Small Business Management in st the 21 Century
Small Business Management in st the 21 Century By David T. Cadden and Sandra L. Lueder © 2012, published by Flat World Knowledge 1
COPYRIGHT PAGE Published by: Flat World Knowledge, Inc. One Bridge Street Irvington, NY 10533 © 2012 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http: //www. flatworldknowledge. com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement. © 2012, published by Flat World Knowledge 2
Chapter 12 People and Organization © 2012, published by Flat World Knowledge 3
Learning Objectives 1. Understand the functions of management. 2. Explain the three basic leadership styles. 3. Explain the three basic levels of management. 4. Understand the management skills that are important for a successful small business. 5. Understand the steps in ethical decision making. © 2012, published by Flat World Knowledge 4
Learning Objectives 6. Understand why an organizational structure is necessary. 7. Understand organizational principles. 8. Explain the guidelines for organizing a small business. 9. Describe the different forms of organizational structure and how they apply to small businesses. © 2012, published by Flat World Knowledge 5
Learning Objectives 10. Understand the different legal forms that a small business can take. 11. Explain the factors that should be considered when choosing a legal form. 12. Understand the advantages and disadvantages of each legal form. 13. Explain why the limited liability company may be the best legal structure for many small businesses. © 2012, published by Flat World Knowledge 6
Learning Objectives 14. Understand the complexities of hiring, retaining, and terminating employees. 15. Be aware of the laws that apply to businesses of all sizes and specifically to small businesses of certain sizes. 16. Understand outsourcing: what it is, when it is a good idea, and when it is a bad idea. 17. Describe ways to improve office productivity. © 2012, published by Flat World Knowledge 7
Learning Objectives 18. Explain how people and organization can add to customer value. 19. Explain how decisions about people and organizations can impact cash flow. 20. Explain how technology and the e-environment are impacting people and organization. © 2012, published by Flat World Knowledge 8
Why Care? • All small businesses need to be concerned about management principles. • Management decisions will impact: – – the success of a business the health of its work environment the business’s growth if growth is desired customer value and satisfaction • Seat-of-the-pants management may work temporarily, but a toll will be taken eventually. © 2012, published by Flat World Knowledge 9
What Is Management? • No universally accepted decision. • Management is all about achieving organizational objectives through people and other resources. • Management principles apply to all organizations. • Most common reason for small business failure is failure by management – Lack of funds can actually be more serious. • Small business owners and managers will engage in a mix of different management activities. © 2012, published by Flat World Knowledge 10
Management Functions © 2012, published by Flat World Knowledge 11
Management Functions • Planning: the process of anticipating future events and conditions and determining courses of action for achieving organizational objectives. – This is the one step in running a small business that is most commonly skipped. • Organizing: grouping people and assigning activities so that job tasks and the mission can be properly carried out. – Establishing a management hierarchy is the foundation for carrying out the organizing function. © 2012, published by Flat World Knowledge 12
Management Functions • The principle of organizing is not dead. • The effectiveness of organizations and worker satisfaction require that there be: – clear and decisive direction from leadership – clarity of responsibilities, authorities, accountabilities – authority that is commensurate with responsibility and accountabilities – unified command (each employee has only one boss) – a clear approval process – rules governing acceptable employee behavior © 2012, published by Flat World Knowledge 13
Management Functions • Staffing: selecting, placing, training, developing, compensating, and evaluating employees (performance evaluation). – All small businesses need to be staffed by competent people. • Directing: the managerial function that initiates action. – Directing is part of the job for every small business owner or manager. © 2012, published by Flat World Knowledge 14
Management Functions • Leading – the process of influencing people to work toward a common goal • Motivating – The process of providing reasons for people to work in the best interests of an organization © 2012, published by Flat World Knowledge 15
Management Functions • Different situations call for leadership styles. • Lewin established three major styles: – Autocratic – Democratic – Laissez-faire • Good leadership is necessary for all small businesses. © 2012, published by Flat World Knowledge 16
Management Functions • Autocratic leadership – The leader makes decisions without involving others; should not be used very often. • Democratic leadership – The leader involves other people in decision making; often the most effective. • Laissez-faire leadership – Minimizes the leader’s involvement in decision making, but the leader is responsible for the final decision. © 2012, published by Flat World Knowledge 17
Management Functions • Controlling: keeping an eye on things. – Feedback is being provided for future planning activities • There are four commonly identified steps in the controlling process. These functions should be circular in motion. – – setting performance standards measuring performance comparing performance taking corrective action © 2012, published by Flat World Knowledge 18
