mis

Notes of Mgm funda and Info Sys
 What is Management?
 According to Harold Koontz, “Management is an art of getting things done through and with the people in formally organized groups. It is an art of creating an environment in which people can perform and individuals and can co-operate towards attainment of group goals”. According to F.W. Taylor, “Management is an art of knowing what to do, when to do and see that it is done in the best and cheapest way”. Management is a purposive activity. It is something that directs group efforts towards the attainment of certain pre – determined goals. It is the process of working with and through others to effectively achieve the goals of the organization, by efficiently using limited resources in the changing world. Of course, these goals may vary from one enterprise to another. E.g.: For one enterprise it may be launching of new products by conducting market surveys and for other it may be profit maximization by minimizing cost. Management involves creating an internal environment: - It is the management which puts into use the various factors of production. Therefore, it is the responsibility of management to create such conditions which are conducive to maximum efforts so that people are able to perform their task efficiently and effectively. It includes ensuring availability of raw materials, determination of wages and salaries, formulation of rules & regulations etc. Therefore, we can say that good management includes both being effective and efficient. Being effective means doing the appropriate task i.e., fitting the square pegs in square holes and round pegs in round holes and being efficient means doing the task correctly, at least possible cost with minimum wastage of resources. Features of Management Management is an activity concerned with guiding human and physical resources such that organizational goals can be achieved. Nature of management can be highlighted as: - Management is Goal-Oriented: The success of any management activity is accessed by its achievement of the predetermined goals or objective. Management is a purposeful activity. It is a tool which helps use of human & physical resources to fulfill the pre-determined goals. For example, the goal of an enterprise is maximum consumer satisfaction by producing quality goods and at reasonable prices. This can be achieved by employing efficient persons and making better use of scarce resources. Management integrates Human, Physical and Financial Resources: In an organization, human beings work with non-human resources like machines, Materials, financial assets, buildings etc. Management integrates human efforts to those resources. It brings harmony among the human, physical and financial resources. Management is Continuous: Management is an ongoing process. It involves continuous handling of problems and issues. It is concerned with identifying the problem and taking appropriate steps to solve it. E.g. the target of a company is maximum production. For achieving this target various policies have to be framed but this is not the end. Marketing and Advertising is also to be done. For this policies have to be again framed. Hence this is an ongoing process. Management is all Pervasive: Management is required in all types of organizations whether it is political, social, cultural or business because it helps and directs various efforts towards a definite purpose. Thus clubs, hospitals, political parties, colleges, hospitals, business firms all require management. Whenever more than one person is engaged in working for a common goal, management is necessary. Whether it is a small business firm which may be engaged in trading or a large firm like Tata Iron & Steel, management is required everywhere irrespective of size or type of activity. Management is a Group Activity: Management is very much less concerned with individual’s efforts. It is more concerned with groups. It involves the use of group effort to achieve predetermined goal of management of ABC & Co. is good refers to a group of persons managing the enterprise. Functions of Management Management has been described as a social process involving responsibility for economical and effective planning & regulation of operation of an enterprise in the fulfillment of given purposes. It is a dynamic process consisting of various elements and activities. These activities are different from operative functions like marketing, finance, purchase etc. Rather these activities are common to each and every manger irrespective of his level or status. Different experts have classified functions of management. According to George & Jerry, “There are four fundamental functions of management i.e. planning, organizing, actuating and controlling”. According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to control”. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for Budgeting. But the most widely accepted are functions of management given by KOONTZ and O’DONNEL i.e. Planning, Organizing, Staffing, Directing and Controlling. 1. Planning It is the basic function of management. It deals with chalking out a future course of action & deciding in advance the most appropriate course of actions for achievement of pre-determined goals. According to KOONTZ, “Planning is deciding in advance – what to do, when to do & how to do. It bridges the gap from where we are & where we want to be”. A plan is a future course of actions. It is an exercise in problem solving & decision making. Planning is determination of courses of action to achieve desired goals. Thus, planning is a systematic thinking about ways & means for accomplishment of pre-determined goals. Planning is necessary to ensure proper utilization of human & non-human resources. It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages etc. 2. Organizing It is the process of bringing together physical, financial and human resources and developing productive relationship amongst them for achievement of organizational goals. According to Henry Fayol, “To organize a business is to provide it with everything useful or its functioning i.e. raw material, tools, capital and personnel’s”. To organize a business involves determining & providing human and non-human resources to the organizational structure. Organizing as a process involves: Identification of activities. Classification of grouping of activities. Assignment of duties. Delegation of authority and creation of responsibility. Coordinating authority and responsibility relationships. 3. Staffing It is the function of manning the organization structure and keeping it manned. Staffing has assumed greater importance in the recent years due to advancement of technology, increase in size of business, complexity of human behavior etc. The main purpose of staffing is to put right man on right job i.e. square pegs in square holes and round pegs in round holes. According to Kootz & O’Donell, “Managerial function of staffing involves manning the organization structure through proper and effective selection; appraisal & development of personnel to fill the roles designed the structure”. Staffing involves: Manpower Planning (estimating man power in terms of searching, choose the person and giving the right place). Recruitment, selection & placement. Training & development. Remuneration. Performance appraisal. Promotions & transfer. 4. Directing It is that part of managerial function which actuates the organizational methods to work efficiently for achievement of organizational purposes. It is considered life-spark of the enterprise which sets it in motion the action of people because planning, organizing and staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect of management which deals directly with influencing, guiding, supervising, motivating sub-ordinate for the achievement of organizational goals. Direction has following elements: Supervision: implies overseeing the work of subordinates by their superiors. It is the act of watching & directing work & workers. Motivation: means inspiring, stimulating or encouraging the sub-ordinates with zeal to work. Positive, negative, monetary, non-monetary incentives may be used for this purpose. Leadership: may be defined as a process by which manager guides and influences the work of subordinates in desired direction. Communications: is the process of passing information, experience, opinion etc from one person to another. It is a bridge of understanding. 5. Controlling It implies measurement of accomplishment against the standards and correction of deviation if any to ensure achievement of organizational goals. The purpose of controlling is to ensure that everything occurs in conformities with the standards. An efficient system of control helps to predict deviations before they actually occur. According to Theo Haimann, “Controlling is the process of checking whether or not proper progress is being made towards the objectives and goals and acting if necessary, to correct any deviation”. According to Koontz & O’Donell “Controlling is the measurement & correction of performance activities of subordinates in order to make sure that the enterprise objectives and plans desired to obtain them as being accomplished” Therefore controlling has following steps: Establishment of standard performance. Measurement of actual performance. Comparison of actual performance with the standards and finding out deviation if any. Corrective action. Levels of Management The term “Levels of Management’ refers to a line of demarcation between various managerial positions in an organization. The number of levels in management increases when the size of the business and work force increases and vice versa. The level of management determines a chain of command, the amount of authority & status enjoyed by any managerial position. The levels of management can be classified in three broad categories: - 1. Top Level of Management It consists of board of directors, chief executive or managing director. The top management is the ultimate source of authority and it manages goals and policies for an enterprise. It devotes more time on planning and coordinating functions. The role of the top management can be summarized as follows – Top management lays down the objectives and broad policies of the enterprise. It issues necessary instructions for preparation of department budgets, procedures, schedules etc. It prepares strategic plans & policies for the enterprise. It appoints the executive for middle level i.e. departmental managers. It controls & coordinates the activities of all the departments. It is also responsible for maintaining a contact with the outside world. It provides guidance and direction. The top management is also responsible towards the shareholders for the performance of the enterprise. 2. Middle Level of Management The branch managers and departmental managers constitute middle level. They are responsible to the top management for the functioning of their department. They devote more time to organizational and directional functions. In small organization, there is only one layer of middle level of management but in big enterprises, there may be senior and junior middle level management. Their role can be emphasized as – They execute the plans of the organization in accordance with the policies and directives of the top management. They make plans for the sub-units of the organization. They participate in employment & training of lower level management. They interpret and explain policies from top level management to lower level. They are responsible for coordinating the activities within the division or department. It also sends important reports and other important data to top level management. They evaluate performance of junior managers. They are also responsible for inspiring lower level managers towards better performance. 3. Lower Level of Management Lower level is also known as supervisory / operative level of management. It consists of supervisors, foreman, section officers, superintendent etc. According to R.C. Davis, “Supervisory management refers to those executives whose work has to be largely with personal oversight and direction of operative employees”. In other words, they are concerned with direction and controlling function of management. Their activities include – Assigning of jobs and tasks to various workers They guide and instruct workers for day to day activities. They are responsible for the quality as well as quantity of production. They are also entrusted with the responsibility of maintaining good relation in the organization. They communicate workers problems, suggestions, and recommendatory appeals etc to the higher level and higher level goals and objectives to the workers. They help to solve the grievances of the workers. They supervise & guide the sub-ordinates. They are responsible for providing training to the workers. They arrange necessary materials, machines, tools etc for getting the things done. They prepare periodical reports about the performance of the workers. They ensure discipline in the enterprise. They motivate workers. They are the image builders of the enterprise because they are in direct contact with the workers. Contemporary Approaches to Information Systems Multiple perspectives on information systems show that the study of information systems is a multidisciplinary field. No single theory or perspective dominates. Diagram below illustrates the major disciplines that contribute problems, issues, and solutions in the study of information systems. In general, the field can be divided into technical and behavioral approaches. Information systems are sociotechnical systems. Though they are composed of machines, devices, and “hard” physical technology, they require substantial social, organizational, and intellectual investments to make them work properly. Technical Approach The technical approach to information systems emphasizes mathematically based models to study information systems, as well as the physical technology and formal capabilities of these systems. The disciplines that contribute to the technical approach are computer science, management science, and operations research. Computer science is concerned with establishing theories of computability, methods of computation, and methods of efficient data storage and access. Management science emphasizes the development of models for decision-making and management practices. Operations research focuses on mathematical techniques for optimizing selected parameters of organizations, such as transportation, inventory control, and transaction costs. Behavioral Approach An important part of the information systems field is concerned with behavioral issues that arise in the development and long-term maintenance of information systems. Issues such as strategic business integration, design, implementation, utilization, and management cannot be explored usefully with the models used in the technical approach. Other behavioral disciplines contribute important concepts and methods. For instance, sociologists study information systems with an eye toward how groups and organizations shape the development of systems and also how systems affect individuals, groups, and organizations. Psychologists study information systems with an interest in how human decision makers perceive and use formal information. Economists study information systems with an interest in what impact systems have on control and cost structures within the firm and within markets. The behavioral approach does not ignore technology. Indeed, information systems technology is often the stimulus for a behavioral problem or issue. But the focus of this approach is generally not on technical solutions. Instead, it concentrates on changes in attitudes, management and organizational policy, and behavior. Approach of This Text: Sociotechnical Systems Throughout this book you will find a rich story with four main actors: suppliers of hardware and software (the technologists); business firms making investments and seeking to obtain value from the technology; managers and employees seeking to achieve business value (and other goals); and the contemporary legal, social, and cultural context (the firm’s environment). Together these actors produce what we call management information systems. The study of management information systems (MIS) arose in the 1970s to focus on the use of computer-based information systems in business firms and government agencies. MIS combines the work of computer science, management science, and operations research with a practical orientation toward developing system solutions to real-world problems and managing information technology resources. It is also concerned with behavioral issues surrounding the development, use, and impact of information systems, which are typically discussed in the fields of sociology, economics, and psychology. The study of information systems has just started to influence other disciplines through concepts such as the information processing view of the firm. Adopting a sociotechnical systems perspective helps to avoid a purely technological approach to information systems. For instance, the fact that information technology is rapidly declining in cost and growing in power does not necessarily or easily translate into productivity enhancement or bottom-line profits. The fact that a firm has recently installed an enterprise-wide financial reporting system does not necessarily mean that it will be used, or used effectively. Likewise, the fact that a firm has recently introduced new business procedures and processes does not necessarily mean employees will be more productive in the absence of investments in new information systems to enable those processes. Planning Function of Management Planning means looking ahead and chalking out future courses of action is to be followed. It is a preparatory step. It is a systematic activity which determines when, how and who is going to perform a specific job. Planning is a detailed program regarding future courses of action. It is rightly said “Well plan is half done”. Therefore planning takes into consideration available & prospective human and physical resources of the organization so as to get effective co-ordination, contribution & perfect adjustment. It is the basic management function which includes formulation of one or more detailed plans to achieve optimum balance of needs or demands with the available resources. According to Urwick, “Planning is a mental predisposition to do things in orderly way, to think before acting and to act in the light of facts rather than guesses”. Planning is deciding best alternative among others to perform different managerial functions in order to achieve predetermined goals. According to Koontz & O’Donell, “Planning is deciding in advance what to do, how to do and who is to do it. Planning bridges the gap between where we are to, where we want to go. It makes possible things to occur which would not otherwise occur”. Steps in Planning Function Planning function of management involves following steps:- 1. Establishment of objectives Planning requires a systematic approach. Planning starts with the setting of goals and objectives to be achieved. Objectives provide a rationale for undertaking various activities as well as indicate direction of efforts. Moreover objectives focus the attention of managers on the end results to be achieved. As a matter of fact, objectives provide nucleus to the planning process. Therefore, objectives should be stated in a clear, precise and unambiguous language. Otherwise the activities undertaken are bound to be ineffective. As far as possible, objectives should be stated in quantitative terms. For example, Number of men working, wages given, units produced, etc. But such an objective cannot be stated in quantitative terms like performance of quality control manager, effectiveness of personnel manager. Such goals should be specified in qualitative terms. Hence objectives should be practical, acceptable, workable and achievable. 2. Establishment of Planning Premises Planning premises are the assumptions about the lively shape of events in future. They serve as a basis of planning. Establishment of planning premises is concerned with determining where one tends to deviate from the actual plans and causes of such deviations. It is to find out what obstacles are there in the way of business during the course of operations. Establishment of planning premises is concerned to take such step that avoids these obstacles to a great extent. Planning premises may be internal or external. Internal includes capital investment policy, management labor relations, philosophy of management, etc. Whereas external includes socio- economic, political and economic changes. Internal premises are controllable whereas external are non- controllable. 3. Choice of alternative course of action When forecast are available and premises are established, a number of alternative course of actions have to be considered. For this purpose, each and every alternative will be evaluated by weighing its pros and cons in the light of resources available and requirements of the organization. The merits, demerits as well as the consequences of each alternative must be examined before the choice is being made. After objective and scientific evaluation, the best alternative is chosen. The planners should take help of various quantitative techniques to judge the stability of an alternative. 4. Formulation of derivative plans Derivative plans are the sub plans or secondary plans which help in the achievement of main plan. Secondary plans will flow from the basic plan. These are meant to support and expediate the achievement of basic plans. These detail plans include policies, procedures, rules, programmes, budgets, schedules, etc. For example, if profit maximization is the main aim of the enterprise, derivative plans will include sales maximization, production maximization, and cost minimization. Derivative plans indicate time schedule and sequence of accomplishing various tasks. 5. Securing Co-operation After the plans have been determined, it is necessary rather advisable to take subordinates or those who have to implement these plans into confidence. The purposes behind taking them into confidence are :- Subordinates may feel motivated since they are involved in decision making process. The organization may be able to get valuable suggestions and improvement in formulation as well as implementation of plans. Also the employees will be more interested in the execution of these plans. 6. Follow up/Appraisal of plans After choosing a particular course of action, it is put into action. After the selected plan is implemented, it is important to appraise its effectiveness. This is done on the basis of feedback or information received from departments or persons concerned. This enables the management to correct deviations or modify the plan. This step establishes a link between planning and controlling function. The follow up must go side by side the implementation of plans so that in the light of observations made, future plans can be made more realistic. Characteristics of Planning 1. Planning is goal-oriented Planning is made to achieve desired objective of business. The goals established should general acceptance otherwise individual efforts & energies will go misguided and misdirected. Planning identifies the action that would lead to desired goals quickly & economically. It provides sense of direction to various activities. E.g. MarutiUdhyog is trying to capture once again Indian Car Market by launching diesel models. 2. Planning is looking ahead Planning is done for future. It requires peeping in future, analyzing it and predicting it. Thus planning is based on forecasting. A plan is a synthesis of forecast. It is a mental predisposition for things to happen in future. 3. Planning is an intellectual process Planning is a mental exercise involving creative thinking, sound judgement and imagination. It is not a mere guesswork but a rotational thinking. A manager can prepare sound plans only if he has sound judgement, foresight and imagination. Planning is always based on goals, facts and considered estimates. 4. Planning involves choice & decision making Planning essentially involves choice among various alternatives. Therefore, if there is only one possible course of action, there is no need planning because there is no choice. Thus, decision making is an integral part of planning. A manager is surrounded by no. of alternatives. He has to pick the best depending upon requirements & resources of the enterprises. 5. Planning is the primary function of management / Primacy of Planning Planning lays foundation for other functions of management. It serves as a guide for organizing, staffing, directing and controlling. All the functions of management are performed within the framework of plans laid out. Therefore planning is the basic or fundamental function of management. 6. Planning is a Continuous Process Planning is a never ending function due to the dynamic business environment. Plans are also prepared for specific period f time and at the end of that period, plans are subjected to revaluation and review in the light of new requirements and changing conditions. Planning never comes into end till the enterprise exists issues, problems may keep cropping up and they have to be tackled by planning effectively. 7. Planning is all Pervasive It is required at all levels of management and in all departments of enterprise. Of course, the scope of planning may differ from one level to another. The top level may be more concerned about planning the organization as a whole whereas the middle level may be more specific in departmental plans and the lower level plans implementation of the same. 8. Planning is designed for efficiency Planning leads to accomplishment of objectives at the minimum possible cost. It avoids wastage of resources and ensures adequate and optimum utilization of resources. A plan is worthless or useless if it does not value the cost incurred on it. Therefore planning must lead to saving of time, effort and money. Planning leads to proper utilization of men, money, materials, methods and machines. 9. Planning is Flexible Planning is done for the future. Since future is unpredictable, planning must provide enough room to cope with the changes in customer’s demand, competition, and govt. policies etc. Under changed circumstances, the original plan of action must be revised and updated to make it more practical. Types of Plans Objectives: Objectives are very basic to the organization and they are defined as ends which the management seeks to achieve by its operations. They serve as a guide for overall business planning. Strategy: strategy is a comprehensive plan for accomplishing organization objectives. This comprehensive plan will include three dimensions, Determining long term objectives, Adopting a particular course of action, and Allocating resources necessary to achieve the objective. Policy: They are guides to managerial action and decisions in the implementation of strategy. Procedure: Procedures are routine steps on how to carry out activities. Procedures are specified steps to be followed in particular circumstances. Method: Methods provide the prescribed ways or manner in which a task has to be performed considering the objective. It deals with a task comprising one step of a procedure and specifies how this step is to be performed. Rule: Rules are specific statements that inform what is to be done. They do not allow for any flexibility or discretion. Programme: Programmes are detailed statements about a project which outlines the objectives, policies, procedures, rules, tasks, human and physical resources required and the budget to implement any course of action. Budget: It is a plan which quantifies future facts and figures. It is a fundamental planning instrument in many organizations. Purpose of planning Planning is done for vision, mission and for goal setting. What is a vision? Vision statement provides direction and inspiration for organizational goal setting. Vision is where you see yourself at the end of the horizon OR milestone therein. It is a single statement dream OR aspiration. Typically a vision has the flavors of 'Being Most admired', 'Among the top league', 'being known for innovation', 'being largest and greatest' and so on. Typically 'most profitable', 'Cheapest' etc. don’t figure in vision statement. Unlike goals, vision is not SMART. It does not have mathematics OR timelines attached to it. Vision is a symbol, and a cause to which we want to bond the stakeholders, (mostly employees and sometime share-holders). As they say, the people work best, when they are working for a cause, than for a goal. Vision provides them that cause. Vision is long-term statement and typically generic & grand. Therefore a vision statement does not change unless the company is getting into a totally different kind of business. Vision should never carry the 'how' part of vision. For example ' To be the most admired brand in Aviation Industry' is a fine vision statement, which can be spoiled by extending it to' To be the most admired brand in the Aviation Industry by providing world-class in-flight services'. The reason for not including 'how' that ‘how’ is may keep on changing with time. Challenges related to Vision Statement: Putting-up a vision is not a challenge. The problem is to make employees engaged with it. Many a time, terms like vision, mission and strategy become more a subject of scorn than being looked up-to. This is primarily because leaders may not be able to make a connection between the vision/mission and a person’s every day work. Too often, employees see a gap between the vision, mission and their goals & priorities. Even if there is a valid/tactical reason for this mismatch, it is not explained. Horizon of Vision: Vision should be the horizon of 5-10 years. If it is less than that, it becomes tactical. If it is of a horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision. Features of a good vision statement: Easy to read and understand. Compact and crisp to leave something to people’s imagination. Gives the destination and not the road-map. Is meaningful and not too open ended and far-fetched. Excite people and make them get goose-bumps. Provides a motivating force, even in hard times. Is perceived as achievable and at the same time is challenging and compelling, stretching us beyond what is comfortable. Vision is a dream/aspiration, fine-tuned to reality: The Entire process starting from Vision down to the business objectives is highly iterative. The question is from where we should start. We strongly recommend that vision and mission statement should be made first without being colored by constraints, capabilities and environment. This can said akin to the vision of armed forces, that’s 'Safe and Secure country from external threats'. This vision is a non-negotiable and it drives the organization to find ways and means to achieve their vision, by overcoming constraints on capabilities and resources. Vision should be a stake in the ground, a position, a dream, which should be prudent, but should be non-negotiable barring few rare circumstances. What is a mission? Mission of an organization is the purpose for which the organization is. Mission is again a single statement, and carries the statement in verb. Mission in one way is the road to achieve the vision. For example, for a luxury products company, the vision could be 'To be among most admired luxury brands in the world' and mission could be 'To add style to the lives' A good mission statement will be: Clear and Crisp: While there are different views, we strongly recommend that mission should only provide what, and not 'how and when'. We would prefer the mission of 'Making People meet their career' to 'making people meet their career through effective career counseling and education'. A mission statement without 'how & when' element leaves a creative space with the organization to enable them take-up wider strategic choices. Have to have a very visible linkage to the business goals and strategy: For example you cannot have a mission (for a home furnishing company) of 'Bringing Style to People’s lives' while your strategy asks for mass product and selling. Its better that either you start selling high-end products to high value customers, OR change your mission statement to 'Help people build homes'. Should not be same as the mission of a competing organization. It should touch upon how its purpose it unique. Mission follows the Vision: The Entire process starting from Vision down to the business objectives is highly iterative. The question is from where should be start. I strongly recommend that mission should follow the vision. This is because the purpose of the organization could change to achieve their vision. For example to achieve the vision of an Insurance company 'To be the most trusted Insurance Company', the mission could be first 'making people financially secure' as their emphasis is on Traditional Insurance product and at a later stage the company can make its mission as 'Making money work for the people' when they also include the non-traditional unit linked investment products. Goal Setting Goal setting is the process of deciding what you want to accomplish and devising a plan to achieve the result you desire. Use the SMART System When it comes to goal setting, the SMART system is simple, down-to-earth and gets the job done. Each goal must be defined so that it meets the following criteria: 1. S - Specific 2. M - Measurable 3. A - Achievable 4. R - Realistic 5. T – Timely Specific, achievable and realistic: Make sure your goals are concrete, concise and attainable. Instead of, "I want to make a lot more money this year," specify "I want to increase my revenues by X percent (a realistic amount) by the end of the year." Measurable: Frame your goals in such a way so you can measure your progress. For example, plan on measuring monthly or quarterly revenues against last year's figures--something you should be doing anyway. Timely: Give yourself a reasonable time frame for achieving your goal. Then break it down into smaller, short-term increments. Realistically, you may not achieve that X percent increase early in the year, but you can work toward it. Divide your goal percent increase into monthly or quarterly increments that allows you to build on your momentum. This produces measurable, attainable and short-term goals to pursue. Also, beware of BHAGs: big, hairy, audacious goals. Super-ambitious goals are great when it comes to long-range planning and decision making, but they don't lend themselves to goal setting. Focus on attainable goals that you can realistically reach within the year. Goal Setting Steps include: Goal decision Goal documentation Evidence of goal success The first step needed to achieve your goal How does each goal impact on your balanced lifestyle Removing blockages Advantages of Planning 1. Planning facilitates management by objectives Planning begins with determination of objectives. It highlights the purposes for which various activities are to be undertaken. In fact, it makes objectives more clear and specific. Planning helps in focusing the attention of employees on the objectives or goals of enterprise. Without planning an organization has no guide. Planning compels manager to prepare a Blue-print of the courses of action to be followed for accomplishment of objectives. Therefore, planning brings order and rationality into the organization. 2. Planning minimizes uncertainties. Business is full of uncertainties. There are risks of various types due to uncertainties. Planning helps in reducing uncertainties of future as it involves anticipation of future events. Although future cannot be predicted with cent percent accuracy but planning helps management to anticipate future and prepare for risks by necessary provisions to meet unexpected turn of events. Therefore with the help of planning, uncertainties can be forecasted which helps in preparing standbys as a result, uncertainties are minimized to a great extent. 3. Planning facilitates co-ordination. Planning revolves around organizational goals. All activities are directed towards common goals. There is an integrated effort throughout the enterprise in various departments and groups. It avoids duplication of efforts. In other words, it leads to better co-ordination. It helps in finding out problems of work performance and aims at rectifying the same. 4. Planning improves employee’s moral. Planning creates an atmosphere of order and discipline in organization. Employees know in advance what is expected of them and therefore conformity can be achieved easily. This encourages employees to show their best and also earn reward for the same. Planning creates a healthy attitude towards work environment which helps in boosting employees moral and efficiency. 5. Planning helps in achieving economies. Effective planning secures economy since it leads to orderly allocation ofresources to various operations. It also facilitates optimum utilization of resources which brings economy in operations. It also avoids wastage of resources by selecting most appropriate use that will contribute to the objective of enterprise. For example, raw materials can be purchased in bulk and transportation cost can be minimized. At the same time it ensures regular supply for the production department, that is, overall efficiency. 6. Planning facilitates controlling. Planning facilitates existence of certain planned goals and standard of performance. It provides basis of controlling. We cannot think of an effective system of controlling without existence of well thought out plans. Planning provides pre-determined goals against which actual performance is compared. In fact, planning and controlling are the two sides of a same coin. If planning is root, controlling is the fruit. 7. Planning provides competitive edge. Planning provides competitive edge to the enterprise over the others which do not have effective planning. This is because of the fact that planning may involve changing in work methods, quality, quantity designs, extension of work, redefining of goals, etc. With the help of forecasting not only the enterprise secures its future but at the same time it is able to estimate the future motives of its competitor which helps in facing future challenges. Therefore, planning leads to best utilization of possible resources, improves quality of production and thus the competitive strength of the enterprise is improved. 8. Planning encourages innovations. In the process of planning, managers have the opportunities of suggesting ways and means of improving performance. Planning is basically a decision making function which involves creative thinking and imagination that ultimately leads to innovation of methods and operations for growth and prosperity of the enterprise. Disadvantages of Planning Internal Limitations There are several limitations of planning. Some of them are inherit in the process of planning like rigidity and other arise due to shortcoming of the techniques of planning and in the planners themselves. 1. Rigidity Planning has tendency to make administration inflexible. Planning implies prior determination of policies, procedures and programmes and a strict adherence to them in all circumstances. There is no scope for individual freedom. The development of employees is highly doubted because of which management might have faced lot of difficulties in future. Planning therefore introduces inelasticity and discourages individual initiative and experimentation. 2. Misdirected Planning Planning may be used to serve individual interests rather than the interest of the enterprise. Attempts can be made to influence setting of objectives, formulation of plans and programmes to suit one’s own requirement rather than that of whole organization. Machinery of planning can never be freed of bias. Every planner has his own likes, dislikes, preferences, attitudes and interests which are reflected in planning. 3. Time consuming Planning is a time consuming process because it involves collection of information, its analysis and interpretation thereof. This entire process takes a lot of time specially where there are a number of alternatives available. Therefore planning is not suitable during emergency or crisis when quick decisions are required. 4. Probability in planning Planning is based on forecasts which are mere estimates about future. These estimates may prove to be inexact due to the uncertainty of future. Any change in the anticipated situation may render plans ineffective. Plans do not always reflect real situations in spite of the sophisticated techniques of forecasting because future is unpredictable. Thus, excessive reliance on plans may prove to be fatal. 5. False sense of security Elaborate planning may create a false sense of security to the effect that everything is taken for granted. Managers assume that as long as they work as per plans, it is satisfactory. Therefore they fail to take up timely actions and an opportunity is lost. Employees are more concerned about fulfillment of plan performance rather than any kind of change. 6. Expensive Collection, analysis and evaluation of different information, facts and alternatives involves a lot of expense in terms of time, effort and money According to Koontz and O’Donell,’ Expenses on planning should never exceed the estimated benefits from planning. ’ External Limitations of Planning Political Climate: Change of government from Congress to some other political party, etc. Labor Union: Strikes, lockouts, agitations. Technological changes: Modern techniques and equipment, computerization. Policies of competitors: E.g. Policies of Coca Cola and Pepsi. Natural Calamities: Earthquakes and floods. Changes in demand and prices: Change in fashion, change in tastes, change in income level, demand falls, price falls, etc. SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan: Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include: patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses: lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels In some cases, a weakness may be the flip side of strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include: an unfulfilled customer need arrival of new technologies loosening of regulations removal of international trade barriers Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include: shifts in consumer tastes away from the firm's products emergence of substitute products new regulations increased trade barriers The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: SWOT / TOWS Matrix Strengths Weaknesses Opportunities S-O strategies W-O strategies Threats S-T strategies W-T strategies S-O strategies pursue opportunities that are a good fit to the company's strengths. W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats. Organizing Function of Management Organizing is the function of management which follows planning. It is a function in which the synchronization and combination of human, physical and financial resources takes place. All the three resources are important to get results. Therefore, organizational function helps in achievement of results which in fact is important for the functioning of a concern. According to Chester Barnard, “Organizing is a function by which the concern is able to define the role positions, the jobs related and the co- ordination between authority and responsibility. Hence, a manager always has to organize in order to get results. A manager performs organizing function with the help of following steps:- Identification of activities: All the activities which have to be performed in a concern have to be identified first. For example, preparation of accounts, making sales, record keeping, quality control, inventory control, etc. All these activities have to be grouped and classified into units. Departmentally organizing the activities: In this step, the manager tries to combine and group similar and related activities into units or departments. This organization of dividing the whole concern into independent units and departments is called depart mentation. Classifying the authority: Once the departments are made, the manager likes to classify the powers and its extent to the managers. This activity of giving a rank in order to the managerial positions is called hierarchy. The top management is into formulation of policies, the middle level management into departmental supervision and lower level management into supervision of foremen. The clarification of authority helps in bringing efficiency in the running of a concern. This helps in achieving efficiency in the running of a concern. This helps in avoiding wastage of time, money, effort, in avoidance of duplication or overlapping of efforts and this helps in bringing smoothness in a concern’s working. Co-ordination between authority and responsibility: Relationships are established among various groups to enable smooth interaction toward the achievement of the organizational goal. Each individual is made aware of his authority and he/she knows whom they have to take orders from and to whom they are accountable and to whom they have to report. A clear organizational structure is drawn and all the employees are made aware of it. Importance of Organizing Function Specialization: Organizational structure is a network of relationships in which the work is divided into units and departments. This division of work is helping in bringing specialization in various activities of concern. Well defined jobs: Organizational structure helps in putting right men on right job which can be done by selecting people for various departments according to their qualifications, skill and experience. This is helping in defining the jobs properly which clarifies the role of every person. Clarifies authority: Organizational structure helps in clarifying the role positions to every manager (status quo). This can be done by clarifying the powers to every manager and the way he has to exercise those powers should be clarified so that misuse of powers does not take place. Well defined jobs and responsibilities attached helps in bringing efficiency into managers working. This helps in increasing productivity. Co-ordination: Organization is a means of creating co- ordination among different departments of the enterprise. It creates clear cut relationships among positions and ensures mutual co- operation among individuals. Harmony of work is brought by higher level managers exercising their authority over interconnected activities of lower level manager. Authority responsibility: Relationships can be fruitful only when there is a formal relationship between the two. For smooth running of an organization, the co- ordination between authority- responsibilities is very important. There should be co- ordination between different relationships. Clarity should be made for having an ultimate responsibility attached to every authority. There is a saying, “Authority without responsibility leads to ineffective behavior and responsibility without authority makes person ineffective.” Therefore, co- ordination of authority- responsibility is very important. Effective administration: The organization structure is helpful in defining the jobs positions. The roles to be performed by different managers are clarified. Specialization is achieved through division of work. This all leads to efficient and effective administration. Growth and diversification: A company’s growth is totally dependent on how efficiently and smoothly a concern works. Efficiency can be brought about by clarifying the role positions to the managers, co-ordination between authority and responsibility and concentrating on specialization. In addition to this, a company can diversify if its potential grows. This is possible only when the organization structure is well- defined. This is possible through a set of formal structure. Sense of security: Organizational structure clarifies the job positions. The roles assigned to every manager are clear. Co- ordination is possible. Therefore, clarity of powers helps automatically in increasing mental satisfaction and thereby a sense of security in a concern. This is very important for job- satisfaction. Scope for new changes: Where the roles and activities to be performed are clear and every person gets independence in his working, this provides enough space to a manager to develop his talents and flourish his knowledge. A manager gets ready for taking independent decisions which can be a road or path to adoption of new techniques of production. This scope for bringing new changes into the running of an enterprise is possible only through a set of organizational structure. Principles of Organizing The organizing process can be done efficiently if the managers have certain guidelines so that they can take decisions and can act. To organize in an effective manner, the following principles of organization can be used by a manager. 