Organization and People block#2:

Ch1 p20-26: globalization and the international context:

Globalization organizations integrating, operating and competing in a worldwide
economy

The organization’s activities are more independent across the worlds, rather than
confined nationally. The following factors can be explanatory factors underlying this trend:
- Improvements in international information and communication facilities leading to
an increased consciousness of differences in workplace attitudes and behavior in
other societies
- International competitive pressure
- Increased mobility of labor
- International business activity
- Greater cross-cultural awareness and acceptance of advantages of diversity

Globalization will also impact on the nature of social responsibilities and business ethics

Successful international management boils down to five simple principles:

1) Listen well so you understand the rationale, motivations and outcomes desired by
the other party
2) Take time to do your research and homework
3) Be courteous and polite, and mindful of local manners and customs
4) Develop good working relationships through trust and respect
5) Embrace the opportunities from international management

Advantages to cross-cultural awareness:

 Increased self-awareness
 Sensitivity to difference and diversity
 Questioning our own assumptions and knowledge
 Lessening ignorance, prejudice and hatred

Factors affecting national

culture:
5 dimensions of Hofstede:
- Power distance: the social distance among people (hierarchical /Structure
/educational level /ETC)
- Uncertainty avoidance: the extent to which members of a society feel threatened
by ambiguity or unusual situations or accepting of risks and uncertainty
- Individualism: the relatively individualistic or collective ethic evident in that
particular society
- Masculinity: a continuum between “masculine” characteristics, and “feminine”
traits
- Long-term/short-term orientation

Areas in which cultural differences may affect aspects of organizational behavior:

- Relationships and rules
- Societies may be more oriented to the individual or collective
- Display of emotions (neutral/emotional societies)
- Diffuse/Specific culture
- Achievement-based societies/ Ascription-based societies
- View of time
- Attitudes to the environment surrounding you

High-and-low-context cultures:
Ed Hall conceptualizes cultures comprising a series of languages in particular:
 Language of time
 Language of space
 Language of things
 Language of friendships
 Language of agreements
Hall suggests that these” languages”, which resemble shared attitudes to the issues in
question, are communicated in very different ways according to whether a society is
classified as a “High-or-Low”-context culture
 High-Context societies (Africa-Asia-
Latin America)
High proportion of information is
“uncoded” and internalized by the
individual
Indirect communication style- words are
less important
Shared group understanding
Importance attached to the past tradition
“diffuse” culture stressing the importance
of trust and personal relationships in
business
Ch3 p.74-78 p.84-90: The organizational environment
Low-Context societies (U.S.A-UK-
Australia-the Scandinavian)
High proportion of information is “coded”
and expressed
Direct communication styles- words are
paramount
Past context is less important
“specific” culture stressing importance of
rules and contracts

The organization as an open system:

Organizations differ in many important respects but they also share common features,
and can be viewed as open systems that takes inputs from the environment and
throughout series of activities transform or convert these inputs into outputs to achieve
some objective.
In terms of the open-systems model, the business organization, for example, takes in
resources such as people, finance, raw materials and information from its environment,
trans- forms or converts these and returns them to the environment in various forms of
outputs such as goods produced, services provided, completed processes or procedures in
order to achieve certain goals such as profit, market standing, level of sales or consumer
satisfaction.
Interactions with the environment:
In order to be effective and maintain survival and growth, the organization must respond
to the opportunities and challenges, and the risks and limitations, presented by the
external environment of which is part

External environment:
- Global/National (macro)
- Industry (meso)

Industry: Country:
Global:  Customers  Demographic
 Technology  Suppliers  Political
 Globalization  Competitors  Culture
 Sustainability  Partners  Legal
 Economical
PESTEL Analysis:

Organizational Conflict:
Conflictbehavior intended to obstruct the achievement of some other person´s goals.
Conflict is based on the incompatibility of goals and arise from opposing behaviors. It can
be viewed at the individual, group or organization level
According to ACAS, conflict in the workplace can be divided into 3 categories:
1. Organized conflict: manifests itself as strike action or action short of strike, wildcat
strikes, occupations, etc.
2. Overt individual conflict: formal grievances raised over working conditions
3. Latent conflict: the signs of unrest, discontent and disengagement are expressed
through increased absence levels and higher turnover of personnel, a drop in
performance and more fractious interpersonal relationships between managers
and the managed, which can lead to an increase in bullying and harassment

Contrasting perspectives of conflict:

It might be expected that a healthy organizational climate would be reflected by complete
harmony in working relationships, loyalty and common commitment to the goals and
objectives of the organization

 Unitarist and Pluralists Perspective: the natural state of the organization is viewed
as an integrated, co-operative and harmonious whole. There is an image of the
organization as a team with a common source of loyalty and one focus of effort.
The pluralist manager is more likely to accept that conflict in organizations requires
careful handling and attempt to reconcile rival interests.
 Radical Perspective: associated with the ideas of writers like Karl Marx. It
challenges the traditional view of conflict in society and sees organizations in terms
of disparity in power and control between owners and workers. According to this
approach, the design of organization structure, management systems and the
choice and use of technology all form part of the struggle for power and control
within the organization.
 Interactionists Perspective: believes that conflict is a positive force and necessary
for effective performance. This approach encourages minimum level of conflict
within the group in order to encourage self-criticism, change and innovation, it
helps to prevent apathy or a too high tolerance that disrupts the status quo of the
group. Conflict per se is not necessarily good or bad but an inevitable feature of
organizational life and should be judge in terms of its effect on performance.

Conflict can be seen as a constructive force, and in certain circumstances it can be

welcomed or even encouraged.

Sources of conflict:
- Differences in perception: differences in perception result in individuals attaching
different meaning to the same stimuli. As perception´s becomes a person’s reality,
value judgements can be a potential major source of conflict
- Limited resources: the greater limitation of resources, then usually the greater
potential for conflict. In an organization with reducing profits or revenues, the
potential for conflict is likely to be intensified
 - Departmentalization and specialization: differing goals and internal environments
of departments are also a potential source of conflict
- Nature of work activities: where the activities of one person are dependent upon
the work of others there is potential for conflict
- Role conflict: a role is the expected pattern of behaviors associated with members
occupying a particular position within the structure of the organization. Problems
of role incompatibility and role ambiguity arise from inadequate or inappropriate
role definition
- Inequitable treatment: the perception of inequity will motivate a person to take
action to restore equity, including changes to input or output, or through acting on
others
- Violation of territory: people tend to become attached to their own “territory”; if
a person´s territory is violated this can lead to conflict
- Environmental Changes: changes in an organizational external environment, can
lead to conflict

Other potential sources of conflict:

- Individual
- Age gap
- Personal friendships
- Group
- Organization

The management of conflict:

 Clarification of goals and objective
 Resource distribution
 HR policies and procedures
 Non-monetary rewards
 Development of interpersonal/ group process skills
 Group activities
 Leadership and management
 Organizational processes
 Socio-technical approach

Ch7 p.220-248: Work motivation and job satisfaction

The significance of motivation:

Four common characteristics that underlie the definition of motivation:
 Motivation is typified as an individual phenomenon
 Motivation is usually described as intentional
 Motivation is multifaceted:
1) What gets people activated (arousal)
 2) The force of an individual to engage in desired behavior
 The purpose of motivational theories is to predict behavior

Motivation the creation of incentives and working environments that enable people to
perform to the best of their ability. The aim of motivation is to engage people with the
work they are doing in order to achieve the best possible outcomes for individuals and the
organization as a whole.

Performance = function (ability X motivation)

“Theory M” program of motivation based on direct cash rewards for above-average

performance. A percentage base is calculated from the average performance of workers
on the staff.

