This Document Contains Chapters 5 to 6 CHAPTER 5 Small Business, Entrepreneurship, and Franchises 5.1 A WORD FROM THE AUTHORS Our study of small business—the final chapter in Part 2, “Business Ownership and Entrepreneurship”—is a logical sequel to Chapter 4, “Choosing a Form of Business Ownership.” Nine out of 10 business firms in the United States are classified as “small,” and many business students will be employed in small companies or will become entrepreneurs themselves one day. Accordingly, we begin Chapter 5 with a profile of the small business. We define small business, list the industries that are widely represented in small firms, analyze some of the characteristics of the entrepreneurs who start small businesses, and explain why small businesses fail. The importance of small business in our economy is acknowledged with respect to four main areas: small businesses are sources of technical innovation, employers, spurs to competition, and specialized marketers. Following a discussion of the advantages and disadvantages of smallness, we emphasize the importance of a business plan and then turn our attention to the Small Business Administration, noting the various forms of assistance it offers to small firms. Finally, we examine franchising, an increasingly popular form of small-business ownership. We use an extended illustration to explain how a franchise originates, and we discuss the advantages and disadvantages to both franchisor and franchisee. We conclude the chapter with global perspectives in small businesses. 5.2 TRANSITION GUIDE New in Chapter 5: Small Business, Entrepreneurship, and Franchises • A new Inside Business feature describes how Locker Lookz’s co-founders designed and marketed a limited line of locker decorations, all styled for middle-school tastes, and priced at $10 and up. • An expanded discussion in the “Small Business: A Profile” section highlights the importance of small businesses in our economy. • “The Small-Business Sector” section has been revised and updated with the latest available information. • Table 5.2, “Establishing a Business Around the World,” has been deleted. • A new Personal Apps cautions would-be entrepreneurs to watch how successful entrepreneurs manage their companies. • The “Women as Small-Business Owners” section has been updated. • A new Career Success feature, “Is Entrepreneurship in Your Future?,” describes how prospective entrepreneurs can assess whether they have the drive, temperament, and attitude to be their own boss. • Table 5.2, “U.S. Business Start-ups, Closures, and Bankruptcies,” has been updated with the latest available data from the SBA. • A new Sustaining the Planet feature describes how Green Plus works with smaller businesses to make them more sustainable through certification, education, networking, and recognition. • A new Entrepreneurial Success feature, “Students by Day, Entrepreneurs by Night,” describes how a growing number of students are becoming entrepreneurs even before they graduate. • A new Personal Apps feature describes how writing a business plan can help you think through many of the issues that can trip up entrepreneurs. • The information about SCORE has been updated. • The Going for Success feature, “Building a Business with SCORE’s Help,” has been deleted. • The material in the “Small-Business Development Centers” section has been updated. • The information about SBICs has been updated. • A discussion about the National Black McDonald’s Operators Association has now been included. • A new Return to Inside Business featuring Locker Lookz has been provided at the end of the chapter. • A new Case 5.2 describes Warby Parker’s business vision for selling affordable prescription eyeglasses. • The Building Skills for Career Success section contains a new Social Media Exercise. • The Exploring the Internet feature in Building Skills for Career Success has been deleted. 5.3 QUICK REFERENCE GUIDE Instructor Resource Location Transition Guide IM, pp. 165–166 Learning Objectives Textbook, p. 133; IM, p. 168 Brief Chapter Outline IM, pp. 168–169 Comprehensive Lecture Outline IM, pp. 170–177 At Issue: Should fast-food restaurants be curtailed from national franchising? IM, p. 177 Career Success Is Entrepreneurship in Your Future? Textbook, p.139 Sustaining the Planet Green Citizenship on a Smaller Scale Textbook, p. 142 Entrepreneurial Success Students by Day. Entrepreneurs by Night Textbook, p. 145 Inside Business Locker Lookz Looks for Higher Sales Textbook, p. 134 Return to Inside Business Textbook, p. 156 Questions and Suggested Answers, IM, p. 178 Marginal Key Terms List Textbook, p. 157 Review Questions Textbook, p. 158 Questions and Suggested Answers, IM, pp. 178–181 Discussion Questions Textbook, p. 158 Questions and Suggested Answers, IM, p. 181 Video Case 5.1 (Murray’s Cheese: More Cheese Please) and Questions Textbook, pp. 158–159 Questions and Suggested Answers, IM, p. 182 Case 5.2 (Warby Parker’s Business Vision) and Questions Textbook, p. 159 Questions and Suggested Answers, IM, pp. 182–183 Building Skills for Career Success Textbook, p. 160 Suggested Answers, IM, pp. 183–185 IM Quiz I & Quiz II IM, pp. 186–188 Answers, IM, p. 188 Classroom Exercises IM, pp. 189–190 5.4 LEARNING OBJECTIVES After studying this chapter, students should be able to: 1. Define what a small business is and recognize the fields in which small businesses are concentrated. 2. Identify the people who start small businesses and the reasons why some succeed and many fail. 3. Assess the contributions of small businesses to our economy. 4. Describe the advantages and disadvantages of operating a small business. 5. Explain how the Small Business Administration helps small businesses. 6. Appraise the concept and types of franchising. 7. Analyze the growth of franchising and its advantages and disadvantages. 