total
increased morale because blue-collar workers are             United States private payroll.
now salaried.                                                     Clearly, small businesses play an important role
     Another development affecting aggregate plan-           in our business economy. It is important to note, how-
ning is postponement. This refers to delaying the            ever, that two-thirds of new small businesses survive
“finish” of a product until the moment of sale. Firms         at least two years, and about half survive at least four
that rely on the postponement strategy, such as PC-          years. Owners of about one-third of the firms that
maker Dell Inc. or clothing franchise Benetton Group         closed said that their firm was successful at closure.
Sp.A., depend upon the availability of aggregate             Major factors contributing to a firm’s success include
inventories of components that can be assembled to           an ample supply of capital, the fact that a firm is large
order shortly after, or even immediately, as an order        enough to have employees, the owner’s higher level of
is taken.                                                    education, and the owner’s reason for starting the firm


                                                                                                                                                              9
                                                             E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                        in the first place, such as freedom for family life or       the business. If the business fails, all of the equity




     ANGELS AND VENTURE CAPITALISTS
                                        wanting to be one’s own boss.                               investors lose their investments. If the business suc-
                                                                                                    ceeds, the founders and equity investors share in the
                                             As noted above, a firm’s supply of capital is often
                                                                                                    benefits.
                                        a major factor in the firm’s ability to survive. Conse-
                                        quently, business owners place a substantial emphasis            The types of equity investors that business owners
                                        on finding sources of funding for their business.            typically pursue include themselves (via their personal
                                        Capital is typically defined as any asset that can be        savings), family members and friends, partners, share-
                                        used to generate resources for the business. Capital for    holders, angels and venture capital investors.
                                        most businesses is generally comprised of some com-
                                        bination of cash, inventory and fixed assets.
                                                                                                    ANGELS
                                        PLANNING FOR A FIRM’S CAPITAL NEEDS
                                                                                                         Angels tend to be wealthy individuals, many
                                             When starting a business, business owners typi-        times themselves entrepreneurs, who invest in new
                                        cally need three types of capital—working capital,          businesses in return for equity ownership interests in
                                        fixed capital and expansion capital. Working capital         these new businesses. It is important to note, however,
                                        supports a business’ short-term operations, and it rep-     that angels do not make these investments out of the
                                        resents a business’ short-term source of funds. It may      kindness of their hearts. Angels tend to be extremely
                                        be used to purchase inventory, pay bills, or take care of   savvy business men and women who seek to take cal-
                                        other unexpected emergencies. Fixed capital repre-          culated risks with business ventures that might enable
                                        sents those funds that a business needs to purchase         them to generate tremendous gains when the busi-
                                        land, buildings, equipment, machinery, furniture or         nesses in which they invest “take off.” Angels repre-
                                        other fixed assets that will be used in the business.        sent an outstanding source of financing for businesses
                                        While working capital supports the business’ short-         that have grown too large to be financed by family and
                                        term needs, fixed capital supports the business’ more        friends, but are still too small to attract the attention of
                                        permanent needs. Businesses need expansion capital          venture capitalists.
                                        when they seek to finance growth, expansion, or other
                                                                                                         Angels fill a substantial need in the capital market
                                        long-term initiatives.
                                                                                                    for young businesses. Typically, angels will finance
                                                                                                    new businesses with capital needs in the range
                                        SOURCES OF CAPITAL                                          $10,000 to $2 million.

                                              As business owners assess their needs for all
                                        types of capital, they must also assess what sources of
                                                                                                    ANGEL-HUNTING TIPS
                                        capital are available to them. Conventional wisdom
                                        has often noted that many start-up businesses tend to        1. Business angels are looking for investments
                                        secure their capital from the four F’s: founders, fami-         capable of achieving a return of 20 percent
                                        lies, friends and fools. This humorous observation,             or more, so make sure you can achieve this
                                        while bearing a nugget of truth, merely scratches the           before you waste time chasing investors.
                                        surface when looking at all of the sources of financing
                                        available to businesses in need of capital.                  2. Angels tend to invest locally, so start your
                                                                                                        search within a 50-mile radius of your busi-
                                             Some businesses owners choose to finance their              ness premises.
                                        businesses with debt. Debt financing is capital that a
                                        business owner has borrowed and must repay with              3. Concentrate on successful individuals within
                                        interest. Debt financing may include traditional bank            your industry since angels prefer to look for
                                        loans, credit card debt, lines of credit, unsecured             investments in industries they know some-
                                        loans, financing from commercial finance companies,               thing about.
                                        insurance policy loans, securing trade credit and Small      4. Use any contacts and networks you may
                                        Business Administration Loans.                                  have.
                                             Many business owners, however, are uncomfort-
                                                                                                     5. It may take six months to a year to find the
                                        able with debt, and they choose to pursue sources of
                                                                                                        right investor and another three to six
                                        equity financing. With equity financing, the people or
                                                                                                        months to negotiate the deal. Don’t pressure
                                        entities who contribute capital to a business do so in
                                                                                                        investors—they may walk away.
                                        exchange for a share of ownership in the business. The
                                        business owner gives the equity investor a share of          6. The first meeting is the most important
                                        ownership in the business since the equity investor is          because business angels tend to place empha-
                                        assuming the primary risk of losing his or her funds in         sis on the entrepreneur and management


10
                                      E N C Y C L O P E D I A      O F   M A N A G E M E N T
     team and how well they will be able to work                    Traditionally, apprentices must find their own




                                                                                                                           APPRENTICESHIP PROGRAMS
     with them.                                                apprenticeships. In Germany, this often is accom-
                                           Joanie Sompayrac    plished through the potential apprentice’s own person-
                                                               al connections or initiative. Additionally, Germany’s
FURTHER READING:                                               Federal Employment Agency helps to place applicants
                                                               with firms seeking apprentices. A range of Web sites are
Karlsgaard. “Dollars from Heaven: A Choir of Angels Bedevils   available that provide databases of employers offering
the VCs.” Forbes, 1 June 1998, 23.
                                                               apprenticeships, searchable by occupation. Though
                                                               apprenticeships are in no way guaranteed, the vast
                                                               majority of Germans have participated in an appren-
                                                               ticeship. Indeed, 71 percent of the German labor force
                                                               had undergone a formal apprenticeship in 1991.
                                                               Moreover, this figure is misleadingly low, since it does
                                                               not include those Germans participating in alternative
 APPRENTICESHIP PROGRAMS
                                                               on-the-job training in specialized training schools
                                                               for health care professionals, hotel workers, or civil
     Apprenticeship programs involve on-the-job train-
                                                               servants.
ing coupled with in-class support for students before
they directly enter the workforce. Apprenticeships also
are called dual-training programs because participants         APPRENTICESHIPS VS. INTERNSHIPS
receive training both in the workplace and at school.
Apprenticeship programs have proven extremely effec-                Apprenticeships differ from the internship model
tive in smoothly transferring school-related skills to         more commonly practiced in the United States and
pragmatic workforce application.                               Canada. Internships offer essentially minor workplace
                                                               exposure over a comparatively short time. The intern-
                                                               ship is seen as merely augmenting the more important
                                                               coursework. The nature of the internship may not even
THE GERMAN MODEL                                               be set by the employer; instead, it might be determined
      Apprenticeship programs were first developed in           by the educational institution with the goodwill of the
Germany, where they have received worldwide atten-             host company. The benefit to the employer in an
tion. As Gitter and Scheuer note: “The comprehensive           internship is often negligible, with the long-range ben-
German apprenticeship system is often seen as a                efit of a better qualified employment pool. If the intern
model for an improved school-to-work transition”               contributes to the organization in more than a superfi-
(1997). Perhaps the reason the German model is so              cial way, it is an added benefit rather than an expected
successful is the commitment of time both parties              outcome, although having an intern pool does allow a
invest in the apprenticeship—usually three or more             company to prescreen potential new employees before
years. This commitment recognizes apprenticeship as            hiring them permanently. Finally, the internship tends
a critical educational and training crossroad.                 to be an isolated, short-term project as opposed to the
                                                               four- to five-year commitment of most apprenticeship
     Also contributing to the acceptance of the German         programs.
model, the Federal Ministry of Education regulates
each occupation’s training requirements and the ulti-               In many respects, apprenticeships are the diamet-
mate rewarding of completion certification to appren-           ric opposite of internships (see Table 1). In an appren-
tices. It also provides the framework for the working          ticeship, the work-related experience is central, with
agreements between apprentices and employers.                  the company, rather than the educational institution,
                                                               determining the terms of study. In apprenticeships, the
     Wages for apprentices generally are one-third of          coursework is coequal (rather than supplemental) to
the standard employment rate in a given occupation.            the on-the-job training. In apprenticeships, the employer
These wages are fixed across companies regionally               expects to receive an immediate tangible benefit from
through collective agreement of participating employers.       the work carried out by the apprentice, in addition to
     Rainer Winkelmann identifies three hallmark                the long-range benefit of a better qualified employ-
features of the German apprenticeship model: “it is            ment pool.
company-based, it relies on voluntary participation by
firms, and it generates portable, occupation-specific
                                                               BENEFITS OF THE GERMAN MODEL
skills” (1996). Additionally, apprenticeships are
funded by the individual companies involved, rather                 Gitter and Scheuer credit apprenticeship for the
than through state funding or payroll taxation. Actual         fact that, “with the exception of those with a postsec-
pay varies greatly according to the nature of the              ondary education, the unemployment rates in the
apprenticeship.                                                United States are more than double those in Germany


                                                                                                                                                     11
                                                               E N C Y C L O P E D I A      O F    M A N A G E M E N T
     APPRENTICESHIP PROGRAMS
                                                                                       Table 1
                                                            Differences Between Apprenticeships and Internships

                                                                            Apprenticeships                              Internships
                                      On-the-job training                   coequal to coursework                        supplemental coursework
                                      Time frame                            4 to 5 years                                 6 months to a year
                                      Training designer                     employer                                     educational institution
                                      Benefit to employer                   tangible                                     coincidental
                                      Procurement                           individual participant                       educational institution




                                 for groups with a comparable education” (1997).               uisite for government funding. This helped to make
                                 Couch identified increased earnings for those partici-         apprenticeship more palatable to employers. Addition-
                                 pating in apprenticeship programs. In all, as Gitter          ally, Great Britain does not nationally legislate appren-
                                 summarizes, “The apprenticeship-trained worker is             ticeship as do other European countries. Rather,
                                 more likely to earn more money, work more hours per           guidelines are sent out from the Department of
                                 year, and rise to supervisory status than are workers         Education and Skills that are left to open interpretation
                                 who have learned the trade through other methods”             from varying geographic and occupational sectors.
                                 (1994).                                                            While a small number of British apprentices
                                                                                               obtain employment directly from an employer, most
                                 EUROPEAN CRITIQUES                                            are directed through the government Learning and
                                 OF THE GERMAN SYSTEM                                          Skills Councils. Oftentimes, it is the training provider
                                                                                               intermediary, rather than the employer, who conducts
                                       Germany has the longest history of apprentice-          the assessment of the apprentice. However, complex
                                 ships, but it is not alone in its application. Several        requirements for receiving government funding for
                                 other European nations also have embraced the con-            apprenticeship programs are often daunting to the pri-
                                 cept, most notably in Switzerland, Austria, Denmark,          vate sector. Therefore many of the apprenticeships in
                                 and in recent years, Great Britain. Yet, not all              Great Britain involve government-supported training
                                 Europeans have embraced apprenticeships. Indeed,              programs and areas of occupation.
                                 the apprenticeship system has come under attack
                                 within the European Union. As Roy Harrison indi-              APPRENTICESHIP IN THE UNITED STATES
                                 cated, the issue focuses on “the degree to which voca-
                                 tional qualifications should be harmonised at a                     Even as apprenticeships have begun to come
                                 European level” (1997).                                       under debate in Europe, they have begun to gain wider
                                       While defenders of the apprenticeship system            acceptance in the United States. The apprenticeship
                                 point to the tangential skills and work-related benefits       programs taking root in the United States remain
                                 of the model, they fail to address European-wide con-         uncoordinated and hosted by a wide variety of
                                 cerns that employers would favor the apprenticeship           sources. Some are sponsored by German companies
                                 model, thus showing a preference for citizens of              themselves. For example, Siemens, the Munich-based
                                 nations like Germany and Austria that support the             multinational, has apprenticeship programs associated
                                 system on a wide scale. Thus, in 1995 the European            with its plants in Lake Mary, Florida; Franklin,
                                 Council of Ministers met to discuss the difficulties           Kentucky; and Wendell, North Carolina. Similarly, the
                                 imposed by the German model. In particular, the min-          Robert Bosch Corporation has set up apprenticeship
                                 isters expressed concern that apprenticeships disrupted       programs linked to its Charleston, South Carolina,
                                 the European goal of eliminating preferences for              facility. Other German companies also have brought
                                 employees from one EU nation over another. The min-           in apprenticeship programs in full or in part to their
                                 isters, as Harrison explains, “stressed that a European       U.S. operations.
                                 area in qualifications and training cannot be estab-                Other apprenticeship programs are sponsored by
                                 lished while countries continue to distrust the quality       non-German companies. For example, Illinois-based
                                 and value of each others’ qualifications” (1997).              Castwell Products (a division of Citation Corporation)
                                                                                               runs an apprenticeship program for its foundry. As
                                                                                               with several other U.S. apprenticeship programs,
                                 GREAT BRITAIN’S APPROACH
                                                                                               applicants come from the factory floor—not from sec-
                                      In 1995 Great Britain introduced Modern Appren-          ondary school. Nonetheless, the apprenticeship pro-
                                 ticeship. Modern Apprenticeship added flexibility into         gram imitates the German model in most other
                                 the program, with no set duration of training as a req-       respects. Castwell’s participants undergo a four-year


12
                               E N C Y C L O P E D I A      O F   M A N A G E M E N T
apprenticeship involving eight college courses related             Issues regarding insurance and liability are




                                                                                                                             APPRENTICESHIP PROGRAMS
to their work, and a rotation every six months for on-       arguably much greater factors in the heavily litigious
the-job training under a different tutor.                    U.S. workplace. German, Austrian, and Danish child-
                                                             labor laws do not view apprenticeships as child labor
     Other U.S. apprenticeship programs are coopera-
                                                             because the apprenticeship systems are so deeply
tive efforts between secondary schools and compa-
                                                             entrenched into the cultural understanding of educa-
nies, coordinated through trade associations. Such
                                                             tion in those countries. By contrast, in the United States,
programs are not accurate representations of the
                                                             where apprenticeships are a new idea, no such clear dif-
German model, but tend to be modifications inspired
                                                             ferentiation exists separating firms employing middle-
by the European apprenticeship system. For example,
                                                             school-age apprentices from companies employing
the Tooling and Manufacturing Association of Park
                                                             inexpensive and illegal child labor. Additionally, in
Ridge, Illinois, jointly set up apprenticeship programs
                                                             Germany teachers view apprenticeships as normal. In
with local high schools and manufacturing firms. The
                                                             the United States, teachers may feel threatened by the
on-the-job training is coordinated with job-related
                                                             implication that traditional U.S. education (data
coursework at the high school and culminates either
                                                             notwithstanding) does not prepare students for jobs.
in an associate’s degree through the summer intern-
ship courses, or entry into the Illinois Institute of             Perhaps the greatest potential impediment to the
Technology’s four-year manufacturing technology              widespread acceptance of apprenticeships may come
program at a junior standing. Bethany Paul, the asso-        from the way in which such programs are seen by
ciation’s apprenticeship manager, points to its success,     labor unions in the United States. In Germany, union
indicating that “in Illinois only 17 percent of students     ranks are filled with members who learned their
finish college compared with over 90 percent who              occupations through apprenticeships. Moreover,
finish their four-year apprenticeship program.”               considerably greater labor-management cooperation
                                                             characterizes the German workplace than in the
     Finally, in some U.S. apprenticeship programs           United States. U.S. labor leaders are likely to be sus-
governmental agencies have tried to plant the seeds          picious of apprenticeship programs as a management
for growing apprenticeship systems directly patterned        ploy to employ non-unionized, underpaid student
on the German model. For example, the Rhode Island           workers. Indiana, for instance, was forced to scrap, for
Departments of Labor and Education coordinated with          these very reasons, a state-sponsored apprenticeship
the Rhode Island Teachers Union and private industry         initiative when local steel unions opposed the pro-
to send representatives directly to Germany and              gram. Still, labor can be supportive as well. Wisconsin
Switzerland to study their apprenticeship models. On         passed a state law establishing apprenticeship pro-
their return in 1998, Rhode Island set in place a state-     grams with the full cooperation of the AFL-CIO.
coordinated pilot apprenticeship program involving
on-the-job training coordinated with business and                 Apprenticeship systems have a long history of
technical coursework. In four to five years, the pro-         successful school-to-work transition in Germany. The
gram culminated in a bachelor’s degree.                      German model has achieved considerable success in
                                                             several other nations such as Austria and Switzerland.
     Similarly, the Oklahoma Department of Human             Though somewhat modified, it has also achieved suc-
Services brought together local chambers of commerce,        cess in variant forms in Denmark and Great Britain,
private companies, and public education organizations        although practiced by a considerably more limited
to form IndEx, a coordinating body for Tulsa-based           number of apprentices and employers. Since the early
apprenticeship programs. Unlike other vocational train-      1990s the German apprenticeship model has achieved
ing, the IndEx programs are actual apprenticeships           growing attention in the United States. To date, U.S.
leading high-school juniors through four years of both       apprenticeships have been both limited and relatively
academic and on-the-job training with pay for both           uncoordinated. Still, the initial programs sponsored
studies and work training. As an incentive, the organi-      both by private and state organizations seem promis-
zation offers a $1,200 bonus for maintaining a 3.1 grade     ing, though they face several potential obstacles
point average or better (Rowley, et al.).
                                                             SEE ALSO: Continuing Education and Lifelong Learning
     Yet despite the growing interest from a variety of                Trends; Training Delivery Methods
quarters in apprenticeship programs in the United States,
                                                                                                           David A. Victor
problems exist. Germany has provided apprenticeships
                                                                                               Revised by Deborah Hausler
of some sort since the Middle Ages. This has led to a
cultural receptivity to apprenticeships that may not be as
readily transferable to the United States. As Gitter and
Scheuer (1997) note, “the key to Germany’s success is
                                                             FURTHER READING:
the country’s social consensus on the importance of
workforce training for youths.” In the end, that consen-     “Apprenticeship Program Shows A European Flair.” Tooling &
sus may not be easily transferred to the United States.      Production, October 1998, 37–38.


                                                                                                                                                       13
                                                             E N C Y C L O P E D I A       O F    M A N A G E M E N T
                                           Buechtemann, Christoph F., Juergen Schupp, and Dana Soloff.      and that it is a skill borne of personality and ability.




     THE ART AND SCIENCE OF MANAGEMENT
                                           “Roads to Work: School-to-Work Transition Patterns in            Those who believe in management as an art are likely
                                           Germany and the United States.” Industrial Relations Journal
                                                                                                            to believe that certain people are more predisposed to
                                           24, no. 2 (1993): 97–111.
                                                                                                            be effective managers than are others, and that some
                                           Filipczak, Bob. “Apprenticeships From High Schools to High       people cannot be taught to be effective managers. That
                                           Skills.” Training, April 1992, 23–29.                            is, even with an understanding of management research
                                           Gitter, Robert J. “Apprenticeship-Trained Workers: United        and an education in management, some people will
                                           States and Great Britain.” Monthly Labor Review, April 1994,     not be capable of being effective practicing managers.
                                           38–43.
                                           Gitter, Robert J., and Markus Scheuer. “U.S. and German
                                           Youths: Unemployment and the Transition from School to
                                           Work.” Monthly Labor Review, March 1997, 16–20.                  FOUNDATIONS OF THE MANAGEMENT
                                                                                                            AS A SCIENCE PERSPECTIVE
                                           Hamilton, Stephen F. “Prospects for an America-Style Youth
                                           Apprenticeship System.” Educational Researcher, April 1993,           Practicing managers who believe in management
                                           11–16.                                                           as a science are likely to believe that there are ideal
                                           Harrison, Roy. “Easing Border Controls for Vocational            managerial practices for certain situations. That is,
                                           Training.” People Management, 18 December 1997, 41.              when faced with a managerial dilemma, the manager
                                                                                                            who believes in the scientific foundation of his or her
                                           Lightner, Stan, and Edward L. Harris. “Legal Aspects of Youth
                                           Apprenticeships: What You Should Know.” Tech Directions,
                                                                                                            craft will expect that there is a rational and objective
                                           November 1994, 21–25.                                            way to determine the correct course of action. This
                                                                                                            manager is likely to follow general principles and the-
                                           “Manufacturers Cultivate ‘Home-Grown’ Employees.” Tooling
                                                                                                            ories and also by creating and testing hypotheses. For
                                           & Production, July 1997, 31.
                                                                                                            instance, if a manager has a problem with an employee’s
                                           Organisation for Economic Co-operation and Development.          poor work performance, the manager will look to spe-
                                           OECD Employment Outlook. Paris: OECD, 1994.                      cific means of performance improvement, expecting
                                           Philbin, Matthew L. “Castwell ‘Grew Its Own’ Maintenance         that certain principles will work in most situations. He
                                           MVP’s.” Modern Casting, May 1997, 44–47.                         or she may rely on concepts learned in business school
                                           Rowley, Wayne, Terry Crist, and Leo Presley. “Partnerships for
                                                                                                            or through a company training program when deter-
                                           Productivity.” Training and Development, January 1995, 53–55.    mining a course of action, perhaps paying less atten-
                                                                                                            tion to political and social factors involved in the
                                           Steedman, Hilary. “Five Years of the Modern Apprenticeship       situation.
                                           Initiative: An Assessment Against Continental European
                                           Models.” National Institute Economic Review, October 2001, 75.        Many early management researchers subscribed
                                                                                                            to the vision of managers as scientists. The scientific
                                           Winkelmann, Rainer. “Employment Prospects and Skill
                                           Acquisition of Apprenticeship-Trained Workers in Germany.”
                                                                                                            management movement was the primary driver of this
                                           Industrial and Labor Relations Review, July 1996, 658–672.       perspective. Scientific management, pioneered by
                                                                                                            Frederick W. Taylor, Frank and Lillian Gilbreth, and
                                                                                                            others, attempted to discover “the one best way” to
                                                                                                            perform jobs. They used scientific processes to evalu-
                                                                                                            ate and organize work so that it became more efficient
                                                                                                            and effective. Scientific management’s emphasis on
                                            THE ART AND SCIENCE
                                            OF MANAGEMENT
                                                                                                            both reducing inefficiencies and on understanding the
                                                                                                            psychology of workers changed manager and employee
                                                One of the enduring questions in the field of man-           attitudes towards the practice of management. See
                                           agement is whether it is an art or a science. Webster’s          Exhibit 1 for a summary of the principles of scientific
                                           College Dictionary defines an art as “skill in conduct-           management.
                                           ing any human activity” and science as “any skill or
                                           technique that reflects a precise application of facts or
                                                                                                            FOUNDATIONS OF THE MANAGEMENT
                                           a principle.” Reflected in the differences in these defi-
                                                                                                            AS AN ART PERSPECTIVE
                                           nitions is the use of precision in science, in that there
                                           is a particular, prescribed way in which a manager                    Practicing managers who believe in management
                                           should act. Thus, management as a science would                  as an art are unlikely to believe that scientific princi-
                                           indicate that in practice, managers use a specific body           ples and theories will be able to implemented in actual
                                           of information and facts to guide their behaviors, but           managerial situations. Instead, these managers are
                                           that management as an art requires no specific body of            likely to rely on the social and political environment
                                           knowledge, only skill. Conversely, those who believe             surrounding the managerial issue, using their own
                                           management is an art are likely to believe that there is         knowledge of a situation, rather than generic rules, to
                                           no specific way to teach or understand management,                determine a course of action. For example, as a contrast


14
                                         E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                                                                                                                 THE ART AND SCIENCE OF MANAGEMENT
                                                          Exhibit 1
                          Frederick W. Taylor’s Principles of Scientific Management

     1. Managers must study the way that workers perform their tasks and understand the job knowledge (formal and
        informal) that workers have, then find ways to improve how tasks are performed.
     2. Managers must codify new methods of performing tasks into written work rules and standard operating
        procedures.
     3. Managers should hire workers who have skills and abilities needed for the tasks to be completed, and should
        train them to perform the tasks according to the established procedures.
     4. Managers must establish a level of performance for the task that is acceptable and fair and should link tit to a
        pay system that reward workers who perform above the acceptable level.




to the example given previously, a manager who has a               respond differently to each employee and situation,
problem with an employee’s poor work performance                   rather than use a prescribed set of responses dictated
is likely to rely on his or her own experiences and                by set of known guidelines.
judgment when addressing this issue. Rather than
having a standard response to such a problem, this                      Another proponent of the management as art
manager is likely to consider a broad range of social              school of thought is Peter Drucker, famed manage-
and political factors, and is likely to take different             ment scholar who is best known for developing ideas
actions depending on the context of the problem.                   related to total quality management. Drucker terms
                                                                   management “a liberal art,” claiming that it is such
     Henry Mintzberg is probably the most well-                    because it deals with the fundamentals of knowledge,
known and prominent advocate of the school of                      wisdom, and leadership, but because it is also con-
thought that management is an art. Mintzberg is an                 cerned with practice and application. Drucker argues
academic researcher whose work capturing the actual                that the discipline (i.e., the science) of management
daily tasks of real managers was ground breaking                   attempts to create a paradigm for managers, in which
research for its time. Mintzberg, through his observa-             facts are established, and exceptions to these facts are
tion of actual managers in their daily work, deter-                ignored as anomalies. He is critical of the assumptions
mined that managers did not sit at their desks,                    that make up the management paradigm, because
thinking, evaluating, and deciding all day long, work-             these assumptions change over time as society and the
ing for long, uninterrupted time periods. Rather,                  business environment change. Thus, management is
Mintzberg determined that mangers engaged in very                  more of an art, because scientific “facts” do not remain
fragmented work, with constant interruptions and rare              stable over time.
opportunities to quietly consider managerial issues.
Thus, Mintzberg revolutionized thinking about man-
agers at the time that his work was published, chal-               ART AND SCIENCE
lenging the prior notion that managers behaved                     IN MANAGEMENT RESEARCH
rationally and methodically. This was in line with the
                                                                        Noted researcher Thomas Kuhn, in his book The
perspective of management as an art, because it indi-
                                                                   Structure of Scientific Revolutions, addresses issues
cated that managers did not necessarily have routine
                                                                   associated with the state of current scientific research
behaviors throughout their days, but instead used their
                                                                   and the opportunities for scientific discovery. Kuhn, in
own social and political skills to solve problems that
                                                                   his previous editions of this text, drew distinctions
arose throughout the course of work.
                                                                   between mature and immature fields of study. In
      Another scholar that promoted the notion of man-             mature fields of study, many of the central questions
agement as an art was David E. Lilienthal, who in                  of that field have been answered, and strong consensus
1967 had his series of lectures titled Management: A               exists among researchers regarding the fundamental
Humanist Art published. In this set of published lec-              assumptions of that field. Conversely, in immature
tures, Lilienthal argues that management requires                  fields of study, there is still a great deal of debate on
more than a mastery of techniques and skills; instead,             major questions in the field, and gains in knowledge
it also requires that managers understand individuals              come sporadically. In many ways, management is an
and their motivations and help them achieve their                  immature science. While its foundations in psychol-
goals. Lilienthal believed that combining management               ogy, sociology, and other related areas give it a long
and leadership into practice, by not only getting work             and rich history, the nature of the areas of study ren-
done but understanding the meaning behind the work,                ders it immature. That is, due to the difficulties of
as effective managerial behavior. Thus, he promoted                studying human behavior in a number of disparate set-
the idea of the manager as a motivator and facilitator             tings, the study of management is still very young
of others. This manager as an artist was likely to                 when compared to other fields of research (e.g., in the


                                                                                                                                                                     15
                                                                   E N C Y C L O P E D I A         O F     M A N A G E M E N T
                                           physical sciences). In fact, many scholars have argued        goal setting in a number of practical situations, bolstered




     THE ART AND SCIENCE OF MANAGEMENT
                                           that the social sciences (e.g., management research)          by the confidence afforded by decades of research sup-
                                           suffer from envy of the physical sciences, in which           porting such actions.
                                           “truths” are able to be determined through research.
                                                                                                               Meta-analysis, in particular, is a methodological
                                           As such, social sciences researchers may strive to
                                                                                                         procedure that has contributed significantly to the
                                           create a more “scientific” approach to their fields in
                                                                                                         study of management. Meta-analysis is a statistical
                                           order to grant them more legitimacy.
                                                                                                         technique that allows a researcher to combine findings
                                                 Despite its relative immaturity, some consistent        from multiple studies, correct for errors in study
                                           answers have been developed in the field of manage-            design, and determine an “average” statistical rela-
                                           ment. In many ways this is due to the increased sophis-       tionship among variables. Meta-analysis first gained a
                                           tication of management research. However, there are           foothold in management research in studies of the
                                           still a number of research gaps in management;                validity of selection techniques for different jobs in
                                           despite our increased knowledge in some areas, there          different organizations. Before the application of
                                           is still a great deal of disagreement and confusion in        meta-analysis to research on the validity of different
                                           other areas. In these circumstances, the practice of          selection techniques, there was a belief in the situa-
                                           management is likely to be dictated by the perspective        tional specificity of these selection methods. That is,
                                           of management as an art. Because there are no hard            studies of the accuracy of selection techniques in pre-
                                           and fast rules in certain circumstances, individual           dicting subsequent job performance had such dis-
                                           managers’ experiences and skills must guide them.             parate results that academics concluded that validity
                                                                                                         of a standardized test, for example, would differ dra-
                                                Today, much of the management research con-
                                                                                                         matically in each selection situation (e.g., with differ-
                                           ducted in academic institutions blends the notion of man-
                                                                                                         ent job applicants, in different organizations, in different
                                           agement as an art and as a science. Some of these trends
                                                                                                         geographic regions). This myth was dispelled, how-
                                           in management research that have pushed the field in
                                                                                                         ever, with the application of meta-analysis to the
                                           either direction—namely increased statistical sophistica-
                                                                                                         results of the collected body of research on the valid-
                                           tion and the emphasis on contextual influences—are
                                                                                                         ity of selection methods. The use of meta-analysis
                                           described below.
                                                                                                         established that the differences in findings were due
                                                                                                         primarily to limitations of research design, such as
                                           INCREASED STATISTICAL SOPHISTICATION.          As com-        small sample size, unreliability of measures, and other
                                           puter technology continues to improve, the ability of         correctable problems. When meta-analysis was applied
                                           management researchers to conduct sophisticated sta-          to this group of studies, they were combined to deter-
                                           tistical analyses has also been enhanced. Powerful sta-       mine that validates of selection techniques were gen-
                                           tistical computing packages are now readily available         eral across jobs and organizations. Thus, the use of
                                           for desktop computers, allowing for high-speed analy-         meta-analysis helped to establish that cognitive ability
                                           sis of complex statistical models. Additionally, new          tests and structured interviews were highly valid
                                           statistical modeling techniques, such as structural           selection methods in nearly every job.
                                           equations modeling, have gained footing in management
                                                                                                              Meta-analysis has now been applied to many dif-
                                           research. Thus, management researchers are now better
                                                                                                         ferent areas of management research, including train-
                                           able to empirically test more complex research hypothe-
                                                                                                         ing, recruitment, fairness, and many other topics.
                                           ses, and management as a science is perpetuated.
                                                                                                         Additionally, there have been a number of refinements
                                                 The improvement in researchers’ ability to analyze      to the statistical corrections used in meta-analysis.
                                           statistics more quickly has resulted in an increase in        This increased acceptance of and use of meta-analysis
                                           information about theories of management. Practicing          in management research supports the notion of man-
                                           managers may now know of certain relationships that           agement as a science. Meta-analysis provides for
                                           have received strong support through decades of empir-        “truths” in management—relationships between vari-
                                           ical research. Such “truths” may become guiding prin-         ables that hold strong regardless of the people or situ-
                                           ciples that practicing managers see as ideal solutions to     ation involved. For instance, one consistent finding is
                                           a variety of situations. For instance, numerous empiri-       that structured selection interviews, ones in which
                                           cal studies over several recent decades have supported        applicants are asked the same set of predetermined
                                           the relationship between appropriate goal setting and         questions, and in which responses are evaluated using
                                           higher work performance. This relationship has been           the same criteria, are a more valid predictor of future
                                           tested in a variety of situations, with a number of con-      job performance than are unstructured interviews, in
                                           textual influences present, yet the statistical relationship   which applicants are asked different questions and
                                           holds in nearly all of them. Thus, a practicing manager       responses are evaluated using different criteria. Meta-
                                           may see this body of empirical research and, in a work        analysis has been used to establish this finding, and
                                           situation, see the benefits of goal setting on perform-        thus a practicing manager may use this information as
                                           ance as a scientific ideal. He or she may then implement       a scientific “fact” when conducting selection interviews.


16
                                         E N C Y C L O P E D I A       O F   M A N A G E M E N T
CONTEXTUAL INFLUENCES. While improvements in                 differ dramatically depending on the belief one has as




                                                                                                                          THE ART AND SCIENCE OF MANAGEMENT
management researchers’ ability to conduct statistical       to the nature of the practice of management. The per-
analysis in their studies has promoted the notion of         spective of management as an art assumes to some
management as a science, in some ways it has also            extent that a manager has a disposition or experiences
promoted management as an art. Because of the capa-          that guide him or her in managerial decisions and activ-
bility to statistically analyze and interpret larger, more   ities. Thus, with this perspective, many managers may
complex models of behavior, researchers are now test-        be successful without any formal education or training
ing models with this increased complexity. In particu-       in management. The perspective of management as a
lar, there is an increased emphasis on contextual            science, however, would indicate that management
influences. That is, rather than focusing solely on how       skills can be taught through an understanding of theory
behaviors are linked to outcomes, many researchers           and principles of management. Many of today’s educa-
now include individual, social, and political variables      tional institutions and workplaces blend the notion of
in research models to have a richer understanding of         management as a science and an art in their approach
behavior. Thus, there are more complex recommenda-           to preparing employees for management.
tions that can be made from recent research, rather
than basic “truths.”                                              Primarily, formal management education for
                                                             practicing managers, such as with bachelors and mas-
     For example, one of the most prominent areas of         ters degrees, emphasizes the science of management.
contextual research in recent years is in person-            Management education in today’s universities prima-
organization fit. Person-organization fit is a part of the     rily emphasizes management as a science. Textbooks
attraction-selection-attrition model that suggests that      are used in management courses for bachelors’ degrees,
certain types of individuals are attracted to particular     and these texts emphasize many of the consistent find-
organizations, selected by those organizations, and          ings of many decades of management research. And, as
either adapt to become an effective part of the organi-      these degrees increase in popularity, it is likely that
zation, or leave if they do not fit with the organization.    more practicing managers will have a set of established
Person-organization fit (p-o fit) is the notion that the       management ideals with which they operate.
particular skills, attitudes, values, and preferences of
an individual employee should fit with those of the                While formal management education may pro-
organization in order for that employee to have high         mote management as a science, many development
job satisfaction and performance. The p-o fit model           efforts support the notion of management as an art. To
indicates that this fit is likely to be as important as an    cultivate management talent, organizations offer men-
assessment of applicants’ abilities when hiring.             toring, overseas experiences, and job rotation. These
Previous models of selection emphasized a strict             activities allow managers to gain greater social and
interpretation of applicant skills, with the use of valid    political insight and thus rely on their own judgment
selection tests as most important. However, the p-o          and abilities to improve their management style. Much
fit model indicates that, even if skills and abilities        of mentoring involves behavior modeling, in which a
have been appropriately measured, that hiring the            protégé may learn nuances of managerial behavior
applicant with the best skills is not always the best        rather than a set of specific guidelines for managing.
course of action, but that hiring an individual who          Overseas experiences are likely to involve a great deal
fits into the culture of the organization could be more       of manager adaptation, and the general rules by which
advantageous.                                                a manager might operate in one culture are likely to
                                                             change when managing workers in other countries.
     This move towards including contextual influ-            Finally, job rotation is a technique that requires a man-
ences in management research models promotes the             ager to work in a variety of settings. Again, this encour-
notion of management as an art. Rather than indicat-         ages a manager to be flexible and adaptive, and likely
ing that there are specific principles and guidelines         rely more on his or her personal skill in managing.
that can guide management practice, it suggests that
managerial behavior should change based on the                    The foundations of management as an art and
social and political context of the situation.               management as a science are evident in today’s educa-
                                                             tional institutions and work organizations. Management
                                                             as a science was primarily influenced by researchers
                                                             in the area of scientific management, such as Frederick
ART AND SCIENCE IN MANAGEMENT
                                                             Taylor, and continues today in much of the empirical
EDUCATION AND DEVELOPMENT
                                                             research on management issues. Management as an
     Management education and development, which             art has been influenced by scholars such as Henry
attempt to prepare today’s managers for organiza-            Mintzberg and Peter Drucker, and is often evident in
tional challenges, are guided by both the notion of          complex theories of management. Many scholars and
management as an art and as a science. The approach          practitioners blend art and science to more effectively
to management education and development is likely to         cultivate managerial talent. This is evident in recent


                                                                                                                                                              17
                                                             E N C Y C L O P E D I A       O F   M A N A G E M E N T
                                 theories of management, research in workplaces, and               capturing and encoding the knowledge of a human expert




     ARTIFICIAL INTELLIGENCE
                                 education and development of managers.                            in a particular domain. For example, the knowledge of
                                 SEE ALSO: Management Science; Management Thought;
                                                                                                   medical doctors might be captured in a computerized
                                           Organizational Behavior; Research Methods and           model that can be used to help diagnose patient illnesses.
                                           Processes; Statistics
                                                                            Marcia J. Simmering    MACHINE LEARNING SYSTEMS
                                                                                                        The second category of AI, machine learning sys-
                                 FURTHER READING:
                                                                                                   tems, creates new knowledge by finding previously
                                 Appley, Lawrence A. Management in Action: The Art of Getting      unknown patterns in data. In contrast to knowledge
                                 Things Done through People. American Management Association,      representation approaches, which model the problem-
                                 1956.                                                             solving structure of human experts, machine learning
                                 DuBrin, Andrew J. Essentials of Management. 6th ed.               systems derive solutions by “learning” patterns in
                                 Peterborough, Ontario: Thomson South-Western, 2003.               data, with little or no intervention by an expert. There
                                 Drucker, Peter F. The Essential Drucker. New York, NY: Harper
                                                                                                   are three main machine learning techniques: neural net-
                                 Collins Publishers, 2001.                                         works, induction algorithms, and genetic algorithms.
                                 Jones, Gareth R., and George, Jennifer M. Contemporary            NEURAL NETWORKS.          Neural networks simulate the
                                 Management. 4th ed. New York, NY: McGraw-Hill Irwin, 2006.        human nervous system. The concepts that guide neural
                                 Kuhn, Thomas S. The Structure of Scientific Revolutions. 3rd ed.   network research and practice stem from studies of
                                 Chicago, IL: The University of Chicago Press, 1996.               biological systems. These systems model the interac-
                                 Lilienthal, David E. Management: A Humanist Art. New York,        tion between nerve cells. Components of a neural net-
                                 NY: Colombia University Press, 1967.                              work include neurons (sometimes called “processing
                                                                                                   elements”), input lines to the neurons (called den-
                                 Mintzberg, Henry. “The Manager’s Job: Folklore and Fact.”
                                                                                                   drites), and output lines from the neurons (called axons).
                                 Harvard Business Review, July-August 1975, 56–62.
                                 ———. The Nature of Managerial Work. New York: Harper &                 Neural networks are composed of richly con-
                                 Row, 1973.                                                        nected sets of neurons forming layers. The neural net-
                                                                                                   work architecture consists of an input layer, which
                                 Rue, Leslie W., and Byars, Lloyd L. Management: Skills and
                                                                                                   inputs data to the network; an output layer, which pro-
                                 Applications. 10th ed. New York, NY: McGraw-Hill Irwin, 2003.
                                                                                                   duces the resulting guess of the network; and a series
                                 Williams, Chuck. Management. Cincinnati, OH: South-Western        of one or more hidden layers, which assist in propa-
                                 College Publishing, 2000.                                         gating. This is illustrated in Figure 1.
                                                                                                         During processing, each neuron performs a
                                                                                                   weighted sum of inputs from the neurons connecting
                                                                                                   to it; this is called activation. The neuron chooses to
                                                                                                   fire if the sum of inputs exceeds some previously set
                                                                                                   threshold value; this is called transfer.
                                  ARTIFICIAL INTELLIGENCE
                                                                                                         Inputs with high weights tend to give greater activa-
                                                                                                   tion to a neuron than inputs with low weights. The weight
                                       Artificial intelligence (AI) refers to computer soft-
                                                                                                   of an input is analogous to the strength of a synapse in a
                                 ware that exhibits intelligent behavior. The term “intelli-
                                                                                                   biological system. In biological systems, learning occurs
                                 gence” is difficult to define, and has been the subject of
                                                                                                   by strengthening or weakening the synaptic connections
                                 heated debate by philosophers, educators, and psychol-
                                                                                                   between nerve cells. An artificial neural network simu-
                                 ogists for ages. Nevertheless, it is possible to enumerate
                                                                                                   lates synaptic connection strength by increasing or
                                 many important characteristics of intelligent behavior.
                                                                                                   decreasing the weight of input lines into neurons.
                                 Intelligence includes the capacity to learn, maintain a
                                 large storehouse of knowledge, utilize commonsense                      Neural networks are trained with a series of data
                                 reasoning, apply analytical abilities, discern relation-          points. The networks guess which response should be
                                 ships between facts, communicate ideas to others and              given, and the guess is compared against the correct
                                 understand communications from others, and perceive               answer for each data point. If errors occur, the weights
                                 and make sense of the world around us. Thus, artificial            into the neurons are adjusted and the process repeats
                                 intelligence systems are computer programs that exhibit           itself. This learning approach is called backpropaga-
                                 one or more of these behaviors.                                   tion, and is similar to statistical regression.
                                      AI systems can be divided into two broad cate-                    Neural networks are used in a wide variety of
                                 gories: knowledge representation systems and machine              business problems, including optical character recog-
                                 learning systems. Knowledge representation systems,               nition, financial forecasting, market demographics
                                 also known as expert systems, provide a structure for             trend assessment, and various robotics applications.


18
                               E N C Y C L O P E D I A        O F     M A N A G E M E N T
                                                                                                                         ARTIFICIAL INTELLIGENCE
                                                      Figure 1




        I1                                                                                                  Output 1
                                   Wt 11


                                   Wt 12




        I2




                                                                                                            Output 2



        I3




                                   Wt 41



        I4                         Wt 42                                                                    Output 3




                    Input                               Hidden                               Output
                    Layer                               Layer                                Layer




INDUCTION ALGORITHMS. Induction algorithms form              selecting the input variables that do the best job of
another approach to machine learning. In contrast to         dividing the data set into homogeneous partitions. For
neural networks, which are highly mathematical in            example, consider Figure 2, which contains the data
nature, induction approaches tend to involve symbolic        set pertaining to decisions that were made on credit
data. As the name implies, these algorithms work by          loan applications.
implementing inductive reasoning approaches. Induc-
tion is a reasoning method that can be characterized as
“learning by example.” Unlike rule-based deduction,                                   Figure 2
induction begins with a set of observations and con-                           Artificial Intelligence &
structs rules to account for these observations.                                   Expert Systems
Inductive reasoning attempts to find general patterns
                                                                                   Credit      Current     Loan
that can fully explain the observations. The system is
                                                                      Salary       History     Assets      Decision
presented with a large set of data consisting of several
input variables and one decision variable. The system            a)   High         Poor        High        Accept
                                                                 b)   High         Poor        Low         Reject
constructs a decision tree by recursively partitioning           c)   Low          Poor        Low         Reject
data sets based on the variables that best distinguish           d)   Low          Good        Low         Accept
between the data elements. That is, it attempts to par-          e)   Low          Good        High        Accept
tition the data so that each partition contains data with        f)   High         Good        Low         Accept

the same value for a decision variable. It does this by


                                                                                                                                                   19
                                                             E N C Y C L O P E D I A         O F   M A N A G E M E N T
                                     An induction algorithm would infer the rules in          sequence on the chromosome. The genetic algorithm




     ARTIFICIAL INTELLIGENCE
                                 Figure 3 to explain this data.                               would start with an initial population of chromosomes
                                                                                              (routes) and measure each according to a fitness func-
                                                                                              tion (the total distance traveled in the route). Those
                                                          Figure 3                            with the best fitness functions would be selected and
                                                                                              those with the worst would be discarded. Then random
                                       If the credit history is good, then accept the loan
                                       application                                            pairs of surviving chromosomes would mate, a
                                       If the credit history is poor and current assets are   process called crossover. This involves swapping city
                                       high, then accept the loan application                 positions between the pair of chromosomes, resulting
                                       If the credit history is poor and current assets are   in a pair of child chromosomes. In addition, some
                                       low, then reject the loan application                  random subset of the population would be mutated, such
                                                                                              that some portion of the sequence of cities would be
                                                                                              altered. The process of selection, crossover, and muta-
                                      As this example illustrates, an induction algo-         tion results in a new population for the next generation.
                                 rithm is able to induce rules that identify the general      This procedure is repeated through as many generations
                                 patterns in data. In doing so, these algorithms can          as necessary in order to obtain an optimal solution.
                                 prune out irrelevant or unnecessary attributes. In the
                                 example above, salary was irrelevant in terms of                  Genetic algorithms are very effective at finding
                                 explaining the loan decision of the data set.                good solutions to optimization problems. Scheduling,
                                                                                              configuration, and routing problems are good candi-
                                      Induction algorithms are often used for data            dates for a genetic algorithm approach. Although
                                 mining applications, such as marketing problems that         genetic algorithms do not guarantee the absolute best
                                 help companies decide on the best market strategies          solution, they do consistently arrive at very good solu-
                                 for new product lines. Data mining is a common serv-         tions in a relatively short period of time.
                                 ice included in data warehouses, which are frequently
                                 used as decision support tools.
                                                                                              AI IN THE TWENTY-FIRST CENTURY
                                 GENETIC ALGORITHMS.       Genetic algorithms use an
                                 evolutionary approach to solve optimization prob-                Artificial intelligence systems provide a key com-
                                 lems. These are based on Darwin’s theory of evolu-           ponent in many computer applications that serve the
                                 tion, and in particular the notion of survival of the        world of business. In fact, AI is so prevalent that many
                                 fittest. Concepts such as reproduction, natural selec-        people encounter such applications on a daily basis
                                 tion, mutation, chromosome, and gene are all included        without even being aware of it.
                                 in the genetic algorithm approach.
                                                                                                   One of the most ubiquitous uses of AI can be
                                      Genetic algorithms are useful in optimization           found in network servers that route electronic mail.
                                 problems that must select from a very large number of        Expert systems are routinely utilized in the medical
                                 possible solutions to a problem. A classic example of        field, where they take the place of doctors in assessing
                                 this is the traveling salesperson problem. Consider a        the results of tests like mammograms or electrocardio-
                                 salesman who must visit n cities. The salesperson’s          grams. Neural networks are commonly used by credit
                                 problem is to find the shortest route by which to visit       card companies, banks, and insurance firms to help
                                 each of these n cities exactly once, so that the sales-      detect fraud. These AI systems can, for example, mon-
                                 man will tour all the cities and return to the origin. For   itor consumer spending habits, detect patterns in the
                                 such a problem there are (n − 1)! possible solutions, or     data, and alert the company when uncharacteristic pat-
                                 (n − 1) factorial. For six cities, this would mean 5 ×       terns arise. Genetic algorithms serve logistics plan-
                                 4 × 3 × 2 × 1 = 120 possible solutions. Suppose that         ning functions in airports, factories, and even military
                                 the salesman must travel to 100 cities. This would           operations, where they are used to help solve incredi-
                                 involve 99! possible solutions. This is such an astro-       bly complex resource-allocation problems. And per-
                                 nomical number that if the world’s most powerful com-        haps most familiar, many companies employ AI
                                 puter began solving such a problem at the time that the      systems to help monitor calls in their customer service
                                 universe had begun and worked continuously on it since,      call centers. These systems can analyze the emotional
                                 it would be less than one percent complete today!            tones of callers’ voices or listen for specific words,
                                                                                              and route those calls to human supervisors for follow-
                                      Obviously, for this type of problem a brute
                                                                                              up attention.
                                 strength method of exhaustively comparing all possi-
                                 ble solutions will not work. This requires the use of             Although computer scientists have thus far failed
                                 heuristic methods, of which the genetic algorithm is a       to create machines that can function with the complex
                                 prime example. For the traveling salesperson problem,        intelligence of human beings, they have succeeded in
                                 a chromosome would be one possible route through             creating a wide range of AI applications that make
                                 the cities, and a gene would be a city in a particular       people’s lives simpler and more convenient.


20
                               E N C Y C L O P E D I A        O F     M A N A G E M E N T
SEE ALSO: Expert Systems                                              • Provide a means for assessors to record their




                                                                                                                              ASSESSMENT CENTERS
                                                    Michel Mitri        observations of participants’ behavior as it
                                    Revised by Rhoda L. Wilburn         occurs
                                                                      • Involve the preparation of an assessor’s
FURTHER READING:                                                        report

Dhar, V., and R. Stein. Seven Methods for Transforming                • Base the integration of behaviors on the
Corporate Data into Business Intelligence. Upper Saddle River,          pooling of assessors’ information, or upon a
NJ: Prentice Hall, 1997.                                                statistical integration process validated in
                                                                        accordance with professionally accepted
“Hot Topics: Artificial Intelligence.” BBC Online. Available
from <http://www.bbc.co.uk/science/hottopics/ai/>.                      standards.

Kahn, Jennifer. “It’s Alive! From Airport Tarmacs to Online Job         Behavioral dimensions that are frequently meas-
Banks to Medical Labs, Artificial Intelligence Is Everywhere.”      ured in assessment centers include planning and
Wired, March 2002. Available from <http://www.wired.com/           organizing, leadership, oral communication, tolerance
wired/archive/10.03/everywhere.html>.                              for stress, and initiative. Participants have their per-
Menzies, Tim. “21st Century AI: Proud, Not Smug.” IEEE             formance on these and similar dimensions evaluated
Intelligent Systems, May/June 2003.                                while they engaging in two or more of the following
                                                                   activities over a one- or two-day period:
Norvig, P., and S. Russell. Artificial Intelligence: A Modern
Approach. Upper Saddle River, NJ: Prentice Hall, 2002.                • In-basket exercises, in which participants
Van, Jon. “Computers Gain Power, But It’s Not What You                  respond to a series of administrative prob-
Think.” Chicago Tribune, 20 March 2005.                                 lems that simulate typical managerial tasks
                                                                      • Leaderless group discussions, in which a
                                                                        group of participants without an assigned
                                                                        leader must arrive at a group solution to a
                                                                        specified problem within a given time period
                                                                      • Role-plays, in which participants are involved
 ASSESSMENT CENTERS                                                     in a simulation of a situation that could occur
                                                                        on the job
     An assessment center is a process used to make                   • Interviews, in which participants typically
personnel decisions in which participants engage in a                   are questioned about how they have handled
variety of exercises and have their performance evalu-                  particular work situations in the past and
ated by multiple assessors. The goal of an assessment                   how they would respond to specific work sit-
center is to simulate job tasks so that an applicant can                uations in the future
demonstrate skills or characteristics that would be                   • Management games, in which participants
effective on the job.                                                   must work cooperatively to meet mental or
    According to the International Task Force on                        physical challenges
Assessment Center Guidelines, assessment centers:
                                                                         Evaluations of assessment center participants can
   • Conduct job analyses of relevant behaviors                    be used for employee selection decisions (hiring and
   • Classify participants’ behaviors into mean-                   promotion), and to help identify training and develop-
     ingful and relevant categories                                ment needs. The most common use of assessment cen-
                                                                   ters is to evaluate participants’ management potential.
   • Use techniques that are designed to provide                   When used for selection or promotion decisions, the
     information for evaluating the dimensions                     emphasis is on identifying participants who do well
     previously determined by the job analysis                     on essential job performance dimensions. When used
   • Involve multiple assessment techniques,                       for training and development purposes, the focus is on
     such as tests, interviews, questionnaires,                    identifying participant deficiencies on critical job
     sociometric devices, and simulations                          dimensions. The feedback and employee development
                                                                   suggestions that result from an assessment form the
   • Include a sufficient number of job-related
                                                                   basis for training programs that are designed to cor-
     simulations, allowing opportunities to observe
                                                                   rect performance problems. For organizations, assess-
     the candidate’s behavior related to each
                                                                   ment centers can serve as needs assessment programs
     competency/dimension being assessed
                                                                   that identify employee development and hiring needs.
   • Utilize several assessors to evaluate each                         Early versions of assessment centers were used
     participant                                                   by the military in the 1940s. The first use of an assess-
   • Employ thoroughly trained assessors                           ment center in an industrial setting was in the 1950s,


                                                                                                                                                   21
                                                                   E N C Y C L O P E D I A      O F    M A N A G E M E N T
                            when AT&T used the process in an attempt to evaluate       indicates that situational judgment tests are good pre-




     ATTRIBUTION THEORY
                            participants’ potential for managerial success. The        dictors of job performance.
                            results of this early assessment center application were
                            encouraging, and assessment center use increased fol-      SEE ALSO: Employee Evaluation and Performance Appraisals;
                                                                                                 Employee Recruitment Planning; Employee
                            lowing AT&T’s apparent success. According to one
                                                                                                 Screening and Selection
                            study by Gaugler, Rosenthal, Thornton, and Bentson,
                            by 1987 more than 2,000 organizations, including                                                              Tim Barnett

                            Pepsico, IBM, Rubbermaid, and the FBI, used assess-                                             Revised by Judith M. Nixon

                            ment centers to select and promote managers.
                                 As the use of assessment centers increased during     FURTHER READING:
                            the 1960s and 1970s, researchers identified several
                                                                                       Beagrie, Scott. “How to Cut It at Assessment Centres.”
                            ways in which their utility as a personnel selection       Personnel Today, 5 October 2004.
                            tool could be improved. In 1973, Bender suggested
                            that companies should undertake validation studies to      Bender, J.M. “What Is ‘Typical’ of Assessment Centers?”
                            ensure that assessment centers actually predicted          Personnel 50, no. 4 (1973): 50–57.
                            managerial success. He also pointed out that assessors     Gatewood, Robert D., and Hubert S. Field. Human Resource
                            should be more thoroughly trained before they evalu-       Selection. 6th ed. Mason, OH: South-Western College
                            ated assessment center participants.                       Publishing, 2004.