The Controlling Function © 2012, published by Flat World Knowledge 19
Levels of Management © 2012, published by Flat World Knowledge 20
Levels of Management • Levels of management are referred to as the management hierarchy. There are typically three levels of management: – Top Management: also known as the executive level; guides and controls the overall fortunes of a business. • Top managers devote most of their time to developing the mission, long-range plans, and strategy of a business. • The small business owner should be top management only. • Estimated that top managers spend 55 percent of their time planning. © 2012, published by Flat World Knowledge 21
Levels of Management – Middle Management: is probably the largest group of managers, the conduit between top management and first -line managers. – First-line or Supervisory Management: works directly with the people who produce and sell the goods and/or the services of a business. • They implement the plans of middle management. © 2012, published by Flat World Knowledge 22
Management Skills • Management Skill: the ability to carry out the process of reaching organizational goals by working with and through people and other organizational resources. • An effective manager: the manager who is able to master four basic type of skills: – – Technical Conceptual Interpersonal Decision making © 2012, published by Flat World Knowledge 23
Management Skills: Technical Skills • Technical Skills: the manager’s ability to understand use the techniques, knowledge, and tools and equipment of a specific discipline or department. – Particularly important skills for first-line managers. – Much less important at top management level. – The need for technical skills by the small owner will depend on the nature and the size of the business. © 2012, published by Flat World Knowledge 24
Management Skills: Conceptual Skills • Conceptual Skills: a manager’s ability to see the organization as a unified whole and to understand how each part of the organization interacts with other parts. – These skills are of the greatest importance to top management. – All small business owners need such skills. © 2012, published by Flat World Knowledge 25
Management Skills: Interpersonal Skills • Interpersonal Skills: include the ability to communicate with, motivate, and lead employees to complete assigned activities, hopefully building cooperation within the manager’s team. – These skills are of greatest importance to top management. – Critical for all small business owners. © 2012, published by Flat World Knowledge 26
Management Skills: Decision Making Skills • Decision Making Skills: the ability to identify a problem or an opportunity, creatively develop alternative solutions, select an alternative, delegate authority to implement a solution, and evaluate the solution. © 2012, published by Flat World Knowledge 27
Management Skills: Decision Making Skills • Making good decisions is never easy. • Doing so is clearly related to small business success. • Decisions made on the basis of flawed logic, emotionalism, or incomplete information can quickly put a small business out of commission. © 2012, published by Flat World Knowledge 28
Organizational Design • Organizing consists of grouping people and assigning activities so that job tasks and the mission of a business can be properly carried out. • The organizational structure should permit interactions among individuals and departments needed to achieve the goals and objectives of the business. • Each small business must decide what organizational design best fits the business. © 2012, published by Flat World Knowledge 29
Fundamentals of Organization • Fundamentals of organization: There are several clear, fundamental issues that managers need to consider when making any kind of organizational decisions: 1. CLEAR OBJECTIVES give meaning to the business—and to the work done by employees—by determining what it is attempting to accomplish. © 2012, published by Flat World Knowledge 30
Fundamentals of Organization 2. The resources of a small business must be COORDINATED to minimize duplication and maximize effectiveness. Business leaders must make sure that employees have the answers to six fundamental questions: 1. What is my job? 2. How am I doing? 3. Does anyone care? 4. How are we doing? 5. What are our vision, mission, and values? 6. How can I help? © 2012, published by Flat World Knowledge 31
Fundamentals of Organization 3. Formal and Informal Organization: When a oneperson small business adds employees, some kind of hierarchy will be needed to indicate who does what. – This hierarchy often becomes the FORMAL ORGANIZATION, the details of the roles and responsibilities of all employees. • Formal organization tends to be static, helping to prevent chaos. • Indicates who is in charge of what. • Downside: a slower decision-making process because of all the people who have to be involved and consulted. © 2012, published by Flat World Knowledge 32
Fundamentals of Organization – INFORMAL ORGANIZATION is almost never explicitly stated. Not written down. • Consists of all the connections and relationships that relate to how people throughout the organization actually network to get a job done. • Informal groups and the infamous grapevine are firmly embedded in the informal organization…completely separate from and sometimes faster than the organization’s formal channels of communication. • Small business owners acknowledge existence of the grapevine and figure out how to use it constructively. © 2012, published by Flat World Knowledge 33