5.5 BRIEF CHAPTER OUTLINE I. Small Business: A Profile A. The Small-Business Sector B. Industries That Attract Small Businesses 1. Distribution Industries 2. Service Industries 3. Production Industries II. The People in Small Businesses: The Entrepreneurs A. Characteristics of Entrepreneurs B. Other Personal Factors C. Motivation D. Women as Small-Business Owners E. Teenagers as Small-Business Owners F. Why Some Entrepreneurs and Small Businesses Fail III. The Importance of Small Businesses in Our Economy A. Providing Technical Innovation B. Providing Employment C. Providing Competition D. Filling Needs of Society and Other Businesses IV. The Pros and Cons of Smallness A. Advantages of Small Business 1. Personal Relationships with Customers and Employees 2. Ability to Adapt to Change 3. Simplified Record Keeping 4. Independence 5. Other Advantages B. Disadvantages of Small Business 1. Risk of Failure 2. Limited Potential 3. Limited Ability to Raise Capital C. The Importance of a Business Plan D. Components of a Business Plan V. The Small Business Administration A. SBA Management Assistance 1. Management Courses and Workshops 2. SCORE B. Help for Minority-Owned Small Businesses 1. Small-Business Institutes 2. Small-Business Development Centers 3. SBA Publications C. SBA Financial Assistance 1. Regular Business Loans 2. Small-Business Investment Companies D. State of Small Business During the Recession VI. Franchising A. What Is Franchising? B. Types of Franchising VII. The Growth of Franchising A. Are Franchises Successful? B. Advantages of Franchising 1. To the Franchisor 2. To the Franchisee C. Disadvantages of Franchising VIII. Global Perspectives in Small Business 5.6 COMPREHENSIVE LECTURE OUTLINE I. SMALL BUSINESS: A PROFILE. According to the Small Business Administration (SBA), a small business is “one which is independently owned and operated for profit and is not dominant in its field.” Table 5.1 provides the SBA small-business size standards for various industries. The SBA periodically revises and simplifies its small-business size regulations. Most small firms have annual sales well below the maximum limits in the SBA guidelines. Teaching Tip: The “So You Think You Know Entrepreneurs?” fun quiz can be used here. A. The Small-Business Sector. In the United States, it typically takes less than a week and $500 to establish a business as a legal entity. There are about 27.5 million businesses in this country. Approximately 18,469 of these employ more than 500 workers—enough to be considered large. The makeup of the small-business sector is constantly changing. While some businesses are starting, others are closing shop. According to a recent study, 69 percent of new businesses survive at least two years, about 50 percent survive at least five years, and 31 percent survive at least ten years. The primary reason for these failures is mismanagement resulting from a lack of business know-how. B. Industries That Attract Small Businesses. Small enterprise ranges from corner newspaper vending to the development of optical fibers. The following industries are dominated by small businesses: • Real estate, rental, and leasing industries: 74 percent • Businesses in the leisure and hospitality services: 61 percent • Construction industries: 86 percent The various kinds of businesses are generally grouped into three broad categories: 1. Distribution Industries. This category includes retailing, wholesaling, transportation, and communications—industries that are concerned with the movement of goods from producers to consumers—and it accounts for about 33 percent of all small businesses. 2. Service Industries. This category accounts for about 48 percent of all small businesses. Of these, about 75 percent provide nonfinancial services, and about 8 percent offer financial services. An increasing number of self-employed Americans are running service businesses from home. 3. Production Industries. This category includes the construction, mining, and manufacturing industries. It accounts for about 19 percent of all small businesses. II. The People in Small Businesses: The Entrepreneurs. The United States is quite entrepreneurial when compared with other countries. Small businesses are typically managed by the people who started and own them. More than 70 percent of Americans would prefer being an entrepreneur to working for someone else. This compares with 46 percent of adults in Western Europe and 58 percent of adults in Canada. A. Characteristics of Entrepreneurs. The most important characteristic of entrepreneurs is entrepreneurial spirit. B. Other Personal Factors. Researchers have suggested the following personal factors as reasons why individuals go into business: 1. Independence 2. A desire to determine one’s own destiny 3. A willingness to find and accept a challenge 4. Researchers believe that people whose families have been in business are most apt to start and run their own businesses. Teaching Tip: Ask students how many of them have parents who run their own small business and if they are interested in small business themselves. 5. The age factor is important, too. More than 70 percent of people who start their own business are between 24 and 44 years old. (See Figure 5.1.) C. Motivation. There must be some motivation to start a business. This may come from losing a job or having an idea for a new product, or it can be the result of commercializing a hobby. D. Women as Small-Business Owners 1. Women make up 51 percent of the U.S. population. According to the SBA, women owned at least 50 percent of all small businesses in 2008. 2. Women own 66 percent of the home-based businesses in the United States, and the number of men in home-based businesses is growing rapidly. 3. 7.8 million women-owned businesses in the United States provide almost 7.6 million jobs and generate $1.2 trillion in sales. 4. Women-owned businesses have proven that they are more successful. They are financially sound, and their risk of failure is lower than average. 