                                 In an attempt to encourage uniformity and pro-        Gaugler, B.B., D.B. Rosenthal, G.C. Thornton, III, and
                                                                                       C. Bentson. “Meta-Analysis of Assessment Center Validity.”
                            fessionalism in assessment center practices, the Task
                                                                                       Journal of Applied Psychology 72 (1987): 493–511.
                            Force on Assessment Center Guidelines published
                            Guidelines and Ethical Considerations for Assessment       The International Congress on Assessment Center Methods.
                            Center Operations in 1989. These guidelines were           Available from <http://www.assessmentcenters.org>.
                            updated in 2000 and endorsed by the International          Joiner, D.A. “Assessment Centers: What’s New?” Public
                            Congress on Assessment Center Methods. They spell          Personnel Management 31, no. 2 (2002): 179–185.
                            out the essential elements of assessment centers and       ———. “Guidelines and Ethical Considerations for Assessment
                            provide recommendations regarding the content of           Center Operations: International Task Force on Assessment
                            assessor training, information participants should         Center Guidelines.” Public Personnel Management 29, no. 3
                            receive before beginning the assessment center, data       (2000): 315–331.
                            usage, and validation methods. In addition, these          Lievens, F., and R.J. Klimoski. “Understanding the Assessment
                            guidelines provide a standard for judging assessment       Center Process: Where Are We Now?” In International Review
                            center practices employed by organizations.                of Industrial and Organizational Psychology. ed. C.L. Cooper
                                                                                       and I.T. Robertson. Chichester, United Kingdom: John Wiley &
                                 The preponderance of research evidence indi-          Sons, Ltd.
                            cates that, when designed and conducted in a manner
                            consistent with professional guidelines, assessment        McDaniel, M.A., F.P. Morgeson, E.B. Finnegan, M.A. Campion,
                                                                                       and E.P. Braverman. “Use of Situational Judgment Tests to
                            centers are valid predictors of future promotions and
                                                                                       Predict Job Performance: A Clarification of the Literature.”
                            job performance. Additional research suggests that         Journal of Applied Psychology 86 (2001): 730–740.
                            assessment centers have less adverse impact on
                            women and minorities than many other commonly                                         n
                                                                                       Spychalski, A.C., M.A. Qui˜ ones, B.B. Gaugler, and K. Pohley.
                                                                                       “A Survey of Assessment Center Practices in Organizations in
                            used selection tools, and courts generally have upheld
                                                                                       the United States.” Personnel Psychology 50 (1997): 71–90.
                            the use of properly designed assessment centers.
                                                                                       Woehr, D.J. and W. Arthur, Jr. “The Construct-Related Validity
                                  The primary criticism of assessment centers is       of Assessment Center Ratings: A Review and Meta-Analysis of
                            that they are very expensive in terms of both develop-     the Role of Methodological Factors.” Journal of Management
                            ment and implementation, which makes their use             29, no. 2 (2003): 231–258.
                            infeasible for many small organizations. Other
                            researchers question the convergent and discriminant
                            validity of the measurement of behavioral dimensions
                            in assessment centers. One method used to overcome
                            the expense problem is to videotape the candidates’
                            performance and have the assessors evaluate them
                            later. This avoids costs and problems related to the        ATTRIBUTION THEORY
                            logistics of assembling candidates and assessors.
                            Another technique is to use “situational judgment               Attribution theory is intended to help a person
                            tests,” or written simulation tests. Candidates either     understand the causes of human behavior, be it their
                            choose the best course of action from a selection of       own or someone else’s. The basis of attribution theory
                            choices or provide a written course of action. Research    is that people want to know the reasons for the actions


22
                          E N C Y C L O P E D I A     O F   M A N A G E M E N T
that they and others take; they want to attribute causes   Internal causes are attributed to the person being




                                                                                                                      ATTRIBUTION THEORY
to behaviors they see rather than assuming that these      observed, while external causes are attributed to out-
behaviors are random. This allows people to assume         side factors. The two internal attributions one can
some feeling of control over their own behaviors           make are that a person’s ability or a person’s effort
and over situations. Psychologist Fritz Heider             determined the outcome. Task difficulty and luck are
(1896–1988) first developed attribution theory in his       the external causes of behavior. When perceiving
1958 book The Psychology of Interpersonal Relations.       behavior, an observer will make a judgment as to
Heider proposed that what people perceived and             which of these factors is the cause of behavior.
believed about what they saw dictated how they would       However, when making a determination between
act, even if their beliefs about what they perceived       internal and external causes of behavior, the perceiver
were invalid.                                              must examine the elements of consistency, distinctive-
                                                           ness, and consensus.
      Heider’s proposed theory of attribution was fur-
ther developed by psychologist Bernard Weiner and               Consistency describes whether the person being
colleagues in the 1970s and 1980s, and this new theo-      observed behaves the same way when faced with the
retical framework has been used primarily in current       same set of circumstances. If the person being
attribution research. A final development to attribution    observed acts the same way in the same type of situa-
theory was provided by psychologist Harold Kelley,         tion, consistency is high; if they act differently each
who examined how consistency, distinctiveness, and         time, then consistency is low. Distinctiveness is
consensus could be used by individuals to establish        whether the observed person acts the same way in dif-
the validity of their perceptions.                         ferent types of situations. If the person being observed
                                                           exhibits the same behavior in a variety of contexts,
    Attributions are critical to management because        then distinctiveness is low; if they have different
perceived causes of behavior may influence managers’        behavior depending on the context, then distinctive-
and employees’ judgments and actions. For instance,        ness is high. Finally, consensus is the degree to which
managers must often observe employee performance           other people, if in the same situation, would behave
and make related judgments. If a manager attributes        similarly to the person being observed. If the observer
an employee’s poor performance to a lack of effort,        sees others acting the same way that the person being
then the outcome is likely to be negative for that         perceived acts, then consensus is high. However, if
employee; he or she may receive a poor performance         others behave differently in the type of situation, then
appraisal rating or even be terminated from the job.       consensus is low. Consistency, distinctiveness, and
Conversely, if a manager perceives that an employee’s      consensus are evaluated when observing behavior, and
poor performance is due to a lack of skill, the manager    then a judgment about an internal versus external
may assign the employee to further training or provide     cause of behavior is made. When consistency, distinc-
more instruction or coaching. Making an inaccurate         tiveness, and consensus are all high, the perceiver con-
judgment about the causes of poor performance can          cludes that there is an external cause of behavior.
have negative repercussions for the organization.          When consistency is high, distinctiveness is low, and
     Attributions also may influence employee moti-         consensus is low, the perceiver will attribute the cause
vation. Employees who perceive the cause of their          of behavior to internal factors.
success to be outside of their control may be reluctant         To better understand consistency, distinctiveness,
to attempt new tasks and may lose motivation to per-       and consensus, consider a workplace example. Nancy,
form well in the workplace. Conversely, employees          a manager, has assigned a team of employees to
who attribute their success to themselves are more         develop a custom sales training program for a client.
likely to have high motivation for work. Thus, under-      As the project progresses, Nancy continues to see
standing attributions that people make can have a          problems in the work produced by Jim, one of the
strong effect on both employee performance and man-        team members. In order to determine why Jim’s per-
agerial effectiveness.                                     formance is not satisfactory, Nancy first considers
                                                           consistency, or whether Jim has performed poorly on
ATTRIBUTION PROCESS                                        other similar team projects. A review of his past per-
                                                           formance appraisals indicates that he has not had prior
AND THE CAUSES OF BEHAVIOR
                                                           performance problems when creating custom sales
     Attribution is considered to be a three-stage         training programs. This would lead Nancy to conclude
process. First, the behavior of an individual must be      that there was an external cause of the poor perform-
observed. Second, the perceiver must determine that        ance. Second, Nancy considers distinctiveness; she
the behavior they have observed is deliberate. That is,    wants to know if Jim has performed poorly on differ-
the person being observed is believed to have behaved      ent types of tasks. Again, in checking Jim’s perform-
intentionally. Finally, the observer attributes the        ance reviews, she finds that when he is on a team to
observed behavior to either internal or external causes.   accomplish a different type of task, such as developing


                                                                                                                                           23
                                                           E N C Y C L O P E D I A      O F   M A N A G E M E N T
                            a selection interview, he has excelled. This further          the fundamental attribution error is the opposite;




     ATTRIBUTION THEORY
                            points to an external cause of Jim’s poor performance.        people assume that others are more influenced by sit-
                            Finally, Nancy assesses consensus, or the behavior of         uation than by personal factors. Thus, while one can
                            others in this similar task. In asking the team members       assume this error to be present in American managers’
                            about their experiences with the current project, she         perceptions, this may not be the case for managers
                            finds that many of them have had difficulty in devel-           from other cultures.
                            oping this custom sales training program. Thus, all                 As described previously, when a person perceives
                            indicators point to Jim’s poor performance being              their own success or failure versus perceiving the suc-
                            caused by an external factor, such as a difficult task or a    cess or failure of others, they assign one or more
                            demanding client. Based on this attribution, Nancy may        causes: effort, ability, task difficulty, or luck. Effort
                            explore ways in which to minimize the negative effects        and ability are internal causes, and task difficulty and
                            of the external factors on Jim’s performance rather than      luck are external causes. Some researchers argue that
                            attempting to influence his level of effort or ability.        it is human nature to have a self-serving bias, which is
                                  The prior example illustrated how consistency,          the tendency to credit one’s own successes to internal
                            distinctiveness, and consensus might point toward an          factors and one’s own failure to external factors. Thus,
                            external cause. However, these three factors also may         a common assessment of a person’s own success
                            lead an observer to attribute behavior to an internal         might be: “I got a raise because I’m very skilled at my
                            cause, such as the observed person’s effort or ability.       job” (ability), or “I was promoted because of all of the
                            Nancy, the observer from the previous example, also           hours I’ve put into the job” (effort). Common assess-
                            has experienced difficulties with a secretary named            ments of a person’s own failure might be: “I didn’t
                            Kelly. Another manager has complained to Nancy that           finish the project on time because the deadline was
                            Kelly has not completed work on time and turns in             unreasonable for the amount of work required” (task
                            work full of errors. Nancy observes Kelly for several         difficulty), or “I didn’t make the sale because someone
                            days and finds that, when given work by this particu-          else happened to speak to the client first” (luck).
                            lar manager, Kelly continues to perform poorly, which         Coupled with the fundamental attribution error, the
                            indicates an internal cause (i.e., high consistency).         self-serving bias indicates that people tend to make
                            Second, when performing work for other managers on            different attributions about their own successes and
                            other tasks, Kelly continues to do substandard work;          failures than the successes and failures of others.
                            this is distinctiveness, and it again points to an internal        While some researchers argue that the self-serving
                            cause. Finally, Nancy observes that when other secre-         bias is widespread across most humans in most cul-
                            taries perform the work assigned by the manager who           tures, others argue that this is not so. Results from a
                            complained about Kelly, they are able to successfully         meta-analysis (a method that statistically combines
                            perform their duties in a timely manner. This is con-         results of multiple empirical research studies) pub-
                            sensus, and it also points to an internal cause. Based        lished in 2004 by Mezulis, Abramson, Hyde, and
                            on these observations, Nancy can attribute Kelly’s            Hankin aimed to address this issue. In examining more
                            poor performance to an internal cause, or namely to           than 500 published research studies, some of the
                            Kelly’s own lack of skill or effort.                          results of this meta-analysis indicated that, in general,
                                                                                          there were no differences between men and women in
                                                                                          their self-serving biases; men and women were just as
                            FUNDAMENTAL ATTRIBUTION ERROR                                 likely to make self-serving attributions. Additionally,
                            AND SELF-SERVING BIAS                                         these researchers found that the United States and
                                 People make attributions every day. However,             other Western nations (Canada, the United Kingdom,
                            these attributions are not always correct. One common         Australia, New Zealand, and Western Europe) had a
                            problem in assigning cause is called the fundamental          strong self-serving bias, which was more pronounced
                            attribution error. This is the tendency of a person to        than in most other cultures on other continents.
                            overestimate the influence of personal factors and             However, despite these strength-related differences,
                            underestimate the influence of situational factors             the researchers found that there was a positive self-
                            when assessing someone else’s behavior. That is,              serving bias in all cultures studied. Within the United
                            when observing behavior, a person is more likely to           States, there were no meaningful differences in self-
                            assume that another person’s behavior is primarily            serving bias among different racial and ethnic groups;
                            caused by them and not by the situation. In the work-         no one race was more likely than the others to be more
                            place, this may mean that managers are more likely to         susceptible to this self-serving bias. The general con-
                            assume that employees’ poor performance is due to a           clusion of Mezulis and her colleagues was that there is
                            lack of ability or effort rather than to task difficulty or    a universal self-serving attributional bias that exists
                            luck. The fundamental attribution error, while promi-         across gender, race, and even nation.
                            nent in North America, is not as common across the                Attribution theory was developed to explain how
                            rest of the world. In other cultures, such as in India,       people understand the causes of human behavior, be it


24
                          E N C Y C L O P E D I A       O F   M A N A G E M E N T
their own or someone else’s. Managers often act based               extroversion) have a stronger impact on job perform-




                                                                                                                                AUTONOMY
on their attributions and may act inappropriately if                ance. Thus, by giving employees more autonomy, they
attributions are not valid. Managers who are aware of               are better able to use their personal attributes to con-
the attributional process, the types of internal and                tribute to job performance.
external attributions, and the presence of the funda-                    Unfortunately, too much autonomy can lead to
mental attribution error and the self-serving bias can              employee dissatisfaction. Each individual has a differ-
better understand their own and others’ behavior.                   ent level of need for autonomy in their job. Some
                                             Marcia J. Simmering    workers prefer more direction from a manager and feel
                                                                    uncomfortable with autonomy; they may not want to
FURTHER READING:                                                    exert effort or take the responsibility of having their
                                                                    name solely associated with a task, project, or prod-
Heider, Fritz. The Psychology of Interpersonal Relations. New       uct. Additionally, if employees are not well-equipped—
York: Wiley, 1958.                                                  either in training or in personality—to exercise
Jones, E.E., D.E. Kanouse, H.H. Kelley, R.E. Nisbett, S. Valins,    autonomy, it may result in workplace tension and poor
and B. Weiner, eds. Attribution: Perceiving the Causes of           performance. Finally, when given autonomy, workers
Behavior. Morristown, NJ: General Learning Press, 1972.             may believe that they have authority somewhat equal
Kelley, H.H. “Attribution in Social Interaction.” In Attribution:   to that of their direct supervisor. This may cause them
Perceiving the Causes of Behavior. ed. E.E. Jones, et al.           to resent the extra responsibility or feel that their pay
Morristown, MJ: General Learning Press, 1972.                       should be increased. A related concern is that man-
Mezulis, Amy H., Lyn Y. Abramson, Janet S. Hyde, and Benjamin       agers may feel marginalized when employee auton-
L. Hankin. “Is There a Universal Positivity Bias in Attributions?   omy increases, particularly when there is a change to
A Meta-Analytic Review of Individual, Developmental, and            a traditional work environment. Managers may feel
Cultural Differences in Self-Serving Attributional Bias.”           that by giving employees autonomy, they no longer
Psychological Bulletin 130, no. 5 (2004): 711–747.                  contribute as much to the organization or that their
                                                                    jobs may be at stake.


                                                                    MANAGERIAL AUTONOMY
                                                                         Managers tend to have increased autonomy in
                                                                    organizations that are more decentralized. In such
 AUTONOMY                                                           organizations, managers have more latitude to make
                                                                    decisions regarding the work of employees and even
     Autonomy is the degree to which a job provides                 personnel decisions. For example, managers with
an employee with the discretion and independence to                 increased autonomy may be able to assign merit raises
schedule their work and determine how it is to be                   to the employees in their unit at their discretion. As
done. Higher levels of autonomy on the job have been                with employee autonomy, this freedom can result in
shown to increase job satisfaction, and in some cases,              feelings of motivation and satisfaction for the man-
motivation to perform the job. In traditional organiza-             ager, who may be in a better position to reward and
tions, only those employees at higher levels had auton-             motivate employees. However, as with employee
omy. However, new organizational structures, such as                autonomy, managers who have autonomy may not be
flatter organizations, have resulted in increased auton-             equipped to handle it. If managers make poor deci-
omy at lower levels. Additionally, many companies                   sions, this may be harmful to employees and the
now make use of autonomous work teams. Autonomy                     organization as a whole. Using the example of auton-
in the workplace can have benefits for employees,                    omy in deciding pay raises, a manager may give merit
teams, managers, and the company as a whole, but it                 pay increases that are significantly higher than those
also may have drawbacks. Information regarding both                 in other work units, which may cause problems across
the pros and cons of autonomy for these groups is dis-              the organization.
cussed below.

                                                                    TEAM AUTONOMY
EMPLOYEE AUTONOMY
                                                                         In recent years, many organizations have made
     According to job design theories, increased auton-             use of teams in the workplace, many of which operate
omy should make employees feel a greater responsibil-               autonomously. Self-managed work teams are those in
ity for the outcomes of their work, and therefore have              which a supervisor gives little direction to the team,
increased work motivation. Research indicates that                  and the team members manage themselves. The suc-
when employees have greater levels of autonomy, their               cess of such teams depends greatly on the team mem-
personality traits (specifically conscientiousness and               bers, including their professional capabilities and their


                                                                                                                                           25
                                                                    E N C Y C L O P E D I A      O F    M A N A G E M E N T
                  ability to work together. Oftentimes, such autonomous      organization also may create disparity among units




     AUTONOMY
                  teams can greatly enhance an organization’s ability to     through different work practices and rules. In the
                  be creative, flexible, and innovative. However, as with     worst case, increased autonomy may allow some
                  individuals, too much autonomy in a team can reduce        employees to engage in unethical behavior. Thus, a
                  productivity. When individuals work too independ-          certain amount of oversight is necessary in organiza-
                  ently, their lack of communication and monitoring of       tions to prevent wrongdoing that may go unnoticed
                  one another may result in poor team performance.           when there are high levels of autonomy.
                  Additionally, without supervision the team may
                                                                                   In conclusion, autonomy generally is a positive
                  pursue goals that are different from those of the organ-
                                                                             attribute for employees, managers, teams, and organi-
                  ization. Thus, periodic meetings and supervision from
                                                                             zations as a whole. Employees typically desire auton-
                  a manager may be necessary to avoid problems asso-
                                                                             omy, and its introduction can increase motivation and
                  ciated with too much autonomy.
                                                                             satisfaction. However, because too much autonomy
                  AUTONOMY AND THE ORGANIZATION                              can have organizational drawbacks, care should be
                                                                             taken when increasing it.
                        The autonomy of employees and managers is
                  often dictated by an organization’s structure and cul-     SEE ALSO: Empowerment
                  ture; traditional, bureaucratic organizations often have                                              Marcia J. Simmering
                  little autonomy, but newer, more organic structures
                  rely on autonomy, empowerment, and participation to
                                                                             FURTHER READING:
                  succeed. Employee autonomy is believed to have min-
                  imized some of the relational barriers between superi-     Gómez-Mejía, Luis R., David B. Balkin, and Robert L. Cardy.
                  ors and subordinates. Therefore, autonomy may              Managing Human Resources. 4th ed. Upper Saddle River, NJ:
                  improve workplace functions through the ideas and          Prentice Hall, 2004.
                  suggestions of employees, and foster relationships         Hackman, J.R., and G.R. Oldham. “Motivation through the
                  with a greater degree of trust between management          Design of Work: Test of a Theory.” Organizational Behavior and
                  and employees. However, increased autonomy in the          Human Performance 16 (1976): 250–279.




26
                E N C Y C L O P E D I A     O F   M A N A G E M E N T
                                                        B

                                                              market values. In actuality, generally accepted account-
                                                              ing principles require that most assets be recorded and
 BALANCE SHEETS                                               disclosed at their historical cost, or the original amount
                                                              that the company paid to obtain ownership or control
      The balance sheet, also known as the statement of       of the assets. As time passes, however, the current
financial position, is a snapshot of a company’s finan-         value of certain assets will drift further and further
cial condition at a single point in time. It presents a       away from their historical cost. In an attempt to pres-
summary listing of a company’s assets, liabilities, and       ent useful information, financial statements show
owners’ equity. The balance sheet is prepared as of the       some assets (for which there is a definite market value)
last day of the business year. Therefore, it corresponds      at their current market value. When there is no specific
to the end of the time period covered by the income           market value, historical values are used. An expanded
statement.                                                    discussion of this concept will follow.

     To understand the balance sheet, its purpose, and            A simple example of a balance sheet appears in
its contents, several accounting concepts need to be          Table 1.
examined. First of all, the balance sheet represents the
accounting equation for a company. The accounting
equation is a mathematical expression that states the         ASSETS
following:
                                                                   As a category, assets include current assets, fixed
             Assets = Liabilities + Owners’ Equity            or long-term assets, property, intangible assets, and
     Stated more fully, this means that the dollar total      other assets.
of the assets equals the dollar total of the liabilities
plus the dollar total of the owners’ equity. The balance      CURRENT ASSETS. Assets can be viewed as company-
sheet presents a company’s resources (i.e., assets, or        owned or controlled resources, from which the organi-
anything the company owns that has monetary value)            zation expects to gain a future benefit. Examples of
and the origin or source of these resources (i.e.,            assets for a typical company include cash, receivables
through borrowing or through the contributions of the         from customers, inventory to be sold, land, and build-
owners). By expressing the same dollar amount twice           ings. In order to make the balance sheet more readable,
(once as the dollar total of the assets, then as the dollar   assets are grouped together based on similar characteris-
total of where the assets came from or who has an             tics and presented in totals, rather than as a long list of
equity interest in them), we see that the two amounts         minor component parts.
must be equal or balance at any given point in time.
                                                                   The first grouping of assets is current assets.
     An interesting observation about the balance             Current assets consist of cash, as well as other assets
sheet is the valuation at which assets are presented.         that will probably be converted to cash or used up
The average person would assume that the assets listed        within one year. The one-year horizon is the crucial
on the balance sheet would be shown at their current          issue in classifying assets as current. The concern is to

                                                                                                                            27
                                                              E N C Y C L O P E D I A       O F    M A N A G E M E N T
     BALANCE SHEETS
                                                                              Table 1
                                                                      Sample Balance Sheet

                                     Assets                                              Liabilities and Owners’ Equity
                             Current assets                      600,000            Current liabilities                          280,000
                             Fixed Assets                         90,000            Long-term debt                               500,000
                             Property                            800,000            Owners’ equity                               900,000
                             Intangible assets                    50,000
                             Other assets                        140,000
                             TOTAL ASSETS                      1,680,000            TOTAL LIABILITIES AND OWNERS’ EQUITY       1,680,000




                        present assets that will provide liquidity in the near       pany has purchased for resale to its customers. If the
                        future. Current assets should be listed on the balance       company is a manufacturer, it will have as many as
                        sheet in the order of most liquid to least liquid.           three different inventory accounts depending on the
                        Therefore, the list of current assets begins with cash.      extent to which the goods have been completed.
                        Cash includes monies available in checking accounts          Inventory classified as raw materials represents the
                        and any cash on-hand at the business that can be used        basic components that enter into the manufacture of
                        immediately as needed. Any cash funds or temporary           the finished product. For a tractor manufacturer, raw
                        investments that have restrictions on their with-            materials would include the engine, frame, tires, and
                        drawals, or that have been set up to be spent beyond         other major parts that are directly traceable to the fin-
                        one year, should not be included in current assets.          ished product. The second type of inventory for a man-
                                                                                     ufacturer would be goods in process. As the name
                              Temporary investments known as trading securi-
                                                                                     implies, this category represents products that have
                        ties are short-term investments that a company intends
                                                                                     been started but are not fully completed. After the
                        to trade actively for profit. These types of investments—
                                                                                     goods are completed, they are included in the final
                        common to the financial statements of insurance com-
                                                                                     inventory classification known as finished goods. The
                        panies and banks—are shown on the balance sheet at
                                                                                     value assigned to inventory is either its current market
                        their current market value as of the date of the balance
                                                                                     price or its cost to the manufacturer, whichever is
                        sheet. Any increase or decrease in market value since
                                                                                     lower. This is a conservative attempt to show inven-
                        the previous balance sheet is included in the calculation
                                                                                     tory at its original cost, or at its lower market value if
                        of net income on the income statement.
                                                                                     it has declined in value since it was purchased or
                             The next category on the list of current assets is      manufactured.
                        accounts receivable, which includes funds that are to
                        be collected within one year from the balance sheet               The final group in the current assets section of the
                        date. Accounts receivable represent the historical           balance sheet is prepaid expenses. This group includes
                        amounts owed to the company by customers as a result         prepayments for such items as office supplies,
                        of regular business operations. Many companies are           postage, and insurance for the upcoming year. The
                        unable to collect all of the receivables due from cus-       total for these items is shown at historical cost.
                        tomers. In order to disclose the amount of the total
                                                                                     FIXED OR LONG-TERM ASSETS.            These assets differ
                        receivables estimated to be collectible, companies
                                                                                     from those listed under current assets because they are
                        deduct what is known as a contra account. A contra
                                                                                     not intended for sale during the year following the bal-
                        account has the opposite balance of the account from
                                                                                     ance sheet date; that is, they will be held for more than
                        which it is subtracted. The specific account title might
                                                                                     one year into the future. Such asset investments are
                        be “allowance for uncollectible accounts” or “allowance
                                                                                     classified under the headings of held to maturity for
                        for bad debts,” and its balance represents the portion
                                                                                     investments in debt instruments such as corporate or
                        of the total receivables that will probably not be col-
                                                                                     government bonds, and available for sale for invest-
                        lected. The expense related to this is shown on the
                                                                                     ments in equity (stock) instruments of other compa-
                        income statement as bad debt expense. The net amount
                                                                                     nies or debt securities that will not be held to maturity.
                        of accounts receivable shown is referred to as the book
                                                                                     Held-to-maturity investments are disclosed in the bal-
                        value. Other receivables commonly included on the
                                                                                     ance sheet at their carrying value. The carrying value
                        balance sheet are notes receivable (due within one
                                                                                     is initially equal to the historical cost of the invest-
                        year) and interest receivable.
                                                                                     ment; this amount is adjusted each accounting period
                             Inventory is shown next in the current asset sec-       so that, when the investment matures, its carrying
                        tion of the balance sheet. If the company is a retailer      value will then be equal to its maturity value. These
                        or wholesaler, this asset represents goods that a com-       adjustments are included in the calculation of income


28
                      E N C Y C L O P E D I A      O F   M A N A G E M E N T
for each accounting period. Available-for-sale invest-       other intangible assets, the historical cost of goodwill




                                                                                                                         BALANCE SHEETS
ments are adjusted to market value at the end of each        is amortized over its future years. Accounting rules set
accounting period, and these adjustments are included        a maximum life of 40 years for goodwill, but this rule
in the calculation of owners’ equity.                        will be reduced to 20 years in the future.
PROPERTY.     Sometimes listed under the expanded            OTHER ASSETS.      This final section covering the dis-
heading property, plant, and equipment, this section         closure of assets on the balance sheet is a miscella-
of the balance sheet includes long-term, tangible            neous category that includes any long-lived asset that
assets that are used in the operation of the business.       does not fit in any of the categories defined above. This
These assets have a long-term life and include such          category might include such assets as long-lived
things as land, buildings, factory and office equip-          receivables (from customers or related companies)
ment, and computers. Land is listed first because it has      and long-lived prepaid insurance premiums (those
an unlimited life, and it is shown at its historical cost.   paid for coverage beyond the next year from the
The other assets, such as buildings and equipment, are       balance sheet date). Another example is a deferred
shown at book value. Book value is the original cost of      charge (such as a deferred tax asset), or an amount
the asset reduced by its total depreciation since being      that has been prepaid based on generally accepted
placed into service by a company. This net amount is         accounting principles and holds future benefit for the
frequently called net book value, and it represents the      company.
remaining cost of the asset to be depreciated over the
remaining useful life of the asset.
     Several methods are used to calculate deprecia-         LIABILITIES
tion (e.g., straight-line and accelerated), and each uses
                                                                 Liabilities include current liabilities, as well as
a mathematical formula to determine the portion of
                                                             long-term debt.
the original cost of the asset that is associated with the
current year’s operations. Note that depreciation is not     CURRENT LIABILITIES. Current liabilities are debts
an attempt to reduce a long-lived asset to its market        that come due within one year following the balance
value. Accountants use market value on the balance           sheet date. These debts usually require cash payments
sheet when it is readily available and required for use      to another entity, and they often have the word “payable”
by generally accepted accounting principles. However,        as part of their name. Accounts payable are amounts
in the case of many property items an unbiased esti-         owed to suppliers by a company that has purchased
mate of market value may not be available. As a result,      inventory or supplies on a credit basis. Interest payable
accountants use the asset’s historical cost, reduced by      represents interest that has accrued on notes payable
the depreciation taken to date, as an indication of its      or other interest-bearing payables since the last pay-
remaining useful service potential.                          ment was made by a company; this type of payable
                                                             might be included in a general group known as accrued
INTANGIBLE ASSETS. Some long-lived assets of a
                                                             expenses. Other current liabilities include estimated
company represent legal rights or intellectual property
                                                             warranty payments, taxes payable, and the current year’s
protections that are intangible by nature. Examples of
                                                             portion of long-term debt that is coming due within
this type of asset include a company’s patents, copy-
                                                             one year from the balance sheet date.
rights, and trademarks. Each of these assets has a
legally specified life and expires at the end of that         LONG-TERM DEBT. Long-term debts are those that
period, although a few can be renewed. Accountants           come due more than one year following the balance
attempt to measure this decline in usefulness by amor-       sheet date. They include bonds payable, mortgage
tizing the historical costs of these assets. This concept    payable, and long-term notes payable, all of which
is the same as recording depreciation for items of tan-      have a specific maturity date. Deferred income taxes
gible property discussed above.                              payable might also be disclosed in this category. The
     One special type of intangible asset is known as        latter item is rather technical and controversial; it
goodwill. Goodwill is acquired when one company              arises when accounting rules used in preparing the
purchases another company and pays more than the             financial statements for reporting to owners differ
estimated market value of the net assets held by the         from rules used on income tax returns for income tax
purchased company. The buying company might do               authorities. Deferred income taxes payable typically
this for a number of reasons, but it is often necessary      result from an item being deducted on the income tax
in order to encourage the previous owners to sell, and       return (as allowed by tax rules) before it is reported as
to guarantee that the acquisition is successful. The dif-    an expense on the income statement (as allowed by
ference between the purchase price and the market            generally accepted accounting principles). When
value of the assets also can be attributed to intangible     these timing differences reverse in future years, the
factors in the purchased company’s success, such as          deferred income taxes payable category is removed as
proprietary processes or customer relationships. Like        the actual payment to tax authorities is made.


                                                                                                                                          29
                                                             E N C Y C L O P E D I A      O F    M A N A G E M E N T
                            OWNERS’ EQUITY                                                       Another important consideration about the bal-




     BALANCED SCORECARD
                                                                                           ance sheet is the manner in which both assets and lia-
                                 This final section of the balance sheet is one of the      bilities are separated into current and noncurrent
                            most difficult to comprehend. It is known as stockhold-         groups. While not all companies will have all of the
                            ers’equity for a corporation and consists of several pos-      classifications discussed above, all will have both cur-
                            sible subdivisions: paid-in capital, adjustments for           rent and noncurrent items. This separation allows the
                            changes in value of certain investments in stocks of           user of the balance sheet to compare a company’s cur-
                            other companies, and retained earnings. The paid-in            rent liquidity needs and resources to its long-term sol-
                            capital section discloses the investment made in the           vency status.
                            corporation by the stockholder-owners. It will include
                            the amount paid into the corporation by the stockholders            In conclusion, balance sheets are an important
                            for different types of equity instruments that have been       tool to help managers, lenders, and investors analyze a
                            issued by the corporation, such as preferred stock             company’s financial status and capabilities. They are
                            equity and common stock equity. Paid-in capital usually        particularly useful in helping to identify trends in the
                            is separated into two parts—the par value of the stock         areas of payables and receivables. However, it is vital
                            and the amount paid in excess of the par value—as              to remember that the document only presents a com-
                            required by generally accepted accounting principles.          pany’s financial situation at a given point in time. It
                                                                                           does not provide any information about the past deci-
                                 Adjustments for market value changes in avail-
                                                                                           sions that helped the company to arrive at that point,
                            able-for-sale investments in other companies are
                                                                                           or about the company’s future direction or potential
                            shown as a component of owners’ equity. These adjust-
                                                                                           for success. For this reason, the balance sheet should
                            ments also are reported in comprehensive income,
                                                                                           be considered along with other required financial
                            because they reflect a change in owners’ equity that is
                                                                                           statements, as well as historical data, when evaluating
                            not a part of net income. Changes in the value of trad-
                                                                                           a company’s performance.
                            ing securities, which are short-term investments, are
                            included in the calculation of net income, whereas
                                                                                           SEE ALSO: Cash Flow Analysis and Statement; Financial
                            changes in value of available-for-sale securities are
                                                                                                     Issues for Managers; Financial Ratios; Income
                            reported only in owners’ equity and the statement of                     Statements
                            comprehensive income.
                                                                                                                                            John M. Alvis
                                 The last category usually found under the heading                                             Revised by Laurie Hillstrom
                            of owners’ equity is retained earnings. This amount
                            represents any earnings (or the difference between
                            total net income and net loss) since the inception of          FURTHER READING:
                            the business that have not been paid out to stockholders
                            as dividends.                                                  “Balance Sheets.” Business Owner’s Toolkit. 2005. CCH Tax
                                                                                           and Accounting. Available from <http://www.toolkit.cch.com/
                                 Returning to the aforementioned accounting equa-          text/P06_7035.asp>.
                            tion, a user of financial statements can better under-
                                                                                           BusinessTown.com. “Basic Accounting: Balance Sheets.”
                            stand that owners’ equity is the balancing amount. If          Available from <http://www.businesstown.com/accounting/
                            assets are considered a company’s resources, they must         basic-sheets.asp>.
                            equal the “sources” from which they came. The sources
                                                                                           Byrnes, Nanette. “The Downside of Disclosure: Too Much Data
                            for assets are a company’s creditors (as seen in the total
                                                                                           Can Be a Bad Thing. It’s Quality of Information That Counts,
                            of the liabilities) and its owners (as seen in the total for   Not Quantity.” Business Week, 26 August 2002, 100.
                            owners’ equity). As such, retained earnings does not
                            represent a fund of cash; instead it represents the por-       Davenport, Todd. “The Uneven Evolution of Accounting
                                                                                           Standards.” American Banker, 28 July 2004.
                            tion of each asset that is owned by the stockholders. The
                            remaining portion of each asset is owed to creditors in
                            the form of liabilities.
                                 It is important to keep in mind that the balance
                            sheet does not present a company’s market value.
                            While some assets are presented at market value,
                            others cannot be disclosed at market value because no           BALANCED SCORECARD
                            such specific market value exists. The changes in the
                            value of the assets that are required to be adjusted to             The balanced scorecard is a performance meas-
                            market value for each balance sheet are included in            urement tool developed in 1992 by Harvard Business
                            either net income or comprehensive income, depend-             School professor Robert S. Kaplan and management
                            ing on the nature of the asset and the purpose for             consultant David P. Norton. Kaplan and Norton’s
                            which management chose to acquire it.                          research led them to believe that traditional financial


30
                          E N C Y C L O P E D I A       O F    M A N A G E M E N T
measures, like return on investment, could not provide           into measurable actions that employees can under-




                                                                                                                              BALANCED SCORECARD
an accurate picture of a company’s performance in the            stand. It also enables managers to balance the con-
innovative business environment of the 1990s. Rather             cerns of various stakeholders in order to improve the
than forcing managers to choose between “hard”                   company’s overall performance. “The balanced score-
financial measures and “soft” operational measures—               card is a powerful concept based on a simple princi-
such as customer retention, product development                  ple: managers need a balanced set of performance
cycle times, or employee satisfaction—they devel-                indicators to run an organization well,” Paul McCunn
oped a method that would allow managers to consider              wrote in Management Accounting. “The indicators
both types of measures in a balanced way. “The bal-              should measure performance against the critical suc-
anced scorecard includes financial measures that tell             cess factors of the business, and the ‘balance’ is the
the results of actions already taken,” Kaplan and                balancing tension between the traditional financial and
Norton explained in the seminal 1992 Harvard                     nonfinancial operational, leading and lagging, and
Business Review article that launched the balanced               action-oriented and monitoring measures.”
scorecard methodology. “And it complements the                        The balanced scorecard concept has enjoyed sig-
financial measures with operational measures on cus-              nificant success since its introduction. According to
tomer satisfaction, internal processes, and the organi-          the Financial Times, it was adopted by 80 percent of
zation’s innovation and improvement activities—                  large U.S. companies as of 2004, making it the nation’s
operational measures that are the drivers of future              most popular management tool for increasing per-
financial performance.”                                           formance. In addition, it has increasingly been applied
      The balanced scorecard provides a framework for            in the public sector since it was promoted by the
managers to use in linking the different types of meas-          National Partnership for Reinventing Government.
urements together. Kaplan and Norton recommend                   Part of the balanced scorecard’s popularity can be
looking at the business from four perspectives: the              attributed to the fact that it is consistent with many
customer’s perspective, an internal business perspec-            common performance improvement initiatives under-
tive, an innovation and learning perspective, and the            taken by companies, such as continuous improvement,
financial (or shareholder’s) perspective. Using the               cross-functional teamwork, or customer-supplier part-
overall corporate strategy as a guide, managers derive           nering. It complements these initiatives by helping
three to five goals related to each perspective, and then         managers to understand the complex interrelation-
develop specific measures to support each goal.                   ships among different business areas. By linking the
Ideally, the scorecard helps managers to clarify their           elements of a company’s competitive strategy in one
vision for the organization and translate that vision            report, the balanced scorecard points out situations


                                                         Table 1
                                                  Balanced Scorecard



                                                    Financial Perspective

                                                  (How does the company
                                                  appear to shareholders?)




                  Internal Business Perspective                                Customer Perspective

                  (What are the critical business                              (How does the company
               processes at which we must excel?)                               appear to customers?)




                                           Innovation & Learning Perspective

                                                   (How can we continue to
                                                  improve and create value?)




                                                                                                                                                   31
                                                                 E N C Y C L O P E D I A      O F       M A N A G E M E N T
                            where improvement in one area comes at the expense        a company in the oil industry might wish to incorpo-




     BALANCED SCORECARD
                            of another. In this way, the scorecard helps managers     rate an environmental regulation perspective. In this
                            to make the decisions and tradeoffs necessary for suc-    way, the balanced scorecard maintains some flexibil-
                            cess in today’s fast-paced and competitive business       ity for companies with special needs to add other
                            environment.                                              perspectives.

                                                                                      CUSTOMER PERSPECTIVE.        According to Kaplan and
                            HISTORY OF THE BALANCED                                   Norton, viewing a business from the customer per-
                            SCORECARD APPROACH                                        spective involves asking the question: “How do cus-
                                                                                      tomers see us?” They contend that many companies in
                                 In 1990 Robert S. Kaplan, a professor of account-    a wide range of industries have made customer service
                            ing at the Harvard Business School, and David P.          a priority. The balanced scorecard allows managers to
                            Norton, co-founder of a Massachusetts-based strategy      translate this broad goal into specific measures that
                            consulting firm called Renaissance Worldwide Inc.,         reflect the issues that are most important to customers.
                            conducted a year-long research project involving 12       For example, Kaplan and Norton mention four main
                            large companies. The original idea behind the study,      areas of customer concern: time, quality, cost, and per-
                            as Anita van de Vliet explained in Management Today,      formance. They recommend that companies establish
                            was that “relying primarily on financial accounting        a goal for each of these areas and then translate each
                            measures was leading to short-term decision-making,       goal into one or more specific measurements. Kaplan
                            over-investment in easily valued assets (through merg-    and Norton note that some possible measures, like per-
                            ers and acquisitions) with readily measurable returns,    cent of sales from new products, can be determined
                            and under-investment in intangible assets, such as        from inside the company. Other measures, like on-
                            product and process innovation, employee skills, or       time delivery, will depend on the requirements of each
                            customer satisfaction, whose short-term returns are       customer. To incorporate such measures into the bal-
                            more difficult to measure” (1997, pp.78).                  anced scorecard, managers will need to obtain outside
                                 Kaplan and Norton looked at the way these com-       information through customer evaluations or bench-
                            panies used performance measurements to control the       marking. Collecting data from outside the company is
                            behavior of managers and employees. They used their       a valuable exercise because it forces managers to view
                            findings to devise a new performance measurement           their company from the customers’ perspective.
                            system that would provide businesses with a balanced
                                                                                      INTERNAL BUSINESS PERSPECTIVE.            The internal
                            view of financial and operational measures. Kaplan
                            and Norton laid out their balanced scorecard approach     business perspective is closely related to the customer
                            to performance measurement in three Harvard Business      perspective. “After all, excellent customer perform-
                            Review articles beginning in 1992. Before long, the       ance derives from processes, decisions, and actions
                            balanced scorecard had become one of the hottest          occurring throughout an organization,” Kaplan and
                            topics at management conferences around the world.        Norton wrote. “Managers need to focus on those crit-
                            In fact, the Harvard Business Review called it one of     ical internal operations that enable them to satisfy cus-
                            the most important and influential management ideas        tomer needs.” Viewing a company from the internal
                            of the past 75 years. In 1996 Kaplan and Norton           business perspective involves asking the question,
                            expanded upon their original concept in a book titled     “What must we excel at?” Kaplan and Norton recom-
                            The Balanced Scorecard: Translating Strategy into         mend focusing first on the internal processes that
                            Action. They followed up with two other books that        impact customer satisfaction, such as quality, produc-
                            further developed the approach: The Strategy-Focused      tivity, cycle time, and employee skills. Using these
                            Organization: How Balanced Scorecard Companies            critical processes as a base, managers should develop
                            Thrive in the New Business Environment (2001) and         goals that will help the company to meet its cus-
                            Strategy Maps: Converting Intangible Assets into          tomers’ expectations. These goals should then be
                            Tangible Outcomes (2004).                                 translated into measures that can be influenced by
                                                                                      employee actions. It is important that internal goals
                                                                                      and measures are broken down at the local level in
                            THE FOUR PERSPECTIVES                                     order to provide a link between top management goals
                                                                                      and individual employee actions. “This linkage ensures
                                 Kaplan and Norton’s basic balanced scorecard         that employees at lower levels in the organization have
                            asks managers to view their business from four differ-    clear targets for actions, decisions, and improvement
                            ent perspectives: the customer perspective, an internal   activities that will contribute to the company’s overall
                            business perspective, an innovation and learning per-     mission,” the authors explained.
                            spective, and the financial or shareholder perspective.
                            These perspectives are relevant to all types of busi-     INNOVATION AND LEARNING PERSPECTIVE. In includ-
                            nesses. However, additional perspectives also may be      ing the innovation and learning perspective in their
                            important in certain types of businesses. For example,    balanced scorecard, Kaplan and Norton recognized


32
                          E N C Y C L O P E D I A     O F   M A N A G E M E N T
that modern companies must make continual improve-          mation about whether the strategy has contributed to




                                                                                                                        BALANCED SCORECARD
ments in order to succeed in an intensely competitive       bottom-line improvement. According to Kaplan and
global business environment. “A company’s ability to        Norton, a common mistake for managers making
innovate, improve, and learn ties directly to the com-      large-scale operational improvements is failing to
pany’s value,” they noted. That is, only through the        follow up with additional actions. For example, a
ability to launch new products, create more value for       company might undertake a quality improvement ini-
customers, and improve operating efficiencies contin-        tiative which, when implemented successfully, creates
ually can a company penetrate new markets and increase      excess capacity or makes certain employees redun-
revenues and margins—in short, grow and thereby             dant. Financial measurements will point out the need
increase shareholder value. Accordingly, viewing a          to make further changes.
business from the innovation and learning perspective
involves asking the question, “How can we continue
to improve and create value?” Managers should estab-
                                                            DEVELOPING A BALANCED SCORECARD
lish goals related to innovation and learning, and then
translate the goals into specific measures—such as                Development of a balanced scorecard begins with
increasing the percentage of the company’s sales            the company’s overall strategy or vision. It is impor-
derived from new products.                                  tant to consult with top management, rather than line
                                                            managers, to obtain a clear picture of where the com-
FINANCIAL PERSPECTIVE. Kaplan and Norton devel-
                                                            pany wants to be in 3 to 5 years. The next step is to
oped the balanced scorecard at a time when financial
                                                            appoint a “scorecard architect” to establish the frame-
measures were increasingly coming under attack from
                                                            work and methodology for designing the scorecard.
management experts. Critics claimed that judging per-
                                                            With this framework in mind, the organization must
formance by financial measures encouraged compa-
                                                            define a linked set of strategic objectives that will lead
nies to focus on short-term results and avoid taking
                                                            the company toward top management’s vision. These
actions that would create value over the long term.
                                                            objectives should be true drivers of performance for
They also argued that financial measures looked back-
                                                            the business as a whole, rather than a list of separate
ward at past actions rather than forward at future pos-
                                                            goals for business units or departments. It may be
sibilities. Some experts told managers to focus solely
                                                            helpful to begin with the four perspectives included in
on operational improvements and allow the financial
                                                            the balanced scorecard model and then add more if
performance to improve on its own.
                                                            needed, depending on the industry.
      Although these arguments convinced Kaplan and
Norton to conduct their study of performance meas-               At this point, most companies will begin to
urement, they found that financial controls are an           involve line managers and staff members—and per-
important part of the puzzle. They claimed that man-        haps even customers—in establishing goals or objec-
agers need to know whether or not their operational         tives. The involvement might take the form of an
improvements are reflected in the bottom line. If not,       executive workshop at which participants review and
it may mean that management needs to reevaluate its         discuss the goals and appropriate measures. This
strategy for the business. “Measures of customer satis-     approach builds consensus around the balanced score-
faction, internal business performance, and innovation      card and reduces the potential for unrealistic goals to
and improvement are derived from the company’s par-         be handed down from the top.
ticular view of the world and its perspective on key             The strategic objectives provide a framework for
success factors. But that view is not necessarily cor-      managers to use in developing specific performance
rect,” Kaplan and Norton wrote. “Periodic financial          measures. “Most of the measures we use are not new,
statements remind executives that improved quality,         but they had been held in different silos, different
response time, productivity, or new products benefit         boxes, in the organization,” Rick Anderson, a per-
the company only when they are translated into              formance analyst at BP Chemicals, told van de Vliet.
improved sales and market share, reduced operating          “The [balanced scorecard] approach has brought
expenses, or higher asset turnover.”                        existing measures onto one piece of paper, so every-
      Thus, the fourth perspective in the balanced          body can relate to one area.” The goals and measures
scorecard asks the question: “How do we look to             in an organization’s balanced scorecard can be broken
shareholders?” Some of the goals a company might            down to provide custom scorecards for all business
set in this area involve profitability, growth, and share-   levels, even down to individual employees. These
holder value. The measures attached to these goals          custom scorecards show how an employee’s work
might include traditional financial performance meas-        activities link to the business’s overall strategy. For
ures, such as return on assets or earnings per share.       incentive and compensation purposes, it is possible to
Although these measures can prove misleading when           assign weights to each measure based on its impor-
taken alone, when incorporated into a balanced score-       tance to the company and the individual’s ability to
card they can provide managers with valuable infor-         affect it.


                                                                                                                                             33
                                                            E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                 Once the balanced scorecard is in place, the next      top-down control. Employees are unlikely to support




     BALANCED SCORECARD
                            step is to collect and analyze the data for performance     the goals and measures if the scorecard is used as a
                            measurements. This data will enable the organization        “gotcha” by management. Another potential pitfall,
                            to see its strong performance areas, as well as areas for   according to the researchers, is trying to use a stan-
                            potential improvement. It is important to supply the        dardized scorecard. Instead, they stress that each
                            performance data to employees, and to empower               organization must devote the time and resources to
                            employees to find ways to sustain high performance           develop its own customized program. Lewy and Du
                            and improve poor performance. Managers also must            Mee found that balanced scorecard implementation
                            realize that the balanced scorecard is not set in stone.    was more likely to fail when companies underesti-
                            Experience in using the scorecard may point out             mated the amount of training and communication
                            areas that should be modified or adapted. In addition,       required during the introductory phase, or the extra
                            managers may find ways to tie the scorecard into             workload and costs involved with periodic reporting
                            other areas, such as budgets, resource allocation,          later on. Even though the balanced scorecard appears
                            compensation, succession planning, and employee             to be a simple idea, implementing it is likely to mean
                            development.                                                huge changes in an organization.