1. Principle of Specialization According to the principle, the whole work of a concern should be divided amongst the subordinates on the basis of qualifications, abilities and skills. It is through division of work specialization can be achieved which results in effective organization. 2. Principle of Functional Definition According to this principle, all the functions in a concern should be completely and clearly defined to the managers and subordinates. This can be done by clearly defining the duties, responsibilities, authority and relationships of people towards each other. Clarifications in authority- responsibility relationships help in achieving co- ordination and thereby organization can take place effectively. For example, the primary functions of production, marketing and finance and the authority responsibility relationships in these departments should be clearly defined to every person attached to that department. Clarification in the authority-responsibility relationship helps in efficient organization. 3. Principles of Span of Control/Supervision According to this principle, span of control is a span of supervision which depicts the number of employees that can be handled and controlled effectively by a single manager. According to this principle, a manager should be able to handle what number of employees under him should be decided. This decision can be taken by choosing either from a wide or narrow span. There are two types of span of control:- Wide span of control- It is one in which a manager can supervise and control effectively a large group of persons at one time. The features of this span are:- Less overhead cost of supervision Prompt response from the employees Better communication Better supervision Better co-ordination Suitable for repetitive jobs According to this span, one manager can effectively and efficiently handle a large number of subordinates at one time. Narrow span of control- According to this span, the work and authority is divided amongst many subordinates and a manager doesn't supervises and control a very big group of people under him. The manager according to a narrow span supervises a selected number of employees at one time. The features are:- Work which requires tight control and supervision, for example, handicrafts, ivory work, etc. which requires craftsmanship, there narrow span is more helpful. Co-ordination is difficult to be achieved. Communication gaps can come. Messages can be distorted. Specialization work can be achieved. Factors influencing Span of Control- There are followings factors influence thespan of control: Managerial abilities- In the concerns where managers are capable qualified and experienced, wide span of control is always helpful. Competence of subordinates- Where the subordinates are capable and competent and their understanding levels are proper, the subordinates tend to very frequently visit the superiors for solving their problems. In such cases, the manager can handle large number of employees. Hence wide span is suitable. Nature of work- If the work is of repetitive nature, wide span of supervision is more helpful. On the other hand, if work requires mental skill or craftsmanship, tight control and supervision is required in which narrow span is more helpful. Delegation of authority- When the work is delegated to lower levels in an efficient and proper way, confusions are less and congeniality of the environment can be maintained. In such cases, wide span of control is suitable and the supervisors can manage and control large number of sub- ordinates at one time. Degree of decentralization- Decentralization is done in order to achieve specialization in which authority is shared by many people and managers at different levels. In such cases, a tall structure is helpful. There are certain concerns where decentralization is done in very effective way which results in direct and personal communication between superiors and sub- ordinates and there the superiors can manage large number of subordinates very easily. In such cases, wide span again helps. 4. Principle of Scalar Chain Scalar chain is a chain of command or authority which flows from top to bottom. With a chain of authority available, wastages of resources are minimized, communication is affected, overlapping of work is avoided and easy organization takes place. A scalar chain of command facilitates work flow in an organization which helps in achievement of effective results. As the authority flows from top to bottom, it clarifies the authority positions to managers at all level and that facilitates effective organization. 5. Principle of Unity of Command It implies one subordinate-one superior relationship. Every subordinate is answerable and accountable to one boss at one time. This helps in avoiding communication gaps and feedback and response is prompt. Unity of command also helps in effective combination of resources, that is, physical, financial resources which helps in easy co- ordination and, therefore, effective organization. Authority Flows from Top to Bottom Managing Director ↓ Marketing Manager ↓ Sales/ Media Manager ↓ Salesmen According to the above diagram, the Managing Director has got the highest level of authority. This authority is shared by the Marketing Manager who shares his authority with the Sales Manager. From this chain of hierarchy, the official chain of communication becomes clear which is helpful in achievement of results and which provides stability to a concern. This scalar chain of command always flows from top to bottom and it defines the authority positions of different managers at different levels. Line Organization Line organization is the oldest and simplest method of administrative organization. According to this type of organization, the authority flows from top to bottom in a concern. The line of command is carried out from top to bottom. This is the reason for calling this organization as scalar organization which means scalar chain of command is a part and parcel of this type of administrative organization. In this type of organization, the line of command flows on an even basis without any gaps in communication and co- ordination taking place. Features of Line Organization: It is the simplest form of organization. Line of authority flows from top to bottom. Specialized and supportive services do not take place in these organizations. Unified control by the line officers can be maintained since they can independently take decisions in their areas and spheres. This kind of organization always helps in bringing efficiency in communication and bringing stability to a concern. Merits of Line Organization: Simplest: It is the most simple and oldest method of administration. Unity of Command: In these organizations, superior-subordinate relationship is maintained and scalar chain of command flows from top to bottom. Better discipline: The control is unified and concentrates on one person and therefore, he can independently make decisions of his own. Unified control ensures better discipline. Fixed responsibility: In this type of organization, every line executive has got fixed authority, power and fixed responsibility attached to every authority. Flexibility: There is a co-ordination between the top most authority and bottom line authority. Since the authority relationships are clear, line officials are independent and can flexibly take the decision. This flexibility gives satisfaction of line executives. Prompt decision: Due to the factors of fixed responsibility and unity of command, the officials can take prompt decision. Demerits of Line Organization: Over reliance: The line executive’s decisions are implemented to the bottom. This results in over-relying on the line officials. Lack of specialization: A line organization flows in a scalar chain from top to bottom and there is no scope for specialized functions. For example, expert advices whatever decisions are taken by line managers are implemented in the same way. Inadequate communication: The policies and strategies which are framed by the top authority are carried out in the same way. This leaves no scope for communication from the other end. The complaints and suggestions of lower authority are not communicated back to the top authority. So there is one way communication. Lack of Co-ordination: Whatever decisions are taken by the line officials, in certain situations wrong decisions, are carried down and implemented in the same way. Therefore, the degree of effective co- ordination is less. Authority leadership: The line officials have tendency to misuse their authority positions. This leads to autocratic leadership and monopoly in the concern. Line and Staff Organization Line and staff organization is a modification of line organization and it is more complex than line organization. According to this administrative organization, specialized and supportive activities are attached to the line of command by appointing staff supervisors and staff specialists who are attached to the line authority. The power of command always remains with the line executives and staff supervisors guide, advice and counsel the line executives. Personal Secretary to the Managing Director is a staff official. MANAGING DIRECTOR ↓ ↓ ↓ Production Manager Marketing Manager Finance Manager ↓ ↓ ↓ Plant Supervisor Market Supervisor Chief Assistant ↓ ↓ ↓ Foreman Salesman Accountant Features of Line and Staff Organization There are two types of staff: Staff Assistants: P.A. to Managing Director, Secretary to Marketing Manager. Staff Supervisor: Operation Control Manager, Quality Controller, PRO Line and Staff Organization is a compromise of line organization. It is more complex than line concern. Division of work and specialization takes place in line and staff organization. The whole organization is divided into different functional areas to which staff specialists are attached. Efficiency can be achieved through the features of specialization. There are two lines of authority which flow at one time in a concern : Line Authority Staff Authority Power of command remains with the line executive and staff serves only as counselors. Merits of Line and Staff Organization Relief to line of executives: In a line and staff organization, the advice and counseling which is provided to the line executives divides the work between the two. The line executive can concentrate on the execution of plans and they get relieved of dividing their attention to many areas. Expert advice: The line and staff organization facilitates expert advice to the line executive at the time of need. The planning and investigation which is related to different matters can be done by the staff specialist and line officers can concentrate on execution of plans. Benefit of Specialization: Line and staff through division of whole concern into two types of authority divides the enterprise into parts and functional areas. This way every officer or official can concentrate in its own area. Better co-ordination: Line and staff organization through specialization is able to provide better decision making and concentration remains in few hands. This feature helps in bringing co- ordination in work as every official is concentrating in their own area. Benefits of Research and Development: Through the advice of specialized staff, the line executives, and the line executives get time to execute plans by taking productive decisions which are helpful for a concern. This gives a wide scope to the line executive to bring innovations and go for research work in those areas. This is possible due to the presence of staff specialists. Training: Due to the presence of staff specialists and their expert advice serves as ground for training to line officials. Line executives can give due concentration to their decision making. This in itself is a training ground for them. Balanced decisions: The factor of specialization which is achieved by line staff helps in bringing co- ordination. This relationship automatically ends up the line official to take better and balanced decision. Unity of action: Unity of action is a result of unified control. Control and its effectively take place when co- ordination is present in the concern. In the line and staff authority all the officials have got independence to make decisions. This serves as effective control in the whole enterprise. Demerits of Line and Staff Organization Lack of understanding: In a line and staff organization, there are two authorities flowing at one time. This results in the confusion between the two. As a result, the workers are not able to understand as to who is their commanding authority. Hence the problem of understanding can be a hurdle in effective running. Lack of sound advice: The line official get used to the expertise advice of the staff. At times the staff specialist also provides wrong decisions which the line executive has to consider. This can affect the efficient running of the enterprise. Line and staff conflicts: Line and staff are two authorities which are flowing at the same time. The factors of designations, status influence sentiments which are related to their relation, can pose a distress on the minds of the employees. This leads to minimizing of co- ordination which hampers a concern’s working. Costly: In line and staff concern, the concerns have to maintain the high remuneration of staff specialist. This proves to be costly for a concern with limited finance. Assumption of authority: The power of concern is with the line official but the staff dislikes it as they are the one more in mental work. Staff steals the show: In a line and staff concern, the higher returns are considered to be a product of staff advice and counseling. The line officials feel dissatisfied and a feeling of distress enters a concern. The satisfaction of line officials is very important for effective results. Functional Organization Functional organization has been divided to put the specialists in the top position throughout the enterprise. This is an organization in which we can define as a system in which functional department are created to deal with the problems of business at various levels. Functional authority remains confined to functional guidance to different departments. This helps in maintaining quality and uniformity of performance of different functions throughout the enterprise. The concept of Functional organization was suggested by F.W. Taylor who recommended the appointment of specialists at important positions. For example, the functional head and Marketing Director directs the subordinates throughout the organization in his particular area. This means that subordinates receives orders from several specialists, managers working above them. Features of Functional Organization The entire organizational activities are divided into specific functions such as operations, finance, marketing and personal relations. Complex form of administrative organization compared to the other two. Three authorities exist- Line, staff and function. Each functional area is put under the charge of functional specialists and he has got the authority to give all decisions regarding the function whenever the function is performed throughout the enterprise. Principle of unity of command does not apply to such organization as it is present in line organization. Merits of Functional Organization Specialization: Better division of labor takes place which results in specialization of function and its consequent benefit. Effective Control: Management control is simplified as the mental functions are separated from manual functions. Checks and balances keep the authority within certain limits. Specialists may be asked to judge the performance of various sections. Efficiency: Greater efficiency is achieved because of every function performing a limited number of functions. Economy: Specialization compiled with standardization facilitates maximum production and economical costs. Expansion: Expert knowledge of functional manager facilitates better control and supervision. Demerits of Functional Organization Confusion: The functional system is quite complicated to put into operation, especially when it is carried out at low levels. Therefore, co- ordination becomes difficult. Lack of Co- ordination: Disciplinary control becomes weak as a worker is commanded not by one person but a large number of people. Thus, there is no unity of command. Difficulty in fixing responsibility: Because of multiple authorities, it is difficult to fix responsibility. Conflicts: There may be conflicts among the supervisory staff of equal ranks. They may not agree on certain issues. Costly: Maintenance of specialist’s staff of the highest order is expensive for a concern. Delegation of Authority A manager alone cannot perform all the tasks assigned to him. In order to meet the targets, the manager should delegate authority. Delegation of Authority means division of authority and powers downwards to the subordinate. Delegation is about entrusting someone else to do parts of your job. Delegation of authority can be defined as subdivision and sub-allocation of powers to the subordinates in order to achieve effective results. Elements of Delegation Authority: in context of a business organization, authority can be defined as the power and right of a person to use and allocate the resources efficiently, to take decisions and to give orders so as to achieve the organizational objectives. Authority must be well- defined. All people who have the authority should know what is the scope of their authority is and they shouldn’t misutilize it. Authority is the right to give commands, orders and get the things done. The top level management has greatest authority. Authority always flows from top to bottom. It explains how a superior gets work done from his subordinate by clearly explaining what is expected of him and how he should go about it. Authority should be accompanied with an equal amount of responsibility. Delegating the authority to someone else doesn’t imply escaping from accountability. Accountability still rest with the person having the utmost authority. Responsibility: is the duty of the person to complete the task assigned to him. A person who is given the responsibility should ensure that he accomplishes the tasks assigned to him. If the tasks for which he was held responsible are not completed, then he should not give explanations or excuses. Responsibility without adequate authority leads to discontent and dissatisfaction among the person. Responsibility flows from bottom to top. The middle level and lower level management holds more responsibility. The person held responsible for a job is answerable for it. If he performs the tasks assigned as expected, he is bound for praises. While if he doesn’t accomplish tasks assigned as expected, then also he is answerable for that. Accountability: means giving explanations for any variance in the actual performance from the expectations set. Accountability cannot be delegated. For example, if ’A’ is given a task with sufficient authority, and ’A’ delegates this task to B and asks him to ensure that task is done well, responsibility rest with ’B’, but accountability still rest with ’A’. The top level management is most accountable. Being accountable means being innovative as the person will think beyond his scope of job. Accountability, in short, means being answerable for the end result. Accountability can’t be escaped. It arises from responsibility. For achieving delegation, a manager has to work in a system and has to perform following steps: - Assignment of tasks and duties Granting of authority Creating responsibility and accountability Delegation of authority is the base of superior-subordinate relationship, it involves following steps:- Assignment of Duties: The delegator first tries to define the task and duties to the subordinate. He also has to define the result expected from the subordinates. Clarity of duty as well as result expected has to be the first step in delegation. Granting of authority: Subdivision of authority takes place when a superior divides and shares his authority with the subordinate. It is for this reason; every subordinate should be given enough independence to carry the task given to him by his superiors. The managers at all levels delegate authority and power which is attached to their job positions. The subdivision of powers is very important to get effective results. Creating Responsibility and Accountability: The delegation process does not end once powers are granted to the subordinates. They at the same time have to be obligatory towards the duties assigned to them. Responsibility is said to be the factor or obligation of an individual to carry out his duties in best of his ability as per the directions of superior. Responsibility is very important. Therefore, it is that which gives effectiveness to authority. At the same time, responsibility is absolute and cannot be shifted. Accountability, on the others hand, is the obligation of the individual to carry out his duties as per the standards of performance. Therefore, it is said that authority is delegated, responsibility is created and accountability is imposed. Accountability arises out of responsibility and responsibility arises out of authority. Therefore, it becomes important that with every authority position an equal and opposite responsibility should be attached. Relationship between Authority and Responsibility Authority is the legal right of person or superior to command his subordinates while accountability is the obligation of individual to carry out his duties as per standards of performance Authority flows from the superiors to subordinates, in which orders and instructions are given to subordinates to complete the task. It is only through authority, a manager exercises control. In a way through exercising the control the superior is demanding accountability from subordinates. If the marketing manager directs the sales supervisor for 50 units of sale to be undertaken in a month, if the above standards are not accomplished, it is the marketing manager who will be accountable to the chief executive officer. Therefore, we can say that authority flows from top to bottom and responsibility flows from bottom to top. Accountability is a result of responsibility and responsibility is result of authority. Therefore, for every authority an equal accountability is attached. Authority Responsibility It is the legal right of a person or a superior to command his subordinates. It is the obligation of subordinate to perform the work assigned to him. Authority is attached to the position of a superior in concern. Responsibility arises out of superior–subordinate relationship in which subordinate agrees to carry out duty given to him. Authority can be delegated by a superior to a subordinate. Responsibility cannot be shifted and is absolute. It flows from top to bottom. It flows from bottom to top. Importance of Delegation Delegation of authority is a process in which the authority and powers are divided and shared amongst the subordinates. When the work of a manager gets beyond his capacity, there should be some system of sharing the work. This is how delegation of authority becomes an important tool in organization function. Through delegation, a manager, in fact, is multiplying himself by dividing/multiplying his work with the subordinates. The importance of delegation can be justified by: Through delegation, a manager is able to divide the work and allocate it to the subordinates. This helps in reducing his work load so that he can work on important areas such as - planning, business analysis etc. With the reduction of load on superior, he can concentrate his energy on important and critical issues of concern. This way he is able to bring effectiveness in his work as well in the work unit. This effectively helps a manager to prove his ability and skills in the best manner. Delegation of authority is the ground on which the superior-subordinate relationship stands. An organization functions as the authority flows from top level to bottom. This in fact shows that through delegation, the superior-subordinate relationship become meaningful. The flow of authority is from top to bottom which is a way of achieving results. Delegation of authority in a way gives enough room and space to the subordinates to flourish their abilities and skill. Through delegating powers, the subordinates get a feeling of importance. They get motivated to work and this motivation provides appropriate results to a concern. Job satisfaction is an important criterion to bring stability and soundness in the relationship between superior and subordinates. Delegation also helps in breaking the monotony of the subordinates so that they can be more creative and efficient. Delegation of authority is not only helpful to the subordinates but it also helps the managers to develop their talents and skills. Since the manager get enough time through delegation to concentrate on important issues, their decision-making gets strong and in a way they can flourish the talents which are required in a manager. Through granting powers and getting the work done, helps the manager to attain communication skills, supervision and guidance, effective motivation and the leadership traits are flourished. Therefore it is only through delegation, a manager can be tested on his traits. Delegation of authority is help to both superior and subordinates. This, in a way, gives stability to a concern’s working. With effective results, a concern can think of creating more departments and divisions flow working. This will require creation of more managers which can be fulfilled by shifting the experienced, skilled managers to these positions. This helps in both virtual as well as horizontal growth which is very important for a concern’s stability. Therefore, from the above points, we can justify that delegation is not just a process but it is a way by which manager multiples himself and is able to bring stability, ability and soundness to a concern. Principles of Delegation There are a few guidelines in form of principles which can be a help to the manager to process of delegation. The principles of delegation are as follows: - Principle of result excepted- suggests that every manager before delegating the powers to the subordinate should be able to clearly define the goals as well as results expected from them. The goals and targets should be completely and clearly defined and the standards of performance should also be notified clearly. For example, a marketing manager explains the salesmen regarding the units of sale to take place in a particular day, say ten units a day have to be the target sales. While a marketing manager provides these guidelines of sales, mentioning the target sales is very important so that the salesman can perform his duty efficiently with a clear set of mind. Principle of Parity of Authority and Responsibility- According to this principle, the manager should keep a balance between authority and responsibility. Both of them should go hand in hand. According to this principle, if a subordinate is given a responsibility to perform a task, then at the same time he should be given enough independence and power to carry out that task effectively. This principle also does not provide excessive authority to the subordinate which at times can be misused by him. The authority should be given in such a way which matches the task given to him. Therefore, there should be no degree of disparity between the two. Principle of absolute responsibility- This says that the authority can be delegated but responsibility cannot be delegated by managers to his subordinates which means responsibility is fixed. The manager at every level, no matter what is his authority, is always responsible to his superior for carrying out his task by delegating the powers. It does not means that he can escape from his responsibility. He will always remain responsible till the completion of task. Every superior is responsible for the acts of their subordinates and are accountable to their superior therefore the superiors cannot pass the blame to the subordinates even if he has delegated certain powers to subordinates example if the production manager has been given a work and the machine breaks down. If repairmen are not able to get repair work done, production manager will be responsible to CEO if their production is not completed. Principle of Authority level- This principle suggests that a manager should exercise his authority within the jurisdiction / framework given. The manager should be forced to consult their superiors with those matters of which the authority is not given that means before a manager takes any important decision, he should make sure that he has the authority to do that on the other hand, subordinate should also not frequently go with regards to their complaints as well as suggestions to their superior if they are not asked to do. This principle emphasizes on the degree of authority and the level up to which it has to be maintained. Centralization and Decentralization Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. According to Allen, “Centralization” is the systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be:- Reservation of decision making power at top level. Reservation of operating authority with the middle level managers. Reservation of operation at lower level at the directions of the top level. Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions Like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son. On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management. The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, “Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points. Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”. Decentralization is wider in scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation the managers remain answerable even for the acts of subordinates to their superiors. Implications of Decentralization There are fewer burdens on the Chief Executive as in the case of centralization. In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it. In decentralization, diversification and horizontal can be easily implanted. In decentralization, concern diversification of activities can place effectively since there is more scope for creating new departments. Therefore, diversification growth is of a degree. In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up. In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide. In a decentralization structure, co-ordination to some extent is difficult to maintain as there are lot many department divisions and authority is delegated to maximum possible extent, i.e., to the bottom most level delegation reaches. Centralization and decentralization are the categories by which the pattern of authority relationships became clear. The degree of centralization and de-centralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it. Delegation and Decentralization Decentralization can be called as extension of delegation. When delegation of authority is done to the fullest possible extent, it gives use to decentralization. Basis Delegation Decentralization Meaning Managers delegate some of their function and authority to their subordinates. Right to take decisions is shared by top management and other level of management. Scope Scope of delegation is limited as superior delegates the powers to the subordinates on individual bases. Scope is wide as the decision making is shared by the subordinates also. Responsibility Responsibility remains of the managers and cannot be delegated Responsibility is also delegated to subordinates. Freedom of Work Freedom is not given to the subordinates as they have to work as per the instructions of their superiors. Freedom to work can be maintained by subordinates as they are free to take decision and to implement it. Nature It is a routine function. It is an important decision of an enterprise. Need on purpose Delegation is important in all concerns whether big or small. No enterprises can work without delegation. Decentralization becomes more important in large concerns and it depends upon the decision made by the enterprise, it is not compulsory. Grant of Authority The authority is granted by one individual to another. It is a systematic act which takes place at all levels and at all functions in a concern. Grant of Responsibility Responsibility cannot be delegated Authority with responsibility is delegated to subordinates. Degree Degree of delegation varies from concern to concern and department to department. Decentralization is total by nature. It spreads throughout the organization i.e. at all levels and all functions. Process Delegation is a process which explains superior subordinate’s relationship. It is an outcome which explains relationship between top management and all other departments. Essentiality Delegation is essential of all kinds of concerns. Decentralization is a decisions function by nature. Significance Delegation is essential for creating the organization Decentralization is an optional policy at the discretion of top management. Withdrawal Delegated authority can be taken back. It is considered as a general policy of top management and is applicable to all departments. Freedom of Action Little freedom to subordinates Considerable freedom Formal and informal organization Formal organization A formal organization refers to the structure of well defined jobs, each bearing a definite measure of authority, responsibility and accountability. Thus, a formal organization is created through the co-ordination of efforts of various individuals. Every member is responsible for the performance of a specified task assigned to him on the basis of authority responsibility relationship in an organization. Informal organization Informal organization refers to the relationship between people in an organization based on personal attitudes, emotion, prejudices, likes and dislikes, etc. These relations are not developed according to procedures and regulations laid down in the formal organization. Benefits of Informal organization to employees Sense of belonging: In a formal organization, there is lack of sense of belongingness and personal satisfaction. Value for emotional problems: In the daily work routine there are many opportunities for tension and frustration. Aid on the job: In case of accidents or illness, members of an informal group help one another. Innovation and originality: By enabling members to modify the job situation more to their liking, the informal organization creates the necessary environment for individual innovation and originality. The individual can experiment with his ideas. Important channel of communication: News travels quickly via informal groups. They are the clandestine transmitters and receivers of information before it is officially released. Social control: Informal groups provide all its members a set of norms or guides to correct behaviour. Members are expected to conform to those norms. Check on authority: Informal group forces the manager to plan and act more carefully than he would otherwise. Informal organization is a check and balance on unlimited use of authority by a manager. Benefits of Informal organization to management Less supervision: Informal group is self-policing. This relieves the management of much of the burden of supervision. An aid to management: The information gives the manager much feedback about employees and their work experiences thereby increasing his understanding of what he needs to do. Disadvantages of an Informal organization Resistance to change: An informal organization is bound by customs, conventions and culture. Role conflict and sub-optimization: In an informal organization, everyone works towards the same objectives. Members put their own group objectives ahead of organization’s objectives. Hence, the organization suffers. Rumour: An informal organization sometimes functions as a carrier of rumour. Group think philosophy: Workers become loyal to their groups. Leadership Basics Leadership is a process by which an executive can direct, guide and influence the behavior and work of others towards accomplishment of specific goals in a given situation. Leadership is the ability of a manager to induce the subordinates to work with confidence and zeal. Leadership is the potential to influence behaviour of others. It is also defined as the capacity to influence a group towards the realization of a goal. Leaders are required to develop future visions, and to motivate the organizational members to want to achieve the visions. According to Keith Davis, “Leadership is the ability to persuade others to seek defined objectives enthusiastically. It is the human factor which binds a group together and motivates it towards goals.” Characteristics of Leadership It is an inter-personal process in which a manager is into influencing and guiding workers towards attainment of goals. It denotes a few qualities to be present in a person who includes intelligence, maturity and personality. It is a group process. It involves two or more people interacting with each other. A leader is involved in shaping and moulding the behaviour of the group towards accomplishment of organizational goals. Leadership is situation bound. There is no best style of leadership. It all depends upon tackling with the situations. Importance of Leadership Leadership is an important function of management which helps to maximize efficiency and to achieve organizational goals. The following points justify the importance of leadership in a concern. Initiates action: Leader is a person who starts the work by communicating the policies and plans to the subordinates from where the work actually starts. Motivation: A leader proves to be playing an incentive role in the concern’s working. He motivates the employees with economic and non-economic rewards and thereby gets the work from the subordinates. Providing guidance: A leader has to not only supervise but also play a guiding role for the subordinates. Guidance here means instructing the subordinates the way they have to perform their work effectively and efficiently. Creating confidence: Confidence is an important factor which can be achieved through expressing the work efforts to the subordinates, explaining them clearly their role and giving them guidelines to achieve the goals effectively. It is also important to hear the employees with regards to their complaints and problems. Building morale: Morale denotes willing co-operation of the employees towards their work and getting them into confidence and winning their trust. A leader can be a morale booster by achieving full co-operation so that they perform with best of their abilities as they work to achieve goals. Builds work environment: Management is getting things done from people. An efficient work environment helps in sound and stable growth. Therefore, human relations should be kept into mind by a leader. He should have personal contacts with employees and should listen to their problems and solve them. He should treat employees on humanitarian terms. Co-ordination: Co-ordination can be achieved through reconciling personal interests with organizational goals. This synchronization can be achieved through proper and effective co-ordination which should be primary motive of a leader. Role of a Leader Following are the main roles of a leader in an organization: Required at all levels: Leadership is a function which is important at all levels of management. In the top level, it is important for getting co-operation in formulation of plans and policies. In the middle and lower level, it is required for interpretation and execution of plans and programmes framed by the top management. Leadership can be exercised through guidance and counseling of the subordinates at the time of execution of plans. Representative of the organization: A leader, i.e., a manager is said to be the representative of the enterprise. He has to represent the concern at seminars, conferences, general meetings, etc. His role is to communicate the rationale of the enterprise to outside public. He is also representative of the own department which he leads. Integrates and reconciles the personal goals with organizational goals: A leader through leadership traits helps in reconciling/ integrating the personal goals of the employees with the organizational goals. He is trying to co-ordinate the efforts of people towards a common purpose and thereby achieves objectives. This can be done only if he can influence and get willing co-operation and urge to accomplish the objectives. He solicits support: A leader is a manager and besides that he is a person who entertains and invites support and co- operation of subordinates. This he can do by his personality, intelligence, maturity and experience which can provide him positive result. In this regard, a leader has to invite suggestions and if possible implement them into plans and programmes of enterprise. This way, he can solicit full support of employees which results in willingness to work and thereby effectiveness in running of a concern. As a friend, philosopher and guide: A leader must possess the three dimensional traits in him. He can be a friend by sharing the feelings, opinions and desires with the employees. He can be a philosopher by utilizing his intelligence and experience and thereby guiding the employees as and when time requires. He can be a guide by supervising and communicating the employees the plans and policies of top management and secure their co-operation to achieve the goals of a concern. At times he can also play the role of a counselor by counseling and a problem-solving approach. He can listen to the problems of the employees and try to solve them. Qualities of a Leader A leader has got multidimensional traits in him who makes him appealing and effective in behavior. The following are the requisites to be present in a good leader: Physical appearance: A leader must have a pleasing appearance. Physique and health are very important for a good leader. Vision and foresight: A leader cannot maintain influence unless he exhibits that he is forward looking. He has to visualize situations and thereby has to frame logical programmes. Intelligence: A leader should be intelligent enough to examine problems and difficult situations. He should be analytical who weighs pros and cons and then summarizes the situation. Therefore, a positive bent of mind and mature outlook is very important. Communicative skills: A leader must be able to communicate the policies and procedures clearly, precisely and effectively. This can be helpful in persuasion and stimulation. Objective: A leader has to be having a fair outlook which is free from bias and which does not reflects his willingness towards a particular individual. He should develop his own opinion and should base his judgment on facts and logic. Knowledge of work: A leader should be very precisely knowing the nature of work of his subordinates because it is then he can win the trust and confidence of his subordinates. Sense of responsibility: Responsibility and accountability towards an individual’s work is very important to bring a sense of influence. A leader must have a sense of responsibility towards organizational goals because only then he can get maximum of capabilities exploited in a real sense. For this, he has to motivate himself and arouse and urge to give best of his abilities. Only then he can motivate the subordinates to the best. Self-confidence and will-power: Confidence in him is important to earn the confidence of the subordinates. He should be trustworthy and should handle the situations with full will power. (You can read more about Self-Confidence at: Self Confidence - Tips to be Confident and Eliminate Your Apprehensions). Humanist: This trait to be present in a leader is essential because he deals with human beings and is in personal contact with them. He has to handle the personal problems of his subordinates with great care and attention. Therefore, treating the human beings on humanitarian grounds is essential for building a congenial environment. Empathy: It is an