5. Just over half of small businesses are home based, and 91 percent have no employees. E. Teenagers as Small-Business Owners. High-tech teen entrepreneurship is definitely exploding. 1. Young entrepreneurs must possess “the five P’s of entrepreneurship”—planning, persistence, patience, people, and profit. 2. Knowledge and ability—especially management ability—are probably the most important factors involved. F. Why Some Entrepreneurs and Small Businesses Fail. Small businesses are prone to failure. Capital, management, and planning are the key ingredients in the survival of a small business. 1. Small businesses can experience a number of money-related problems, such as insufficient capital for start-up and continuous cash-flow obstacles. 2. Money, time, personnel, and inventory need to be effectively managed if a small business is to succeed. 3. Success and expansion sometimes lead to problems. The entrepreneur must plan carefully and adjust competently to potentially new and disruptive situations. III. THE IMPORTANCE OF SMALL BUSINESSES IN OUR ECONOMY A. Providing Technical Innovation. Studies show that the incidence of innovation among small-business workers is significantly higher than among workers in large businesses. Small firms produce two and a half times as many innovations as large firms relative to the number of persons employed. Small firms employ 40 percent of all high-tech workers and produce 13 to 14 more patents per employee than large patenting firms. B. Providing Employment. Small businesses represent 99.7 percent of all employers, employ over one-half of the private workforce, and provide about two-thirds of the net new jobs added to our economy. During the 2008–2009 recession, businesses with fewer than 20 employees began losing jobs as early as mid-2007. From 2008 to mid-2009, these smallest businesses accounted for 24 percent of the net job losses, while those with 20–499 employees accounted for 36 percent. C. Providing Competition. Small businesses challenge larger, established firms in many ways, prompting them to become more efficient and more responsive to consumer needs. D. Filling Needs of Society and Other Businesses. Many large firms may be unwilling or unable to meet the special needs of smaller groups of consumers. Such groups create almost perfect markets for small companies. Small firms also provide a variety of goods and services to one another and to much larger firms. Teaching Tip: Ask your students what unfulfilled needs might exist in their communities or consider using the “Most Creative Business/Product Combination Contest” here. IV. THE PROS AND CONS OF SMALLNESS. For many small-business owners, the advantages of remaining small far outweigh the disadvantages. A. Advantages of Small Business 1. Personal Relationships with Customers and Employees. The owners of retail shops get to know many of their customers by name and deal with them on a personal basis. Through such relationships, small-business owners often become involved in social, cultural, and political affairs within the community. The personal service offered to customers is a major competitive weapon of small businesses. 2. Ability to Adapt to Change. As his or her own boss, the owner-manager of a small business does not need anyone’s permission to adapt to change. 3. Simplified Record Keeping. Many small firms need to keep only a simple set of records. 4. Independence. Small-business owners don’t have to punch in and out, bid for vacation times, take orders from superiors, or worry about being fired or laid off. 5. Other Advantages. Small-business owners also enjoy a number of the advantages of sole proprietorship, which are discussed in Chapter 4. B. Disadvantages of Small Business 1. Risk of Failure. About 50 percent of small firms close their doors within the first five years. 2. Limited Potential. Many small firms are simply the means of making a living for the owner and his or her family. Such businesses are unlikely to grow much. Also, employees have limited opportunity for advancement. 3. Limited Ability to Raise Capital. Small businesses typically have a limited ability to obtain capital. As shown in Figure 5.2, most small-business financing comes out of the owner’s pocket. C. The Importance of a Business Plan. A business plan is a carefully constructed guide for the person starting a business. Potential investors examine the business plan to determine if they would like to invest in or help finance a new venture. D. Components of a Business Plan 1. The business plan should be easy to read, uncluttered, and complete. (See Table 5.3 for the components of a business plan.) 2. Table 5.4 provides a business plan checklist. The plan should answer the following four questions: a) What exactly are the nature and mission of the new venture? b) Why is this new enterprise a good idea? c) What are the businessperson’s goals? d) How much will the new venture cost? V. THE SMALL BUSINESS ADMINISTRATION. The Small Business Administration (SBA), created by Congress in 1953, is a governmental agency that assists, counsels, and protects the interests of small businesses in the United States. It helps people get into business and stay in business. The agency provides assistance to owners and managers of prospective, new, and established small businesses. A. SBA Management Assistance. The SBA places special emphasis on improving the management ability of the owners and managers of small businesses. Recently, the SBA indicated that it provided management and technical assistance to nearly 1 million small businesses. 1. Management Courses and Workshops. The management courses offered by the SBA cover all the functions, duties, and roles of managers. The Small Business Training Network is an online training network consisting of 83 courses, workshops, and resources. 