                            AVOIDING POTENTIAL PITFALLS
                                                                                        SOFTWARE AND SUPPORT
                                 Numerous organizations have implemented some
                                                                                             Once the balanced scorecard has been imple-
                            version of the balanced scorecard since its introduc-
                                                                                        mented successfully, the next significant task involves
                            tion in 1992. However, professor Claude Lewy of the
                                                                                        collecting and analyzing measurement data. Some
                            Free University of Amsterdam found that 70 percent
                                                                                        companies found this process to be time-consuming
                            of scorecard implementations failed. Many companies
                                                                                        and expensive, because the data was located on numer-
                            are attracted by the power and simplicity of the bal-
                                                                                        ous different computer systems throughout the
                            anced scorecard concept, but then find implementa-
                                                                                        organization. However, by the 2000s a number of tec-
                            tion to be extremely time-consuming and expensive.
                                                                                        hnological advances—such as data warehouses, enter-
                            Lewy admits that the balanced scorecard can be an
                                                                                        prise resource planning systems, decision-support
                            effective way of translating an overall strategy to the
                                                                                        tools, groupware, and Internet technology—made data
                            many parts of an organization. However, he stresses
                                                                                        collection and analysis significantly easier. In fact, sev-
                            that organizations must have a clear idea of what they
                                                                                        eral software vendors created balanced scorecard
                            want to accomplish, and be willing to commit the nec-
                                                                                        applications for desktop computers. Typical software
                            essary resources in order to successfully implement
                                                                                        packages allow users to plug in the performance
                            the balanced scorecard. Along with Lex Du Mee of
                                                                                        measures the company has chosen to monitor. The
                            KPMG Management Consulting, Lewy conducted a
                                                                                        computer then collects the data and supplies per-
                            study of seven European companies and came up with
                                                                                        formance grades according to formulas the company
                            what he called the Ten Commandments of Balanced
                                                                                        has determined. With the advent of electronic bal-
                            Scorecard Implementation.
                                                                                        anced scorecard applications, the process of per-
                                 In order to ensure an effective balanced scorecard     formance measurement can be automated throughout
                            implementation, Lewy and Du Mee recommended                 a company.
                            that organizations obtain the commitment of a top-
                            level sponsor, as well as relevant line managers. The             In addition, Kaplan and Norton have used computer
                            balanced scorecard initiative must be the organiza-         technology to provide information and support to organ-
                            tion’s top priority if implementation is to succeed.        izations that adopt the balanced scorecard. For example,
                            They also emphasized the importance of putting              Norton’s consulting firm, Renaissance Worldwide Inc.,
                            strategic goals in place before implementing the score-     and Gentia Software formed the Balanced Scorecard
                            card. Otherwise, the goals and measures included in         Technology Council. This virtual users group sponsors a
                            the scorecard are likely to drive the wrong behavior.       Web site (www.balancedscorecard.com) that provides
                            Lewy and Du Mee also suggested that organizations           research, product information, and a forum for ideas.
                            try a pilot program before moving on to full-scale          Kaplan and Norton also founded an organization called
                            implementation. Testing the balanced scorecard in a         the Balanced Scorecard Collaborative “to facilitate world-
                            few key business areas enables managers to make nec-        wide awareness, use, enhancement, and integrity of the
                            essary changes and increase support for the initiative      Balanced Scorecard as a value-added management
                            before involving the entire company. It also is impor-      process.” The collaborative also hosts a Web site at
                            tant to provide information and training to employees       www.bsccol.com.
                            prior to an organization-wide rollout.
                                Lewy and Du Mee also warn managers against              SEE ALSO: Performance Measurement; Strategy Formulation
                            using the balanced scorecard as a way to achieve extra                                            Laurie Collier Hillstrom



34
                          E N C Y C L O P E D I A      O F   M A N A G E M E N T
FURTHER READING:                                                      The FDA requires that a product’s national drug




                                                                                                                              BAR CODING AND RADIO FREQUENCY IDENTIFICATION
                                                                 code be placed on the container label and outer wrap-
Cameron, Preston. “The Balancing Act: Even in Today’s Volatile
Economic Climate, Many Organizations Are Turning to the
                                                                 per on most prescription drugs and about 70 percent of
Balanced Scorecard to Help Steer Their Organization in the       over-the-counter drugs and on blood and blood com-
Right Direction” CMA Management 75, no. 10 (2002).               ponents intended for transfusion. The U.S. Food and
                                                                 Drug Administration (FDA) estimates that this will
Kaplan, Robert S., and David P. Norton. “The Balanced
                                                                 prevent nearly 500,000 adverse events and blood
Scorecard—Measures That Drive Performance.” Harvard
Business Review 70, no. 1 (1992): 71.
                                                                 transfusion errors and save $98 billion in reduced
                                                                 healthcare costs over a two year period.
———. The Balanced Scorecard: Translating Strategy into
Action. Boston: Harvard Business School Press, 1996.
                                                                 HOW BARCODING WORKS
———. “Putting the Balanced Scorecard to Work.” Harvard
Business Review 71, no. 5 (1993).                                BARCODE READERS. The barcode itself does not actu-
———. The Strategy-Focused Organization: How Balanced             ally contain detailed information. The barcode simply
Scorecard Companies Thrive in the New Business Environment.      provides a reference number that cues a computer to
Boston: Harvard Business School Press, 2001.                     access information. A barcode reader is required to
                                                                 read a barcode. Barcode readers may be fixed, portable
———. Strategy Maps: Converting Intangible Assets into
Tangible Outcomes. Boston: Harvard Business School Press,
                                                                 batch, or portable RF. Fixed readers are attached to a
2004.                                                            host computer and terminal, and transmit one item at a
                                                                 time as the data is scanned. Battery-powered portable
———. “Using the Balanced Scorecard as a Strategic                batch readers store data into memory for batch transfer
Management System” Harvard Business Review 74, no. 1
                                                                 into a host computer at a later time. The portable RF
(1996): 75.
                                                                 reader can transmit data in real-time, on-line.
Lester, Tom. “Measure for Measure: The Balanced Scorecard
Remains a Widely Used Management Tool, but Great Care Must       SCANNERS AND DECODERS.         The basic reader con-
Be Taken to Select Appropriate and Relevant Metrics.” The        sists of a scanner and a decoder. Scanners capture the
Financial Times, 6 October 2004.                                 image of the barcode, and the decoder takes the digi-
Lewy, Claude, and Lex Du Mee. “The Ten Commandments of
                                                                 tized bar space patterns, decodes them, and transmits
Balanced Scorecard Implementation.” Management Control and       the decoded data to the computer.
Accounting, April 1998.                                               There are several types of scanners. Laser scan-
McCunn, Paul. “The Balanced Scorecard. . .the Eleventh           ners use a single spot of light to sweep across the bar-
Commandment.” Management Accounting 76, no. 11 (1998): 34.       code in a linear fashion. CCD scanners use an LED
                                                                 array with thousands of light detectors; the entire bar-
van de Vliet, Anita. “The New Balancing Act.” Management
Today, July 1997, 78.
                                                                 code image is captured and then transmitted. Automatic
                                                                 scanners are in a fixed position and read barcodes as
Williams, Kathy. “What Constitutes a Successful Balanced         they go by on a conveyor. Handheld scanners, such as
Scorecard?” Strategic Finance 86, no. 5 (2004).                  wands, are portable and may be carried from place to
                                                                 place, as in a warehouse.
                                                                      When a scanner is passed over the barcode, the
                                                                 dark bars absorb the scanner’s light while the light
                                                                 spaces reflect it. A photocell detector receives the
 BAR CODING AND RADIO                                            reflected light and converts it into an electrical signal.
 FREQUENCY IDENTIFICATION                                        A low electrical signal is created for the reflected light
                                                                 and a high electrical signal is created for the dark bars.
     A barcode is a series of parallel black bars and            The width of the element determines the duration of
white spaces, both of varying widths. Bars and spaces            the electrical signal. The decoder then decodes the
together are called elements. Different combinations             signal into the characters represented by the barcode
of the bars and spaces represent different characters,           and passes it to a computer in traditional data format.
such as numbers or letters. Each combination or
sequence of bars and spaces is a code that can be trans-
lated into information such as price, product type,              TYPES OF BARCODES
place of manufacture, or origin of shipment.
                                                                      There are different types of barcodes. Some bar-
     Barcodes are simple to use, accurate, and quick.            codes are entirely numeric, whereas others have numeric
Almost everyone is familiar with their use in retail             and alphabetic characters. The type used is dependent
establishments. They are also often used in ware-                upon the implementation, the data that needs to be
houses and manufacturing for selecting items from                encoded, and how the barcode is to be printed. There
storage, receiving goods, and shipping.                          are several barcode standards, called symbologies,


                                                                                                                                                                              35
                                                                 E N C Y C L O P E D I A       O F   M A N A G E M E N T
                                                       each serving a different purpose. Each standard             incoming radio-frequency scan. Active tags have their




     BAR CODING AND RADIO FREQUENCY IDENTIFICATION
                                                       defines the printed symbol and how the scanner reads         own power source. The lack of a power source makes
                                                       and decodes the printed symbol.                             the passive tag much less expensive to manufacture
                                                                                                                   and much smaller (thinner than a sheet of paper) than
                                                            The Uniform Product Code (UPC) has been the
                                                                                                                   an active tag. As a result, the vast majority of RFID
                                                       North American standard for several decades. Others
                                                                                                                   tags are passive. However, the response of a passive
                                                       include the Automotive Industry Action Group (AIAG),
                                                                                                                   tag is typically just an ID number. Active tags have
                                                       the European Article Numbering System (EAN), and
                                                                                                                   longer ranges, the ability to store more information,
                                                       the Reduced Space Symbology (RSS)—an emerging
                                                                                                                   and are more accurate and reliable.
                                                       standard for compressing barcodes so that they can fit
                                                       into small spaces such as a prescription bottle, and the          The tag contains a transponder with a digital
                                                       Global Trade Item Number (GTIN) or “Gee-tin,”               memory chip with a unique electronic product code. A
                                                       which can read and store other types of code.               stationary or handheld device called an interrogator,
                                                                                                                   consisting of an antenna, transceiver, and decoder,
                                                                                                                   emits a signal creating an electromagnetic zone. When
                                                       RFID                                                        a tag comes within the range of a reader, it detects an
                                                             Radio frequency identification (RFID) could            activation signal that causes the tag to “wake up” and
                                                       become the most far-reaching wireless technology            start sending data. The reader captures the data encoded
                                                       since the cell phone. RFID is a method of remotely          in the tag’s integrated circuit, decodes it, and sends it
                                                       storing and retrieving data using a small object            over a network to a host computer for processing.
                                                       attached to or incorporated into a product. Its purpose
                                                       is to enable data to be transmitted via a portable device
                                                       called a tag, read by a reader, and processed according     THE ADVANTAGES OF RFID
                                                       to the needs of the particular application.                 OVER BARCODING
                                                            Transmitted data may provide information about              RFID tags can contain far more detailed informa-
                                                       product location, or specifics such as color, price, or      tion than barcodes. Barcodes require a clear line of
                                                       purchase date. In some systems a return receipt can be      sight between the scanner and the barcode, a need that
                                                       generated. RFID tags contain far more detailed infor-       is absent from the RFID. It is also only possible to
                                                       mation than can be placed on a barcode. Some tags           scan just one barcode at a time. Within the field of a
                                                       hold enough information to provide routing informa-         reader, hundreds of RFID tags could be read within
                                                       tion for shipping containers, as well as a detailed         seconds. RFID codes are long enough that every RFID
                                                       inventory of what is inside the container.                  tag may have a unique code, allowing an individual
                                                            An RFID system consists of tags, tag readers, tag      item to be tracked as it changes location. Barcodes are
                                                       programming stations, circulation readers, sorting          limited to a single code for all stages of movement of
                                                       equipment, and tag inventory wands. The tag is the          a particular product.
                                                       key component. Data can be printed or etched on an               Despite its advantages, it is unlikely that RFID
                                                       electronic substrate and then embedded in a plastic or      will replace barcoding. The cost of tags is prohibitive
                                                       laminated paper tag.                                        in many situations, and there is less need to track indi-
                                                            Tags are classified according to their radio fre-       vidual products from origin to final consumer.
                                                       quency: low-frequency, high-frequency, UHF, and
                                                       microwave. Low-frequency tags are commonly used
                                                       in automobile anti-theft systems and animal identifi-        RFID USES
                                                       cation. High-frequency tags are used in library books,
                                                                                                                       During WWII, RFID devices were used to distin-
                                                       pallet tracking, building access, airline baggage track-
                                                                                                                   guish British planes from inbound German planes.
                                                       ing, and apparel tracking. Low- and high-frequency
                                                                                                                   Modern uses include:
                                                       tags can be used without a license. UHF tags are used
                                                       to track pallets, containers, trucks, and trailers. UHF        • Toll booths-RFID tags are used for elec-
                                                       cannot be used globally as there is no one global stan-          tronic toll collection. Tags are read as vehi-
                                                       dard. Microwave tags are used in long-range access,              cles pass causing debits from prepaid
                                                       such as General Motors’ OnStar system.                           accounts.
                                                            While most RFID tags are write-once/read-only,            • Electronic cash-cards imbedded with RFID
                                                       there are some that offer read/write capability. These           chips can be used as electronic cash.
                                                       tags would allow tag data to be rewritten if need be.
                                                                                                                      • Prisons-The Ohio Dept. of Rehabilitation
                                                            Also, tags may be either passive or active. Passive         and Correction requires inmates to wear
                                                       tags do not have their own power supply. Their power             transmitters. Prison computers are alerted if
                                                       comes from a minute electrical current induced by an             a prisoner tries to remove his tag.


36
                                                     E N C Y C L O P E D I A      O F   M A N A G E M E N T
   • Food-Refrigerators will someday be able to                 RFID usage is destined to continue and to




                                                                                                                           BASES OF POWER
     track the expiration dates of the food it con-        expand, especially as costs decline and RFID technol-
     tains. SAP is working with Australian cattle          ogy is improved.
     ranchers to mark their animals with RFID
                                                           SEE ALSO: Distribution and Distribution Requirements Plan-
     tags and mark the cuts of meat derived from                     ning; Logistics and Transportation; Reverse Supply
     individual cows. This would allow companies                     Chain Logistics; Supply Chain Management; Ware-
     to recall meat infected with contaminants                       housing and Warehouse Management
     such as bovine spongiform encephalopathy                                                          R. Anthony Inman
     and avoid wholesale destruction of cattle.
   • Humans-Medical information can be recorded            FURTHER READING:
     on RFID tags implanted under human skin.
     This has already been approved by the FDA.            “Barcoding for Beginners & Bar Code FAQ.” IDAutomation.
                                                           com, Inc. Available from http://www.idautomation.com/barcod-
   • Electronic keys-The majority of new cars              ing4beginners.html.
     come equipped with keys embedded with
                                                           Brewin, Bob. “Radio Frequency Identification.” ComputerWorld,
     RFID tags containing unique identifiers. If a
                                                           16 December 2002.
     thief uses a key without the tag, the car will
     be immobilized within minutes. The same               Corcoran, Cate T. “Wal-Mart’s Mandate: The Retailer’s RFID
     concept can be used to secure buildings and           Initiative Generates Mixed Signals.” Women’s Wear Daily 189,
                                                           no. 8: 16B.
     facilities.
                                                           Coyle, John J., Edward J. Bardi, and C. John Langley, Jr. The
   • Merchandise-RFID tags can be used to track            Management of Business Logistics. Mason, OH: Thomson
     assets, manage inventory, and authorize pay-          South–Western, 2003.
     ments. The Gap retail clothing chain uses
     shelves with RFID readers that monitor inven-         “FDA Issues Final Barcoding Rule for Drugs and Blood.”
                                                           Healthcare Financial Management 58, no. 4: 12.
     tory by gathering information through layers
     of clothing. Wal-Mart, Home Depot, and other          Forcinio, Hallie. “Prepare for Barcoding.” Pharmaceutical
     giant retailers are investing heavily in RFID         Technology 28, no. 5: 38–43.
     technology to improve supply chain effi-               Glover, Tony. “RFID Tags Could Be the Saviour of Supply
     ciency and track products. Wal-Mart has               Chain Management.” MicroScope, 11 October 2004, 12.
     already mandated RFID use from its top 100
                                                           In-Stat. “RFID Tag Market to Approach $3 Billion in
     suppliers.
                                                           2009.” Available from <http://www.instat.com/newmk.asp?ID=
   • Counterfeiting-The European Union is con-             1206>.
     sidering introducing RFID tags onto ban-              Mayfield, Kendra. “Radio ID Tags: Beyond Barcodes.” Wired
     knotes to prevent forgery. RFID tagged drugs          News, 20 May 2002.
     can be monitored from factory to use, pre-
                                                           “Market Research into RFID.” Printing World, 3 March
     venting drug counterfeiting. Branded mer-             2005, 46.
     chandise tagged with unique serial numbers
     can be authenticated at various stages of its         “Organic RFID Tags.” R&D 47, no. 2 (February 2005): 17.
     supply chain, thus thwarting potential coun-          Power, Denise. “RFID Eyed to Thwart Counterfeiting.” Women’s
     terfeiters.                                           Wear Daily 189, no. 49: 16B.

                                                           “RFID Report.” Supply Chain Management Review 9, no. 2
                                                           (March 2005): 60.
CONTROVERSY OVER RFID USE                                  Spiegel, Robert. “Barcoding: An Extra Digit for Logistics.”
                                                           Logistics Management 442, no. 6: 44.
      The use of RFID has caused some concern for
privacy advocates. They feel that it may be a privacy      Worth Data. “Bar Code Basics.” Available from <http://www.
violation for a consumer unaware of the presence an        Barcodehq.com/primer.htm>.
RFID tracking tag, or if they are unable to remove or
deactivate it. Other concerns revolve around the abil-
ity to fraudulently or surreptitiously read a tag from a
distance, and the ability to identify a purchaser
through the use of a credit card or a loyalty card.
     RFID advocates, however, feel that opposition
will lessen as RFID use becomes more widespread             BASES OF POWER
and its use across a wide range of industries becomes
apparent.                                                  SEE:        Leadership Styles and Bases of Power


                                                                                                                                            37
                                                           E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                                                                   benchmarking process helps managers to find gaps in




     BENCHMARKING
                                                                                   performance and turn them into opportunities for
                       BENCHMARKING                                                improvement. Benchmarking enables companies to
                                                                                   identify the most successful strategies used by other
                           Benchmarking is the process through which a             companies of comparable size, type, or regional loca-
                      company measures its products, services, and practices       tion, and then adopt relevant measures to make their
                      against its toughest competitors, or those companies         own programs more efficient. Most companies apply
                      recognized as leaders in its industry. Benchmarking is       benchmarking as part of a broad strategic process. For
                      one of a manager’s best tools for determining whether        example, companies use benchmarking in order to
                      the company is performing particular functions and           find breakthrough ideas for improving processes, to
                      activities efficiently, whether its costs are in line with    support quality improvement programs, to motivate
                      those of competitors, and whether its internal activities    staffs to improve performance, and to satisfy manage-
                      and business processes need improvement. The idea            ment’s need for competitive assessments.
                      behind benchmarking is to measure internal processes              Benchmarking targets roles, processes, and criti-
                      against an external standard. It is a way of learning        cal success factors. Roles are what define the job or
                      which companies are best at performing certain activi-       function that a person fulfills. Processes are what con-
                      ties and functions and then imitating—or better still,       sume a company’s resources. Critical success factors
                      improving on—their techniques.                               are issues that company must address for success over
                           Benchmarking focuses on company-to-company              the long-term in order to gain a competitive advan-
                      comparisons of how well basic functions and pro-             tage. Benchmarking focuses on these things in order
                      cesses are performed. Among many possibilities, it           to point out inefficiencies and potential areas for
                      may look at how materials are purchased, suppliers           improvement.
                      are paid, inventories are managed, employees are
                                                                                        A company that decides to undertake a bench-
                      trained, or payrolls are processed; at how fast the com-
                                                                                   marking initiative should consider the following ques-
                      pany can get new products to market; at how the qual-
                                                                                   tions: When? Why? Who? What? and How?
                      ity control function is performed; at how customer
                      orders are filled and shipped; and at how maintenance         WHEN. Benchmarking can be used at any time, but is
                      is performed.                                                usually performed in response to needs that arise
                           Benchmarking enables managers to determine              within a company. According to C.J. McNair and
                      what the best practice is, to prioritize opportunities for   Kathleen H.J. Leibfried in their book Benchmarking:
                      improvement, to enhance performance relative to cus-         A Tool for Continuous Improvement, some potential
                      tomer expectations, and to leapfrog the traditional          “triggers” for the benchmarking process include:
                      cycle of change. It also helps managers to understand
                                                                                      • quality programs
                      the most accurate and efficient means of performing
                      an activity, to learn how lower costs are actually              • cost reduction/budget process
                      achieved, and to take action to improve a company’s             • operations improvement efforts
                      cost competitiveness. As a result, benchmarking has
                      been used in many companies as a tool for obtaining a           • management change
                      competitive advantage.                                          • new operations/new ventures
                           Companies usually undertake benchmarking with              • rethinking existing strategies
                      a view towards the many improvements that it may
                      offer. These benefits include reducing labor cost,               • competitive assaults/crises
                      streamlining the work flow through reengineered busi-
                                                                                   WHY. This is the most important question in manage-
                      ness processes and common administrative systems,
                                                                                   ment’s decision to begin the benchmarking process.
                      improving data center operations through consolidation
                                                                                   McNair and Leibfried suggest several reasons why
                      and downsizing, cooperative business and information
                                                                                   companies may embark upon benchmarking:
                      technology planning, implementing new technology,
                      outsourcing some assignments and functions, redesign-           • to signal management’s willingness to pursue
                      ing the development and support processes, and restruc-           a philosophy that embraces change in a proac-
                      turing and reorganizing the information technology                tive rather than reactive manner;
                      functions.
                                                                                      • to establish meaningful goals and performance
                                                                                        measures that reflect an external/customer
                      BENCHMARKING BASICS                                               focus, foster “quantum leap” thinking, and
                                                                                        focus on high-payoff opportunities;
                          The goal of benchmarking is to identify the weak-
                      nesses within an organization and improve upon them,            • to create early awareness of competitive dis-
                      with the idea of becoming the “best of the best.” The             advantage; and


38
                    E N C Y C L O P E D I A      O F    M A N A G E M E N T
   • to promote teamwork that is based on com-               TYPES OF BENCHMARKING




                                                                                                                        BENCHMARKING
     petitive need and is driven by concrete data
     analysis, not intuition or gut feeling.                      There are a number of different types of bench-
                                                             marking, which are driven by different motivating fac-
WHO.    Companies may decide to benchmark inter-             tors and thus involve different comparisons. Some of
nally, against competitors, against industry perform-        the major types of benchmarking are as follows:
ance, or against the “best of the best.” Internal            Metric benchmarking is the use of quantitative meas-
benchmarking is the analysis of existing practice            ures as reference points for comparisons. Best-practice
within various departments or divisions of the organi-       benchmarking focuses on identifying outstanding
zation, looking for best performance as well as identi-      techniques. Information technology benchmarking
fying baseline activities and drivers. Competitive           includes data processing, systems analysis, program-
benchmarking looks at a company’s direct competi-            ming, end-user support, and networks. Infrastructure
tors and evaluates how the company is doing in com-          benchmarking includes data centers, networks, data/
parison. Knowing the strengths and weaknesses of the         information, end-user support, and distribution remote
competition is not only important in plotting a suc-         centers. Application benchmarking includes system
cessful strategy, but it can also help prioritize areas of   analysis, development and maintenance programming,
improvement as specific customer expectations are             and functionality. Strategy benchmarking includes skills
identified. Industry benchmarking is more trend-based         assessment, information technology strategy, business-
and has a much broader scope. It can help establish          technology alignment, and delineation of roles and
performance baselines. The best-in-class form of             responsibilities.
benchmarking examines multiple industries in search               There are many motivators that drive the different
of new, innovative practices. It not only provides a         types of benchmarking. Application benchmarking
broad scope, but also it provides the best opportunities     and infrastructure benchmarking, for example, use
over that range.                                             such motivators as cost, quality, competition, and goal
                                                             setting. An advantage of benchmarking is that it facil-
WHAT. Benchmarking can focus on roles, processes,            itates the process of change, clearly laying out the
or strategic issues. It can be used to establish the func-   types of solutions external organizations have used
tion or mission of an organization. It can also be used      and providing a global perspective on how part of the
to examine existing practices while looking at the           company affects the whole. It further helps focus
organization as a whole to identify practices that sup-      improvement in the areas where actual gains can be
port major processes or critical objectives. When            made, which translates into value added to the com-
focusing on specific processes or activities, the depth       pany as well as its employees.
of the analysis is a key issue. The analysis can take the
form of vertical or horizontal benchmarking. Vertical
benchmarking is where the focus is placed on specific         SUCCESSFUL BENCHMARKING
departments or functions, while horizontal bench-
                                                                  There are several keys to successful benchmark-
marking is where the focus is placed on a specific
                                                             ing. Management commitment is one that companies
process or activity. Concerning strategic issues, the
                                                             frequently name. Since management from top to
objective is to identify factors that are of greatest
                                                             bottom is responsible for the continued operation and
importance to competitive advantage, to define meas-
                                                             evaluation of the company, it is imperative that man-
ures of excellence that capture these issues, and to iso-
                                                             agement be committed as a team to using and imple-
late companies that appear to be top performers in
                                                             menting benchmarking strategies. A strong network
these areas.
                                                             of personal contacts as well as having an open mind to
                                                             ideas is other keys. In order to implement benchmark-
HOW. Benchmarking uses different sources of infor-
                                                             ing at all stages, there must be a well-trained team of
mation, including published material, trade meetings,
                                                             people in order for the process to work accurately and
and conversations with industry experts, consultants,
                                                             efficiently. Based on the information gathered by a
customers, and marketing representatives. The emer-
                                                             well-trained team, there must also be an effort toward
gence of Internet technology has facilitated the bench-
                                                             continuous improvement. Other keys include a bench-
marking process. The Internet offers access to a
                                                             marking process that has historical success, sufficient
number of databases-like Power-MARQ from the
                                                             time and staff, and complete understanding of the
nonprofit American Productivity and Quality Center-
                                                             processes to be benchmarked.
containing performance indicators for thousands of
different companies. The Internet also enables compa-             In almost any type of program that a company
nies to conduct electronic surveys to collect bench-         researches or intends to implement, there must be
marking data. How a company benchmarks may                   goals and objectives set for that specific program.
depend on available resources, deadlines, and the            Benchmarking is no different. Successful companies
number of alternative sources of information.                determine goals and objectives, focus on them, keep


                                                                                                                                       39
                                                             E N C Y C L O P E D I A      O F   M A N A G E M E N T
                       them simple, and follow through on them. As in any                Greene, Charles B. Benchmarking the Information Technology




     BODY LANGUAGE
                       program, it is always imperative to gather accurate and           Function. New York: The Conference Board, 1993.
                       consistent information. The data should be understood             Mard, Michael J., et al. Driving Your Company’s Value: Strategic
                       and able to be defined as well as measured. The data               Benchmarking for Value. New Jersey: John Wiley, 2004.
                       must be able to be interpreted in order to make com-
                       parisons with other organizations. Lastly, keys to suc-           McNair, C.J., and Kathleen H.J. Leibfried. Benchmarking: A
                                                                                         Tool for Continuous Improvement. Harper Business, 1992.
                       cessful benchmarking include a thorough follow-
                       through process and assistance from consultants with              Powers, Vicki. “Boosting Business Performance through
                       experience in designing and establishing such programs.           Benchmarking.” Financial Executive (November 2004).

                                                                                         Tirbutt, Edmund. “Brimming with Confidence: Benchmarking
                                                                                         Your Perks against Your Rivals’ Can Provide HR with Added
                       THE FUTURE OF BENCHMARKING                                        Reassurance.” Employee Benefits (November 2004).

                            Although early work in benchmarking focused
                       on the manufacturing sector, it is now considered a
                       management tool that can be applied to virtually any
                       business. It has become commonplace for companies
                       to use in order to compete in and lead their respective
                       industries. It has helped many reduce costs, increase
                                                                                          BODY LANGUAGE
                       productivity, improve quality, and strengthen cus-
                       tomer service.
                                                                                               People in the workplace can convey a great deal
                            In his book Benchmarking the Information                     of information without even speaking; this is called
                       Technology Function, Charles B. Greene noted that                 nonverbal communication. Nonverbal communica-
                       companies are increasingly interested in benchmark-               tion can convey just as much as written and verbal
                       ing for a number of activities, including:                        communication, and human beings read and react to
                                                                                         these nonverbal signals in the workplace. Body lan-
                          • cost of supporting business driver (transac-
                                                                                         guage is nonverbal communication that involves
                            tion costs, or cost per order)
                                                                                         body movement and gestures, which communica-
                          • systems development activities, including                    tions researchers call kinesics. There are hundreds of
                            maintenance, backlogs, development pro-                      thousands of possible signs that can be communi-
                            ductivity and project management                             cated through body movements and gestures. In addi-
                          • end-user support                                             tion to body movements and gestures, the nonverbal
                                                                                         cues given through facial expressions and eye con-
                          • data centers/communication networks                          tact, personal space, and touch, influence individual
                          • skills management                                            interactions in the workplace. While this body lan-
                          • business strategy alignment                                  guage is fairly well understood in general in each
                                                                                         culture, there are major cultural differences in non-
                          • technology management                                        verbal communication.
                          • customer/user satisfaction

                            According to a 2003 Bain and Company survey
                       quoted in Financial Executive, benchmarking received              BODY MOVEMENTS AND GESTURE
                       the second-highest usage score (84 percent) among
                       more than two dozen management tools used by                           Gestures, or movements of the head, hands, arms,
                       senior executives around the world. The survey also               and legs can be used to convey specific messages that
                       reported that users tend to be highly satisfied (rated             have linguistic translations. For example, a person
                       3.96 on a 5-point scale) with the results benchmarking            might use a wave their hand rather than saying “hello”,
                       provides to their companies.                                      or nod his or her head in agreement, which means
                                                                                         “yes” or “okay.” These gestures can be very useful in
                       SEE ALSO: Competitive Advantage; Continuous Improvement;          the workplace because they are a quick way to convey
                                 World-Class Manufacturer                                thoughts and feelings without needing to speak or
                                                                      James C. Koch      write. Additionally, many such gestures are generally
                                                           Revised by Laurie Hillstrom   widely understood, although they may carry different
                                                                                         meanings in other cultures. For instance, although the
                                                                                         “ok” sign that is made through touch of the thumb and
                       FURTHER READING:
                                                                                         forefinger with the remaining fingers extended is seen
                       Engle, Paul. “World-Class Benchmarking.” Industrial Engineer      as a positive gesture in the U.S., in some other cul-
                       August 2004.                                                      tures, this is seen as a vulgar gesture.


40
                     E N C Y C L O P E D I A       O F    M A N A G E M E N T
     In addition to the gestures that people use that            • Crossed arms often connote a defensive pos-




                                                                                                                          BODY LANGUAGE
have a particular meaning, people also use gestures                ture, which can indicate that a person is
that do not have specific, generally understood mean-               unhappy with the speaker, feels threatened
ings. These gestures, called illustrators, add meaning             by the speaker, or does not want to listen to
to a verbal message. For instance, when giving a pres-             the speaker.
entation, a person might use hand gestures to empha-             • Adaptors, such as fidgeting or playing with
size a point. Many people use gestures while speaking              objects, may indicate that you are nervous
to others to accompany their words, and while these                around the speaker or disinterested in the
body movements may not have a meaning that can be                  speaker’s message.
pinpointed, they serve to embellish a person’s words.

     A person’s body movements that convey feelings           FACIAL EXPRESSIONS AND EYE CONTACT
and emotions through facial expressions and body
                                                                   Although facial expressions and eye contact are
positions are called affect displays. These body move-
                                                              not kinesics and therefore technically not body lan-
ments may indicate whether a person is open and
                                                              guage, they are types of nonverbal communication that
receptive, angry, distracted, or a number of other emo-
                                                              can have an effect on business relations. Researchers
tions. Many affect displays are commonly interpreted;
                                                              have found that people can identify with great accu-
for instance, individuals who sit in a slumped position
                                                              racy seven separate human emotions, even after seeing
and frown are believed to be disinterested or unhappy.
                                                              only facial and eye expressions: sadness, happiness,
Those who sit upright, smile, and have raised eye-
                                                              anger, fear, surprise, contempt, and interest. Therefore,
brows, are seen as interested and happy. While these
                                                              without speaking a word, a facial expression can
affect displays are often appropriately interpreted,
                                                              convey a great deal of information to others. Similarly,
they may not be related to the interaction with another
                                                              eye contact or lack of eye contact can also indicate a
person, and thus may be misread. For instance, if a
                                                              person’s attitudes and emotions.
person has a terrible headache, he may squint, look
down, and grimace during a conversation, indicating                Research indicates that people use four different
to the speaker that he disagrees with her, even if he is      facial management techniques to control our facial
receptive to and in agreement with the speaker.               expressions. First, people intensify their facial expres-
                                                              sions, or exaggerate them, in order to show strong
      Researchers also categorize certain nonverbal           emotion. For example, a saleswoman who just made a
behaviors called adaptors, which are typically uncon-         major sale might intensify her positive expression by
scious behaviors and are used when a person is tense          smiling more broadly and raising her eyebrows.
or anxious. Examples of illustrators are adjusting one’s      Second, people may deintensify their facial expres-
clothes, biting one’s nails, or fidgeting and toying with      sions when they control or subdue them. For instance,
an object. Illustrators indicate to others that a person is   an employee who just found out that he got a raise
upset or nervous, and behavior such as this during a          might smile less or look less happy after finding out
job interview or a meeting with a coworker may be             that his coworker did not get a raise. Third, a person
interpreted very negatively. A person who engages in          neutralizes their expressions when they avoid showing
such behavior may be seen as preoccupied, anxious,            any facial expression. A person might not show any
or even as dishonest. As with affect displays, such           emotion when being reprimanded in the workplace or
body language may not convey true feelings; a person          when attempting to negotiate with another busi-
who fidgets and bites her nails may be exhibiting such         nessperson. Finally, humans mask their facial expres-
behaviors for innocuous reasons. Thus, while such             sions. This occurs when a person hides his or her true
behaviors are often interpreted correctly as presenting       emotions and conveys different emotions. For exam-
anxiety, they do not necessarily indicate that a person       ple, an employee might express enthusiasm to a man-
is in any way dishonest.                                      ager who gives him an undesirable task in order to
                                                              curry favor with that manager. Or, a customer service
     When listening to others, individuals often
                                                              representative might express concern and caring in her
convey messages nonverbally. Therefore, care should
                                                              facial expression, when in actuality she is annoyed by
be taken to avoid the following:
                                                              the customer. Each of these facial management tech-
   • Sitting or leaning back is a body movement               niques makes is possible for people to interact with
     that may convey disinterest in a speaker’s               one another in socially acceptable ways.
     words or disagreement with the speaker.                       Making and maintaining eye contact can have
     Additionally, resting your chin on your hand             positive outcomes in the workplace. Eye contact can
     may convey boredom. Conversely, leaning                  be used to indicate to a person that you are receptive to
     forward slightly, raising eyebrows, and                  what they have to say. Additionally, eye contact may
     making eye contact indicate that you are                 indicate that you want to communicate with a person.
     receptive to the speaker.                                Finally, eye contact can be used to express respect for


                                                                                                                                          41
                                                              E N C Y C L O P E D I A      O F    M A N A G E M E N T
                       a person by maintaining longer eye contact. Interest-       if they seem physically uncomfortable, they may have




     BODY LANGUAGE
                       ingly, refraining from making eye contact, such as          a larger personal space, which should be respected.
                       looking down or away, may indicate a level of respect
                       for someone of higher status. A lack of eye contact, or
                       an unwillingness to maintain eye contact may indicate       TOUCH
                       discomfort with a situation, a disinterest in the other          In the workplace, people may use touch to com-
                       person’s words, or a dislike of the person. However,        municate nonverbally. The functional-professional
                       the degree to which a person does or does not make          touch is businesslike and impersonal. The touch that a
                       eye contact may be dependent on their own level of          physician uses when conducting a physical examina-
                       shyness or extraversion and cannot always be inter-         tion is a functional-professional touch. However,
                       preted as a reaction to a particular person or situation.   touch is not a part of most professions, and thus, this
                                                                                   type of touch is not used often in business settings.
                                                                                   The social-polite touch, such as a handshake, is much
                       PERSONAL SPACE                                              more common. This type of touch is used to recognize
                                                                                   other individuals. It is an expected touch in many busi-
                             Researchers use the term proxemic to describe
                                                                                   ness settings. Finally, the friendship-warmth touch
                       the way that a person uses space in communication.
                                                                                   shows that you value another as a person. A pat on the
                       Each individual has a personal space, which is like an
                                                                                   back or a hug is a friendship-warmth touch. In most
                       invisible bubble surrounding them. This bubble becomes
                                                                                   workplaces, the social-polite touch is the only neces-
                       larger or smaller, depending on the person with whom
                                                                                   sary touch, and most managers and employees are
                       we interact. We are comfortable standing or sitting
                                                                                   encouraged to avoid using touch (particularly the
                       closer to someone we like and more comfortable with
                                                                                   friendship-warmth touch) in the workplace. While
                       someone we dislike or don’t know well standing or
                                                                                   many people see a hand on a shoulder or a pat on
                       sitting at a distance. However, the amount of personal
                                                                                   the back as a useful touch to convey encouragement
                       space that a person desires depends on many charac-
                                                                                   or concern for another’s well-being, sexual harass-
                       teristics, including gender and age.
                                                                                   ment fears have made many avoid all types of touch
                            The personal space that a person prefers also          beyond handshakes.
                       depends on the situation. When interacting with
                       friends, relatives, or conducting casual business,
                       most people prefer a distance of one and a half to          CULTURAL DIFFERENCES
                       four feet. When conducting formal or impersonal                  Across the U.S., most body language is consis-
                       business, most individuals prefer a personal space of       tently understood. However, in other nations and cul-
                       4 to 8 feet. Therefore, a person is likely to be more       tures, what is considered to be appropriate body
                       comfortable standing closely to a trusted coworker          language in one place, may be seen as highly inappro-
                       than to a new customer.                                     priate in others. As noted above, the American sign for
                             Although there are broad norms for a comfort-         “ok” may be seen as vulgar in other nations. Similarly,
                       able personal space, it is not uncommon for a person        other types of gestures and body movements may
                       to feel that their personal space has been violated         convey unwanted negative meanings. Therefore, care
                       when another person sits or stands too closely. When        should be taken before using gestures in other coun-
                       personal space is violated, there are several reactions     tries or with business partners from other countries.
                       that people might have. First, they may withdraw by         Body movements can also be misinterpreted based on
                       backing up or leaving the room. Second, if anticipat-       culture. Although most people in the world understand
                       ing the possibility of a personal space violation, a        the movement of the head up and down to mean “yes”
                       person may avoid having their space violated. This          or “I agree,” this is not the case in all countries.
                       could mean staying away from meetings, crowds, and               Norms and expectations regarding facial expres-
                       parties. Third, people may insulate themselves from         sions and eye contact also differ across cultures.
                       intrusion of personal space. A manager who puts her         Because different cultures have different norms for
                       desk in her office in such a way that no one can sit near    respect, eye contact that is seen as relationship-building
                       her is insulating. An employee who takes a seat at a        and respectful in the U.S. may be seen as challenging
                       the end of a table during a meeting might be doing so       and disrespectful in other cultures.
                       to prevent others from sitting near him. Finally, a              Finally, personal space and touch are used differ-
                       person may fight to keep his personal space by asking        ently in different nations. Americans tend to prefer
                       the other person to back up or move away. In a busi-        larger amounts of personal space than do some Latin
                       ness setting, it may be helpful to recognize the behav-     Americans, Italians, and Middle-Easterners. Germans,
                       iors that others engage in when their personal space is     Chinese, and Japanese prefer larger amounts of per-
                       violated. That is, if you notice that others step back      sonal space, similar to what Americans prefer. Thus,
                       from you when speaking, sit at more of a distance, or       when conducting business with people from other


42
                     E N C Y C L O P E D I A      O F   M A N A G E M E N T
cultures, it is important to understand and respect their          is often the case that marginal ideas that are




                                                                                                                          BRAINSTORMING
personal space needs. Americans who do business                    added upon or altered in some fashion
with those who prefer less personal space may have to              become transformed into powerful solu-
fight the urge to step back and therefore avoid insult-             tions. It should be emphasized that ideas do
ing a business partner.                                            not belong to the individual who presents
                                                                   them, but to the group.
SEE ALSO: International Cultural Differences
                                         Marcia J. Simmering
                                                                    When generating ideas, it is best to have the
                                                               members of a group first generate ideas individually
                                                               and silently rather than shouting out ideas as an entire
FURTHER READING:
                                                               group. Research indicates that by having people work
Beall, Anne E. “Body Language Speaks.” Communication World     individually, they generate a greater number of unique
(March/April 2004): 18–20.                                     ideas than when brainstorming as a group. After indi-
                                                               vidual brainstorming, all ideas can be shared, and fur-
Knapp, M, L., and J.A. Hall. Nonverbal Communication in
Human Interaction. 5th ed. Fort Worth, TX: Wadsworth, 2002.    ther brainstorming as a group can be used.

Konnellan, Thomas K. “Great Expectations, Great Results.”
                                                                    What topics should be addressed in brainstorm-
HRMagazine (June 2003): 155–158.                               ing sessions? While theoretically it is possible to
                                                               brainstorm around any topic, Osborn believed that the
Ribbens, Geoff, and Richard Thompson. Understanding Body
                                                               problem or topic should be specific rather than gen-
Language. Barron’s Educational Series, 2001.
                                                               eral; that is, it should be narrow enough so that the
                                                               participants can easily comprehend its nature and
                                                               target their responses to its solution. Also, multiple
                                                               problems, such as brainstorming about what a new
                                                               product should be named, how it should be packaged,
                                                               and how it should be advertised, should not be set
 BRAINSTORMING
                                                               before a brainstorming group. The problems should be
                                                               separated, and brainstormed in separate meetings that
     Brainstorming was developed by Alex F. Osborn             are devoted to one of the aforementioned topics.
in 1939 to enhance the ability of work groups to solve              Osborn believed the ideal size for a brainstorm-
problems creatively. The participants in his early             ing group was between 5 and 10 people; however, he
groups called his process “brainstorming” because it           also contended that with the right kind of leader, large
seemed to them that they were using their brains “to           numbers of people of up to 100 could successfully par-
storm a creative problem and to do so in commando              ticipate in brainstorming sessions. However, research
fashion, with each stormer audaciously attacking the           indicates that larger groups generally do not generate
same objective.” According to David Whetten and                more ideas than small groups.
Kim Cameron, there are four cardinal principles that                In order to facilitate success, leaders of brain-
govern effective brainstorming processes:                      storming sessions should do the following:
 1. No evaluation of the effectiveness of any                   1. Facilitators should teach the principles and
    given alternative is to be undertaken while the                objectives of brainstorming to the group
    group is generating alternatives. Evaluation                   before beginning the brainstorming session.
    of alternatives must come at a later stage in                  Unless all group members understand these
    the problem-solving process.                                   rules, the brainstorming effort will fail.
 2. The leader of the group must place no                       2. Facilitators must enforce the rules during the
    parameters upon the group regarding what                       brainstorming session. Inevitably, people
    kinds of alternatives or solutions should be                   will begin evaluating suggestions during the
    suggested; in fact, the team leader should                     “generation” phase of brainstorming or vio-
    encourage the group to come up with novel                      late one of the other principles. When such
    ideas that normally would not receive con-                     violations occur, the leader must reteach the
    sideration in the organization.                                principle in question that has been violated,
 3. The quantity of ideas should initially take                    and relaunch the brainstorming process in
    precedence over the quality of ideas; that is,                 the group.
    the leader should push the group to produce                 3. Facilitators must ensure that the ideas are
    a large number of ideas irrespective of their                  listed so that they can be referred to later when
    quality.                                                       the group analyzes the ideas that it has gener-
 4. Participants should feel free to add to or                     ated. Idea records are often kept on flip charts,
    modify previous ideas proposed by others; it                   but an individual can record the information


                                                                                                                                          43
                                                               E N C Y C L O P E D I A       O F   M A N A G E M E N T
                           and the results photocopied and distributed            Another potential problem with face-to-face brain-




     BRAINSTORMING
                           to the participants as well.                           storming is social loafing, which occurs when individ-
                                                                                  uals put forth less effort on a group project than they
                        4. Facilitators should try to encourage all group
                                                                                  do working alone.
                           members to get involved in the session and
                           contribute ideas. Some group members may                    Electronic brainstorming sessions may reduce
                           be reluctant to share their thoughts, which            some of these problems. In online or network settings,
                           could lead to one or two participants dominat-         participants can simultaneously contribute ideas, and
                           ing the session. A good facilitator finds ways          can usually do so anonymously. Anonymity may make
                           to draw out ideas from all group members.              it more likely that individuals will contribute a larger
                        5. Facilitators need to keep the group focused            number of creative alternatives. In fact, empirical
                           and prevent participants from getting dis-             research suggests that electronic sessions are gener-
                           couraged. Typically, participants offer sev-           ally more effective than face-to-face sessions in terms
                           eral ideas at the beginning of a session; often        of the number of alternative ideas generated.
                           these are the more obvious alternative solu-                Although the anonymity offered by electronic
                           tions to the problem at hand. After these ini-         brainstorming sessions may reduce the negative
                           tial ideas are offered, the session might get          impact of some of the problems associated with face-
                           bogged down as the quantity of ideas sub-              to-face sessions, other research suggests that social
                           sides. Facilitators should assist the group to         loafing might still be a problem. One study published
                           push past this initial stage and continue              in the Journal of Management Information Systems
                           working to come up with other alternatives,            found that allowing participants in electronic sessions
                           because it is at this point where truly creative       to view and compare their participation rates against
                           solutions to problems may be offered.                  those of others in the group (e.g., a tally of how many
                        6. Facilitators need to be able to restate and dis-       ideas were suggested by each person) increased indi-
                           till poorly articulated ideas in a way that            viduals’ contributions of ideas, as everyone could
                           clarifies without altering their meaning.               readily see who was not participating much. In this
                                                                                  study, electronic idea forums that allowed social com-
                            After a large set of ideas has been generated, they   parison were the most productive, followed by anony-
                       must then be evaluated and culled according to their       mous electronic forums. Face-to-face sessions were
                       efficacy. At this point, a large number of options are      the least productive in terms of the quantity of alterna-
                       open to the leader in terms of how the ideas should be     tive solutions generated.
                       evaluated. However, generally it is advisable that the
                       group who generated the ideas be accountable for
                       evaluating them as well. During the analysis stage the     BRAINSTORMING AS CREATIVE
                       leader must facilitate an evaluation of the ideas that     DECISION MAKING
                       the group generated. As the listed ideas are sub-
                       tracted, merged, and refined in group discussion, it is           Because of its emphasis on group participation
                       common for a more comprehensive solution to the            and creativity, brainstorming may also be seen as a
                       problem to be produced than what could have been           tool for creative decision making. Creative decision
                       generated individually or in other group problem-          making is a group decision-making technique in
                       solving processes.                                         which group members attempt to generate as many
                                                                                  alternative solutions as possible for a given problem.
                                                                                  It is one of a number of decision-making tools that are
                       POTENTIAL PROBLEMS
                                                                                  used to ensure consideration of a diverse set of alter-
                            Face-to-face brainstorming sessions may not           native solutions. Other common decision-making
                       always generate a large number of creative ideas for a     techniques include the nominal group technique and
                       variety of reasons. One problem with face-to-face ses-     the Delphi technique.
                       sions is called production blocking, which is basically
                       anything that prevents a group member from verbaliz-       SEE ALSO: Creativity; Decision Making; Group Dynamics;
                       ing his or her ideas as they occur. Common production                Problem Solving
                       blocks are forgetting and distractions. Another problem                                Tim Barnett and Mark E. Mendenhall
                       with face-to-face sessions is evaluation apprehension,                                     Revised by Marcia J. Simmering
                       which simply means that individuals are afraid to vocal-
                       ize their ideas. Evaluation apprehension might be
                       caused because individuals are reluctant to share novel,   FURTHER READING:
                       but incompletely developed, ideas. Group members           Ditkoff, Mitchell. “Ten Skills for Brainstorming: Breakthrough
                       might also be afraid of how others will react if they      Thinking.” Journal for Quality and Participation, November/
                       suggest unpopular or politically sensitive alternatives.   December 1998, 30–32.


44
                     E N C Y C L O P E D I A     O F    M A N A G E M E N T
Ivancevich, John M., Robert Konopaske, and Michael T.          discounts. If no units are sold, there is no total revenue




                                                                                                                              BREAK-EVEN POINT
Matteson. Organizational Behavior and Management, 7th ed.      ($0). However, total costs are considered from two
Boston: Irwin/McGraw-Hill, 2004.
                                                               perspectives. Variable costs are those that increase
Jones, Gareth R., Jennifer M. George, and Charles W.L. Hill.   with the quantity produced; for example, more materi-
Contemporary Management, 2nd edition. Boston: Irwin/           als will be required as more units are produced. Fixed
McGraw-Hill, 2000.                                             costs, however, are those that will be incurred by the
Osborn, Alex F. Applied Imagination: Principles and            company even if no units are produced. In a company
Procedures of Creative Thinking. New York: Scribner, 1953.     that produces a single good or service, this would
Shepherd, Morgan M., et al. “Invoking Social Comparison to     include all costs necessary to provide the production
Improve Electronic Brainstorming: Beyond Anonymity.”           environment, such as administrative costs, deprecia-
Journal of Management Information Systems 12, no. 3 (1996):    tion of equipment, and regulatory fees. In a multi-
155–168.                                                       product company, fixed costs are usually allocations
Whetten, David A., and Kim S. Cameron. Developing              of such costs to a particular product, although some
Management Skills. 6th ed. Upper Saddle River, NJ: Prentice    fixed costs (such as a specific supervisor’s salary) may
Hall, 2005.                                                    be totally attributable to the product.
                                                                    Figure 1 displays the standard break-even analy-
                                                               sis framework. Units of output are measured on the
                                                               horizontal axis, whereas total dollars (both revenues
                                                               and costs) are the vertical units of measure. Total rev-
                                                               enues are nonexistent ($0) if no units are sold.
 BREAK-EVEN POINT                                              However, the fixed costs provide a floor for total costs;
                                                               above this floor, variable costs are tracked on a per-
      A company’s break-even point is the amount of            unit basis. Without the inclusion of fixed costs, all
sales or revenues that it must generate in order to equal      products for which marginal revenue exceeds mar-
its expenses. In other words, it is the point at which the     ginal costs would appear to be profitable.
company neither makes a profit nor suffers a loss.
Calculating the break-even point (through break-even
analysis) can provide a simple, yet powerful quantita-                                  Figure 1
tive tool for managers. In its simplest form, break-even
                                                                         Simple Break-Even Analysis:
analysis provides insight into whether or not revenue                   Total Revenues and Total Costs
from a product or service has the ability to cover the
                                                                       Dollars
relevant costs of production of that product or service.
                                                                                                    Total Revenues
Managers can use this information in making a wide
range of business decisions, including setting prices,                                                    Total Costs
preparing competitive bids, and applying for loans.
                                                                                              Break-Even Point
BACKGROUND
     The break-even point has its origins in the eco-                                            Units of Output
nomic concept of the “point of indifference.” From an
economic perspective, this point indicates the quantity
of some good at which the decision maker would be                    In Figure 1, the break-even point illustrates the
indifferent, i.e., would be satisfied, without reason to        quantity at which total revenues and total costs are
celebrate or to opine. At this quantity, the costs and         equal; it is the point of intersection for these two totals.
benefits are precisely balanced.                                Above this quantity, total revenues will be greater than
                                                               total costs, generating a profit for the company. Below
     Similarly, the managerial concept of break-even           this quantity, total costs will exceed total revenues,
analysis seeks to find the quantity of output that just         creating a loss.
covers all costs so that no loss is generated. Managers
can determine the minimum quantity of sales at which                To find this break-even quantity, the manager uses
the company would avoid a loss in the production of a          the standard profit equation, where profit is the differ-
given good. If a product cannot cover its own costs, it        ence between total revenues and total costs. Predeter-
inherently reduces the profitability of the firm.                mining the profit to be $0, he/she then solves for the
                                                               quantity that makes this equation true, as follows:
MANAGERIAL ANALYSIS                                                 Let TR = Total revenues
                                                                         TC = Total costs
     Typically the scenario is developed and graphed                     P = Selling price
in linear terms. Revenue is assumed to be equal for                      F = Fixed costs
each unit sold, without the complication of quantity                     V = Variable costs



                                                                                                                                                 45
                                                               E N C Y C L O P E D I A           O F    M A N A G E M E N T
                                    Q = Quantity of output                            lent, especially if the customer is price-sensitive.




     BREAK-EVEN POINT
                                                   TR = P × Q                         Price-elasticity exists when customers will respond
                                                 TC = F + V × Q                       positively to lower prices and negatively to higher
                                                 TR − TC = profit                      prices, and is particularly applicable to nonessential
                              Because there is no profit ($0) at the break-even        products. A small change in price may affect the sale
                          point, TR − TC = 0, and then P × Q − (F + V × Q) = 0.       of skis more than the sale of insulin, an inelastic-
                          Finally, Q = F(P − V).                                      demand item due to its inherently essential nature.
                                                                                      Therefore, using this method to set a prospective price
                               This is typically known as the contribution            for a product may be more appropriate for products
                          margin model, as it defines the break-even quantity          with inelastic demand. For products with elastic demand,
                          (Q) as the number of times the company must gener-          it is wiser to estimate demand based on an established,
                          ate the unit contribution margin (P − V ), or selling       acceptable market price.
                          price minus variable costs, to cover the fixed costs. It
                          is particularly interesting to note that the higher the          Typically, total revenues and total costs are mod-
                          fixed costs, the higher the break-even point. Thus,          eled as linear values, implying that each unit of output
                          companies with large investments in equipment and/or        incurs the same per-unit revenue and per-unit variable
                          high administrative-line ratios may require greater         costs. Volume sales or bulk purchasing may incorpo-
                          sales to break even.                                        rate quantity discounts, but the linear model appears
                               As an example, if fixed costs are $100, price per       to ignore these options.
                          unit is $10, and variable costs per unit are $6, then the        A primary key to detecting the applicability of
                          break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷       linearity is determining the relevant range of output. If
                          $4). When 25 units are produced and sold, each of           the forecast of demand suggests that 100 units will be
                          these units will not only have covered its own mar-         demanded, but quantity discounts on materials are
                          ginal (variable) costs, but will have also have con-        applicable for purchases over 500 units from a single
                          tributed enough in total to have covered all associated     supplier, then linearity is appropriate in the anticipated
                          fixed costs. Beyond these 25 units, all fixed costs have      range of demand (100 units plus or minus some fore-
                          been paid, and each unit contributes to profits by the       cast error). If, instead, quantity discounts begin at 50
                          excess of price over variable costs, or the contribution    units of materials, then the average cost of materials
                          margin. If demand is estimated to be at least 25 units,     may be used in the model. A more difficult issue is
                          then the company will not experience a loss. Profits         that of volume sales, when such sales are frequently
                          will grow with each unit demanded above this 25-unit        dependent on the ordering patterns of numerous cus-
                          break-even level.                                           tomers. In this case, historical records of the propor-
                               While it is useful to know the quantity of sales at    tionate quantity-discount sales may be useful in
                          which a product will cease to generate losses, it may       determining average revenues.
                          be even more useful to know the quantity necessary to
                          generate a desired level of profit, say D.                        Linearity may not be appropriate due to quantity
                                                                                      sales/purchases, as noted, or to the step-function
                                                 TR − TC = D                          nature of fixed costs. For example, if demand sur-
                                            P × Q − (F + V × Q) = D                   passes the capacity of a one-shift production line, then
                                           Then Q = (F + D) ÷ (P − V)
                                                                                      a second shift may be added. The second-shift super-
                               This has the effect of regarding the desired profit     visor’s salary is a fixed-cost addition, but only at a suf-
                          as an increase in the fixed costs to be covered by sales     ficient level of output. Modeling the added complexity
                          of the product. As the decision-making process often        of nonlinear or step-function costs requires more
                          requires profits for payback period, internal rate of        sophistication, but may be avoided if the manager is
                          return, or net present value analysis, this form may be     willing to accept average costs to use the simpler
                          more useful than the basic break-even model.                linear model.