old adage “Stepping into the shoes of others”. This is very important because fair judgment and objectivity comes only then. A leader should understand the problems and complaints of employees and should also have a complete view of the needs and aspirations of the employees. This helps in improving human relations and personal contacts with the employees. From the above qualities present in a leader, one can understand the scope of leadership and it’s importance for scope of business. A leader cannot have all traits at one time. But a few of them helps in achieving effective results. Leadership and Management - Relationship & Differences Leadership and management are the terms that are often considered synonymous. It is essential to understand that leadership is an essential part of effective management. As a crucial component of management, remarkable leadership behaviour stresses upon building an environment in which each and every employee develops and excels. Leadership is defined as the potential to influence and drive the group efforts towards the accomplishment of goals. This influence may originate from formal sources, such as that provided by acquisition of managerial position in an organization. A manager must have traits of a leader, i.e., he must possess leadership qualities. Leaders develop and begin strategies that build and sustain competitive advantage. Organizations require robust leadership and robust management for optimal organizational efficiency. Differences between Leadership and Management Leadership differs from management in a sense that: While managers lay down the structure and delegates authority and responsibility, leaders provides direction by developing the organizational vision and communicating it to the employees and inspiring them to achieve it. While management includes focus on planning, organizing, staffing, directing and controlling; leadership is mainly a part of directing function of management. Leaders focus on listening, building relationships, teamwork, inspiring, motivating and persuading the followers. While a leader gets his authority from his followers, a manager gets his authority by virtue of his position in the organization. While managers follow the organization’s policies and procedure, the leaders follow their own instinct. Management is more of science as the managers are exact, planned, standard, logical and more of mind. Leadership, on the other hand, is an art. In an organization, if the managers are required, then leaders are a must/essential. While management deals with the technical dimension in an organization or the job content; leadership deals with the people aspect in an organization. While management measures/evaluates people by their name, past records, present performance; leadership sees and evaluates individuals as having potential for things that can’t be measured, i.e., it deals with future and the performance of people if their potential is fully extracted. If management is reactive, leadership is proactive. Management is based more on written communication, while leadership is based more on verbal communication. Leader versus Manager “Leadership and manager ship are two synonymous terms” is an incorrect statement. Leadership doesn’t require any managerial position to act as a leader. On the other hand, a manager can be a true manager only if he has got the traits of leader in him. By virtue of his position, manager has to provide leadership to his group. A manager has to perform all five functions to achieve goals, i.e., Planning, Organizing, Staffing, Directing, and Controlling. Leadership is a part of these functions. Leadership as a general term is not related to manager ship. A person can be a leader by virtue of qualities in him. For example: leader of a club, class, welfare association, social organization, etc. Therefore, it is true to say that, “All managers are leaders, but all leaders are not managers.” A leader is one who influences the behavior and work of others in group efforts towards achievement of specified goals in a given situation. On the other hand, manager can be a true manager only if he has got traits of leader in him. Manager at all levels are expected to be the leaders of work groups so that subordinates willingly carry instructions and accept their guidance. A person can be a leader by virtue of all qualities in him. Basis Manager Leader Origin A person becomes a manager by virtue of his position. A person becomes a leader on basis of his personal qualities. Formal Rights Manager has got formal rights in an organization because of his status. Rights are not available to a leader. Followers The subordinates are the followers of managers. The group of employees whom the leaders lead is his followers. Functions A manager performs all five functions of management. Leader influences people to work willingly for group objectives. Necessity A manager is very essential to a concern. A leader is required to create cordial relation between person working in and for organization. Stability It is more stable. Leadership is temporary. Mutual Relationship All managers are leaders. All leaders are not managers. Accountability Manager is accountable for self and subordinates behaviour and performance. Leaders have no well-defined accountability. Concern A manager’s concern is organizational goals. A leader’s concern is group goals and member’s satisfaction. Followers People follow manager by virtue of job description. People follow them on voluntary basis. Role continuation Sanctions Manager has command over allocation and distribution of sanctions. A leader has command over different sanctions and related task records. Leadership and Motivation Motivation is a goal-oriented characteristic that helps a person achieve his objectives. It pushes an individual to work hard at achieving his or her goals. An executive must have the right leadership traits to influence motivation. However, there is no specific blueprint for motivation. As a leader, one should keep an open perspective on human nature. Knowing different needs of subordinates will certainly make the decision-making process easier. Both an employee as well as manager must possess leadership and motivational traits. An effective leader must have a thorough knowledge of motivational factors for others. He must understand the basic needs of employees, peers and his superiors. Leadership is used as a means of motivating others. Given below are important guidelines that outline the basic view of motivation: Harmonize and match the subordinate needs with the organizational needs. As a leader, the executive must ensure that the business has the same morals and ethics that he seeks in his employees. He should make sure that his subordinates are encouraged and trained in a manner that meets the needs of the business. Appreciation and rewards are key motivators that influence a person to achieve a desired goal. Rewarding good/ exceptional behavior with a small token of appreciation, certificate or letter can be a great motivator. If a certificate is awarded to a person, it should mention the particular act or the quality for which the individual is being rewarded. Being a role model is also a key motivator that influences people in reaching their goals. A leader should set a good example to ensure his people to grow and achieve their goals effectively. Encouraging individuals to get involved in planning and important issues resolution procedure not only motivates them, but also teaches the intricacies of these key decision-making factors. Moreover, it will help everyone to get better understanding of their role in the organization. The communication will be unambiguous and will certainly attract acknowledgement and appreciation from the leader. Developing moral and team spirit certainly has a key impact on the well-being of an organization. The metal or emotional state of a person constitutes his or her moral fabric. A leader’s actions and decisions affect the morale of his subordinates. Hence, he should always be aware of his decisions and activities. Team spirit is the soul of the organization. The leader should always make sure his subordinates enjoy performing their duties as a team and make themselves a part of the organization’s plans. A leader should step into the shoes of the subordinates and view things from subordinate’s angle. He should empathize with them during difficult times. Empathizing with their personal problems makes them stronger-mentally and emotionally. A meaningful and challenging job accomplished inculcates a sense of achievement among employees. The executive must make their employees feel they are performing an important work that is necessary for the organization’s well-being and success. This motivational aspect drives them to fulfill goals. Remember, “To become an efficient leader, you must be self-motivated”. You must know your identity, your needs and you must have a strong urge to do anything to achieve your goals. Once you are self-motivated, only then you can motivate others to achieve their goals and to harmonize their personal goals with the common goals of the organization. Organizational Leadership Organizations need strong leadership for optimum effectiveness. Leadership, as we know, is a trait which is both inbuilt and can be acquired also. Organizational leadership deals with both human psychology as well as expert tactics. Organizational leadership emphasizes on developing leadership skills and abilities that are relevant across the organizations. It means the potential of the individuals to face the hard times in the industry and still grow during those times. It clearly identifies and distinguishes the leaders from the managers. The leader should have potential to control the group of individuals. An ideal organizational leader should not dominate over others. He should guide the individuals under him, give them a sense of direction to achieve organizational goals successfully and should act responsibly. He should be optimistic for sure. He should be empathetic and should understand the need of the group members. An organizational leader should not only lead others individually but also manage the actions of the group. Individuals who are highly ambitious, have high energy level, an urge to lead, self-confidence, intelligence, have thorough knowledge of job, are honest and flexible are more likely to succeed as organizational leaders. Individuals who learn the organizational leadership develop abilities and skills of teamwork, effective communication, conflict resolution, and group problem solving techniques. Organizational leaders clearly communicate organizational mission, vision and policies; build employees morale, ensure efficient business operations; help employees grow professionally and contribute positively towards organizations mission. Tips for Effective Organizational Leadership A leader must lead him, only then he can lead others. He must be committed on personal and professional front, and must be responsible. He must be a role model for others and set an example for them. A leader must boost up the morale of the employees. He should motivate them well so that they are committed to the organization. He should be well acquainted with them, have concern for them and encourage them to take initiatives. This will result in more efficient and effective employees and ensure organizational success. A leader must work as a team. He should always support his team and respect them. He should not hurt any employee. A true leader should not be too bossy and should not consider him as the supreme authority. He should realize that he is part of the organization as a whole. Organizational leadership involves all the processes and possible results that lead to development and achievement of organizational goals. It includes employees’ involvement, genuineness, effective listening and strategic communication. Leadership Ethics - Traits of an Ethical Leader Ethics refer to the desirable and appropriate values and morals according to an individual or the society at large. Ethics deal with the purity of individuals and their intentions. Ethics serve as guidelines for analyzing “what is good or bad” in a specific scenario. Correlating ethics with leadership, we find that ethics is all about the leader’s identity and the leader’s role. Ethical theories on leadership talk about two main things: (a) The actions and behaviour of leaders; and (b) the personality and character of leaders. It is essential to note that “Ethics are an essential to leadership”. A leader drives and influences the subordinates / followers to achieve a common goal, be it in case of team work, organizational quest, or any project. It is an ethical job of the leader to treat his subordinates with respect as each of them has unique personality. The ethical environment in an organization is built and developed by a leader as they have an influential role in the organization and due to the fact that leaders have an influence in developing the organizational values. An effective and ethical leader has the following traits / characteristics: Dignity and respectfulness: He respects others. An ethical leader should not use his followers as a medium to achieve his personal goals. He should respect their feelings, decision and values. Respecting the followers implies listening effectively to them, being compassionate to them, as well as being liberal in hearing opposing viewpoints. In short, it implies treating the followers in a manner that authenticate their values and beliefs. Serving others: He serves others. An ethical leader should place his follower’s interests ahead of his interests. He should be humane. He must act in a manner that is always fruitful for his followers. Justice: He is fair and just. An ethical leader must treat all his followers equally. There should be no personal bias. Wherever some followers are treated differently, the ground for differential treatment should be fair, clear, and built on morality. Community building: He develops community. An ethical leader considers his own purpose as well as his followers’ purpose, while making efforts to achieve the goals suitable to both of them. He is considerate to the community interests. He does not overlook the followers’ intentions. He works harder for the community goals. Honesty: He is loyal and honest. Honesty is essential to be an ethical and effective leader. Honest leaders can be always relied upon and depended upon. They always earn respect of their followers. An honest leader presents the fact and circumstances truly and completely, no matter how critical and harmful the fact may be. He does not misrepresent any fact. It is essential to note that leadership is all about values, and it is impossible to be a leader if you lack the awareness and concern for your own personal values. Leadership has a moral and ethical aspect. These ethics define leadership. Leaders can use the above mentioned traits as yardsticks for influencing their own behavior. Leadership Strategy - Which Leadership Style to Follow? Without an effective leadership strategy, it is believed, that the organizational strategies do not work. Best players in a team do not guarantee success without a great coach, similarly, work teams may not function effectively if leaders do not follow an appropriate leadership strategy. To understand leadership styles here are three scenarios - Scenario 1 - A Teacher gives a question to the class full of students, however, solves it for them; Scenario 2 - A Teacher gives the question to the students and observes how students solve them; Scenario 3 - A Teacher gives a question to the students and moves around the class, observes the students, and helps wherever required. Scenario 1 was “Leading from the Front”, Scenario 2 was “Supportive Leadership Style”, and Scenario 3 was “Interactive Leadership Style”. Besides this the leadership styles / strategies could be based on personality traits like Directive Leadership, Structured Leadership, Intuitive Leadership, or Process Driven leadership. Here are some tips while selecting leadership strategy / style: A leader must be aware of his / her personality traits and those of his team members / followers to understand which leadership style will be most effective. A leader may not adopt a consistent leadership all through his / her career. Situational Leadership helps addressing varied needs / expectations of the followers as he the leader adopts a strategy based on a situation he / she is in. In case a leader has a self-reliant team, he needs to be using a directive leadership style or lead form the front. He could instead delegate and provide inputs where necessary. Common mistakes especially a lot of new leaders make is to copy established / well know leaders. Remember, each situation is unique and so are the followers. A leadership style which may be suited to a well-known leader may not be appropriate for your team. Make no mistake here - do not try and imitate other leaders. A leader will never be afraid of trying new approach to solve a work problem or address a conflicting situation. It is quite a possibility that a leader adopts a style that is not by the book. A leader must keep enhancing his / her leadership skills. While on the job experience matters a lot, getting enrolled into leadership courses after detailed evaluation of the program and feedback of the participants will help implementing a leadership style more effectively. It is often said that good leaders are born and not made; however, good leaders are those who are aware of their personality traits and also of their followers. They know which leadership style is to be adopted in a particular situation. Once this is done, there is a little challenge left for a leader to become a “good / great” leader. Leadership Styles - Important Leadership Styles All leaders do not possess same attitude or same perspective. As discussed earlier, few leaders adopt the carrot approach and a few adopt the stick approach. Thus, all of the leaders do not get the things done in the same manner. Their style varies. The leadership style varies with the kind of people the leader interacts and deals with. A perfect/standard leadership style is one which assists a leader in getting the best out of the people who follow him. Some of the important leadership styles are as follows: Autocratic leadership style:In this style of leadership, a leader has complete command and hold over their employees/team. The team cannot put forward their views even if they are best for the teams or organizational interests. They cannot criticize or question the leader’s way of getting things done. The leader himself gets the things done. The advantage of this style is that it leads to speedy decision-making and greater productivity under leader’s supervision. Drawbacks of this leadership style are that it leads to greater employee absenteeism and turnover. This leadership style works only when the leader is the best in performing or when the job is monotonous, unskilled and routine in nature or where the project is short-term and risky. The Laissez Faire Leadership Style: Here, the leader totally trusts their employees/team to perform the job themselves. He just concentrates on the intellectual/rational aspect of his work and does not focus on the management aspect of his work. The team/employees are welcomed to share their views and provide suggestions which are best for organizational interests. This leadership style works only when the employees are skilled, loyal, experienced and intellectual. Democrative/Participative leadership style:The leaders invite and encourage the team members to play an important role in decision-making process, though the ultimate decision-making power rests with the leader. The leader guides the employees on what to perform and how to perform, while the employees communicate to the leader their experience and the suggestions if any. The advantages of this leadership style are that it leads to satisfied, motivated and more skilled employees. It leads to an optimistic work environment and also encourages creativity. This leadership style has the only drawback that it is time-consuming. Bureaucratic leadership: Here the leaders strictly adhere to the organizational rules and policies. Also, they make sure that the employees/team also strictly follows the rules and procedures. Promotions take place on the basis of employees’ ability to adhere to organizational rules. This leadership style gradually develops over time. This leadership style is more suitable when safe work conditions and quality are required. But this leadership style discourages creativity and does not make employees self-contented. What is Motivation? Motivation is the word derived from the word ’motive’ which means needs, desires, wants or drives within the individuals. It is the process of stimulating people to actions to accomplish the goals. In the work goal context the psychological factors stimulating the people’s behaviour can be - Desire for money Success Recognition Job-satisfaction Team work, etc. One of the most important functions of management is to create willingness amongst the employees to perform in the best of their abilities. Therefore the role of a leader is to arouse interest in performance of employees in their jobs. The process of motivation consists of three stages:- A felt need or drive A stimulus in which needs have to be aroused When needs are satisfied, the satisfaction or accomplishment of goals. Therefore, we can say that motivation is a psychological phenomenon which means needs and wants of the individuals have to be tackled by framing an incentive plan. Maslow’s Need Hierarchy Model Human behavior is goal-directed. Motivation cause goal-directed behaviour. It is through motivation that needs can be handled and tackled purposely. This can be understood by understanding the hierarchy of needs by manager. The needs of individual are serves as a driving force in human behaviour. Therefore, a manager must understand the “hierarchy of needs”. Maslow has proposed “The Need Hierarchy Model”. Self-actualization Needs Esteem Needs Social Needs Security Needs Physiological Needs The needs have been classified into the following in order: Physiological needs: These are the basic needs of an individual which includes food, clothing, shelter, air, water, etc. These needs relate to the survival and maintenance of human life. Safety needs: These needs are also important for human beings. Everybody wants job security, protection against danger, safety of property, etc. Social needs: These needs emerge from society. Man is a social animal. These needs become important. For example- love, affection, belongingness, friendship, conversation, etc. Esteem needs: These needs relate to desire for self-respect, recognition and respect from others. Self-actualization needs: These are the needs of the highest order and these needs are found in those people whose previous four needs are satisfied. This will include need for social service, meditation. Motivation Incentives - Incentives to motivate employee Incentive is an act or promise for greater action. It is also called as a stimulus to greater action. Incentives are something which is given in addition to wagers. It means additional remuneration or benefit to an employee in recognition of achievement or better work. Incentives provide a spur or zeal in the employees for better performance. It is a natural thing that nobody acts without a purpose behind. Therefore, a hope for a reward is a powerful incentive to motivate employees. Besides monetary incentive, there are some other stimuli which can drive a person to better. This will include job satisfaction, job security, job promotion, and pride for accomplishment. Therefore, incentives really can sometimes work to accomplish the goals of a concern. The need of incentives can be many:- To increase productivity, To drive or arouse a stimulus work, To enhance commitment in work performance, To psychologically satisfy a person which leads to job satisfaction, To shape the behavior or outlook of subordinate towards work, To inculcate zeal and enthusiasm towards work, To get the maximum of their capabilities so that they are exploited and utilized maximally. Therefore, management has to offer the following two categories of incentives to motivate employees:- Monetary incentives: Those incentives which satisfy the subordinates by providing them rewards in terms of rupees. Money has been recognized as a chief source of satisfying the needs of people. Money is also helpful to satisfy the social needs by possessing various material items. Therefore, money not only satisfies psychological needs but also the security and social needs. Therefore, in many factories, various wage plans and bonus schemes are introduced to motivate and stimulate the people to work. Non-monetary incentives: Besides the monetary incentives, there are certain non-financial incentives which can satisfy the ego and self- actualization needs of employees. The incentives which cannot be measured in terms of money are under the category of “Non- monetary incentives”. Whenever a manager has to satisfy the psychological needs of the subordinates, he makes use of non-financial incentives. Non- financial incentives can be of the following types:- Security of service: Job security is an incentive which provides great motivation to employees. If his job is secured, he will put maximum efforts to achieve the objectives of the enterprise. This also helps since he is very far off from mental tension and he can give his best to the enterprise. Praise or recognition: The praise or recognition is another non- financial incentive which satisfies the ego needs of the employees. Sometimes praise becomes more effective than any other incentive. The employees will respond more to praise and try to give the best of their abilities to a concern. Suggestion scheme: The organization should look forward to taking suggestions and inviting suggestion schemes from the subordinates. This inculcates a spirit of participation in the employees. This can be done by publishing various articles written by employees to improve the work environment which can be published in various magazines of the company. This also is helpful to motivate the employees to feel important and they can also be in search for innovative methods which can be applied for better work methods. This ultimately helps in growing a concern and adapting new methods of operations. Job enrichment: Job enrichment is another non- monetary incentive in which the job of a worker can be enriched. This can be done by increasing his responsibilities, giving him an important designation, increasing the content and nature of the work. This way efficient worker can get challenging jobs in which they can prove their worth. This also helps in the greatest motivation of the efficient employees. Promotion opportunities: Promotion is an effective tool to increase the spirit to work in a concern. If the employees are provided opportunities for the advancement and growth, they feel satisfied and contented and they become more committed to the organization. The above non- financial tools can be framed effectively by giving due concentration to the role of employees. A combination of financial and non- financial incentives help together in bringing motivation and zeal to work in a concern. Positive Incentives Positive incentives are those incentives which provide a positive assurance for fulfilling the needs and wants. Positive incentives generally have an optimistic attitude behind and they are generally given to satisfy the psychological requirements of employees. For example-promotion, praise, recognition, perks and allowances, etc. It is positive by nature. Negative Incentives Negative incentives are those whose purpose is to correct the mistakes or defaults of employees. The purpose is to rectify mistakes in order to get effective results. Negative incentive is generally resorted to when positive incentive does not work and a psychological set back has to be given to employees. It is negative by nature. For example- demotion, transfer, fines, penalties. Importance of Motivation Motivation is a very important for an organization because of the following benefits it provides:- Puts human resources into action Every concern requires physical, financial and human resources to accomplish the goals. It is through motivation that the human resources can be utilized by making full use of it. This can be done by building willingness in employees to work. This will help the enterprise in securing best possible utilization of resources. Improves level of efficiency of employees The level of a subordinate or an employee does not only depend upon his qualifications and abilities. For getting best of his work performance, the gap between ability and willingness has to be filled which helps in improving the level of performance of subordinates. This will result into- Increase in productivity, Reducing cost of operations, and Improving overall efficiency. Leads to achievement of organizational goals The goals of an enterprise can be achieved only when the following factors take place :- There is best possible utilization of resources, There is a co-operative work environment, The employees are goal-directed and they act in a purposive manner, Goals can be achieved if co-ordination and co-operation takes place simultaneously which can be effectively done through motivation. Builds friendly relationship Motivation is an important factor which brings employees satisfaction. This can be done by keeping into mind and framing an incentive plan for the benefit of the employees. This could initiate the following things: Monetary and non-monetary incentives, Promotion opportunities for employees, Disincentives for inefficient employees. In order to build a cordial, friendly atmosphere in a concern, the above steps should be taken by a manager. This would help in: Effective co-operation which brings stability, Industrial dispute and unrest in employees will reduce, The employees will be adaptable to the changes and there will be no resistance to the change, This will help in providing a smooth and sound concern in which individual interests will coincide with the organizational interests, This will result in profit maximization through increased productivity. Leads to stability of work force Stability of workforce is very important from the point of view of reputation and goodwill of a concern. The employees can remain loyal to the enterprise only when they have a feeling of participation in the management. The skills and efficiency of employees will always be of advantage to employees as well as employees. This will lead to a good public image in the market which will attract competent and qualified people into a concern. As it is said, “Old is gold” which suffices with the role of motivation here, the older the people, more the experience and their adjustment into a concern which can be of benefit to the enterprise. From the above discussion, we can say that motivation is an internal feeling which can be understood only by manager since he is in close contact with the employees. Needs, wants and desires are inter-related and they are the driving force to act. These needs can be understood by the manager and he can frame motivation plans accordingly. We can say that motivation therefore is a continuous process since motivation process is based on needs which are unlimited. The process has to be continued throughout. We can summarize by saying that motivation is important both to an individual and a business. Motivation is important to an individual as: Motivation will help him achieve his personal goals. If an individual is motivated, he will have job satisfaction. Motivation will help in self-development of individual. An individual would always gain by working with a dynamic team. Similarly, motivation is important to a business as: The more motivated the employees are, the more empowered the team is. The more is the team work and individual employee contribution, more profitable and successful is the business. During period of amendments, there will be more adaptability and creativity. Motivation will lead to an optimistic and challenging attitude at work place. Motivation and Morale - Relationship and Differences Morale can be defined as the total satisfaction derived by an individual from his job, his work-group, his superior, the organization he works for and the environment. It generally relates to the feeling of individual’s comfort, happiness and satisfaction. According to Davis, “Morale is a mental condition of groups and individuals which determines their attitude.” In short, morale is a fusion of employees’ attitudes, behaviour, manifestation of views and opinions - all taken together in their work scenarios, exhibiting the employees’ feelings towards work, working terms and relation with their employers. Morale includes employees’ attitudes on and specific reaction to their job. There are two states of morale: High morale: High morale implies determination at work- an essential in achievement of management objectives. High morale results in: A keen teamwork on part of the employees. Organizational Commitment and a sense of belongingness in the employees mind. Immediate conflict identification and resolution. Healthy and safe work environment. Effective communication in the organization. Increase in productivity. Greater motivation. Low morale - Low morale has following features: Greater grievances and conflicts in organization. High rate of employee absenteeism and turnover. Dissatisfaction with the superiors and employers. Poor working conditions. Employee’s frustration. Decrease in productivity. Lack of motivation. Though motivation and morale are closely related concepts, they are different in following ways: While motivation is an internal-psychological drive of an individual which urges him to behave in a specific manner, morale is more of a group scenario. Higher motivation often leads to higher morale of employees, but high morale does not essentially result in greatly motivated employees as to have a positive attitude towards all factors of work situation may not essentially force the employees to work more efficiently. While motivation is an individual concept, morale is a group concept. Thus, motivation takes into consideration the individual differences among the employees, and morale of the employees can be increased by taking those factors into consideration which influence group scenario or total work settings. Motivation acquires primary concern in every organization, while morale is a secondary phenomenon because high motivation essentially leads to higher productivity while high morale may not necessarily lead to higher productivity. Things tied to morale are usually things that are just part of the work environment, and things tied to motivation are tied to the performance of the individual. Staff Motivation - Motivation Tips for Employees Employees are the building blocks of an organization. Organizational success depends on the collective efforts of the employees. The employees will collectively contribute to organizational growth when they are motivated. Below mentioned are some tips for motivating the staff / employees in an organization: Evaluate yourself: In order to motivate, encourage and control your staff’s behaviour, it is essential to understand, encourage and control your own behaviour as a manager. Work upon utilizing your strengths and opportunities to neutralize and lower the negative impact of your weaknesses and organizational threats. The manager should adopt the approach “You’re OK - I’m OK”. Be familiar with your staff: The manager should be well acquainted with his staff. The more and the better he knows his staff, the simpler it is to get them involved in the job as well as in achieving the team and organizational goals. This will also invite staff’s commitment and loyalty. A cordial superior-subordinate relationship is a key factor in job-satisfaction. Provide the employees certain benefits: Give your staff some financial and other benefits. Give them bonuses, pay them for overtime, and give them health and family insurance benefits. Make sure they get breaks from work. Let them enjoy vacations and holidays. Participate in new employee’s induction Programme: Induction proceeds with recruitment advertising. At this point of time, the potential entrants start creating their own impressions and desires about the job and the organization. The manner in which the selection is conducted and the consequent recruitment process will either build or damage the impression about the job and organization. Thus, the manager must have a say in framing the advertisement and also in the selection and recruitment process. After the decision about the candidate is made, the manager must take personal interest in the selected joiner’s joining date, the family relocation issues, cost of removal, etc. Being observed by the new recruit and your entire team / staff to be involved completely, will ensure a persuasive entry in the organization. Provide feedback to the staff constantly: The staff members are keen to know how they are performing. Try giving a regular and constructive feedback to your staff. This will be more acceptable by the staff. Do not base the feedback on assumptions, but on facts and personal observations. Do not indulge in favoritism or comparing the employee with someone else. Sit with your staff on daily or weekly basis and make sure that feedback happens. This will help in boosting employee’s morale and will thus motivate the staff. Acknowledge your staff on their achievements: A pat on the back, some words of praise, and giving a note of credit to the employee / staff member at personal level with some form of broad publicity can motivate the staff a lot. Make it a point to mention the staff’s outstanding achievements in official newsletters or organization’s journal. Not only acknowledge the employee with highest contribution, but also acknowledge the employee who meets and over exceeds the targets. Ensure effective time management: Having control over time ensures that things are done in right manner. Motivate your staff to have “closed” times, i.e., few hours when there are no interruptions for the staff in performing their job role so that they can concentrate on the job, and “open” times when the staff freely communicate and interact. Plan one to one sessions of interaction with your staff where they can ask their queries and also can get your attention and, thereby, they will not feel neglected. This all will work in long run to motivate the staff. Have stress management techniques in your organization: Create an environment in which you and your staff can work within optimum pressure levels. Ensure an optimistic attitude towards stress in the workplace. Have training sessions on stress management, and ensure a follow-up with group meetings on the manner stress can be lowered at work. Give your staff autonomy in work. Identify the stress symptoms in employees and try to deal with them. Use counseling technique: The employees’ / staff feelings towards the work, their peer, their superiors and towards the future can be effectively dealt through the staff counseling. Counseling provides an environment, incentive and support which enable the employee to achieve his identity. Give the employees learning opportunities: Employees should consistently learn new skills on the job. It has been well said by someone that with people hopping jobs more often than required and organizations no longer giving job security to employees, the young blood employees specifically realize that continuing learning is the best way to remain employable. Opportunities should be given to the employees to develop their skills and competencies and to make best use of their skills. Link the staff goals with the organizational goals. Set an example for your staff / subordinates: Be a role model for your staff. The staff would learn from what you do and not from what you say / claim. The way you interact with your clients / customers and how do you react later after the interaction is over have an impact upon the staff? The staff more closely observes your non-verbal communication (gestures, body language). Being unpunctual, wasting the organization’s capital, mismanaging organization’s physical equipment’s, asking the staff to do your personal work, etc. all has a negative impact on the staff. Try setting an example for your staff to follow. Smile often: Smiling can have a tremendous effect on boosting the morale of the staff. A smiling superior creates an optimistic and motivating work environment. Smiling is an essential component of the body language of confidence, acceptance and boldness. Smile consistently, naturally and often, to demonstrate that you feel good and positive about the staffs who work for you. It encourages new ideas and feedback from the staff. The staff does not feel hesitant and threatened to discuss their views this way. Listen effectively: Listening attentively is a form of recognizing and appreciating the person who is talking. Reciprocal / Mutual listening develops cordial and healthy personal relationships on which the employee / staff development rests. If the managers do not listen attentively to the subordinates, the morale of the subordinates lowers down and they do not feel like sharing their ideas or giving their views. Effective listening by the manager boosts up the employees’ morale and thus motivates them. Ensure effective communication: In order to motivate your staff, indulge in effective communication such as avoid using anger expressions, utilize questioning techniques to know staff’s mindset and analysis rather than ordering the staff what to do, base your judgements on facts and not on assumptions, use relaxed and steady tone of voice, listen effectively and be positive and helpful in your responses. Share your views with the staff. Develop and encourage creativity: The staff should be encouraged to develop the creativity skills so as to solve organizational problems. Give them time and resources for developing creativity. Let them hold constant brainstorming sessions. Invite ideas and suggestions from the staff. They may turn out to be very productive. Don’t be rigid. Be flexible: Introduce flexibility in work. Allow for flexible working hours if possible. Let the employees work at home occasionally if need arises. Do not be rigid in accepting ideas from your staff. Stimulate flexible attitudes in the employees who are accountable to you by asking what changes they would like to bring about if given a chance. Adopt job enrichment: Job enrichment implies giving room for a better quality of working life. It means facilitating people to achieve self-development, fame and success through a more challenging and interesting job which provides more promotional and advancement opportunities. Give employees more freedom in job, involve them in decision-making process, show them loyalty and celebrate their achievements. Respect your team: Respect not only the employees’ rights to share and express their views, and to be themselves, but their time too. This will ensure that the employees respect you and your time. Make the staff feel that they are respected not just as employees / workers but as individuals too. Workplace Motivation – Carrot or Stick approach doesn’t work anymore “I am in this job because I have no other option.” If this is what an employee of your company feels, read on to know how this statement can be changed to something more positive - “I love what I do.” First things first - whose responsibility is it to ensure that an employee loves his job? While an employee would say - the employer, the human resource experts have a different point of view which sounds fair. It’s both the employer and the employee who should work together to make work fun for each other. It is interesting to know here, that employees do not rank ’salary’ as the top factor in determining whether they like their jobs or not. What is important to them then - the opportunity to do what is ’important’. Almost all the employees would like to feel part of the big picture and would want to contribute to the organizational goals in some way or the other. Doing the mundane, routine work will never excite them - what excites them is - work that challenges them to use their talent. Right Management Consultants conducted a survey sometime back and found that 83% of about 500 workers surveyed were motivated by “challenges at work”. Also, as per an executive editor of the Harvard Business Review, while salary and promotions could do a great job of demotivating people if handled ineffectively, they aren’t so much effective in motivating people. So then what needs to be done for effective motivation at workplace? Link Rewards directly to Performance: An organization should adopt a fair reward structure which provides incentive to the most deserving employee. Have an incentive structure in place doesn’t solve the problem... what makes it workable is the employees trust in the system and believe that they will be rewarded if they perform well. Compliment employees: Even though an employee’s name has not appeared in the list of people getting incentives, go ahead and compliment that employee for a job well done - no matter how small. There is nothing more satisfying to an employee than a pat on his back. Be transparent: While there may be some strategic decisions which you might want to share with the employees at a later stage, make sure employees do not give in to the rumours. Stay in touch with the employees. Work on your PDP: Every employee is responsible for his / her own career. He / she should work towards his ’Personal Development Plan’ *PDP+ as discussed and agreed by his manager. Find out what are the training company offers and which is best suited to his development needs. How this will motivate you - remember training always increase your marketability and enhance your career. Participate and Network- Employees: Remember you work for a company where a one-on-one attention might not be possible. Do not wait for an invitation to participate in a discussion. If you are a part of a forum, then you have full right to express your opinion and be a part of the process. Expressing yourself is a good way of motivating yourself. Self-Motivation at Work Self-motivation is a power that drives us to keep moving ahead. It encourages continuous learning and success, whatever is the scenario. Self-motivation