Organization Chart • The organization chart is a visual representation of the formal organization of a business. – The chart shows the structure of the organization and the relationships and relative ranks of its positions. – It helps organize the workplace while outlining the direction of management control for subordinates. – Even the one-person small business can use some kind of organization chart to see what functions need to be performed. – Will ensure that everything that should be done is getting done. © 2012, published by Flat World Knowledge 34
Organization Chart © 2012, published by Flat World Knowledge 35
Organization Chart: Benefits • Benefits of organization charts: – effectively communicate organizational, employee, and enterprise information – provide a quick snapshot about the formal hierarchy in a business – are transparent and predictable about what should happen in a business © 2012, published by Flat World Knowledge 36
Organization Chart: Limitations • Limitations of organization charts: – static and inflexible, often being out of date – do not aid in understanding what actually happens within the informal organization – cannot cope with changing boundaries of firms due to outsourcing, information technology, strategic alliances, and the network economy © 2012, published by Flat World Knowledge 37
Organization Chart • Most small businesses find organization charts useful. • Small businesses have a definite advantage because their small size allows for more flexibility and manageability. © 2012, published by Flat World Knowledge 38
Organizational Design • Formal Authority is the right to give orders and set policy. • Two major types of authority that the small business owner should understand: – Line authority refers to having direct authority over lower positions in the hierarchy. • A manager with line authority is the unquestioned superior for all activities of his or her subordinates. • Examples: president, VP of operations, marketing manager, small business owner/manager – Staff authority is advisory only. • There is no authority to take action, and there is no responsibility for revenue generation. © 2012, published by Flat World Knowledge 39
Organizational Design • Small businesses may prefer to hire outside service providers for staff functions (e. g. , legal and accounting services) because it would be difficult to keep such people busy full time. • Staff personnel are often the first to go when cutbacks occur. • Centralization: little or no authority and job activities are delegated to subordinates. – A relatively small number of line managers make the decisions and hold most of the authority and power. © 2012, published by Flat World Knowledge 40
Organizational Design • Decentralization is the opposite. Authority and job activities are delegated. • Organizations move back and forth on the centralization-decentralization continuum. • No universally accepted guidelines for determining whether a centralized or decentralized approach should be used. • Each small business owner/manager must consider which approach makes the best sense. © 2012, published by Flat World Knowledge 41
Guidelines for Organization • These principles are applicable to small businesses although they should not be etched in stone. • Unity of Command: No subordinate should have more than one boss. – Violating this principle will create confusion and frustration. • Division of Labor: A job can be performed more efficiently if the work is divided among individuals and groups so that attention and effort are focused on discrete portions of the task. © 2012, published by Flat World Knowledge 42
Guidelines for Organization • Span of Control (span of management): the number of people or subordinates that a manager supervises. – The span of control typically becomes smaller as a person moves up the management hierarchy. – There is no magic number for every manager. The number will vary based on a number of factors. • As a small business grows, there will likely be more management hierarchy unless the small business owner is committed to a flatter organization. © 2012, published by Flat World Knowledge 43
Guidelines for Organization • Scalar Principle: authority and responsibility should flow in a clear, unbroken line from the highest to the lowest manager. – Result: More effective decision making and communication • This principle is particularly important to small businesses because the tendency may otherwise be to operate on a more informal basis because of the size of the business. © 2012, published by Flat World Knowledge 44
Types of Organization Structure • Knowing about organizational structures is important for a small business that is already up and running as well as the small business in its early stages. • Small business owners should be flexible enough to change the structure over time as the situation demands. • Small businesses with fewer than 15 employees may not have to worry about its organization structure. • There are many structure options. © 2012, published by Flat World Knowledge 45
Types of Organization Structure: Functional • Functional Structure: Organizes a business according to job or purpose in the organization and is most easily recognized by departments that focus on a single function or goal. © 2012, published by Flat World Knowledge 46
Types of Organization Structure: Divisional • Divisional Structure: Organizational functions still exist, but they are based on product, geographic area or territory, or customer. • Each division will have its own functional department(s). © 2012, published by Flat World Knowledge 47