                                                                                           One obviously important measure in the break-
                          BASIC ASSUMPTIONS                                           even model is that of fixed costs. In the traditional
                                                                                      cost-accounting world, fixed costs may be determined
                               There are several assumptions that affect the
                                                                                      by full costing or by variable costing. Full costing
                          applicability of break-even analysis. If these assump-
                                                                                      assigns a portion of fixed production overhead charges
                          tions are violated, the analysis may lead to erroneous
                                                                                      to each unit of production, treating these as a variable
                          conclusions.
                                                                                      cost. Variable costing, by contrast, treats these fixed
                               It is tempting to the manager to set the contribu-     production overhead charges as period charges; a por-
                          tion margin (and thus the price) by using the sales goal    tion of these costs may be included in the fixed costs
                          (or certain demand) as the quantity. However, sales         allocated to the product. Thus, full costing reduces the
                          goals and market demand are not necessarily equiva-         denominator in the break-even model, whereas the


46
                        E N C Y C L O P E D I A        O F   M A N A G E M E N T
variable costing alternative increases the denominator.       time and attention required by this product, rather than




                                                                                                                         BREAK-EVEN POINT
While both of these methods increase the break-even           on its proportion of direct labor hours to total direct
point, they may not lend themselves to the same               labor hours.
conclusion.
     Recognizing the appropriate time horizon may
also affect the usefulness of break-even analysis, as         EXTENSIONS OF BREAK-EVEN ANALYSIS
prices and costs tend to change over time. For a
prospective outlook incorporating generalized infla-                Break-even analysis typically compares revenues to
tion, the linear model may perform adequately. Using          costs. However, other models employ similar analysis.
the earlier example, if all prices and costs double, then
the break-even point Q = 200 ÷ (20 − 12) = 200 ÷ 8 =
25 units, as determined with current costs. However,                                 Figure 2
weakened market demand for the product may occur,                        Crossover Chart of Three Options
even as materials costs are rising. In this case, the price
may shift downward to $18 to bolster price-elastic                    Dollars                       Option A
demand, while materials costs may rise to $14. In this                                                    Option B
case, the break-even quantity is 50 (200 ÷ [18 − 14]),                                                    Option C
rather than 25. Managers should project break-even
quantities based on reasonably predictable prices and
costs.
     It may defy traditional thinking to determine
                                                                  0             X1     X2           Units of Output
which costs are variable and which are fixed.
Typically, variable costs have been defined primarily
as “labor and materials.” However, labor may be effec-
tively salaried by contract or by managerial policy that           In the crossover chart, the analyst graphs total-
supports a full workweek for employees. In this case,         cost lines from two or more options. These choices
labor should be included in the fixed costs in the             may include alternative equipment choices or loca-
model.                                                        tion choices. The only data needed are fixed and vari-
     Complicating the analysis further is the concept         able costs of each option. In Figure 2, the total costs
that all costs are variable in the long run, so that fixed     (variable and fixed costs) for three options are
costs and the time horizon are interdependent. Using a        graphed. Option A has the low-cost advantage when
make-or-buy analysis, managers may decide to change           output ranges between zero and X units, whereas
from in-house production of a product to subcontract-         Option B is the least-cost alternative between X and
ing its production; in this case, fixed costs are minimal      X units of output. Above X units, Option C will cost
and almost 100 percent of the costs are variable.             less than either A or B. This analysis forces the man-
Alternatively, they may choose to purchase cutting-           ager to focus on the relevant range of demand for the
edge technology, in which case much of the variable           product, while allowing for sensitivity analysis. If
labor cost is eliminated; the bulk of the costs then          current demand is slightly less than X Option B
involve the (fixed) depreciation of the new equipment.         would appear to be the best choice. However, if
Managers should project break-even quantities based           medium-term forecasts indicate that demand will
on the choice of capital-labor mix to be used in the rel-     continue to grow, Option C might be the least-cost
evant time horizon.                                           choice for equipment expected to last several years.
                                                              To determine the quantity at which Option B wrests
     Traditionally, fixed costs have been allocated to         the advantage from Option A, the manager sets the
products based on estimates of production for the             total cost of A equal to the total cost of B (FA + VA ×
fiscal year and on direct labor hours required for pro-        Q = FB + VB × Q) and solves for the sole quantity of
duction. Technological advances have significantly             output (Q) that will make this equation true. Finding
reduced the proportion of direct labor costs and have         the break-even point between Options B and C fol-
increased the indirect costs through computerization and      lows similar logic.
the requisite skilled, salaried staff to support company-
wide computer systems. Activity-based costing (ABC)                 The Economic Order Quantity (EOQ) model
is an allocation system in which managers attempt to          attempts to determine the least-total-cost quantity in
identify “cost drivers” which accurately reflect the           the purchase of goods or materials. In this model, the
appropriate usage of fixed costs attributable to pro-          total of ordering and holding costs is minimized at the
duction of specific products in a multi-product firm.           quantity where the total ordering cost and total holding
This ABC system tends to allocate, for example, the           cost are equal, i.e., the break-even point between these
CEO’s salary to a product based on his/her specific            two costs.


                                                                                                                                            47
                                                              E N C Y C L O P E D I A       O F   M A N A G E M E N T
                                                                                      attendants. Hotel and telecommunication managers




     BREAK-EVEN POINT
                                                 Figure 3                             advertise lower rates on weekends to smooth demand
                                      Economic Order Quantity:                        through slow business periods and avoid times
                                     Ordering and Holding Costs                       when the high-fixed-cost equipment is underutilized.
                                Dollars                                               Retailers and banks track customer flow patterns by
                                                           Total Holding Costs        day and by hour to enhance their short-term schedul-
                                                                                      ing efficiencies. Whatever method is used, the goal of
                                                                                      these service industries is the same as that in manu-
                                                                                      facturing: reduce fixed costs to lower the break-even
                                                           Total Ordering Costs
                                                                                      point.
                                                                                           Break-even analysis is a simple tool that defines
                                                           Order Quantity
                                                                                      the minimum quantity of sales that will cover both
                                                                                      variable and fixed costs. Such analysis gives managers
                                                                                      a quantity to compare to the forecast of demand. If the
                               As companies merge, layoffs are common. The
                                                                                      break-even point lies above anticipated demand,
                          newly formed company typically enjoys a stock-price
                                                                                      implying a loss on the product, the manager can use
                          surge, anticipating the leaner and meaner operations
                                                                                      this information to make a variety of decisions. The
                          of the firm. Obviously, investors are aware that the
                                                                                      product may be discontinued or, by contrast, may
                          layoffs reduce the duplication of fixed-cost personnel,
                                                                                      receive additional advertising and/or be re-priced to
                          leading to a smaller break-even point and thus profits
                                                                                      enhance demand. One of the most effective uses of
                          that begin at a lower level of output.
                                                                                      break-even analysis lies in the recognition of the rele-
                                                                                      vant fixed and variable costs. The more flexible the
                                                                                      equipment and personnel, the lower the fixed costs,
                          APPLICATIONS IN SERVICE INDUSTRIES
                                                                                      and the lower the break-even point.
                                While many of the examples used have assumed
                                                                                          It is difficult to overstate the importance of break-
                          that the producer was a manufacturer (i.e., labor and
                                                                                      even analysis to sound business management and deci-
                          materials), break-even analysis may be even more
                                                                                      sion making. Ian Benoliel, CEO of management
                          important for service industries. The reason for this
                                                                                      software developer NumberCruncher.com, said on
                          lies in the basic difference in goods and services: serv-
                                                                                      Entrepreneur.com (2002):
                          ices cannot be placed in inventory for later sale. What
                          is a variable cost in manufacturing may necessarily be           The break-even point may seem like Business
                          a fixed cost in services. For example, in the restaurant          101, yet it remains an enigma to many com-
                          industry, unknown demand requires that cooks and                 panies. Any company that ignores the break-
                          table-service personnel be on duty, even when cus-               even point runs the risk of an early death and
                          tomers are few. In retail sales, clerical and cash regis-        at the very least will encounter a lot of unnec-
                          ter workers must be scheduled. If a barber shop is               essary headaches later on.
                          open, at least one barber must be present. Emergency
                          rooms require round-the-clock staffing. The absence          SEE ALSO: Activity-Based Costing; Cost Accounting; Cost-
                          of sufficient service personnel frustrates the customer,               Volume-Profit Analysis; Financial Issues for
                          who may balk at this visit to the service firm and may                 Managers
                          find competitors that fulfill the customer’s needs.                                                           Karen L. Brown
                                The wages for this basic level of personnel must                                           Revised by Laurie Hillstrom
                          be counted as fixed costs, as they are necessary for the
                          potential production of services, despite the actual
                          demand. However, the wages for on-call workers
                                                                                      FURTHER READING:
                          might be better classified as variable costs, as these
                          wages will vary with units of production. Services,         Benoliel, Ian. “Calculating Your Breakeven Point.” Entrepreneur
                          therefore, may be burdened with an extremely large          .com (25 March 2002). <http://www.entrepreneur.com/article/
                          ratio of fixed-to-variable costs.                            0,4621,298145,00.html>.

                                Service industries, without the luxury of invento-    “Breakeven Analysis.” Business Owner’s Toolkit. Available
                          riable products, have developed a number of ways to         from <http://www.toolkit.cch.com/text/P06_7530.asp>.
                          provide flexibility in fixed costs. Professionals require
                          appointments, and restaurants take reservations; when       Deal, Jack. “The Break-Even Point and the Break-Even
                                                                                      Margin.” Business Know-How.com. Available from <http://
                          the customer flow pattern can be predetermined,
                                                                                      www.businessknowhow.com/money/breakeven.htm>.
                          excess personnel can be scheduled only when needed,
                          reducing fixed costs. Airlines may shift low-demand          Garrison, Ray H., and Eric W. Noreen. Managerial Accounting.
                          flight legs to smaller aircraft, using less fuel and fewer   Boston: Irwin/McGraw-Hill, 1999.


48
                        E N C Y C L O P E D I A      O F     M A N A G E M E N T
Horngren, Charles T., George Foster, and Srikant M. Datar. Cost   capital available. Also, debt-rating agencies do not




                                                                                                                              BUDGETING
Accounting: A Managerial Emphasis. Upper Saddle River, NJ:        rate the debt-paying ability of many small businesses,
Prentice Hall, 1997.
                                                                  limiting the extent to which these businesses can raise
Render, Barry, and Jay Heizer. Principles of Operations           cash through bond issues. Without a ready market for
Management. Upper Saddle River, NJ: Prentice Hall, 1997.          debt, small businesses must often turn to the less liquid
                                                                  forms of debt financing such as bank loans, in some
                                                                  cases at higher interest rates than would be available
                                                                  from established credit markets available to larger
                                                                  corporations.
                                                                        Budgets allow businesses to better utilize the
                                                                  financial resources available to them. To begin with,
 BUDGETING                                                        budgets help businesses operate within their means;
                                                                  that is, over the long term, budgets assist businesses in
      Organizations develop specific plans for saving              spending less money than they earn. Next, budgets
and spending income and these plans, or budgets, are              help businesses achieve their financial goals by plan-
essential for developing spending and saving priori-              ning for the future and organizing money into cate-
ties. Properly preparing a budget also serves as a ref-           gories such as income, expenses, and savings. In short,
erence to check how well money is being managed                   budgets help a business avoid credit problems, better
during a period by allowing managers to see actual                prepare for financial emergencies, and build better
revenues and expenses compared to budgeted rev-                   money management skills by creating a structured
enues and expenses. Corrective action can be taken                plan.
earlier in a period when revenue shortfalls or expense
                                                                       There are several steps that should be followed to
excesses are identified.
                                                                  successfully implement a budget. These include set-
     The term “budget” can be dated back to medieval              ting financial goals, planning budget categories, main-
England, where it meant “leather purse” or “wallet.” A            taining financial records, and balancing and adjusting
budget allows businesses to meet specific goals by cre-            the budget. Setting financial goals is the starting point
ating a system of saving and spending money effi-                  in the budgeting process. Questions managers should
ciently. Simply defined, a budget is a plan for using              asked include: “What do we want accomplished
corporate funds in a way that best meets the firm’s                within one month, one year, or ten years?” “What new
wants and needs. The plan includes a recorded entry               products or services do we want to offer in the short-
of expected income, expenses, and savings over a                  and long-term and how can we finance these?” “Will
defined period of time.                                            my operating expenses increase with inflation, and
     A wide range of budgeting techniques exist, and              how will we increase revenue to meet these additional
although the fundamental purposes are similar, the                expenses?” Clearly, there are dozens of questions
specifics among various organizations are often differ-            managers should ask to cover all the categories of rev-
ent. One important aspect of budgeting is how organi-             enue, expense, and debt and equity financing in addi-
zations increase cash to finance ongoing operations                tion to these, but these questions provide a starting
and new opportunities. Large corporations, for exam-              point to spur additional questions. The answers to
ple, may have the option of increasing cash by selling            these questions should help determine how income
treasury stock (previously authorized shares of owner-            should be spent and saved, but in general, budgeting
ship that have never been offered for sale on the stock           questions should revolve around estimates of income
market). The liquidity of equity (stock) markets allows           and expenses. Categories include fixed expenses such
managers to implement these equity decisions fairly               as rent, insurance premiums, and taxes; estimates of
quickly to budget for projected needs. In addition, the           variable expenses such as utilities and wages; and esti-
debt-paying ability of large corporations is rated by             mates that allow for uncertainties.
several independent organizations. This creates a                      One way to budget is by comparing estimated
market for corporate debt, more commonly referred to              financial figures created before a budgeting period with
as bonds. Corporations with favorable debt ratings                actual experience at the end of the budgeting period.
have the ability to borrow money; that is, issue bonds,           The initial estimates are called pro forma financial
at lower interest rates than those with unfavorable debt          statements. The three primary types of financial state-
ratings. Small businesses, in contrast, often do not              ments are a balance sheet, income statement, and state-
have publicly traded shares of stock. Although these              ment of cash flows. The balance sheet shows assets
businesses can sell stock to investors, the process is            owned, liabilities owed, and owners’ equity (owners’
more uncertain because the market for this type of                financial stake in the businesses). The income state-
stock is less liquid. Venture capital is also an option,          ment details profit and loss for a given period. The
but the number of small businesses seeking venture                statement of cash flows helps managers see where cash
capital nearly always exceeds the amount of venture               came from and where it went. By comparing pro forma


                                                                                                                                          49
                                                                  E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                    financial statements to end-of-period financial state-          FURTHER READING:




     BUNDLED GOODS AND SERVICES
                                    ments, managers can judge whether or not their budg-
                                                                                                  Henry, David. “Loading Up on Junk.” Business Week, 31 January
                                    ets are in line with estimates. Adjustments can then be       2005, 78–80.
                                    made for future budgeting periods.
                                                                                                  Schick, Allen. “Twenty-Five Years of Budgeting Reform.”
                                         A budget must meet certain characteristics to suc-       OECD Journal on Budgeting 1, no, 4 (2004): 102–124.
                                    cessfully manage money. The budgeting should be               U.S. Small Business Administration. Small Business Startup
                                    specific enough to provide the needed information. It          Guide. 2005. Available from <http://www.sba.gov/starting_
                                    should be realistic as well as flexible. When unex-            business/startup/guide.html>.
                                    pected expenses arise, the spending plan should be
                                    able to handle these costs. A budget is not a permanent
                                    plan and should be realigned when circumstances
                                    occur that alter budget categories. The budget should
                                    be carefully planned and organized, yet clear enough
                                    to be communicated to organizational stakeholders
                                    such as lenders and owners.
                                                                                                   BUNDLED GOODS AND SERVICES
                                         Companies create budgets for a mixture of rea-
                                    sons. They can serve a variety of functions, and thus               Bundling is a marketing tactic that involves offer-
                                    many techniques can be implemented to develop                 ing two or more goods or services as a package deal
                                    them. Budgets can be used as a means of forecasting           for a discounted price. Examples of bundling are as
                                    and planning for the future. Their creation can also          widespread as McDonald’s value meals and automo-
                                    be used as a motivational tool. The plan can be used          biles with features such as air conditioning, sunroofs,
                                    as a means of evaluation and control as well as a             and geographical systems. The most well-known exam-
                                    resource for information and decision-making.                 ple is the bundled computer package complete with a
                                    Many different approaches to the budgeting process            monitor, mouse, keyboard, and preloaded software for
                                    in addition to preparation or pro forma financial             a single price. Alternatively, one could select and buy
                                    statements and comparison to actual financial state-           each component of the system separately. All compo-
                                    ments can be used depending on the desired function           nents being equal, the differences are that the buyer
                                    of the company. Breakeven analysis, for instance,             doesn’t have to purchase each item separately, and that
                                    estimates the amount of sales required to cover a             the bundled package could cost as much as a third less
                                    new product’s or new service’s expenses. Payback              than the each-sold-separately package. Bundling can
                                    periods are similar, but add to breakeven analysis’           be of products from one company, but cross-industry
                                    focus on needed sales by adding the length of time            bundling is not uncommon—for example combining
                                    needed to achieve those sales. This tells managers            airline tickets with credit cards.
                                    how long it will take to recoup initial expenses.                  Bundling has been researched for over thirty-
                                    Another type of budgeting is capital budgeting, in            seven years. While it doesn’t always pan out, bundling
                                    which large the estimated revenue from capital proj-          has been shown to be an effective and profitable mar-
                                    ects such as purchase of property, plants, and equip-         keting strategy under a variety of circumstances,
                                    ment is projected. Additional techniques include              including so-called pure bundling, in which a group of
                                    such as parametric, partial, zero-based, and equity           products are only available as a bundle and aren’t sold
                                    budgeting. Each of these may be applied to organi-            separately, as well as mixed bundling, where the prod-
                                    zations’ financial situations depending on the needs           ucts are sold both as bundles and as individual units.
                                    of the individual businesses.                                 Industries that have implemented bundling of goods
                                                                                                  and/or services include utilities, telecommunications
                                         Whatever technique managers use, the important
                                                                                                  services, software and computer companies, journal
                                    thing is that budgeting is essential. Businesses without
                                                                                                  publishers, automobiles, vacation packages, and fast
                                    budgets can quickly find themselves short of cash not
                                                                                                  food restaurants, to name a few. Bundling usually
                                    only for new products and services, growth and expan-
                                                                                                  saves the consumer from 7 percent to 15 percent over
                                    sion, and improvements in capital projects, but also in
                                                                                                  the cost of purchasing the items separately.
                                    simply meeting short-term needs such as payroll,
                                    insurance, and tax expenses. Budgeting is thus a key
                                    element in all business planning.                             APPROACHES TO BUNDLING
                                                                                                        Companies may choose to bundle goods for sev-
                                    SEE ALSO: Financial Issues for Managers; Zero-Based           eral reasons, including cost efficiency, market opportu-
                                              Budgeting
                                                                                                  nities to enhance profits, and competitive strategy. Due
                                                                                  Kevin Nelson    to economies of scale, bundling may result in cost sav-
                                                                     Revised by Scott B. Droege   ings on the supply side. For instance, in some scenarios


50
                                  E N C Y C L O P E D I A     O F   M A N A G E M E N T
a company may save on packaging and inventory costs        INDUSTRY CASE STUDIES




                                                                                                                       BUNDLED GOODS AND SERVICES
by bundling products rather than carrying them sepa-
rately. There has been a fair amount of published          UTILITIES AND TELECOMMUNICATIONS. In response

research delving into what kinds of bundling practices     to much of the deregulation or re-regulation in the
are most likely to produce cost savings. Factors a com-    utilities industry, companies are looking to bundle
pany must consider include whether the bundled prod-       their services to provide their products with reduced
ucts compete with each other and whether the demand        costs to the consumer while using the power of free
for the bundled products is positively or negatively       markets. According to a telecommunications bundling
correlated. And even though the tendency is to price       report published in Utility Business, 35 percent of
bundles lower than the sum of their individual compo-      telecom customers are as likely to purchase bundled
nents, in some cases companies successfully pursue         services (local, long distance, and electric/gas serv-
strategies in which the bundled price is actually          ices) from an electric/gas provider as they are from
higher. This is called ‘premium bundles.’                  a local telephone service provider. According to
                                                           another nationwide survey appearing in Public Utilities
     As a competitive strategy, a marketer of a suc-       Fortnightly, residential consumers and small busi-
cessful product may bundle a newer or less successful      ness owners are increasingly interested in purchasing
product with its stronger product as a means of edging     bundled goods and services. These customers also
its way into a new market. Perhaps the most famous         want specialized packages that are offered at a dis-
example of this is Microsoft Corporation’s bundling
                                                           count of at least 5 percent with package increases
of various software applications. First they bundled
                                                           directly proportional to the size of the discount.
Access and PowerPoint with Word and Excel. Later
                                                           Overall, customers assume that bundling goods and
they bundled their Internet browser with their market-
                                                           services will add value and create economies of scale,
leading operating system. When they did this they
                                                           according to a study in Security Distributing &
increase their market share from 7 percent to 38 per-
                                                           Marketing.
cent in one year. (In that example of bundling, which
proved highly successful for Microsoft, the legality of
the practice was the subject of protracted litigation,     COMPUTER HARDWARE AND SOFTWARE.                In recent
however, because it raised concerns about anti-            years, computer hardware and software companies
competitive behavior.) In a broader marketing sense,       have offered the bundling of their goods and services.
bundling is often intended to entice value- and con-       Computer companies such as Gateway, Dell, and
venience-seeking customers who would otherwise             Compaq offer Microsoft products pre-installed on
buy from another supplier or multiple suppliers by         their hard drives as a prerequisite to a customer buying
offering unique or appealing combinations of goods         the product. These computer companies also offer
relative to their competitors.                             extra software and peripherals as standard equipment
                                                           with new desktop, laptop, or server models. Gateway,
     On the demand side, bundling is used to extract
                                                           for example, offers a package including a mouse,
consumer surplus, or an economic value in excess of
the purchase price, as suggested by Chuang and Sirbu.      mouse pad, wrist support, and maintenance kit for
In the business-to-business market, for example, a         about $10 in addition to the purchase of a new
national survey of telecommunications managers             machine. If these items were purchased separately, the
showed that 57 percent of businesses will subscribe to     cost could be as much as $40. In 1999, software pub-
bundles of two or more services, while 19 percent of       lisher Corel Corporation began bundling its Word-
businesses would purchase bundled services if they         Perfect Office Suite with a Hong Kong-based group,
were priced 10 percent lower.                              PC Chips Group, in order to appeal to smaller busi-
                                                           nesses looking for a computer with a large amount of
     As with most marketing practices, there is no         software.
exact formula for how to create a bundled package that
will succeed in the marketplace. However, some                  Computer hardware and software producers
observers have noted several qualities that appear         bundle their packages for several reasons. First, you
common to many successful bundling strategies.             cannot have a computer without software and vice-
According to a 1997 study by Mercer Management             versa, and consumers would rather not incur the added
Consulting, Lexington, Massachusetts, good bundles         expense of buying these two components separately.
have five qualities: (1) the package is worth more than     Secondly, it is very cost effective for both entities to
the sum of its parts; (2) the bundle brings order and      enter into agreements to let their services co-exist with
simplicity to a set of confusing or tedious choices; (3)   the consumer. Lastly, the bundling process gives these
the bundle solves a problem for the consumer; (4) the      producers brand recognition in the market. Microsoft
bundle is focused and lean in an effort to avoid carry-    became the standard through selling its software prod-
ing options the consumer has no use for; and (5) the       ucts to the industry’s largest computer producers such
bundle generates interest or even controversy.             as IBM, Dell, Gateway, and Compaq.


                                                                                                                                                    51
                                                           E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                      UNBUNDLING TRENDS                                                Salinger, Michael A. “A Graphical Analysis of Bundling.”




     BUSINESS CONTINUITY PLANNING
                                                                                                       Journal of Business 68, no. 1 (1995): 85–98.
                                           Antitrust violations have forced some examples
                                                                                                       Solomon, Howard. “Corel Inks Office Suite Bundling Deal with
                                      of unbundling. The European Court of First Instance              PC Chips.” Computing Canada 25, no. 15 (1999): 15–17.
                                      ruled against Microsoft in December of 2004. Microsoft
                                      must provide the European market with a version of               “Utilities Pose Threat to Bundling.” Utility Business, 28
                                      Windows operating system without their media player.             February 1999, 72.
                                      The goal of this decision is to prevent Microsoft from
                                      having a monopoly.
                                           There is some evidence that some consumers
                                      want unbundling. They want the option to buy exactly
                                      what they want, i.e., unbundled products. One exam-
                                      ple is pay-per-click advertising on Google and Yahoo.
                                      Advertisers would rather not pay based on an esti-                BUSINESS CONTINUITY PLANNING
                                      mated audience, but are willing to pay for ads that
                                      actually are clicked on. Other examples include music                 Organizations are faced with a variety of threats
                                      (the consumer wants to download and pay for one                  and vulnerabilities, and these continue to evolve.
                                      song) or brokerage (buy one $5.00 stock) or pay for              Business disruptions can include natural disasters
                                      one periodical article rather than subscribe to the jour-        such as floods, fires, hurricanes, and power outages.
                                      nal. This trend will not make bundling disappear,                Since 9/11, the threat of man-made disasters such as
                                      because for many consumers the package is easier and             terrorist attacks has taken on a sense of urgency as
                                      more convenient. However companies will need to                  well. The increasing density of our population further
                                      carefully package bundles to meet consumer desires.              exacerbates the threats posed by both natural and man-
                                                                                                       made disasters. Although business continuity planning
                                      SEE ALSO: Service Industry; Service Operations; Service          and disaster recovery planning are now generally rec-
                                                Process Matrix; Strategy Formulation
                                                                                                       ognized as vital, creating and maintaining a sound
                                                                                     James C. Koch     plan is quite complex.
                                                                          Revised by Judith M. Nixon
                                                                                                             Business continuity planning addresses the prospect
                                                                                                       that a disaster might interrupt an organization’s business
                                      FURTHER READING:                                                 operations. Whether an organization is for-profit, non-
                                      “Bundle Up, Electric Providers.” Public Utilities Fortnightly    profit, or governmental, the need to mitigate disaster risks
                                      137, no. 2 (1999): 62.                                           has become especially salient. Firms should evaluate
                                                                                                       their degree of exposure to disaster, both externally (e.g.,
                                      “Bundling Survey Assesses Consumers’ Interests.” Security
                                      Distributing and Marketing 29, no. 1 (1999): 30.
                                                                                                       floods, fires, hurricanes) and internally (e.g., HVAC fail-
                                                                                                       ure, sabotage).
                                      “Business Unbundled: Microsoft.” The Economist 374, 8407
                                      (2005): 48.                                                            A business impact analysis helps management to
                                                                                                       understand the criticality of different business func-
                                      Chuang, John Chung-I, and Marvin A. Sirbu. Network Delivery
                                                                                                       tions, recovery time required, and the need for various
                                      of Information Goods: Optimal Pricing of Articles and
                                      Subscriptions. 1997.
                                                                                                       resources. The question of which corporate functions
                                                                                                       receive top priority should be addressed. In selecting a
                                      ———. “Optimal Bundling Strategy for Digital Information          strategy to protect the organization, cost-benefit com-
                                      Goods: Network Delivery of Articles and Subscriptions.”
                                                                                                       parisons are made with regard to the effects of doing
                                      Information Economics and Policy 11, no. 2 (1999): 147–76.
                                                                                                       without various services and functions (e.g., call cen-
                                      Fuerderer, R., A. Herrmann, and G. Wuebker, eds. Optimal         ters, production locations, proprietary data) at specific
                                      Bundling: Marketing Strategies for Improving Economic            points in time, and developing plans for optimum
                                      Performance. New York: Springer, 1999.
                                                                                                       recovery periods for each service and function.
                                      Janiszewski, C., and M. Chuha, Jr. “The Influence of Price
                                                                                                            Thus, a business continuity plan includes the pro-
                                      Discount Framing on the Evaluation of a Product Bundle.”
                                      Journal of Consumer Research 30, no. 4 (2004): 534–547.
                                                                                                       cedures and information about resources to help an
                                                                                                       organization recover from a disruption in its business
                                      Mason, Charles. “The Future of Competition.” America’s           operations. In the financial markets, major industry
                                      Network 103, no. 3 (1999): S4–S5.
                                                                                                       players have responded to the 9/11 terrorist attacks by
                                      Mannes, G. “The Urge to Unbundle.” Fast Company 91 (2005):       attempting to deal with future risks, especially risks
                                      23–24.                                                           regarding trading operations. But because most net-
                                      Ovans, Andrea. “Make a Bundle Bundling.” Harvard Business        works rely on the open Internet, viruses or other serv-
                                      Review 75, no. 6 (1997): 18–20.                                  ice attacks remain potential threats.
                                      Porter, Anne Millen. “Electric Power Customers Prepare for          A central office failure brought about by a fire or
                                      Competition.” Purchasing, 25 March 1999, S4–S11.                 power outage can also affect trading operations.


52
                                    E N C Y C L O P E D I A       O F    M A N A G E M E N T
Redundancy (including back-up sites and additional         During the rash of hurricanes that hit Florida in 2004,




                                                                                                                         BUSINESS CONTINUITY PLANNING
staff and technologies) is recommended, albeit expen-      every time a major warning was issued and facilities
sive. An additional risk is that an entire network (such   evacuated, primary operations were transferred to New
as AT&T) might go down. Jay Pultz, research vice-          York until the threat passed. The system is viewed as
president at disaster and business continuity consul-      an insurance policy for the bank.
tancy firm Gartner, Inc., is concerned that failures will        Oddly enough, smaller businesses have been found
increase because the companies that provide the net-       to lead many midsize businesses in implementing true
works are collapsing their infrastructure to a single      disaster-recovery solutions. Small businesses often
backbone, as opposed to separate backbones for the         rely on value added resellers (VARs) for their solu-
Internet, phone, data, etc.                                tions, and larger firms use internal IT departments.
     Business continuity and disaster recovery plan-       Midsize firms, however, are too complex to be relo-
ning can demand a great deal of resources. For exam-       cated quickly, yet lack the internal staff to restore busi-
ple, Voca (the United Kingdom direct debits clearing       ness processes rapidly, increasing opportunities for
house) spends about 35 percent of its IT budget on         VARs to offer business continuity services to this
these plans. But the alternative may be worse. Losses      market.
can mount quickly when firms cannot access data.
     According to a study by Gartner, Inc., the average    APPLICATIONS TO SUPPLY
cost of computer-network downtime is $42,000 an            CHAIN MANAGEMENT
hour. Technology-dependent firms such as online bro-
kerages may incur costs of $1 million or more an hour.           Outsourcing has become a standard practice
To ensure seamless service in case of disaster, Voca       among many organizations as a way to add flexibility
runs its business from a back-up site for up to five        to the supply chain. Often a particular task can be done
weeks a year. Off-site backups appear to be a favorite     more efficiently and/or effectively by an outside
method for protecting data for 58 percent of solution      vendor. The advantage for the focal firm is that it can
providers, according to recent CRN poll data.              focus on its core competence, or at least those func-
                                                           tions it does well, and outsource other functions so as
      The Confederation of British Industry and secu-      to gain efficiency. Thus, rather than integrating all
rity firm Qinetiq report that, even after overhauling       functions within the firm boundaries, the trend toward
business continuity plans, 60 percent of British com-      outsourcing and a variety of cooperative relationships
panies are concerned about their preparation for disas-    continues. Ironically, the gains in efficiency and flexi-
ter. Almost 70 percent of respondents to Information       bility may often be outweighed by risks of being
Week Research’s Outlook 2005 survey ranked busi-           dependent on sole suppliers.
ness continuity planning or disaster preparedness as a
                                                                 In a Bank Technology News article titled “Business
high priority. Still, according to analyst David Hill of
                                                           Continuity Planning Must Extend to Vendors,” John
Mesabi Group, most companies have neglected some
                                                           Hoge argues that client-vendor relationships are sym-
operational needs, such as recovering data after a virus
                                                           biotic and should lead to greater efficiency and produc-
attack. Moreover, many business continuity plans are
                                                           tivity in a variety of industries. In banking, technology
never even tested, and according to Peter Gerr of the
                                                           vendors are critical for the bank’s basic business
Enterprise Strategy Group, one out of every five recov-
                                                           processes. But if the vendor’s systems go down, the
ery efforts fails.
                                                           bank’s systems can go down as well.
     But forward-thinking enterprises are recognizing            The implication is that vendors are increasingly
both external and internal signals for the need to for-    compelled to include business continuity and disaster
mulate contingency plans. Externally, business conti-      recovery as key aspects of their activities. Some ven-
nuity plans may be driven by regulation, as in the         dors have adopted business impact analysis to tailor a
banking industry. Internal risk exposure, however, is      recovery plan to meet the recovery requirements of
a critical driver as well. A case in point is Madrid-      specific units. An interesting twist regarding the bene-
based Banco Santander International, the largest           fits of “leaner” supply chains is the increased need for
commercial bank in South America and the tenth             contingency plans in case of disruptions.
largest bank in the world. If operations stopped and             The “dark side” of supply chain management is
trades or payments failed, the bank could be liable for    discussed in a white paper appearing in a March 2005
compensation.                                              issue of Supply Chain Management Review. The
    To maintain protection of business-critical cus-       authors explore the notion of supply continuity plan-
tomer data at its private banking center in Miami,         ning, which is a comprehensive approach to managing
Banco Santander chose a solution from VERITAS              supply risk. They state that by employing their supply
Software Corp. based on its compatibility with the         continuity planning model, organizations can guard
bank’s infrastructure. Data could then be replicated       against a major supply disruption that could poten-
between Miami and New York sites over the IP network.      tially delay orders and result in loss of customers.


                                                                                                                                                        53
                                                           E N C Y C L O P E D I A       O F    M A N A G E M E N T
                             Whereas companies previously relied on inven-            FURTHER READING:




     BUSINESS PLAN
                       tory buffers (safety stock, lead times, excess capacity)
                                                                                      Barnes, James C. A Guide to Business Continuity Planning. New
                       to protect them, today’s competitive environment               York, NY: Wiley, 2001.
                       makes these buffers less attractive. A consequence is
                       that today’s lean supply chains are increasingly frag-         “The Business Continuity Planning & Disaster Recovery
                       ile, or more sensitive to shocks and disruptions.              Planning Directory.” Disaster Recovery World. Available from
                                                                                      <http://www.disasterrecoveryworld.com>.
                            The authors make a strong case for how devas-             Garvey, Martin J. “From Good to Great (Maybe).” Information-
                       tating disruptions can be by citing several events,            Week, 3 January 2005, 45.
                       including a fire at a factory supplying valves to
                                                                                      Gerson, Vicki. “Better Safe Than Sorry.” Bank Systems &
                       Toyota, resulting in estimated costs of $195 million;
                                                                                      Technology 42, no. 1 (2005): 41.
                       an earthquake in Taiwan, hampering the supply of
                       computer chips and computer demand during the hol-             Hanna, Greg. “How to Take a Computer Disaster in Stride.”
                       iday season; a lightning strike at a radio-frequency           Strategic Finance 86, no. 7 (2005): 48–52.
                       chip plant in Albuquerque, NM, resulting in a fire,             Hofmann, Mark A. “Y2K Spurred Continuity Plan That Was Put
                       production delays, and the eventual withdrawal of              to Test by 9/11.” Business Insurance 39, no. 16 (2005): 71.
                       Ericsson from mobile phone manufacturing-because
                                                                                      Hoge, John. “Business Continuity Planning Must Extend to
                       the plant was its sole supplier; and the 9/11 terrorist        Vendors.” Bank Technology News 18, no. 2 (2005): 47.
                       attacks, resulting in loss of life and loss of informa-
                       tion databases.                                                Hood, Sarah B. “Always Be Prepared.” Canadian Business 78,
                                                                                      no. 6 (2005): 61–63.
                            Based on case studies of four organizations that          Huber, Nick. “Business Continuity Plans Eat 35% of Clearing
                       proactively manage inbound supply risk, the authors            House’s Core IT Spend.” ComputerWeekly, 8 February 2005, 5.
                       present a framework describing detailed efforts focused
                                                                                      Roberts, John, and Frank J. Ohlhorst. “Disaster Planning
                       on four major activities: creating system awareness of
                                                                                      Promises Big Channel Profits.” CRN 1130 (2005): 22.
                       supply risk, preventing the occurrence of supply dis-
                       ruptions, remediating supply interruptions, and man-           Sisk, Michael. “Business Continuity: Still Not Entirely Ready
                       aging knowledge.                                               For Disaster.” Bank Technology News 17, no. 12 (2004): 41.

                                                                                      Zsidisin, George, A., Gary L. Ragatz, and Steven A. Melnyk.
                                                                                      “The Dark Side of Supply Chain Management.” Supply Chain
                       BEING PREPARED                                                 Management Review 9, no. 2 (March 2005): 46–52.

                            In a 2005 Canadian Business article titled
                       “Always Be Prepared,” an expert in enterprise risk
                       presents a series of questions that managers should
                       ask about the firm’s state of readiness to continue busi-
                       ness after a disruption. For example, does the business
                       even have a plan? Is the plan tailor-made or “off the           BUSINESS PLAN
                       rack?” Are critical functions the basis of the plan? The
                       maintenance of knowledge management, regular test-                  A business plan is a written document used to
                       ing of the plan, and supplier preparedness are other           describe a proposed venture or idea. It typically
                       important issues.                                              includes the current state of a business, future vision
                                                                                      for the business, target market analysis and chal-
                             Being prepared for disaster is increasingly essen-
                                                                                      lenges, sales and marketing strategies, and funding
                       tial. The good news for those new to business continu-
                                                                                      requirements to reach stated goals. Many business
                       ity planning and disaster recovery planning is that
                                                                                      plans are designed with the intention of securing fund-
                       information on how to prepare is proliferating.
                                                                                      ing and investors to support a proposed idea; others
                       Business continuity and disaster recovery planning
                                                                                      are designed to assist with reorganization, takeovers,
                       software explore the potential impacts of disaster, and
                                                                                      or to serve as an internal planning document. On its
                       underlying risks; constructing a plan; maintenance,
                                                                                      website, the U.S. Small Business Administration
                       testing, and auditing to ensure that the plan remains
                                                                                      (SBA)(http://www.sba.gov) describes it this way:
                       appropriate to the needs of the organization; and sup-
                       port infrastructure and services.                                   A business plan precisely defines your busi-
                                                                                           ness, identifies your goals, and serves as
                       SEE ALSO: Contingency Approach to Management; Lean Man-             your firm’s resume. . . It helps you allocate
                                 ufacturing and Just-in-Time Production; Strategic         resources properly, handle unforeseen com-
                                 Planning Tools; Strategy Formulation; Supply Chain        plications, and make good business decisions.
                                 Management                                                Because it provides specific and organized
                                                                      Bruce Walters        information about your company and how


54
                     E N C Y C L O P E D I A       O F    M A N A G E M E N T
     you will repay borrowed money, a good                    business plan can be formed toward fulfilling these




                                                                                                                          BUSINESS PLAN
     business plan is a crucial part of any loan              goals.
     application. Additionally, it informs sales                   From a management perspective, a business plan
     personnel, suppliers, and others about your              allows managers to set priorities and allocate resources
     operations and goals.                                    effectively. It brings order and direction to an organi-
                                                              zation and provides a vision of the future that employ-
                                                              ees throughout the company can put energy into and
GETTING STARTED                                               get excited about. This shared vision and focus will
     The article “Write the Right Business Plan,” lists       benefit the company at every level and ensure that all
ten things to consider before tackling the document:          constituents are working cooperatively and cohe-
                                                              sively. Ideally, all employees will utilize the informa-
 1. Decide why you’re writing your plan—what                  tion from the business plan to assist in goal setting,
    is your motivation?                                       and guide in decision making and performance
 2. Do your homework—read some books,                         assessments.
    explore web resources.
 3. Compile your information—locate articles,                 ELEMENTS OF A BUSINESS PLAN
    financial statements.
                                                                   The U.S. Small Business Administration recom-
 4. Start typing—write down all your ideas,                   mends that a business plan describe four main ele-
    notes and questions in outline form.                      ments of the proposed venture: an overview of the
 5. Write a rough draft—Flesh out the outline                 business, a marketing analysis, a financial plan, and a
    with full sentences and paragraphs.                       management plan. An executive summary and other
                                                              supporting documents should also accompany the
 6. Do more research—support your case with                   plan. These elements provide a solid starting point for
    data via Small Business Association con-                  a general plan, but there is no single formula to a busi-
    tacts, annual reports, and competitors in the             ness plan and a multitude of factors will impact the
    chosen industry.                                          amount of content needed in a good business plan.
 7. Think about the numbers—develop pro                            The executive summary is a synopsis of the entire
    forma financial statements.                                business plan. It is critical that this summary be care-
 8. Write a final draft—demonstrate attention to               fully crafted and compelling. This is the first and pos-
    detail with accuracy and clarity.                         sibly the only information that a potential investor will
                                                              read; if it is not informative enough or if it is lacking
 9. Get feedback—have someone else read over                  crucial data, the investor might not read beyond this
    your plan and offer advice.                               summary component.
10. Polish your plan to perfection—include a                       The business overview segment is a profile of the
    cover page, table of contents, nondisclosure              company and its primary industry. Projections, trends,
    form and an executive summary containing                  and industry outlooks should be included. In this sec-
    highlights.                                               tion the company describes the unique elements that
      Employees with the right skill set and expertise        make it a prime candidate for its proposed venture.
can collaborate to create the business plan. Alternatively,        A market analysis details how the company will
a consultant can be hired to assist with the process. A       handle its sales and marketing strategies. This analysis
consultant can bring expertise and professionalism to         includes information on the company’s products or serv-
the appearance and tone of your business plan, pro-           ices and intended customers, and how customers will be
vide informed market analysis and research assis-             made aware of the product or service. This section
tance, and supply educated projections for a market           should also include a competitive analysis with a break-
that the entrepreneur might be unfamiliar with or have        down identifying Strengths, Weaknesses, Opportunities,
little experience analyzing.                                  and Threats (SWOT) to the company and the business
     After determining who will be working on the             proposed. A plan of action should explain how the com-
plan, it is useful to decide on the scope of the plan and     pany will address, exploit, or withstand each of these
timeframe for completion of the plan. Once the team           eventualities.
or consultant is in place, research and analysis can                The financial section discusses the current finan-
begin. Internal and external assessments should be            cial state of the company and what types of financing
conducted and then examined. The interpretations of           will be required for the proposed venture. In this area,
these assessments will be the framework of the plan-          it is appropriate to discuss the specific dollar amounts
and will guide goal setting and strategies for the com-       required for the business venture, the cost to maintain
pany. Once goals and strategies are determined, a solid       and sustain the venture, and projections of income,


                                                                                                                                          55
                                                              E N C Y C L O P E D I A      O F    M A N A G E M E N T
     BUSINESS PLAN
                                                                  Element of a Business Plan
                            1. Cover sheet
                            2. Statement of purpose
                            3. Table of contents
                                   I. The Business
                                   A.   Description of business
                                   B.   Marketing
                                   C.   Competition
                                   D.   Operating procedures
                                   E.   Personnel
                                   F.   Business insurance

                                   II. Financial Data
                                   A. Loan applications
                                   B. Capital equipment and supply list
                                   C. Balance sheet
                                   D. Breakeven analysis
                                   E. Pro-forma income projections (profit & loss statements)
                                      Three-year summary
                                      Detail by month, first year
                                      Detail by quarters, second and third years
                                      Assumptions upon which projections were based
                                   F. Pro-forma cash flow

                                   III. Supporting Documents
                                   Tax returns of principals for the last three years Personal financial statement (all banks have these forms)
                                   For franchised businesses, a copy of franchise contract and all supporting documents provided by the
                                   franchisor
                                   Copy of proposed lease or purchase agreement for building space
                                   Copy of licenses and other legal documents
                                   Copy of resumes of all principals
                                   Copies of letters of intent from suppliers, etc.




                       balance sheets, and cash flow. Statistics, facts, and             give little emphasis to marketing and management
                       research should support any financial projections                 issues. Venture capital fund managers are typically
                       listed.                                                          most interested in both the marketing and the financial
                            The management plan section should discuss the              aspects of the plan. Business angels focus on entrepre-
                       strengths, experience, achievements, and expertise of            neurial elements and “investor fit” considerations.
                       the person or team undertaking the business venture.             Thus business plan writers should customize their pro-
                       Investors want to know that they are offering their sup-         posals based on the audience they are trying to reach.
                       port to a person or team qualified and capable of han-                 Bankers are interested in businesses that will be
                       dling the business proposed and the funds loaned.                successful over the long term and entrepreneurs who
                            A complete business plan will provide evidence              will remain committed to the project as described in
                       to the lender that the entrepreneur has performed a              the business plan. When making their lending deci-
                       thorough investigation of this new business venture,             sions, they are interested in collateral as security for
                       because it details how the business will generate cash           the loan, and tend to support projects that are less risky.
                       flow, pay for operating expenses, and service debt                A banker’s main interest is the repayment of the loan.
                       repayment.
                                                                                             Venture capital fund managers invest for capital
                            The accompanying table offers several elements              gain, and when a venture is successful, they also ben-
                       for inclusion in designing a business plan.                      efit. Likewise, if a business fails, venture capital fund
                                                                                        managers stand to lose significantly-and at much cost
                                                                                        to the outside investors whose funds they are manag-
                       CUSTOMIZING FOR INVESTOR-TYPE
                                                                                        ing. Therefore, venture capital fund managers focus
                            Bankers, venture capital fund managers, and                 on the uniqueness of the product or service, the status
                       business angels each look at different features of a             of the market, and the management team’s potential
                       business plan when assessing it for investment. Bankers          for success. Venture capital fund managers’ main
                       tend to focus on the financial aspects of the plan, and           interest is growth potential and potential returns.


56
                     E N C Y C L O P E D I A       O F    M A N A G E M E N T
     Business angels interests align more closely with           Local Small Business Administration (SBA)




                                                                                                                              BUSINESS PLAN
venture capital fund managers than with bankers.            offices or websites (<http://www.sba.gov>) also offer
Business angels focus on how their interests match up       resources. The SBA has sponsored more than 200,000
with the entrepreneur’s and how well they are able to       loans worth more than $45 billion, making it the
work with the entrepreneur over the length of the proj-     largest single financial backer of U.S. businesses in
ect. They seek out entrepreneurs who have strong,           the country. The SBA provides free online courses, e-
positive qualities, such as integrity and responsibility,   mail guidance, print materials, and face-to-face con-
and with whom they feel a connection. Because the           sultations to small business owners.
investment is personal for the business angel, he or
she is interested in financial gains, but also enjoys             The SBA also administers the Small Business
the opportunity to participate in the venture itself. A     Development Center Program to provide management
business angel’s main interest is potential returns,        assistance to current and prospective small business
camaraderie with the entrepreneur(s), and personal          owners. This program provides a broad-based system
involvement.                                                of assistance for the small business community by
                                                            linking the resources of federal, state and local gov-
                                                            ernments with the resources of the educational com-
                                                            munity and the private sector.
RECENT TRENDS
     An article by A. Gome investigates a growing               There are also several books and software pro-
trend among certain entrepreneurs to move away from         grams that assist with creating a business plan.
the old-style business plan that contains an extended,           Business plans are useful documents for garner-
long-term outlook. They are opting instead to use an        ing funds for entrepreneurial ventures and evaluating
abbreviated, shorter-term document that better fits          progress in a business start-up. They are also useful
their business strategy.                                    for evaluating success in established companies,
     Long-range planning documents don’t work as            establishing steps for reorganizations or acquisitions,
well for some entrepreneurs because of the fast-chang-      and for guiding the overall strategy of a company.
ing markets they are entering into, which renders the       Customizing the business plan for the intended
business plan irrelevant within months. And, the short-     investor type ensures that the proposal will mesh with
term nature of some ventures preclude the need for a        the investor’s interests and key considerations.
long-term plan. It is unnecessary to have a five-year
plan if the entrepreneur expects to conclude his ven-       SEE ALSO: Entrepreneurship; Venture Capital
ture within a shorter time frame.                                                                          Monica C. Turner


                                                            FURTHER READING:
LIVING DOCUMENTS
                                                            Bunderson, Gaye. “Have Your Business Plan in Hand Before
     Replacing the traditional business plan is what is     Seeking $$$.” Idaho Business Review, 31 January 2005.
called a “living document,” typically one page in           Business Plans Handbook. Farmington Hills, MI: Gale Group,
length and with a forward-looking range of one year.        Inc., 2004.
Goal-setting may be projected on three- to six-month
                                                            Delmar, F. and Shane, S. “Does Business Planning Facilitate the
timeframes, which are more easily monitored and
                                                            Development of New Ventures?” Strategic Management Journal
attainable. The living document contains similar            24 (December 2004): 1165–1185.
elements of a typical business plan-vision, values,
objectives, methods toward reaching objectives-but          Gome, A. “Plan Not to Plan.” BRW 27 (February 2005): 72–73.
abbreviated to fit on a single page. This document           Lasher, William. The Perfect Business Plan Made Simple. New
needs constant updating and adjusting, with ample           York, NY: Broadway Books, 2005.
flexibility to respond to customer and market fluctua-
                                                            Mason, Colin and Matthew Stark. “What Do Investors Look for
tions. Highly-tailored documents may also need to be        in a Business Plan?” International Small Business Journal 22
prepared for each type of stakeholder, whether bankers,     (June 2005): 227–248.
venture capital fund managers, or business angels.
                                                            McKeever, Mike P. How to Write a Business Plan. Berkeley,
                                                            CA: Nolo, 2005.

RESOURCES                                                   Office of Small Business Development Centers. U.S. Small
                                                            Business Administration. Available from http://www.sba.gov/
     There are many resources for the entrepreneur          sbdc/aboutus.html.
looking to write a business plan. Local business organ-     Pinson, Linda. Anatomy of a Business Plan: A Step-By-Step
izations, public libraries, colleges and universities       Guide to Building a Business and Securing Your Company’s
may offer useful workshops, seminars, or courses.           Future. Chicago, IL: Dearborn Trade Publishing, 2005.


                                                                                                                                              57
                                                            E N C Y C L O P E D I A         O F    M A N A G E M E N T
                                        U.S. Small Business Administration. “Elements of a Business                  ioral concepts and tools that are necessary to implement




     BUSINESS PROCESS REENGINEERING
                                        Plan.” Available from <http://www.sba.gov/starting_business/                 process reengineering. To accomplish this, organiza-
                                        planning/writingplan.html>.
                                                                                                                     tions must foster an environment that encourages quan-
                                                                                                                     tum leaps in improvement by throwing out existing
                                                                                                                     systems and processes and inventing new ones.
                                                                                                                          The intent of process reengineering is to make
                                                                                                                     organizations significantly more flexible, responsive,
                                                                                                                     efficient, and effective for their customers, employees
                                         BUSINESS PROCESS REENGINEERING                                              and other stakeholders. According to field experts
                                                                                                                     Michael Hammer and James Champy, process reengi-
                                             Process reengineering is redesigning or reinvent-                       neering requires the “fundamental rethinking and radi-
                                        ing how we perform our daily work, and it is a concept                       cal redesign of business processes to achieve dramatic
                                        that is applicable to all industries regardless of size,                     improvements in critical, contemporary measures of
                                        type, and location.                                                          performance, such as cost, quality, service, and speed.”
                                             While selected elements of process reengineering                             If process reengineering is to work, a business’s
                                        are well documented in the late 1800s and early 1900s,                       priorities must change in the following ways: (1) from
                                        process reengineering as a body of knowledge or as an                        boss to customer focus; (2) from controlled workers to
                                        improvement initiative, takes the best of the historical                     empowered, involved process owners and decision
                                        management and improvement principles and com-                               makers; (3) from activity-based work to a results ori-
                                        bines them with more recent philosophies and princi-                         entation; (4) from scorekeeping to leading and teach-
                                        ples, which make all people in an organization function                      ing so that people measure their own results; (5) from
                                        as process owners and reinvent processes. It is this                         functional (vertical) to process (horizontal or cross
                                        combination of the old and the new as well as the                            functional) orientation; (6) from serial to concurrent
                                        emphasis on dramatic, rapid reinvention that makes                           operations; (7) from complex to simple, streamlined
                                        process reengineering an exciting concept. The differ-                       processes; (8) from empire building and guarding the
                                        ences between continuous process improvement and                             status quo to inventing new systems and processes and
                                        process reengineering are outlined in Figure 1.                              looking toward the future (i.e., from the caretaker
                                              The first question in process reengineering is:                         mentality to visionary leadership).
                                        “Why are we doing this at all?” Answering this ques-                              As organizational priorities change, the culture
                                        tion is the beginning of the immediate, dramatic change                      will change as well. As people understand the vision
                                        and the application of supporting technical and behav-                       for a better culture with better capabilities and results,



                                                                                                           Figure 1
                                              Area of Difference                         Continuous Improvement                              Reengineering
                                              Reason for change                          Desire to improve baselines                         Compelling; (Rapid
                                                                                                                                             process re-design for survival)

                                              Targets                                    Small improvement in every process;                 Aggressive (e.g., 10x or more,
                                                                                         Cumulative effects                                  Six Sigma, etc.)

