2. Management, Leadership and Decision Making
Role of a Manager
Traditional levels of management:
Senior Management:
Examples: Board of Directors.
Role: Set corporate objectives and strategic direction.
The board is responsible to shareholders and is led by the CEO.
Middle Management:
Accountable to senior management.
Role: Run business functions and departments.
Junior Management:
Supervisory role, accountable to middle management.
Role: Monitor and control day-to-day tasks, and manage teams of workers.
Main roles of managers:
Set objectives: e.g., Sales targets by product and territory.
Analyse performance: e.g., Sales performance compared with last year and budget.
Review performance: e.g., Individual appraisals for each salesperson.
Make decisions: e.g., Where and how to spend the promotional budget.
Lead others: Motivate, encourage, and inspire the sales team.
Tannenbaum Schmidt Continuum
Variety of leadership styles:
Autocratic: Leaders tell their teams exactly what to do.
Democratic/Participative: Leaders involve employees in decision-making.
Continuum: A range of approaches between autocratic and democratic.
Tannenbaum and Schmidt Continuum:
Developed in 1958 by ‘Contingency theorists’ Robert Tannenbaum and Warren Schmidt.
It is a ‘continuum’ of leadership behaviour.
Continuum represents a range of actions related to:
Degree of authority used by the manager.
Area of freedom available to non-managers.
Four stages of leadership:
Tells: The leader identifies problems, makes decisions, and announces them to subordinates, expecting implementation.
Sells: The leader still makes decisions but attempts to overcome resistance through discussion and persuasion.
Consults: The leader identifies the problem and presents it to the group, listening to advice and suggestions before making a decision.
Joins: The leader defines the problem and passes on the solving and decision-making to the group (of which the manager is part).
"Tell" style is more autocratic.
Scientific Decision Making
Business is all about decision-making.
Examples: What price to charge? Who and how many to employ? How to respond to a new competitor? How much inventory to hold? Whether to expand the business?
Two approaches to decision-making in business:
Intuition (Hunch):
Based on intuition, gut feeling, and experience.
Scientific:
Based on data and analysis.
Scientific decision-making involves making decisions based on evidence and adopting a systematic approach, rather than intuition, hunch, or ‘gut reaction’.
Examples of scientific decision-making:
Decision trees.
Investment appraisal.
Dynamic pricing.
Benefits of scientific decision-making:
Data-driven = evidence-based.
Removes some (but not all) subjective judgment from decisions.
Drawbacks of scientific decision-making:
May still rely on assumptions (judgment).
Doesn’t guarantee the correct decision.
May ignore the crucial aspect of business experience.
Risks and Uncertainty
Risk:
The possibility that events will not occur as planned/hoped - i.e., go wrong.
Uncertainty:
The unpredictable and uncontrollable events that affect business decisions and actions.
Examples of Risk in Business:
Cyber-security and Fraud
Environmental damage.
Supply Chain Shocks.
Changing Regulation and Legislation.
Economic Change
Examples of Uncertainty in Business:
How will the market respond to changes in the marketing mix? (e.g. Price increase).
Will a new business achieve its break-even output?
Will suppliers prove reliable if used for the first time?
How many employees will leave this year?
Decision Trees
What is a Decision Tree?
A mathematical model used to help managers make decisions when faced with choices.
How it works:
A decision tree uses estimates and probabilities to calculate likely outcomes.
Calculating these estimates helps to decide whether the net gain from a decision is worthwhile.
The 4-step approach to Decision Trees:
Identify the options.
Add possible outcomes.
Add Associated Costs, Outcome Probabilities, and Financial Results.
Calculate the Expected Values and Net Gains.
Final thoughts on decision trees:
Like investment appraisal, decision trees are a popular tool for management decision-making.
Output from decision trees is very sensitive to the probabilities assigned.
It is important not to solely rely on them to justify a decision, but to aid decision-making.
Influences on Decision Making
The approach taken to making business decisions is influenced by a variety of factors:
Business Objectives / Budgets:
Set the scene for how decisions are made.