2. SCORE. The Service Corps of Retired Executives (SCORE) is a group of more than 13,000 retired businesspeople who volunteer their services to small businesses through the SBA. A small-business owner can request free counseling from SCORE. In 2009, SCORE volunteers served over 523,800 small-business people. B. Help for Minority-Owned Small Businesses. The SBA makes a special effort to assist those minorities who want to start small businesses or expand existing ones. The Minority Business Development Agency awards grants to develop and increase business opportunities for members of racial and ethnic minorities. Helping women become entrepreneurs is also a special goal of the SBA. 1. Small-Business Institutes. A small-business institute (SBI) is a group of senior and graduate students in business administration who provide management counseling to small businesses. 2. Small-Business Development Centers. A small-business development center (SBDC) is a university-based group that provides individual counseling and practical training to owners of small businesses. In 2011, there were over 1,000 SBDC locations, primarily at colleges and universities, assisting small businesses. 3. SBA Publications. The SBA issues management, marketing, and technical publications dealing with hundreds of topics of interest to present to prospective managers of small firms. C. SBA Financial Assistance. The SBA offers special financial assistance programs that cover a variety of situations. For example, the Supplemental Terrorist Activity Relief (STAR) program has made $3.7 billion in loans to 8,202 small businesses harmed or disrupted by the September 11 terrorist attacks and loans up to $150,000 to small businesses affected by Hurricanes Katrina and Rita. However, its primary function is to guarantee loans to eligible businesses. 1. Regular Business Loans. Most of the SBA’s business loans are actually made by private lenders such as banks, but repayment is partially guaranteed by the agency. The average size of an SBA-guaranteed business loan is about $300,000 for an average duration of about eight years. 2. Small-Business Investment Companies. Venture capital is money invested in small and sometimes struggling firms that have the potential to become very successful. To help such companies, the SBA licenses, regulates, and provides financial assistance to small-business investment companies (SBICs), which are privately owned firms that provide venture capital to small enterprises that meet their investment standards. SBICs are intended to be profit-making organizations. However, SBA aid allows them to invest in small businesses that would not otherwise attract venture capital. D. State of Small Business During the Recession. Celebrating the 47th annual observance of National Small Business Week in May 2010, President Obama stated, “Our nation is still emerging from one of the worst recessions in our history, and small businesses were among the hardest hit. … In these difficult times, we must do all we can to help these firms recover from the recession and put Americans back to work. Our government cannot guarantee a company’s success, but it can help create market conditions that allow small businesses to thrive.” As if the recession was not enough, in the states near the Gulf of Mexico, many small businesses suffered financial losses following the April 20, 2010, Deepwater BP oil spill that shut down commercial and recreational fishing along the coasts. According to the SBA Administrator Karen Mills, “With the region still recovering … it’s critical that we take every step we can to provide small businesses with resources to make it through this latest crisis so that they can continue to drive local economic growth and provide good-paying jobs.” The SBA is offering working capital loans up to $2 million at an interest rate of 4 percent with terms up to 30 years. VI. FRANCHISING. A franchise is a license to operate an individually owned business as though it were part of a chain of outlets or stores. Often, the business itself is also called a franchise. A. What Is Franchising? 1. Franchising is the actual granting of a franchise. 2. The franchisor supplies a known and advertised business name, management skills, the required training and materials, and a method of doing business. 3. The franchisee supplies labor and capital, operates the franchised business, and agrees to abide by the franchise agreement. Table 5.5 lists some items that would be covered in a typical franchise agreement. B. Types of Franchising. Franchising arrangements fall into three categories. 1. A manufacturer authorizes a number of retail stores to sell a certain brand-name item. 2. A producer licenses distributors to sell a given product to retailers. 3. The franchisor supplies brand names, techniques, or other services, instead of a complete product. His or her primary responsibility is the careful development and control of marketing strategies. VII. The Growth of Franchising. Franchising has experienced enormous growth since the mid-1970s. This growth has generally paralleled the expansion of the fast-food industry. A. Are Franchises Successful? 1. The success rate for businesses owned and operated by franchisees is significantly higher than the success rate for other independently owned small businesses. 2. Franchising, however, is not a guarantee of success for either franchisees or franchisors. Teaching Tip: Display a list of the top 10 franchises. Ask your students which of these franchises they would invest in and why. This could also be a short group or partner activity. B. Advantages of Franchising 1. To the Franchisor a) The franchisor gains fast and selective distribution of its products without incurring the high cost of constructing and operating its own outlets. b) The franchisor benefits from the fact that the franchisee, usually a sole proprietor, is highly motivated to succeed. The success of the franchise means more sales, which translate into higher royalties for the franchisor. 