                                              Approach                                   Non-structured                                      Structured and Disciplined

                                              Scope                                      Evaluation of all steps in all                      Broad cross functional processes
                                                                                         processes

                                              Focus                                      Parts of a system                                   Relations in system

                                              Level of change                            Incremental and continuous                          Order of magnitude

                                              Organizational structure                   Vertical or horizontal                              Flattened, horizontal

                                              Involvement of executives                  Important up-front; support                         Intensive long term involvement
                                                                                         throughout

                                              Involvement of all employees               Gradual voluntary involvement                       Non-voluntary

                                              Use of teams                               Work teams and cross-functional team                Cross functional teams

                                              Role of information                        Incidental                                          Cornerstone



                                         Source: Mildred Golden Pryor and William Donald Pryor, Process Reengineering, Center for Excellence, A Partnership between Texas A&M
                                         University-Commerce and Raytheon-E-Systems, 1994.




58
                                      E N C Y C L O P E D I A            O F     M A N A G E M E N T
they will be able-individually and as members of                • Training and involvement of individuals and




                                                                                                                      BUSINESS PROCESS REENGINEERING
teams-to contribute positively to make the organiza-              teams as process owners who have the
tional vision a reality.                                          knowledge and power to re-invent their
                                                                  processes.

REASONS FOR PROCESS REENGINEERING                               • A focus on total redesign of processes with
                                                                  non-voluntary involvement of all internal con-
     There are several reasons for organizations to               stituents (management and non-management
reengineer their business processes: (1) to re-invent the         employees).
way they do work to satisfy their customers; (2) to be          • Rewards based on results; and a disciplined
competitive; (3) to cure systemic process and behav-              approach.
ioral problems; (4) to enhance their capability to
expand to other industries; (5) to accommodate an era             Those same experts state there are many reasons
of change; (6) to satisfy their customers, employees,        that process reengineering fails, including:
and other stakeholders who want them to be dramati-             • Not focusing on critical processes first.
cally different and/or to produce different results (7) to
survive and be successful in the long term; and (8) to          • Trying to gradually “fix” a process instead
invent the “rules of the game.”                                   of dramatically re-inventing it.

     Whatever the reason for reengineering, managers            • Making process reengineering the priority
should ask themselves: What do our customers and                  and ignoring everything else (e.g., strategy
other stakeholders want/require? How must we change               development and deployment, re-structuring
the processes to meet customer and other stakeholder              based on new strategies, etc.).
requirements and be more efficient and effective? Once           • Neglecting values and culture needed to sup-
streamlined, should the processes be computerized (i.e.,          port process reengineering and allowing
how can information technology be used to improve                 existing culture, attitudes, and behavior to
quality, cycle time, and other critical baselines)?               hinder reengineering efforts (e.g., short-term
Processes must be streamlined (i.e., re-invented) before          thinking, bias against conflict and consensus
they are computerized. Otherwise, the processes may               decision making, etc.).
produce results faster, but those results may not be the        • “Settling” for small successes instead of
ones needed.                                                      requiring dramatic results.
                                                                • Stopping the process reengineering effort
REQUIREMENTS FOR SUCCESSFUL                                       too early before results can be achieved.
PROCESS REENGINEERING                                           • Placing prior constraints on the definition of
    Many experts indicate that there are essential ele-           the problem and the scope for the reengineer-
ments of process reengineering, including:                        ing effort.

   • Initiation from the top by someone with a                  • Trying to implement reengineering from the
     vision for the whole process and relentless                  bottom up instead of top down.
     deployment of the vision throughout the                    • Assigning someone who doesn’t understand
     organization.                                                Reengineering to lead the effort.
   • Leadership that drives rapid, dramatic process             • Skimping on reengineering resources.
     redesign.
                                                                • Dissipating energy across too many Reengi-
   • A new value system which includes a greater                  neering projects at once.
     emphasis on satisfying customers and other
     stakeholders.                                              • Attempting to reengineer when the CEO is
                                                                  near retirement.
   • A fundamental re-thinking of the way people
     perform their daily work, with an emphasis                 • Failing to distinguish reengineering from, or
     on improving results (quality, cycle time,                   align it with, other improvement initiatives
     cost, and other baselines).                                  (e.g., quality improvement, strategic align-
                                                                  ment, right-sizing, customer-supplier part-
   • An emphasis on the use of cross-functional
                                                                  nerships, innovation, empowerment, etc.)
     work teams which may result in structural
     redesign as well as process redesign.                      • Concentrating primarily on design and neglect-
   • Enhanced information dissemination (includ-                  ing implementation.
     ing computerization after process redesign) in             • Pulling back when people resist making
     order to enable process owners to make better                reengineering changes (not understanding
     decisions.                                                   that resistance to change is normal).


                                                                                                                                                       59
                                                             E N C Y C L O P E D I A     O F    M A N A G E M E N T
     BUSINESS PROCESS REENGINEERING
                                                                                                           Figure 2
                                                                                     Golden-Pryor Improvement Flowchart



                                                                                           Step A
                                                 Select process to                  Identify Customers
                                                     evaluate                           of Process


                                                                                           Step B
                                                                                        Document
                                                                                    Customer/Supplier
                                                                                      Relationships
                                                                                       (flowcharts)


                                                                                         Step C
                                                                                      Determine the
                                                                                     Process Results                             Step G
                                                                                       Customers                        Initiate benchmarking
                                                                                     Required/Desire                    internally & externally
                                                                                                                         (competitors; best in
                                                                                                                                 class)
                                                                                         Step D
                                                                                    Establish process
                                                                                    measurements &                            Step H
                                                                                        baselines                       Compare C & E and G

                                                                                         Step E
                                                                                    Document process                           Step J
                                                                                        results                             Risk Analysis


                                                                                         Step F                                Step K
                                                                                      Compare C & E                     Re-invent the process
                                                                                                                                                          Step L
                                                                                          Step I                                                          N Implement
                                                                                                                                 Step L
                                                                                   Evaluate and modify                                                    N Document
                                                                                                                          Institutionalize the
                                                                                    existing process                                                      N Train
                                                                                                                             new process
                                                                                        (Kaizen)                                                          N Monitor Results




                                          Source: Mildred Golden Pryor and William Donald Pryor, Process Reengineering, Center for Excellence, A Partnership between Raytheon E-Systems
                                          and Texas A&M University-Commerce, Texas, 1994.



                                             Strategic approaches that are process-focused and                           Process reengineering is a valuable concept for
                                        that are extensions of process reengineering:                               organizations that are willing to undergo dramatic
                                                                                                                    change and radical process redesign. It can co-exist with
                                           • Intensification-improving/re-inventing pro-                             ongoing gradual process improvement efforts because
                                             cesses to better serve customers.                                      not all processes can be radically redesigned at once.
                                           • Extension-using strong processes to enter                                   In process reengineering, as in all improvement
                                             new markets.                                                           initiatives, assessments should be made in terms of
                                                                                                                    cost/benefit analysis, and risk analysis. However, even
                                           • Augmentation-expanding processes to pro-
                                                                                                                    the assessments should be done with a sense of urgency
                                             vide additional services to existing customers.
                                                                                                                    since process reengineering requires speed as well as
                                           • Conversion-using a process that you perform                            radical redesign. Documentation of results will serve
                                             well and performing that process as a service                          as the baseline for future improvements.
                                             for other companies.                                                        The various improvement methodologies (i.e.,
                                                                                                                    continuous improvement and process reengineering)
                                           • Innovation-applying processes that you per-
                                                                                                                    should not be used as separate efforts but rather as two
                                             form well to create and deliver different goods
                                                                                                                    approaches within a single improvement initiative. In
                                             and services.
                                                                                                                    fact, a single flowchart can be used to make choices
                                           • Diversification-creating new processes to                               regarding both continuous process improvement and
                                             deliver new goods or services.                                         process reengineering (see Figure 2). Both gradual


60
                                      E N C Y C L O P E D I A           O F     M A N A G E M E N T
continuous improvement and process reengineering




                                                                                                                                  BUSINESS STRUCTURE
should be an integral part of process management.
                                                                    BUSINESS STRUCTURE
SEE ALSO: Continuous Improvement; Product-Process Matrix
                                           Mildred Golden Pryor
                                                                         When forming a new company, one of the first
                                                                   critical decisions is the formal structure that business
                                                                   will take. Issues such as liability, ownership, operating
                                                                   strategy, and taxation are all impacted by the formal
FURTHER READING:
                                                                   structure of the business. Four different business struc-
Bossidy, Larry, and Ram Charan. Execution: The Discipline of       tures are discussed below: partnership, corporation,
Getting Things Done. New York, NY: Crown Publishing Group,         Subchapter S, and limited liability corporation (LLC).
Random House, 2002.
Champy, James. Reengineering Management. New York, NY:             PARTNERSHIPS
HarperCollins Publishers, 1995.
                                                                        A partnership is a business association where two
———. X-Engineering the Corporation: Re-inventing Your
Business in the Digital Age. New York, NY: Warner Business
                                                                   or more individuals (or partners) share equally in profits
Books, 2001.                                                       and losses. As is the case with a sole proprietorship, part-
                                                                   ners have full legal responsibility for the business
Davenport, Thomas H. “Need Radical Innovation and
                                                                   (including debts against the business). Persons entering
Continuous Improvement? Integrate Process Reengineering and
TQM.” Planning Review, May-June 1993, 7–12.
                                                                   into this type of business need a partnership agreement
                                                                   detailing how much each partner owns of the business,
———. Process Innovation. Boston, MA: Harvard Business              how much capital each person will contribute, and the
School Press, 1993.
                                                                   percentage of profits to which they are entitled; how
Hammer, Michael. The Reengineering Revolution. New York,           company decisions will be made; if the company is open
NY: HarperCollins Publishing, 1996.                                to new/additional partners, and how they can join; and in
———. “Reengineering Work: Don’t Automate, Obliterate.”             what cases and how the company would be dissolved.
Harvard Business Review, July-August 1990, 104–112.
                                                                        In a general partnership, all partners are liable for
Hammer, Michael, and James Champy. Reengineering the               actions made on the company’s behalf, including deci-
Corporation. New York, NY: Harper Business Publisher,              sions make and actions taken by other partners. Profits
1993.                                                              (and loss) are shared by all partners, as are company
Hengst, Marielle den, and Gert-Jan de Vreede. “Collaborative       assets and authority.
Business Engineering: A Decade of Lessons from the Field.”
Journal Of Management Information Systems 20, no. 4 (Spring              A limited partnership is a similar business arrange-
2004): 85–113.                                                     ment with one significant difference. In a limited part-
                                                                   nership, one or more partners are not involved in the
Kinni, Theodore. “A Reengineering Primer.” Quality Digest,
January 1994, 26–30.
                                                                   management of the business and are not personally
                                                                   liable for the partnership’s obligations. The extent to
Kumar, Sameer, and Ralph Harris. “Improving Business               which the limited partner is liable is thus “limited” to
Processes for Increased Operational Efficiency: A Case Study.”
                                                                   his or her capital investment in the partnership.
Journal Of Manufacturing Technology Management 15, no. 7
(2004): 662.                                                             In a limited partnership agreement, several condi-
                                                                   tions have to be met, the most important of which is
Petroski, Henry. “Look First to Failure.” Harvard Business
                                                                   that a limited partner or partners have no control or
Review 82, no. 10 (October 2004): 18.
                                                                   management over the daily operations of the organiza-
Pryor, Mildred Golden, and Donald W. Pryor. “Process               tion. There must be at least two partners and one or
Reengineering as a Quality Strategy.” Israel Society For Quality   more of these general partners manage the business
Proceedings, November 1994, 681–696.
                                                                   and are liable for firm debts and financial responsibil-
———. Process Reengineering Training Manual. Commerce,              ities. If a limited partner becomes involved in the oper-
TX: Center for Excellence, 1994.                                   ation of the partnership, he or she stands to lose
Reijers, H.A., and S. Liman Mansar. “Best Practices in Business    protection against liability. In addition, a limited part-
Process Redesign: An Overview and Qualitative Evaluation of        nership agreement, certificate, or registration has to be
Successful Redesign Heuristics” OMEGA 33, no. 4 (August            filed, usually with the secretary of state, but this varies
2005): 283.                                                        by state. Such an agreement generally includes the
Roberts, Lon. Process Reengineering: The Key To Achieving          names of general and limited partners, the nature of
Breakthrough Success. Milwaukee, WI: ASQ Press, 1994.              the business, and the term of the limited partnership or
Young, Martha, and Michael Jude. “Business Process
                                                                   the date of dissolution. Since limited partnerships are
Virtualization, Outsourcing and Process Reengineering.” Cisco      often used to raise capital, there is a set term of dura-
Press. Available from <http://www.informit.com/articles/           tion for the agreement. Individual states may also have
article.asp?p=169681>.                                             additional limited partnership requirements.


                                                                                                                                                       61
                                                                   E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                 The most frequent use of the limited partnership        seventy-five shareholders or less and only one class of




     BUSINESS STRUCTURE
                            agreement has been as an investment, removing the lim-       stock, and all shareholders must meet eligibility
                            ited partner from financial liability but raising capital     requirements. If a company meets these requirements,
                            through his or her investments or contributions. Limited     they can treat company profits as distributions through
                            partnerships are common in real estate investments and,      shareholders’ personal tax returns. This way the income
                            more recently, in entertainment business ventures.           is taxed to shareholders instead of the corporation, and
                                 Partnerships are not required to file tax returns for    income taxes are only paid once. Subchapter S corpo-
                            the company, but individual partners do have to claim        rations are also known as small business corporations,
                            their share of the company’s income or loss on per-          S-corps, S corporations, or tax-option corporations.
                            sonal tax returns. The Internal Revenue Service (IRS)
                            governs limited partnerships for tax purposes. IRS
                            guidelines restrict limited partnership investments to       LIMITED LIABILITY CORPORATION
                            80 percent of the total partnership interests (see IRS
                            Revenue Procedure 92-88 for information governing                 The limited liability corporation (LLC) structure
                            limited partnerships). Limited partnerships are also         combines the benefits of ownership with the personal
                            taxable under state revenue regulations.                     protection a corporation offers against debts and judg-
                                                                                         ments. One or more people can form an LLC, and
                                                                                         business owner(s) can either choose to file taxes as a
                            CORPORATIONS
                                                                                         sole proprietorship/partnership or as a corporation.
                                 The major difference between a partnership and a        The process of forming an LLC is more extensive than
                            corporation is that the corporation exists as a unique       a partnership agreement but still involves less regula-
                            and separate entity from its owners, or shareholders. A      tory paperwork than incorporation.
                            corporation must be chartered by the state in which it is          Major advantages offered by the LLC structure
                            headquartered, and it can be taxed, sued, enter into con-    are that the business does not have to incorporate (or
                            tractual agreements, and is responsible for its own          pay corporate taxes); one person alone can create an
                            debts. The shareholders own the corporation, and they        LLC; owners can be compensated through company
                            elect a board of directors to make major decisions and       profits; and business losses can be reported against
                            oversee corporate policy. The corporation files its own       personal income. Still, some may choose to file taxes
                            tax return and pays taxes on its income from operations.     as a corporate entity, particularly if owners want to
                            Unlike partnerships, which often dissolve when a part-       keep corporate income within the business to aid its
                            ner leaves, a corporation can continue despite turnover      growth. According to the Small Business Administration,
                            in shareholders/ownership. For this reason, a corporate      an LLC cannot file partnership tax forms if it meets
                            structure is more stable and reliable than a partnership.    more than two of the following four qualities that
                                  There are several major advantages to choosing         would classify it as a corporation: (1) limited liability
                            incorporation over partnership. Sale of stock can help       to the extent of assets; (2) continuity of life; (3) cen-
                            raise large amounts of capital significantly faster and       tralization of management; and (4) free transferability
                            shareholders are only responsible for their personal finan-   of ownership to interests. If more than two of these
                            cial investment in the company. Shareholders have only       apply, the LLC must file corporation tax forms.
                            limited liability for debts and judgments made against the        An LLC that chooses to be taxed as an S corpora-
                            company. And the corporation can deduct the cost of ben-     tion can also do the following, which the tradition S
                            efits paid to employees from corporate tax returns.           corporation cannot, according to David Meier in
                                 Forming a corporation costs more money than a           Entrepreneur:
                            partnership, including legal and regulatory fees, which
                            vary depending on the state in which the business is            • have more than seventy-five business owners
                            incorporated. Corporations are subject to monitoring            • include a nonresident alien as an owner
                            by federal and state agencies, and some local agencies
                                                                                            • have either a corporation or a partnership as
                            as well. More paperwork related to taxes and regula-
                                                                                              an owner
                            tory compliance is required. Taxes are higher for cor-
                            porations, particularly if it pays dividends, which are         • have more than 80 percent ownership in a
                            taxed twice (once as corporation income, then again               separate corporate entity
                            as shareholder income).
                                                                                            • have disproportionate ownership—owner-
                                                                                              ship percentages that are different from each
                            SUBCHAPTER S                                                      respective owner’s investment in the business
                                 Some small businesses are able to take advantage           • flow-through business loss deductions in
                            of the corporate structure and avoid double taxation.             excess of each respective owner’s investment
                            These companies must be small, domestic firms with                 in the business


62
                          E N C Y C L O P E D I A      O F    M A N A G E M E N T
   • have owners/members that are active in the                 Gabriel, Michael Lynn. Everyone’s Partnership Book. Available




                                                                                                                                 BUSINESS STRUCTURE
     management of the business without losing                  from <http://www.attorneyetal.com/Previews/Partnr.html>.
     limited personal liability exposure.                       Hynes, Dennis L. Agency, Partnership, and the LLC in a
                                                                Nutshell. St. Paul, MN: West Publishing, 1997.
SEE ALSO: Entrepreneurship; Organizational Chart                Mancuso, Anthony. LLC or Corporation?: How To Choose The
                                               Boyd Childress   Right Form For Your Business Entity. Berkeley, CA: NOLO, 2005.
                                  Revised by Wendy H. Mason     Meier, David. “The Many Benefits of Forming an LLC: A Closer
                                                                Look at Why This Legal Structure Can Be Good for Business.”
                                                                Entrepreneur, 16 August 2004. Available from <http://www
FURTHER READING:                                                .entrepreneur.com/article/0,4621,316656,00.html>.
“Choosing the Best Ownership Structure for Your Business.” On   Small Business Administration. “Forms of Business Ownership.”
NOLO.com. Available from: <http://www.nolo.com/resource.        Available from <http://www.sba.gov/starting_business/legal/
cfm/catid/5de04e60-45bb-4108-8d757e247f35b8ab/111/182/>.        forms.html>.




                                                                                                                                                      63
                                                                E N C Y C L O P E D I A         O F    M A N A G E M E N T
                                                      C

                                                             plans provide a set of mandatory benefits that are usu-
 CAFETERIA PLAN—FLEXIBLE                                     ally designed to meet the basic needs of all employees.
 BENEFITS                                                    In addition to legally-required benefits, medical insur-
                                                             ance, long-term disability insurance, and retirement
     A cafeteria plan, also called a flexible benefit          benefits are often included in the core. Optional bene-
plan, allows employees to choose from a menu of              fits are offered to employees who spend benefit cred-
optional benefits the ones that best fit their individual      its to select other benefits that best fit their needs.
needs. Thus, employees can customize their benefit            Modular plans usually package several different bun-
packages. In a cafeteria plan, benefits required by law       dles of benefits that offer increasingly extensive arrays
(e.g. Social Security, unemployment compensation,            of benefits. The basic module might include only the
workers’s compensation) and those mandated by com-           legally-required benefits, basic health insurance, and
pany policies or labor agreements are supplemented           life insurance. A second module might include every-
by a list of other benefits to which employees can sub-       thing in the basic module plus additional benefits. A
scribe. Employees’s choices of optional benefits are          third module might include everything in modules one
limited only by the total benefit dollars available and       and two and even more benefits. Employees would
the variety of benefits offered by the employer.              choose the module that best fits their needs and life
Optional benefits that are often part of cafeteria plans      situation.
include dental insurance, vision care, group-term life
insurance, child care, and disability insurance. Many
companies offer some form of cafeteria benefit plan to        PROBLEMS WITH CAFETERIA PLANS
their employees, although smaller companies are less
likely to offer flexible benefits than larger companies.            Perhaps the largest problem with cafeteria plans,
                                                             as opposed to one-size-fits-all benefit plans, is that
     Most cafeteria plans are compliant with Section 125     cafeteria plans are more complicated to administer.
of the Internal Revenue Code. This means that they meet      Since employees choose individualized benefit pack-
specific requirements set out by the Internal Revenue
                                                             ages, the company must take care to record and main-
Service. Such plans offer the potential of cost savings to
                                                             tain each employee’s benefit package accurately. The
both employers and employees, particularly because
                                                             company must maintain adequate communication
amounts spent by either the employer or the employee
                                                             with employees about changes in the cost of benefits,
are spent out of pre-tax earnings. Thus, both employers
                                                             their coverage, and their use of benefits. Employees
and employees may save on Federal Insurance
Contributions Act payroll taxes and the employee may         must also be offered the opportunity to re-visit their
save on state and federal income taxes as well.              benefit choices and make new selections as their needs
                                                             and life situations change. Additionally, employers
                                                             must be careful to comply with Internal Revenue
                                                             Service (IRS) rules and regulations regarding cafeteria
TYPES OF CAFETERIA PLANS                                     plans so that the plans retain their tax-favored status.
     There are several variations of cafeteria plans,             Another issue that arises with cafeteria plans is
including core-plus plans and modular plans. Core-plus       the adverse selection problem. This problem arises

                                                                                                                        65
                                                             E N C Y C L O P E D I A      O F   M A N A G E M E N T
                           because employees are likely to choose the optional           performance. In addition, capacity is an important




     CAPACITY PLANNING
                           benefits they are most likely to use. If enough employ-        factor in the organization’s choice of technology.
                           ees do this, the cost of the benefit will eventually be
                                                                                              Capacity is usually assumed to mean the maxi-
                           driven up, as the premiums received must cover the
                                                                                         mum rate at which a transformation system produces
                           expenditures of the benefit. For example, suppose a
                                                                                         or processes inputs. Sometimes, this rate may actually
                           company allows employees to change their cafeteria
                                                                                         be “all at once”—as with the capacity of an airplane.
                           plan selections once each year. During this “free
                                                                                         A more usable definition of capacity would be the
                           enrollment” period, an employee who knows (or sus-
                                                                                         volume of output per elapsed time and the production
                           pects) that he or she faces extensive dental work in the
                                                                                         capability of a facility.
                           coming year would be more likely to sign up for dental
                           insurance than the employee who expects only routine               Capacity planning is the process used to deter-
                           dental care. Likewise, an employee who has begun              mine how much capacity is needed (and when) in
                           having vision problems would probably be more likely          order to manufacture greater product or begin produc-
                           to sign up for vision coverage than an employee with          tion of a new product. A number of factors can affect
                           perfect eyesight. Sometimes, employers will place             capacity—number of workers, ability of workers,
                           restrictions on certain benefits to try to alleviate the       number of machines, waste, scrap, defects, errors, pro-
                           adverse selection problem. Modular plans may also             ductivity, suppliers, government regulations, and pre-
                           reduce the adverse selection problem, as the employer         ventive maintenance. Capacity planning is relevant in
                           can package benefits in a way that limits employees’s          both the long term and the short term. However, there
                           opportunity to choose individual benefits, by requir-          are different issues at stake for each.
                           ing them to choose a broad package of benefits.

                                Given the increasing diversity of the labor force,       LONG-TERM CAPACITY PLANNING
                           the demand for benefit packages tailored to individual
                                                                                              Over the long term, capacity planning relates pri-
                           needs and circumstances is likely to remain strong.
                                                                                         marily to strategic issues involving the firm’s major
                           Thus, one would expect the number of companies offer-
                                                                                         production facilities. In addition, long-term capacity
                           ing flexible benefit plans to continue to increase, as well
                                                                                         issues are interrelated with location decisions.
                           as the rate of employee participation in such plans.
                                                                                         Technology and transferability of the process to other
                           SEE ALSO: Human Resource Management                           products is also intertwined with long-term capacity
                                                                                         planning. Long-term capacity planning may evolve
                                                                           Tim Barnett
                                                                                         when short-term changes in capacity are insufficient.
                                                                                         For example, if the firm’s addition of a third shift to its
                           FURTHER READING:                                              current two-shift plan still does not produce enough
                                                                                         output, and subcontracting arrangements cannot be
                           Gomez-Mejia, Luis R., David B. Balkin, and Robert L. Cardy.   made, one feasible alternative is to add capital equip-
                           Managing Human Resources. 4th ed. Upper Saddle River, NJ:     ment and modify the layout of the plant (long-term
                           Prentice-Hall, 2004.
                                                                                         actions). It may even be desirable to add additional
                           Henderson, Richard L. Compensation Management in a            plant space or to construct a new facility (long-term
                           Knowledge-Based World. 9th ed. Upper Saddle River, NJ:        alternatives).
                           Prentice-Hall, 2003.

                                                                                         SHORT-TERM CAPACITY PLANNING
                                                                                              In the short term, capacity planning concerns
                                                                                         issues of scheduling, labor shifts, and balancing
                                                                                         resource capacities. The goal of short-term capacity
                                                                                         planning is to handle unexpected shifts in demand in
                            CAPACITY PLANNING
                                                                                         an efficient economic manner. The time frame for
                                                                                         short-term planning is frequently only a few days but
                                Capacity planning has seen an increased empha-
                                                                                         may run as long as six months.
                           sis due to the financial benefits of the efficient use of
                           capacity plans within material requirements planning               Alternatives for making short-term changes in
                           systems and other information systems. Insufficient            capacity are fairly numerous and can even include the
                           capacity can quickly lead to deteriorating delivery per-      decision to not meet demand at all. The easiest and
                           formance, unnecessarily increase work-in-process,             most commonly-used method to increase capacity in
                           and frustrate sales personnel and those in manufactur-        the short term is working overtime. This is a flexible
                           ing. However, excess capacity can be costly and               and inexpensive alternative. While the firm has to pay
                           unnecessary. The inability to properly manage capacity        one and one half times the normal labor rate, it foregoes
                           can be a barrier to the achievement of maximum firm            the expense of hiring, training, and paying additional


66
                         E N C Y C L O P E D I A       O F   M A N A G E M E N T
benefits. When not used abusively, most workers               required by the MPS by the time needed to produce




                                                                                                                               CASE METHOD OF ANALYSIS
appreciate the opportunity to earn extra wages. If over-     each. Resource profiles are the same as bills of capac-
time does not provide enough short-term capacity,            ity, except lead times are included so that workloads
other resource-increasing alternatives are available.        fall into the correct periods.
These include adding shifts, employing casual or part-            Capacity requirements planning (CRP) is only
time workers, the use of floating workers, leasing            applicable in firms using MRP or MRP II. CRP uses
workers, and facilities subcontracting.                      the information from one of the previous rough-cut
     Firms may also increase capacity by improving           methods, plus MRP outputs on existing inventories
the use of their resources. The most common alterna-         and lot sizing. The result is a tabular load report for
tives in this category are worker cross training and         each work center or a graphical load profile for help-
overlapping or staggering shifts. Most manufacturing         ing plan-production requirements. This will indicate
firms inventory some output ahead of demand so that           where capacity is inadequate or idle, allowing for
any need for a capacity change is absorbed by the            imbalances to be corrected by shifts in personnel or
inventory buffer. From a technical perspective, firms         equipment or the use of overtime or added shifts.
may initiate a process design intended to increase pro-      Finite capacity scheduling is an extension of CRP that
ductivity at work stations. Manufacturers can also           simulates job order stopping and starting to produce a
shift demand to avoid capacity requirement fluctua-           detailed schedule that provides a set of start and finish
tion by backlogging, queuing demand, or lengthening          dates for each operation at each work center.
the firm’s lead times. Service firms accomplish the                  A failure to understand the critical nature of man-
same results through scheduling appointments and             aging capacity can lead to chaos and serious customer
reservations.                                                service problems. If there is a mismatch between
     A more creative approach is to modify the output.       available and required capacity, adjustments should be
Standardizing the output or offering complimentary           made. However, it should be noted that firms cannot
services are examples. In services, one might allow          have perfectly-balanced material and capacity plans
customers to do some of the process work themselves          that easily accommodate emergency orders. If flexibil-
(e.g., self-service gas stations and fast-food restau-       ity is the firm’s competitive priority, excess capacity
rants). Another alternative—reducing quality—is an           would be appropriate.
undesirable yet viable tactic.
                                                             SEE ALSO: Aggregate Planning; Manufacturing Resources
     Finally, the firm may attempt to modify demand.                    Planning
Changing the price and promoting the product are
                                                                                                           R. Anthony Inman
common. Another alternative is to partition demand
by initiating a yield or revenue management system.
Utilities also report success in shifting demand by the      FURTHER READING:
use of “off-peak” pricing.
                                                             Cochran, Jeffery K., and Alberto Marquez Uribe. “A Set
                                                             Covering Formulation for Agile Capacity Planning Within
                                                             Supply Chains.” International Journal of Production Economics
CAPACITY-PLANNING TECHNIQUES                                 95, no. 2 (2005): 139–149.

     There are four procedures for capacity planning;        Jonsson, Patrik, and Stig-Arne Mattsson. “Use and Applicability
                                                             of Capacity Planning Methods.” Production and Inventory
capacity planning using overall factors (CPOF),
                                                             Management Journal 43, no. 3-4 (2002): 89–95.
capacity bills, resource profiles, and capacity require-
ments planning (CRP). The first three are rough-cut           Meredith, Jack R., and Scott M. Shafer. Operations Management
                                                             for MBAs. 2nd Edition. New York: John Wiley and Sons, Inc.,
approaches (involving analysis to identify potential
                                                             2002.
bottlenecks) that can be used with or without manu-
                                                             Vollmann, Thomas E., William L. Berry, D. Clay Whybark, and
facturing resource planning (MRP) systems. CRP is
                                                             Robert F. Jacobs. Manufacturing Planning and Control Systems.
used in conjunction with MRP systems.                        Boston: McGraw-Hill, 2005.
     Capacity using overall factors is a simple, manual
approach to capacity planning that is based on the
master production schedule and production standards
that convert required units of finished goods into his-
torical loads on each work center. Bills of capacity is
a procedure based on the MPS. Instead of using his-
torical ratios, however, it utilizes the bills of material    CASE METHOD OF ANALYSIS
and routing sheet (which shows the sequence or work
centers required to manufacture the part, as well as the          The case method of analysis involves studying
setup and run time). Capacity requirements can then          actual business situations—written as an in-depth
be determined by multiplying the number of units             presentation of a company, its market, and its strategic


                                                                                                                                                         67
                                                             E N C Y C L O P E D I A         O F    M A N A G E M E N T
                                 decisions—in order to improve a manager’s or a stu-           used in weekend-format continuing education and




     CASE METHOD OF ANALYSIS
                                 dent’s problem-solving ability. Cases typically investi-      professional development programs.
                                 gate a contemporary issue in a real-life context. There            In their study of the skills of technologists,
                                 are multiple issues to consider and many “correct” or         Birchall and Smith found that technologists are often
                                 viable alternatives to solve the case issues are presented.   seen as not having sufficient input into the strategic
                                 Case studies provide students with a “note of reality”        decision-making process of organizations. Thus, many
                                 that makes learning more relevant and enjoyable.              turn to MBA programs to develop their knowledge,
                                      Cases are written and published in textbooks by          understanding, and personal competencies. The case
                                 students, faculty, or consultants. Cases may be based         method has traditionally been used to aid in this edu-
                                 on actual company experiences, like a consulting proj-        cational process. They also stress the use of multimedia
                                 ect, or may be developed from articles and events in          tools and groupware to create enhanced learning
                                 business periodicals and newspapers. Cases include            opportunities based on a dynamic case analysis.
                                 actual information of a company’s decisions and may                Many groups and organizations also publish
                                 include interviews, observations, or data from firm and        cases for educational use. Sources for cases for busi-
                                 industry records, as well as database records and pub-        ness schools include:
                                 lished historical facts on the company and the industry.
                                 Barbazette identified five types of cases studies:                 • The Aspen Institute Business and Society
                                                                                                    Program
                                  1. Identification cases studies help learners                    • The Batten Institute, Darden Graduate School
                                     identify positive and negative characteristics                 of Business, University of Virginia
                                     of the situation.
                                                                                                  • Harvard Business School
                                  2. Problem-solving case studies use systematic
                                                                                                  • Richard Ivey School of Business, University
                                     and creative problem-solving techniques.
                                                                                                    of Western Ontario
                                  3. Practice case studies require students to use                • South-Western Publishing Company’s
                                     a new idea or try a new skill.                                 CaseNet
                                  4. Application cases studies are used at the end                • Stanford Graduate School of Business
                                     of a training program to summarize and
                                     review.                                                   The American Association for Business Communica-
                                                                                               tion, for example, included the best cases for teaching
                                  5. Serial case studies progressively add new                 communications in a special issue of Business Com-
                                     elements.                                                 munication Quarterly. Rogers and Rymer report that
                                                                                               their reviewer panel of experienced instructors agreed
                                                                                               that the best cases include the following attributes:
                                 HISTORY OF CASES
                                                                                                  • Focus on the discipline
                                      The case method was invented by the Harvard
                                 Business School over 80 years ago, where it still                • Require decision making
                                 remains the foundation for teaching and research. By             • Furnish a business context
                                 studying and examining actual cases, professors
                                                                                                  • Present an engaging story or scenario
                                 believed students could develop better insight as to
                                 how organizations reach conclusions. This method of              • Provide sufficiently-realistic detail for analy-
                                 study and analysis is seen as an effective way to train            sis and response
                                 young business leaders to consider facts and present             • Function readily in a classroom setting
                                 them more efficiently.
                                                                                                  • Apply to a wide range of teaching philoso-
                                                                                                    phies and educational settings
                                 POPULARITY OF CASES TODAY                                        • Relate to contemporary issues and problems
                                      Today, cases remain a popular method of study in
                                 business schools—especially at Harvard and the
                                                                                               TEACHING WITH CASES
                                 University of Virginia, where they are used heavily in
                                 the Master of Business Administration (MBA) pro-                    Cases rely almost exclusively upon discussion to
                                 grams. While technology, computer simulations, and            elicit diverse ideas, experiences, and views about case
                                 other learning methods continue to grow, cases fill a          material. Cases allow students to explore actual deci-
                                 much-needed function in the educational process of            sions made by companies. The case presents an
                                 students, future managers, and leaders. Cases are used        account of what happened to a business or industry
                                 in a wide variety of disciplines and areas of study.          over a period of time, for example. It includes the
                                 They are also popular for executive training and are          events with which managers had to deal and charts


68
                               E N C Y C L O P E D I A       O F   M A N A G E M E N T
various responses to these decisions. According to Hill          Many students favor the case method because there




                                                                                                                                CASE METHOD OF ANALYSIS
and Jones, cases provide students with the experience       are no “right” or “wrong” answers to the cases. Unlike
of organizational problems they have not yet had the        solving a math or finance problem, there may be mul-
opportunity to experience first-hand. In a relatively        tiple ways to reach a successful solution for the case.
short period of time, students have the chance to           Diversity of opinion and diversity of group make-up
appreciate and analyze problems faced by many dif-          often bring unique solutions to cases. Students learn to
ferent companies and to understand how managers             respond quickly, formulate answers, speak up, and
attempted to resolve them. Cases also illustrate under-     participate in class discussion. They learn to separate
lying business theories.                                    background information from the real problem. They
     To prepare a case analysis, students typically read    learn to succinctly state problems, to recommend
the case several times before a classroom discussion.       potential alternative solutions, and to explore the pros
They first read for a general idea about the problem, the    and cons of each solution. They learn to find hidden
players in the case, the level of the decision, and the     information in charts, graphs, tables, and financial data
type of company or industry presented. On second and        often included in cases.
subsequent readings, students look for deeper problems           Some students are discouraged by cases because
and issues and try to differentiate symptoms from real      they do not yield only one, clear answer. Students
case problems.                                              are forced to develop skills of critical thinking and
     Some schools encourage students to research the        these skills, while important to today’s managers, take
company by locating articles on the company at the          time to perfect. Students may also fear presenting their
time the case situation occurred. Another research          ideas to a large group. They may fear public speaking
technique is to have students conduct a financial            or presentation in general or they may fear their par-
analysis of the company that might include ratio            ticular thoughts will be ridiculed by others. Some with
analysis or industry/competitor research. Many schools      limited work or life experience may not feel capable
encourage students to discuss assigned cases in small       of critiquing a top-level manager’s past decisions.
groups or study teams before class. These teams may         However, these unique and fresh ideas often present
develop potential alternatives to solve the problems        interesting alternatives.
and ensure each member has considered the relevant
                                                            SEE ALSO: Business Plan; Training Delivery Methods
facts in the case.
                                                                                                            Marilyn M. Helms
     Class discussion occurs in either one large group
                                                                                                   Revised by Judith M. Nixon
or several smaller groups. In these groups, participants
decide on the solution(s) and the proper course of
implementation. They must also consider the time            FURTHER READING:
frame for implementation as well as evaluation and          Barbazette, Jean. Instant Case Studies: How to Design, Adapt,
success measures. Class members or participants cri-        and Use Case Studies in Training. San Francisco: Pfeiffer, 2004.
tique the various viable alternatives that are presented.
                                                            Barnes, Louis B., C.R. Christensen, and Abby J. Hansen.
The class is then presented with what the company           Teaching and the Case Method. 3rd ed. Boston: Harvard
under study actually did to solve the problem. Some         Business School Press, 1994.
cases are used as quizzes or exams.
                                                            Birchall, David, and Matty Smith. “Developing the Skills of
     Teaching with cases has changed relatively little      Technologists in Strategic Decision Making—A Multi-Media
over the years. However, a new approach, developed          Case Approach.” International Journal of Technology
by Theroux, is called “real time case method.,” In this     Management 15, no. 8 (1998): 854–868.
method, a semester-long case is delivered in weekly         Christensen, C.R. Teaching by the Case Method. Boston:
installments and focuses on one company and the cur-        Harvard Business School, 1983.
rent events it faces. This method differs from the tra-
                                                            Copeland, M. “The Genesis of the Case Method in Business
ditional case study method by its extended coverage
                                                            Administration.” In The Case Method at the Harvard Business
and real-timeinteractivity.                                 School. ed. Malcolm P. McNair. New York: McGraw-Hill, 1954.

                                                            Hill, Charles W.L., and Gareth R. Jones. Strategic Management:
                                                            An Integrated Approach. 5th ed. Boston: Houghton/Mifflin
STUDENTS’S PERCEPTIONS OF CASES                             Publishing Co., 2001.
      Although case method teaching has been used           Hunger, J.D., and Thomas L Wheelen. Essential of Strategic
extensively in virtually all business schools for years,    Management. 3rd ed. Upper Saddle River, NJ: Prentice Hall,
little research has been conducted to investigate the       2003.
effectiveness and usefulness of the method. Among           Klein, Hans E., ed. The Art of Interactive Teaching with Cases,
the few studies available is Weil’s, which measures         Simulations, Games, and other Interactive Methods. Boston:
students’s perceptions. Weil’s study confirmed the           The World Association for Case Method Research and
usefulness of the case method.                              Application, 1995.


                                                                                                                                                          69
                                                            E N C Y C L O P E D I A          O F     M A N A G E M E N T
                                          Oyelere, Peter, Joanna Yeoh, Colin Firer, and Sidney Weil. “A    Projected cash flow statements are typically devel-




     CASH FLOW ANALYSIS AND STATEMENT
                                          Study of Students’s Perceptions of the Usefulness of Case        oped using historical cash flow data modified for
                                          Studies for Development of Finance and Accounting-Related
                                                                                                           anticipated changes in price, volume, interest rates,
                                          Skills and Knowledge.” Accounting Education 10, no. 2 (2001):
                                          123–146.
                                                                                                           and so on.
                                                                                                                To enhance evaluation, a properly-prepared cash
                                          Rogers, Priscilla S., and Jone Rymer. “Business and Management
                                          Communication Cases: Challenges and Opportunities.”              flow statement distinguishes between recurring and
                                          Business Communication Quarterly 61, no. 1 (1998): 7–25.         nonrecurring cash flows. For example, collection of
                                                                                                           cash from customers is a recurring activity in the
                                          Theroux, J., and C. Kilbane. “The Real-Time Case Method: A
                                                                                                           normal course of operations, whereas collections of
                                          New Approach to an Old Tradition.” Journal of Education for
                                          Business 79, no. 3 (2004): 163–167.                              cash proceeds from secured bank loans (or issuances
                                                                                                           of stock, or transfers of personal assets to the com-
                                                                                                           pany) is typically not considered a recurring activity.
                                                                                                           Similarly, cash payments to vendors is a recurring
                                                                                                           activity, whereas repayments of secured bank loans
                                                                                                           (or the purchase of certain investments or capital
                                                                                                           assets) is typically not considered a recurring activity
                                                                                                           in the normal course of operations.
                                           CASH FLOW ANALYSIS AND STATEMENT
                                                                                                                In contrast to nonrecurring cash inflows or out-
                                                Cash flow analysis is a method of analyzing the             flows, most recurring cash inflows or outflows occur
                                          financing, investing, and operating activities of a com-          (often frequently) within each cash cycle (i.e., within
                                          pany. The primary goal of cash flow analysis is to iden-          the average time horizon of the cash cycle). The cash
                                          tify, in a timely manner, cash flow problems as well as           cycle (also known as the operating cycle or the earn-
                                          cash flow opportunities. The primary document used in             ings cycle) is the series of transactions or economic
                                          cash flow analysis is the cash flow statement. Since               events in a given company whereby:
                                          1988, the Securities and Exchange Commission (SEC)
                                                                                                            1. Cash is converted into goods and services.
                                          has required every company that files reports to include
                                          a cash flow statement with its quarterly and annual                2. Goods and services are sold to customers.
                                          reports. The cash flow statement is useful to managers,            3. Cash is collected from customers.
                                          lenders, and investors because it translates the earnings
                                          reported on the income statement—which are subject                    To a large degree, the volatility of the individual
                                          to reporting regulations and accounting decisions—               cash inflows and outflows within the cash cycle will
                                          into a simple summary of how much cash the com-                  dictate the working-capital requirements of a company.
                                          pany has generated during the period in question. “Cash          Working capital generally refers to the average level of
                                          flow measures real money flowing into, or out of, a                unrestricted cash required by a company to ensure that
                                          company’s bank account,” Harry Domash notes on his               all stakeholders are paid on a timely basis. In most
                                          Web site, WinningInvesting.com. “Unlike reported                 cases, working capital can be monitored through the
                                          earnings, there is little a company can do to overstate its      use of a cash budget.
                                          bank balance.”
                                                                                                           THE CASH BUDGET

                                          THE CASH FLOW STATEMENT                                               In contrast to cash flow statements, cash budgets
                                                                                                           provide much more timely information regarding cash
                                               A typical cash flow statement is divided into three          inflows and outflows. For example, whereas cash flow
                                          parts: cash from operations (from daily business activ-          statements are often prepared on a monthly, quarterly,
                                          ities like collecting payments from customers or                 or annual basis, cash budgets are often prepared on a
                                          making payments to suppliers and employees); cash                daily, weekly, or monthly basis. Thus, cash budgets
                                          from investment activities (the purchase or sale of              may be said to be prepared on a continuous rolling
                                          assets); and cash from financing activities (the issuing          basis (e.g., are updated every month for the next
                                          of stock or borrowing of funds). The final total shows            twelve months). Additionally, cash budgets provide
                                          the net increase or decrease in cash for the period.             much more detailed information than cash flow state-
                                               Cash flow statements facilitate decision making              ments. For example, cash budgets will typically dis-
                                          by providing a basis for judgments concerning the                tinguish between cash collections from credit customers
                                          profitability, financial condition, and financial man-              and cash collections from cash customers.
                                          agement of a company. While historical cash flow                       A thorough understanding of company opera-
                                          statements facilitate the systematic evaluation of past          tions is necessary to reasonably assure that the nature
                                          cash flows, projected (or pro forma) cash flow state-              and timing of cash inflows and outflows is properly
                                          ments provide insights regarding future cash flows.               reflected in the cash budget. Such an understanding


70
                                        E N C Y C L O P E D I A        O F    M A N A G E M E N T
becomes increasingly important as the precision of the          2. The current period ending cash balance




                                                                                                                           CASH FLOW ANALYSIS AND STATEMENT
cash budget increases. For example, a 360-day rolling              equals the new (or next) period’s beginning
budget requires a greater knowledge of a company                   cash balance.
than a two-month rolling budget.
                                                                3. The current period ending cash balance sig-
     While cash budgets are primarily concerned with               nals either a cash flow opportunity (e.g., pos-
operational issues, there may be strategic issues that             sible investment of idle cash) or a cash flow
need to be considered before preparing the cash                    problem (e.g., the need to borrow cash or
budget. For example, predetermined cash amounts                    adjust one or more of the cash budget items
may be earmarked for the acquisition of certain                    giving rise to the borrow signal).
investments or capital assets, or for the liquidation of
certain indebtedness. Further, there may be policy             RATIO ANALYSIS
issues that need to be considered prior to preparing a
cash budget. For example, should excess cash, if any,                In addition to cash flow statements and cash budg-
be invested in certificates of deposit or in some form          ets, ratio analysis can also be employed as an effective
of short-term marketable securities (e.g., commercial          cash flow analysis technique. Ratios often provide
paper or U.S. Treasury bills)?                                 insights regarding the relationship of two numbers (e.g.,
                                                               net cash provided from operations versus capital expen-
     Generally speaking, the cash budget is grounded in        ditures) that would not be readily apparent from the
the overall projected cash requirements of a company           mere inspection of the individual numerator or denom-
for a given period. In turn, the overall projected cash        inator. Additionally, ratios facilitate comparisons with
requirements are grounded in the overall projected free        similar ratios of prior years of the same company (i.e.,
cash flow. Free cash flow is defined as net cash flow              intracompany comparisons) as well as comparisons of
from operations less the following three items:                other companies (i.e., intercompany or industry com-
 1. Cash used by essential investing activities                parisons). While ratio analysis may be used in conjunc-
    (e.g., replacements of critical capital assets).           tion with the cash flow statement and/or the cash
                                                               budget, ratio analysis is often used as a stand-alone,
 2. Scheduled repayments of debt.
                                                               attention-directing, or monitoring technique.
 3. Normal dividend payments.
If the calculated amount of free cash flow is positive, this    ADDITIONAL BENEFITS
amount represents the cash available to invest in new
lines of business, retire additional debt, and/or increase          In his book, Buy Low, Sell High, Collect Early,
dividends. If the calculated amount of free cash flow is        and Pay Late: The Manager’s Guide to Financial
negative, this amount represents the amount of cash that       Survival, Dick Levin suggests the following benefits
must be borrowed (and/or obtained through sales of             that stem from cash forecasting (i.e., preparing a pro-
nonessential assets, etc.) in order to support the strategic   jected cash flow statement or cash budget):
goals of the company. To a large degree, the free cash          1. Knowing what the cash position of the com-
flow paradigm parallels the cash flow statement.                     pany is and what it is likely to be avoids
     Using the overall projected cash flow require-                 embarrassment. For example, it helps avoid
ments of a company (in conjunction with the free cash              having to lie that the check is in the mail.
flow paradigm), detailed budgets are developed for the           2. A firm that understands its cash position can
selected time interval within the overall time horizon             borrow exactly what it needs and no more,
of the budget (i.e., the annual budget could be devel-             there by minimizing interest or, if applicable,
oped on a daily, weekly, or monthly basis). Typically,             the firm can invest its idle cash.
the complexity of the company’s operations will dic-
tate the level of detail required for the cash budget.          3. Walking into the bank with a cash flow
Similarly, the complexity of the corporate operations              analysis impresses loan officers.
will drive the number of assumptions and estimation             4. Cash flow analyses deter surprises by enabling
algorithms required to properly prepare a budget (e.g.,            proactive cash flow strategies.
credit customers are assumed to remit cash as follows:
50 percent in the month of sale; 30 percent in the              5. Cash flow analysis ensures that a company
month after sale; and so on). Several basic concepts               does not have to bounce a check before it
germane to all cash budgets are:                                   realizes that it needs to borrow money to
                                                                   cover expenses. In contrast, if the cash flow
 1. Current period beginning cash balances plus                    analysis indicates that a loan will be needed
    current period cash inflows less current                        several months from now, the firm can turn
    period cash outflows equals current period                      down the first two offers of terms and have
    ending cash balances.                                          time for further negotiations.


                                                                                                                                                              71
                                                               E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                          LOAN APPLICATIONS                                           is extremely difficult to perform a cash flow analysis




     CASH FLOW ANALYSIS AND STATEMENT
                                                                                                      when the company does not have a cash flow history.
                                               Potential borrowers should be prepared to answer       Accordingly, alternative sources of information should
                                          the following questions when applying for loans:            be obtained from trade journals, government agencies,
                                           1. How much cash is needed?                                and potential lenders. Additional information can be
                                           2. How will this cash help the business (i.e.,             solicited from potential customers, vendors, and com-
                                              how does the loan help the business accom-              petitors, allowing the firm to learn from others’s mis-
                                              plish its business objectives as documented             takes and successes.
                                              in the business plan)?
                                           3. How will the company pay back the cash?                 UNCONSTRAINED GROWTH
                                           4. How will the company pay back the cash if
                                              the company goes bankrupt?                                   While inadequate capitalization represents a
                                                                                                      front-end problem, unconstrained growth represents a
                                           5. How much do the major stakeholders have
                                                                                                      potential back-end problem. Often, unconstrained
                                              invested in the company?
                                                                                                      growth provokes business failure because the com-
                                               Admittedly, it is in the best interest of the poten-   pany is growing faster than their cash flow. While
                                          tial borrower to address these questions prior to           many cash flow problems are operational in nature,
                                          requesting a loan. Accordingly, in addition to having a     unconstrained growth is a symptom of a much larger
                                          well-prepared cash flow analysis, the potential bor-         strategic problem. Accordingly, even to the extent that
                                          rower should prepare a separate document addressing         cash flow analyses are performed on a timely basis,
                                          the following information:                                  such analyses will never overcome a flawed strategy
                                                                                                      underpinning the unconstrained growth.
                                           1. Details of the assumptions underpinning the
                                              specific amount needed should be prepared
                                              (with cross-references to relevant informa-             BANKRUPTCY
                                              tion included in the cash flow analysis).
                                           2. The logic underlying the business need                        A company is said to be bankrupt when it experi-
                                              for the amount of cash requested should                 ences financial distress to the extent that the protection
                                              be clearly stated (and cross-referenced to              of the bankruptcy laws is employed for the orderly
                                              the relevant objectives stated in the busi-             disposition of assets and settlement of creditors’s
                                              ness plan or some other strategic planning              claims. Significantly, not all bankruptcies are fatal. In
                                              document).                                              some circumstances, creditors may allow the bankrupt
                                                                                                      company to reorganize its financial affairs, allowing
                                           3. The company should clearly state what
                                                                                                      the company to continue or reopen. Such a reorgani-
                                              potential assets would be available to sat-
                                                                                                      zation might include relieving the company from fur-
                                              isfy the claims of the lender in case of
                                                                                                      ther liability on the unsatisfied portion of the company’s
                                              default (i.e., the company should indicate
                                                                                                      obligations. Admittedly, such reorganizations are per-
                                              the assets available for the collateralization
                                                                                                      formed in vain if the reasons underlying the financial
                                              of the loan).
                                                                                                      distress have not been properly resolved. Unfortunately,
                                           4. Details of the equity interests of major stake-         properly-prepared and timely cash flow analyses can
                                              holders should be stated.                               not compensate for poor management, poor products,
                                          In some cases, the lender may also request personal         or weak internal controls.
                                          guarantees of loan repayment. If this is necessary, the     SEE ALSO: Budgeting; Financial Issues for Managers; Financial
                                          document will need to include relevant information                    Ratios; Strategic Planning Tools
                                          regarding the personal assets of the major stakehold-
                                                                                                                                                Michael S. Luehlfing
                                          ers available to satisfy the claims of the lender in case
                                                                                                                                          Revised by Laurie Hillstrom
                                          of default.
                                                                                                      FURTHER READING:

                                          INADEQUATE CAPITALIZATION                                   Brahmasrene, Tantatape, C.D. Strupeck, and Donna Whitten.
                                                                                                      “Examining Preferences in Cash Flow Statement Format.”
                                                Many businesses fail due to inadequate capital-       CPA Journal 58 (2004).
                                          ization. Inadequate capitalization basically implies        Domash, Harry. “Check Cash Flow First.” Winninginvesting.
                                          that there were not enough cash and/or credit arrange-      com. Available from http://www.winninginvesting.com/
                                          ments secured prior to initiating operations to ensure      cash_flow.htm.
                                          that the company could pay its debts during the early       “Intro to Fundamental Analysis: The Cash Flow Statement.”
                                          stages of operations (when cash inflows are nominal,         Investopedia.com. Available from http://www.investopedia.com/
                                          if any, and cash outflows are very high). Admittedly, it     university/fundamentalanalysis/cashflow.asp.