 Extrinsic motivation: related to “tangible” rewards, these rewards are often

determined at the organizational level
 Intrinsic motivation: related to “psychological” rewards, these rewards are those
that can usually be determined by the actions and behavior of individual managers

Broader intrinsic motivation:

- Attachment/affiliation: concerning the need for engagement and sharing, a feeling
of community and a sense of belonging to the company
- Exploration/assertion: concerning the ability to play and work, a sense of fun and
enjoyment, the need for self-assertion and the ability to choose
Developing a passion for work:
 Meaningful work
 Collaboration
 Fairness
 Autonomy
  Recognition
 Growth
 Connectedness with leaders
 Connectedness with colleagues

Threefold Classification:
- Economic rewards
- Intrinsic satisfaction
- Social relationships
Content theories of motivation:
These theories attempt to explain those specific thing that actually motivate the individual
at work.

Maslow´s Hierarchy of need:

Herzberg´s Dual-Factor Theory

Hygiene or maintenance factors: is those, if absent, cause dissatisfaction. Related to the

job context, they are concerned with job environment and are extrinsic to the job itself.
Motivators or growth factors: those that serve to motivate the individual to superior
effort and performance.

Alderfer´s modified need hierarchy model:

 Existence needs: concerned with sustaining human existence, survival, and cover
physiological and safety needs of a material nature
 Relatedness needs: concerned with relationships to the social environment, cover
Love/belonging, affiliation and meaningful interpersonal relationships of a safety
or esteem nature
 Growth needs: concerned with the development of potential and cover self-
esteem and self-actualization
The needs are more a continuum than hierarchical level.

Nohria´s four-drives model of motivation:

 The drive to acquire- scarce goods and intangibles such as social status. R
rewards that value good performance
  The drive to bond- connections with individuals and groups. Rcollaborative and
open culture
 The drive to comprehend- satisfy curiosity and master the world around us.
Rmeaningful and challenging jobs
 The drive to defend- against external threats and promote justice. Rtransparent
performance of management system
For each of these drives there is a primary organizational level that front-line managers
can use in order to best meet these deep needs and drives.

McClelland´s achievement motivation theory:

 The achievement motive
 The power motive
 The affiliative motive
 The avoidance motive

From empirical research McClelland identified four characteristics of people with a strong
achievement need:
- Moderate task difficulty and goals as an achievement incentive
- Personal responsibility for performance
- Need for clear and unambiguous feedback on how well they are performing
- More innovative

Process of theories motivation:

or extrinsic motivation, attempt to identify the relationships among the dynamic
variables that make up motivation and the actions required to influence
Expectancy theory:
A theory of motivation based on a person´s beliefs about effort-performance-outcome
relationships. People are influenced by the expected results of their actions
Vroom´s expectancy theory:
- Valence: term used for the feeling of specific outcomes. This is the attractiveness
of, or preference for, a particular outcome to the individual
- Instrumentality: from which the valences of outcomes are derived. This leads to a
distinction between first-level outcomes and second level outcomes. The first-
level outcomes are performance related. The second-level outcomes are need
related.
- Expectancy: when someone chooses between alternative behaviors that may have
an effect in the outcome

Equity Theory:
Suggests motivation is moderated by perceived fairness or discrepancies between
personal contributions and rewards compared to others. Focuses on people´s feelings of
how fairly they have been treated in comparison with the treatment received by others.

Goal theory:
The basic premise is that people´s goals or intentions play an important part in
determining behavior. The combination of goal difficulty- the extent to which it is
challenging and demanding- and the extent of the person´s commitment regulates the
level of effort
expended.
Attribution theory:
The process by which people interpret the perceived causes of behavior

Organizational behavior modification:

The application of learning principles to influence organizational behavior. OBMod works
best for behaviors that are specific, objective and countable. Organizations that encourage
the members to learn and undertake desired behaviors and not to undertake undesired
behaviors follow five main steps:
1. Identify
2. Measure
3. Determine
4. Develop
5. Measure and evaluate

Motivation of knowledge workers:

The performance of knowledge workers should be judge on both the cleverness of ideas
and the utility and commercial value of their applied knowledge. The performance of
knowledge workers is dependent upon 4 key characteristics:
1) Task competence
2) Peer and management support
3) Task and role clarity
4) Corporate awareness