2. To the Franchisee a) The franchisee gets the opportunity to start a business with limited capital and to make use of the business experience of others. If business problems arise, the franchisor gives the franchisee guidance and advice. b) The franchisee receives materials to use in local advertising and can take part in national promotional campaigns sponsored by the franchisor. C. Disadvantages of Franchising. The disadvantages of franchising mainly affect the franchisee, because the franchisor retains a great deal of control. The franchisor’s contract can dictate every aspect of the business. 1. Franchise holders pay for their security. Usually, one-time franchise fees and continuing royalty and advertising fees are collected as a percentage of sales. 2. Franchise operators must work hard, often putting in 10- and 12-hour days, six days a week. Even success can cause problems. 3. Sometimes a franchise is so successful that the franchisor opens its own outlet nearby, in direct competition. 4. The International Franchise Association advises prospective franchise purchasers to investigate before investing and to exercise caution before buying. VIII. Global Perspectives in Small Business A. For American small businesses, the world is becoming smaller. B. The SBA offers help to the nation’s small-business owners who want to enter the world markets. C. International trade will become more important to small-business owners as they face unique challenges in the new century. Teaching Tip: The “Ok—I Have an Idea—Now What?” group activity could be used here. It takes approximately 20 minutes. CHAPTER 6 Understanding the Management Process 6.1 A WORD FROM THE AUTHORS This chapter is the first of three chapters on management activities and organization. In this chapter, we provide an overview of the management process. We define management as the process of coordinating people and other resources of an organization to achieve the goals of the organization. We also describe four basic management functions: planning, organizing, leading and motivating, and controlling. (A more detailed discussion of organizational structure follows in Chapter 7.) We also cover the various managerial levels of responsibility, areas of expertise, skills, and roles. Next, we examine the concept of leadership and briefly discuss the autocratic, participative, and entrepreneurial styles of leadership. Then we turn to the major steps in the managerial decision-making process: identifying the problem or opportunity, generating alternatives, selecting an alternative, and implementing the solution. We also examine total quality management and the nature of total quality management programs. Finally, we summarize what it takes to become a successful manager today. 6.2 TRANSITION GUIDE New in Chapter 6: Understanding the Management Process • A new Inside Business feature describes IBM’s new CEO and how she plans to keep reinventing the company. • Updated statistics for Starbucks have been provided in the “Establishing Goals and Objectives” section. • A new Ethical Success or Failure? Feature, “Digging Deep to Research Competitors,” describes the ethical limits of competitive research. • New examples of how Gannett, IKEA, and Air Canada use strategic, tactical, and contingency plans have been incorporated in the “Types of Plans” section. • The Going for Success feature, “Be Prepared with a Contingency Plan,” has been deleted. • A new Going for Success feature, “Steve Jobs: Futurist Extraordinaire,” describes Jobs’ ability to be innovative and a leader. • The Sustaining the Planet feature, “Walmart Leads in Managing Sustainability,” has been deleted. • Updated statistics for Monster.com have been included in the “Human Resources Managers” section. • A new example about how Jim Whitehurst of Red Hat believes in conceptual thinkers has been added to the “Conceptual Skills” section. • A new example about Howard Schultz discussing his commitment to the community and overall growth has been added to the “Interpersonal Skills” section. • The Spotlight feature, “What Are the Top Ranked Traits of Successful Female Leaders,” has been deleted. • In the “Styles of Leadership” section, a new example about Steve Jobs’ leadership style has been added. • A new example has been added to the section on “Selecting an Alternative” describing how McDonald’s had to change its menu to include healthier options. • The Ethical Challenges and Successful Solutions feature, “Through Social Media, Do Workers Create Problems for their Employers?,” has been updated and renamed as a Social Media feature. • A new example has been added to the section “Implementing and Evaluating the Solution” describing how stakeholders are spending time to prevent a financial system breakdown in the future. • A new Return to Inside Business about IBM has been provided at the end of the chapter. • A new Case 6.2 describes Amazon’s growth into a multifaceted, multinational business. • The Building Skills for Career Success section contains a new Social Media exercise. • The Exploring the Internet feature in Building Skills for Career Success has been deleted. • The assignment feature in the Developing Critical-Thinking Skills exercise has been updated with new URLs. • The assignment feature in the Researching Different Careers exercise has been updated with new dates. 