Types of Organization Structure: Matrix • Matrix Structure: Brings together specialists from different areas of a business to work on different projects on a short-term basis. • Each person on the project team to report to two bosses: a line manager and a project manager. • Violates the one boss principle (unity of command) • Great for people who like to work in chaos. © 2012, published by Flat World Knowledge 48
Types of Organization Structure: Virtual Organization/Network • Virtual Organization (or Network Organization): Administration is the primary function performed. • Other functions such as marketing or engineering are outsourced to other organizations or individuals. • Barriers of time and location removed. • Can be quite attractive to small businesses and start-ups. • Costs and capital requirements will be significantly reduced and flexibility enhanced. © 2012, published by Flat World Knowledge 49
Legal Forms of Organization • Legal form of the business is one of the first decisions a small business owner will have to make. • The factors that should be considered: – – – – The owner’s vision The desired level of control The level of structure desired The acceptable liability exposure Tax implications The extent of sharing profits Financing needs The need for cash © 2012, published by Flat World Knowledge 50
Legal Forms of Organization: Sole Proprietorship • Sole Proprietorship: a business that is owned and usually operated by one person. • The oldest, simplest, and cheapest form of business ownership. • Advantages: tax breaks, owner retailing all profits, pride of ownership • Disadvantages: owner absorbs all losses, unlimited liability, difficulty finding financing © 2012, published by Flat World Knowledge 51
Legal Forms of Organization: Partnership • Partnership: two or more people voluntarily operating a business as co-owners for profit. – General partnership: all the partners have unlimited liability and each partner can enter into contracts on behalf of the other partners. – Limited partnership: there is at least one general partner and one or more limited partners whose liability is limited to the cash or property invested in the partnership. • Advantages: owner retains all profits; easy to dissolve • Disadvantages: unlimited financial liability for general partners; interpersonal content; and management deficiencies. © 2012, published by Flat World Knowledge 52
Legal Forms of Organization: Corporation • Corporation: an artificial person created by law, with most of the legal rights of a real person. • These rights include the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts. • Advantages: limited liability; skilled management team; ease of raising capital • Disadvantages: double taxation; difficult and expensive to start; financial disclosure © 2012, published by Flat World Knowledge 53
Legal Forms of Organization: Limited Liability Company (LLC) • Limited Liability Company (LLC): a relatively new form of business ownership. • A blend of a sole proprietorship and a corporation. • Limited liability and taxed only once. • The LLC business structure is the best choice for most small businesses: the owners will have the greatest flexibility, and there is a liability shield that protects all owners. © 2012, published by Flat World Knowledge 54
Hiring New People • All businesses want to attract, develop, and retain enough qualified employees to perform the activities necessary to accomplish the organizational objectives of the business. • The hiring of the first few people may end up being pretty simple, but as the hiring continues, there should be a more formal hiring process in place. © 2012, published by Flat World Knowledge 55
Hiring New People • Identifying job requirements: A small business owner should not proceed with hiring anyone until he or she has a clear idea of what the new hire will do and how that new hire will help attain the objectives of the business. • Doing things right with the first new hire will establish a strong foundation for hiring in the future. • A good job description must be created. • Job descriptions should be flexible for the small business owner. © 2012, published by Flat World Knowledge 56
Hiring New People • Choose sources of candidates: Hiring a new employee is expensive • It is important to choose sources that have the greatest potential for reaching the people who will most likely be interested in what a small business has to offer. • Selecting a mix of sources makes sense, e. g. , the Internet and employee referrals. © 2012, published by Flat World Knowledge 57
Hiring New People • Review applications and resumes: Be very clear about the objectives of the business and the associated reason(s) for a new hire. • Know the law: there are laws that apply to small businesses no matter what their size…but there also laws that apply to businesses of a certain size. © 2012, published by Flat World Knowledge 58
Hiring New People • Interview candidates: Knowing the law is also important when interviewing candidates. • There are many topics that are off limits. Everyone involved in the interviewing process knows what they are. • Interview focus: the job, its requirements, and the qualifications of the candidate. © 2012, published by Flat World Knowledge 59
Hiring New People • Conduct employment tests and references: An effective testing program can: – improve accuracy in selecting employees – provide an effective means for comparing candidates – provide information about training, development, or counseling needs • Disadvantages: fallibility of tests; tests can never measure everything; many tests discriminate against minorities. © 2012, published by Flat World Knowledge 60