is a primary means of realizing our goals and progressing. It is basically related to our inventiveness in setting dynamic goals for ourselves, and our faith that we possess the required skills and competencies for achieving those challenging goals. We often feel the need for self-motivation. Following are the ways/techniques for self-motivation: Communicate and talk to get motivated: Communicating with someone can boost up your energy and make you go on track. Talk with optimistic and motivated individuals. They can be your colleagues, friends, wife, or any one with whom you can share your ideas. Remain optimistic: When facing hurdles; we always make efforts to find how to overcome them. Also, one should understand the good in bad. Discover your interest area: If you lack interest in current task, you should not proceed and continue with it. If an individual has no interest in the task, but if it is essential to perform, he should correlate it with a bigger ultimate goal. Self-acknowledgement: One should know when his motivation level is saturated and he feels like on top of the world. There will be a blueprint that once an individual acknowledge, he can proceed with his job and can grow. Monitor and record your success: Maintain a success bar for the assignments you are currently working on. When you observe any progress, you will obviously want to foster it. Uplift energy level: Energy is very essential for self-motivation. Do regular exercises. Have proper sleep. Have tea/coffee during breaks to refresh you. Assist, support and motivate others: Discuss and share your views and ideas with your friends and peers and assist them in getting motivated. When we observe others performing good, it will keep us motivated too. Invite feedback from others on your achievements. Encourage learning: Always encourages learning. Read and grasp the logic and jist of the reading. Learning makes an individual more confident in commencing new assignments. Break your bigger goals into smaller goals: Set a short time deadline for each smaller goal so as to achieve bigger goal on time. Team Motivation - Tips for Motivating Team A group heading towards a common objective will perform best when it is motivated as a team. Team motivation is determined by how well the team members’ needs and requirements are met by the team. Some tips for effective team motivation are as follows: The team’s objective should well align and synchronize with the team members needs and requirements. Give in written the team’s mission and ensure that all understand it (as mission is a foundation based on which the team performs). For maintaining motivation, the team should be given challenges (which must be difficult but achievable) consistently. Giving a team responsibility accompanied by authority can also be a good motivator for the team to perform. The team should be provided with growth opportunities. The team’s motivation level is high when the team members feel that they are being promoted, their skills and competencies are being enhanced, and they are learning new things consistently. Effective and true leaders can develop environment for the team to motivate itself. They provide spur for self- actualization behaviour of team members. Devote quality/productive time to your team. Have an optimistic and good relation with your team members. This will make you more acquainted with them and you can get knowledge of how well they are performing their job. Welcome their views and ideas as they may be fruitful and it will also boost their morale. Motivation is all about empowerment. The skills and competencies of the team members should be fully utilized. Empowering the team members makes them accountable for their own actions. Provide feedback to the team consistently. Become their mentor. Give the team recognition for good and outstanding performance. Give the team a constructive and not negative feedback. Discover and offset the factors which discourage team spirit such as too many conflicts, lethargy, team members’ escape from responsibilities, lack of job satisfaction, etc. Motivational Challenges Motivation seems to be a simple function of management in books, but in practice it is more challenging. The reasons for motivation being challenging job are as follows: One of the main reasons of motivation being a challenging job is due to the changing workforce. The employees become a part of their organization with various needs and expectations. Different employees have different beliefs, attitudes, values, backgrounds and thinking. But all the organizations are not aware of the diversity in their workforce and thus are not aware and clear about different ways of motivating their diverse workforce. Employees motives cannot be seen, they can only be presumed. Suppose, there are two employees in a team showing varying performance despite being of same age group, having same educational qualifications and same work experience. The reason being what motivates one employee may not seem motivating to other. Motivation of employees becomes challenging especially when the organizations have considerably changed the job role of the employees, or have lessened the hierarchy levels of hierarchy, or have chucked out a significant number of employees in the name of down-sizing or right-sizing. Certain firms have chosen to hire and fire and paying for performance strategies nearly giving up motivational efforts. These strategies are unsuccessful in making an individual overreach himself. The vigorous nature of needs also pose challenge to a manager in motivating his subordinates. This is because an employee at a certain point of time has diverse needs and expectations. Also, these needs and expectations keep on changing and might also clash with each other. For instance-the employees who spend extra time at work for meeting their needs for accomplishment might discover that the extra time spent by them clash with their social needs and with the need for affiliation. Essentials / Features of a Good Motivation System Motivation is a state of mind. High motivation leads to high morale and greater production. A motivated employee gives his best to the organization. He stays loyal and committed to the organization. A sound motivation system in an organization should have the following features: Superior performance should be reasonably rewarded and should be duely acknowledged. If the performance is not consistently up to the mark, then the system must make provisions for penalties. The employees must be dealt in a fair and just manner. The grievances and obstacles faced by them must be dealt instantly and fairly. Carrot and stick approach should be implemented to motivate both efficient and inefficient employees. The employees should treat negative consequences (such as fear of punishment) as stick, an outside push and move away from it. They should take positive consequences (such as reward) as carrot, an inner pull and move towards it. Performance appraisal system should be very effective. Ensure flexibility in working arrangements. A sound motivation system must be correlated to organizational goals. Thus, the individual/employee goals must be harmonized with the organizational goals. The motivational system must be modified to the situation and to the organization. A sound motivation system requires modifying the nature of individual’s jobs. The jobs should be redesigned or restructured according to the requirement of situation. Any of the alternatives to job specialization - job rotation, job enlargement, job enrichment, etc. could be used. The management approach should be participative. All the subordinates and employees should be involved in decision- making process. The motivation system should involve monetary as well as non- monetary rewards. The monetary rewards should be correlated to performance. Performance should be based on the employees’ action towards the goals, and not on the fame of employees. “Motivate yourself to motivate your employees” should be the managerial approach. The managers must understand and identify the motivators for each employee. Sound motivation system should encourage supportive supervision whereby the supervisors share their views and experiences with their subordinates, listen to the subordinates views, and assist the subordinates in performing the designated job. Classical Theories of Motivation The motivation concepts were mainly developed around 1950’s. Three main theories were made during this period. These three classical theories are- Maslow’s hierarchy of needs theory Herzberg’s Two factor theory Theory X and Theory Y These theories are building blocks of the contemporary theories developed later. The working mangers and learned professionals till date use these classical theories to explain the concept of employee motivation. Maslow’s Hierarchy of Needs Theory Abraham Maslow is well renowned for proposing the Hierarchy of Needs Theory in 1943. This theory is a classical depiction of human motivation. This theory is based on the assumption that there is a hierarchy of five needs within each individual. The urgency of these needs varies. These five needs are as follows- Physiological needs: These are the basic needs of air, water, food, clothing and shelter. In other words, physiological needs are the needs for basic amenities of life. Safety needs: Safety needs include physical, environmental and emotional safety and protection. For instance- Job security, financial security, protection from animals, family security, health security, etc. Social needs: Social needs include the need for love, affection, care, belongingness, and friendship. Esteem needs: Esteem needs are of two types: internal esteem needs (self- respect, confidence, competence, achievement and freedom) and external esteem needs (recognition, power, status, attention and admiration). Self-actualization need: This include the urge to become what you are capable of becoming / what you have the potential to become. It includes the need for growth and self-contentment. It also includes desire for gaining more knowledge, social- service, creativity and being aesthetic. The self- actualization needs are never fully satiable. As an individual grows psychologically, opportunities keep cropping up to continue growing. According to Maslow, individuals are motivated by unsatisfied needs. As each of these needs is significantly satisfied, it drives and forces the next need to emerge. Maslow grouped the five needs into two categories - Higher-order needs and Lower-order needs. The physiological and the safety needs constituted the lower-order needs. These lower-order needs are mainly satisfied externally. The social, esteem, and self-actualization needs constituted the higher-order needs. These higher-order needs are generally satisfied internally, i.e., within an individual. Thus, we can conclude that during boom period, the employees lower-order needs are significantly met. Implications of Maslow’s Hierarchy of Needs Theory for Managers As far as the physiological needs are concerned, the managers should give employees appropriate salaries to purchase the basic necessities of life. Breaks and eating opportunities should be given to employees. As far as the safety needs are concerned, the managers should provide the employees job security, safe and hygienic work environment, and retirement benefits so as to retain them. As far as social needs are concerned, the management should encourage teamwork and organize social events. As far as esteem needs are concerned, the managers can appreciate and reward employees on accomplishing and exceeding their targets. The management can give the deserved employee higher job rank / position in the organization. As far as self-actualization needs are concerned, the managers can give the employees challenging jobs in which the employees’ skills and competencies are fully utilized. Moreover, growth opportunities can be given to them so that they can reach the peak. The managers must identify the need level at which the employee is existing and then those needs can be utilized as push for motivation. Limitations of Maslow’s Theory It is essential to note that not all employees are governed by same set of needs. Different individuals may be driven by different needs at same point of time. It is always the most powerful unsatisfied need that motivates an individual. The theory is not empirically supported. The theory is not applicable in case of starving artist as even if the artist’s basic needs are not satisfied, he will still strive for recognition and achievement. Herzberg’s Two-Factor Theory of Motivation In 1959, Frederick Herzberg, a behavioral scientist proposed a two-factor theory or the motivator-hygiene theory. According to Herzberg, there are some job factors that result in satisfaction while there are other job factors that prevent dissatisfaction. According to Herzberg, the opposite of “Satisfaction” is “No satisfaction” and the opposite of “Dissatisfaction” is “No Dissatisfaction”. Herzberg classified these job factors into two categories- Hygiene factors: Hygiene factors are those job factors which are essential for existence of motivation at workplace. These do not lead to positive satisfaction for long-term. But if these factors are absent / if these factors are non-existent at workplace, then they lead to dissatisfaction. In other words, hygiene factors are those factors which when adequate / reasonable in a job, pacify the employees and do not make them dissatisfied. These factors are extrinsic to work. Hygiene factors are also called as dissatisfies or maintenance factors as they are required to avoid dissatisfaction. These factors describe the job environment / scenario. The hygiene factors symbolized the physiological needs which the individuals wanted and expected to be fulfilled. Hygiene factors include: Pay: The pay or salary structure should be appropriate and reasonable. It must be equal and competitive to those in the same industry in the same domain. Company Policies and administrative policies: The company policies should not be too rigid. They should be fair and clear. It should include flexible working hours, dress code, breaks, vacation, etc. Fringe benefits: The employees should be offered health care plans (mediclaim), benefits for the family members, employee help programmes, etc. Physical Working conditions: The working conditions should be safe, clean and hygienic. The work equipment’s should be updated and well-maintained. Status: The employees’ status within the organization should be familiar and retained. Interpersonal relations: The relationship of the employees with his peers, superiors and subordinates should be appropriate and acceptable. There should be no conflict or humiliation element present. Job Security: The organization must provide job security to the employees. Motivational factors: According to Herzberg, the hygiene factors cannot be regarded as motivators. The motivational factors yield positive satisfaction. These factors are inherent to work. These factors motivate the employees for a superior performance. These factors are called satisfiers. These are factors involved in performing the job. Employees find these factors intrinsically rewarding. The motivators symbolized the psychological needs that were perceived as an additional benefit. Motivational factors include: Recognition: The employees should be praised and recognized for their accomplishments by the managers. Sense of achievement: The employees must have a sense of achievement. This depends on the job. There must be a fruit of some sort in the job. Growth and promotional opportunities: There must be growth and advancement opportunities in an organization to motivate the employees to perform well. Responsibility: The employees must hold themselves responsible for the work. The managers should give them ownership of the work. They should minimize control but retain accountability. Meaningfulness of the work: The work itself should be meaningful, interesting and challenging for the employee to perform and to get motivated. Limitations of Two-Factor Theory The two factor theory is not free from limitations: The two-factor theory overlooks situational variables. Herzberg assumed a correlation between satisfaction and productivity. But the research conducted by Herzberg stressed upon satisfaction and ignored productivity. The theory’s reliability is uncertain. Analysis has to be made by the raters. The raters may spoil the findings by analyzing same response in different manner. No comprehensive measure of satisfaction was used. An employee may find his job acceptable despite the fact that he may hate/object part of his job. The two factor theory is not free from bias as it is based on the natural reaction of employees when they are enquired the sources of satisfaction and dissatisfaction at work. They will blame dissatisfaction on the external factors such as salary structure, company policies and peer relationship. Also, the employees will give credit to themselves for the satisfaction factor at work. The theory ignores blue-collar workers. Despite these limitations, Herzberg’s Two-Factor theory is acceptable broadly. Implications of Two-Factor Theory The Two-Factor theory implies that the managers must stress upon guaranteeing the adequacy of the hygiene factors to avoid employee dissatisfaction. Also, the managers must make sure that the work is stimulating and rewarding so that the employees are motivated to work and perform harder and better. This theory emphasize upon job-enrichment so as to motivate the employees. The job must utilize the employee’s skills and competencies to the maximum. Focusing on the motivational factors can improve work-quality. Theory X and Theory Y In 1960, Douglas McGregor formulated Theory X and Theory Y suggesting two aspects of human behaviour at work, or in other words, two different views of individuals (employees): one of which is negative, called as Theory X and the other is positive, so called as Theory Y. According to McGregor, the perception of managers on the nature of individuals is based on various assumptions. Assumptions of Theory X An average employee intrinsically does not like work and tries to escape it whenever possible. Since the employee does not want to work, he must be persuaded, compelled, or warned with punishment so as to achieve organizational goals. A close supervision is required on part of managers. The managers adopt a more dictatorial style. Many employees rank job security on top, and they have little or no aspiration/ ambition. Employees generally dislike responsibilities. Employees resist change. An average employee needs formal direction. Assumptions of Theory Y Employees can perceive their job as relaxing and normal. They exercise their physical and mental efforts in an inherent manner in their jobs. Employees may not require only threat, external control and coercion to work, but they can use self-direction and self-control if they are dedicated and sincere to achieve the organizational objectives. If the job is rewarding and satisfying, then it will result in employees’ loyalty and commitment to organization. An average employee can learn to admit and recognize the responsibility. In fact, he can even learn to obtain responsibility. The employees have skills and capabilities. Their logical capabilities should be fully utilized. In other words, the creativity, resourcefulness and innovative potentiality of the employees can be utilized to solve organizational problems. Thus, we can say that Theory X presents a pessimistic view of employees’ nature and behaviour at work, while Theory Y presents an optimistic view of the employees’ nature and behaviour at work. If correlate it with Maslow’s theory, we can say that Theory X is based on the assumption that the employees emphasize on the physiological needs and the safety needs; while Theory X is based on the assumption that the social needs, esteem needs and the self-actualization needs dominate the employees. McGregor views Theory Y to be more valid and reasonable than Theory X. Thus, he encouraged cordial team relations, responsible and stimulating jobs, and participation of all in decision-making process. Implications of Theory X and Theory Y Quite a few organizations use Theory X today. Theory X encourages use of tight control and supervision. It implies that employees are reluctant to organizational changes. Thus, it does not encourage innovation. Many organizations are using Theory Y techniques. Theory Y implies that the managers should create and encourage a work environment which provides opportunities to employees to take initiative and self-direction. Employees should be given opportunities to contribute to organizational well-being. Theory Y encourages decentralization of authority, teamwork and participative decision making in an organization. Theory Y searches and discovers the ways in which an employee can make significant contributions in an organization. It harmonizes and matches employees’ needs and aspirations with organizational needs and aspirations. Modern Theories of Motivation We all are familiar with the classical theories of motivation, but they all are not empirically supported. As far as contemporary theories of motivation are concerned, all are well supported with evidences. Some of the contemporary / modern theories of motivation are explained below: ERG Theory McClelland’s Theory of Needs Goal Setting Theory Reinforcement Theory Equity Theory of Motivation Expectancy Theory of Motivation ERG Theory of Motivation To bring Maslow’s need hierarchy theory of motivation in synchronization with empirical research, Clayton Alderfer redefined it in his own terms. His rework is called as ERG theory of motivation. He recategorized Maslow’s hierarchy of needs into three simpler and broader classes of needs: Existence needs: These include need for basic material necessities. In short, it includes an individual’s physiological and physical safety needs. Relatedness needs: These include the aspiration individuals have for maintaining significant interpersonal relationships (be it with family, peers or superiors), getting public fame and recognition. Maslow’s social needs and external component of esteem needs fall under this class of need. Growth needs: These include need for self-development and personal growth and advancement. Maslow’s self-actualization needs and intrinsic component of esteem needs fall under this category of need. Difference between Maslow Need Hierarchy Theory and Alderfer’s ERG Theory ERG Theory states that at a given point of time, more than one need may be operational. ERG Theory also shows that if the fulfillment of a higher-level need is subdued, there is an increase in desire for satisfying a lower-level need. According to Maslow, an individual remains at a particular need level until that need is satisfied. While according to ERG theory, if a higher- level need aggravates, an individual may revert to increase the satisfaction of a lower- level need. This is called frustration- regression aspect of ERG theory. For instance- when growth need aggravates, then an individual might be motivated to accomplish the relatedness need and if there are issues in accomplishing relatedness needs, then he might be motivated by the existence needs. Thus, frustration/aggravation can result in regression to a lower-level need. While Maslow’s need hierarchy theory is rigid as it assumes that the needs follow a specific and orderly hierarchy and unless a lower-level need is satisfied, an individual cannot proceed to the higher-level need; ERG Theory of motivation is very flexible as he perceived the needs as a range/variety rather than perceiving them as a hierarchy. According to Alderfer, an individual can work on growth needs even if his existence or relatedness needs remain unsatisfied. Thus, he gives explanation to the issue of “starving artist” who can struggle for growth even if he is hungry. Implications of the ERG Theory Managers must understand that an employee has various needs that must be satisfied at the same time. According to the ERG theory, if the manager concentrates solely on one need at a time, this will not effectively motivate the employee. Also, the frustration- regression aspect of ERG Theory has an added effect on workplace motivation. For instance- if an employee is not provided with growth and advancement opportunities in an organization, he might revert to the relatedness need such as socializing needs and to meet those socializing needs, if the environment or circumstances do not permit, he might revert to the need for money to fulfill those socializing needs. The sooner the manager realizes and discovers this, the more immediate steps they will take to fulfill those needs which are frustrated until such time that the employee can again pursue growth. McClelland’s Theory of Needs David McClelland and his associates proposed McClelland’s theory of Needs / Achievement Motivation Theory. This theory states that human behaviour is affected by three needs - Need for Power, Achievement and Affiliation. Need for achievement is the urge to excel, to accomplish in relation to a set of standards, to struggle to achieve success. Need for power is the desire to influence other individual’s behaviour as per your wish. In other words, it is the desire to have control over others and to be influential. Need for affiliation is a need for open and sociable interpersonal relationships. In other words, it is a desire for relationship based on co-operation and mutual understanding. The individuals with high achievement needs are highly motivated by competing and challenging work. They look for promotional opportunities in job. They have a strong urge for feedback on their achievement. Such individuals try to get satisfaction in performing things better. High achievement is directly related to high performance. Individuals who are better and above average performers are highly motivated. They assume responsibility for solving the problems at work. McClelland called such individuals as gamblers as they set challenging targets for themselves and they take deliberate risk to achieve those set targets. Such individuals look for innovative ways of performing job. They perceive achievement of goals as a reward, and value it more than a financial reward. The individuals who are motivated by power have a strong urge to be influential and controlling. They want that their views and ideas should dominate and thus, they want to lead. Such individuals are motivated by the need for reputation and self-esteem. Individuals with greater power and authority will perform better than those possessing less power. Generally, managers with high need for power turn out to be more efficient and successful managers. They are more determined and loyal to the organization they work for. Need for power should not always be taken negatively. It can be viewed as the need to have a positive effect on the organization and to support the organization in achieving it’s goals. The individuals who are motivated by affiliation have an urge for a friendly and supportive environment. Such individuals are effective performers in a team. These people want to be liked by others. The manager’s ability to make decisions is hampered if they have a high affiliation need as they prefer to be accepted and liked by others, and this weakens their objectivity. Individuals having high affiliation needs prefer working in an environment providing greater personal interaction. Such people have a need to be on the good books of all. They generally cannot be good leaders. Goal Setting Theory of Motivation In 1960’s, Edwin Locke put forward the Goal-setting theory of motivation. This theory states that goal setting is essentially linked to task performance. It states that specific and challenging goals along with appropriate feedback contribute to higher and better task performance. In simple words, goals indicate and give direction to an employee about what needs to be done and how much efforts are required to be put in. The important features of goal-setting theory are as follows: The willingness to work towards attainment of goal is main source of job motivation. Clear, particular and difficult goals are greater motivating factors than easy, general and vague goals. Page No. 63 of 143 Fundamentals of Management System B Level Paper I (B3.1) Specific and clear goals lead to greater output and better performance. Unambiguous, measurable and clear goals accompanied by a deadline for completion avoids misunderstanding. Goals should be realistic and challenging. This gives an individual a feeling of pride and triumph when he attains them, and sets him up for attainment of next goal. The more challenging the goal, the greater is the reward generally and the more is the passion for achieving it. Better and appropriate feedback of results directs the employee behaviour and contributes to higher performance than absence of feedback. Feedback is a means of gaining reputation, making clarifications and regulating goal difficulties. It helps employees to work with more involvement and leads to greater job satisfaction. Employees’ participation in goal is not always desirable. Participation of setting goal, however, makes goal more acceptable and leads to more involvement. Goal setting theory has certain eventualities such as: Self-efficiency: Self-efficiency is the individual’s self-confidence and faith that he has potential of performing the task. Higher the level of self-efficiency, greater will be the efforts put in by the individual when they face challenging tasks. While, lower the level of self-efficiency, less will be the efforts put in by the individual or he might even quit while meeting challenges. Goal commitment: Goal setting theory assumes that the individual is committed to the goal and will not leave the goal. The goal commitment is dependent on the following factors: ü Goals are made open, known and broadcasted. ü Goals should be set-self by individual rather than designated. ü Individual’s set goals should be consistent with the organizational goals and vision. Advantages of Goal Setting Theory Goal setting theory is a technique used to raise incentives for employees to complete work quickly and effectively. Goal setting leads to better performance by increasing motivation and efforts, but also through increasing and improving the feedback quality. Limitations of Goal Setting Theory At times, the organizational goals are in conflict with the managerial goals. Goal conflict has a detrimental effect on the performance if it motivates incompatible action drift. Very difficult and complex goals stimulate riskier behaviour. If the employee lacks skills and competencies to perform actions essential for goal, then the goal-setting can fail and lead to undermining of performance. There is no evidence to prove that goal-setting improves job satisfaction. Reinforcement Theory of Motivation Reinforcement theory of motivation was proposed by BF Skinner and his associates. It states that individual’s behaviour is a function of its consequences. It is based on “law of effect”, i.e, individual’s behaviour with positive consequences tends to be repeated, but individual’s behaviour with negative consequences tends not to be repeated. Page No. 64 of 143 Fundamentals of Management System B Level Paper I (B3.1) Reinforcement theory of motivation overlooks the internal state of individual, i.e., the inner feelings and drives of individuals are ignored by Skinner. This theory focuses totally on what happens to an individual when he takes some action. Thus, according to Skinner, the external environment of the organization must be designed effectively and positively so as to motivate the employee. This theory is a strong tool for analyzing controlling mechanism for individual’s behaviour. However, it does not focus on the causes of individual’s behaviour. The managers use the following methods for controlling the behaviour of the employees: Positive Reinforcement: This implies giving a positive response when an individual shows positive and required behaviour. For example - Immediately praising an employee for coming early for job. This will increase probability of outstanding behaviour occurring again. Reward is a positive reinforce, but not necessarily. If and only if the employees’ behaviour improves, reward can said to be a positive reinforcer. Positive reinforcement stimulates occurrence of behaviour. It must be noted that more spontaneous is the giving of reward, the greater reinforcement value it has. Negative Reinforcement: This implies rewarding an employee by removing negative / undesirable consequences. Both positive and negative reinforcement can be used for increasing desirable / required behaviour. Punishment: It implies removing positive consequences so as to lower the probability of repeating undesirable behaviour in future. In other words, punishment means applying undesirable consequence for showing undesirable behaviour. For instance - Suspending an employee for breaking the organizational rules. Punishment can be equalized by positive reinforcement from alternative source. Extinction: It implies absence of reinforcements. In other words, extinction implies lowering the probability of undesired behaviour by removing reward for that kind of behaviour. For instance - if an employee no longer receives praise and admiration for his good work, he may feel that his behaviour is generating no fruitful consequence. Extinction may unintentionally lower desirable behaviour. Implications of Reinforcement Theory Reinforcement theory explains in detail how an individual learns behaviour. Managers who are making attempt to motivate the employees must ensure that they do not reward all employees simultaneously. They must tell the employees what they are not doing correct. They must tell the employees how they can achieve positive reinforcement. Equity Theory of Motivation The core of the equity theory is the principle of balance or equity. As per this motivation theory, an individual’s motivation level is correlated to his perception of equity, fairness and justice practiced by the management. Higher is individual’s perception of fairness, greater is the motivation level and vice versa. While evaluating fairness, employee compares the job input (in terms of contribution) to outcome (in terms of compensation) and also compares the same with that of another peer of equal cadre/category. D/I ratio (output-input ratio) is used to make such a comparison. Page No. 65 of 143 Fundamentals of Management System B Level Paper I (B3.1) EQUITY THEORY Ratio Comparison Perception O/I a < O/I b Under-rewarded (Equity Tension) O/I a = O/I b Equity O/I a > O/I b Over-rewarded (Equity Tension) Negative Tension state: Equity is perceived when this ratio is equal. While if this ratio is unequal, it leads to “equity tension”. J.Stacy Adams called this a negative tension state which motivates him to do something right to relieve this tension. A comparison has been made between 2 workers A and B to understand this point. Referents: The four comparisons an employee can make have been termed as “referents” according to Goodman. The referent chosen is a significant variable in equity theory. These referents are as follows: Self-inside: An employee’s experience in a different position inside his present organization. Self-outside: An employee’s experience in a situation outside the present organization. Other-inside: Another employee or group of employees inside the employee’s present organization. Other-outside: Another employee or employees outside the employee’s present organization. An employee might compare himself with his peer within the present job in the current organization or with his friend/peer working in some other organization or with the past jobs held by him with others. An employee’s choice of the referent will be influenced by the appeal of the referent and the employee’s knowledge about the referent. Moderating Variables: The gender, salary, education and the experience level are moderating variables. Individuals with greater and higher education are more informed. Thus, they are likely to compare themselves with the outsiders. Males and females prefer same sex comparison. It has been observed that females are paid typically less than males in comparable jobs and have less salary expectations than male for the same work. Thus, a women employee that uses another women employee as a referent tends to lead to a lower comparative standard. Employees with greater experience know their organization very well and compare themselves with their own colleagues, while employees with less experience rely on their personal experiences and knowledge for making comparisons. Choices: The employees who perceive inequity and are under negative tension can make the following choices: Change in input (e.g. Don’t overexert) Change their outcome (Produce quantity output and increasing earning by sacrificing quality when piece rate incentive system exist) Choose a different referent Quit the job Change self-perception (For instance - I know that I’ve performed better and harder than everyone else.) Change perception of others (For instance - Jack’s job is not as desirable as I earlier thought it was.) Page No. 66 of 143 Fundamentals of Management System B Level Paper I (B3.1) Assumptions of the Equity Theory The theory demonstrates that the individuals are concerned both with their own rewards and also with what others get in their comparison. Employees expect a fair and equitable return for their contribution to their jobs. Employees decide what their equitable return should be after comparing their inputs and outcomes with those of their colleagues. Employees who perceive themselves as being in an inequitable scenario will attempt to reduce the inequity either by distorting inputs and/or outcomes psychologically, by directly altering inputs and/or outputs, or by quitting the organization. Expectancy Theory of Motivation The expectancy theory was proposed by Victor Vroom of Yale School of Management in 1964. Vroom stresses and focuses on outcomes, and not on needs unlike Maslow and Herzberg. The theory states that the intensity of a tendency to perform in a particular manner is dependent on the intensity of an expectation that the performance will be followed by a definite outcome and on the appeal of the outcome to the individual. The Expectancy theory states that employee’s motivation is an outcome of how much an individual wants a reward (Valence), the assessment that the likelihood that the effort will lead to expected performance (Expectancy) and the belief that the performance will lead to reward (Instrumentality). In short, Valence is the significance associated by an individual about the expected outcome. It is an expected and not the actual satisfaction that an employee expects to receive after achieving the goals. Expectancy is the faith that better efforts will result in better performance. Expectancy is influenced by factors such as possession of appropriate skills for performing the job, availability of right resources, availability of crucial information and getting the required support for completing the job. Instrumentality is the faith that if you perform well, then a valid outcome will be there. Instrumentality is affected by factors such as believe in the people who decide who receives what outcome, the simplicity of the process deciding who gets what outcome, and clarity of relationship between performance and outcomes. Thus, the expectancy theory concentrates on the following three relationships: Effort-performance relationship: What is the likelihood that the individual’s effort be recognized in his performance appraisal? Performance-reward relationship: It talks about the extent to which the employee believes that getting a good performance appraisal leads to organizational rewards. Rewards-personal goals relationship: It is all about the attractiveness or appeal of the potential reward to the individual. Vroom was of view that employees consciously decide whether to perform or not at the job. This decision solely depended on the employee’s motivation level which in turn depends on three factors of expectancy, valence and instrumentality. Advantages of the Expectancy Theory It is based on self-interest individual who want to achieve maximum satisfaction and who wants to minimize dissatisfaction. This theory stresses upon the expectations and perception; what is real and actual is immaterial. Page No. 67 of 143 Fundamentals of Management System B Level Paper I (B3.1) It emphasizes on rewards or pay-offs. It focuses on psychological extravagance where final objective of individual is to attain maximum pleasure and least pain. Limitations of the Expectancy Theory The expectancy theory seems to be idealistic because quite a few individuals perceive high degree correlation between performance and rewards. The application of this theory is limited as reward is not directly correlated with performance in many organizations. It is related to other parameters also such as position, effort, responsibility, education, etc. Implications of the Expectancy Theory The managers can correlate the preferred outcomes to the aimed performance levels. The managers must ensure that the employees can achieve the aimed performance levels. The deserving employees must be rewarded for their exceptional performance. The reward system must be fair and just in an organization. Organizations must design interesting, dynamic and challenging jobs. The employee’s motivation level should be continually assessed through various techniques such as questionnaire, personal interviews, etc. Controlling Function of Management Controlling consists of verifying whether everything occurs in conformities with the plans adopted, instructions issued and principles established. Controlling ensures that there is effective and efficient utilization of organizational resources so as to achieve the planned goals. Controlling measures the deviation of actual performance from the standard performance, discovers the causes of such deviations and helps in taking corrective actions According to Brech, “Controlling is a systematic exercise which is called as a process of checking actual performance against the standards or plans with a view to ensure adequate progress and also recording such experience as is gained as a contribution to possible future needs.” According to Donnell, “Just as a navigator continually takes reading to ensure whether he is relative to a planned action, so should a business manager continually take reading to assure himself that his enterprise is on right course.” Controlling has got two basic purposes It facilitates co-ordination It helps in planning Page No. 68 of 143 Fundamentals of Management System B Level Paper I (B3.1) Features of Controlling Function Following are the characteristics of controlling function of management- Controlling is an end function: A function which comes once the performances are made in conformities with plans. Controlling is a pervasive function: which means it is performed by managers at all levels and in all type of concerns. Controlling is forward looking: because effective control is not possible without past being controlled. Controlling always looks to future so that follow-up can be made whenever required. Controlling is a dynamic process: since controlling requires taking reviewedmethods; changes have to be made wherever possible. Controlling is related with planning: Planning and Controlling are two inseparable functions of management. Without planning, controlling is a meaningless exercise and without controlling, planning is useless. Planning presupposes controlling and controlling succeeds planning. Process of Controlling Controlling as a management function involves following steps: Establishment of standards: Standards are the plans or the targets which have to be achieved in the course of business function. They can also be called as the criterions for judging the performance. Standards generally are classified into two- Measurable or tangible: Those standards which can be measured and expressed are called as measurable standards. They can be in form of cost, output, expenditure, time, profit, etc. Non-measurable or intangible: There are standards which cannot be measured monetarily. For example- performance of a manager, deviation of workers, their attitudes towards a concern. These are called as intangible standards. Controlling becomes easy through establishment of these standards because controlling is exercised on the basis of these standards. Measurement of performance: The second major step in controlling is to measure the performance. Finding out deviations becomes easy through measuring the actual performance. Performance levels are sometimes easy to measure and sometimes difficult. Measurement of tangible standards is easy as it can be expressed in units, cost, money terms, etc. Quantitative measurement becomes difficult when performance of manager has to be measured. Performance of a manager cannot be measured in quantities. It can be measured only by- Attitude of the workers, Their morale to work, The development in the attitudes regarding the physical environment, and Their communication with the superiors. It is also sometimes done through various reports like weekly, monthly, quarterly, yearly reports. Comparison of actual and standard performance: Comparison of actual performance with the planned targets is very important. Deviation can be defined as the gap between actual performance and the planned targets. The manager has to find out two things here- extent of deviation and cause of deviation. Extent of deviation means that the manager has to find out whether the deviation is positive or negative or whether the actual performance is in conformity with the planned performance. The managers have to exercise control by exception. He has to find out those deviations which are critical and important for business. Minor deviations have to be ignored. Major deviations like replacement of machinery, appointment of workers, quality of raw material, rate of profits, etc. should be looked upon consciously. Therefore it is said, “If a manager controls everything, he ends up controlling nothing.” For example, if stationery charges increase by a minor 5 to 10%, it can be called as a minor deviation. On the other hand, if monthly production decreases continuously, it is called as major deviation. Once the deviation is identified, a manager has to think about various causes