6.3 QUICK REFERENCE GUIDE Instructor Resource Location Transition Guide IM, pp. 202–203 Learning Objectives Textbook, p. 164; IM, p. 205 Brief Chapter Outline IM, pp. 205–206 Comprehensive Lecture Outline IM, pp. 206–213 At Issue: Which style of management do you believe to be most effective? IM, p. 211 Ethical Success or Failure? Digging Deep to Research Competitors Textbook, p. 169 Going for Success Steve Jobs: Futurist Extraordinaire Textbook, p. 174 Social Media Through Social Media, Do Workers Create Problems for Their Employers? Textbook, p. 180 Inside Business IBM’s New CEO Feels Technological Leadership Is Key Textbook, p. 165 Return to Inside Business Textbook, p. 182 Questions and Suggested Answers, IM, p. 214 Marginal Key Terms List Textbook, p. 183 Review Questions Textbook, pp. 183–184 Questions and Suggested Answers, IM, pp. 214–216 Discussion Questions Textbook, p. 184 Questions and Suggested Answers, IM, pp. 216–218 Video Case 6.1 (L.L.Bean Relies on Its Core Values and Effective Leadership) and Questions Textbook, pp. 184–185 Questions and Suggested Answers, IM, p. 218 Case 6.2 (What’s Next for “Earth’s Biggest Bookstore?”) and Questions Textbook, p. 185 Questions and Suggested Answers, IM, p. 219 Building Skills for Career Success Textbook, pp. 186–187 Suggested Answers, IM, pp. 219–221 IM Quiz I & Quiz II IM, pp. 222–224 Answers, IM, p. 224 Classroom Exercises IM, p. 225 6.4 LEARNING OBJECTIVES After studying this chapter, students should be able to: 1. Define what management is. 2. Describe the four basic management functions: planning, organizing, leading and motivating, and controlling. 3. Distinguish among the various kinds of managers in terms of both level and area of management. 4. Identify the key management skills of successful managers. 5. Explain the different types of leadership. 6. Discuss the steps in the managerial decision-making process. 7. Describe how organizations benefit from total quality management. 6.5 BRIEF CHAPTER OUTLINE I. What Is Management? II. Basic Management Functions A. Planning 1. Strategic Planning Process 2. Establishing Goals and Objectives 3. SWOT Analysis 4. Types of Plans B. Organizing the Enterprise C. Leading and Motivating D. Controlling Ongoing Activities III. Kinds of Managers A. Levels of Management 1. Top Managers 2. Middle Managers 3. First-Line Managers B. Areas of Management Specialization 1. Financial Managers 2. Operations Managers 3. Marketing Managers 4. Human Resources Managers 5. Administrative Managers IV. Key Skills of Successful Managers A. Conceptual Skills B. Analytic Skills C. Interpersonal Skills D. Technical Skills E. Communication Skills V. Leadership A. Formal and Informal Leadership B. Styles of Leadership C. Which Leadership Style Is the Best? VI. Managerial Decision Making A. Identifying the Problem or Opportunity B. Generating Alternatives C. Selecting an Alternative D. Implementing and Evaluating the Solution VII. Managing Total Quality 6.6 COMPREHENSIVE LECTURE OUTLINE Undoubtedly, management is one of the most exciting, challenging, and rewarding professions. The men and women who manage businesses play an important part in shaping the world in which we live. I. WHAT IS MANAGEMENT? Management is the process of coordinating people and other resources to achieve the goals of the organization. Most organizations use four kinds of resources. (See Figure 6.1.) A. Material resources are the tangible, physical resources an organization uses. B. Human resources—people—are probably the organization’s most important assets. C. Financial resources are the funds the organization uses to meet its obligations to investors and creditors. D. Informational resources enable the organization to know what is changing and how it is changing. Then the company can adapt to change. Teaching Tip: Ask your students what resources they are using to accomplish the educational goals they have set for themselves and the educational goals set by their families. It is important to realize that these four types of resources are only general categories of resources. Within each category are hundreds or thousands of more specific resources from which management must choose those that can best accomplish their goals. II. BASIC MANAGEMENT FUNCTIONS. Another way to look at management is in terms of the different functions that managers perform. These functions are planning, organizing, leading and motivating employees, and controlling. Figure 6.2 provides a visual framework for discussion of these management functions. Management functions do not occur according to some rigid timetable. At any given time, managers may engage in a number of functions simultaneously. A. Planning. Management must set goals for the organization. Planning is establishing goals and deciding how to accomplish them. An organization’s mission is a statement of the basic purpose that makes this organization different from others. 1. Strategic Planning Process. The strategic planning process involves establishing an organization’s major goals and objectives and allocating resources to achieve them. Teaching Tip: Use the 20-minute “What’s Our Mission?” exercise here. 2. Establishing Goals and Objectives. A goal is an end result that the organization is expected to achieve over a one- to ten-year period. An objective is a specific statement detailing what the organization intends to accomplish over a shorter period of time. a) Goals and objectives can deal with a variety of factors, such as sales, company growth, costs, customer satisfaction, and employee morale. Teaching Tip: Pose the following statements to your students and ask if they are goals or objectives. Add some of your own. (1) I plan to be a success in business (goal). (2) I plan to graduate in four years with a 3.5 or better GPA (objective). (3) I plan to become a world-class tennis player and win Wimbledon next year (unrealistic objective). b) Goals can also span various periods of time. c) Goals developed for different departments may conflict with one another. The process of balancing conflicting goals is called optimization. 