Knowledge workers spend half their time on interactions and, in order to improve their
productivity, companies should explore the barriers that impede these interactions:
 - Physical and technical
- Social or cultural
- Contextual
- Time

Ch9 p.330 p-326-327 p.336-337: Leadership in organizations

New types of leaders are needed to create new futures, and the challenge for
management and leadership education is to:
 Develop workers and unleash their creative potential
 Create a positive workplace that will attract and retain knowledge workers
 Reinforce innovations and risk-taking to adapt to an uncertain future

Transformational leadership:
Transactional leadership: based on legitimate authority within the bureaucratic
structure of the organization
Transformational (or creative) leadership: a process of engendering higher levels of
motivation and commitment among followers

Bass propose that a leader should transform and motivate its followers by:
1. Generating greater awareness of the importance of the purpose of the
organization and task outcomes
2. Inducing them to transcend their own self-interests for the sake of the
organization or team
3. Activating their higher-level needs

Components of transformational leadership:

 Idealized influence
 Inspirational influence
 Intellectual stimulation
 Individualized consideration

Guidelines for transformational leadership:

- Articulate a clear and appealing vision
- Explain how the vision can be attained
- Act confident and optimistic
- Express confidence in followers
- Use dramatic, symbolic actions
- Lead by example
Power and leadership influence:
Leadership influence is a social process and may be seen in terms of the type of power
that at leader can exercise over the behavior and actions of others.
 Read power: based on the subordinate´s perception that the leader has the ability
and resources to obtain rewards for those who comply with directives
 Coercive power: based on fear and the subordinate´s perception that the leader
has the ability to punish or to bring about undesirable outcomes for those who do
not comply with directives
 Legitimate power: based on the subordinate´s perception that the leader has the
right to exercise influence because of the leader´s role or position in the
organization
 Referent power: based on the subordinate´s identification with the leader
 Expert power: based on subordinate´s perception of the leader as someone who is
competent and who has some special knowledge or expertise in given area

Variables affecting leadership effectiveness:

- Characteristics of the manager
- Type of power of the manager
- Characteristics of the followers
- Type and nature of the organization
- Technology, systems of communication and methods of work organization
- Informal organization
- Nature and influence of the external environment and national culture

Alternatives views of leadership:

- Shared and distributed leadership: multiple leaders throughout the organization
- Responsible leadership: emerged as an organizations approach to governance,
social responsibilities and business ethics

Ch 10: Understanding Management:

Organizations can only achieve their goals and objective through the co-ordinated efforts
of their members. It is by the process of management and execution of work that the
activities of the organization are carried out

We can regard management as:

 Taking place within a structured organizational setting with prescribed roles
 Directed towards the attainment of aims and objectives
 Achieved through the efforts of other people
 Using systems and procedures
Common of activities of management:
- Forecasting and planning:
- Organizing
- Commanding
- Co-ordinating
- Controlling

Principles of management:
These principles most be flexibles and adaptable changing circumstances
1. Division of work
2. Authority and responsibility
3. Discipline
4. Unity of command
5. Unity of direction
6. Subordination of individual interest to general interest
7. Remuneration of personnel
8. Centralization
9. Scalar chain
10. Order (material and social order)
11. Equity
12. Stability of tenure of personnel
13. Initiative
14. Esprit de corps should be fostered, as harmony and unity among members of
the organization are a great strength in the organizations

Practice of management entails (according to Fayol’s):

 Setting and programing objective
 Motivating and aligning effort
 Co-ordinating and controlling activities
 Developing and assigning talent
 Accumulating and applying knowledge
 Amassing and allocating resources
 Building and nurturing relationships
  Balancing and meeting stakeholder demands

Responsibility for the work of other

people:
1) Fulfilling the specific purpose and
mission of the institution, whether
business enterprise
2) Making work productive and the
worker achieving
3) Managing social impacts and social
responsibilities

“Management is all about control. Success

gives you control and control gives you longevity as a manager” Sir Alex Ferguson