72
                                        E N C Y C L O P E D I A      O F   M A N A G E M E N T
Levin, Richard I. Buy Low, Sell High, Collect Early, and Pay   The cells may have no conveyorized movement of




                                                                                                                           CELLULAR MANUFACTURING
Late: The Manager’s Guide to Financial Survival. Englewood     parts between machines, or they may have a flow line
Cliffs, NJ: Prentice-Hall, 1983.
                                                               connected by a conveyor that can provide automatic
Mills, John, and Jeanne H. Yamamura. “The Power of Cash Flow   transfer.
Ratios.” Journal of Accountancy 186, no. 4 (1998): 53–57.
                                                                    Cellular manufacturing is a hybrid system that
“Preparing Your Cash Flow Statement.” U.S. Small Business      links the advantages of a job shop with the product
Administration, Online Women’s Business Center. Available
                                                               layout of the continuous flow line. The cell design pro-
from http://www.onlinewbc.gov/docs/finance/cashflow.html.
                                                               vides for quick and efficient flow, and the high pro-
Silver, Jay. “Use of Cash Flow Projections.” Secured Lender,   ductivity associated with assembly lines. However, it
March/April 1997, 64–68.
                                                               also provides the flexibility of the job shop, allowing
Simon, Geoffrey A. “A Cash Flow Statement Says, ‘Show Me       both similar and diverse products to be added to the
the Money!’” Tampa Bay Business Journal 27 (2001).             line without slowing the process. Figures 1 and 2 com-
                                                               pares a cellular layout to that of the typical job shop
                                                               (process layout).


                                                                                        Figure 1
                                                                                    Process Layout
 CELLULAR MANUFACTURING

     Cellular manufacturing is a manufacturing
process that produces families of parts within a single
line or cell of machines operated by machinists who                 Hydraulic Presses              Milling Machines
work only within the line or cell. A cell is a small
scale, clearly-defined production unit within a larger
factory. This unit has complete responsibility for pro-
ducing a family of like parts or a product. All neces-                    Lathes                      Welders
sary machines and manpower are contained within
this cell, thus giving it a degree of operational auton-
omy. Each worker is expected to have mastered a full
range of operating skills required by his or her cell.
Therefore, systematic job rotation and training are                                     Figure 2
necessary conditions for effective cell development.                                Cellular Layout
Complete worker training is needed to ensure that
flexible worker assignments can be fulfilled.
     Cellular manufacturing, which is actually an appli-
cation of group technology, has been described as a step-                 Cell #1                      Cell #2
ping stone to achieving world class manufacturing
status. The objective of cellular manufacturing is to
design cells in such a way that some measure of per-
formance is optimized. This measure of performance                        Cell #3                      Cell #4

could be productivity, cycle time, or some other logistics
measure. Measures seen in practice include pieces per
man hour, unit cost, on-time delivery, lead time, defect
rates, and percentage of parts made cell-complete.             BENEFITS OF CELLULAR
     This process involves placing a cluster of care-          MANUFACTURING
fully selected sets of functionally dissimilar machines             Many firms utilizing cellular manufacturing have
in close proximity to each other. The result is small,         reported near immediate improvements in perform-
stand-alone manufacturing units dedicated to the pro-          ance, with only relatively minor adverse effects. Cited
duction of a set or family of parts—or essentially, a          improvements which seem to have occurred fairly
miniature version of a plant layout.                           quickly include reductions in work-in-process, fin-
                                                               ished goods, lead time, late orders, scrap, direct labor,
      While the machinery may be functionally dissim-
                                                               and workspace.
ilar, the family of parts produced contains similar pro-
cessing requirements or has geometric similarities.                In particular, production and quality control is
Thus, all parts basically follow the same routing with         enhanced. By breaking the factory into small, homo-
some minor variations (e.g., skipping an operation).           geneous and cohesive productive units, production


                                                                                                                                                    73
                                                               E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                and quality control is made easier. Cells that are not       the workers to master all the skills internal to the cell,




     CELLULAR MANUFACTURING
                                performing according to volume and quality targets           little or no additional training should be needed when
                                can be easily isolated, since the parts/products affected    workers have to be redeployed in response to volume or
                                can be traced to a single cell. Also, because the pro-       sales mix changes. When it is routine for workers to
                                ductive units are small, the search for the root of prob-    learn new skills, they can be easily transferred to
                                lems is made easier.                                         another job within the cell or possibly even to an
                                     Quality parameters and control procedures can           entirely different production unit. Without this worker
                                be dovetailed to the particular requirements of the          flexibility and versatility, there can be no real produc-
                                parts or workpieces specific to a certain cell. By            tion system flexibility.
                                focusing quality control activity on a particular pro-
                                duction unit or part type, the cell can quickly master       LIMITATIONS
                                the necessary quality requirements. Control is always
                                enhanced when productive units are kept at a mini-                While its benefits have been well documented, it
                                mum operating scale, which is what cellular manu-            should also be noted that some have argued that imple-
                                facturing provides.                                          menting cellular manufacturing could lead to a decrease
                                                                                             in manufacturing flexibility. It is felt that conversion
                                     When production is structured using cellular
                                                                                             to cells may cause some loss in routing flexibility,
                                manufacturing logic, flow systematization is possible.
                                                                                             which could then impact the viability of cell use.
                                Grouping of parts or products into sets or families
                                                                                             Obtaining balance among cells is also more difficult
                                reveals which ones are more or less amenable to
                                                                                             than for flow or job shops. Flow shops have relatively
                                continuous, coupled flow. Parts that are standardized
                                                                                             fixed capacity, and job shops can draw from a pool of
                                and common to many products will have very low
                                                                                             skilled labor so balance isn’t that much of a problem.
                                changeover times, and thus, are quickly convertible to
                                                                                             By contrast, with cells, if demand diminishes greatly,
                                continuous, line-flow production. Products that are
                                                                                             it may be necessary to break up that cell and redistrib-
                                low-volume, high-variety and require longer set-up
                                                                                             ute the equipment or reform the families.
                                times can be managed so that they evolve toward a
                                line flow.                                                         Also, some researchers have warned that the bene-
                                     Cells can be designed to exploit the characteris-       fits of cellular manufacturing could deteriorate over
                                tics peculiar to each part family so as to optimize the      time due to ongoing changes in the production environ-
                                flow for each cell and for groups of cells as a whole.        ment. Finally, it must be noted that conversion to cellu-
                                Flow systematization can be done one cell at a time so       lar manufacturing can involve the costly realignment of
                                as to avoid large disruptions in operations. Then the        equipment. The burden lies with the manager to deter-
                                cells that were easy to systemize can provide experi-        mine if the costs of switching from a process layout to
                                ence that can be exploited when the more difficult sys-       a cellular one outweigh the costs of the inefficiencies
                                tematization projects occur later. Cells that have been      and inflexibility of conventional plant layouts.
                                changed to a line flow will invariably show superior
                                performance in the areas of quality, throughput time,
                                and cost, which can lead to eventual plantwide benefit.
                                                                                             THE IMPLEMENTATION PROCESS

                                      Work flow that is adapted to the unique require-             A wide variety of methods for the implementa-
                                ments of each product or part allows the plant to produce    tion of cellular manufacturing have been proposed.
                                high-volume and high-variety products simultaneously.        These range from complex computer and mathemati-
                                Since the cell structure integrates both worker and          cal models to straightforward applications, such as
                                product versatility into a single unit, it has the poten-    production flow analysis. A pattern for implementa-
                                tial to attain maximum system flexibility while main-         tion is now presented.
                                taining factory focus. Cells can be designed around
                                                                                                   The first step in implementing cellular manufac-
                                single products, product groups, unique parts, part
                                                                                             turing is to break down the various items produced by
                                families, or whatever unique market requirements are
                                                                                             the company into a number of part sets or families.
                                identified. For the same part, there may be one high-
                                                                                             The grouping process (group technology) involves
                                volume, standardized design and one low-volume cus-
                                                                                             identifying items with similarities in design character-
                                tomized design. Cells can be built specifically for any
                                                                                             istics or manufacturing characteristics, and grouping
                                of these with a focus on the individual marketing or
                                                                                             them into part families. Design characteristics include
                                production requirement called for by the individual
                                                                                             size, shape, and function; manufacturing characteris-
                                product or part.
                                                                                             tics or process characteristics are based on the type
                                     Systematic job rotation and training in multiple        and sequence of operations required. In many cases,
                                skills also make possible quick, flexible work assign-        though not always, the two kinds of characteristics are
                                ments that can be used to alleviate bottlenecks occur-       correlated. Therefore design families may be dis-
                                ring within the cell. Since normal cell operation requires   tinctly different from processing families.


74
                              E N C Y C L O P E D I A      O F    M A N A G E M E N T
     Once identified, similar items can be classified         Hopefully, the floor layout will also provide for the




                                                                                                                         CELLULAR MANUFACTURING
into families. Then a system is developed that facili-      easy flow of a product to shipping, if shipping is
tates retrieval from a design and manufacturing data-       located close to the cells in a streamlined flow.
base. For example, the system can be used to determine
                                                                 Some plants in advanced stages of cellular manu-
if an identical or similar part exists before a com-
                                                            facturing utilize what is known as a “mini-plant.” The
pletely new part is designed. If a similar part is found,
                                                            cell not only does the manufacturing, but also has its
it may be that a simple modification would produce
                                                            own support services, including its own industrial
satisfactory results without the expense of new part
                                                            engineer, quality manager, accountant, and marketing
design. Similarly, planning the manufacturing of a
                                                            representative and/or salesperson. Only research and
new part after matching it with an existing part family
                                                            development and human resource management are not
can eliminate new and costly processing requirements.
                                                            dedicated to the mini-plant.
      This grouping of part or product families requires
a systematic analysis that often proves to be a major           An entire facility can be broken down into a
undertaking. Usually, there is a considerable amount        number of mini-plants, each of which operates as an
of data to analyze, and this in turn can be quite time-     independent profit center.
consuming and costly. Three primary methods exist
                                                            THE IMPACT OF CELLULAR MANUFACTURING ON
for accomplishing the grouping process: visual inspec-
                                                            WORKERS.     Nancy Hyer and Urban Wemmerlov noted
tion, examination of design and production data, and
                                                            in Mechanical Engineering that while technology and
production flow analysis. Visual inspection is the least
                                                            processes represent the “hard side” of cells, people rep-
accurate of the three but nonetheless the simplest and
                                                            resent the “soft side.” They state that the soft side fac-
the least costly. The most commonly used method of
                                                            tors are far more difficult to change than are the hard
analysis is the examination of design and production
                                                            side factors. Most implementing firms spend most of
data. This method is more accurate but is also more
                                                            their time struggling with soft issues. Cellular manu-
time-consuming. Production flow analysis examines
                                                            facturing calls for radical changes in the way industrial
operation sequences and machine routing to uncover
                                                            work is designed, structured, planned, controlled, and
similarities (therefore, it has a manufacturing perspec-
                                                            supervised. It makes worker self-management a reality,
tive rather than a design perspective). However, unless
                                                            so management must be convinced that the workers
the operation sequencing and routings are verified,
                                                            can master all the required aspects of the work.
this method could be far from optimal.
                                                                 The decision to implement cellular manufactur-
     The resulting number of families determines the
                                                            ing requires a deep commitment to excellence and a
number of cells required, as well as what machines are
                                                            desire to permanently change the way factories are
required within each cell. The cell usually includes all
                                                            viewed and managed. Cellular manufacturing affects
the processing operations needed to complete a part or
                                                            workers in a number of ways. Among the factors now
subassembly. However, it is possible for a product to
                                                            discussed are issues of self-management, motivation,
go from raw materials to packaging and be ready for
                                                            employee input, supervision, and group cohesiveness.
shipment by the time it reaches the end of the cell.
     The families will also help determine where            SELF-MANAGEMENT. Cell workers are encouraged to
within the cell each machine will be located for            think creatively about production problems and are
the most efficient flow, and how many employees are           expected to arrive at pragmatic solutions to them. While
needed within each cell. After the product families are     they are free to seek advice from plant management and
determined, the machines needed for the production          staff, the identified problems and subsequent analysis,
process of a specific family are organized into cells        and usually the solutions, are entirely their own. Workers
according to processing requirements (e.g., the order       have the authority and are encouraged to implement and
of processing). Frequently, machines are grouped in         follow up on action plans to improve their work. Some
an efficient U-shaped configuration. Since each machine       managers ask cells to set improvement targets for them-
operates on its own for much of the cycle, few work-        selves and measure their performance in comparison to
ers may be needed, and even then only for a limited         these targets. In addition, workers are given the freedom
number of steps.                                            to plan, coordinate, and control their work within their
                                                            cell as long as they meet company standards of quality,
     The optimal layout is one that minimizes the dis-      volume, time, and cost.
tance between cells, or the distance to the next pro-
duction point. The resulting reduction in time and          MOTIVATION. Behavioral psychology proposes that
handling ultimately provides a reduction in processing      challenging work assignments keep employees moti-
costs. Some firms utilize “linked-cell manufacturing,”       vated, satisfied, and productive. Flexible work assign-
which is the concept of arranging the manufacturing         ments within the cells ensure that employees are
cells near the assembly cells. Again, this decreases        constantly learning new tasks and constantly being
travel distances while reducing materials handling.         challenged. Job rotation within the cell introduces


                                                                                                                                                  75
                                                            E N C Y C L O P E D I A       O F   M A N A G E M E N T
                                variety in work patterns, thereby breaking the monot-        to provide assistance. Cell manufacturing builds a




     CELLULAR MANUFACTURING
                                ony (which has been known to cause absenteeism and           cohesive subculture within the wider social environ-
                                problems in quality and productivity). Industrial            ment of the plant.
                                work is productively accomplished in a group work
                                                                                                  The use of flexible work assignments contributes
                                setting. Cellular manufacturing can energize the
                                                                                             even more to the group’s cohesiveness and loyalty.
                                group, attacking the lethargy found in many indus-
                                                                                             Employees who regularly perform the work also done
                                trial situations.
                                                                                             by coworkers are more likely to demonstrate empathy
                                EMPLOYEE INPUT.       With the cell work group ener-         and support when dealing with each other on the job.
                                gized and motivated, the employees are more likely to        If each worker has experienced each job firsthand,
                                actively and continually bring their mental capabili-        they are more able to offer encouragement and advice
                                ties to bear on job-related problems. Cell workers are       on how the work can be improved and each worker is
                                the closest ones to the production process, so practical     more receptive to the input of his or her coworkers.
                                ideas are likely to instigate other ideas, which could       Each worker can view and understand completely the
                                then give rise to a continuous, almost self-sustaining       task, responsibilities, and mission that top manage-
                                chain reaction of improvement. As the workers see            ment has dedicated to the cell. The cross-fertilization
                                their own creative output being implemented, they            process that emerges can generate some truly creative
                                begin to develop self-esteem and a stronger desire to        ideas for process improvement. As the expression
                                succeed. They even begin to challenge each other to          goes, “as iron sharpens iron, so shall one man sharpen
                                improve on their prior accomplishments.                      another.”
                                                                                                  Finally, work group cohesiveness, reinforced
                                     The drive toward excellence is fueled by the
                                                                                             by the cell structure, facilitates total people manage-
                                human need to achieve until the desire to excel and
                                                                                             ment. Due to its small scale and mission focus, the cell
                                continuously improve becomes part of the factory
                                                                                             can be easily mobilized. Top management is too far
                                culture. Then as workers learn by doing more, they
                                                                                             removed, spatially and socially, from the workers to
                                become more proficient at generating ideas which,
                                                                                             be able to interact with them extensively enough to
                                perpetuates the cycle of improvement. Cellular manu-
                                                                                             significantly control the socialization process.
                                facturing can be the structural catalyst that starts, con-
                                                                                             Management can shape corporate values and create a
                                tains, and sustains the improvement process.
                                                                                             nurturing social environment, but it cannot instill these
                                SUPERVISION .     The intense use of manufacturing           values into the minds of the lower level employees.
                                cells tends to flatten the factory management struc-          Hence, corporate values are better communicated and
                                ture and reduce overhead costs. When work group              instilled into daily work habits by small group
                                autonomy, worker versatility, and small group improve-       processes.
                                ment activities converge, the need for supervision is             The cell is better able to exercise social control
                                drastically reduced, if not eliminated all together. Cell    over deviant workers since it can directly and immedi-
                                manufacturing perpetuates the idea that the work             ately manipulate social rewards and punishment. Any
                                group should supervise itself. A workforce that is           worker who fails to conform may find his deviant
                                motivated, trained, and assigned specific clear respon-       behavior quickly detected and reacted to by the with-
                                sibility for a product or part, coupled with simplified       drawal of the social support of the cell. Deviant behav-
                                production planning and control, does not need to be         ior that is hidden from management for long periods
                                minutely controlled or supervised in order to do a           of time is very visible to the small group and can be
                                good job.                                                    dealt with quickly.

                                GROUP COHESIVENESS.       The creation of small-scale             Conversely, high-performing group members are
                                productions dedicated to production of a few similar         also quickly visible but are rewarded with esteem and
                                parts increases work group cohesiveness. Since each          respect from the other cell workers. Consequently,
                                cell has few employees, typically less than fourteen,        management can work through the cell to instill the
                                extensive interpersonal contact is unavoidable. The          corporation’s values, attitudes, and philosophies.
                                workers are now part of a single, identifiable unit           Once these are internalized by the group’s key mem-
                                with operating autonomy and responsibility for a             bers, the group itself will take over the socialization
                                specific product, linked by the common purpose of             process of indoctrinating these values into the mindset
                                continually improving the productive unit for which          of each worker.
                                they are responsible. The cell structure keeps prob-
                                lems at a level where they are manageable and gives
                                                                                             FOCUSED CELLULAR MANUFACTURING
                                employees the opportunity to exercise their creative
                                potential in a pragmatic way. When problems call-                In International Journal of Operations and
                                ing for technical expertise beyond that of the work-         Production Management, Fahad Al-Mubarak and
                                ers, managers and production staff can be called on          Basheer M. Khumawala discuss a similar alternative


76
                              E N C Y C L O P E D I A      O F    M A N A G E M E N T
to cellular manufacturing, focused cellular manufac-




                                                                                                                            CHAIN OF COMMAND PRINCIPLE
turing (FCM). They define focused cellular manufac-
turing as a layout scheme that groups components by              CENSUS—ECONOMIC
end-items and forms cell of machine for fabrication
and assembly of the end-items. It differs from cellu-           SEE:       Economic Census
lar manufacturing in that it does not attempt to take
advantage of process similarities so as to reduce
setup times.

     The major advantage of FCM is the reduction of
completion times for assembled end-items and work-
in-process inventories while maintaining some degree             CHAIN OF COMMAND PRINCIPLE
of flexibility. In addition, it should be easy to install in
a firm producing a few end-items in large volume or                    The chain of command, sometimes called the scaler
many end-items produced in small volume. Apparently,            chain, is the formal line of authority, communication,
installing a single, focused cell for a few end-items is        and responsibility within an organization. The chain of
more practical than installation of many cells as               command is usually depicted on an organizational chart,
required for a cellular layout.                                 which identifies the superior and subordinate relation-
     The flow systematization and physical process               ships in the organizational structure. According to clas-
integration of cellular manufacturing reinforce each            sical organization theory the organizational chart allows
other in potent ways. The underlying mechanisms can             one to visualize the lines of authority and communica-
be collectively used to push manufacturing to higher            tion within an organizational structure and ensures clear
performance levels. The result is an effectively designed       assignment of duties and responsibilities. By utilizing
cellular manufacturing structure, a production opera-           the chain of command, and its visible authority relation-
tion that integrates many concepts of superior manu-            ships, the principle of unity of command is maintained.
facturing performance into a single small-scale                 Unity of command means that each subordinate reports
production unit whose place in the large manufactur-            to one and only one superior.
ing system is clearly visible.

     One final note is to distinguish cellular manu-             HISTORICAL BACKGROUND
facturing from flexible manufacturing. A flexible
manufacturing system is a more fully automated ver-                   The chain of command principle is ancient, but
sion of cellular manufacturing. A flexible manufac-              its application to the management of organizations
turing system utilizes a computer to control the start          was only systematized in the twentieth century. Two
of work at each machine and to control the transfer             individuals—the French engineer and executive Henri
of parts from machine to machine. While quite                   Fayol and the German sociologist Max Weber—
expensive, flexible manufacturing systems enable                 contributed much to our understanding of this princi-
manufacturers to achieve some of the benefits of                 ple. In his book, General and Industrial Management,
product layouts with small batch sizes provide                  Fayol presented what have come to be known as the
greater flexibility because the system can operate               fourteen principles of management. These principles
with little or no human intervention.                           include both the unity of command (his fourth princi-
                                                                ple) and the scalar chain (line of authority). Fayol’s
SEE ALSO: Layout; World-Class Manufacturer                      principle of the unity of command holds that a subor-
                                            R. Anthony Inman
                                                                dinate should report to one and only one supervisor.
                                                                Fayol believed that this was necessary to provide the
                                                                supervisor with clear position authority, and to pre-
                                                                vent a subordinate from receiving conflicting orders.
FURTHER READING:                                                Fayol’s scalar chain principle states that authority and
Al-Mubarak, Fahad and Basheer M. Khumawala. “Focused            responsibility flow, one level at a time, in a vertical
Cellular Manufacturing: An Alternative to Cellular              line from the highest level in an organization to its
Manufacturing.” International Journal of Operations and         lowest level. This line of authority establishes an orga-
Production Management 23, no. 3 (2003): 277–299.                nization’s hierarchy. Fayol believed that it was a man-
                                                                agement error to abandon the chain of command for
Hyer, Nancy and Urban Wemmerlov. “Cell Manufacturing: The
                                                                no reason, but he also allowed for circumstances in
Hard Part Is to Get People in Step with the Program.”
Mechanical Engineering 126, no. 3 (1 March 2004): E14–16.
                                                                which the chain of command might be bypassed for
                                                                the good of the company. For example, Fayol sug-
Meredith, Jack R., and Scott M. Shafer. Operations Management   gested that communication delays might sometimes
for MBAs. Hoboken, NJ: John Wiley & Sons, Inc., 2004.           be caused by blind adherence to the chain of command


                                                                                                                                                         77
                                                                E N C Y C L O P E D I A      O F    M A N A G E M E N T
                         and unity of command principles, and proposed what            SEE ALSO: Management Control; Management Functions;




     CHANGE—MANAGING
                         he called the “gangplank,” which allows communica-                      Organizational Chart; Organizational Structure
                         tions outside the chain of command as long as superi-                                                 Denise Marie Tanguay
                         ors are made aware. Weber also studied the problems                                                  Revised by Tim Barnett
                         inherent in large organizations, as organizations grew
                         from family structures to much larger entities during         FURTHER READING:
                         the Industrial Revolution (1760–1850). Weber pro-
                         posed the bureaucracy as a model of efficient organi-          Fayol, Henri. General and Industrial Management. trans.
                         zation. Bureaucratic characteristics have clearly             Constance Storrs. London: Pitman Publishing, Ltd., 1949.
                         defined hierarchies of authority and responsibility,           Longnecker, Justin G. Principles of Management and
                         consistent with the chain of command principle.               Organizational Behavior. 4th ed. Columbus, OH: Charles E.
                                                                                       Merrill Publishing Company, 1977.

                                                                                       Weber, Max. The Theory of Social and Economic Organization.
                                                                                       trans. A.M. Henderson and T. Parsons. New York: Oxford
                         CURRENT STATUS                                                University Press, 1947.
                              In many organizations, the chain of command              Wren, Daniel A. The Evolution of Management Thought. 4th ed.
                         principle is still very much alive. The manager’s status      New York: John Wiley & Sons, Inc., 1994.
                         is that of the deliverer of orders, and the employee
                         enacts them under the monitoring of the manager.
                         Both parties share responsibility for achievements.
                         But, as Longnecker suggests in his book Principles of
                         Management and Organizational Behavior, commu-
                         nication provides the underpinnings of this relation-
                         ship. The discussions and meetings contact managers            CHANGE—MANAGING
                         and their subordinates have may improve or harm the
                         effectiveness of the direct report relationships in the       SEE:        Managing Change
                         chain of command.
                              A problem associated with the chain of command
                         occurs when a subordinate bypasses a manager in either
                         the giving of information or the requesting of a deci-
                         sion. This act undermines the authority and position of
                         the manager who is bypassed. If this practice is allowed
                                                                                        CHANGE—REACTIVE VS. PROACTIVE
                         to continue in a bureaucratically-organized company,
                         morale of the managers will decline. The urgency and
                                                                                       SEE:        Reactive vs. Proactive Change
                         frequency of these situations may, of course, mitigate
                         the impact and inappropriateness of such contacts.
                              With the rapidly-changing environment and
                         increasing uncertainty that organizations face in the
                         twenty-first century, some adopt structures that empha-
                         size flexibility and quick response to change. These
                         types of organizations attempt to place decision-              CHANGE—TRENDS IN ORGANIZATIONS
                         making authority in the organizational structure with
                         those who can most effectively and efficiently respond         SEE:        Trends in Organizational Change
                         to environmental imperatives. Thus, these organiza-
                         tions may have flatter hierarchies and communication
                         and decision-making patterns that do not fully adhere
                         to the chain of command or unity of command princi-
                         ples. In the case of matrix organizations, employees
                         frequently have two managers or supervisors, violating
                         the unity of command and chain of command princi-              CHAOS THEORY
                         ples. To be effective, individuals working in these
                         organizations learn to share power, use open con-                   Chaos theory is a scientific principle describing
                         frontation to resolve issues, and to utilize all directions   the unpredictability of systems. Most fully explored
                         in the organization to disseminate information. These         and recognized during the mid-to-late 1980s, its prem-
                         more organic structures are not rigidly bound to the          ise is that systems sometimes reside in chaos, generat-
                         chain of command principle, although it is still an           ing energy but without any predictability or direction.
                         important organizing principle in most organizations.         These complex systems may be weather patterns,


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                       E N C Y C L O P E D I A       O F   M A N A G E M E N T
ecosystems, water flows, anatomical functions, or            and a population biologist pushing to study strangely-




                                                                                                                       CHAOS THEORY
organizations. While these systems’s chaotic behavior       complex behavior in simple biological models. During
may appear random at first, chaotic systems can be           the 1970s, these scientists and others in the United
defined by a mathematical formula, and they are not          States and Europe began to see beyond what appeared
without order or finite boundaries. This theory, in rela-    to be random disorder in nature (the atmosphere,
tion to organizational behavior, was somewhat dis-          wildlife populations, etc.), finding connections in
counted during the 1990s, giving way to the very            erratic behavior. As recounted by James Gleick
similar complexity theory.                                  (b.1954) in Chaos, a French mathematical physicist
                                                            had just made the disputable claim that turbulence in
                                                            fluids might have something to do with a bizarre, infi-
                                                            nitely-tangled abstraction he termed a “strange attrac-
ORIGINS OF CHAOS THEORY
                                                            tor.” Stephen Smale (b. 1930), at the University of
      One of the first scientists to comment on chaos        California, Berkeley, was involved in the study of
was Henri Poincaré(1854–1912), a late-nineteenth            “dynamical systems.” He proposed a physical law that
century French mathematician who extensively stud-          systems can behave erratically, but the erratic behav-
ied topology and dynamic systems. He left writings          ior cannot be stable. At this point, however, main-
hinting at the same unpredictability in systems that        stream science was not sure what to make of these
Edward Lorenz (b. 1917) would study more than half          theories, and some universities and research centers
a century later. Poincaré explained, “It may happen         deliberately avoided association with proponents of
that small differences in the initial conditions produce    chaos theory.
very great ones in the final phenomena. A small error
                                                                  By the mid-1980s, chaos was a buzzword for the
in the former will produce an enormous error in the
                                                            fast-growing movement reshaping scientific establish-
latter. Prediction becomes impossible.” Unfortunately,
                                                            ments, and conferences and journals on the subject
the study of dynamic systems was largely ignored long
                                                            were on the rise. Universities sought chaos “special-
after Poincaré’s death.
                                                            ists” for high-level positions. A Center for Nonlinear
      During the early 1960s, a few scientists from         Studies was established at Los Alamos, as were other
various disciplines were again taking note of “odd          institutes devoted to the study of nonlinear dynamics
behavior” in complex systems such as the earth’s            and complex systems. A new language consisting of
atmosphere and the human brain. One of these scien-         terms such as fractals, bifurcations, and smooth noodle
tists was Edward Lorenz, a meteorologist from the           maps was born. In 1987, James Gleick published his
Massachusetts Institute of Technology (MIT), who            landmark work, Chaos: Making a New Science,
was experimenting with computational models of              chronicling the development of chaos theory, as well
the atmosphere. In the process of his experimentation       as the science and scientists fueling its progress.
he discovered one of chaos theory’s fundamental
principles— the Butterfly Effect. The Butterfly Effect
is named for its assertion that a butterfly flapping its      THE SCIENCE OF CHAOS THEORY
wings in Tokyo can impact weather patterns in Chicago.
More scientifically, the Butterfly Effect proves that              As stated by James Gleick, chaos is a science of
forces governing weather formation are unstable.            the “global nature of systems,” and so it crosses many
These unstable forces allow minuscule changes in the        disciplinary lines—from ecology to medicine, elec-
atmosphere to have major impact elsewhere. More             tronics, and the economy. It is a theory, method, set of
broadly applied, the Butterfly Effect means that what        beliefs, and way of conducting scientific research.
may appear to be insignificant changes to small parts        Technically, chaos models are based on “state space,”
of a system can have exponentially larger effects on        improved versions of the Cartesian graphs used in cal-
that system. It also helps to dispel the notion that        culus. In calculus, speed and distance can be repre-
random system activity and disturbances must be due         sented on a Cartesian graph as x and y. Chaos models
to external influences, and not the result of minor fluc-     allow the plotting of many more variables in an imag-
tuations within the system itself.                          inary space, producing more complex imaginary shapes.
                                                            Even this model assumes, however, that all variables
     Another major contributor to chaos theory is           can be graphed, and may not be able to account for sit-
Mitchell Feigenbaum (b. 1944). A physicist at the the-      uations in the real world where the number of vari-
oretical division of the Los Alamos National Laboratory     ables changes from moment to moment.
starting in 1974, Feigenbaum dedicated much of his
time researching chaos and trying to build mathemati-            The primary tool for understanding chaos theory
cal formulas that might be used to explain the phenom-      (and complexity theory as well) is dynamic systems
enon Others working on related ideas (though in different   theory, which is used to describe processes that con-
disciplines) include a Berkeley, California mathemati-      stantly change over time (e.g., the ups and downs of the
cian who formed a group to study “dynamical systems”        stock market). When systems become dislodged from


                                                                                                                                      79
                                                            E N C Y C L O P E D I A      O F   M A N A G E M E N T
                      a stable state, they go through a period of oscillation,    out predictability.” These systems never land in the




     CHAOS THEORY
                      swinging back and forth between order and chaos.            same place twice, but they also never exceed certain
                      According to Margaret J. Wheatley in Leadership and         boundaries.
                      the New Science, “Chaos is the final state in a system’s
                      movement away from order.” When a system does
                      reach that point, the parts of a system are manifest as     PRACTICAL APPLICATION
                      turbulence, totally lacking in direction or meaning.        OF CHAOS THEORY
                      Wheatley quotes researchers John Briggs and F. David             By the early 1980s, evidence accumulated that
                      Peat explaining the process of oscillation:                 chaos theory was a real phenomenon. One of the first
                           Evidently familiar order and chaotic order             frequently-cited examples is a dripping water faucet.
                           are laminated like bands of intermittency.             At times, water drops from a leaky faucet exhibit
                           Wandering into certain bands, a system is              chaotic behavior (the water does not drip at a constant
                           extruded and bent back on itself as it iterates,       or orderly rate), eliminating the possibility of accu-
                           dragged toward disintegration, transforma-             rately predicting the timing of those drops. More
                           tion, and chaos. Inside other bands, systems           recently, the orbit of Pluto was shown to be chaotic.
                           cycle dynamically, maintaining their shapes            Scientists took advantage of applications using chaos
                           for long periods of time. But eventually all           to their benefit; chaos-aware control techniques could
                           orderly systems will feel the wild, seductive          be used to stabilize lasers and heart rhythms, among
                           pull of the strange chaotic attractor.                 multiple other uses.
                      In simpler terms, every system has the potential to fall          Another arena within which chaos theory is
                      into chaos.                                                 useful is that of organizations. Applying chaos theory
                           The above “strange attractor” is the very same         to organizational behavior allows theorists to take a
                      that a French mathematical physicist identified in the       step back from the management of day-to-day activi-
                      early 1960s. In complex systems, where all should fall      ties and see how organizations function as unified sys-
                      apart, the attractor comes in, magnetically pulling         tems. An organization is a classic example of a
                      system variables into an area and creating a visible        nonlinear system (i.e., a system in which minor events
                      shape. Because previous efforts to graph such phe-          have the potential to set off grave consequences or
                      nomena could only be completed in two dimensions,           chain reactions, and major changes may have little or
                      this effect could not be visualized. However, comput-       no effect on the system whatsoever). In order to exploit
                      ers now allow the phenomena of “strange attractors”         the chaotic quality of an organization, one needs to try
                      to become visible, as images of multiple dimensions         to see the organizational shape that emerges from a
                      representing multiple variables can finally be created.      distance. Instead of pinpointing causes in the organi-
                                                                                  zation for organizational problems, the company is
                           Part of the difficulty in studying chaos theory         better served, according to chaos theory, by looking
                      arises because complex systems are difficult to study        for organizational patterns that lead to certain types of
                      in pieces. Scientists’s efforts to separate pieces of       behavior within the organization.
                      dynamical systems often fall apart. The system depends
                      on each minute part of that system and the way it inter-          Organizational expectations for acceptable behav-
                      acts with all other components. As Briggs and Peat          ior, and the degree of freedom with which individuals
                      state, “The whole shape of things depends upon the          are allowed to work, shape the way a company’s prob-
                      minutest part. The part is the whole in this respect, for   lems and challenges are handled by its members. By
                      through the action of any part, the whole in the form       allowing people and groups within an organization
                      of chaos or transformative change may manifest.”            some autonomy, businesses encourage the organiza-
                                                                                  tion to organize itself, enacting multiple iterations of
                           In the same breath, it is important to establish the
                                                                                  its own functioning until the various pieces of the
                      importance of the autonomy the smallest parts of a
                                                                                  organization can work together most effectively. An
                      system possess. Each component of a complex system
                                                                                  organization that encourages this type of management
                      has the ability to fluctuate, randomly and unpre-
                                                                                  has been termed a fractal organization, one that trusts
                      dictably, within the context of the system itself. The
                                                                                  in natural organizational phenomena to order itself.
                      system’s guiding principles (the attractors) allow these
                      parts to cohere over time into definite and predictable           However, applying chaos theory to organizational
                      form. This runs contrary to the impression many have        practice tends to go against the grain of most formal
                      of chaos theory, believing there is no order to be had      management patterns. Order can be confused with the
                      in such a system. But chaotic movement does possess         more popular notion of control. Defined by organiza-
                      finite boundaries, within which is the capacity for infi-     tion charts and job descriptions, traditional manage-
                      nite possibility. Even lacking direction, parts of a        ment does not generally seek to add disorder to its
                      system can combine so that the system generates mul-        strategic plan. As Wheatley states, “It is hard to open
                      tiple configurations of itself, displaying “order with-      ourselves up to a world of inherentorderliness.”


80
                    E N C Y C L O P E D I A      O F    M A N A G E M E N T
Organizations are focused on structure and design.               Organizational theorist Karl Weick (b. 1936)




                                                                                                                               CLOSED SYSTEMS
Charts are drawn to illustrate who is accountable to        offers a similar theory to Peters’s, believing that busi-
whom or who plays what role and when. Business              ness strategies should be “just in time. . .supported by
experts break down organizations into the smallest of       more investment in general knowledge, a large skill
parts. They build models of organizational practice         repertoire, the ability to do a quick study, trust in intu-
and policy with hope that this atomizing yields better      itions, and sophistication in cutting losses.” Though
information on how to improve the organization’s            he did not articulate his theories in terms of the explicit
functioning. However, chaos theory implies that this is     ideas offered by quantum physics and chaos theory,
unnecessary, even harmful.                                  his statements support the general idea that the cre-
                                                            ation and health of an organization (or a system)
     Self-organizing systems are those enabled to grow
                                                            depends on the interaction of various people and parts
and evolve with free will. As long as each part of the
                                                            within that system. However, as Wheatley states in
system remains consistent with itself and the systems’s
                                                            her book:
past; these systems can harness the power of creativity,
evolution, and free will—all within the boundaries of              Organizations lack this kind of faith, faith
the organization’s overall vision and culture. In this             that they can accomplish their purposes in
respect, chaos theory shows the need for effective lead-           various ways and that they do best when they
ership, a guiding vision, strong values, organizational            focus on direction and vision, letting tran-
beliefs, and open communication.                                   sient forms emerge and disappear. We seem
     During the 1980s, chaos theory did begin to                   fixated on structures. . .and organizations, or
change decision-making processes in business. A                    we who create them, survive only because
good example is the evolution of high-functioning                  we build crafty and smart—smart enough to
teams. Members of effective teams frequently recreate              defend ourselves from the natural forces of
the role each member plays, depending on the needs                 destruction.
of the team at a given point. Though not always the
                                                            SEE ALSO: Complexity Theory; Trends in Organizational
formally-designated manager, informal leaders                         Change
emerge in an organization not because they have been
                                                                                                          Wendy H. Mason
given control, but because they have a strong sense of
                                                                                             Revised by Hal P. Kirkwood, Jr.
how to address the needs of the group and its mem-
bers. The most successful leaders understand that it is
not the organization or the individual who is most          FURTHER READING:
important, but the relationship between the two. And
                                                            Chen, Guanrong, and Xinghuo Yu, eds. Chaos Control: Theory
that relationship is in constant change.
                                                            and Applications (Lecture Notes in Control and Information
     One of the most influential business writers of the     Sciences). New York: Springer-Verlag, 2003.
1980s and 1990s, Tom Peters (b. 1942), wrote, Thriving      Farazmand, Ali. “Chaos and Transformation Theories: A
on Chaos: Handbook for a Management Revolution in           Theoretical Analysis with Implications for Organization Theory
1987. Peters offers a strategy to help corporations deal    and Public Management.” Public Organization Review 3, no. 4
with the uncertainty of competitive markets through         (2003): 339–372.
customer responsiveness, fast-paced innovation,             Gleick, James. Chaos: Making a New Science. New York:
empowering personnel, and most importantly, learn-          Penguin Books, 1987.
ing to work within an environment of change. In fact,
                                                            Peters, Tom. Thriving on Chaos. New York: HarperCollins,
Peters asserts that we live in “a world turned upside       1987.
down,” and survival depends on embracing “revolution.”
While not explicitly concerned with chaos theory,           Sullivan, Terence J. “The Viability of Using Various System
                                                            Theories to Describe Organisational Change.” Journal of
Peters’s focus on letting an organization (and its
                                                            Educational Administration 42, no. 1 (2004): 43–54.
people) drive itself is quite compatible with the central
tenets of chaos theory.                                     Wheatley, Margaret J. Leadership and the New Science:
                                                            Discovering Order in a Chaotic World Revised. San Francisco:
     As the global economy and technology continue to       Berrett-Koehler Publishers, 2001.
change the way business is conducted on a daily basis,
evidence of chaos is clearly visible. While businesses
could once succeed as “non-adaptive,” controlling insti-
tutions with permanently-installed hierarchical struc-
tures, modern corporations must be able to restructure
as markets expand and technology evolves. According
to Peters, “To meet the demands of the fast-changing         CLOSED SYSTEMS
competitive scene, we must simply learn to love change
as much as we have hated it in the past.”                   SEE:         Open and Closed Systems


                                                                                                                                                81
                                                            E N C Y C L O P E D I A         O F    M A N A G E M E N T
                                                                                         systems within a single organization. Individuals




     COALITION BUILDING
                                                                                         express initial concern about a lack of resources to
                             COALITION BUILDING                                          fully develop an integrated information system, yet
                                                                                         have no formal way to share concerns with manage-
                                 Coalitions refer to the temporary formation of          ment. These individuals represent several units within
                            persons, groups, or even nations for some type of joint      the organization, including accounting, research, mar-
                            or common action. It has been used as a term most            keting, and distribution—few of whom commonly
                            often in relation to political or national issues, such as   interact with the others. The issue focuses on manage-
                            President George H. W. Bush’s allied coalition during        ment’s budget control. But, as a group, membership
                            the Gulf War. In business, coalitions have been present      serves on the overall organizational budget planning
                            for many years as a means of bringing together people,       committee. At the point of decision making, the coali-
                            departments within an organization, entire companies,        tion acts in accord with common interests to recom-
                            or industries with some common purpose. Examples             mend a comprehensive information system mutual to
                            of such purposes might include; achieving a common           the needs of all units. Once this recommendation is
                            corporate goal, lowering insurance rates, regulating an      forwarded to the organization’s executive, the coali-
                            industry action, or strategic planning. Coalitions are       tion disbands or continues, depending on the final
                            an exercise in power, whether in politics or business.       decision on how the resources are to be used for infor-
                                                                                         mation management.
                                                                                              Whatever definition of coalitions is accepted,
                            HISTORY OF COALITIONS
                                                                                         understanding organizational coalitions helps to under-
                                 The concept of coalition building has too often         stand behavior in a complex organizational structures.
                            been confused with interest groups and lobbying. The         Coalitions are a potent force in organizations.
                            term refers to the formation of different interests, but     Organizational behavior literature is largely independ-
                            not necessarily with the same intent as an interest          ent of the social psychology literature on coalitions,
                            group. From the French coalascere, the word is gener-        yet a closer tie between the two fields is building.
                            ally defined in political terms. Most early coalitions        Likewise, business and organization literature has not
                            were temporary alliances formed among nontradi-              utilized the vast literature of political science that
                            tional allies to combat a common foe. Bush’s Gulf            examines the unique formation of coalitions for
                            coalition is one such example, and an example of a           mutual goals. The merging of these three independent
                            coalition that did not hold together even over a short       disciplines into a body of coalition literature can only
                            span of time. Coalitions are also formed for election        enhance our understanding of the formation of groups
                            purposes. A historical example of this is the Republican     for common purposes.
                            Party, formed in the mid-nineteenth century from rep-
                            resentatives from virtually all parties then existing on
                            the American political scene—Whigs, Democrats,               COALITION BUILDING
                            Free-Soilers, Abolitionists, Know-Nothings, members               A review of the business and behavioral science
                            of the temperance movement, and others without a             literature on coalitions suggests the following are
                            party allegiance. All of these elements did not survive      common characteristics found in most coalitions:
                            the formation of the Republican Party as we know it
                            today.                                                        1. Members act as a group.
                                                                                          2. They are formed for a specific purpose.
                            COALITIONS DEFINED                                            3. They contain a group of interacting
                                 There are various definitions of a coalition that fit         individuals.
                            an organizational behavior setting. One simply states         4. They are independent from the organiza-
                            that a coalition occurs when members of a group                  tion’s formal structure.
                            organize to support their side of a particular issue.
                                                                                          5. They have no formal structure.
                            Another definition refers to a coalition as a relation-
                            ship over a specific issue. Coalitions exist to preserve       6. They are oriented to a specific issue to advance
                            and even enhance self-interests, whether those of an             the group’s purpose.
                            individual or group, and achieve an adequate balance          7. Perception of membership is mutual among
                            of power favorable to the coalition members’s advan-             members.
                            tage. A more complete definition is a group formed to
                            pursue a strategy that will be to the advantage of those      8. They have an external focus.
                            most directly affected.                                      These characteristics may be common with other
                                 Another example of a coalition is one that forms        types of groups within organizations, but coalitions
                            over the issue of funding for management information         are separate and quite often powerful. As a part of an


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                          E N C Y C L O P E D I A      O F    M A N A G E M E N T
organizational power structure, coalitions are fre-           be able to exercise power at a later time, but this is




                                                                                                                          COALITION BUILDING
quently seen as a manager’s legitimate search for             unlikely in most organizations. Coalitions may prevail
power, and as such, are used to increase personal power       and coalition goals may become the dominant organi-
or to achieve organizational goals. When building a           zational goal, although this alternative course of coali-
coalition, potential members will identify those indi-        tion action lacks adequate research findings from
viduals or groups who have a common interest or goal          which to derive any solid conclusions. The stability of
and who are most likely to join. Generally, coalitions        coalitions thus depends on goals, course of action, out-
take time to form as participants identify the common         comes, and continued common interest.
goal, the best manner to approach that goal, and the
individuals or groups most likely to share the preferred
strategy of goal-seeking. Borrowing from social psy-          COALITION GOALS
chology literature, “Coalitions form one person (or                 Coalition goals generally focus on the distribu-
group) at a time.”                                            tion of resources, always a source of contention in
      Coalitions are used to increase a power base.           organizations. The lack of adequate resources, changes
Therefore, an understanding of coalition building is          in the resource base, perceived inequitable resource
integral to a comprehensive knowledge of organiza-            distribution, and lack of a comprehensive understand-
tional behavior. As in politics, the emphasis on the          ing of resource allocation frequently result in the
word, “temporary” is closely associated with coali-           development of coalitions. Research also indicates
tions, but is not necessarily the rule in corporate life.     that those with broader discretion and influence in job
Social psychologists Keith Murnigham and Danny                responsibilities and work activities are more likely to
Brass conclude that successful coalitions are fluid,           participate in coalition building. When the work envi-
form rather quickly, expand, burst at the moment of           ronment is more rigidly controlled, coalitions are not
decision, and then rapidly disappear. Other types of          as likely to be pursued as a strategy for addressing col-
relationships within the organization can include             lective goals.
alliances, networks, cliques, a supportive managerial              An example of a coalition and its effectiveness is
relationship, and other forms. Networks are a broad-          found in the experience of Transworld Corporation’s
based cooperative pursuit of general self interests,          president Charles Bradshaw. As reported in Business
while alliances involve individuals or groups sup-            Week, Bradshaw’s fate as president was doomed by a
porting each other. A clique is a group of individuals        coalition of forces within the company. At a finance
held together by a common interest. Cliques often             committee meeting where Bradshaw opposed Trans-
form coalitions. Research indicates that some surrep-         world’s acquisition of a nursing home corporation, the
titiousness (e.g., mobilizing quietly) may be essen-          committee chair recited an endless list of facts and fig-
tial to building a coalition. There is also research          ures in support of the purchase. Bradshaw reflected,
concluding that resistance, fear of retaliation, and          “Within two or three minutes I knew I had lost. No one
insults often create ripe conditions for coalition            was talking directly to me, but all statements addressed
building.                                                     my opposition. I could tell there was general agree-
     Several conditions have to be present for the for-       ment around the board table.” The finance committee
mation of a coalition. First, there has to be an issue        assumed the form of a coalition for a common organi-
that requires addressing or interest in an issue that         zational purpose and Bradshaw was defeated on the
coalition members find they have in common. Second,            acquisition issue. Although an example of a very pow-
potential members have to share a belief that they can        erful coalition, it includes most of the common charac-
achieve success through building a coalition. Third,          teristics of the coalition—an interacting group (the
there must be an understanding that the action taken          finance committee), a specific purpose (the nursing
has to be jointly performed. Once these criteria are          home corporation acquisition), a concentrated act
met, the building of the coalition begins. Generally,         (voting together in opposition to Bradshaw), no formal
coalition members form from a weakness—that is,               internal structure (a corporate committee), external
individually they are not strong enough in the organi-        focus (acquisition of an entity outside the organiza-
zation to achieve their goal.                                 tion), and orientation to advance the members’s pur-
      When this collective action leads to a response,        pose (the corporate acquisition).
coalitions can take one of several directions. If ini-
tially successful, the coalition may grow. But the same
                                                              COALITION LITERATURE
is true if the coalition first encounters failure yet per-
sists in reaching a collective goal. Disbanding the                The concept of coalitions has undergone differ-
coalition is also a possibility in either scenario, result-   ing applications and meanings within organizational
ing in the dormancy of the coalition. Coalitions may          theory. The earliest uses focus on conflicts within
well be strengthened by success and continue to grow          organizations and the presence of multiple goals within
in power and influence. A dormant coalition may also           the same organization. Herbert Simon, former professor


                                                                                                                                               83
                                                              E N C Y C L O P E D I A      O F    M A N A G E M E N T
                            at Carnegie Mellon University and 1978 recipient of         gration issues, foreign trade, the insurance market, and




     COALITION BUILDING
                            the Nobel Prize in economics, was one of the first           community activism. In the area of organizational
                            researchers to identify the issue of conflict over goals     behavior, research centers on the role of coalitions in
                            in an organization. Simon, however, failed to mention       organizational change, or how groups with seemingly
                            coalitions arising within the organizations over this       dichotomous interests merge to exercise power on
                            conflict. Simon’s 1958 book, Organizations, which he         business strategy and decision making within an organ-
                            co-authored with James G. March, mentioned coali-           ization undergoing significant administrative and struc-
                            tions between but not within organizations. March,          tural change.
                            also at Carnegie Mellon and later at Stanford, did draw
                                                                                             In their seminal article on coalition research,
                            a relationship between coalitions and organizations in
                                                                                        William Stephenson, Jone Pearce, and Lyman Porter
                            a 1962 article in the Journal of Politics. March contin-
                                                                                        (of the University of California at Irvine) state that
                            ued his work with Richard Cyert (also at Carnegie
                                                                                        the study of coalitions has yet to produce any new
                            Mellon at that time and later president of the institu-
                                                                                        way of understanding organizational processes.
                            tion from 1972 to 1990) in works like the 1963, A
                                                                                        Considering the wide array of research from psychol-
                            Behavioral Theory of the Firm.
                                                                                        ogy, political science, game theory, sociology, and
                                 The second significant period of coalition              organizational behavior, their conclusion still begs an
                            research centered on James Thompson, who adopted            adequate answer. We can come to an understanding of
                            the work of March and Cyert in his 1967 book, Org-          the conditions necessary for the formation of a coali-
                            anizations in Action, where he coined the term, “dom-       tion, how they are built, how they exercise power and
                            inant coalition.” Thompson (who was teaching business       influence, and how they survive or disband, yet the
                            at Indiana University in 1967) concluded there were         question of the role of the coalition in organizational
                            certain constraints on coalition building, mainly the       behavior remains unanswered and fertile for the
                            organization’s technology and environment. Thompson         researcher so inclined to look further for questions and
                            theorized that the more uncertainty in organizations        answers.
                            due to technology and environment, the more power
                            bases that exist. The coalition grows as the uncertainty    SEE ALSO: Group Decision Making; Group Dynamics;
                            increases.                                                            Managing Change; Organizational Structure; Teams
                                                                                                  and Teamwork; Trends in Organizational Change
                                 Thompson also used the term, “inner circle” to                                                          Boyd Childress
                            describe the select few within an organization whose                                            Revised by Wendy H. Mason
                            connections provide them with influence. Their role
                            in coalition building is often one of leadership, but
                            they seldom act alone in achieving goals. Their             FURTHER READING:
                            power is enhanced as the coalition strives to achieve
                            a group goal; thus, the individual and coalition feed       Johns, Gary. Organizational Behavior: Understanding and
                            off each other. Carrying Thompson’s point one step          Managing Life at Work. New York: HarperCollins, 1996.
                            further, interdependency in an organization creates a       March, James G., and Richard M. Cyert. A Behavioral Theory of
                            greater likelihood for the formation of a coalition or      the Firm. Englewood Cliffs, NJ: Prentice-Hall, 1963.
                            coalitions.
                                                                                        Murnigham, John Keith, and Daniel J. Brass. “Intraorganizational
                                 A third phase of coalition scholarship was gener-      Coalitions.” In Research on Negotiation in Organizations. eds.
                            ated with the introduction of political science and         Max H. Bazerman, Roy J. Lewicki, and Blair H. Sheppard.
                            social psychology methods and studies to organiza-          Greenwich: JAI Press, 1991.
                            tional behavior. This led to the current divergent use of   Pfeffer, Jeffrey. New Directions for Organization Theory:
                            the term, and research from several disciplines points      Problems and Prospects. New York: Oxford University Press,
                            to how individual efforts at influence become the basis      1997.
                            for coalition building. The application of different
                            schools of research on coalitions led to more thorough      Roberts, Joan M. Alliances, Coalitions and Partnerships:
                                                                                        Building Collaborative Organizations. St. Paul, MN: New
                            study into the formation and operation of coalitions in
                                                                                        Society Publishers, 2004.
                            the organization. In addition, game theory proponents
                            contribute to understanding of the role of coalitions       Simon, Herbert A., and James G. March. Organizations. New
                            and their formation.                                        York: Wiley, 1958.