3. SWOT Analysis. SWOT analysis is the identification and evaluation of a firm’s strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors that affect a company’s capabilities. Strengths refer to a firm’s favorable characteristics and core competencies. Core competencies are approaches and processes that a company performs well and may give it an advantage over its competitors. Opportunities and threats are external factors. Examples of strengths, weaknesses, opportunities, and threats are shown in Figure 6.3. 4. Types of Plans. Once an organization sets goals and objectives, managers must develop plans for achieving them. A plan is an outline of the actions by which the organization intends to accomplish its goals and objectives. Every organization should develop several types of plans. (See Figure 6.4.) a) An organization’s strategic plan is its broadest set of plans and is developed as a guide for major policy setting and decision making. b) A tactical plan is a smaller-scale (and usually shorter-range) plan developed to implement a strategy. Most tactical plans cover a one- to three-year period. c) An operational plan is a type of plan designed to implement tactical plans. d) A contingency plan is a plan that outlines alternative courses of action that may be taken if the organization’s other plans are disrupted or become ineffective. Teaching Tip: Use the “What Do We Do If . . . ?” contingency planning exercise here. It will take approximately 20 minutes. B. Organizing the Enterprise. Organizing is the grouping of resources and activities to accomplish some end result in an efficient and effective manner. C. Leading and Motivating. Leading is the process of influencing people to work toward a common goal. Motivating is the process of providing reasons for people to work in the best interests of the organization. Together, leading and motivating are often called directing. Teaching Tip: Ask your students how they “control” their performance in the classroom. Have students use Figure 6.5 to outline the three steps of the control function. D. Controlling Ongoing Activities. Controlling is the process of evaluating and regulating ongoing activities to ensure that goals are achieved. The control function includes three steps. 1. The first step is setting standards with which performance can be compared. 2. The second step is measuring actual performance and comparing it with the standard. 3. The third step is taking corrective action as necessary. (See Figure 6.5.) III. KINDS OF MANAGERS A. Levels of Management. The three general levels of management are top, middle, and first-line. (See Figure 6.6.) 1. Top Managers. A top manager is an upper-level executive who guides and controls the overall fortunes of the organization. They are responsible for developing the mission of the organization and the firm’s strategy. 2. Middle Managers. A middle manager is a manager who implements the strategy developed by top managers. 3. First-Line Managers. A first-line manager is a manager who coordinates and supervises the activities of operating employees. Teaching Tip: Go to www.bls.gov/oco/ocos012.htm. This site lists Department of Labor facts and statistics on top executives; pay levels are included. This can lead into a discussion with students about the value provided by good executives. Recently, there has been much discussion on whether top executives are overpaid, relative to other employees. Ask your students if they perceive this to be the case. B. Areas of Management Specialization. An organizational structure can also be divided into areas of management specialization. (See Figure 6.7.) 1. Financial Managers. A financial manager is primarily responsible for the organization’s financial resources. 2. Operations Managers. An operations manager manages the systems that convert resources into goods and services. 3. Marketing Managers. A marketing manager is responsible for facilitating the exchange of products between the organization and its customers or clients. 4. Human Resources Managers. A human resources manager is charged with managing the organization’s human resources programs. 5. Administrative Managers. An administrative manager (also called a general manager) is not associated with any specific functional area but provides overall administrative guidance and leadership. Teaching Tip: This is an excellent place to assign all or part of the Building Skills for Career Success exercises located after Case 6.2 in the text. IV. KEY SKILLS OF SUCCESSFUL MANAGERS. Managers need a variety of skills including conceptual, analytic, interpersonal, technical, and communication skills. A. Conceptual Skills. Conceptual skills are the ability to think in abstract terms. Conceptual skills allow the manager to see the “big picture.” They appear to be more crucial for top managers than for middle or first-line managers. B. Analytic Skills. Analytic skills are the ability to identify problems correctly, generate reasonable alternatives, and select the “best” alternatives to solve problems. C. Interpersonal Skills. Interpersonal skills include the ability to deal effectively with other people, both inside and outside the organization. D. Technical Skills. Technical skills are specific skills needed to accomplish a specialized activity. First-line managers (and, to a lesser extent, middle managers) need the technical skills relevant to the activities they manage. E. Communication Skills. Communication skills, both oral and written, are the ability to speak, listen, and write effectively. V. LEADERSHIP. Leadership has been broadly defined as the ability to influence others. A leader has power and can use it to affect the behavior of others. Leadership is different from management in that a leader strives for voluntary cooperation, whereas a manager may depend on coercion to change employee behavior. A. Formal and Informal Leadership. Formal leaders have legitimate power of position; that is, they hold authority from an organization and influence others to work for the organization’s objectives. Informal leaders usually have no authority and may or may not exert their influence in support of the organization. Teaching Tip: Use the individual leadership self-assessment exercise “Take Me to Your Leader!” here. B. Styles of Leadership. In the last few decades, several styles of leadership have been identified. 