Hiring New People • Each small business must decide whether tests make sense for the business. • Checking references is much more difficult but not checking references can result in poor hiring choices. • Check with an attorney before moving forward with reference checking. © 2012, published by Flat World Knowledge 61
Hiring New People • Select a candidate and negotiate an offer: Three main issues: – compensation (including benefits); – job performance and expectations; – accommodation for disabilities. • Small businesses can offer benefits that only a small business can offer. © 2012, published by Flat World Knowledge 62
Hiring New People • Set performance expectations: Prospective new employees should know and understand their performance expectations. • The small business doing the hiring needs to determine what those expectations are. • It must be clear how the employee’s work can positively impact the achievement of the business’s goals. © 2012, published by Flat World Knowledge 63
Hiring New People • Make accommodations for disabilities: A small business that has 15 or more employees is required by the American Disabilities Act (ADA) to make reasonable workplace accommodations for the employee. • A tax credit is available to an eligible small business— and businesses may deduct the costs (up to $5, 000) of removing an architectural barrier. © 2012, published by Flat World Knowledge 64
Retention • Retention refers to keeping employees • Plays an important role in the cost of running a business. • The first few years of an employee’s service are the most costly because money will be spent on recruiting and training the employee. • Good training and orientation at the outset of employment can set the stage for increased retention. © 2012, published by Flat World Knowledge 65
Retention • Employee incentive programs are particularly important for small businesses © 2012, published by Flat World Knowledge 66
Termination • Termination is about ending the employment of current employees against their will. – Termination at will: An employee does not have an employment contract. • The employer does not have to give the employee a reason, as long as the termination isn’t unlawful or discriminatory. • Employees can also leave at will. – Termination for cause: A person is being fired for a specific reason, e. g. , stealing, lying, falsifying records, and embezzlement. © 2012, published by Flat World Knowledge 67
Outsourcing • Outsourcing is the practice of using outside firms, some of which may be offshore, to handle work that is normally performed within a company. • Small business owners routinely outsource a range of services, e. g. , landscaping, distribution, and cleaning. • A major reason for outsourcing? – Cost reduction © 2012, published by Flat World Knowledge 68
Outsourcing • When outsourcing is a good idea: – When it allows a business to continue performing the functions it does best, while hiring other companies (often other small businesses) to do tasks they can handle more competently and cost effectively. • When outsourcing is a bad idea: – When the activities are handled better internally, e. g. , sales and technology. – When it ends up being more costly. – May create morale problems within the company. © 2012, published by Flat World Knowledge 69
Office Productivity • The smaller a business is, the more efficient and effective it must be. • Productivity is an issue in the office and in manufacturing. • Even the smallest business can improve productivity by using technology. • Some technologies that have changed office productivity: smartphones, the i. Pad (and its competitor products, ) and web conferencing products. © 2012, published by Flat World Knowledge 70
Office Productivity • Virtual or telecommuting employees: Employees that work from locations other than the traditional office. • These individuals can work from anywhere. © 2012, published by Flat World Knowledge 71
Office Productivity • Advantages: – – companies could save $6, 500 annually per employee no distractions from co-workers no stress from office politics employees are more productive • Disadvantages: – Virtual employees won’t work for all types of businesses, (e. g. , you can’t have virtual servers in restaurants. ) – The creation of the appropriate infrastructure can be very expensive. © 2012, published by Flat World Knowledge 72
Customer Value Implications • • • Small business CEOs and top management tend to have more personalized relationships. Small businesses are flatter, less bureaucratic, and sometimes less centralized. A small business owner will also have a closer relationship with customers and employees. © 2012, published by Flat World Knowledge 73
Cash Flow Implications • • The simpler the organization, the more positive the impact of cash flow. Improper hiring and termination practices will also have adverse effect on cash flow. Hiring and termination errors can also open up a small business to lawsuits, another major hit to cash flow. Technology adoption for office productivity may adversely affect the cash flow in the short term, but (hopefully) the higher productivity should offset those losses in the longer term. © 2012, published by Flat World Knowledge 74
Implications of Technology and the EEnvironment • • • Technology is very pervasive in today’s workplace Ignoring it will be done at each small business’s peril. Mobile technology is now entering the hiring process, as is the use of Skype for interviews. Talent management software is available Many new technology products are being geared to the small business. The e-environment has opened the door to multiple ways to improve productivity. © 2012, published by Flat World Knowledge 75
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