                                 More recently, research into coalitions has moved      Stephenson, William B., Jone L. Pearce, and Lyman W. Porter.
                            away from the organizational environment to the polit-      “The Concept of Coalition in Organization Theory and
                            ical arena where coalitions have an impact on busi-         Research.” Academy of Management Review (April 1985):
                                                                                        256–268.
                            ness. Periodical literature is highlighted with articles
                            on how coalitions influence international business and       Thompson, James D. Organizations in Action: Social Science
                            economics, the health care industry, diversity and inte-    Bases of Administrative Theory. New York: McGraw-Hill, 1967.


84
                          E N C Y C L O P E D I A      O F   M A N A G E M E N T
                                                            can be seen, heard, felt, tasted, or smelled) to carry the




                                                                                                                         COMMUNICATION
                                                            message to the receiver. The receiver, in turn, decodes
 COMMUNICATION                                              that message; that is, he finds meaning in it. Yet the
                                                            signs used in messages have no inherent meaning; the
     Communication is the sharing or exchange of            only meaning in the message is what the sender or
thought by oral, written, or nonverbal means. To func-      receiver attributes to it.
tion effectively, managers need to know and be able to           To make sense out of a message, to determine the
apply strategically a variety of communication skills       meaning to attribute to it, the receiver uses perception.
that match varying managerial tasks. These tasks            With perception, the receiver interprets the signs in a
might call for nonverbal, presentational, or written        communication interaction in light of his past experi-
skills as the manager meets others, speaks at meet-         ence. That is, he makes sense out of the message based
ings, or prepares reports to be read by clients or those    on what those signs meant when he encountered them
higher on the organizational ladder. To work effec-         in the past. A firm, quick handshake, for example, may
tively, managers also need to know sources of infor-        signal “businesslike” to someone because in the past
mation. Finally, managers need to understand the            he found people who shook hands that way were busi-
different communication channels available.                 nesslike.

UPWARD AND DOWNWARD                                         PERCEPTION
COMMUNICATION
                                                                  No person sees things exactly the same way as
     Information, the lifeblood of any organization,        another; each has a unique set of experiences, a unique
needs to flow freely to be effective. Successful man-        perceptual “filter,” through which he or she compares
agement requires downward communication to subor-           and interprets messages. Making up this filter is the
dinates, upward communication to superiors, and             unique blend of education, upbringing, and all of the
horizontal communication to peers in other divisions.       life experiences of the perceiver. Even in the case of
Getting a task done, perhaps through delegation, is         twins, the perceptual filter will vary from between them.
just one aspect of the manager’s job. Obtaining the         When communicating, each receiver uses that filter to
resources to do that job, letting others know what is       give meaning to or make sense out of the experience.
going on, and coordinating with others are also crucial
skills. These skills keep the organization working, and           Herein lies the challenge in communication, par-
enhance the visibility of the manager and her division,     ticularly for managers who need to be understood in
thus ensuring continued support and promotion.              order to get things done: getting the receiver to com-
                                                            prehend the message in a way similar to what was
     Downward communication is more than passing            intended. While the word “communication” implies
on information to subordinates. It may involve effec-       that a common meaning is shared between sender and
tively managing the tone of the message, as well as         receiver, this is not always the case. Under optimum
showing skill in delegation to ensure the job is done       circumstances, the meaning attributed to the message
effectively by the right person. In upward communica-       by the receiver will be close to what was intended by
tion, tone is even more crucial, as are timing, strategy,   the sender. In most situations, however, the meaning is
and audience adaptation. In neither case can the man-       only an approximation, and may even be contrary to
ager operate on automatic as the messages are sent out.     what was intended. The challenge of communication
                                                            lies in limiting this divergence of meanings between
                                                            sender and receiver.
THE COMMUNICATION PROCESS
                                                                 While the wide range of potential experiences
     At first glance the communication process, or the       make communicating with someone from within the
steps taken to get message from one mind to another,        same culture a challenge, across cultures the possibil-
seems simple enough. As the definition at the opening        ities are even wider and the challenge even greater.
suggested, the sender has an idea, which he transmits       What one sign means in one culture might be taken in
to the receiver through signs—physical sensations           an entirely different way in another. The friendly
capable of being perceived by another. These signs          Tunisian businessman who holds another man’s hand
might be a printed or spoken word, a gesture, a hand-       as they walk down the street may be misunderstood in
shake, or a stern look, to name just a few. The receiver    the North American culture, for example. Similarly,
takes those signs, interprets them and then reacts with     an intended signal may mean nothing to someone
feedback.                                                   from another culture, while an unintended one may
                                                            trigger an unexpected response.
      The process is more complex, though. When
communicating, the sender encodes the message. That               Understanding the dynamics that underlie percep-
is, she chooses some tangible sign (something which         tion is crucial to effective and successful communication.


                                                                                                                                         85
                                                            E N C Y C L O P E D I A       O F   M A N A G E M E N T
                       Because people make sense out of present messages             person passing it along. By the time a message goes




     COMMUNICATION
                       based on past experiences, if those past experiences          from bottom to top, it is not likely to be recognized by
                       differ, the interpretations assigned may differ slightly or   the person who initiated it.
                       even radically depending on the situation. In business             Although communication barriers are inevitable,
                       communication, differences in education, roles in the         effective managers learn to adapt messages to counter-
                       organization, age, or gender may lead to radical differ-      act their impact. The seasoned manager, especially
                       ences in the meaning attributed to a sign.                    when in the role of sender, learns where they occur and
                                                                                     how to deal with them. As receiver, she has a similar
                       AUDIENCE ADAPTATION                                           and often more challenging duty. The effort is repaid by
                                                                                     the clearer and more effective messages that result.
                            The effective communicator learns early the
                       value of audience adaptation and that many elements
                       of the message can be shaped to suit the receiver’s
                                                                                     COMMUNICATION REDUNDANCY
                       unique perceptual filter. Without this adaptation, the              While audience adaptation is an important tool in
                       success of the message is uncertain. The language             dealing with communication barriers, it alone is not
                       used is probably the most obvious area. If the receiver       enough to minimize their impact. As a result, commu-
                       does not understand the technical vocabulary of the           nication long ago evolved to develop an additional
                       sender, then the latter needs to use terms common to          means to combat communication barriers: redun-
                       both sender and receiver.                                     dancy, the predictability built into a message that helps
                            On the other hand, if the receiver has less educa-       ensure comprehension. Every message is, to a degree,
                       tion than the sender, then word choice and sentence           predictable or redundant, and that predictability helps
                       length may need to be adapted to reflect the receiver’s        overcome the uncertainty introduced by communica-
                       needs. For example, if the receiver is skeptical of tech-     tion barriers. Effective communicators learn to build
                       nology, then someone sending a message supporting             in redundancy where needed.
                       the purchase of new data processing equipment needs               Communication redundancy occurs in several
                       to shape it in a way that will overcome the perceptual        ways. One of the most obvious of these is through
                       blinders the receiver has to the subject. If the receiver     simple repetition of the message, perhaps by making a
                       is a superior, then the format of the message might           point early and again later into the same message. A
                       need to be more formal.                                       long report, by contrast, might have its main points
                                                                                     repeated in a variety of places, including the executive
                                                                                     summary, the body, and the conclusion.
                       COMMUNICATION BARRIERS
                                                                                           Another source of redundancy lies in the use of
                            Communication barriers (often also called noise          multiple media. Much spoken communication is
                       or static) complicate the communication process. A            repeated in the nonverbal elements of the message. A
                       communication barrier is anything that impedes the            formal oral presentation is usually accompanied with
                       communication process. These barriers are inevitable.         slides, product samples, or videotaped segments to
                       While they cannot be avoided, both the sender and             support the spoken word. A person interviewing for a
                       receiver can work to minimize them.                           job stresses his seriousness and sincerity with a new
                            Interpersonal communication barriers arise within        suit, a warm handshake, consistent eye contact, and an
                       the sender or receiver. For example, if one person has        earnest tone in his voice.
                       biases against the topic under discussion, anything                A less obvious but more frequent source of redun-
                       said in the conversation will be affected by that per-        dancy lies in the grammar and syntax (roughly the
                       ceptual factor. Interpersonal barriers can also arise         word order used) of the message. These back up a
                       between sender and receiver. One example would be a           message by helping the reader or listener predict the
                       strong emotion like anger during the interaction,             unknown from the known. For example, the role and
                       which would impair both the sending and receiving of          meaning of an uncertain word at the beginning of a
                       the message in a number of ways. A subtler interper-          sentence can be determined partly by its placement
                       sonal barrier is bypassing, in which the sender has one       after the word “the” and before a verb in the sentence,
                       meaning for a term, while the receiver has another (for       as well as by whether or not the verb takes the singular
                       example, “hardware” could be taken to mean different          or plural.
                       things in an interchange).
                                                                                          In the previous example, the context in which the
                            Organizational barriers arise as a result of the         written message takes place, the collective meanings
                       interaction taking place within the larger work unit.         of the previous and following sentences, also adds to
                       The classic example is the serial transmission effect.        the predictability. Should noise garble one word of the
                       As a message passes along the chain of command                message, the other words surrounding it can provide
                       from one level to the next, it changes to reflect the          the clues needed for understanding, something that


86
                     E N C Y C L O P E D I A       O F   M A N A G E M E N T
anyone familiar with speaking or reading a foreign                 Many think of “body language” as synonymous




                                                                                                                           COMMUNICATION
language would know. Similarly, in a technical descrip-      with nonverbal communication. Body language is a
tion, the context surrounding an unclear word or con-        rich source of information in interpersonal communi-
cept may be enough to determine its meaning, especially      cation. The gestures that an interviewee uses can
in a carefully constructed message.                          emphasize or contradict what he is saying. Similarly,
                                                             his posture and eye contact can indicate respect and
     A surprising source of communication redun-
                                                             careful attention. Far subtler, but equally important,
dancy lies in the way a message is formatted. In a
                                                             are the physical elements over which he has little con-
business environment, format can help the receiver
                                                             trol, but which still impact the impression he is making
predict what will be in a message. A good example
                                                             on the interviewer. His height, weight, physical attrac-
is the traditional annual report, which always carries
                                                             tiveness, and even his race are all sources of potential
the same type of information. Similarly, someone
                                                             signals that may affect the impression he is making.
reading a memorandum from a colleague can rea-
sonably expect that it will deal with internal busi-              But nonverbal signals come from many other
ness matters.                                                sources, one of which is time. If the interviewee in the
                                                             previous example arrived ten minutes late, he may
     By contrast, the expectations inherent in a partic-
                                                             have made such a poor impression that his chances for
ular format can serve as a source of noise when it con-
                                                             hire are jeopardized. A second interviewee who arrives
tains an unexpected message. For example, a company
                                                             ten minutes early signals eagerness and promptness.
attempting to be innovative sends out its annual report
as a videotape. Many of those receiving it might miss             Haptics is a source of nonverbal communication
the point since it does not look like an annual report.      that deals with touch. An interviewee with a weak hand-
On the other hand, since it might arouse attention,          shake may leave a poor impression. The pat on the back
using a familiar format to package new material can          that accompanies a verbal “well done” and a written
be an effective marketing tool in another application.       commendation may strongly reinforce the verbal and
                                                             written statements. Subconsciously, most managers
      As a result of redundancy, in whatever form it
                                                             realize that when the permissible level of haptic com-
may appear, much of any message is predictable. The
                                                             munication is exceeded, it is done to communicate a
unpredictable element of the message, the new mate-
                                                             message about the state of the parties’ relationship. It is
rial that the receiver learns from the interaction, is the
                                                             either warmer than it had been, or one of the parties
information that is inherent in the message. Everything
                                                             wishes it so. Unfortunately, explain Borisoff and Victor,
else backs the message.
                                                             conflict can arise when the two parties involved do not
     While managers need skill in all areas of commu-        agree on an acceptable haptic level for the relationship.
nication, two areas, nonverbal communication and the
                                                                  Nonverbal communication also includes prox-
corporate grapevine, are particularly relevant. Both
                                                             emics, a person’s relationship to others in physical
are often misunderstood, and skill in strategically
                                                             space. Most are familiar with the idea of a personal space
communicating through them is invaluable.
                                                             “bubble” that we like to keep around ourselves. In the
                                                             North American culture, this intimate space may be an
                                                             18-inch circle around the person, which only those clos-
NONVERBAL COMMUNICATION
                                                             est are allowed to invade. Just beyond this space close
      Nonverbal communication occurs when there is an        friends may be tolerated, and acquaintances even farther
exchange of information through nonlinguistic signs. In      out. Other cultures may have wider or narrower circles.
a spoken (and to some extent written) message, it con-       Table 1 sets out the meanings typically attributed to per-
sists of everything except the words. Nonverbal com-         sonal spaces in the North American culture.
munication is a valid and rich source of information and
                                                                   Managers also send nonverbal signals through
merits close study. As with other elements of communi-
                                                             their work environment. These signals can affect the
cation, the meaning of nonverbal signals depends upon
                                                             communication process in obvious or subtle ways. For
perception. It does not have to be intentional in order to
                                                             example, a manager may arrange the office so that she
carry meaning to another person.
                                                             speaks to subordinates across a broad expanse of desk.
     Nonverbal communication serves a variety of             Or, she may choose to be less intimidating and use a
purposes, including sending first impressions such as         round table for conferences. The artifacts she uses in
a warm handshake. It also signals emotions (through          the office may say something about who the manager
tears or smiles), status (through clothing and jewelry),     is, or how she wishes to be seen. The organization also
and when one wants to either take or relinquish a turn       speaks through the space it allots to employees. For
in conversation (using gestures or drawing a breath).        example, the perception that a large, windowed,
Nonverbal signals can also signal when someone is            corner office may signal prestige while a tiny, sterile
lying; for example when being deceptive, vocal pitch         cubicle may convey (intentionally or unintentionally)
often rises.                                                 low status.


                                                                                                                                           87
                                                             E N C Y C L O P E D I A       O F    M A N A G E M E N T
     COMMUNICATION
                                                                                                Table 1
                                                            Proxemic Distances in the North America Culture

                                           Zone                               Distance                             Persons Tolerated
                                          Intimate                                 0 to 18’                    Partner/spouse, parents, children
                                         Personal                                 18‘ to 4’’                            Close friends
                                           Social                                 4’’ to 12’’                        Business associates
                                           Public                                  12’’ up                                Strangers


                          Adapted from Smeltzer and Waltman et al., pp. 234-235




                       THE GRAPEVINE                                                                 active participant since he both sends and receives
                                                                                                     information on the grapevine. This person often has a
                            The grapevine is the informal, confidential com-                          job with easy access to information at different levels
                       munication network that quickly develops within any                           of the organization (and often with little commitment
                       organization to supplement the formal channels. The                           to any level). This might be a secretary, a mailroom
                       structure of the grapevine is amorphous; it follows                           clerk, a custodian, or a computer technician. Often,
                       relationship and networking patterns within and out-                          too, the liaison is an extrovert and likable. While this
                       side the organization, rather than the formal, rational                       role means that the liaison is in on much of what is
                       ones imposed by the organization’s hierarchy. Thus,                           going on in the organization, he also takes a chance
                       members of a carpool, or people gathering around the                          since the information he passes on might be linked
                       water cooler or in the cafeteria, may be from different                       back to him.
                       divisions of a company, but share information to pass
                       the time. The information may even pass out of the                                 Another role played in the grapevine is the
                       organization at one level and come back in at another                         deadender. This person generally receives informa-
                       as people go from one network to another. For exam-                           tion, but rarely passes it on. By far the most common
                       ple, a member of a civic group might casually (and                            participant in the grapevine, this person may have
                       confidentially) pass on interesting information to a                           access to information from one or more liaisons.
                       friend at a club, who later meets a subordinate of the                        This role is the safest one to play in the grapevine
                       first speaker at a weekend barbecue.                                           since the deadender is not linked to the information
                                                                                                     as it moves through the organization. Many man-
                            The grapevine has several functions in the organ-                        agers wisely play this role since it provides useful
                       ization. For one, it carries information inappropriate                        information on what is happening within the organ-
                       for formal media. Fearing legal repercussions, most                           ization without the additional risk passing it on to
                       would rarely use printed media to share opinions on                           others might entail.
                       the competence, ethics, or behavior of others. At the
                       same time, they will freely discuss these informally on                            The third role is the isolate. For one or more rea-
                       the grapevine. Similarly, the grapevine will carry good                       sons, she neither sends nor receives information.
                       or bad news affecting the organization far more                               Physical separation may account for the role in a few
                       quickly than formal media can.                                                instances (the classic example is the lighthouse keeper),
                                                                                                     but the isolation may also be due to frequent travel
                            The grapevine can also serve as a medium for                             that keeps the individual away from the main office.
                       translating what top management says into meaning-                            Frequently, the isolation can be traced to interpersonal
                       ful terms. For example, a new and seemingly liberal                           problems or to indifference to what is happening in
                       policy on casual dress may be translated as it moves                          the organization (many plateaued employees fit in this
                       along the grapevine to clarify what the limits of casual                      category). Not surprisingly, top management often
                       dress actually are. As it informally fleshes out or clari-                     plays the role of isolate, although often unwillingly or
                       fies what is also traveling in the formal channels, the                        unknowingly. This isolation may be owing to the kinds
                       grapevine can also serve as a source of communication                         of information passing on the grapevine or to the lack
                       redundancy. And when these corporate-sanctioned                               of access others have to top management.
                       channels are inaccurate, especially in an unhealthy
                                                                                                           Of course, what is passing on the grapevine may
                       communication climate, what is on the grapevine is
                                                                                                     affect a person’s behavior or role played. The isolate
                       usually trusted far more by those using it than what
                                                                                                     who is close to retirement and indifferent to much of
                       passes on the formal channels.
                                                                                                     what is going on around him may suddenly become a
                           Participants in the grapevine play at least one of                        liaison when rumors of an early retirement package or a
                       several roles. The first of these, the liaison, is the most                    cut in health benefits circulate. Meanwhile, the youngest


88
                     E N C Y C L O P E D I A            O F      M A N A G E M E N T
members of the organization may not give a passing          semination of organizational culture that may occur




                                                                                                                              COMPETITIVE ADVANTAGE
thought to this seemingly irrelevant information.           through personal interactions may be lost with the
                                                            increased reliance on electronic communication
                                                            channels.
COMMUNICATION CHANNELS
                                                                                                           John L. Waltman
     Communication channels—or the media through                                               Revised by Marcia Simmering
which messages are sent—can have an influence on
the success of communication. Typical channels used
in business communication are face-to-face conversa-        FURTHER READING:
tions, telephone conversations, formal letters, memos,
                                                            Athos, A.G., and R.C. Coffey. “Time, Space and Things.” In
or e-mails. Each channel has its own advantages and
                                                            Behavior in Organizations: A Multidimensional View.
disadvantages in communicating a particular message.        Englewood Cliffs, NJ: Prentice Hall, 1975.
     Media richness theory indicates that the various
communication channels differ in their capability to        Borisoff, Deborah, and David A. Victor. Conflict Management:
                                                            A Communication Skills Approach. Englewood Cliffs, NJ:
provide rich information. Face-to-face interaction is
                                                            Prentice Hall, 1989.
highest in media richness, because a person can per-
ceive verbal and nonverbal communication, including         Knapp, Mark L., and Judith A. Hall. Nonverbal Communication
posture, gestures, tone of voice, and eye contact,          In Human Interaction. Belmont, CA: Wadsworth Publishing,
which can aid the perceiver in understanding the mes-       2001.
sage being sent. Letters and e-mails have fairly low        Smeltzer, Larry R., and John L. Waltman, et al. Managerial
media richness; they provide more opportunity for the       Communication: A Strategic Approach. Needham, MA: Ginn
perceiver to misunderstand the sender’s intent. Thus,       Press, 1991.
messages should be communicated through channels
                                                            Timm, Paul R., and Kristen Bell DeTienne. Managerial
that provide sufficient levels of media richness for
                                                            Communication. Englewood Cliffs, NJ: Prentice Hall, Inc., 1991.
their purpose. For instance, when managers give neg-
ative feedback to employees, discipline them, or fire
them, it should be done in person. However, dissemi-
nating routine, nonsensitive information is properly
done through memos or e-mails, where media rich-
ness is not critical.
     A communication channel that has grown in pop-          COMPETITIVE ADVANTAGE
ularity in business is electronic mail, or e-mail. E-mail
provides almost instantaneous communication around               Many firms strive for a competitive advantage,
the world, and is often a quick, convenient way to com-     but few truly understand what it is or how to achieve
municate with others. This is particularly true for         and keep it. A competitive advantage can be gained by
workers in remote locations, such as telecommuters.         offering the consumer a greater value than the com-
E-mail may also allow individuals to get their work         petitors, such as by offering lower prices or providing
done more quickly and to manage communication               quality services or other benefits that justify a higher
more effectively, particularly by having a record of pre-   price. The strongest competitive advantage is a strat-
vious correspondence easily at hand on their computer.      egy that that cannot be imitated by other companies.
     Despite e-mail’s many advantages, there are
                                                                 Competitive advantage can be also viewed as any
several problems associated with the increased use
                                                            activity that creates superior value above its rivals. A
of e-mail in business. First, e-mail may not be pri-
                                                            company wants the gap between perceived value and
vate; e-mail messages may be accessed by people
                                                            cost of the product to be greater than the competition.
who were not intended to see the messages, and this
may create problems related to keeping trade secrets              Michael Porter defines three generic strategies
or managing employee relations. Additionally, e-mail        that firm’s may use to gain competitive advantage:
messages may be accessed long after they are sent;          cost leadership, differentiation, and focus. A firm
they may leave a “paper trail” that an organization         utilizing a cost leadership strategy seeks to be the low-
would rather not have. A second problem with e-mail         cost producer relative to its competitors. A differenti-
use is information overload. Because e-mail is easy         ation strategy requires that the firm possess a
and quick, many employees find that they have prob-          “non-price” attribute that distinguishes the firm as
lems managing their e-mail communication or that            superior to its peers. Firms following a focus approach
their work is constantly interrupted by e-mail arrival.     direct their attention to narrow product lines, buyer
The third problem associated with e-mail is that it         segments, or geographic markets. “Focused” firms
reduces the benefits that occur with more media-rich         will use cost or differentiation to gain advantage, but
communication. Much of the socialization and dis-           only within a narrow target market.


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                               COST ADVANTAGE RESULTING                                    entiated to meet various consumer needs. In Principles




     COMPETITIVE ADVANTAGE
                               FROM EFFICIENCY                                             of Marketing (1999), authors Gary Armstrong and
                                                                                           Philip Kotler note that differentiation can occur by
                                    Efficiency is the ratio of inputs to outputs. Inputs    manipulating many characteristics, including features,
                               can be any materials, overhead, or labor that is            performance, style, design, consistency, durability,
                               assigned to the product or service. The outputs can be      reliability, or reparability. Differentiation allows a
                               measured as the number of products produced or serv-        company to target specific populations.
                               ices performed. The firm that can achieve the highest
                               efficiency for the same service or product can widen              It is easy to think of companies that have used
                               the gap between cost and perceived value and may            these characteristics to promote their products.
                               have greater profit margins.                                 Maytag has differentiated itself by presenting “Old
                                                                                           reliable,” the Maytag repairman who never has any
                                    There are many ways a company can increase             work to do because Maytag’s products purportedly
                               efficiency. Efficiency is enhanced if, holding outputs        function without any problems and do not require
                               constant, inputs are reduced; or if holding inputs con-     repairs. The Eveready Battery Co./Energizer has pro-
                               stant, outputs are increased. Inputs can be reduced in      moted their products’ performance with the Energizer
                               many ways. Labor inputs can be reduced if employees         Bunny® that “keeps going and going.”
                               are better trained so that time spent on each individual
                               output is decreased.                                             Many chain restaurants differentiate themselves
                                                                                           with consistency and style. If a consumer has a
                                     Decreasing waste can decrease materials needed.       favorite dish at her local Applebee’s restaurant, she
                               If a method can be devised to decrease waste, it would      can be assured it will look and taste the same at any
                               increase efficiency. For instance, a bottling plant might    Applebee’s restaurant anywhere in the country. And,
                               determine that 10 gallons of liquid are spilled every       the style of theme restaurants is the key to some estab-
                               day as a result of the bottling process. If the amount of   lishments. Planet Hollywood and Hard Rock Cafe
                               lost liquid can be reduced, efficiency will increase.        profit from their themes.
                                     Outputs can be increased by increasing the number         In the auto industry, durability is promoted by
                               of units a machine can produce in given period of time.     Chevrolet’s “Like a Rock” advertising campaign.
                               Decreasing downtime can also increase outputs. For
                               example, if a machine regularly breaks down and is out
                               of order for two hours a day, finding a way to eliminate     SERVICE DIFFERENTIATION
                               this downtime would increase the number of outputs.
                                                                                                Companies can also differentiate the services that
                                    It is often argued that large companies, by defini-     accompany the physical product. Two companies can
                               tion, are able to be more efficient because they can         offer a similar physical product, but the company that
                               achieve economies of scale that others are not able to      offers additional services can charge a premium for
                               reach. Large companies usually offer more products          the product. Mary Kay cosmetics offers skin-care and
                               in each product line, and their products may help to        glamour cosmetics that are very similar to those
                               satisfy many different needs. If a consumer is not sure     offered by many other cosmetic companies; but these
                               of the exact product he needs, he can go to the larger      products are usually accompanied with an informa-
                               producer and be confident that the larger producer has       tional, instructional training session provided by the
                               something to offer. The consumer might believe that         consultant. This additional service allows Mary Kay
                               the smaller producer may be too specialized. Larger         to charge more for their product than if they sold the
                               companies can cater to a larger population because of       product through more traditional channels.
                               sheer size, while smaller companies have fewer
                               resources and must specialize or fall victim to larger,          In the personal computer business, Dell and
                               more efficient companies.                                    Gateway claim to provide excellent technical support
                                                                                           services to handle any glitches that may occur once a
                                                                                           consumer has bought their product. This 24-hour-a-
                               PRODUCT DIFFERENTIATION                                     day tech support provides a very important advantage
                                                                                           over other PC makers, who may be perceived as less
                                     Product differentiation is achieved by offering a     reliable when a customer needs immediate assistance
                               valued variation of the physical product. The ability to    with a problem.
                               differentiate a product varies greatly along a contin-
                               uum depending on the specific product. There are some
                               products that do not lend themselves to much differen-
                                                                                           PEOPLE DIFFERENTIATION
                               tiation, such as beef, lumber, and notebook paper.
                               Some products, on the other hand, can be highly dif-             Hiring and training better people than the com-
                               ferentiated. Appliances, restaurants, automobiles, and      petitor can become an immeasurable competitive
                               even batteries can all be customized and highly differ-     advantage for a company. A company’s employees are


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                             E N C Y C L O P E D I A      O F   M A N A G E M E N T
often overlooked, but should be given careful consid-      port their image. Ford Motor Co.’s former “Quality is




                                                                                                                       COMPETITIVE ADVANTAGE
eration. This human resource-based advantage is diffi-      Job 1” slogan needed to be supported in every aspect,
cult for a competitor to imitate because the source of     including advertisements, production, sales floor pres-
the advantage may not be very apparent to an outsider.     entation, and customer service.
As a Money magazine article reported, Herb Kelleher,
CEO of Southwest Airlines, explains that the culture,           Often, a company will try giving a product a per-
attitudes, beliefs, and actions of his employees consti-   sonality. It can be done through a story, symbol, or
tute his strongest competitive advantage: “The intan-      other identifying means. Most consumers are familiar
gibles are more important than the tangibles because       with the Keebler Elves and the magic tree where they
you can always imitate the tangibles; you can buy the      do all of the Keebler baking. This story of the elves
airplane, you can rent the ticket counter space. But the   and the tree gives Keebler cookies a personality. When
hardest thing for someone to emulate is the spirit of      consumers purchase Keebler cookies, they are not just
your people.”                                              purchasing cookies, but the story of the elves and the
                                                           magic tree as well. A symbol can be an easily recog-
     This competitive advantage can encompass many         nizable trademark of a company that reminds the con-
areas. Employers who pay attention to employees,           sumer of the brand image. The Nike “swoosh” is a
monitoring their performance and commitment, may           symbol that carries prestige and makes the Nike label
find themselves with a very strong competitive advan-       recognizable.
tage. A well-trained production staff will generate a
better quality product. Yet, a competitor may not be
able to distinguish if the advantage is due to superior
                                                           QUALITY DIFFERENTIATION
materials, equipment or employees.
     People differentiation is important when con-              Quality is the idea that something is reliable in
sumers deal directly with employees. Employees are         the sense that it does the job it is designed to do. When
the frontline defense against waning customer satis-       considering competitive advantage, one cannot just
faction. The associate at Wal-Mart who helps a cus-        view quality as it relates to the product. The quality of
tomer locate a product may result in the customer          the material going into the product and the quality of
returning numerous times, generating hundreds of           production operations should also be scrutinized.
dollars in revenue. Home Depot prides itself on having     Materials quality is very important. The manufacturer
a knowledgeable sales staff in their home improve-         that can get the best material at a given price will
ment warehouses. The consumer knows that the staff         widen the gap between perceived quality and cost.
will be helpful and courteous, and this is very impor-     Greater quality materials decrease the number of
tant to the consumer who may be trying a new home          returns, reworks, and repairs necessary. Quality labor
improvement technique with limited knowledge on            also reduces the costs associated with these three
the subject.                                               expenses.

     Another way a company can differentiate itself
through people is by having a recognizable person at
                                                           INNOVATION DIFFERENTIATION
the top of the company. A recognizable CEO can make
a company stand out. Some CEOs are such charis-                 When people think of innovation, they usually
matic public figures that to the consumer, the CEO is       have a narrow view that encompasses only product
the company. If the CEO is considered reputable and        innovation. Product innovation is very important to
is well-liked, it speaks very well for the company, and    remain competitive, but just as important is process
consumers pay attention. National media coverage of        innovation. Process innovation is anything new or
CEOs has increased tremendously, jumping 21 percent        novel about the way a company operates. Process
between 1992 and 1997 (Gaines-Ross).                       innovations are important because they often reduce
                                                           costs, and it may take competitors a significant amount
                                                           of time to discover and imitate them.
IMAGE DIFFERENTIATION                                           Some process innovations can completely revolu-
     Armstrong and Kotler pointed out in Principles        tionize the way a product is produced. When the
of Marketing that when competing products or serv-         assembly line was first gaining popularity in the early
ices are similar, buyers may perceive a difference         twentieth century, it was an innovation that signifi-
based on company or brand image. Thus companies            cantly reduced costs. The first companies to use this
should work to establish images that differentiate         innovation had a competitive advantage over the com-
them from competitors. A favorable brand image takes       panies that were slow or reluctant to change.
a significant amount of time to build. Unfortunately,            As one of the first Internet service providers,
one negative impression can kill the image practically     America Online offered a unique innovation for access-
overnight. Everything that a company does must sup-        ing the nascent Internet—its unique and user-friendly


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                                  interface. The company grew at a massive rate, lead-         SEE ALSO: Economies of Scale and Economies of Scope;




     COMPETITIVE INTELLIGENCE
                                  ing the rapidly developing Internet sector as a force in               Porter’s 5-Forces Model
                                  American business. While most innovations are not                                                            Dena Waggoner
                                  going to revolutionize the way that all firms operate,                                            Revised by R. Anthony Inman
                                  the small innovations can reduce costs by thousands
                                  or even millions of dollars, and large innovations may
                                  save billions over time.                                     FURTHER READING:

                                                                                               Armstrong, Gary, and Philip Kotler. Principles of Marketing. 8th
                                                                                               ed. Upper Saddle River, NJ: Prentice Hall, 1999.
                                  SUSTAINABLE COMPETITIVE
                                                                                               Dess, Gregory G., G.T. Lumpkin, and Alan B. Eisner. Strategic
                                  ADVANTAGE                                                    Management: Text and Cases. Boston: McGraw-Hill Irwin, 2006.
                                        The achievement of competitive advantage is not        Gaines-Ross, Leslie, and Chris Komisarjevsky. “The Brand
                                  always permanent or even long lasting. Once a firm            Name CEO.” Across the Board 36, no. 6, (1999): 26–29.
                                  establishes itself in an area of advantage, other firms
                                                                                               Kelleher, Herb, and Sarah Rose. “How Herb Keeps Southwest
                                  will follow suit in an effort to capitalize on their simi-   Hopping.” Money, 28, 1999, 61–62.
                                  larities. A firm is said to have a “sustainable” compet-
                                  itive advantage when its competitors are unable to           Raturi, Amitabh S., and James R. Evans. Principles of Operations
                                                                                               Management. Mason, OH: Thomson South-Western, 2005.
                                  duplicate the benefits of the firm’s strategy. In order
                                  for a firm to attain a “sustainable” competitive advan-
                                  tage, its generic strategy must be grounded in an
                                  attribute that meets four criteria. It must be:
                                     • Valuable—it is of value to consumers.
                                     • Rare—it is not commonplace or easily
                                       obtained.                                                COMPETITIVE INTELLIGENCE
                                     • Inimitable—it cannot be easily imitated or
                                       copied by competitors.                                        Intelligence is information that has been analyzed
                                     • Non-substitutable—consumers cannot or                   for decision making. It is important to understand the
                                       will not substitute another product or attrib-          difference between information and intelligence.
                                       ute for the one providing the firm with com-             Information is the starting point; it is readily available
                                       petitive advantage.                                     numbers, statistics, bits of data about people, compa-
                                                                                               nies, products, and strategies. As a matter of fact, infor-
                                                                                               mation overload is one of the leading problems of
                                                                                               today’s executive and the top reason for needing a com-
                                  SELECTING A COMPETITIVE ADVANTAGE
                                                                                               petitive intelligence expert. Information becomes intel-
                                       A company may be lucky enough to identify sev-          ligence when is it distilled and analyzed. Combining
                                  eral potential competitive advantages, and it must be        this idea with those of competition or competitors
                                  able to determine which are worth pursuing. Not all          leads to the concept of gathering and analyzing infor-
                                  differentiation is important. Some differences are too       mation about competitors for use in making manage-
                                  subtle, too easily mimicked by competitors, and many         ment decisions. Competitive intelligence provides a
                                  are too expensive. A company must be sure the con-           link between information and business strategies and
                                  sumer wants, understands, and appreciates the differ-        decisions. It is the process of turning vast quantities of
                                  ence offered.                                                information into action.
                                       The maker of expensive suits may offer its suits             The field of competitive intelligence, as a profes-
                                  in the widest array of colors, but if 95 percent of the      sion, is relatively new in the U.S. An indication of the
                                  consumers wear only black and navy blue suits, then          importance of competitive intelligence is the growth,
                                  the wide array of colors adds little perceived value to      since 1986, of the Society of Competitor Intelligence
                                  the product. Variety would not become a competitive          Professionals (SCIP), an organization committed to
                                  advantage, and would be a waste of resources. A dif-         developing, improving, and promulgating the meth-
                                  ference may be worth developing and promoting,               ods, techniques, and ethical standards of the group.
                                  advise Armstrong and Kotler, if it is important, dis-        SCIP defines competitive intelligence as “the legal and
                                  tinctive, superior, communicable, preemptive, afford-        ethical collection and analysis of information regard-
                                  able, and profitable.                                         ing the capabilities, vulnerabilities, and intentions of
                                       A competitive advantage can make or break a             business competitors conducted by using information
                                  firm, so it is crucial that all managers are familiar with    databases and other ‘open sources’ and through ethi-
                                  competitive advantages and how to create, maintain,          cal inquiry.” The major research firm in the field, Fuld
                                  and benefit from them.                                        & Company, Inc., defines it as “information that has


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                                E N C Y C L O P E D I A      O F    M A N A G E M E N T
been analyzed to the point where you can make a deci-         information. They do dig into public records and gov-




                                                                                                                             COMPETITIVE INTELLIGENCE
sion and a tool to alert management to early warning          ernment databases and use the latest technology (such
of both threats and opportunities. Competitive intelli-       as satellite photoreconnaissance and software tools
gence offers approximations and best views of the             such as spiders) to help gather and analyze large
market and the competition. It is not a peek at the           datasets. However, the professionals and companies
rival’s financial books.” Competitive intelligence can         for which they work do not use illegal methods.
help managers discover new markets or businesses,
beat the competition to market, foresee competitor’s
actions, determine which companies to acquire, learn          THE PROCESS
about new products and technologies that will affect
the industry, and forecast political or legislative changes         Today, competitive intelligence is an important
that will affect the company.                                 activity within corporations, serving all areas of busi-
                                                              ness functioning: research and development, human
                                                              resources, sales, etc. A recent survey by The Futures
                                                              Group found that 80 percent of large, U.S.-based
EXAMPLES                                                      organizations have a formal, in-house, competitive
     Examples of competitive intelligence include             intelligence department. In the future, competitive
stock traders who analyze the data on prices and price        intelligence activities will become standard. The wide
movements to determine the best investments. These            availability of information on the Web makes compet-
stock traders have the same data as other traders, but        itive intelligence more accessible to medium-size and
analysis of the data separates them from others.              small firms. Software tools to analyze and disseminate
Another example is the Japanese automobile indus-             intelligence also make it easier to implement compet-
try’s analysis of the U.S.-automobile market in the           itive intelligence tools. The process of competitive
1970s. High gasoline prices and smaller families cre-         intelligence is outlined in the following steps:
ated a demand in the United States for smaller, more
                                                               1. Setting intelligence objectives (i.e., designing
fuel-efficient cars. Japanese automakers employed
                                                                  the requirements)
competitive intelligence methods to determine this
trend and then made manufacturing decisions based              2. Collecting and organizing data about the
on it, beating the U.S. Big Three to market with high             industry and competitors
quality, fuel-efficient cars. Another example of suc-           3. Analyzing and interpreting the data
cessful use of competitive intelligence is AT&T’s
database of in-company experts. Part of this service is        4. Disseminating the intelligence
the monitoring of companies with which their own              SETTING THE OBJECTIVES.          A clear statement of the
employees are most interested. This led to some early         intelligence needs of the organization should be outlined
insights of emerging competitors. A final example is           by management. If this step is ignored, the competitive
how Wal-Mart stores studied problems Sears had with           intelligence department will be bogged down with too
distribution, and built a state-of-the art distribution       much information and possibly distracted by ad-hoc
system so that Wal-Mart customers were not frustrated         requests for data. This step is necessary regardless of
by out-of-stock items, as were Sears’s customers.             where in the organization the competitive intelligence
                                                              department is located. Some corporations have compet-
                                                              itive intelligence report directly to the CEO; in others, it
ETHICAL METHODS                                               is located in marketing or in research and development.
                                                              The role of any competitive intelligence program should
     Competitive intelligence is not spying on the            be driven by the needs of the corporation, especially
competition. It has been associated in the past with the      areas that have key performance consequences.
political and military intelligence used during the Cold
War era. Because of this association, many people             COLLECTING AND ORGANIZING THE DATA. The online
think that competitive intelligence uses illegal, shady,      revolution has enhanced ease in collecting and obtain-
or unethical means to gather information about com-           ing information, but the competitive intelligence expert
petitors. Visions of wiretapping, bribing competitor’s        must constantly be alert to new sources and places for
employees, or stealing information come to mind.              finding information. The most obvious data collection
This is not true today. Such techniques can damage            sources include trade magazine and newspaper arti-
the reputation and image of corporations and are not          cles, company Web sites, newswires, chat forums, and
worth the risk. SCIP takes a strong position on the           Web search engines. Free information is available on
importance of ethics and developed a code of ethics           industries via census data on government Web pages.
for members. Note the words, “legal and ethical,” and         Similarly, free public company information from U.S.
the emphasis on retrieving data from “open sources.”          Securities and Exchange Commission (SEC) filings,
Competitive intelligence experts use openly-available         such as the 10-K and 10-Q report, can be easily obtained


                                                                                                                                                        93
                                                              E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                  on the Web. These corporate reports yield detailed            intelligence as a needed business function. Porter’s




     COMPETITIVE INTELLIGENCE
                                  financial and product information and also identify            books outline the tools for analyzing competitors and
                                  mergers, acquisitions, and legal proceedings against          evaluating their strengths and weaknesses, which can
                                  the company. Other channels for fee-based data are            then lead to opportunities. Leonard Fuld’s work
                                  information aggregators such as Factiva, Lexis Nexis,         helped revolutionize and define the field. Fuld is a key
                                  Hoover’s Online, MergentOnline and Standard and               writer and the founder of a major consulting firm that
                                  Poors’s databases. Analyst reports and market research        trains people in competitive intelligence methods and
                                  reports from companies such as Jupiter, Forrester             techniques.
                                  Research, and Frost and Sullivan, although usually
                                  quite expensive to acquire, provide detailed analyses
                                  on companies and industries.                                  THE COMPETITIVE INTELLIGENCE EXPERT

                                  ANALYZING AND INTERPRETING THE DATA.            Analysis           The competitive intelligence expert or analyst
                                  and interpretation is the real core of competitive intel-     usually has a strong business background, combined
                                  ligence. Collected data must be transformed into “qual-       with experience in the company. Likely candidates for
                                  itative” information (i.e., intelligence). One way to         the assignment are generally research-oriented people
                                  analyze data obtained from the Web is to use a Spider.        in sales, marketing, or research and development.
                                  There are competitive intelligence Spiders available          Combining research skills with communication and
                                  that index and categorize documents found though              writing skills is essential. Because of the research ori-
                                  Web searchers. Whether a Spider is used or not, the           entation of the job, people with library or information
                                  next step is to interpret the information. Lehmann and        science backgrounds in the company are logical
                                  Winer outline four important aspects competitive intel-       choices.
                                  ligence professionals need to interpret about competi-
                                  tors: their current and future objectives, their current      ORGANIZATIONS
                                  strategies, their resources, and their future strategies.
                                  Once this assessment is complete, competitive intelli-        THE SOCIETY OF COMPETITIVE INTELLIGENCE PRO-
                                  gence professionals measure their companies in com-           FESSIONALS (SCIP).     The Society of Competitive
                                  parison to competitors; this is known as benchmarking.        Intelligence Professionals (SCIP), established in 1986,
                                  From the benchmarking process, trend identification            is a global, nonprofit, membership organization for
                                  and prediction can be made.                                   everyone involved in creating and managing business
                                                                                                knowledge. The mission of SCIP is to enhance the
                                  DISSEMINATING THE INFORMATION.         Dissemination is       skills of knowledge professionals to help their compa-
                                  the delivery of current, real-time intelligence to the        nies achieve and maintain a competitive advantage.
                                  decision makers in the firm at the time they need it.          SCIP publishes the following influential periodicals:
                                  Timely dissemination is essential if the intelligence is
                                  to be perceived as trustworthy. The current philosophy           • Competitive Intelligence Magazine. A
                                  is that delivering to people at all levels in the organi-          bimonthly publication with articles by peers
                                  zation enhances competitive advantages.                            in the competitive intelligence profession.
                                                                                                   • Journal of Competitive Intelligence and
                                                                                                     Management. A quarterly, international, blind-
                                  HISTORY AND LITERATURE                                             refereed journal covering all aspects of com-
                                                                                                     petitive intelligence and related management
                                         Competitive intelligence is, in part, an outgrowth          fields. This journal seeks to further the devel-
                                  of the military intelligence field. Within corporations,            opment of competitive intelligence and to
                                  it is a direct outgrowth, or evolution, of market research,        encourage greater understanding of the man-
                                  which uses investigation (especially understanding the             agement of competition.
                                  strategies, capabilities, and options of competitors or          • Competitive Intelligence Review. A journal
                                  rivals) to examine the marketplace. Examining mar-                 archive for peer-reviewed research and case
                                  keting research books at the time competitive intelli-             studies focused on the practice of competi-
                                  gence emerged helps identify the shift. Market research            tive intelligence. Archive includes contents
                                  differs from competitive intelligence in that it is usu-           listings, summaries, and articles from past
                                  ally conducted when a new product is in the planning               journal issues, dated 1990 to 2001.
                                  or development stage and often utilizes surveys, focus           • SCIP Online. SCIP’s email newsletter, sent
                                  groups, and other research tools to study the market.              free to all members twice a month.
                                  Competitive intelligence requires a more continuous
                                  and structured scanning of competitors and the envi-          COMPETITIVE INTELLIGENCE DIVISION OF THE SPECIAL
                                  ronment. William T. Kelly’s work introduced the field          LIBRARIES ASSOCIATION (SLA). This organization was
                                  of intelligence in his 1965 text. Michael E. Porter’s         formed in 2004 as an association for corporate librari-
                                  books, aimed at practitioners, identify competitive           ans and information professionals who have evolved


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                                E N C Y C L O P E D I A       O F   M A N A G E M E N T
beyond collecting and managing information, to pro-             Kahaner, Larry. Competitive Intelligence: How To Gather,




                                                                                                                                   COMPLEXITY THEORY
vide examination of data that can help their organiza-          Analyze, and Use Information to Move Your Business to the Top.
                                                                New York: Simon & Schuster, 1997.
tions succeed. The Competitive Intelligence Division
encompasses all aspects of competitive intelligence             Kelley, William Thomas. Marketing Intelligence: The
including: (1) planning, (2) identifying decision               Management of Marketing Information. London: Staples P.,
makers’s intelligence needs, (3) collecting and analyz-         1968.
ing information, (4) disseminating intelligence prod-           Lehmann, Donald R., and Russell S. Winer. Analysis for
ucts and services, (5) evaluating intelligence activities,      Marketing Planning. 4th ed. Boston: Irwin, 1997.
(6) promoting intelligence services among a client
                                                                Miller, Jerry, et al. Millennium Intelligence: Understanding and
base, and (7) additional industry-specific issues.               Conducting Competitive Intelligence in the Digital Age.
Competitive Intelligence Division members concen-               Medford, NJ: CyberAge Books, 2000.
trate on developing their competitive intelligence
                                                                Porter, Michael E. Competitive Advantage: Creating and
skills to assist them in functioning more effectively as
                                                                Sustaining Superior Performance. New York: Free Press, 1985.
intelligence professionals within their respective
organizations.                                                  ———. Competitive Strategy: Techniques for Analyzing
                                                                Industries and Competitors. New York: Free Press, 1980.
FULD   & COMPANY, INC. Fuld & Company, Inc., is a
                                                                Snow, C.C. ed. Strategy, Organization Design and Human
research and consulting firm in the field of business             Resources Management. Greenwich, CT: JAI Press, 1989.
and competitive intelligence. This company, founded
by Leonard Fuld in 1979, is a full-service business             Tyson, Kirk W.M. The Complete Guide to Competitive
                                                                Intelligence. 2nd ed. Chicago: Leading Edge Pub., 2002.
intelligence firm providing: (1) research and analysis,
(2) strategic consulting, (3) business intelligence             Vibert, Conor, ed. Introduction to Online Competitive
process consulting, and (4) training to help clients            Intelligence Research: Search Strategies, Research Case Study,
understand the external competitive environment.                Research Problems, and Data Source Evaluations and Reviews.
                                                                Mason, Ohio: Thomson/Texere, 2004.
THE INSTITUTE FOR STRATEGY AND COMPETITIVENESS
                                                                Walle, Alf H. “From Marketing Research to Competitive
AT HARVARD SCHOOL OF BUSINESS.          This Institute, led     Intelligence: Useful Generalization or Loss of Focus?”
by Michael E. Porter, studies competition and its impli-        Management Decision 37, no. 5/6 (1999): 519–525.
cations for company strategy; the competitiveness of
                                                                West, Chris. Competitive Intelligence. New York: Palgrave,
nations, regions and cities; and solutions to social prob-      2001.
lems. Based at Harvard Business School, the Institute is
dedicated to extending the research pioneered by
Professor Porter and disseminating it to scholars and
practitioners on a global basis.
                                              Judith M. Nixon

                                                                 COMPLEXITY THEORY
FURTHER READING:

Boncella, Robert J. “Competitive Intelligence on the Web.”            The basic premise of complexity theory is that
Communications of AIS 12 (2003): 327–340.                       there is a hidden order to the behavior (and evolution)
Burwell, Helen P. Online Competitive Intelligence: Increase     of complex systems, whether that system is a national
Your Profits Using Cyber-Intelligence. Tempe, AZ: Facts on       economy, an ecosystem, an organization, or a produc-
Demand Press, 1999.                                             tion line. In business and finance, complexity theory
Chen, Hsinchun. “CI Spider.” Decision Support Systems 34, no.
                                                                places its focus on the ways a factory or company
1 (2002): 1–17.                                                 resemble an ecosystem or market, rather than a machine
                                                                “whose parts and functions have been plucked out in
“Corporate CI ‘Eagles.’” Competitive Intelligence Magazine,     advance,” according to David Berreby. He maintains
January 1998. Available from <http://www.scip.org>.
                                                                that the organization of systems is no accident, but “the
Fuld, Leonard M. Competitive Intelligence: How To Get It; How   results of laws of nature that we don’t yet fully under-
To Use It. New York: Wiley, 1985.                               stand.” Once understood, managers will learn that if left
———. Monitoring The Competition: Find Out What’s Really         to function on their own, systems organize themselves,
Going on Over There. New York: Wiley, 1988.                     bringing about “order for free.”
———. The New Competitor Intelligence: The Complete                    Proponents of complexity theory believe specific
Resource for Finding, Analyzing, and Using Information about    traits are shared by most complex systems. These sys-
Your Competitors. New York: Wiley, 1995.                        tems are the combination of many independent actors
Gilad, Benjamin, and Tamar Gilad. The Business Intelligence     behaving as a single unit. These actors respond to their
System: A New Tool for Competitive Advantage. New York:         environment, much as stock markets respond to news
American Management Association, 1988.                          of changing economies, genes respond to natural


                                                                                                                                                       95
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                           selection, or the human brain responds to sensory input.    I suspect that the fate of all complex adapting systems




     COMPLEXITY THEORY
                           All of these “networks” also act as a single system made    in the biosphere—from single cells to economies—is
                           of many interacting components. Complexity theory           to evolve to a natural state between order and chaos, a
                           attempts to explain how even millions of independent        grand compromise between structure and surprise.”
                           actors can unintentionally demonstrate patterned behav-     Kauffman’s theories originated during his pre-medi-
                           ior and properties that, while present in the overall       cine days, when his studies of genetics began to
                           system, are not present in any individual component of      inspire questions about DNA and genetic structures.
                           that system.                                                Kauffman felt that there had to be some kind of built-
                                                                                       in order, that trial and error was too much of a long
                                Complexity theory was founded on researchers’s
                                                                                       shot to be responsible for the perfect biomolecular
                           attempts to rationalize the behavior of large and com-
                                                                                       structure of the human genome.
                           plex systems, believing they cannot be explained by
                           usual rules of nature. It attempts to discover how the           Other researchers with a stronger focus on the
                           many disparate elements of a system work with each          business side of complexity theory are Howard Sherman
                           other to shape the system and its outcomes, as well as      and Ron Schultz, authors of Open Boundaries and fel-
                           how each component changes over time. It is also one        lows at Santa Fe Center for Emergent Strategies in
                           way to express the perceived domination of systems          collaboration with the Santa Fe Institute. They believe
                           over their myriad smaller influences.                        business today is faster and nonlinear (effects are not
                                                                                       proportional to their causes), and that “experts” cannot
                                While complexity theory is strikingly similar to
                                                                                       predict which products or companies will succeed.
                           chaos theory, complexity theorists maintain that
                                                                                       Sherman and Schultz assert that competitive advan-
                           chaos, by itself, does not account for the coherence of
                                                                                       tage is fleeting, and that change can rapidly turn assets
                           self-organizing, complex systems. Rather, complex
                                                                                       into dead weight.
                           systems reside at the edge of chaos—the actors or
                           components of a system are never locked in to a par-             Another major contributor to complexity theory
                           ticular position or role within the system, but they        is John Holland, a computer scientist and professor at
                           never fall completely out of control. As M. Mitchell        the University of Michigan. Holland designed the
                           Waldrop states in Complexity, “The edge of chaos is         genetic algorithm based on the idea that components
                           the constantly shifting battle zone between stagnation      of complex systems can be broken down into building
                           and anarchy, the one place where a complex system           blocks, whose characteristics can then be represented
                           can be spontaneous, adaptive, and alive.”                   in code. In simulations, units of code recombine to
                                                                                       make “offspring”; the best of these offspring are
                                 Sherry Turkle, author of Life on the Screen and       allowed to reproduce, while the worst are discarded.
                           professor of sociology of science at the Massachusetts      As the algorithm works, better code evolves, and the
                           Institute of Technology (MIT), feels that technology        results can be translated into real-world applications.
                           has helped bring the issues of complexity theory to
                           life. She asserts that computers helped persuade us
                           that knowing all the parts of a system (or a computer)
                                                                                       DETAILS OF COMPLEXITY THEORY
                           cannot give anyone the ability to foresee all the com-
                           plexity that can arise as all of those parts interact.           A complex system is defined as one in which
                                                                                       many independent agents interact with each other in
                                                                                       multiple (sometimes infinite) ways. This variety of
                                                                                       actors also allows for the “spontaneous self-organiza-
                           ORIGINS OF COMPLEXITY THEORY
                                                                                       tion” that sometimes takes place in a system. This self-
                                Much of the research on complexity theory orig-        organization occurs without anyone being in charge or
                           inates from the Sante Fe Institute in New Mexico, a         planning the organization. Rather, it is more a result of
                           mecca for those studying complexity theory. George          organisms/agents constantly adapting to each other.
                           A. Cowan, head of research at the Los Alamos nuclear        The complex systems are also adaptive (i.e., they
                           laboratory, founded the Santa Fe Institute in the mid-      always adapt in a way that benefits them). As an anal-
                           1980s. Scientists at the institute claim that through the   ogy, Waldrop suggests analogy to the way the human
                           study of complexity theory, one can see not only the        brain adapts to learn from experience.
                           laws of chaos, but also those of order—through which
                                                                                            Another important concept in complexity theory
                           a powerful explanation for how any collection of com-
                                                                                       is that there is no master controller of any system.
                           ponents will organize itself can be generated.
                                                                                       Rather, coherent system behavior is generated by the
                               One of complexity theory’s leading proponents is        competition and cooperation between actors that is
                           Stuart Kauffman, author of At Home in the Universe:         always present. And the components of a system do
                           The Search for the Laws of Self-Organization and            have different levels of organization—like an organi-
                           Complexity. Also a member of the Santa Fe Institute,        zation made up of divisions, which contain different
                           Kauffman states, “Life exists at the edge of chaos          departments, which are in comprised of different


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                         E N C Y C L O P E D I A      O F   M A N A G E M E N T
workers. But the important differentiation from this             No intelligence from on high can match the




                                                                                                                           COMPLEXITY THEORY
“organization,” made by John Holland in Complexity,              quality of solutions to market problems that
is that “complex adaptive systems are constantly revis-          arise from players who are constantly commu-
ing and rearranging their building blocks as they gain           nicating with one another on the ground level.
experience. A firm will promote individuals who do                The invisible hand of the marketplace should
well and (more rarely) will reshuffle its organizational          displace the visible hand of the manager. The
chart for greater efficiency. Countries will make new             markets can determine where one team or ini-
trading agreements or realign themselves into whole              tiative or company ends and another begins.
new alliances.”                                                  Managers interfere at their peril.
      Another important part of complexity theory is
                                                                  Efforts to downplay management, as related by
its assumption that there are principles underlying all
                                                            Hout, claim that “management as we have known it is
“emergent properties,” or traits that emerge from the
                                                            too cumbersome for today’s fast, unpredictable pace. A
interactions of many different actors. David Berreby
                                                            new kind of company wins now. The best management
uses the analogy of an ant colony that switches to a
                                                            models don’t adapt to the new economy; they emerge
better food source. No individual ant made the deci-
                                                            from it. It’s no longer the survival of the fittest; it’s the
sion; it was a result of their interactions.
                                                            arrival of the fittest.” Even so, putting the ideas of com-
     One of the defining characteristics of complex          plexity theory to work does not mean management need
systems is the inability to predict the outcome of any      rest on its laurels. Hout asserts that organizations’s lead-
given change to the system. Because a system depends        ers retain an obligation to formulate a guiding vision for
on so many intricate interactions, the number of possi-     the company, provide effective leadership, express and
ble reactions to any given change is infinite. Minor         encourage strong values and organizational beliefs, and
events can have enormous consequences because of            provide avenues for open communication. Managers
the chain of reactions they might incite. Conversely,       need to manage the way that accident and law interact,
major changes may have an almost insignificant effect        knowing how and where to push to keep the system
on the system as a whole. Because of this, strong control   from neither descending into chaos nor becoming
of any complex system may be impossible. While it           rigidly ordered.
may have order, no one absolutely governs a complex
system.                                                          Letting an organization self-organize does not
                                                            negate the need for strategy. Rather, it means that orga-
     Scientists create computer simulations that enable     nizational strategy should evolve based on feedback
them to better identify emerging patterns in a system.      and change as it occurs. By establishing a corporate
They also write modification programs allowing               strategy first, an organization defines itself through
system components to adapt to changes in the envi-          conditions that were previously in place, and becomes
ronment without the absolute necessity of radical           non-adaptive to continuously-evolving market condi-
changes to the overall structure. Computers can use         tions. Sherman and Schultz recommend the “try some-
these simulations to design production schedules and        thing and see what happens” mentality.
optimize assembly line performance.