1. Autocratic leadership is a task-oriented leadership style in which workers are told what to do and how to accomplish it. Workers have no say in the decision-making process. 2. Participative leadership is a leadership style in which all members of a team are involved in identifying essential goals and developing strategies to reach those goals. 3. Entrepreneurial leadership is a personality-based leadership style in which the manager seeks to inspire workers with a vision of what can be accomplished to benefit all stakeholders. Teaching Tip: Ask students if they have personally known people with each or any of the major leadership styles. Which did they prefer? Which was most effective? C. Which Leadership Style Is the Best? 1. Each of these styles has advantages and disadvantages. 2. Participative leadership can motivate employees to work effectively because they are implementing their own decisions. However, the decision-making process in participative leadership takes time that subordinates could be devoting to the work itself. Table 6.1 provides tips for effective leadership. VI. MANAGERIAL DECISION MAKING. Decision making is the act of choosing one alternative from among a set of alternatives. Managerial decision making involves four steps. (See Figure 6.9.) A. Identifying the Problem or Opportunity. A problem is the discrepancy between an actual condition and a desired condition—the difference between what is occurring and what one wishes to occur. 1. A problem may be “negative” or “positive.” A positive problem may be viewed as an “opportunity.” 2. Sometimes managers’ preconceptions of the problem prevent them from seeing the situation as it actually is. 3. Effective managers learn to look ahead so that they are prepared when decisions must be made. B. Generating Alternatives. After a problem has been suitably defined, the next task is to generate alternatives. Certain techniques, such as brainstorming and trial and error, can be used to generate alternatives. C. Selecting an Alternative. A final decision is influenced by a number of considerations, including financial constraints, human and informational resources, time limits, legal obstacles, and political factors. D. Implementing and Evaluating the Solution. Implementation of a decision requires time, planning, preparation of personnel, and evaluation of the results. 1. Managers must usually deal with unforeseen consequences as well, even when they have carefully considered the alternatives. 2. If the chosen course of action removes the difference between the actual conditions and the desired conditions, it is judged to be effective. 3. If the problem still exists, managers may a) Decide to give the chosen alternative more time to work. b) Adopt a different alternative. c) Start the problem identification process all over again. Teaching Tip: Use the 15- to 20-minute exercise “What Should I Do?” here. VII. MANAGING TOTAL QUALITY. The management of quality is a high priority in some organizations today. Total quality management (TQM) is the coordination of efforts directed at improving customer satisfaction, increasing employee participation, strengthening supplier partnerships, and facilitating an organizational atmosphere of continuous quality improvement. For effective total quality management, managers must address each of the following components: A. Customer Satisfaction. Ways to improve customer satisfaction include producing higher-quality products, providing better customer service, and showing customers that the company really cares about them. B. Employee Participation. Employee participation can be increased by allowing employees to contribute to decisions, to develop self-managed work teams, and to assume responsibility and accountability for improving the quality of their work. C. Strengthening Supplier Partnerships. Developing good working relationships with suppliers can help to ensure that the right supplies and materials will be delivered on time at a lower cost. D. Continuous Quality Improvement. This should not be viewed as achievable through one single program that has a target objective. A program based on continuous improvement has proven to be the most effective long-term approach. One tool that is used for TQM is called benchmarking. Benchmarking is the process of evaluating the products, processes, or management practices of another organization for the purpose of improving quality. The five basic steps of benchmarking are identifying objectives, forming a benchmarking team, collecting and analyzing data, and acting on the results. Although many factors influence the effectiveness of a TQM program, two issues are critical. A. Top management must make a strong commitment to a total quality management program by treating quality improvement as a top priority and giving it frequent attention. B. Management must coordinate the specific elements of a TQM program so that they work in harmony with each other. Although not all U.S. companies have TQM programs, these programs provide many benefits. A. Overall financial benefits include lower operating costs, higher return on sales and on investment, and an improved ability to use premium pricing rather than competitive pricing. Teaching Tip: Introduce your students to the concept of return on quality (ROQ), which treats quality improvement as an investment. In other words, not all quality measures are worthwhile financially and should be evaluated based on their effect on business results. Instructor Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083
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