which have led to deviation. The causes can be- Erroneous planning, Co-ordination loosens, Implementation of plans is defective, and Supervision and communication is ineffective, etc. Taking remedial actions: Once the causes and extent of deviations are known, the manager has to detect those errors and take remedial measures for it. There are two alternatives here- Taking corrective measures for deviations which have occurred; and After taking the corrective measures, if the actual performance is not in conformity with plans, the manager can revise the targets. It is here the controlling process comes to an end. Follow up is an important step because it is only through taking corrective measures, a manager can exercise controlling. Relationship between planning and controlling Planning and controlling are two separate functions of management, yet they are closely related. The scope of activities if both is overlapping to each other. Without the basis of planning, controlling activities becomes baseless and without controlling, planning becomes a meaningless exercise. In absence of controlling, no purpose can be served by. Therefore, planning and controlling reinforce each other. According to Billy Goetz, “Relationship between the two can be summarized in the following points Planning precedes controlling and controlling succeeds planning. Planning and controlling are insuperable functions of management. Activities are put on rails by planning and they are kept at right place through controlling. The process of planning and controlling works on Systems Approach which is as follows : Planning → Results → Corrective Action Planning and controlling are integral parts of an organization as both are important for smooth running of an enterprise. Planning and controlling reinforce each other. Each drives the other function of management. In the present dynamic environment which affects the organization, the strong relationship between the two is very critical and important. In the present day environment, it is quite likely that planning fails due to some unforeseen events. There controlling comes to the rescue. Once controlling is done effectively, it gives us stimulus to make better plans. Therefore, planning and controlling are intemperate functions of a business enterprise. Open Loop and Closed Loop Control Mechanisms Not all systems are able to control their own operations. A system without the control mechanism, feedback loop, and objective elements is called an open loop system. A system with the three control elements is called a closed loop system. Open loop control is very simple, and requires the minimum investment in design or management. The algorithms merely translate the objectives into control settings, ignoring the activity and metrics information. As a result the effects of system use will not be well controlled, and considerable margins will have to be provided in order to ensure adequate performance. This control policy is suited to non-critical area performance is not necessary. Feed Forward Control Mechanisms Feed Forward control improves on the performance of Open Loop control by including in the algorithms an input from the activity of the system. This allows some changes in the control settings based upon the (simplified) predictions of the effects of that activity. Thus at the cost of greater design and management investment, a better match between objectives and performance may be obtained. However the predictions that can be made will always be an approximation and so there is always the possibility of undesirable effects or poor performance due to wrong priorities, inadequate quotas etc. Feed Forward control does, however, have a major advantage as it provides reasonable control without risking instability effects. Feed Back Control Mechanisms Feed Back control provides the best match between actual system performance and the expressed objectives. This is a result of the measurement of what is going on within the system, and the alteration of the controls so as to minimize the difference. However such feedback loops are subject to severe instabilities, in which the inherent delays around the loop cause overreaction in the setting of the controls, leading to further overcorrection in the opposite sense. The classic example of this is ‘thrashing’ in paged operating systems. Thrashing occurs when the demand for a scarce resource (memory pages) becomes very high, causing more and more processes to be swapped out to secondary storage (disk). Eventually competition for pages becomes so intense that processes waiting for pages to be swapped in find that whilst waiting other important pages have been swapped out, and they must wait for those to be swapped in, during which others will be swapped out. In severe cases, the performance is so degraded that buffers fill, and corrective actions cannot be taken as no process can get control to institute corrective actions. System and Types of systems A system is a set of detailed methods, procedures, and routines established or formulated to carry out a specific activity, perform a duty, or solve a problem. Organized, purposeful structure regarded as a 'whole' consisting of interrelated and interdependent elements (components, entities, factors, members, parts etc.). These elements continually influence one another (directly or indirectly) to maintain their activity and the existence of the system, in order to achieve the common purpose the 'goal' of the system. All systems have (a) inputs, outputs, and feedback mechanisms, (b) maintain an internal steady-state (called homeostasis) despite a changing external environment, (c) display properties that are peculiar to the whole (called emergent properties) but are not possessed by any of the individual elements, and (d) have boundaries that are usually defined by the system observer. Systems underlie every phenomenon, and are everywhere one looks for them. They are limited only by the observer’s capacity to comprehend the complexity of the observed entity, item or phenomenon. Every system is a part of a larger system, is composed of sub-systems, and shares common properties with other systems that help in transferring understanding and solutions from one system to another. Systems obey rules which cannot be understood by breaking them into parts, and stop functioning (or malfunction) when an element is removed or altered significantly. Together, they provide a coherent and unified way of viewing and interpreting the universe as a meta-system of interlinked wholes, and of organizing our thoughts about the world Physical or Abstract Systems: Physical systems are tangible entities that may be static or dynamic in operation. Abstract systems are conceptual or non-physical entities which may be as straightforward as formulas of relationships among sets of variables or models – the abstract conceptualization of physical situations. Open or Closed Systems: An open system continually interacts with its environments. It receives inputs from and delivers output to the outside. An information system belongs to this category, since it must adapt to the changing demands of the user. In contrast, a closed system is isolated from environmental influences. In reality completely closed systems are rare. Deterministic or Probabilistic Systems: A deterministic system is one in which the occurrence of all events is perfectly predictable. If we get the description of the system state at a particular time, the next state can be easily predicted. An example of such a system is a numerically controlled machine tool. Probabilistic system is one in which the occurrence of events cannot be perfectly predicted. An example of such a system is a warehouse and its contents. Need of an Efficient Management Information System Effective management information systems are needed by all business organization because of the increased complexity and rate of change of today’s business environment. For Example, Marketing manager need information about sales performance and trends, financial manger returns, production managers needs information analyzing resources requirement and worker productivity and personnel manager require information concerning employee compensation and professional development? Thus, effective management information systems must be developed to provide modern managers with the specific marketing, financial, production and personnel information products they required to support their decision making responsibilities. An MIS provides the following advantages. It facilitates planning: MIS improves the quality of plants by providing relevant information for sound decision making. Due to increase in the size and complexity of organizations, managers have lost personal contact with the scene of operations. In Minimizes information overload: MIS change the larger amount of data in to summarize form and there by avoids the confusion which may arise when managers are flooded with detailed facts. MIS Encourages Decentralization: Decentralization of authority is possibly when there is a system for monitoring operations at lower levels. MIS is successfully used for measuring performance and making necessary change in the organizational plans and procedures. It brings Coordination: MIS facilities integration of specialized activities by keeping each department aware of the problem and requirements of other departments. It connects all decision centers in the organization. It makes control easier: MIS serves as a link between managerial planning and control. It improves the ability of management to evaluate and improve performance. The used computers has increased the data processing and storage capabilities and reduced the cost. MIS assembles, process, stores, retrieves, evaluates and disseminates the information. Accounting Information Systems Accounting Information Systems (AISs) combine the study and practice of accounting with the design, implementation, and monitoring of information systems. Such systems use modern information technology resources together with traditional accounting controls and methods to provide users the financial information necessary to manage their organizations. AIS Technology Input: The input devices commonly associated with AIS include: standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. In addition, many financial systems come "Web-enabled" to allow devices to connect to the World Wide Web. Process: Basic processing is achieved through computer systems ranging from individual personal computers to large-scale enterprise servers. However, conceptually, the underlying processing model is still the "double-entry" accounting system initially introduced in the fifteenth century. Output: Output devices used include computer displays, impact and nonimpact printers, and electronic communication devices for EDI and e-commerce. The output content may encompass almost any type of financial reports from budgets and tax reports to multinational financial statements. AIS Information Systems in Context AISs cover all business functions from backbone accounting transaction processing systems to sophisticated financial management planning and processing systems. Financial reporting is starts at the operational levels of the organization, where the transaction processing systems capture important business events such as normal production, purchasing, and selling activities. These events (transactions) are classified and summarized for internal decision making and for external financial reporting. Cost accounting systems are used in manufacturing and service environments. These allow organizations to track the costs associated with the production of goods and/or performance of services. In addition, the AIS can provide advanced analyses for improved resource allocation and performance tracking. Management accounting systems are used to allow organizational planning, monitoring, and control for a variety of activities. This allows managerial-level employees to have access to advanced reporting and statistical analysis. The systems can be used to gather information, to develop various scenarios, and to choose an optimal answer among alternative scenarios. Development The development of AIS includes five basic phases: planning, analysis, design, implementation, and support. The time period associated with each of these phases can be as short as a few weeks or as long as several years. Planning project management objectives and techniques: The first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables. Analysis: The analysis phase is used to both determine and document the accounting and business processes used by the organization. Such processes are redesigned to take advantage of best practices or of the operating characteristics of modern system solutions. Data analysis is a thorough review of the accounting information that is currently being collected by an organization. Current data are then compared to the data that the organization should be using for managerial purposes. This method is used primarily when designing accounting transaction processing systems. Decision analysis is a thorough review of the decisions a manager is responsible for making. The primary decisions that managers are responsible for are identified on an individual basis. Then models are created to support the manager in gathering financial and related information to develop and design alternatives, and to make actionable choices. This method is valuable when decision support is the system's primary objective. Process analysis is a thorough review of the organization's business processes. Organizational processes are identified and segmented into a series of events that either add or change data. These processes can then be modified or reengineered to improve the organization's operations in terms of lowering cost, improving service, improving quality, or improving management information. This method is appropriate when automation or reengineering is the system's primary objective. Design: The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow. Logical data storage designs are identified by modeling the relationships among the organization's resources, events, and agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool sets provided by specific software manufacturers. Reporting is the driving force behind an AIS development. If the system analysis and design are successful, the reporting process provides the information that helps drive management decision making. Accounting systems make use of a variety of scheduled and on-demand reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or matrices, to show complex relationships in multiple dimensions. There are numerous characteristics to consider when defining reporting requirements. The reports must be accessible through the system's interface. They should convey information in a proactive manner. They must be relevant. Accuracy must be maintained. Lastly, reports must meet the information processing (cognitive) style of the audience they are to inform. Reports are of three basic types: A filter report that separates select data from a database, such as a monthly check register; a responsibility report to meet the needs of a specific user, such as a weekly sales report for a regional sales manager; a comparative report to show period differences, percentage breakdowns and variances between actual and budgeted expenditures. An example would be the financial statement analytics showing the expenses from the current year and prior year as a percentage of sales. Screen designs and system interfaces are the primary data capture devices of AISs and are developed through a variety of tools. Storage is achieved through the use of normalized databases that assure functionality and flexibility. Business process maps and flowcharts are used to document the operations of the systems. Modern AISs use specialized databases and processing designed specifically for accounting operations. This means that much of the base processing capabilities come delivered with the accounting or enterprise software. Implementation: The implementation phase consists of two primary parts: construction and delivery. Construction includes the selection of hardware, software and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint. Delivery is the process of conducting final system and user acceptance testing; preparing the conversion plan; installing the production database; training the users; and converting all operations to the new system. Tool sets are a variety of application development aids that are vendor-specific and used for customization of delivered systems. They allow the addition of fields and tables to the database, along with ability to create screen and other interfaces for data capture. In addition, they help set accessibility and security levels for adequate internal control within the accounting applications. Security: Security exists in several forms. Physical security of the system must be addressed. In typical AISs the equipment is located in a locked room with access granted only to technicians. Software access controls are set at several levels, depending on the size of the AIS. The first level of security occurs at the network level, which protects the organization's communication systems. Next is the operating system level security, which protects the computing environment. Then, database security is enabled to protect organizational data from theft, corruption, or other forms of damage. Lastly, application security is used to keep unauthorized persons from performing operations within the AIS. Testing: Testing is performed at four levels. Stub or unit testing is used to insure the proper operation of individual modifications. Program testing involves the interaction between the individual modification and the program it enhances. System testing is used to determine that the program modifications work within the AIS as a whole. Acceptance testing ensures that the modifications meet user expectations and that the entire AIS perform as designed. Conversion entails the method used to change from old AIS to a new AIS. There are several methods for achieving this goal. One is to run the new and old systems in parallel for a specified period. A second method is to directly cut over to the new system at a specified point. A third is to phase in the system, either by location or system function. A fourth is to pilot the new system at a specific site before converting the rest of the organization. Support: The support phase has two objectives. The first is to update and maintain the AIS. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting. The second objective of support is to continue development by continuously improving the business through adjustments to the AIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications. Attestation AISs change the way internal controls are implemented and the type of audit trails that exist within a modern organization. The lack of traditional forensic evidence, such as paper, necessitates the involvement of accounting professionals in the design of such systems. Periodic involvement of public auditing firms can be used to make sure the AIS is in compliance with current internal control and financial reporting standards. After implementation, the focus of attestation is the review and verification of system operation. This requires adherence to standards such as ISO 9000-3 for software design and development as well as standards for control of information technology. Periodic functional business reviews should be conducted to be sure the AIS remains in compliance with the intended business functions. Quality standards dictate that this review should be done according to a periodic schedule. Order Processing Order processing starts with the receipt of an order from a customer. It may be obtained by a salesperson, be telephoned in, or arrive by mail. Regular buyers and sellers are often linked electronically. As the buyer’s inventories become low, an electronic purchase order is generated. It is communicated to the seller, whose computers will determine that the goods are available, and the seller will inform the buyer, still using electronic methods, that the order will be filled and shipped by a certain date. Steps in Order Processing Developing steps for processing orders is crucial for your business. Without the proper order-processing work flow, the order processing within your business will be chaotic and unreliable. Take the time to develop the proper order-processing guidelines and your business will run more smoothly and you will have higher customer satisfaction. 1. Use a Standardized Form When Taking Orders Whether your company uses a customer service representative to take orders or the customer enters orders directly through your website, it is vital that you have a standardized form. This allows the person filling out the form to know what information is required and ensures that all needed information is collected. Each of your inventory items may have slightly different order details. For example, if you operate a furniture store, the order form for a sofa may include the type of fabric while the form for a table may require the type of finish. It is important that incomplete order forms are not accepted. If an order form does not have the needed information, it must be returned and completed before it can be processed. 2. Confirm the Order After an order form had been submitted, it should be confirmed with the customer. This can be accomplished by sending an email with the order details. It is not necessary to require that the customer verify the order. Instead, make it clear that the customer should contact your company if there are any problems with the order. Be sure to make your company's contact information easily accessible to the customer. 3. Distribute the Order Form Internally Once the order form is filled out, it should be forwarded to everyone who needs to perform an action related to fulfilling the order. This includes the warehouse, the accounts receivable department and the manufacturer, if the order is being fulfilled by a third party. The expected fulfillment date should be clearly indicated so that everyone involved knows the timetable. 4. Communicate With the Customer It is vital to clearly communicate with the customer. Tell the customer if there is a delay in the fulfillment of the order. Being upfront and honest with the customer when there is a problem is much better than ignoring it. Also, inform the customer when the order ships. Tell her the carrier, the tracking number and the expected delivery date. Ask for feedback from the customer after he receives the order. Have a customer service representative call to make sure the customer is happy with the purchase or use an online survey to gain feedback. Either way, the customer feedback will give very useful insight into your order-fulfillment process. Inventory Control System An inventory control system is a set of hardware and software based tools that automate the process of tracking inventory. The kinds of inventory tracked with an inventory control system can include almost any type of quantifiable good, including food, clothing, books, equipment, and any other item that consumers, retailers, or wholesalers may purchase. Modern inventory control systems are almost exclusively based on barcode technology. Though barcodes were initially developed to automate the process of grocery store checkout, their ability to encode a wide variety of alphabetic and numeric symbols makes them ideal for encoding merchandise for inventory applications. Inventory control systems work in real-time using wireless technology to transmit information to a central computer system as transactions occur. What Industries Use Inventory Control Systems? Inventory control systems are employed in a wide variety of applications, but they all revolve around tracking delivery of goods to customers. Inventory control is crucial in retail stores, especially those with a large number or variety of merchandise items for sale. Inventory control is also used in warehouses to track orders and shipments, and for automated order processing. Other important applications of inventory control systems are in manufacturing, shipping, and receiving. Why is Inventory Control Important? Inventory control is important to ensure quality control in businesses that handle transactions revolving around consumer goods. Without proper inventory control, a large retail store may run out of stock on an important item. A good inventory control system will alert the retailer when it is time to reorder. Inventory control is also an important means of automatically tracking large shipments. For example, if a business orders ten pairs of socks for retail resale, but only receives nine pairs, this will be obvious upon inspecting the contents of the package, and error is not likely. On the other hand, say a wholesaler orders 100,000 pairs of socks and 10,000 are missing. Manually counting each pair of socks is likely to result in error. An automated inventory control system helps to minimize the risk of error. In retail stores, an inventory control system also helps track theft of retail merchandise, providing valuable information about store profits and the need for theft-prevention systems. How Does an Inventory Control System Work? Automated inventory control systems work by scanning a barcode either on the item. A barcode scanner is used to read the barcode, and the information encoded by the barcode is read by the machine. This information is then tracked by a central computer system. For example, a purchase order may contain a list of items to be pulled for packing and shipping. The inventory control system can serve a variety of functions in this case. It can help a worker locate the items on the order list in the warehouse, it can encode shipping information like tracking numbers and delivery addresses, and it can remove these purchased items from the inventory tally to keep an accurate count of in-stock items. All of this data works in tandem to provide businesses with real-time inventory tracking information. Inventory control systems make it simple to locate and analyze inventory information in real-time with a simple database search. Applications An inventory control system may be used to automate a sales order fulfillment process. Such a system contains a list of order to be filled, and then prompts workers to pick the necessary items, and provides them with packaging and shipping information. An inventory system also manages in and outwards material of hardware. Real-time inventory control systems may use wireless, mobile terminals to record inventory transactions at the moment they occur. A wireless LAN transmits the transaction information to a central database. Physical inventory counting and cycle counting are features of many inventory control systems which can enhance the organization. Accounts Receivable Systems An accounts receivable system is a system that is totally integrated and is a consistent sub-system of general ledger systems. It is designed to generate computerized invoices through to the receipting of generated invoices. Most accounts receivable systems have the ability to generate a variety of reports such as ledger prints, retention reports, age analysis reports, cash expected reports, and account analysis reports. Selecting the right accounts receivable system for a particular business is not easy since there are no perfect systems. Every system has its strengths and weaknesses. Selecting any accounts receivable system always involves some compromises on the part of the business. These systems, which are often sold in modules, quickly became popular since they promised the integration of various operations of a company that were previously considered to be completely unrelated. These systems generally take one or two years to implement and are catching on rapidly. The accounts receivable system of a company's business system allows the application and tracking of receivables and collections. By using this module allows for important information to be stored for an unlimited amount of customers and transactions. It also helps accommodate the efficient processing of customer payments and adjustments. Most accounts receivable systems consist of two major functions - Debtors Control Function and Receipting Function. Debtors Control Function includes accounts receivable data entry, which also includes invoicing, and accounts receivable processing. Receipting Functions include receipt data entry and bank deposit reports. Some examples of accounts receivable systems are Administrative Billings and Collections (ABCO), ABCO Online Inquiry (ABCOINQ), BLCO Online Inquiry (BLCOINQ), Direct Premium Remittance System (DPRS), Program Billings and Collections (BLCO), Program Billings and Collections System with Graphical User Interface (BLCO-GUI), Personal Computer Billings, and Collections System (PC-BLCO). Each of these systems has its own uses. For example, ABCO is used for automatic handling of a variety of bills which once recorded, are monitored constantly until the collection takes place through an automated system. DPRS, on the other hand, is a centralized system for collecting premiums from eligible non-Federal enrollees who choose to participate in the Federal Employees Health Benefits Program. BLCO is used to issue bills for inspection services and process all collections. Accounts Payable System (APS) The Accounts Payable System (APS) provides comprehensive control of vendors, purchase orders, payables and checks, and introduces a new level of automation for the effective management and payment of payables. Management Control APS centralizes accounts payable operations on the enterprise server to give management complete control over the payable payment approval and check production process. Individuals, with proper clearance through the security system, have complete access to audit every payable and check from any terminal attached to the enterprise server. Managers find it easy to get information directly, putting them in control of the funds disbursed from their organization. Simple Operations, Practical Results APS simplifies the payment process, from payable entry, to payment approval, to check production, and finally to check reconciliation, and includes the following features: Discounts are calculated automatically. General ledger integration transactions (cash or accrual) are automatic. Payables are paid from either DDA or general ledger checking accounts. Payables can be categorized and paid via a single check. Paid payables are retained for as long as necessary. Vendors are paid by check, magnetic tape (electronic ACH), or credited to DDA or Savings as an on-us item. Year-end tax information is reported to vendors and federal government. Payables with prepaid expenses may be split based upon expense frequency. The option of adding usage tax without affecting the net amount of the transaction is provided. Transaction history is maintained for expense category and vendor reporting. Multi-institution, branch and cost center capabilities are optional. Credit amounts can be entered on payable accounts. Complete Vendor Information To control payments, maintain activity history and simplify check production, vendor records are maintained for each person or business receiving disbursements. Vendor Type Default Specifications can be used when establishing new vendor accounts. These specifications control such information as the General Ledger Account numbers, Payment information and 1099 Reporting Codes. Vendor control parameters and account information include: Name, address, contact, and telephone numbers Discount terms Checking and general ledger expense accounts for payable payments Branch and cost center assignments Two years of purchase and payment history, and tax reporting totals Consolidated payments (generates one check to pay several payables) Recurring payables Credit limit Maximum and minimum payable amounts Totals of available and lost discounts Default values to simplify new payable maintenance Purchase Orders Start the Process Purchase orders are used to confirm that a service or product has been ordered. Anticipated delivery dates can be entered on purchase orders for easy follow-up when deliveries are late. Each purchase order includes: Number Order Date Branch Amount Delivery Date Description Streamlined Payable Entry Payable entry is simplified by automatic insertion of a vendor's name and address, expense allocations, year-end tax reporting information, terms and discounts, all based upon vendor specifications. Vendor payables that do not "fit the mold" can be overridden during on-line entry. Prepaid expense information is available on the new payable entry. These fields define the number of occurrences, frequency and start date of the prepaid expenses. Usage tax is also available on the New Payable screen for those items purchased out of state which require in-state sales tax to be applied. Variances between a payable amount and the amount of its originating purchase order by more than a specified tolerance are reported as exceptions. Repetitive Entries Eliminated Recurring expenses, such as rent, can be set up to eliminate repetitive payable maintenance. The frequency of recurring entries can be daily, weekly, every two weeks, monthly, quarterly, semiannually or annually. Vendor Credit Accounts Established Vendor credit accounts, using multiple expense accounts, can be set up for any credit received from a vendor. When new credit accounts are entered, the amount of the credit will be debited to the General Ledger credit suspense account, and a credit will be applied to each of thc credit expense accounts. As the credit amount is used in payments, a credit will be applied to the General Ledger credit suspense account for the amount of the credit, which was used. An addenda record, which includes the payable account number, the amount of credit applied for payment and the payment date will be attached to the credit account. Impact on General Ledger Payables are expenses on either a cash or accrual basis. An unlimited number of categories (accounts) are expensed on a single payable, and entries are generated automatically. Expenses that have been allocated incorrectly on unpaid payables are adjusted through on-time payable maintenance, and APS generates adjusting transactions. Prepaid expenses will automatically produce general ledger entries once the new payable is set up, eliminating manual entries. Checking Accounts as Source of Payments Checking accounts are established in APS as the source of funds for payable payments. Checking accounts are processed as either DDA or general ledger accounts. Parameters defined on checking accounts include: Beginning check numbers Check form type -- personal or universal 8 1/2" x 11", side-by-side, or enunciated checks in both 8 1/2" x 11" and side-by-side format The number of months check history is retained On-line Check Print function The signature title printed on checks Whether checks are reconciled in APS or the ITI Check Reconciliation System (CRS) Payable Payments Approved in Groups Payables are approved for payment using a display terminal and can be approved one at a time or in groups. Individual payables may be reviewed and optionally approved for payment using the group selection criteria. Individual due dates and dates to be paid may also be changed using the individual group selection. All payables of a particular branch, cost center, vendor, or checking account can be approved at once. In addition, payables due before, on, or after a particular due date can be approved at once. Payables can also be approved according to their assigned priority. When each payable is originally set up, a relative payment priority (1-9) is assigned. All payables with identical priority codes can be selected for group approval. Payables that have been approved for payment can be reviewed through on-line inquiry. Payment options to vendors are by check, ACH credit to DDA or Savings, or on-us credit to DDA or Savings. Payments to vendors by ACH or check may be produced in advance of payment due date, with associated general ledger entries delayed until due date. Reporting APS generates reports for reviewing new payables, new credit accounts, approved payments, past due payables, checks and vendor outstanding credit amounts. Approved to Pay Report Cash Requirements Report Check Register General Ledger Distribution Report General Ledger Exception Report Payable Exception Report Lost Discount Report Paid Payable Report Past Due Aging Report Pending Discount Report Purchase Order Exception Report Vendor Exception Report Vendor History Report Prepaid Expense Journal Vendor Credit Notices New Credit Accounts Report Vendor Outstanding Credit Report Transaction Report by General Ledger Account General Ledger Transaction Report by Checking Account General Ledger Transaction Report by Vendor Credit Advice Account Credit Advice Credit Applied Notices Incomplete Payables Distribution Report Incomplete Vendor Credit Distribution Report Incomplete Recurring Distribution Report Year-End Tax Reporting Tax reporting totals are automatically extracted from the APS files for 1099 reporting via the EOY/5000 series of programs. Tax reports may be obtained at any time. Tax information is available on each payable entry. Additional Software/Hardware Not Required The Accounts Payable System can be processed as a stand-alone product or integrated with the Premier II System and the Financial Management System (FMS). However, APS requires no additional software or hardware. Payroll System The Payroll application is a comprehensive system that calculates payroll in line with global compensation benchmarks and guarantees 100% correct payroll calculation. The system is designed to reduce the workload of the payroll department by using automation, self-service capabilities and high level of integration with other systems. Payroll System works on a multi-level security mechanism. Trust levels are based on the role of employees in the payroll process and according to the rules and requirements for appropriate user access. Payroll System provides accuracy, speed, flexibility, security and cost savings for all elements of your payroll compliance, processing, record keeping and reporting. It can further be integrated with third party systems including current financial and accounting systems. You can configure the application as per company specific compensation rules and for statutory elements such as tax and insurance. The key modules in the payroll system include: Salary Processing: Salary processing is done online and include features like calculation of Gross to Net pay, Net to Gross pay, do pro-rata calculations, on-line pay slip calculation and pay analysis. Payroll generation: The Payroll System will help you minimize processing time and ensure accuracy of paychecks. Batch Processing and Retroactive Payroll give you control and flexibility to process large quantities of accumulated data. You can generate pay slips on demand and on the screen anytime through controlled user access. Taxation: The system manages current taxation procedures and complies with legal requirements. It keeps a track of how each payroll activity is going to impact tax. Since tax legislation changes often, the payroll system is built to respond quickly to those changes. Loans and Allowances: Loan and allowance management becomes easier to manage with the HURIS Payroll System. With features like flexible installments, payment plans and the use of employee self-service, the administration effort is significantly reduce. The module is tightly integrated with other modules of the Payroll System and with other applications of the HURIS suite. Deductions: The system allows for all types of deduction calculations and its incorporation in other modules. The system provides the flexibility to the payroll manager to modify the rules and formulas as often as necessary. Expense Reporting: This module allows the organization to capture expense information. Sophisticated reporting allows you to generate n number of reports as per requirements. General Ledger The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand side lists debit transactions and the right hand side lists credit transactions. This gives a 'T' shape to each individual general ledger account. A "T" account showing debits on the left and credits on the right. The general ledger is a collection of the group of accounts that supports the value items shown in the major financial statements. It is built up by posting transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. For instance, an accounts receivable subsidiary ledger would contain a separate account for each credit customer, tracking that customer's balance separately. This subsidiary ledger would then be totaled and compared with its controlling account (in this case, Accounts Receivable) to ensure accuracy as part of the process of preparing a trial balance. There are seven basic categories in which all accounts are grouped: Assets Expense Gains (Profits) Liability Losses Owner's equity Revenue The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a checkbook). The listing of the account names is called the chart of accounts. The extraction of account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits. The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into sub ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc. Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation: Assets = Liabilities + (Shareholders or Owners equity) The accounting equation is the mathematical structure of the balance sheet. Although a general ledger appears to be fairly simple, in large or complex organizations or organizations with various subsidiaries, the general ledger can grow to be quite large and take several hours or days to audit or balance Billing System A system that tracks customer usage of services, and calculates the impact on a customer's account, based on the price of the services. Billing systems have come to include noncore functionality such as customer management, integration with payment gateways, and statistical analysis. Billing is the process of generating an invoice to recover sales price from the customer also called Invoicing. An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms. The buyer has a maximum amount of days to pay these goods and are sometimes offered a discount if paid before. Purchasing System Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations. Typically the word “purchasing” is not used interchangeably with the word “procurement”, since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing. Purchasing system is a set of procedures, manual or computerized, followed by an organization to achieve the following basic objectives: (1) to determine the quality and quantity needed and the time when an item is needed; (2) to obtain the best possible price; and (3) to maintain information on sources of supply. The system should utilize such concepts as Economic Order Quantity (EOQ), optimal reorder point, quantity discount, and Material Requirement Planning (MRP). Sales and Marketing Information Systems The sales and marketing function is responsible for selling the organization’s products or services. Marketing is concerned with identifying the customers for the firm’s products or services, determining what customers need or want, planning and developing products and services to meet their needs, and advertising and promoting these products and services. A sale is concerned with contacting customers, selling the products and services, taking orders, and following up on sales. Sales and marketing information systems support these activities. At the strategic level, sales and marketing systems monitor trends affecting new products and sales opportunities, support planning for new products and services, and monitor the performance of competitors. At the management level, sales and marketing systems is support market research, advertising and promotional campaigns, and pricing decisions. They analyze sales performance and the performance of the sales staff. At the operational level, sales and marketing systems assist in locating and contacting prospective customers, tracking sales, processing orders, and providing customer service support. Manufacturing and Production Information Systems The manufacturing and production function is responsible for actually producing the firm’s goods and services. Manufacturing and production systems deal with the planning, development, and maintenance of production facilities; the establishment of production goals; the acquisition, storage, and availability of production materials; and the scheduling of equipment, facilities, materials, and labor required to fashion finished products. Manufacturing and production information systems support these activities. Strategic-level manufacturing systems deal with the firm’s long-term manufacturing goals, such as where to locate new plants or whether to invest in new manufacturing technology. At the management level, manufacturing and production systems analyze and monitor manufacturing and production costs and resources. Operational manufacturing and production systems deal with the status of production tasks. Most manufacturing and production systems use some sort of inventory system, as illustrated below. Data about each item in inventory, such as the number of units depleted because of a shipment or purchase or the number of units replenished by reordering or returns, are either scanned or keyed into the system. The inventory master file contains basic data about each item, including the unique identification code for each item, a description of the item, the number of units on hand, the number of units on order, and the reorder point (the number of units in inventory that triggers a decision to reorder to prevent a stockout). Companies can estimate the number of items to reorder, or they can use a formula for calculating the least expensive quantity to reorder called the economic order quantity. The system produces reports that give information about such things as the number of each item available in inventory, the number of units of each item to reorder, or items in inventory that must be replenished. Human Resources Information Systems The human resources function is responsible for attracting, developing, and maintaining the firm’s workforce. Human resources information systems support activities, such as identifying potential employees, maintaining complete records on existing employees, and creating programs to develop employees’ talents and skills. Strategic-level human resources systems identify the manpower requirements (skills, educational level, types of positions, number of positions, and cost) for meeting the firm’s long-term business plans. At the management level, human resources systems help managers monitor and analyze the recruitment, allocation, and compensation of employees. Human resources operational systems track the recruitment and placement of the firm’s employees Figure below illustrates a typical human resources TPS for employee record keeping. It maintains basic employee data, such as the employee’s name, age, sex, marital status, address, educational background, salary, job title, date of hire, and date of termination. The system can produce a variety of reports, such as lists of newly hired employees, employees who are terminated or on leaves of absence, employees classified by job type or educational level, or employee job performance evaluations. Such systems are typically designed to provide data that can satisfy federal and state record keeping requirements for Equal Employment Opportunity (EEO) and other purposes. Transaction Processing Systems Transaction processing systems (TPS) are the basic business systems that serve the operational level of the organization. A transaction processing system is a computerized system that performs and records the daily routine transactions necessary to conduct business. Examples are sales order entry, hotel reservation systems, payroll, employee record keeping, and shipping. At the operational level, tasks, resources, and goals are predefined and highly structured. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor according to predefined criteria. All that must be determined is whether the customer meets the criteria. Figure below depicts a payroll TPS, which is a typical accounting transaction processing system found in most firms. A payroll system keeps track of the money paid to employees. The master file is composed of discrete pieces of information (such as a name, address, or employee number) called data elements. Data are keyed into the system, updating the data elements. The elements on the master file are combined in different ways to make up reports of interest to management and government agencies and to send paychecks to employees. These TPS can generate other report combinations of existing data elements. Other typical TPS applications are identified in Figure below. The figure shows that there are five functional categories of TPS: sales/marketing, manufacturing/production, finance/accounting, human resources, and other types of TPS that are unique to a particular industry. The United Parcel Service (UPS) package tracking system described in Chapter 1 is an example of a manufacturing TPS. UPS sells package delivery services; the TPS system keeps track of all of its package shipment transactions. Page No. 90 of 143 Fundamentals of Management System B Level Paper I (B3.1) Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it. Imagine what would happen to UPS if its package tracking system were not working! What would the airlines do without their computerized reservation systems? Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other types of systems. (For example, the payroll system illustrated here, along with other accounting TPS, supplies data to the company’s general ledger system, which is responsible for maintaining records of the firm’s income and expenses and for producing reports such as income statements and balance sheets.) Management Information Systems The term management information systems (MIS) designates a specific category of information systems serving management-level functions. Management information systems (MIS) serve the management level of the organization, providing managers with reports and often online access to the organization’s current performance and historical records. Typically, MIS are oriented almost exclusively to internal, not environmental or external, events. MIS primarily serve the functions of planning, controlling, and decision making at the management level. Generally, they depend on underlying transaction processing systems for their data. MIS summarize and report on the company’s basic operations. The basic transaction data from TPS are compressed and are usually presented in long reports that are produced on a regular schedule. First figure below shows how a typical MIS transforms transaction level data from inventory, production, and accounting into MIS files that are used to provide managers with reports. Second figure below shows a sample report from this system. MIS usually serve managers primarily interested in weekly, monthly, and yearly results, although some MIS enable managers to drill down to see daily or hourly data if required. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a fast-food chain or, as illustrated in Figure below, compare total annual sales figures for specific products to planned targets. These systems are generally not flexible and have little analytical capability. Most MIS use simple routines such as summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques Decision Support Systems Decision-support systems (DSS) also serve the management level of the organization. DSS help managers make decisions that are unique, rapidly changing, and not easily specified in advance. They address problems where the procedure for arriving at a solution may not be fully predefined in advance. Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors. Clearly, by design, DSS have more analytical power than other systems. They use a variety of models to analyze data, or they condense large amounts of data into a form in which they can be analyzed by decision makers. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly software. DSS are interactive; the user can change assumptions, ask new questions, and include new data. An interesting, small, but powerful DSS is the voyage-estimating system of a subsidiary of a large American metals company that exists primarily to carry bulk cargoes of coal, oil, ores, and finished products for its parent company. The firm owns some vessels, charters others, and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and port expenses. Technical details include a myriad of factors, such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading patterns (location of cargo for different ports). The system can answer questions such as the following: Given a customer delivery schedule and an offered freight rate, which vessel should be assigned at what rate to maximize profits? What is the optimal speed at which a particular vessel can optimize its profit and still meet its delivery schedule? What is the optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia? Figure below illustrates the DSS built for this company. The system operates on a powerful desktop Page No. 92 of 143 Fundamentals of Management System B Level Paper I (B3.1) personal computer, providing a system of menus that makes it easy for users to enter data or obtain information. This voyage-estimating DSS draws heavily on analytical models. Other types of DSS are less model-driven, focusing instead on extracting useful information to support decision making from massive quantities of data. For example, Intrawest—the largest ski operator in North America—collects and stores vast amounts of customer data from its Web site, call center, lodging reservations, ski schools, and ski equipment rental stores. It uses special software to analyze these data to determine the value, revenue potential, and loyalty of each customer so managers can make better decisions on how to target their marketing programs. The system segments customers into seven categories based on needs, attitudes, and behaviors, ranging from “passionate experts” to “value-minded family vacationers.” The company then e-mails video clips that would appeal to each segment to encourage more visits to its resorts. Sometimes you’ll hear DSS systems referred to as business intelligence systems because they focus on helping users make better business decisions. Executive Support Systems Senior managers use executive support systems (ESS) to help them make decisions. ESS serves the strategic level of the organization. They address no routine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS is designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. For example, the CEO of Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the United States, has an ESS that provides on his desktop a minute-to-minute view of the firm’s financial performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory. ESS employs the most advanced graphics software and can present graphs and data from many sources. Often the information is delivered to senior executives through a portal, which uses a Web interface to present integrated personalized business content from a variety of sources. Unlike the other types of information systems, ESS is not designed primarily to solve specific problems. Instead, ESS provides a generalized computing and communications capacity that can be applied to a changing array of problems. Although many DSS are designed to be highly analytical, ESS tends to make less use of analytical models. Questions ESS assists in answering include the following: In what business should we be? What are the competitors doing? What new acquisitions would protect us from cyclical business swings? Which units should we sell to raise cash for acquisitions? Figure below illustrates a model of an ESS. It consists of workstations with menus, interactive graphics, and communications capabilities that can be used to access historical and competitive data from internal corporate systems and external databases such as Dow Jones News/Retrieval or Standard & Poor’s. Because ESS are designed to be used by senior managers who often have little, if any, direct contact or experience with computer-based information systems, they incorporate easy-to-use graphic interfaces. Executive information system (EIS) An Executive Information System (EIS) is a type of management information system intended to facilitate and support the information and decision-making needs of senior executives by providing easy access to both internal and external information relevant to meeting the strategic goals of the organization. It is commonly considered as a specialized form of a Decision Support System (DSS). Components The components of an EIS can typically be classified as: 1. Hardware When talking about hardware for an EIS environment, we should focus on the hardware that meet the executive’s needs. The executive must be put first and the executive’s needs must be defined before the hardware can be selected. The basic computer hardware needed for a typical EIS includes four components: Input data-entry devices: These devices allow the executive to enter, verify, and update data immediately; The central processing unit (CPU): This is the kernel because it controls the other computer system components Data storage files: The executive can use this part to save useful business information, and this part also help the executive to search historical business information easily Output devices: which provide a visual or permanent record for the executive to save or read. This device refers to the visual output device such as monitor or printer. In addition, with the advent of local area networks (LAN), several EIS products for networked workstations became available. These systems require less support and less expensive computer hardware. They also increase access of the EIS information to many more users within a company. 2. Software Choosing the appropriate software is vital to design an effective EIS.[citation needed] Therefore, the software components and how they integrate the data into one system are very important. The basic software needed for a typical EIS includes four components: Text base software: The most common form of text is probably documents; Database: Heterogeneous databases residing on a range of vendor-specific and open computer platforms help executives access both internal and external data; Graphic base: Graphics can turn volumes of text and statistics into visual information for executives. Typical graphic types are: time series charts, scatter diagrams, maps, motion graphics, sequence charts, and comparison-oriented graphs (i.e., bar charts); Model base: The EIS models contain routine and special statistical, financial, and other quantitative analysis. Perhaps a more difficult problem for executives is choosing from a range of highly technical software packages. Ease of use, responsiveness to executives' requests, and price are all reasonable considerations. Further, it should be considered whether the package can run on existing hardware. 3. User Interface An EIS needs to be efficient to retrieve relevant data for decision makers, so the user interface is very important. Several types of interfaces can be available to the EIS structure, such as scheduled reports, questions/answers, menu driven, command language, natural language, and input/output. It is crucial that the interface must fit the decision maker’s decision-making style. If the executive is not comfortable with the information questions/answers style, the EIS will not be fully utilized. The ideal interface for an EIS would be simple to use and highly flexible, providing consistent performance, reflecting the executive’s world, and containing help information. 4. Telecommunication As decentralizing is becoming the current trend in companies, telecommunications will play a pivotal role in networked information systems. Transmitting data from one place to another has become crucial for establishing a reliable network. In addition, telecommunications within an EIS can accelerate the need for access to distributed data. Advantages of EIS Easy for upper-level executives to use, extensive computer experience is not required in operations Provides timely delivery of company summary information Information that is provided is better understood Filters data for management Improves to tracking information Offers efficiency to decision makers Disadvantages of EIS System dependent Limited functionality, by design Information overload for some managers Benefits hard to quantify High implementation costs System may become slow, large, and hard to manage Need good internal processes for data management May lead to less reliable and less secure data Expert Systems (ES) An expert system is a software system that incorporates concepts derived from experts in a field and uses their knowledge to provide problem analysis to users of the software. The most common form of expert system is a computer program, with a set of rules that analyzes information (usually supplied by the user of the system) about a specific class of problems, and recommends one or more courses of user action. The expert system may also provide mathematical analysis of the problem(s). The expert system utilizes what appears to be reasoning capabilities to reach conclusions. A related term is wizard. A wizard is an interactive computer program that helps a user solve a problem. Originally the term wizard was used for programs that construct a database search query based on criteria supplied by the user. However, some rule-based expert systems are also called wizards. Other "Wizards" are a sequence of online forms that guide users through a series of choices, such as the ones which manage the installation of new software on computers, and these are not expert systems. Components of Expert Systems An expert system consists of the following components: The user interface: Interact with users The knowledge base: Store knowledge and facts The inference engine: compile that knowledge Types of problems solved by expert systems Expert systems are most valuable to organizations that have a high-level of know-how experience and expertise that cannot be easily transferred to other members. They are designed to carry the Page No. 96 of 143 Fundamentals of Management System B Level Paper I (B3.1) intelligence and information found in the intellect of experts and provide this knowledge to other members of the organization for problem-solving purposes. Typically, the problems to be solved are of the sort that would normally be tackled by a medical or other professional. Real experts in the problem domain (which will typically be very narrow, for instance "diagnosing skin conditions in human teenagers") are asked to provide "rules of thumb" on how they evaluate the problems, either explicitly with the aid of experienced systems developers, or sometimes implicitly, by getting such experts to evaluate test cases and using computer programs to examine the test data and (in a strictly limited manner) derive rules from that. Generally, expert systems are used for problems for which there is no single "correct" solution which can be encoded in a conventional algorithm — one would not write an expert system to find shortest paths through graphs, or sort data, as there are simply easier ways to do these tasks. Simple systems use simple true/false logic to evaluate data. More sophisticated systems are capable of performing at least some evaluation, taking into account real-world uncertainties, using such methods as fuzzy logic. Such sophistication is difficult to develop and still highly imperfect. Advantages: Provides consistent answers for repetitive decisions, processes and tasks Holds and maintains significant levels of information Encourages organizations to clarify the logic of their decision-making Never "forgets" to ask a question, as a human might Disadvantages: Lacks common sense needed in some decision making Cannot make creative responses as human expert would in unusual circumstances Domain experts not always able to explain their logic and reasoning Errors may occur in the knowledge base, and lead to wrong decisions Cannot adapt to changing environments, unless knowledge base is changed Group Decision Support Systems The DSS we have just described focus primarily on individual decision making. However, so much work is accomplished in groups within firms that a special category of systems called group decision-support systems (GDSS) has been developed to support group and organizational decision making. A group decision-support system (GDSS) is an interactive computer-based system used to facilitate the solution of unstructured problems by a set of decision makers working together as a group. Groupware and Web-based tools for videoconferencing and electronic meetings described earlier in this text can support some group decision processes, but their focus is primarily on communication. GDSS, however, provide tools and technologies geared explicitly toward group decision making and were developed in response to a growing concern over the quality and effectiveness of meetings. The underlying problems in group decision making have been the explosion of decision-maker meetings, the growing length of those meetings, and the increased number of attendees. Estimates on the amount of a manager’s time spent in meetings range from 35 to 70 percent. Page No. 97 of 143 Fundamentals of Management System B Level Paper I (B3.1) Components of GDSS GDSS make meetings more productive by providing tools to facilitate planning, generating, organizing, and evaluating ideas; establishing priorities; and documenting meeting proceedings for others in the firm. GDSS consist of three basic elements: hardware, software tools, and people. Hardware refers to the conference facility itself, including the room, the tables, and the chairs. Such a facility must be physically laid out in a manner that supports group collaboration. It also must include some electronic hardware, such as electronic display boards, as well as audiovisual, computer, and networking equipment. In addition specific GDSS software tools support group meetings. These tools were originally developed for meetings in which all participants are in the same room, but they also can be used for networked meetings in which participants are in different locations. Specific GDSS software tools include the following: Electronic questionnaires aid the organizers in permeating planning by identifying issues of concern and by helping to ensure that key planning information is not overlooked. Electronic brainstorming tools enable individuals, simultaneously and anonymously, to contribute ideas on the topics of the meeting. Idea organizers facilitate the organized integration and synthesis of ideas generated during brainstorming. Questionnaire tools support the facilitators and group leaders as they gather information before and during the process of setting priorities. Tools for voting or setting priorities make available a range of methods from simple voting, to ranking in order, to a range of weighted techniques for setting priorities or voting. Stakeholder identification and analysis tools use structured approaches to evaluate the impact of an emerging proposal on the organization and to identify stakeholders and evaluate the potential impact of those stakeholders on the proposed project. Policy formation tools provide structured support for developing agreement on the wording of policy statements. Group dictionaries document group agreement on definitions of words and terms central to the project. People refer not only to the participants but also to a trained facilitator and often to a staff that supports the hardware and software. Together, these elements have led to the creation of a range of different kinds of GDSS, from simple electronic boardrooms to elaborate collaboration laboratories. In a collaboration laboratory, individuals work on their own desktop PCs or workstations. Their input is integrated on a file server and is viewable on a common screen at the front of the room; in most systems the integrated input is also viewable on the individual participant’s screen. Redesigning the organization with information systems Building a new information system is one kind of planned organizational change. The introduction of a new information system involves much more than new hardware and software. It also includes changes in jobs, skills, management, and organization. When we design a new information system, we are redesigning the organization. System builders must understand how a system will affect the organization as a whole. Linking Information Systems to the Business Plan Deciding which new systems to build should be an essential part of the organizational planning process. Organizations need to develop an information systems plan that supports their overall business plan and in which strategic systems are incorporated into top-level planning. Once specific projects have been selected within the overall context of a strategic plan for the business and the systems area, an information systems plan can be developed. The plan serves as a road map indicating the direction of systems development (the purpose of the plan), the rationale, the current systems/situation, new developments to consider, the management strategy, the implementation plan, and the budget The plan contains a statement of corporate goals and specifies how information technology will support the attainment of those goals. The report shows how general goals will be achieved by specific systems projects. It identifies specific target dates and milestones that can be used later to evaluate the plan’s progress in terms of how many objectives were actually attained in the time frame specified in the plan. The plan indicates the key management decisions concerning hardware acquisition; telecommunications; centralization/decentralization of authority, data, and hardware; and required organizational change. Organizational changes are also usually described, including management and employee training requirements; recruiting efforts; changes in business processes; and changes in authority, structure, or management practice. Establishing Organizational Information Requirements To develop an effective information systems plan, the organization must have a clear understanding of both its long and short-term information requirements. Two principal methodologies for establishing the essential information requirements of the organization as a whole are enterprise analysis and critical success factors. Enterprise Analysis (Business Systems Planning) Enterprise analysis (also called business systems planning) argues that the firm’s information requirements can be understood only by examining the entire organization in terms of organizational units, functions, processes, and data elements. Enterprise analysis can help identify the key entities and attributes of the organization’s data. The central method used in the enterprise analysis approach is to take a large sample of managers and ask them how they use information, where they get their information, what their objectives are, how they make decisions, and what their data needs are. The results of this large survey of managers are aggregated into subunits, functions, processes, and data matrices. Data elements are organized into logical application groups—groups of data elements that support related sets of organizational processes. Strategic Analysis or Critical Success Factors The strategic analysis, or critical success factors, approach argues that an organization’s information requirements are determined by a small number of critical success factors (CSFs) of managers. If these goals can be attained, success of the firm or organization is assured. CSFs are shaped by the Page No. 99 of 143 Fundamentals of Management System B Level Paper I (B3.1) industry, the firm, the manager, and the broader environment. New information systems should focus on providing information that helps the firm meet these goals. The principal method used in CSF analysis is personal interviews—three or four— with a number of top managers identifying their goals and the resulting CSFs. These personal CSFs are aggregated to develop a picture of the firm’s CSFs. Then systems are built to deliver information on these CSFs. Systems Development and Organizational Change Information technology can promote various degrees of organizational change, ranging from incremental to far-reaching. Figure below shows four kinds of structural organizational change that are enabled by information technology: (1) automation, (2) rationalization, (3) reengineering, and (4) paradigm shifts. Each carries different rewards and risks. The most common form of IT-enabled organizational change is automation. The first applications of information technology involved assisting employees with performing their tasks more efficiently and effectively. Calculating paychecks and payroll registers, giving bank teller’s instant access to customer deposit records, and developing a nationwide network of airline reservation terminals for airline reservation agents are all examples of early automation. A deeper form of organizational change—one that follows quickly from early automation—is rationalization of procedures. Automation frequently reveals new bottlenecks in production and makes the existing arrangement of procedures and structures painfully cumbersome. Rationalization of procedures is the streamlining of standard operating procedures. For example, the Victoria Country Fire Authority’s new emergency management system described in the chapter-opening case is effective not only because it uses computer technology but also because its design enables the organization to operate more efficiently. The procedures of the Victoria Country Fire Authority (CFA), or any organization, must be rationally structured to achieve this result. CFA had to have standard identification codes for emergency equipment, fire brigades, and localities and standard rules for routing brigades and equipment to the appropriate emergency location. Without a certain amount of rationalization in the CFA’s organization, its computer technology would have been useless. A more powerful type of organizational change is business process reengineering, in which business processes are analyzed, simplified, and redesigned. Using information technology, organizations can rethink and streamline their business processes to improve speed, service, and quality. Business reengineering reorganizes work flows, combining steps to cut waste and eliminating repetitive, paper-intensive tasks (sometimes the new design eliminates jobs as well). It is much more ambitious than rationalization of procedures, requiring a new vision of how the process is to be organized. A widely cited example of business reengineering is Ford Motor Company’s invoiceless processing, which reduced headcount in Ford’s North American Accounts Payable organization of 500 people by 75 percent. Accounts payable clerks used to spend most of their time resolving discrepancies between purchase orders, receiving documents, and invoices. Ford reengineered its accounts payable process so that the purchasing department enters a purchase order into an online database that can be checked by the receiving department when the ordered items arrive. If the received goods match the purchase order, the system automatically generates a check for accounts payable to send to the vendor. There is no need for vendors to send invoices (Hammer and Champy, 1993). Rationalizing procedures and redesigning business processes are limited to specific parts of a business. New information systems can ultimately affect the design of the entire organization by transforming how the organization carries out its business or even the nature of the business. For instance, the long-haul trucking and transportation firm Schneider National used new information systems to change its business model. Schneider created a new business managing the logistics for other companies. Baxter International’s stockless inventory system (described in Chapter 3) transformed Baxter into a working partner with hospitals and into a manager of its customers’ supplies. This more radical form of business change is called a paradigm shift. A paradigm shift involves rethinking the nature of the business and the nature of the organization. Business Process Reengineering (BPR) Many companies today are focusing on building new information systems that will improve their business processes. Some of these system projects represent radical restructuring of business processes, whereas others entail more incremental process change. Business process reengineering (BPR) is primarily a one-time effort, focusing on identifying one or two strategic business processes that need radical change. BPR projects tend to be expensive and organizationally disruptive. But organizations have many business processes and support processes that must be constantly revised to keep the business competitive. Business process management and quality improvement programs provide opportunities for more incremental and ongoing types of business process change. Steps in Effective Reengineering One of the most important strategic decisions that a firm can make is not deciding how to use computers to improve business processes but rather understanding what business processes need improvement. Considerable time and cost can also be spent improving business processes that have little impact on overall firm performance and revenue. Managers need to determine what business processes are the most important to focus on when applying new information technology and how improving these processes will help the firm execute its strategy. The conventional method of designing systems establishes the information requirements of a business function or process and then determines how they can be supported by information technology. Business Process Management Business process management (BPM) enables organizations to manage incremental process changes that are required simultaneously in many areas of the business. It provides a methodology and tools for dealing with the organization’s ongoing need to revise—and ideally optimize—its numerous internal business processes and processes shared with other organizations. It enables organizations to make continual improvements to many business processes simultaneously and to use processes as the fundamental building blocks of corporate information systems. BPM includes work flow management, business process modeling, quality management, change management, and tools for recasting the firm’s business processes into a standardized form where they can be continually manipulated. Companies practicing business process management use process-mapping tools to identify and document existing processes and to create models of improved processes that can then be translated into software systems. The process models might require entirely new systems or could be based on existing systems and data. BPM software tools automatically manage processes across the business, extract data from various sources and databases, and generate transactions in multiple related systems. BPM also includes process monitoring and analytics. Organizations must be able to verify that process performance has been improved and measure the impact of process changes on key business performance indicators. A number of commercial software vendors, including IBM, BEA Systems, Vitria, Intalio, FileNet, Tibco, and Fuego, supply business process management products. Total Quality Management And Six Sigma Quality management is another area of continuous process improvement. In addition to increasing organizational efficiency, companies must fine-tune their business processes to improve the quality in their products, services, and operations. Many are using the concept of total quality management (TQM) to make quality the responsibility of all people and functions within an organization. TQM holds that the achievement of quality control is an end in itself. Everyone is expected to contribute to the overall improvement of quality—the engineer who avoids design errors, the production worker who spots defects, the sales representative who presents the product properly to potential customers, and even the secretary who avoids typing mistakes. Another quality concept that is being widely implemented today is six sigma. Six sigma is a specific measure of quality, representing 3.4 defects per million opportunities. Most companies cannot achieve this level of quality but use six sigma as a goal to implement a set of methodologies and techniques for improving quality and reducing costs. Studies have repeatedly shown that the earlier in the business cycle a problem is eliminated, the less it costs the company. Thus, quality improvements not only raise the level of product and service quality, but they can also lower costs. How Information Systems Support Quality Improvements TQM and six sigma are considered to be more incremental than business process reengineering. TQM typically focuses on making a series of continuous improvements rather than dramatic bursts of change. Six sigma uses statistical analysis tools to detect flaws in the execution of an existing process and make minor adjustments. Sometimes, however, processes may have to be fully reengineered to achieve a specified level of quality. Information systems can help firms achieve their quality goals by helping them simplify products or processes, make improvements based on customer demands, reduce cycle time, improve the quality and precision of design and production, and meet benchmarking standards. Benchmarking consists of setting strict standards for products, services, and other activities, and then measuring performance against those standards. Enterprise Resource Planning (ERP) Enterprise resource planning (ERP) or Enterprise System integrates internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, etc. ERP systems automate this activity with an integrated computer-based application. Its purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders. ERP systems can run on a variety of hardware and network configurations, typically employing a database to store its data. ERP systems typically include the following characteristics: An integrated system that operates in (next to) real time, without relying on periodic updates A common database that supports all applications A consistent look and feel throughout each module Installation of the system without elaborate application/data integration by the Information Technology (IT) department Connectivity to Plant Floor Information ERP systems connect to real-time data and transaction data in a variety of ways. These systems are typically configured by systems integrators, who are able to bring in their unique knowledge on process, equipment, and vendor solutions. Page No. 103 of 143 Fundamentals of Management System B Level Paper I (B3.1) Direct integration: ERP systems connectivity (communications to plant floor equipment) as part of their product offering. This requires the ERP system developers to offer specific support for the variety of plant floor equipment that they want to interface with. ERP Vendors must be expert in their own products, and connectivity to other vendor products, often those offered by competitors. Database integration: ERP systems connect to plant floor data sources through a staging table in a database. Plant floor systems deposit the necessary information into the database. The ERP system takes the information from the table. The benefit of staging is that ERP vendors do not need to master the complexities of equipment integration. Connectivity becomes the responsibility of the systems integrator. Enterprise appliance transaction modules (EATM): These devices communicate directly with plant floor equipment and with the ERP system via methods supported by the ERP system. EATM can employ a staging table, Web Services, or system–specific program interfaces (APIs). The benefit of an EATM is that it offers an off–the–shelf solution. Custom integration solutions: Many system integrators offer custom solutions. These systems tend to have the highest level of initial integration cost, and can have a higher long term cost in terms on maintenance and reliability. Long term costs can be minimized through careful system testing and thorough documentation. Custom-integrated solutions typically run on workstation or server class computers. Standard protocols: Communications drivers are available for plant floor equipment and separate products have the ability to log data to relational database tables. Standards exist within the industry to support interoperability between software products, the most widely known being OPC, managed by the OPC Foundation. Advantages The fundamental benefit of ERP is that by integrating the myriad processes by which businesses operate, it saves time and expense. Decisions can be quicker and with fewer errors. Data is visible across the organization. Tasks that benefit from this integration include: Sales forecasting which allows inventory optimization Order tracking, from acceptance through fulfillment Revenue tracking, from invoice through cash receipt Matching purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced) ERP systems centralize data Benefits of this include: No synchronizing changes between multiple systems - consolidation of finance, marketing and sales, human resource, and manufacturing applications Enables standard product naming/coding Provides comprehensive view of the enterprise (no "islands of information"). Makes real–time information available to management anywhere, anytime to make proper decisions Protects sensitive data by consolidating multiple security systems into a single structure Disadvantages Customization is problematic Re-engineering of business processes to fit the ERP system may damage competitiveness and/or divert focus from other critical activities Can cost more than less integrated and/or less comprehensive solutions Overcoming resistance to sharing sensitive information between departments can be a diversion. Integration of truly independent businesses can create unnecessary dependencies. Extensive training requirements take resources from daily operations. Risks in ERP implementations An ERP project involves functional analysis, requirements gathering, scope planning, testing, programming and implementation. Risks can occur at any time during this process. Technical Failures: Technical difficulties arise from performance constraints imposed by the project. These constraints are usually caused by the project team's inability to ensure the availability of the necessary technical expertise. Your end product is only as good as the technical expertise available. The technical aspect also creates risk because there is no way of ensuring the secrecy of information. Project Scope: Defining the project scope is an important part of any IT project, including ERP implementations. You do not want to make the project scope too big and make the project unmanageable and expensive. If the project scope is too small, you might miss some important requirements and implement the ERP incorrectly. Change Management: Change creates the risk of instability among employees. People are afraid of change for different reasons such as fear of the unknown and fear of losing their job. Change also creates the risk of losing potential business while employees are training for the new system. Involving the staff in the ERP implementation is important, as you do not wish to drop the new changes on them with no warning; however, continuing to service the customer is also important. Supply Chain Management Systems Supply chain management refers to the close linkage and coordination of activities involved in buying, making, and moving a product. It integrates business processes to speed information, product, and fund flows up and down a supply chain to reduce time, redundant effort, and inventory costs. The supply chain is a network of organizations and business processes for procuring raw materials, transforming these materials into intermediate and finished products, and distributing the finished products to customers. It links suppliers, manufacturing plants, distribution centers, retail outlets, and customers to supply goods and services from source through consumption. Materials, information, and payments flow through the supply chain in both directions. Goods start out as raw materials and move through logistics and production systems until they reach customers. Returned items are flow in the reverse direction from the buyer back to the seller. Figure below provides a simplified illustration of a supply chain, showing the flow of information and material among suppliers, manufacturers, distributors, retailers, and customers. The upstream portion of the supply chain includes the organization’s suppliers and their suppliers and the processes for managing relationships with them. The downstream portion consists of the organizations and processes for distributing and delivering products to the final customers. The manufacturer also manages internal supply chain processes for transforming the materials, components, and services furnished by suppliers into finished goods and for managing materials and inventory. Materials flow downstream from raw material sources through manufacturing facilities that transform the raw materials into intermediate products (also referred to as components or parts). These are assembled on the next level to form finished products. The products are shipped to distribution centers and from there to retailers and customers. Supply Chain Processes Many processes and sub processes are involved in managing the supply chain to expedite this flow of information and materials. The Supply Chain Council (SCC) developed a Supply Chain Operations Reference Model (SCOR) as a cross-industry process reference model for supply chain management. SCOR defines a common set of supply chain processes to help companies better understand supply chain management issues and set goals for supply chain improvement. SCOR identifies five major supply chain processes: plan, source, make, deliver, and return. Plan: Consists of processes that balance aggregate demand and supply to develop a course of action to meet sourcing, production, and delivery requirements Source: Consists of processes that procure goods and services needed to create a specific product or service Make: Consists of processes that transform a product into a finished state to meet planned or actual demand Deliver: Consists of processes that provide finished goods and services to meet actual or planned demand, including order management, transportation management, and distribution management Return: Consists of processes associated with returning products or receiving returned products, including post delivery customer support Information and Supply Chain Management Inefficiencies in the supply chain, such as parts shortages, underutilized plant capacity, excessive finished goods inventory, or runaway transportation costs, are caused by inaccurate or untimely information. If a manufacturer had perfect information about exactly how many units of product customers wanted, when they wanted them, and when they could be produced, it would be possible to implement a highly efficient just-in-time strategy. Components would arrive exactly at the moment they were needed and finished goods would be shipped as they left the assembly line. In a supply chain, however, uncertainties arise because many events cannot be foreseen —uncertain product demand, late shipments from suppliers, defective parts or raw material, or production process breakdowns. To satisfy customers, manufacturers often deal with such uncertainties and unforeseen events by keeping more material or products in inventory than what they think they may actually need. The safety stock acts as a buffer for the lack of flexibility in the supply chain. Although excess inventory is expensive, low fill rates are also costly because business may be lost from canceled orders. One recurring problem in supply chain management is the bullwhip effect, in which information about the demand for a product gets distorted as it passes from one entity to the next across the supply chain. A slight rise in demand for an item might cause different members in the supply chain—distributors, manufacturers, suppliers, secondary suppliers, and tertiary suppliers to stockpile inventory so each has enough “just in case.” These changes ripple throughout the supply chain, magnifying what started out as a small change from planned orders, creating excess inventory, production, warehousing, and shipping costs. Supply Chain Management Applications The central objective of supply chain management systems is information visibility—open and rapid communication and information sharing between members of the supply chain. Correct movement of accurate information makes it possible to time orders, shipments, and production properly to minimize stocking levels and expedite deliveries to customers. Supply chain management systems automate the flow of information between a company and its supply chain partners so they can make better decisions to optimize their performance. In essence, supply chain software can be classified as either software to help businesses plan their supply chains (supply chain planning) or software to help them execute the supply chain steps (supply chain execution). Supply chain planning systems enable the firm to generate demand forecasts for a product and to develop sourcing and manufacturing plans for that product. Such systems help companies make better operating decisions, such as determining how much of a specific product to manufacture in a given time period; establishing inventory levels for raw materials, intermediate products, and finished goods; determining where to store finished goods; and identifying the transportation mode to use for product delivery. Supply Chain Performance Measurement Companies need to be able to measure the performance of their supply chain management efforts using objective performance information. A number of metrics can be used to evaluate the performance of supply chain processes, and supply chain management systems can provide the data for them. A metric is a standard measurement of performance. Important metrics for measuring supply chain performance include the fill rate (the ability to fill orders by the due date), the average time from order to delivery, the number of days of supply in inventory, forecast accuracy, and the cycle time for sourcing and making a product. (Cycle time is the total elapsed time to complete a business process.) Companies may not necessarily excel in all these areas, but management should choose the operations that are most critical for the success of the firm and focus on metrics that measure their performance. Although large software vendors have tools for automating many of the most important supply chain processes, no software package or set of tools does everything. The specific supply chain management objectives for each company should determine which supply chain management package or set of software tools to use. Supply Chain Management and the Internet In the pre-Internet environment, supply chain coordination was hampered by the difficulties of making information flow smoothly among disparate internal supply chain systems for purchasing, materials management, manufacturing, and distribution. It was also difficult to share information with external supply chain partners because the systems of suppliers, distributors, or logistics providers were based on incompatible technology platforms and standards. Enterprise systems could supply some integration of internal supply chain processes but they were not designed to deal with external supply chain processes. Some supply chain integration can be supplied inexpensively using Internet technology. Firms can use intranets to improve coordination among their internal supply chain processes, and they can use extranets to coordinate supply chain processes shared with their business partners Using intranets and extranets, all members of the supply chain can instantly communicate with each other, using up-to-date information to adjust purchasing, logistics, manufacturing, packaging, and schedules. A manager can use a Web interface to tap into suppliers’ systems to determine whether inventory and production capabilities match demand for the firm’s products. Business partners can use Web-based supply chain management tools to collaborate online on forecasts. Sales representatives can access suppliers’ production schedules and logistics information to monitor customers’ order status. The low cost of providing this information with Web-based tools instead of costly proprietary systems encourages companies to share critical business information with a greater number of suppliers. Demand-Driven Supply Chains Internet-based supply chain management applications are clearly changing the way businesses work internally and with each other. In addition to reducing costs, these supply chain management systems facilitate efficient customer response, enabling the workings of the business to be driven more by customer demand. Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock). In a push-based model, production master schedules are based on forecasts or best guesses of demand for products, and products are “pushed” to customers. With new flows of information made possible by Web-based tools, supply chain management can more easily follow a pull-based model. In a pull-based model, also known as a demand-driven model or build-to-order, actual customer orders or purchases trigger events in the supply chain. Transactions to produce and deliver only what customers have ordered move up the supply chain from retailers to distributors to manufacturers and eventually to suppliers. Only products to fulfill these orders move back down the scaupply chain to the retailer. Manufacturers would use only actual order demand information to drive their production schedules and the procurement of components or raw materials, as illustrated in Figure below. The Internet and Internet technology make it possible to move from sequential supply chains, where information and materials flow sequentially from company to company, to concurrent supply chains, Page No. 110 of 143 Fundamentals of Management System B Level Paper I (B3.1) where information flows in many directions simultaneously among members of a supply chain network. Members of the network can immediately adjust to changes in schedules or orders. Ultimately, the Internet could create a “digital logistics nervous system” throughout the supply chain. This system would permit simultaneous, multidirectional communication of information about participants’ inventories, orders, and capacities, and would work to optimize the activities of individual firms and groups of firms interacting in e-commerce marketplaces Business Value of Supply Chain Management Systems Supply chain management systems enable firms to streamline both their internal and external supply chain processes and provide management with more accurate information about what to produce, store, and move. By implementing a networked and integrated supply chain management system, companies can match supply to demand, reduce inventory levels, and improve delivery service, speed product time to market, and use assets more effectively. Companies that excel in supply chain management have been found to produce higher rates of growth in their market value than the average for their industries. Effective supply chain management systems enhance organizational performance in the following areas: Improved customer service and responsiveness: If a product is not available when a customer wants it, that customer will likely try to purchase it from someone else. Having the right product at the right place at the right time will increase sales. Cost reduction: Supply chain management helps companies contain, and often reduce, some or all of the costs associated with moving a product through the supply chain. These costs include material acquisition, inventory carrying, transportation, and planning costs. Total supply chain costs represent the majority of operating expenses for many businesses and in some industries approach 75 percent of the total operating budget. Reducing supply chain costs can thus have a major impact on firm profitability. Cash utilization: The sooner a company delivers a product, the sooner that company will get paid. Companies leading in supply chain efficiency have cash available two to three months faster than companies that do not have this capability. Customer Relationship Management Systems Businesses have always valued their customers, but today there is much greater appreciation of the importance of customers for the profitability of the enterprise. Because competitive advantage based on an innovative new product or service can be very short lived, companies are realizing that their only enduring competitive strength may be their relationships with their customers. Some say that the basis of competition has switched from who sells the most products and services to who “owns” the customer and those customer relationships represent the firm’s most valuable asset. Many firms are turning to customer relationship management (CRM) to maximize the benefits of their customer assets. Customer relationship management is both a business and technology discipline for managing customer relationships to optimize revenue, profitability, customer satisfaction, and customer retention. It uses information technology to track all of the ways in which a company interacts with its customers and to analyze these interactions to maximize the lifetime value of customers for the company while simultaneously maximizing satisfaction for the customers. Different customers represent different levels of profit for the firm. Some customers cost a great deal to attract and to service, whereas others cost very little to service and to attract for large purchases. Customer relationship management helps organizations identify customers who cost little to attract and to keep and who provide the greatest revenues for every marketing or customer service dollar spent. These “good” customers represent about 80 to 90 percent of a company’s profits, but they represent only 10 to 20 percent of the company’s customer base. CRM also focuses on ways of retaining profitable customers and maximizing lifetime revenue from them. It can cost up to six times as much to acquire a new customer as to keep an old customer. These figures vary by industry, but higher customer retention rates generally increase revenues and reduce costs for the firm. Customer relationship management extends to a firm’s business partners who are responsible for selling to customers. Partner relationship management (PRM) uses many of the same data, tools, and systems as customer relationship management to enhance collaboration between a company and its selling partners. If a company does not sell directly to customers but rather works through distributors or retailers, PRM helps these channels sell to customers directly. It provides a company and its selling partners with the ability to trade information and distribute leads and data about customers, integrating lead generation, pricing, promotions, order configurations, and availability. It also provides a firm with tools to assess its partners’ performance so it can make sure its best partners receive the support they need to close more business. Customer Relationship Management Applications Customer relationship management (CRM) systems were designed to provide information and tools to deliver superior customer experience and to maximize customer lifetime value for the firm. CRM systems capture and integrate customer data from all over the organization, consolidating the data, analyzing the data, and then distributing the results to various systems and customer touch points across the enterprise. A touch point (also known as a contact point) is a method of interaction with the customer, such as telephone, e-mail, customer service desk, conventional mail, Web site, or retail store. Customer Relationship Management Software Commercial customer relationship management (CRM) software packages range from niche tools that perform limited functions, such as personalizing Web sites for specific customers, to large-scale enterprise applications that capture myriad interactions with customers, analyze them with sophisticated reporting tools, and link to other major enterprise applications, such as supply chain management and enterprise systems. The more comprehensive CRM packages contain modules for partner relationship management (PRM) and employee relationship management (ERM). Employee relationship management software deals with employee issues that are closely related to CRM, such as setting objectives, employee performance management, performance-based compensation, and employee training. Major CRM application software vendors include Siebel Systems, Clarify, and Salesforce.com. Enterprise software vendors such as SAP, Oracle, and PeopleSoft are also active in customer relationship management and feature tools for integrating their enterprise system modules with their customer relationship management modules. Customer relationship management systems typically provide software and online tools for sales, customer service, and marketing. Their capabilities include the following: Sales force automation (SFA): Sales force automation modules in CRM systems help sales staff increase their productivity by focusing sales efforts on the most profitable customers, those who are good candidates for sales and services. CRM systems provide sales prospect and contact information, product information, product configuration capabilities, and sales quote generation capabilities. Such software can assemble information about a particular customer’s past purchases to help the salesperson make personalized recommendations. CRM software enables customer and prospect information to be shared easily among sales, marketing, and delivery departments. It increases each salesperson’s efficiency in reducing the cost per sale as well as the cost of acquiring new customers and retaining old ones. CRM software also has capabilities for sales forecasting, territory management, and team selling. Customer service: Customer service modules in CRM systems provide information and tools to make call centers, help desks, and customer support staff more efficient. They have capabilities for assigning and managing customer service requests. One such capability is an appointment or advice telephone line: When a customer calls a standard phone number, the system routes the call to the correct service person, who inputs information about that customer into the system only once. Once the customer’s data are in the system, any service representative can handle the customer relationship. Improved access to consistent and accurate customer information helps call centers handle more calls per day and decreases the duration of each call. Thus, call centers and customer service groups can achieve greater productivity, reduced transaction time, and higher quality of service at lower cost. The customer is happier because he or she spends less time on the phone restating his or her problem to customer service. CRM systems may also include Web-based self-service capabilities: the company Web site can be set up to provide inquiring customers personalized support information as well as the option to contact customer service staff by phone for additional assistance. Marketing: Customer relationship management systems support direct-marketing campaigns by providing capabilities for capturing prospect and customer data, for providing product and service information, for qualifying leads for targeted marketing, and for scheduling and tracking direct-marketing mailings or e-mail. Marketing modules would also include tools for analyzing marketing and customer data—identifying profitable and unprofitable customers, designing products and services to satisfy specific customer needs and interests, and identifying opportunities for cross-selling, up-selling, and bundling. Cross-selling is the marketing of complementary products to customers. (For example, in financial services a customer with a checking account might be sold a money market account or a home improvement loan.) Up-selling is the marketing of higher-value products or services to new or existing customers. (An example might be a credit card company persuading a good customer to upgrade from a conventional credit card to a “platinum” card with a larger credit line, additional services—and a higher annual fee.) Bundling is one kind of cross-selling in which a combination of products is sold as a bundle at a price lower than the total cost of the individual products. For example, Verizon sells bundled telephone services that include local and long-distance service, voice mail service, caller identification, and digital subscriber line (DSL) access to the Internet. CRM tools also help firms manage and execute marketing campaigns at all stages, from planning to determine the rate of success for each campaign. Figure below illustrates how a best practice for increasing customer loyalty through customer service might be modeled by CRM software. Directly servicing customers provides firms with opportunities to increase customer retention by singling out profitable long-term customers for preferential treatment. CRM software can assign each customer a score based on that person’s value and loyalty to the company and provide that information to help call centers route each customer’s service request to agents who can best handle that customer’s needs. The system would automatically provide the service agent with a detailed profile of that customer that included his or her score for value and loyalty. The service agent could use this information to present special offers or additional service to the customer to encourage the customer to keep transacting business with the company. Operational and Analytical CRM All of the applications we have just described support either the operational or analytical aspects of customer relationship management. Operational CRM includes customer facing applications such as tools for sales force automation, call center and customer service support, and marketing automation. Analytical CRM includes applications that analyze customer data generated by operational CRM applications to provide information for improving business performance management. Analytical CRM applications are based on data warehouses that consolidate the data from operational CRM systems and customer touch points for use with online analytical processing (OLAP), data mining, and other data analysis techniques. Customer data collected by the organization might be combined with data from other sources, such as customer lists for direct marketing campaigns purchased from other companies or demographic data. Such data could be analyzed to identify buying patterns, to create segments for targeted marketing, and to pinpoint profitable and unprofitable customers. Analytical CRM could also create individual customer profiles, showing each person’s accounts, transactions with the business, and known interests. Business Value of Customer Relationship Management Systems Companies with effective customer relationship management systems can realize many benefits, including increased customer satisfaction, reduced direct marketing costs, more effective marketing, and lower costs for customer acquisition and retention. Information from CRM systems can increase sales revenue by identifying the most profitable customers and segments for focused marketing, cross-selling, and up-selling. Customer churn is reduced as sales, service, and marketing better respond to customer needs. The churn rate measures the number of customers who stop using or purchasing products or services from a company. It is an important indicator of the growth or decline of a firm’s customer base. The Importance of CRM Performance Measurement A company’s decision about which customer-related activities to measure, how costs are assigned to the activities, and the manner in which the activities are assigned back to customers can have a huge impact on profitability calculations. Some companies that invest in CRM have little or no idea of their return on investment (ROI). They fail to create measurements of current performance or set targets for improved performance with the new CRM system. Successful CRM implementations require that financial and operational goals and the metrics to evaluate them be clearly defined at the beginning of the project. Metrics for customer relationship management might include the cost per lead, cost per sale, number of repeat customers, reduction of churn, or sales closing rate. Another important metric is the customer lifetime value (CLTV). CLTV is based on the relationship between the revenue produced by a specific customer, the expenses incurred in acquiring and servicing that customer, and the expected life of the relationship between the customer and the company. CLTV represents the difference between revenues and expenses minus the cost of promotional marketing used to retain an account; the value of this amount is expressed in today’s dollars. Electronic Commerce There are many ways to classify electronic commerce transactions. One is by looking at the nature of the participants in the electronic commerce transaction. The three major electronic commerce categories are business-to-consumer (B2C) e-commerce, business-to-business (B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce. Business-to-consumer (B2C) electronic commerce involves retailing products and services to individual shoppers. BarnesandNoble.com, which sells books, software, and music to individual consumers, is an example of B2C e-commerce. Business-to-business (B2B) electronic commerce involves sales of goods and services among businesses. Milacron’s Web site for selling machinery, mold bases, and related tooling, supplies, and services to companies engaged in plastics processing is an example of B2B e-commerce. Consumer-to-consumer (C2C) electronic commerce involves consumers selling directly to consumers. For example, eBay, the giant Web auction site, enables people to sell their goods to other consumers by auctioning the merchandise off to the highest bidder. Direct Sales over the Web Manufacturers can sell their products and services directly to retail customers, bypassing intermediaries such as distributors or retail outlets. Eliminating intermediaries in the distribution channel can significantly lower purchase transaction costs. Operators of virtual storefronts, such as Amazon.com or EPM.com, do not have large expenditures for rent, sales staff, and the other operations associated with a traditional retail store. Airlines can sell tickets directly to passengers through their own Web sites or through travel sites such as Travelocity without paying commissions to travel agents. Interactive Marketing and Personalization Marketers are using the interactive features of Web pages to hold consumers’ attention or to capture detailed information about consumer tastes and interests for one-to-one marketing (see Chapter 3). Web sites have become a bountiful source of detailed information about customer behavior, preferences, needs, and buying patterns that companies can use to tailor promotions, products, services, and pricing. Some customer information may be obtained by asking visitors to “register” online and provide information about them, but many companies also collect customer information using software tools that track the activities of Web site visitors. Clickstream tracking tools collect data on customer activities at Web sites and store them in a log. The tools record the site that users visited prior to coming to a particular Web site and where these users go when they leave that site. They also record the specific pages visited on the particular site, the time spent on each page of the site, the types of pages visited, and what the visitors purchased. Firms can analyze this information about customer interests and behavior to develop precise profiles of existing and potential customers. Communications and product offerings can be tailored precisely to individual customers. Firms can create unique personalized Web pages that display content or ads for products or services of special interest to each user, improving the customer’s experience and creating additional value. By using Web personalization technology to modify the Web pages presented to each customer, marketers achieve the benefits of using individual salespeople at dramatically lower costs. Personalization can also help firms form lasting relationships with customers by providing individualized content, information, and services. One technique for Web personalization is collaborative filtering, which compares information gathered about a specific user’s behavior at a Web site to data about other customers with similar interests to predict what the user would like to see next. The software then makes recommendations to users based on their assumed interests. For example, Amazon.com and BarnesandNoble.com use collaborative filtering software to prepare personalized book recommendations: “Customers who bought this book also bought . . .” Blogs have emerged as another promising Web-based tool for marketing. A blog, the popular term for Weblog, is an informal yet structured Web site where individuals can publish stories, opinions, and links to other Web sites of interest. Many users subscribe to a blog site, post their views and opinions, and create links to and from other blogs or Web sites. Most blogs are published by individuals, but corporate blogs have emerged as useful marketing tools. Blogs provide a more personal way of presenting information to the public and prospective customers about new products and services. For example, Macromedia, which makes Flash, Dreamweaver, Fireworks and Cold Fusion software for multimedia applications, uses weblogs to nurture ties with customers and introduce them to new features in its software. The blogs provide a forum where managers can discuss the new products, show developers how to use the new features, answer questions, and obtain customer feedback. Some companies also use blogs internally to communicate and exchange ideas about projects and company news. The cost of customer surveys and focus groups is very high. Learning how customers feel or what they think about products or services by examining customer visits to Web sites and online feedback is much cheaper. Customer information that can be acquired over the Internet has become so useful that new third-party services have arisen to provide businesses with customer-generated information that cannot be obtained by directly interacting with customers on the company Web site. Such services monitor customer discussions about products that are taking place through online communities and message boards, conduct online market research surveys, or monitor the online surfing and buying behavior of large numbers of customers at many different Web sites. Customer Self-Service The Web and other network technologies are inspiring new approaches to customer service and support. Many companies are using their Web sites and e-mail to answer customer questions or to provide customers with helpful information. The Web provides a medium for customers to interact with the company, at the customers’ convenience, and find information that previously required a human customer-support expert. Automated self-service or other Web-based responses to customer questions cost only a fraction of what a live customer service representative on the telephone costs. Companies are realizing substantial cost savings from Web-based customer self-service applications. For instance, American, Northwest, and other major airlines have created Web sites where customers can review flight departure and arrival times, seating charts, and airport logistics; check frequent-flyer miles; and purchase tickets online. Business-to-Business Electronic Commerce: New Efficiencies and Relationships Today, about 80 percent of B2B e-commerce is based on proprietary systems for electronic data interchange (EDI). Electronic data interchange (EDI) enables the computer-to-computer exchange between two organizations of standard transactions, such as invoices, bills of lading, shipment schedules, or purchase orders. Transactions are automatically transmitted from one information system to another through a network, eliminating the printing and handling of paper at one end and the inputting of data at the other. Each major industry in the United States and much of the rest of the world has EDI standards that define the structure and information fields of electronic documents for that industry. Although many organizations still use private networks for EDI, companies are increasingly turning to the Internet for this purpose because it provides a much more flexible and low-cost platform for linking to other firms. Using the Internet, businesses can extend digital technology to a wider range of activities and broaden their circle of trading partners. Private industrial networks are B2B extranets that focus on continuous business process coordination between companies for collaboration and supply chain management. A private industrial network typically consists of a large firm using an extranet to link to its suppliers and other key business partners (see Figure 4-6). The network is owned by the buyer, and it permits the firm and designated suppliers, distributors, and other business partners to share product design and development, marketing, production scheduling, inventory management, and unstructured communication, including graphics and e-mail. Another term for a private industrial network is a private exchange. Private exchanges are currently the fastest-growing type of B2B commerce. Net marketplaces, which are sometimes called e-hubs, provide a single digital marketplace based on Internet technology for many different buyers and sellers (see Figure 4-7). They are industry-owned or operate as independent intermediaries between buyers and sellers. Net marketplaces are more transaction oriented (and less relationship oriented) than private industrial networks, generating revenue from purchase and sale transactions and other services provided to clients. Participants in Net marketplaces can establish prices through online negotiations, auctions, or requests for quotations, or they can use fixed prices. Customers benefit from lower search costs, lower transaction costs, and wider selection. There are many different types of Net marketplaces and ways of classifying them. Some Net marketplaces sell direct goods and some sell indirect goods. Direct goods are goods used in a production process, such as sheet steel for auto body production. Indirect goods are all other goods not directly involved in the production process, such as office supplies or products for maintenance and repair. Some Net marketplaces support contractual purchasing based on long-term relationships with designated suppliers, and others support short-term spot purchasing, where goods are purchased based on immediate needs, often from many different suppliers. Some Net marketplaces serve vertical markets for specific industries, such as automobiles, telecommunications, or machine tools, whereas others serve horizontal markets for goods and services that can be found in many different industries, such as office equipment or transportation. Ariba bundles extensive e-commerce services with a Net marketplace for long-term contractual purchasing of both indirect and direct goods. It provides both buyers and sellers with software systems and Net marketplace services, aggregating hundreds of catalogs into a single marketplace and customizing procurement and sales processes to work with their systems. For buyers, Ariba automates sourcing, contract management, purchase orders, requisitions, business rules enforcement, and payment. For sellers, Ariba provides services for catalog creation and content management, order management, invoicing, and settlement. Electronic Commerce Payment Systems Special electronic payment systems have been developed to pay for goods electronically on the Internet. Electronic payment systems for the Internet include systems for credit card payments, digital cash, digital wallets, accumulated balance digital payment systems, stored value payment systems, peer-to-peer payment systems, electronic checks, and electronic billing presentment and payment systems. Credit cards account for 80 percent of online payments in the United States and about 50 percent of online purchases outside the United States. The more sophisticated electronic commerce software has capabilities for processing credit card purchases on the Web. Businesses can also contract with services that extend the functionality of existing credit card payment systems. Digital wallets make paying for purchases over the Web more efficient by eliminating the need for shoppers to enter their address and credit card information repeatedly each time they buy something. A digital wallet securely stores credit card and owner identification information and provides that information at an electronic commerce site’s “checkout counter.” The digital wallet enters the shopper’s name, credit card number, and shipping information automatically when invoked to complete the purchase. Amazon.com’s 1-Click Shopping, which enables a consumer to fill in shipping and credit card information automatically by clicking one button, uses electronic wallet technology. MSN Wallet, MasterCard Wallet, and America Online’s Quick Checkout are other digital wallet systems. Micropayment systems have been developed for purchases of less than $10, such as downloads of individual articles or music clips that would be too small for conventional credit card payments. Accumulated balance payment systems or stored value payment systems are useful for such purposes. Accumulated balance digital payment systems enable users to make micropayments and purchases on the Web, accumulating a debit balance that they must pay periodically on their credit card or telephone bills. IPIN has been widely adopted by online music sites that sell music tracks for 99 cents. It invoices customers through existing consumer billing services such as telephone and wireless service companies, Internet service providers, and banks. PaymentOne and Trivnet enable consumers to charge small purchases to their monthly telephone bill. Stored value payment systems enable consumers to make instant online payments to merchants and other individuals based on value stored in a digital account. Online value systems rely on the value stored in a consumer’s bank, checking, or credit card account and some of these systems require the use of a digital wallet. Ecount offers a prepaid debit account for online purchases, and RocketCash is a new online stored value system aimed at teenagers. Smart cards are another type of stored value system used for micropayments. A smart card is a plastic card the size of a credit card that stores digital information. The smart card can store health records, identification data, or telephone numbers, or it can serve as an “electronic purse” in place of cash. The Mondex and American Express Blue smart cards contain electronic cash and can be used to transfer funds to merchants in physical storefronts and to merchants on the Internet. Both are contact smart cards that require use of special card-reading devices whenever the cards need to transfer cash to either an online or offline merchant. (Internet users must attach a smart card reader to their PCs to use the card. To pay for a Web purchase, the user would swipe the smart card through the card reader.) Digital cash (also known as electronic cash or e-cash) can also be used for micropayments or larger purchases. Digital cash is currency represented in electronic form that moves outside the normal network of money (paper currency, coins, checks, credit cards). Users are supplied with client software and can exchange money with another e-cash user over the Internet or with a retailer accepting e-cash. The eCoin.net is an example of a digital cash service. In addition to facilitating micropayments, digital cash can be useful for people who do not have credit cards and wish to make Web purchases. New Web-based peer-to-peer payment systems have sprung up to serve people who want to send money to vendors or individuals who are not set up to accept credit card payments. The party sending money uses his or her credit card to create an account with the designated payment at a Web site dedicated to peer-to-peer payments. The recipient “picks up” the payment by visiting the Web site and supplying information about where to send the payment (a bank account or a physical address). PayPal has become a popular peer-to-peer payment system. Digital checking payment systems, such as Western Union MoneyZap and eCheck, extend the functionality of existing checking accounts so they can be used for online shopping payments. Digital checks are less expensive than credit cards and much faster than traditional paper-based checking. These checks are encrypted with a digital signature that can be verified and used for payments in electronic commerce. Electronic check systems are useful in business-to-business electronic commerce. Electronic billing presentment and payment systems are used for paying routine monthly bills. They enable users to view their bills electronically and pay them through electronic fund transfers from bank or credit card accounts. These services support payment for online and physical store purchases of goods or services after the purchase has taken place. They notify purchasers about bills that are due, present the bills, and process the payments. Some of these services, such as CheckFree, consolidate subscribers’ bills from various sources so that they can all be paid at one time. Systems Analysis Systems analysis is the analysis of the problem that the organization will try to solve with an information system. It consists of defining the problem, identifying its causes, specifying the solution, and identifying the information requirements that must be met by a system solution. The systems analyst creates a road map of the existing organization and systems, identifying the primary owners and users of data along with existing hardware and software. The systems analyst then details the problems of existing systems. By examining documents, work papers, and procedures; observing system operations; and interviewing key users of the systems, the analyst can identify the problem areas and objectives a solution would achieve. Often the solution requires building a new information system or improving an existing one. The systems analysis would include a feasibility study to determine whether that solution was feasible, or achievable, from a financial, technical, and organizational standpoint. The feasibility study would determine whether the proposed system was a good investment, whether the technology needed for the system was available and could be handled by the firm’s information systems specialists, and whether the organization could handle the changes introduced by the system. Normally, the systems analysis process identifies several alternative solutions that the organization can pursue. The process then assesses the feasibility of each. A written systems proposal report describes the costs and benefits, advantages and disadvantages of each alternative. It is up to management to determine which mix of costs, benefits, technical features, and organizational impacts represents the most desirable alternative. Establishing Information Requirements Perhaps the most challenging task of the systems analyst is to define the specific information requirements that must be met by the system solution selected. At the most basic level, the information requirements of a new system involve identifying who needs what information, where, when, and how. Requirements analysis carefully defines the objectives of the new or modified system and develops a detailed description of the functions that the new system must perform. Faulty requirements analysis is a leading cause of systems failure and high systems development costs. A system designed around the wrong set of requirements will either have to be discarded because of poor performance or will need to undergo major modifications. Some problems do not require an information system solution but instead need an adjustment in management, additional training, or refinement of existing organizational procedures. If the problem is information related, systems analysis still may be required to diagnose the problem and arrive at the proper solution. Systems Design Systems analysis describes what a system should do to meet information requirements, and systems design shows how the system will fulfill this objective. The design of an information system is the overall plan or model for that system. Like the blueprint of a building or house, it consists of all the specifications that give the system its form and structure. The systems designer details the system specifications that will deliver the functions identified during systems analysis. These specifications should address all of the managerial, organizational, and technological components of the system solution. Programming During the programming stage, system specifications that were prepared during the design stage are translated into software program code. Today, many organizations no longer do their own programming for new systems. Instead, they purchase the software that meets the requirements for a new system from external sources such as software packages from a commercial software vendor, software services from an application service provider, or outsourcing firms that develop custom application software for their clients. Testing Exhaustive and thorough testing must be conducted to ascertain whether the system produces the right results. Testing answers the question, “Will the system produce the desired results under known conditions?” The amount of time needed to answer this question has been traditionally underrated in systems project planning. Testing is time consuming: Test data must be carefully prepared, results reviewed, and corrections made in the system. In some instances parts of the system may have to be redesigned. The risks resulting from glossing over this step are enormous. Testing an information system can be broken down into three types of activities: unit testing, system testing, and acceptance testing. Unit testing, or program testing, consists of testing each program separately in the system. It is widely believed that the purpose of such testing is to guarantee that programs are error free, but this goal is realistically impossible. Testing should be viewed instead as a means of locating errors in programs, focusing on finding all the ways to make a program fail. Once they are pinpointed, problems can be corrected. System testing tests the functioning of the information system as a whole. It tries to determine whether discrete modules will function together as planned and whether discrepancies exist between the way the system actually works and the way it was conceived. Among the areas examined are performance time, capacity for file storage and handling peak loads, recovery and restart capabilities, and manual procedures. Acceptance testing provides the final certification that the system is ready to be used in a production setting. Systems tests are evaluated by users and reviewed by management. When all parties are satisfied that the new system meets their standards, the system is formally accepted for installation. The systems development team works with users to devise a systematic test plan. The test plan includes all of the preparations for the series of tests we have just described. Conversion Conversion is the process of changing from the old system to the new system. Four main conversion strategies can be employed: the parallel strategy, the direct cutover strategy, the pilot study strategy, and the phased approach strategy. In a parallel strategy both the old system and its potential replacement are run together for a time until everyone is assured that the new one functions correctly. This is the safest conversion approach because, in the event of errors or processing disruptions, the old system can still be used as a backup. However, this approach is very expensive, and additional staff or resources may be required to run the extra system. The direct cutover strategy replaces the old system entirely with the new system on an appointed day. It is a very risky approach that can potentially be more costly than running two systems in parallel if serious problems with the new system are found. There is no other system to fall back on. Dislocations, disruptions, and the cost of corrections may be enormous. The pilot study strategy introduces the new system to only a limited area of the organization, such as a single department or operating unit. When this pilot version is complete and working smoothly, it is installed throughout the rest of the organization, either simultaneously or in stages. The phased approach strategy introduces the new system in stages, either by functions or by organizational units. If, for example, the system is introduced by functions, a new payroll system might begin with hourly workers who are paid weekly, followed six months later by adding salaried employees (who are paid monthly) to the system. If the system is introduced by organizational units, corporate headquarters might be converted first, followed by outlying operating units four months later. Moving from an old system to a new one requires that end users be trained to use the new system. Detailed documentation showing how the system works from both a technical and end-user standpoint is finalized during conversion time for use in training and everyday operations. Lack of proper training and documentation contributes to system failure, so this portion of the systems development process is very important. Production and Maintenance After the new system is installed and conversion is complete, the system is said to be in production. During this stage, the system will be reviewed by both users and technical specialists to determine how well it has met its original objectives and to decide whether any revisions or modifications are in order. In some instances, a formal post implementation audit document is prepared. After the system has been fine-tuned, it must be maintained while it is in production to correct errors, meet requirements, or improve processing efficiency. Changes in hardware, software, documentation, or procedures to a production system to