                                                            CONTRARY BELIEFS
COMPLEXITY THEORY IN BUSINESS
                                                                  The idea that allowing complex systems to self-
     Complexity theory is used in business as a way to
                                                            organize will yield the best solutions has validity, but
encourage innovative thinking and real-time responses
                                                            complexity theory is not a panacea for all organizations.
to change by allowing business units to self-organize.
                                                            The notions of complexity theory assume that people in
Sherman and Schultz (as related by Hout) argue that
                                                            these companies are enthusiastic, intelligent, and can
modern business moves in a nonlinear fashion, with
                                                            effectively work in teams—requiring less management
no continuity in the flow of competitive events, except
                                                            than workers in more traditional, hierarchical, rigidly-
when observed from hindsight. In order to effectively
                                                            controlled environments. Unfortunately, however, these
put complexity theory to work, however, organization
                                                            fast-growing, evolutionary companies with bright,
leaders need to give up rigid control of these systems
                                                            ambitious workers may need more management rather
from above. Far more can be learned by stepping back
                                                            than less. Companies that are shaped and reshaped on
from the day-to-day running of the organization and
                                                            such a frequent basis—constantly adapting to a chang-
watching for emergent properties and organizational
                                                            ing business environment—lose some of the stability
patterns. Those conditions or patterns that bring about
                                                            found at traditional corporate giants such as the indus-
the best solutions should be preserved whenever pos-
                                                            trial and automotive behemoths.
sible. Managers also need to allow organizations to
evolve in response to ongoing messages from cus-                 The modern corporation has a lot at stake. There
tomers. As Hout states:                                     are difficulties in teamwork and collaboration, with


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                                                            E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                                 potential issues such as nonperforming team members,              FURTHER READING:




     COMPUTER-AIDED DESIGN AND MANUFACTURING
                                                 personality conflicts, opposing business styles, and the
                                                                                                                   Battram, Arthur. Navigating Complexity: The Essential Guide to
                                                 effects of stress on job performance. Organizational              Complexity Theory in Business and Management. London: Spiro
                                                 leaders need to effectively manage personnel and job              Press, 2002.
                                                 performance, reward and groom talented performers,
                                                                                                                   Caldart, Adrián A., and Joan E. Ricart. “Corporate Strategy
                                                 develop business relationships and networks, resolve
                                                                                                                   Revisited: A View from Complexity Theory.” European
                                                 conflict, and divest the company of nonperformers                  Management Review 1, no. 1 (2004): 96–104.
                                                 who may be holding the company back from adapt-
                                                 ing well to emerging trends and technologies. Other               Casti, John L. Complexification: Explaining a Paradoxical
                                                                                                                   World Through the Science of Surprise. New York:
                                                 business leaders see emergent strategy as a problem,
                                                                                                                   HarperCollins, 1994.
                                                 rather than a cure. According to Alan Kay, head of
                                                 research and development at Disney Imagineering,                  Hout, Thomas M. “Books in Review: Are Managers Obsolete?”
                                                 “Most businesses do not move so fast that foresight,              Harvard Business Review 77, no. 2 (1999): 161–168.
                                                 commitment, preemption, deterrence, and other tra-                Okes, Duke. “Complexity Theory Simplifies Choices.” Quality
                                                 ditional elements of strategy have lost their ability to          Progress 36, no. 7 (2003): 35–38.
                                                 build value. The best way to predict the future is to             Olsen, Edwin E., Glenda H. Eoyang, Richard Beckhard, and
                                                 invent it.”                                                       Peter Vaill. Facilitating Organization Change: Lessons from
                                                                                                                   Complexity Science. San Francisco: Pfeiffer, 2001.
                                                      Complexity theory and the Santa Fe Institute repre-
                                                 sent common ground where scientists and theorists from            Sherman, Howard J., and Ralph Schultz. Open Boundaries:
                                                                                                                   Creating Business Innovation Through Complexity. Reading,
                                                 disciplines such as economics, physics, business man-
                                                                                                                   MA: Perseus Books, 1998.
                                                 agement, and computer science can research behavior of
                                                 complex systems and their various components. The                 Waldrop, Mitchell M. Complexity: The Emerging Science at the
                                                 complexity paradigm also offers a means of applying               Edge of Order and Chaos. New York: Simon and Schuster, 1992.
                                                 modern theories that an organization is more like a living
                                                 organism than a machine. Organizations are conceptual-
                                                 ized as evolving in response to complex interactions
                                                 within and without the system.
                                                                                                                    COMPUTER-AIDED DESIGN
                                                      Ron Schultz, co-author of Open Boundaries,
                                                                                                                    AND MANUFACTURING
                                                 explains that complexity theory “is about how our
                                                 ideas shape our behaviors. If our ideas about the world                Computer-aided design (CAD), also known as
                                                 in which we operate are machine-like and mechanical,              computer-aided design and drafting (CADD), involves
                                                 our behaviors will be very different than if our ideas            the entire spectrum of drawing with the aid of a com-
                                                 are based on that of complex adaptive systems, which              puter—from straight lines to custom animation. In
                                                 are more evolutionary and organic.” Rather than fol-              practice, CAD refers to software for the design of engi-
                                                 lowing more linear approaches to corporate decision               neering and architectural solutions, complete with two-
                                                 making, complexity theory offers organizations a way              and three-dimensional modeling capabilities.
                                                 to thrive on the ambiguity and unpredictability that
                                                                                                                        Computer-aided manufacturing (CAM) involves
                                                 characterize modern business.
                                                                                                                   the use of computers to aid in any manufacturing
                                                      Some of complexity theory’s leading experts,                 process, including flexible manufacturing and robot-
                                                 such as J. Doyne Farmer and Norman Packard, make                  ics. Often outputs from CAD systems serve as inputs
                                                 a living advising companies and practically applying              to CAM systems. When these two systems work in
                                                 the ideas behind complexity theory to business areas              conjunction, the result is called CADCAM, and
                                                 such as corporate investment. Organizations putting               becomes part of a firm’s computer-integrated manu-
                                                 the theory into practice include Xerox’s Palo Alto                facturing (CIM) process.
                                                 Research Center (PARC), Applied Biosystems, and                        CADCAM systems are intended to assist in many,
                                                 the United States Marine Corps. Complexity theory                 if not all, of the steps of a typical product life cycle.
                                                 offers companies the opportunity to create new mar-               The product life cycle involves a design phase and an
                                                 kets and establish new ways to spread emerging                    implementation phase. The design phase includes
                                                 knowledge throughout the company—enabling the                     identifying the design needs and specifications; per-
                                                 organization, as a whole, to respond faster and better            forming a feasibility study, design documentation,
                                                 to ongoing change.                                                evaluation, analysis, and optimization; and completing
                                                                                                                   the design itself. The implementation phase includes
                                                 SEE ALSO: Chaos Theory; Managing Change; Organizational           process planning, production planning, quality control,
                                                           Behavior; Trends in Organizational Change               packaging, marketing, and shipping.
                                                                                              Wendy H. Mason            CAD systems can help with most of the design
                                                                                  Revised by Hal P. Kirkwood, Jr   phase processes, while CAM systems can help with


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most of the implementation processes. The contribu-         in a solid model of an object. Feature representation




                                                                                                                       COMPUTER-AIDED DESIGN AND MANUFACTURING
tions of CAD and CAM systems are described below.           helps the user define parts. It also simplifies CAD soft-
                                                            ware design because features are easier to parameterize
                                                            than explicit interactions. Objects built from features
CAD SYSTEMS                                                 are called parts. Since a product being designed is com-
                                                            posed of several parts, many CAD systems include a
     CAD systems are a specialized form of graphics         useful assembly model, in which the parts are refer-
software, and thus must adhere to basic principles of       enced and their geometric and functional relationships
graphics programming. All graphics programs work            are stored.
in the context of a graphics device (e.g., a window on
                                                                 CAD models can be manipulated and viewed in a
a monitor, a printer, or a plotter). Graphics images are
                                                            wide variety of contexts. They can be viewed from any
drawn in relation to a 2-D or 3-D coordinate system,
                                                            angle and perspective desired, broken apart or sliced,
of which there are several types.
                                                            and even put through simulation tests to analyze for
      A device coordinate system is 2-D and maps            strengths and defects of design. Parts can be moved
images directly to the points (pixels) of the hardware      within their coordinate systems via rotation operations,
device. In order to facilitate device-independent graph-    which provide different perspectives of a part, and
ics, a virtual device coordinate system abstracts the 2-D   translation, which allows the part to move to different
points into a logical framework.                            locations in the view space. In addition, CAD systems
     Of course, the devices being designed are gener-       provide valuable dimensioning functionality, which
ally 3-D objects, which also require a world coordinate     assigns size values based on the designer’s drawing.
system for representing the space in which the objects           The movement of these images is a form of ani-
reside, and a model coordinate system for representing      mation. Often, CAD systems include virtual reality
each of the objects in that space. CAD software             technology, which produces animated images that
includes algorithms for projecting the 3-D models onto      simulate a real-world interaction with the object being
the 2-D device coordinate systems and vice versa.           designed. For example, if the object is a building, the
     CAD systems include several primitive drawing          virtual reality system may allow you to visualize the
functions, including lines, polygons, circles and arcs,     scene as if you were walking around the inside and the
rectangles, and other simple shapes. From these prim-       outside of the building, enabling you to dynamically
itives, 3-D composites can be constructed, and include      view the building from a multitude of perspectives. In
cubes, pyramids, cones, wedges, cylinders, and spheres.     order to produce realistic effects, the system must
These shapes can be drawn in any color, and filled           depict the expected effects of light reflecting on the
with solid colors or other patterns (called hatching). In   surface as it moves through the user’s view space. This
addition, basic shapes can be altered by filleting           process is called rendering.
(rounding) or chamfering (line segmentation).                    Rendering technology includes facilities for
     Based on the manipulation of basic shapes,             shading, reflection, and ray tracing. This technique,
designers construct models of objects. A skeletal wire      which is also used in sophisticated video games, pro-
form model is a 3-D representation that shows all           vides a realistic image of the object and often helps
edges and features as lines. A more realistic-looking       users make decisions prior to investing money in
model is called a solid model, which is a 3-D model of      building construction. Some virtual reality interfaces
the object being designed as a unitary whole showing        involve more than just visual stimuli. In fact, they
no hidden features. The solid model represents a            allow the designer to be completely immersed in the
closed volume. It includes surface information and          virtual environment, experiencing kinesthetic interac-
data determining if the closed volume contains other        tion with the designed device.
objects or features.                                             Some CAD systems go beyond assisting in parts
     Solid modeling involves functions for creating 3-      design and actually include functionality for testing a
D shapes, combining shapes (via union, intersection,        product against stresses in the environment. Using a
and difference operations), sweeping (translational         technique called finite element method (FEM), these
and rotational) for converting simple shapes into more      systems determine stress, deformation, heat transfer,
complex ones, skinning (for creation of surface tex-        magnetic field distribution, fluid flow, and other con-
tures), and various boundary creation functions. Solid      tinuous field problems.
modeling also includes parameterization, in which the            Finite element analysis is not concerned with all
CAD system maintains a set of relationships between         design details, so instead of the complete solid model
the components of an object so that changes can be          a mesh is used. Mesh generation involves computing a
propagated to following constructions.                      set of simple elements giving a good approximation of
      Common shapes are constructed into features           the designed part. A good meshing must result in an
(e.g., slots, holes, pockets), which can then be included   analytical model of sufficient precision for the FEM


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                                                            E N C Y C L O P E D I A      O F   M A N A G E M E N T
                                                  computation, but with a minimum number of elements               Process planning is a manufacturing function that




      COMPUTER-AIDED DESIGN AND MANUFACTURING
                                                  in order to avoid unnecessary complexity.                   establishes which processes and parameters are to be
                                                                                                              used, as well as the machines performing these
                                                       In addition to FEM, some CAD systems provide           processes. This often involves preparing detailed work
                                                  a variety of optimization techniques, including simu-       instructions to machines for assembling or manufac-
                                                  lated annealing and genetic algorithms (borrowed            turing parts. Computer-aided process planning
                                                  from the field of artificial intelligence). These meth-       (CAPP) systems help to automate the planning
                                                  ods help to improve the shape, thickness, and other         process by developing, based on the family classifica-
                                                  parameters of a designed object while satisfying user-      tion of the part being produced, a sequence of opera-
                                                  defined constraints (e.g., allowable stress levels or cost   tions required for producing this part (sometimes
                                                  limitations).                                               called a routing), together with text descriptions of the
                                                       When a designer uses CAD to develop a product          work to be done at each step in the sequence.
                                                  design, this data is stored into a CAD database. CAD        Sometimes these process plans are constructed based
                                                  systems allow for a design process in which objects         on data from the CAD databases.
                                                  are composed of sub-objects, which are composed of               Process planning is a difficult scheduling prob-
                                                  smaller components, and so on. Thus CAD databases           lem. For a complex manufacturing procedure, there
                                                  tend to be object-oriented. Since CAD designs may           could be a huge number of possible permutations of
                                                  need to be used in CAM systems, or shared with other        tasks in a process requiring the use of sophisticated
                                                  CAD designers using a variety of software packages,         optimization methods to obtain the best process plan.
                                                  most CAD packages ensure that their databases con-          Techniques such as genetic algorithms and heuristic
                                                  form to one of the standard CAD data formats. One           search (based on artificial intelligence) are often
                                                  such standard, developed by the American National           employed to solve this problem.
                                                  Standards Institute (ANSI), is called Initial Graphics
                                                  Exchange Specification (IGES).                                    The most common CAM application is numeri-
                                                                                                              cal control (NC), in which programmed instructions
                                                       Another data format is DXF, which is used by the       control machine tools that grind, cut, mill, punch, or
                                                  popular AutoCAD software and is becoming a de facto         bend raw stock into finished products. Often the NC
                                                  industry standard. The capability to convert from one       inputs specifications from a CAD database, together
                                                  file format to another is called data exchange, and is a     with additional information from the machine tool
                                                  common feature of many CAD software packages.               operator. A typical NC machine tool includes a
                                                                                                              machine control unit (MCU) and the machine tool
                                                        Modern CAD systems offer a number of advan-           itself. The MCU includes a data processing unit
                                                  tages to designers and companies. For example, they         (DPU), which reads and decodes instructions from a
                                                  enable users to save time, money, and other resources       part program, and a control loop unit (CLU), which
                                                  by automatically generating standard components of a        converts the instructions into control signals and oper-
                                                  design, allowing the reuse of previously designed           ates the drive mechanisms of the machine tool.
                                                  components, and facilitating design modification.
                                                  Such systems also provide for the verification of                 The part program is a set of statements that con-
                                                  designs against specifications, the simulation and test-     tain geometric information about the part and motion
                                                  ing of designs, and the output of designs and engi-         information about how the cutting tool should move
                                                  neering documentation directly to manufacturing             with respect to the workpiece. Cutting speed, feed
                                                  facilities. While some designers complain that the lim-     rate, and other information are also specified to meet
                                                  itations of CAD systems sometimes serve to curb their       the required part tolerances. Part programming is an
                                                  creativity, there is no doubt that they have become an      entire technical discipline in itself, requiring a sophis-
                                                  indispensable tool in electrical, mechanical, and archi-    ticated programming language and coordinate system
                                                  tectural design.                                            reference points. Sometimes parts programs can be
                                                                                                              generated automatically from CAD databases, where
                                                                                                              the geometric and functional specifications of the
                                                                                                              CAD design automatically translate into the parts pro-
                                                  CAM SYSTEMS                                                 gram instructions.
                                                       The manufacturing process includes process                  Numerical control systems are evolving into a
                                                  planning, production planning (involving tool pro-          more sophisticated technology called rapid prototyping
                                                  curement, materials ordering, and numerical control         and manufacturing (RP&M). This technology involves
                                                  programming), production, quality control, packag-          three steps: forming cross sections of the objects to be
                                                  ing, marketing, and shipping. CAM systems assist in         manufactured, laying cross sections layer by layer, and
                                                  all but the last two steps of this process. In CAM sys-     combining the layers. This is a tool-less approach to
                                                  tems, the computer interfaces directly or indirectly        manufacturing made possible by the availability of
                                                  with the plant’s production resources.                      solid modeling CAD systems. RP&M is often used for


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evaluating designs, verifying functional specifications,    and short lead time. CADCAM systems apply com-




                                                                                                                            COMPUTER-INTEGRATED MANUFACTURING
and reverse engineering.                                   puting technology to make these requirements a real-
                                                           ity, and promise to exert a major influence on design,
      Of course, machine control systems are often used
                                                           engineering, and manufacturing processes for the
in conjunction with robotics technology, making use of
                                                           foreseeable future.
artificial intelligence and computer controlled humanoid
physical capabilities (e.g., dexterity, movement, and      SEE ALSO: Computer-Integrated Manufacturing; Manufacturing
vision). These “steel-collar workers” increase produc-               Resources Planning; Robotics
tivity and reduce costs by replacing human workers in                                                        Michel Mitri
repetitive, mundane, and hazardous environments.                                             Revised by Rhoda L. Wilburn

     CAM systems often include components for
automating the quality control function. This involves     FURTHER READING:
evaluating product and process specifications, testing
                                                           Bean, Robert. “CAD Should Enable Design Creativity:
incoming materials and outgoing products, and testing
                                                           Engineers Need CAD Tools as Easy as the ‘Paper Napkin.’”
the production process in progress. Quality control        Design News, 10 January 2005.
systems often measure the products that are coming
off the assembly line to ensure that they are meeting      Grabowski, Ralph, and R. Huber. The Successful CAD
                                                           Manager’s Handbook. Albany, NY: Delmar Publishers, 1994.
the tolerance specifications established in the CAD
databases. They produce exception reports for the          Lee, Kunwoo. Principles of CAD/CAM/CAE Systems. Reading,
assembly line managers when products are not meet-         MA: Addison Wesley, 1999.
ing specifications.                                         McMahon, Chris, and Jimmie Browne. CAD/CAM: Principles,
                                                           Practice, and Manufacturing Management. 2d ed. Upper Saddle
     In summary, CAM systems increase manufactur-
                                                           River, NJ: Prentice-Hall, 1999.
ing efficiency by simplifying and automating produc-
tion processes, improve the utilization of production      Port, Otis. “Design Tools Move into the Fast Lane.” Business
facilities, reduce investment in production inventories,   Week, 2 June 2003.
and ultimately improve customer service by drasti-         Sheh, Mike. “A Quantum Leap in Engineering Design.”
cally reducing out-of-stock situations.                    Business Week, 2 June 2003.




PUTTING IT ALL TOGETHER: COMPUTER
INTEGRATED MANUFACTURING
     In a CADCAM system, a part is designed on the
                                                            COMPUTER-AIDED MANUFACTURING
computer (via CAD) then transmitted directly to the com-
puter-driven machine tools that manufacture the part
                                                           SEE:        Computer-Aided Design and Manufacturing
via CAM. Within this process, there will be many other
computerized steps along the way. The entire realm of
design, material handling, manufacturing, and packag-
ing is often referred to as computer-integrated manu-
facturing (CIM).
     CIM includes all aspects of CAD and CAM, as            COMPUTER-INTEGRATED
well as inventory management. To keep costs down,           MANUFACTURING
companies have a strong motivation to minimize stock
volumes in their warehouses. Just-in-time (JIT) inven-          Computer-integrated manufacturing (CIM) is the
tory policies are becoming the norm. To facilitate this,   use of computer techniques to integrate manufactur-
CIM includes material requirements planning (MRP)          ing activities. These activities encompass all functions
as part of its overall configuration. MRP systems help      necessary to translate customer needs into a final prod-
to plan the types and quantities of materials that will    uct. CIM starts with the development of a product con-
be needed for the manufacturing process. The merger        cept that may exist in the marketing organization;
of MRP with CAM’s production scheduling and shop           includes product design and specification, usually the
floor control is called manufacturing resource plan-        responsibility of an engineering organization; and
ning (MRPII). Thus, the merger of MRP with                 extends through production into delivery and after-
CADCAM systems integrates the production and the           sales activities that reside in a field service or sales
inventory control functions of an organization.            organization. Integration of these activities requires
                                                           that accurate information be available when needed
     Today’s industries cannot survive unless they can     and in the format required by the person or group
introduce new products with high quality, low cost,        requesting the data. Data may come directly from the


                                                                                                                                                                101
                                                           E N C Y C L O P E D I A        O F    M A N A G E M E N T
                                            originating source or through an intermediate data-     mechanized machines that were driven and controlled




      COMPUTER-INTEGRATED MANUFACTURING
                                            base according to Jorgensen and Krause. CIM systems     by cams and complex devices such as automatic screw
                                            have emerged as a result of the developments in man-    machines. Process manufacturers made use of these
                                            ufacturing and computer technology. According to        cam-driven controllers and limit switches for opera-
                                            Kusiak the computer plays an important role integrat-   tions such as heat treating, filling and canning, bot-
                                            ing the following functional areas of a CIM system:     tling, and weaving states Robert Thacker of the
                                               • Part and product design. There are four phases     Society of Manufacturing Engineers. The historical
                                                 that are crucial in part and product design.       approach to automation focused on individual activi-
                                                 They include preliminary design, refinement,        ties that result in the incorporation of large amounts of
                                                 analysis, and implementation.                      computerized activities. In the 1980s, managing infor-
                                                                                                    mation became an important issue.
                                               • Tool and fixture design. Tooling engineers
                                                 using computer-aided design (CAD) tools to
                                                 develop the systems or fixtures that produce
                                                                                                    CIM BENEFITS
                                                 the parts.
                                               • Process planning. The process planner designs           According to the U.S. National Research Council,
                                                 a plan that outlines the routes, operations,       CIM improves production productivity by 40 to 70
                                                 machines, and tools required. He or she also       percent, as well as enhances engineering productivity
                                                 attempts to minimize cost, manufacturing           and quality. CIM can also decrease design costs by 15
                                                 time, and machine idle time while maximiz-         to 30 percent, reduce overall lead time by 20 to 60 per-
                                                 ing productivity and quality.                      cent, and cut work-in-process inventory by 30 to 60
                                                                                                    percent. Managers who use CIM believe that there is a
                                               • Programming of numerically controlled              direct relationship between the efficiency of informa-
                                                 machines and material handling systems.            tion management and the efficiency and the overall
                                               • Production planning. There are two concepts        effectiveness of the manufacturing enterprise. Thacker’s
                                                 used here including materials requirement          view is that many CIM programs focus attention on
                                                 planning (MRP) and machine loading and             the efficiency of information management and the
                                                 scheduling.                                        problems that come with it instead of developing new
                                               • Machining. This is part of the actual manu-        and more sophisticated manufacturing machines,
                                                 facturing process, including turning,              material transformation processes, manufacturing
                                                 drilling, and face milling for metal removal       management processes, and production facilities.
                                                 operations.                                        Computer-integrated manufacturing can be applied to
                                                                                                    nonmanufacturing organizations by changing the man-
                                               • Assembly. After they are manufactured,             ufacturing focus toward a service orientation. CIM and
                                                 parts and subassemblies are put together           Job Definition Format (JDF) are becoming increas-
                                                 with other parts to create a finished product       ingly beneficial to printing companies to streamline
                                                 or subassembly.                                    their production process.
                                               • Maintenance. Computers can monitor, inter-
                                                 vene, and even correct machine malfunctions
                                                 as well as quality issues within manufacturing.    THE CIM PLAN
                                               • Quality control. This involves three steps
                                                                                                         A plan for a CIM system should provide a
                                                 including system design, parameter design,
                                                                                                    description of projects for automating activities,
                                                 and tolerance design.
                                                                                                    assisting activities with technology, and integrating
                                               • Inspection. This stage determines if there         the information flows among these activities. The
                                                 have been errors and quality issues during         planning process includes six crucial steps:
                                                 the manufacturing of the product.
                                                                                                       • project activation
                                               • Storage and retrieval. These tasks involve
                                                 raw materials, work-in-process inventory,             • business assessment
                                                 finished goods, and equipment.                         • business modeling
                                                                                                       • needs analysis
                                            CIM ORIGIN
                                                                                                       • conceptual design
                                                 The term computer-integrated manufacturing
                                                                                                       • CIM plan consolidation and economic
                                            was coined by Dr. Joseph Harrington in his 1974 book
                                                                                                         analysis
                                            bearing that name. Until the 1970s, the most aggres-
                                            sive and successful automation was seen in production        This process, according to Jorgensen and Krause,
                                            operations. Discrete parts manufacturing used highly    also acts as a building block for the future of the


102
                                          E N C Y C L O P E D I A     O F    M A N A G E M E N T
organization integrating these functions in order to       the business, how to develop and connect an applica-




                                                                                                                             COMPUTER-INTEGRATED MANUFACTURING
diminish them as an impediment to integration.             tion, communications, and database network.
                                                                The physical plan contains the actual require-
                                                           ments for setting the CIM system in place. These
CONCEPTUAL DESIGN
                                                           requirements can include equipment such as hard-
     The conceptual design of a CIM environment            ware, software, and work cells. The plan is a layout of
consists of individual systems that fulfill the required    where the computers, work stations, robots, applica-
capabilities, an overall architecture incorporating the    tions, and databases are located in order to optimize
systems and the communication links, and a migration       their use within the CIM and within the company.
path from the current systems architecture. Functional     According to Thacker, sooner or later it becomes the
requirements must be compared to the current inven-        CIM implementation plan for the enterprise.
tory of systems and available technology to determine           CIM is challenged by technical and cultural
system availability. Jorgensen and Krause state that       boundaries. The technical challenge is first compli-
the following techniques are used in satisfying system     cated by the varying applications involved. Thacker
requirements:                                              claims that it is also complicated by the number of ven-
   • exploiting unused and available functional            dors that the CIM serves as well as incompatibility
     capabilities of current systems;                      problems among systems and lack of standards for data
                                                           storage, formatting, and communications. Companies
   • identifying functional capabilities available         must also have people who are well-trained in the var-
     for, but not installed on, current in-house           ious aspects of CIM. They must be able to understand
     systems;                                              the applications, technology, and communications and
   • locating systems that are commercially                integration requirements of the technology.
     available but not currently in-house;                       CIM cultural problems begin within the division
   • recognizing state-of-the-art technology that          of functional units within the company such as engi-
     is not immediately commercially available             neering design, manufacturing engineering, process
     on a system;                                          planning, marketing, finance, operations, information
                                                           systems, materials control, field service, distribution,
   • foreseeing functional capabilities of systems
                                                           quality, and production planning. CIM requires these
     on the technical horizon; and
                                                           functional units to act as whole and not separate enti-
   • determining whether the requirement is                ties. The planning process represents a significant com-
     beyond the capabilities of systems on the             mitment by the company implementing it. Although the
     technical horizon.                                    costs of implementing the environment are substantial, the
                                                           benefits once the system is in place greatly outweigh
                                                           the costs. The implementation process should ensure
MANAGING A CIM                                             that there is a common goal and a common understand-
     Managers must understand that short-term goals        ing of the company’s objectives and that the priority
must support the long-term goal of implementing a          functions are being accomplished by all areas of the
CIM. Top management establishes long-term goals            company according to Jorgensen and Krause.
for the company and envisions the general direction of     SEE ALSO: Computer-Aided Design and Manufacturing;
the company. The middle management then creates                      Flexible Manufacturing; Management Information
objectives to achieve this goal. Upper management                    Systems; Robotics
sees the focus as being very broad, whereas middle                                                          John C. Koch
management must have a more narrow focus.                                                     Revised by Hal Kirkwood, Jr.
     In deciding to implement a CIM, there are three
perspectives that must be considered: the conceptual       FURTHER READING:
plan, the logical plan, and the physical plan. The con-
                                                           Cagle, E. “Awaiting the Big Payoff.” Printing Impressions 47,
ceptual plan is used to demonstrate a knowledgeable        no. 6 (November 2004): 54–56.
understanding of the elements of CIM and how they are
                                                           Kusiak, Andrew. Intelligent Manufacturing Systems. Englewood
related and managed. Thacker goes on to say that the       Cliffs, NJ: Prentice Hall, 1990.
conceptual plan states that by integrating the elements
                                                           Mahmood, T. “Real-time Computer Integrated Manufacturing.”
of a business, a manager will produce results better and   Circuits Assembly 6, no. 3 (March 1995): 58–60.
faster than those same elements working independently.
                                                           Rehg, James A., and Henry W. Kraebber. Computer Integrated
     The logical plan organizes the functional ele-        Manufacturing. Upper Saddle River, NJ: Pearson Prentice Hall,
ments and logically demonstrates the relationships         2004.
and dependencies between the elements. Thacker             Ruey-Chyi, W., C. Ruey-Shun, and C.R. Fan. “Design an
details that it further shows how to plan and control      Intelligent CIM System Based on Data Mining Technology for


                                                                                                                                                                 103
                                                           E N C Y C L O P E D I A        O F    M A N A G E M E N T
                            New Manufacturing Processes.” International Journal of




      COMPUTER NETWORKS
                            Materials and Product Technology 2, no. 6 (2004): 487–504.                         Figure 1
                                                                                                           A Bus Topology
                            Thacker, Robert M. A New CIM Model. Dearborn, MI: Society
                            of Manufacturing Engineers, 1989.




                                                                                                    Backbone


                             COMPUTER NETWORKS

                                  For most businesses in the United States, comput-
                            ers are an essential part of their daily operations. Many
                            businesses have come to rely on their computers to
                            store and track information, communicate with cus-
                            tomers and suppliers, design and manufacture prod-
                                                                                                                   Nodes
                            ucts, and more. It is not uncommon for businesses of
                            all sizes to have multiple computers in an office. Often,
                            these computers are connected through networks that          TOKEN RING. With a ring configuration, each node is
                            allow information to be shared between computers.            connected sequentially along the network backbone.
                                                                                         However, unlike the bus configuration, the end of the
                                 A computer network, as defined in the Merriam-           network connects to the first node, forming a circuit.
                            Webster dictionary, is “a system of computers,               Nodes on a token ring take turns sending and receiv-
                            peripherals, terminals, and databases connected by           ing information. In the token ring topology, a token
                            communications lines.” In other words, networks are          travels along the backbone with the information being
                            used to connect computers to other computers, as well        sent. The node with the token sends information to the
                            as to other devices such as printers, scanners, and fax      next node along the backbone. The receiving node
                            machines. Networks can be used to connect devices in         reads the information addressed to it and then passes
                            the same building or they can be used to connect             the token and any additional information to the next
                            devices that are miles apart. Perhaps the most well          node. This continues until the token and data make it
                            known network in use today is the Internet. Many indi-       back to the first node in the network.
                            viduals and businesses around the world connect to
                            the Internet on a daily basis. Other examples of net-
                            works include library card catalogs, the displays of                               Figure 2
                            flight arrival and departure times used at airports, and                     A Token Ring Topology
                            credit card readers at retail stores.

                                                                                                 Node                             Backbone
                            NETWORK CONFIGURATIONS
                                 Networks can be set up in a number of different
                            ways depending on the number of devices, the dis-
                            tances between those devices, the transmission speed
                            requirements, and other factors. The most popular
                            configurations, or topologies, include the bus, token
                            ring, star, and star bus topologies.

                            BUS. With a bus configuration, each node is con-
                            nected sequentially along the network backbone. A
                            node is any device connected to the network, such as a
                            computer, printer, or scanner. Backbone is the term
                            used to describe the main cables to which the network
                            segments are connected. Resistors are placed at each         STAR.   With a star configuration, each node is con-
                            end of the network to ensure that the signal is termi-       nected to a central hub via network segments. When
                            nated when it reaches the end. When one node sends           one node sends information to another node, the infor-
                            information to another node through the network, the         mation passes through the hub. The hub does not filter
                            information travels along the backbone until it reaches      or route the information in any way; it simply serves as
                            the desired receiving node.                                  a connector between network segments.


104
                          E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                                        LOCAL AREA NETWORKS AND WIDE




                                                                                                                     COMPUTER NETWORKS
                     Figure 3                           AREA NETWORKS
                 A Star Topology
                                                              A local area network (LAN), as the name implies,
                                                        is a network that connects devices that are local, or rel-
                                                        atively close to each other. Nodes on a LAN are usu-
                                                        ally in the same building. A wide area network (WAN),
                                                        on the other hand, is used to connect nodes that could
                                                        be miles apart. LANs generally transmit data faster
                                                        than WANs, and they are usually more reliable. Fiber-
                           Hub          Segments        optic cables are used for both LANs and WANs.
                                                        ETHERNET NETWORKING.        Ethernet is a LAN protocol
  Node                                                  (i.e., a set of rules that governs communications)
                                                        developed in the mid-1970s by Bob Metcalfe and
                                                        David Boggs at Xerox Corporation’s Palo Alto
                                                        Research Center. Today, Ethernet is the most widely
                                                        used network technology in the world. The original
                                                        Ethernet used a bus topology and provided for transfer
                                                        rates of up to 10 million bits per second (Mbps). This
                                                        Ethernet specification was modified slightly and
STAR BUS. With a star bus configuration, the hubs of     became the Institute of Electrical and Electronics
multiple star networks are connected together via the   Engineering (IEEE) 802.3 standard, which helped
backbone. This is the most common network configu-       solidify Ethernet as a widely-recognized, open inter-
ration in use.                                          national standard. The IEEE 802.3 specifies the phys-
                                                        ical networking interface and lower layers of software
                                                        usually associated with Ethernet. Vendors ship an esti-
                                                        mated total of 300 million Ethernet ports each year.
                     Figure 4
               A Star Bus Topology                           Although networks using Ethernet protocol gen-
                                                        erally connect devices over short distances, technolog-
                                                        ical advances now allow Ethernet to connect devices
                                                        that are miles apart. Ethernet is widely accepted and
                                                        largely installed because it is simple and efficient and
                                                        because network interface cards (NIC) for Ethernet can
                                                        be easily installed in personal computers, workstations,
                                                        or high-end computers. Furthermore, it can run on a
                           Hub          Segments        variety of media, including fiber optics, twisted-pair,
                                                        cable, and wireless connections.

                                                        REPEATERS.     When Ethernet was first implemented,
                                                        most people used a copper coaxial cable. However,
                                                        the maximum length of this cable was 500 meters,
              Backbone                                  which was not long enough for some networks. To
                                                        address this problem, network engineers used
                                                        repeaters to connect several Ethernet segments.

                                                        BRIDGES. Bridges provide a simple means for con-
                                                        necting LANs. A bridge is a device that connects phys-
                                                        ically separate LAN segments (such as different
                                                        Ethernet cables) into one logical LAN segment. There
                           Hub                          are four categories of bridges: transparent, source
                                        Segments
                                                        routing, encapsulating, and translating. Transparent
                                                        bridges are used for Ethernet, whereas source routing
  Node                                                  bridges are used for token ring networks. Encapsulating
                                                        bridges connect two segments of the same media (such
                                                        as token ring to token ring) over a medium. The receiv-
                                                        ing bridge removes the envelope, checks the destina-
                                                        tion, and sends the frame to the destination device.
                                                        Translating bridges are used to connect different types


                                                                                                                                         105
                                                        E N C Y C L O P E D I A       O F   M A N A G E M E N T
                            of network media such as Ethernet and FDDI (fiber             support), a switch allows each node to use the full




      COMPUTER NETWORKS
                            distributed data interface). FDDI is a set of protocols      bandwidth.
                            that uses a modified form of the token-passing method
                                                                                              In a fully switched network, each node is con-
                            over fiber-optic cable.
                                                                                         nected to a dedicated segment of the network, which
                            ROUTERS.    LAN segments joined by a router are phys-        in turn is connected to a switch. Each switch supports
                            ically and logically separate networks. In contrast to a     multiple dedicated segments. When a node sends a
                            bridge, when multiple network segments are joined by         signal, the switch picks it up and sends it through the
                            a router they maintain their separate logical identities     appropriate segment to the receiving node. Ethernet
                            (network address space), but constitute an internetwork.     protocol in a fully switched environment does not
                                                                                         require collision detection because the switches can
                                  Routers specify the destination and route for each     send and receive data simultaneously, thus eliminating
                            packet, and they can be used to direct packets and inter-    the chance of collision.
                            connect a variety of network architectures. A major dif-
                            ference between a bridge and a router is that the bridge          Most companies do not use fully switched net-
                            distinguishes packets by source and destination address,     works, as the cost of replacing each hub with a switch
                            whereas a router can also distinguish packets by proto-      can be expensive. Instead, most use a mixed network
                            col type. Routers provide for the interfaces to WANs         configuration in which a combination of hubs and
                            such as frame relay and packet switching services. Some      switches are used. For example, all of the computers
                            new bridge products have added router capabilities;          in each department may be connected to their own
                            hence, the practical distinction is becoming blurred,        departmental hub, and then all of the departmental
                            giving rise to the term “brouter.”                           hubs may be connected to a switch.
                                 Routers can also be used to limit access to a net-
                            work by the type of application (e.g., allowing elec-
                            tronic mail to pass, but not file transfer traffic). This      ETHERNET ADVANCEMENTS
                            capability provides a measure of security for the net-
                            work, and is used extensively when creating firewalls.             The dominance of Ethernet as a LAN technology
                            Firewalls are implemented to secure an organization’s        for desktop PCs has made it difficult for other technolo-
                            network when it is linked to the Internet.                   gies to gain acceptance. Ethernet technology continues
                                                                                         to evolve as Ethernet vendors develop techniques to
                            SWITCHES. Ethernet communicates across the net-              increase bandwidth and the support of more complex
                            work using the Carrier Sense Multiple Access with            network configurations. For example, Fast Ethernet
                            Collision Detection (CSMA/CD) process. A protocol            technology was developed to provide for increased
                            using CSMA/CD monitors, or listens to, the media for         bandwidth of up to 100 Mbps, ten times faster than the
                            network traffic, or information traveling through the         original Ethernet. When migrating from Ethernet to
                            network from one node to another. If a node does not         Fast Ethernet, a company may need to change network
                            sense any traffic, it will send frames or packets of          interface cards and the central wiring hub, and it may
                            information onto the media. A network frame is like a        also need to upgrade the wiring.
                            mailed letter. The letter is put in an envelope that has a
                                                                                               In May 1996 eleven network vendors (including
                            return address and the address of its destination. Data
                                                                                         Cisco Systems and Sun Microsystems) formed the
                            are like the letter and the frame is like the envelope.
                                                                                         Gigabit Ethernet Alliance. The goal of the alliance was
                            The data is placed in the frame and the frame has the
                                                                                         to develop a standard for 1 Gigabit per second (Gbps)
                            addressing information and error-checking code. Each
                                                                                         Ethernet transmissions. Soon thereafter, network ven-
                            protocol has its distinctive frame. The device contin-
                                                                                         dors were successful in designing networks that
                            ues sending until it finishes or until a collision occurs.
                                                                                         achieved the 1 Gbps transmissions goal, and in 2002 the
                                 A collision happens when more than one device           IEEE approved the fibre-only 10 Gbps Ethernet.
                            transmits data at the same time. When a collision            Throughout 2004 great progress was made in the devel-
                            occurs, each device waits a random amount of time            opment of l0 Gbps Ethernet technology and its infra-
                            before trying to retransmit the data. By having each         structure. The increased speed of the 10 Gbps Ethernet
                            node wait a random amount of time, there is only a           in terms of data storage, system backup, teleconferenc-
                            slim chance that the two devices will send out the data      ing, and surveillance systems will prove beneficial to
                            at the same time again. The collision detection and          blade servers, networked enterprise switches, video
                            frame retransmission are part of the protocol.               servers, and other applications. The higher density,
                                 One way to reduce the number of collisions is to        reduced power, and improved cost-effectiveness appeal
                            add switches to the network. A switch, like a hub, con-      to all of the major system developers.
                            nects nodes to each other. However, while a hub                   Another development in Ethernet technology is
                            requires each node to share the bandwidth (i.e., the         power over Ethernet (POE), which the IEEE published
                            amount of simultaneous data traffic the network can           in July 2003 as the 802.3af standard. PowerDsine


106
                          E N C Y C L O P E D I A      O F    M A N A G E M E N T
                                                                                                                                                   COMPUTER NETWORKS
                                                                    Table 1
                                                      Common Line Designations

        Line Designation                                             Speed                                        Equivalents
      DS0 (Digital Signal Zero)                                64 Kbps
      ISDN                                                     16 Kbps or 128 Kbps                           Two DS0 lines plus signaling
      T1                                                       1.544 Mbps                                    24 DS0 lines
      T3                                                       43.232 Mbps                                   28 T1 lines
      OC3 (Optical Carrier 3)                                  155 Mbps                                      84 T1 lines
      OC12                                                     622 Mbps                                      4 OC3 lines
      OC48                                                     2.5 Gbps                                      4 OC12 lines
      OC192                                                    9.6 Gbps                                      4 OC48 lines

 Adapted from “How does a T1 line work?” How Stuff Works, Inc., 2005. Available from http://computer.howstuffworks.com/question372.htm




came up with the idea for POE in 1998 and convinced                           higher speed and extreme reliability make this a popu-
3Com, Intel, Mitel, National Semiconductor, and                               lar choice for many medium- to large-sized businesses.
Nortel Networks to promote this technology. One of                            T1 lines can handle hundreds of users simultaneously
the main purposes of POE is to standardize connec-                            for general browsing. However, it cannot handle that
tions to portable and remote devices that no longer                           many users simultaneously downloading large files,
need AC line power. POE can be used for a number of                           such as MP3 files or video files. For very large compa-
applications, including digital cameras, security sys-                        nies, T1 lines may not be sufficient.
tems, and smart sensors.
                                                                              CABLE MODEMS.      A cable modem is a device used to
                                                                              connect a computer to a coaxial cable, such as the kind
NETWORK REMOTE ACCESS DEVICES                                                 used for cable television, in order to access online
                                                                              services. This device modulates and demodulates sig-
     Network remote access devices are used to con-
                                                                              nals like a conventional modem. In addition, a cable
nect remote (off-site) users to an organization’s net-
                                                                              modem functions like a router designed for installa-
work. There are many options available. See Table 1 for
                                                                              tion on cable television networks. The most popular
some of the common line designations.
                                                                              application for cable modems is high-speed Internet
                                                                              access, which provides much faster service than stan-
MODEMS.     A modem is a device that converts data                            dard telephone-line modems, thus enabling users to
from digital to analog signals so it can travel over the                      access streaming audio, video, and other services.
public switched telephone network (PSTN) to its des-
tination. Once the signal reaches its destination, the
                                                                              WIRELESS TECHNOLOGY. Mobile telephones, laptop
modem converts it back to digital. As the PSTN was
designed to carry voice (analog signals), it is not the                       computers, and handheld computers are so affordable
best option for carrying data. Digital data networks                          that they have become a part of everyday life for many
(DDNs) are replacing the PSTN. DDNs are used to                               people and businesses around the world. Advances in
transmit both data and digitized voice. Because of                            wireless technology have made it possible for people to
their slow data transmission speeds, modems are no                            access networks without having to physically connect
longer used in most business environments.                                    to the network through cables. For example, it is not
                                                                              uncommon for business travelers to access networks on
                                                                              their wireless fidelity (Wi-Fi)-enabled laptop PCs or
ISDN.  Integrated services digital network (ISDN) is a
                                                                              handheld computers while waiting at an airport.
switched, high-speed data service. ISDN is an inter-
national telecommunications standard for transmit-                                 Bluetooth is a wireless standard developed by a
ting voice, video, and data over digital lines running                        group of electronics manufacturers to allow any elec-
at 64 Kbps, and reaches 1.5 Mbps in North America                             tronic device—such as computers, cell phones, key-
and 2 Mbps in Europe. ISDN uses the same copper                               boards, and headphones—to find and connect to other
telephone lines as modems do, but at a rate approxi-                          devices without any direct action from the user. The
mately five times faster. Furthermore, it is extremely                         devices find one another and transmit data without any
reliable.                                                                     user input at all. Because Bluetooth technology is
                                                                              inexpensive and does not require the user to do any-
T1.  A T1 line carries data approximately 60 times                            thing special to make it work, it is gaining wide use
faster than a modem on a normal telephone line. The                           around the world.


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                                                                              E N C Y C L O P E D I A               O F      M A N A G E M E N T
                                 Wireless products are now affordable and very




      COMPUTER SECURITY
                            reliable. With wireless connections, it is possible for
                            people to move around while connected to a network.               COMPUTER SECURITY
                            This could be very useful in environments such as
                            hospitals, so that health care professionals could                    Computers have become such a big part of
                            access patient records from various locations around             everyday life—both at work and at home—for many
                            the campus. Many home and small-business users also              people around the world. These days, computers are
                            use wireless networks to avoid the need to route                 an essential part of practically every type of business,
                            twisted-pair wiring around their premises. In fact,              from small, home-based businesses to large multi-
                            domestic, small-office, and home-office networking                 national corporations. In the business world, compa-
                            accounts for most of the wireless Ethernet equipment             nies use computers to store information, design and
                            sales in the United States.                                      manufacture products, run complex calculations, etc.
                                                                                             On a personal level, many people rely on their home
                                 In summary, computers connected with commu-
                                                                                             computers to store important information, watch
                            nications networks improve productivity and prof-
                                                                                             movies, play games, communicate with others, and
                            itability by enabling people and organizations to
                                                                                             shop over the Internet.
                            develop closer relationships with coworkers, cus-
                            tomers, business partners, and other people in general.                Because so much valuable information is stored
                                                                                             on computers, a new type of criminal has emerged in
                            SEE ALSO: Computer Security; The Internet                        recent years. These criminals, sometimes called “hack-
                                                                            Badie N. Farah   ers” or “scammers,” use their computers to “break in”
                                                               Revised by Rhoda L. Wilburn   to companies’ or other people’s computers to steal
                                                                                             information, such as credit card numbers. The inci-
                                                                                             dence of identity theft is on the rise as computer crim-
                                                                                             inals find increasingly sophisticated ways to obtain
                            FURTHER READING:
                                                                                             personal information and use it in malicious ways.
                            Black, Uyless. ATM Volume III Internetworking with ATM.          However, not all hackers are interested in stealing
                            Upper Saddle River, NJ: Prentice Hall, 1999.                     information. Instead, some send viruses through web-
                                                                                             sites or email to damage the receivers’ computers.
                            FitzGerald, J., and A. Dennis. Business Data Communications
                            and Networking. 6th ed. New York: John Wiley & Sons, 1999.
                                                                                             RECORDS PROTECTION
                            Franklin, Curt. “How Bluetooth Works.” How Stuff Works, Inc.
                            Available from <http://electronics.howstuffworks.com/bluetooth         Information stored in a computer system is sub-
                            .htm>.
                                                                                             ject to a variety of threats. It was not long ago that the
                            Horn, Keith. “10-Gbit Ethernet Is Ready, along with its          biggest concern about computer data was protecting it
                            Customers.” Electronic Design, 23 August 2004, 18.               from physical disasters such as floods and fires, tech-
                                                                                             nology failures, and human errors. Most organizations
                            “How Does a T1 Line Work?” How Stuff Works, Inc. Available       develop contingency plans whereby they examine the
                            from <http://computer.howstuffworks.com/question372.htm>.
                                                                                             possibilities of losing computer operations, and for-
                            Marsh, David. “Ethernet Keeps Pumping the Data.” EDN, 14         mulate procedures for minimizing damage. A disaster
                            October 2004, 63.                                                recovery plan is typically adopted to outline how the
                                                                                             organization will carry on business in the event of a
                            ———. “Pow