A culture of strong budgetary control should encourage more data & evidence-driven decisions.
Organisational Structure - Who Makes the Decisions?
Who has the authority to make decisions?
Are employees empowered to make decisions to deliver more responsive customer service?
Is decision-making centralised or decentralised?
Attitude to Risk:
Close link to business culture.
Is risk-taking encouraged?
What are the penalties for poor decisions?
Availability & Reliability of Data:
Is the data available to support a scientific approach?
Are management comfortable with using scientific methods? Do they have the right skills and experience?
The External Environment:
How fast is the external environment changing?
Do the uncertainties in the external environment make scientific approaches less reliable?
Role and Importance of Stakeholders
What is a Stakeholder?
A stakeholder is any individual or organisation that has a vested interest in the activities and decision-making of a business.
Difference between Stakeholders and Shareholders:
Stakeholders:
Have an interest in the business - but do not own it.
May work for (employees) or otherwise transact with the business.
Shareholders:
Own a business.
May also work in the business.
Benefit directly from increases in the value of the business.
Internal stakeholders:
They are closely connected to the organisation and their needs are likely to have a strong influence on an organisation.
Examples of internal stakeholders:
Owners.
Shareholders.
Employees.
Managers.
Trade union representatives.
Members of work councils.
External stakeholders:
They have diverse needs and varying levels of influence on an organisation’s ability to meet its objectives.
Even though they are external to the organisation they still have a contractual relationship.
They are sometimes known as ‘connected stakeholders’
Examples of external stakeholders:
Customers.
Competitors.
Suppliers.
Central and local government agencies and regulators.
Pressure groups.
Investors.
Bankers.
Creditors.
Professional and Trade associations.
The local community.
The media.
Primary stakeholders:
Those who are directly involved and affected, either positively or negatively, by an organisation’s actions.
These people will have the power to influence and shape decisions.
Secondary stakeholders:
They are the ‘intermediaries’ so the persons or organisations who are indirectly affected by an organisation’s actions.
These people will have the power to influence and shape decisions.
Key stakeholders:
They can either be primary or secondary stakeholders but will have significant influence upon, or within, an organisation.
Stakeholder and Shareholder Mapping
Difference between Stakeholders and Shareholders:
Stakeholders:
Have an interest in the business- but do not own it
May work for (employees) or otherwise transact with the business
Shareholders:
Own the business
May also work in the business
Benefit directly from increases in the value of the business
Examples of Business Stakeholders:
Owners
Society
Creditors
Suppliers
Government
Customers
Managers
Employees
Stakeholders have different interests in a business:
Shareholders/Owners: Mainly interested in:
Return on investment and profits + dividends
Success and growth of the business
Proper running of the business
Managers and Employees: Mainly interested in:
Rewards, including basic pay and other financial incentives
Job security and working conditions
Promotion opportunities + job satisfaction & status- motivation, roles and responsibilities
Customers: Mainly interested in:
Value for money
Product quality & Customer service
Stakeholders have different interests in a business:
Suppliers:
Continued, profitable trade with business
Financial stability- can the business pay its bills?
Banks and other financial providers
Can the business repay amounts loaned or invested?
Profitability and cash flows of the business
Growth in profits and value of the business
Government:
The correct collection and payment of taxes (e.g. VAT)
Helping the business to grow- creating jobs
Compliance with business legislation
Society:
The success of the business- particularly creating and retaining jobs
Compliance with local laws and regulations (e.g. noise, pollution)
Potential conflicts between Stakeholders:
Cutting jobs or closing business units will be supported by shareholders and banks but opposed by Employees and the local community
Adding extra shifts to increase capacity will be supported by Management, Customers and suppliers but opposed by the local community
Introducing greater automation will be supported by Customers and shareholders but opposed by Employees
Increasing selling prices will be supported by the shareholders and management but opposed by customers
Stakeholder power:
Some stakeholders have more power over a business than others