correct errors, meet new requirements, or improve processing efficiency are termed maintenance. Studies of maintenance have examined the amount of time required for various maintenance tasks. Approximately 20 percent of the time is devoted to debugging or correcting emergency production problems; another 20 percent is concerned with changes in data, files, reports, hardware, or system software. But 60 percent of all maintenance work consists of making user enhancements, improving documentation, and recoding system components for greater processing efficiency. The amount of Page No. 124 of 143 Fundamentals of Management System B Level Paper I (B3.1) work in the third category of maintenance problems could be reduced significantly through better systems analysis and design practices. There are alternative methodologies for modeling and designing systems. Structured methodologies and object-oriented development are the most prominent. Structured Methodologies Structured methodologies have been used to document, analyze, and design information systems since the 1970s. Structured refers to the fact that the techniques are step by step, with each step building on the previous one. Structured methodologies are top-down, progressing from the highest, most abstract level to the lowest level of detail—from the general to the specific. Structured development methods are process-oriented, focusing primarily on modeling the processes, or actions that capture, store, manipulate, and distribute data as the data flow through a system. These methods separate data from processes. A separate programming procedure must be written every time someone wants to take an action on a particular piece of data. The procedures act on data that the program passes to them. The primary tool for representing a system’s component processes and the flow of data between them is the data flow diagram (DFD). The data flow diagram offers a logical graphic model of information flow, partitioning a system into modules that show manageable levels of detail. It rigorously specifies the processes or transformations that occur within each module and the interfaces that exist between them. Figure below shows a simple data flow diagram for a mail-in university course registration system. The rounded boxes represent processes, which portray the transformation of data. The square box represents an external entity, which is an originator or receiver of data, located outside the boundaries of the system being modeled. The open rectangles represent data stores, which are either manual or automated inventories of data. The arrows represent data flows, which show the movement between processes, external entities, and data stores. They always contain packets of data with the name or content of each data flow listed beside the arrow. Object-Oriented Development Structured methods are useful for modeling processes, but do not handle the modeling of data well. They also treat data and processes as logically separate entities, whereas in the real world such separation seems unnatural. Different modeling conventions are used for analysis (the data flow diagram) and for design (the structure chart). Object-oriented development tries to deal with these issues. Object-oriented development uses the object as the basic unit of systems analysis and design. An object combines data and the specific processes that operate on those data. Data encapsulated in an object can be accessed and modified only by the operations, or methods, associated with that object. Instead of passing data to procedures, programs send a message for an object to perform an operation that is already embedded in it. The system is modeled as a collection of objects and the relationships among them. Because processing logic resides within objects rather than in separate software programs, objects must collaborate with each other to make the system work. Object-oriented modeling is based on the concepts of class and inheritance. Objects belonging to a certain class, or general categories of similar objects, have the features of that class. Classes of objects in turn can inherit all the structure and behaviors of a more general class and then add variables and behaviors unique to each object. New classes of objects are created by choosing an existing class and specifying how the new class differs from the existing class, instead of starting from scratch each time. We can see how class and inheritance work in Figure below, which illustrates the relationships among classes concerning employees and how they are paid. Employee is the common ancestor, or superclass, for the other three classes. Salaried, Hourly, and Temporary are subclasses of Employee. The class name is in the top compartment, the attributes for each class are in the middle portion of each box, and the list of operations is in the bottom portion of each box. The features that are shared by all employees (id, name, address, date hired, position, and pay) are stored in the Employee superclass, whereas each subclass stores features that are specific to that particular type of employee. Specific to Hourly employees, for example, are their hourly rates and overtime rates. A solid line from the subclass to the superclass is a generalization path showing that the subclasses Salaried, Hourly, and Temporary have common features that can be generalized into the superclass Employee. Unified Modeling Language (UML) has become the industry standard for representing various views of an object-oriented system using a series of graphical diagrams. The underlying model integrates these views to promote consistency during analysis, design, and implementation. UML uses two principal types of diagrams: structural diagrams and behavioral diagrams. Structural diagrams are used to describe the relationship between classes. Figure above is an example of one type of structural diagram called a class diagram. It shows classes of employees and the relationships between them. The terminators at the end of the relationship lines in this diagram indicate the nature of the relationship. The relationships depicted in Figure 14-9 are examples of generalization, which is a relationship between a general kind of thing and a more specific kind of thing. This type of relationship is sometimes described as an “is-a relationship”. Generalization relationships are used for modeling class inheritance. Behavioral diagrams are used to describe interactions in an object-oriented system. Figure below illustrates one type of behavioral diagram called a use case diagram. A use case diagram shows the relationship between an actor and a system. The actor (represented in the diagram as a stick man) is an external entity that interacts with the system, and the use case represents a series of related actions initiated by the actor to accomplish a specific goal. Several interrelated use cases are represented as ovals within a box. Use case modeling is used to specify the functional requirements of a system, focusing on what the system does rather than how it does it. The system’s objects and their interactions with each other and with the users of the system are derived from the use case model. Computer-Aided Software Engineering Computer-aided software engineering (CASE)—sometimes called computer-aided systems engineering—provides software tools to automate the methodologies we have just described to reduce the amount of repetitive work the developer needs to do. CASE tools also facilitate the creation of clear documentation and the coordination of team development efforts. Team members can share their work easily by accessing each other’s files to review or modify what has been done. Modest productivity benefits can also be achieved if the tools are used properly. Many CASE tools are PC-based, with powerful graphical capabilities. CASE tools provide automated graphics facilities for producing charts and diagrams, screen and report generators, data dictionaries, extensive reporting facilities, analysis and checking tools, code generators, and documentation generators. In general, CASE tools try to increase productivity and quality by doing the following: Enforce a standard development methodology and design discipline Improve communication between users and technical specialists Organize and correlate design components and provide rapid access to them using a design repository Automate tedious and error-prone portions of analysis and design Automate code generation and testing and control rollout Many CASE tools have been classified in terms of whether they support activities at the front end or the back end of the systems development process. Front-end CASE tools focus on capturing analysis and design information in the early stages of systems development, whereas back-end CASE tools address coding, testing, and maintenance activities. Back-end tools help convert specifications automatically into program code. CASE tools automatically tie data elements to the processes where they are used. If a data flow diagram is changed from one process to another, the elements in the data dictionary would be altered automatically to reflect the change in the diagram. CASE tools also contain features for validating design diagrams and specifications. CASE tools thus support iterative design by automating revisions and changes and providing prototyping facilities. A CASE information repository stores all the information defined by the analysts during the project. The repository includes data flow diagrams, structure charts, entity-relationship diagrams, UML diagrams, data definitions, process specifications, screen and report formats, notes and comments, and test results. To be used effectively, CASE tools require organizational discipline, management support, and an organizational culture that appreciates the value of such tools. Every member of a development project must adhere to a common set of naming conventions and standards as well as to a development methodology. The best CASE tools enforce common methods and standards, which may discourage their use in situations where organizational discipline is lacking. Prototyping Prototyping consists of building an experimental system rapidly and inexpensively for end users to evaluate. By interacting with the prototype, users can get a better idea of their information requirements. The prototype endorsed by the users can be used as a template to create the final system. The prototype is a working version of an information system or part of the system, but is meant to be only a preliminary model. Once operational, the prototype will be further refined until it conforms precisely to users’ requirements. Once the design has been finalized, the prototype can be converted to a polished production system. The process of building a preliminary design, trying it out, refining it, and trying again has been called an iterative process of systems development because the steps required to build a system can be repeated over and over again. Prototyping is more explicitly iterative than the conventional life cycle, and it actively promotes system design changes. It has been said that prototyping replaces unplanned rework with planned iteration, with each version more accurately reflecting users’ requirements. Steps in Prototyping Figure below shows a four-step model of the prototyping process, which consists of the following: Step 1: Identify the user’s basic requirements: The system designer (usually an information systems specialist) works with the user only long enough to capture the user’s basic information needs. Step 2: Develop an initial prototype: The system designer creates a working prototype quickly, using tools for rapidly generating software. Step 3: Use the prototype: The user is encouraged to work with the system to determine how well the prototype meets his or her needs and to make suggestions for improving the prototype. Step 4: Revise and enhance the prototype: The system builder notes all changes the user requests and refines the prototype accordingly. After the prototype has been revised, the cycle returns to step 3. Steps 3 and 4 are repeated until the user is satisfied. When no more iteration is required, the approved prototype then becomes an operational prototype that furnishes the final specifications for the application. Sometimes the prototype is adopted as the production version of the system. Advantages and Disadvantages of Prototyping Prototyping is most useful when there is some uncertainty about requirements or design solutions. Prototyping is especially useful in designing an information system’s end-user interface (the part of the system with which end users interact, such as online display and data-entry screens, reports, or Web pages). Because prototyping encourages intense end-user involvement throughout the systems development life cycle, it is more likely to produce systems that fulfill user requirements. However, rapid prototyping can gloss over essential steps in systems development. If the completed prototype works reasonably well, management may not see the need for reprogramming, redesign, or full documentation and testing to build a polished production system. Some of these hastily constructed systems may not easily accommodate large quantities of data or a large number of users in a production environment. Rapid Application Development (RAD) Methodology RAD (rapid application development) proposes that products can be developed faster and of higher quality by: Using workshops or focus groups to gather requirements. Prototyping and user testing of designs. Re-using software components. Following a schedule that defers design improvements to the next product version. Keeping review meetings and other team communication informal. There are commercial products that include requirements gathering tools, prototyping tools, software development environments such as those for the Java platform, groupware for communication among development members, and testing tools. RAD usually embraces object-oriented programming methodology, which inherently fosters software re-use. The most popular object-oriented programming languages, C++ and Java, are offered in visual programming packages often described as providing rapid application development. Advantages and Disadvantages Rapid Application Development systems commonly have these advantages: increased speed of development and increased quality. The speed increases can be achieved using a variety of methods including, rapid prototyping, virtualization of system related routines, the use of CASE tools and other techniques. Quality, as defined by RAD, is both the degree to which a delivered application meets the needs of users as well as the degree to which a delivered system has low maintenance costs. RAD increases quality through the involvement of the user in the analysis and design stages. Some systems also deliver advantages of interoperability, extensibility, and portability. Early RAD systems had two primary disadvantages: reduced Scalability, and reduced features. Reduced scalability occurs because a RAD developed application starts as a prototype and evolves into a finished application. Reduced features occur due to time boxing, where features are pushed to later versions in order to finish a release in a short amount of time. Business strategy Business strategy is a set of activities and decisions firms make that determine the following: Products and services the firm produces Industries in which the firm competes Competitors, suppliers, and customers of the firm Long-term goals of the firm Strategies often result from a conscious strategic planning process in which nearly all small to large firms engage at least once a year. This process produces a document called the strategic plan, and the managers of the firm are given the task of achieving the goals of the strategic plan. But firms have to adapt these plans to changing environments. Where firms end up is not necessarily where they planned to be. Nevertheless, strategic plans are useful interim tools for defining what the firm will do until the business environment changes. Thinking about strategy usually takes place at three different levels: Business: A single firm producing a set of related products and services Firm: A collection of businesses that make up a single, multidivisional firm Industry: A collection of firms that make up an industrial environment or ecosystem IT Evaluation and Selection A firm’s IT infrastructure provides the foundation for serving customers, working with vendors, and managing internal firm business processes There are two ways of defining IT infrastructure: as technology or as services clusters. In one sense IT infrastructure is like the plumbing or electrical systems in a building: a set of physical devices and software applications that are required to operate the entire enterprise. But an even more useful service-based definition focuses on the services provided by all this hardware and software. These services include the following: Computing platforms used to provide computing services that connect employees, customers, and suppliers into a coherent digital environment, including large mainframes, desktop and laptop computers, and personal digital assistants (PDAs) and Internet appliances. Telecommunications: services that provide data, voice, and video connectivity to employees, customers, and suppliers. Data management: services that store and manage corporate data and provide capabilities for analyzing the data. Application software: services that provide enterprise-wide capabilities such as enterprise resource planning, customer relationship management, supply chain management, and knowledge management systems that are shared by all business units. Physical facilities: management services that develop and manage the physical installations required for computing, telecommunications, and data management services. IT management: services that plan and develop the infrastructure, coordinate with the business units for IT services, manage accounting for the IT expenditure, and provide project management services. IT standards: services that provide the firm and its business units with policies that determine which information technology will be used, when, and how. IT education: services that provide training in system use to employees and offer managers training in how to plan for and manage IT investments. IT research and development: services that provide the firm with research on potential future IT projects and investments that could help the firm differentiate itself in the marketplace. Evolution of IT Infrastructure: 1950–2005 The IT infrastructure in organizations today is an outgrowth of over 50 years of evolution in computing platforms. We have identified five stages in this evolution, each representing a different configuration of computing power and infrastructure elements. The five eras are automated special-purpose machines, general-purpose mainframe and minicomputer computing, personal computers, client/server networks, and enterprise and Internet computing. Software and Hardware Selection and Evaluation Perhaps the single most frequent question that CIOs ask (often prodded by their boards of directors) is, “Are we spending too much on IT infrastructure?” In some companies the opposite question is more common: “Are we spending enough on IT to keep up with our competitors?” As it turns out, there is no single, simple answer, no formula for getting it right. But there are several ways to approach the issue and several rules of thumb. Market demand for your firm’s services: Make an inventory of the services you currently provide to customers, suppliers, and employees. Most firms do not have such an inventory. Survey each group, or hold focus groups to find out if the services you currently offer are meeting the needs of each group. For example, are customers complaining of slow responses to their queries about price and availability? Are employees complaining about the difficulty of finding the right information for their jobs? Are suppliers complaining about the difficulties of discovering your production requirements? Your firm’s business strategy: Analyze your firm’s five-year business strategy and try to assess what new services and capabilities will be required to achieve strategic goals. Your firm’s information technology (IT) strategy, infrastructure, and cost: Examine your firm’s information technology plans for the next five years and assess its alignment with the firm’s business plans. Make an inventory of existing IT infrastructure cost. Many firms do not know the total cost of their existing IT infrastructure. You will want to perform a total cost of ownership analysis. If your firm has no IT strategy, you will need to devise one that takes into account the firm’s five-year strategic plan. Information technology assessment: Is your firm behind the technology curve or at the bleeding edge of information technology? Both situations are to be avoided. Clearly, you do not want to spend resources on advanced technologies that are still experimental, often expensive, and sometimes unreliable. You want to spend on technologies for which standards have been established and suppliers of IT are competing on cost, not design, and where there are multiple suppliers. On the other hand, you do not want to put off investment in new technologies, allowing your competitors time to develop new business models and capabilities and experience using the new technologies. Competitor firm services: Benchmark your service levels to customers, suppliers, and employees against those of your competitors. Establish quantitative and qualitative measures of service for your firm and your competitors, and try to assess what services they offer customers, suppliers, and employees. If your firm has significant shortfalls in service levels to either group, your firm is at a competitive disadvantage. Look for ways your firm can excel at service levels. Competitor firm IT infrastructure investments: Benchmark your expenditures for IT infrastructure against your competitors. Although some firms regard their IT expenditures as a competitive secret, you can find out information on public companies’ IT investments in their SEC Form 10-K annual reports to the federal government when those expenditures impact a firm’s financial results. Many companies are quite public about their innovative expenditures on IT, and you can impute the level of expenditures based on your research in the trade and professional literature. Total Cost of Ownership of Technology Assets In benchmarking your firm’s expenditures on IT infrastructure with that of your competitors, you will need to consider a wide range of costs. The actual cost of owning technology resources includes the original cost of acquiring and installing hardware and software, as well as ongoing administration costs for hardware and software upgrades, maintenance, technical support, training, and even utility and real estate costs for running and housing the technology. The total cost of ownership (TCO) model can be used to analyze these direct and indirect costs to help firms determine the actual cost of specific technology implementations. When all the TCO cost components are considered, the TCO for a PC might run up to three times the original purchase price of the equipment. Hidden costs for support staff, downtime, and additional network management can make distributed client/server architectures—especially those incorporating handheld computers and wireless devices—more expensive than centralized mainframe architectures. Hardware and software acquisition costs account for only about 20 percent of TCO, so managers must pay close attention to administration costs to understand the full cost of the firm’s hardware and software. It is possible to reduce some of these administration costs through better management. Many large firms are saddled with redundant, incompatible hardware and software because their departments and divisions have been allowed to make their own technology purchases. Such information technology infrastructures are excessively unwieldy and expensive to administer. These firms could reduce their TCO through greater centralization and standardization of their hardware and software resources. Companies could reduce the size of the information systems staff required to support their infrastructure if the firm minimizes the number of different computer models and pieces of software that employees are allowed to use. In a centralized infrastructure, systems can be administered from a central location and troubleshooting can be performed from that location. Systems documentation and User procedures Documentation: Written description of a Computer Program. It falls into several categories: (1) internal documentation, consisting of comments within the program; (2) on-line documentation, displayed as the program runs or called up with a Command such as Help; (3) reference cards, containing easily forgotten details for quick reference; (4) reference manuals, setting out complete instructions for the program in a systematic way; and (5) tutorials, serving as introduction for new users. Operating Procedures Instructions for turning the system on and getting the programs initiated (loaded). Instructions for obtaining source documents for data entry. Instructions for entering data at the terminal, which includes a picture of each screen layout the user will encounter. A description of error messages that can occur and the alternative methods for handling them. A description of the defaults taken in the programs and the instructions for changing them. Instructions for distributing the computer's output, which includes sample pages for each type of report. System Documentation Data dictionary - Description of the files and databases. System flow chart - Description of the data as it flows from source document to report. Application program documentation - Description of the inputs, processing and outputs for each data entry, query, update and report program in the system. Technical Documentation File structures and access methods Program flow charts Program source code listings Machine procedures (JCL) System Vulnerability Figure below illustrates the most common threats against contemporary information systems. They can stem from technical, organizational, and environmental factors compounded by poor management decisions. In the multitier client/server computing environment illustrated here, vulnerabilities exist at each layer and in the communications between the layers. Users at the client layer can cause harm by introducing errors or by accessing systems without authorization. It is possible to access data flowing over networks, steal valuable data during transmission, or alter messages without authorization. Radiation can disrupt a network at various points as well. Intruders can launch denial of service attacks or malicious software to disrupt the operation of Web sites. Those capable of penetrating corporate systems can destroy or alter corporate data stored in databases or files. Systems malfunction if computer hardware breaks down, is not configured properly, or is damaged by improper use or criminal acts. Errors in programming, improper installation, or unauthorized changes cause computer software to fail. Computer systems can also be disrupted by power failures, floods, fires, or other natural disasters. Domestic or offshore outsourcing to another company adds to system vulnerability because valuable information will reside on networks and computers outside the organization’s control. Without strong safeguards, valuable data could be lost, destroyed, or could fall into the wrong hands, revealing important trade secrets or information that violates personal privacy. Some worry that outsourcing application development to offshore companies might provide opportunities for programmers to insert hidden code that would later enable someone to gain control over an application or its data. Computer Fraud Computer fraud is the use of information technology to commit fraud like misrepresent, destroy, steal information, or cause harm to others by accessing information through deceptive and illegal means. Types of computer fraud vary and can be complex or simple. Simple types of fraud might include: Sending hoax emails intended to scare people. Illegally using someone else’s computer or “posing” as someone else on the Internet. Using spyware to gather information about people More complex frauds include: Emails requesting money in return for “small deposits” Violating copyright laws by copying information with the intent to sell information, like DVDs, CDs. Hacking into computer systems to gather large amounts of information for illegal purposes Sending computer viruses or worms with the intent to destroy or ruin someone else’s computer Computer Abuse Computer Abuse is the unauthorized access to computer systems, the modification of programs, the manipulation or interception of data. There are following type of computer abuse: Pornography: It is common for staff to abuse their company links to the Internet in order to download material of an inappropriate nature. Invasion of privacy: The invasion of people’s privacy by the interception of their electronic mail, or the simple theft of their passwords or User IDs Abuse of a Company Computer System / Information-Secrets: This encompasses the employee explicitly breaking company policies or AUP's by way of setting up their own personal email accounts on a company computer as well as browsing or searching for other than company directed topics. Preventing Computer Fraud Email Precautions: If you receive emails from senders you don't know, delete them immediately without opening them and do not reply to unsubscribe as this can tip off phishers that they have reached a valid email address. If you get any type of unsolicited email or pop-up message that asks for any type of personal information, don't respond to it and notify your Internet Service Provider (ISP) immediately. Never send personal or sensitive business information via unsecured email. Any information sent through unsecured email messages may be intercepted and stolen. Online Precautions: Install and keep anti-virus/anti-spyware software on your computer updated. Don't keep personal or business information, passwords or account numbers online or on websites. If you bank online, make sure you stay at your computer for the entire transaction, and then be sure you sign off completely when you are done. Ask to have your account and credit card statements sent to you online directly from your bank or Credit Card Company. Information Security Information security is defined as: The concepts, techniques, technical and administrative measures used to protect information assets from deliberate or inadvertent unauthorized acquisition, Damage, Disclosure, Manipulation, Modification, Loss, or Misuse and sometimes to even suppress the knowledge of a certain information’s existence Need of Information Security Security and control have become a critical, although perhaps unappreciated, area of information systems investment. When computer systems fail to run or work as required, firms that depend heavily on computers experience a serious loss of business function. The longer computer systems are down, the more serious the consequences for the firm. Some firms relying on computers to process their critical business transactions might experience a total loss of business function if they lose computer capability for more than a few days. And with so much business now dependent on the Internet and networked systems, firms are more vulnerable than ever to disruption and harm. Security incidents have been growing at a phenomenal rate. Contents of Information Security Plan An array of tools and technologies can help firms protect against or monitor intrusion. They include tools for authentication, firewalls, intrusion detection systems, antivirus software, and encryption. Tools and methodologies are also available to help firms make their software more reliable. 1. Access Control Access control consists of all the policies and procedures a company uses to prevent improper access to systems by unauthorized insiders and outsiders. To gain access a user must be authorized and authenticated. Authentication refers to the ability to know that a person is who he or she claims to be. Access control software is designed to allow only authorized persons to use systems or to access data using some method for authentication. 2. Firewalls As growing numbers of businesses expose their networks to Internet traffic, firewalls are becoming a necessity. A firewall is a combination of hardware and software that controls the flow of incoming and outgoing network traffic. It is generally placed between the organization’s private internal networks and untrusted external networks such as the Internet, although firewalls can also be used to protect one part of a company’s network from the rest of the network. The firewall acts like a gatekeeper that examines each user’s credentials before access is granted to a network. The firewall identifies names, Internet Protocol (IP) addresses, applications, and other characteristics of incoming traffic. It checks this information against the access rules that have been programmed into the system by the network administrator. The firewall prevents unauthorized communication into and out of the network, allowing the organization to enforce a security policy on traffic flowing between its network and other untrusted networks, including the Internet. 3. Intrusion Detection Systems In addition to firewalls, commercial security vendors now provide intrusion detection tools and services to protect against suspicious network traffic and attempts to access files and databases. Intrusion detection systems feature full-time monitoring tools placed at the most vulnerable points or “hot spots” of corporate networks to detect and deter intruders continually. The system generates an alarm if it finds a suspicious or anomalous event. Scanning software looks for patterns indicative of known methods of computer attacks, such as bad passwords, checks to see if important files have been removed or modified, and sends warnings of vandalism or system administration errors. Monitoring software examines events as they are happening to discover security attacks in progress. The intrusion detection tool can also be customized to shut down a particularly sensitive part of a network if it receives unauthorized traffic. 4. Antivirus Software Defensive technology plans for both individuals and businesses must include antivirus protection for every computer. Antivirus software is designed to check computer systems and drives for the presence of computer viruses. Often the software can eliminate the virus from the infected area. However, most antivirus software is effective only against viruses already known when the software was written. To remain effective, the antivirus software must be continually updated. 5. Encryption and Public Key Infrastructure Many organizations rely on encryption to protect sensitive information transmitted over the Internet and other networks. Encryption is the coding and scrambling of messages to prevent unauthorized access to or understanding of the data being transmitted. A message can be encrypted by applying a secret numerical code, called an encryption key, so that the data are transmitted as a scrambled set of characters. (The key consists of a large group of letters, numbers, and symbols.) To be read, the message must be decrypted (unscrambled) with a matching key. Principles of Information Security Confidentiality: Confidentiality is the term used to prevent the disclosure of information to unauthorized individuals or systems. Integrity: In information security, integrity means that data cannot be modified undetectably. Availability: For any information system to serve its purpose, the information must be available when it is needed. This means that the computing systems used to store and process the information, the security controls used to protect it, and the communication channels used to access it must be functioning correctly. High availability systems aim to remain available at all times, preventing service disruptions due to power outages, hardware failures, and system upgrades. Ensuring availability also involves preventing denial-of-service attacks. Authenticity: In computing, e-Business and information security it is necessary to ensure that the data, transactions, communications or documents (electronic or physical) are genuine. It is also important for authenticity to validate that both parties involved are who they claim they are. Non-repudiation: In law, non-repudiation implies one's intention to fulfill their obligations to a contract. It also implies that one party of a transaction cannot deny having received a transaction nor can the other party deny having sent a transaction. Best Approach to Implement Information Security The most effective way of providing information security is to use a structured approach based upon your specific security requirements. This will ensure that you concentrate on the important areas. Managers should ask the following questions: What firm resources are the most critical to control and secure? How much would it cost to replace these critical assets if they were destroyed or compromised? What would be the legal and business impact if they were accessed by unauthorized parties? What level of system downtime is acceptable? How much disruption in business function or financial loss is the business willing to tolerate? What is the minimum acceptable level of performance for software and systems? If zero defects are impossible to achieve in large complex pieces of software, what constitutes acceptable, if not perfect, software performance? How much is the business willing to invest to protect its information assets? Ensuring System Quality In addition to implementing effective security measures, firms can make systems more reliable by devoting more attention to system reliability and quality. System quality can be improved by expending more resources during the early stages of system design when it is possible to correct errors before the system is actually designed. Thorough testing further reduces system errors, even though it may be impossible to eliminate them completely. Before system is designed, the test normally used is a walkthrough—a review of a specification or design document by a small group of carefully selected people. Once designing begins, system must be tested. When errors are discovered, the source is found and eliminated through a process called debugging. Electronic commerce and electronic business applications introduce new levels of complexity for testing to ensure high-quality performance and functionality. Behind each large Web site, such as Amazon.com, eBay, or ETRADE, are hundreds of servers and software programs, creating numerous points of vulnerability. These Web sites must be built and tested to make sure they are secure and that they can withstand unexpected spikes in traffic Testing wireless applications poses additional challenges. Many wireless and conventional Web applications are linked to the same back-end systems so the total load on those systems increases dramatically as wireless users are added. Automated load-testing tools that simulate thousands of simultaneous wireless Web and conventional Web browser sessions can help companies measure the impact on system performance. Application controls Application controls are controls specific to a particular accounting application. They are particularly effective in detecting whether a system has been tampered with and so are effective in detecting fraud. Application controls are divided into those controls placed on input, output, processing and storage. Separate application controls are developed for different applications. Application controls must be evaluated specifically for every audit area in which the client uses the computer where the auditor plans to reduce assessed control risk. Input Controls: Controls over input are designed to assure that the information processed by the computer is valid, complete, and accurate. These controls are critical because a large number of errors in computer systems are the results from input errors. Common input controls include check digits, batch totals, hash totals, limits or reasonableness tests, validity checks etc. hash controls are: Serial numbering of documents Validation checks on documents Batching documents and checking of batch totals authorization procedures. Process Controls: Controls over processing are designed to assure that data input into the system is accurately processed. This means that all data entered in the computer are processed, processed only once, and processed accurately. Most processing controls are also programmed controls, which mean that the computer is programmed to do the checking. Processing controls are divided into two categories. These are: (1) Validation tests. The validation checks are made on the data when it is being processed. These checks ensure that the data is processed correctly. (2) File checks. File checks are the controls to ensure that the integrity of the files that hold the data for the organization remain intact during processing. Output controls: Controls over output are designed to assure that data generated by the computer are valid, accurate, and complete. Moreover, outputs should be distributed in the appropriate quantities only to authorized people. The most important output control is review of the data for reasonableness by someone who knows what the output should look like. Storage Controls: Many transactions depend on the accuracy of information in the Master File. For example, all sales transactions depend on price list, or all payroll amounts depend on hourlyate or salary rate. User departments should get periodic reports containing the contents of the Master File. There should be procedures in place to verify that the correct version of the Master File is being used. Administrative Controls Administrative Controls relate to the environment within which systems are developed, maintained and operated. Such controls related to all parts of the electronic data processing (EDP) system and they apply to any one application. Administrative controls are to ensure the integrity of application development and implementation and to ensure that computer operations are properly administered to protect hardware, programmes and data files. The main types of administrative controls are: Division of duties: Duties are assigned to different individuals in the organization. This is done in such a way that no one person can have full control over transaction. This ensures that an individual cannot have full control over the creation and operating of the system. There should be segregation of duties within EDP Department, so as to prevent EDP personnel from authorizing and recording transactions to hide theft of assets, and to minimize the possibility of recording and processing errors. In principle, no one individual should be able to access the data, alter the computer system or programme, and access the computer. Operation control: Operation controls are necessary controls since they determine what the computer systems and the employees using the system have been doing. The operator should be prevented from having sufficient knowledge of the programme to modify it immediately before or during its use. Data Control: Data controls are put in place to minimize the number of errors and omission that occur in the file system. The function of the data control is to test the effectiveness and efficiency of all aspects of the system. This includes the application of various controls, the quality of the input, and the reasonableness of the output. Hardware Security Control: The computer hardware is not only important to the processing of the information but is also a valuable fixed asset for the company. Computer hardware must be placed in a secure area where the access to it is limited only to those who need to use it. Arrangements should be made to protect the computer against fires and power fluctuations. There should also be some controls in place to recover the system in case the hardware fails. These controls would ensure that the breakdown of the hardware would not have a serious effect on the company. Systems Development controls: These are the controls that are put over the design and implementation of the system. These controls ensure that the system is developed with a minimum number of errors. The purpose of this control area is to ensure that the client adequately controls computer programmes and related documentation. Organizational Controls Such controls ensure that (i) there is judicious separation of duties to reduce the risk of employee fraud or sabotage by limiting the scope of authority of any individual, (ii) there are comprehensive written standards and (iii) access to and use of computer terminals is properly authorized. These high level controls are important as they influence the effectiveness of any lower level controls which operate within accounting applications. Unless management maintains appropriate IT policies and standards, it is unlikely that other controls will be sufficiently strong to support a controls related audit approach. An assessment of the high level IT policies, strategies and procedures will provide the auditor with a reasonably reliable indication as to the existence and effectiveness of any lower level detailed controls. Operation and File Controls Operation and file controls are meant to ensure safeguarding the computer and computer files from unauthorized access, loss or theft. Controls relating to reception, conversion and processing of data and distribution of the final output promote the completeness and reliability of these operations and safeguard against the unauthorized processing of data or programmes. File controls and procedures adequately safeguard files and software against loss, misuse, theft, damage, unauthorized disclosure and accidental or deliberate corruption. As the computer provides a means of holding, assessing and amending information, it is imperative that its use is controlled. There should be a definite schedule of work that is authorized to run on it and restrictions should be placed on the number and type of staff allowed access to it. Also, computer files are records of an organization which have to be well-safeguarded.