Facts: study after study has shown that

- Managers work at an unrelenting pace
- Their activities are typically characterized by brevity, fragmentation, variety, and
discontinuity
- They are strongly oriented to action

Same problems in Management and both public-enterprise/public-enterprise:

- The clarification of aims and objectives
- The design of a suitable structure
- Carrying out essential administrative functions
- The efficiency and effectiveness of their operations

The work of a manager:

In practice will be influenced by factors like:
 The nature of the organization, its culture, philosophy, objectives, and size
 The type of structure
 Activities and tasks involved
 Technology and methods of performing work
  The nature of people employed
 The level of the organization at which the manager is working

The environmental setting:

Internal environment relates to the culture and climate of the organization

External environment relates to the organization as an open system
Managerial roles:
1) Interpersonal roles: relations with other people arising from the manager´s status
and authority
a. Figurehead role (most basic): the manager is a symbol, represents the
organization
b. Leader role (most important): permeates all activities of a manager, motivates
the staff and delegates tasks
c. Liaison role: involve the manager in horizontal relationships with individuals
and groups outside the manager´s own unit of organization

2) Information roles: related to the sources and communication of information arising

from the manager´s interpersonal roles
a. Monitor role: the manager seeks and receives information to develop and
understand the work of the organization and its environment. (information
may be external or internal sources, and be formal or informal)
b. Disseminator role: involves the manager transmitting external information
through the liaison role the organization, and internal information through the
leader role between the subordinates
c. Spokesperson role: involves the manager as formal authority in transmitting
information to people outside the unit and the general public such as suppliers,
customers, government departments and the press
 3) Decisional roles: involve the making of strategic organizational decision on the
basis of the manager´s status and authority, and access to information
a. Entrepreneurial role: the manager has to initiate and plan controlled change
through exploiting opportunities or solve problems, and take action to improve
the current situation
b. Disturbance handler role: the manger reacts to involuntary situations and
unpredictable events
c. Resource allocator role: the manger uses its formal authority to decide where
resources (such as money) and effort will be spent
d. Negotiator role: the manager participates in negotiations with other
individuals of the organization because of its authority

Why organizations need managers?

- To ensure the organization serves its basic purpose
- The design and maintain the stability of the operation of the organization
- To take charge of the strategy
- To ensure the organization serves the ends of those people who control it
- To serve as the key informational link between the organization and the
environment
- As formal authority to operate the organization´s status system

Agenda-setting: constant activity of the managers. This requires individual managers

responsible for achieving targets to have a continual and changing series of agendas to
help bring intentions into reality.
Network-building: involves the managers interacting with other people and establishing a
network of co-operative relations outside the formal structure.

Stewarts´ model to understand managerial work and behavior, based on:

Demands: that anyone in the job has to do
Constraints: the internal and external factors that limit what the manager can do
Choices: the activities the manager is free to do so

Theory X:
Represents the carrot-stick assumptions:
- The average person is lazy and has an inherent like of work
- Most people must be coerced, directed, controlled and threatened with
punishments if the organization is to achieve its objectives
- The average person avoids responsibility, prefers to be directed, lacks ambitions
and values, security most of all
- Motivations occurs only at the physiological and security levels

The central principle of theory X is direction and control through a centralized system of
organization and the exercise of authority.
Theory Y:
Represents the assumptions consistent with current research and knowledge. The central
principle of theory Y is the integration of individual and organizational goals. Its
assumptions are:
- For most people, work is as natural as play or rest
- People will exercise self-direction and self-control in the service of objectives
which they are committed
- Commitment to objectives is a function of rewards associated with their
achievements
- Given the right conditions, the average worker can learn to accept and to seek
responsibility
- The capacity for creativity in solving organizational problems is distributed widely
in the population
- The intellectual potential of the average person is only partially utilized
- Motivation occurs at the affiliation, esteem and self-actualization levels as well at
the physiological and security levels
The managerial/leadership grids:
Management systems:
 System 1: Exploitive authority. Decisions are imposed, motivation is based on
threats
 System 2: Benevolent authority. A form of leadership, motivation is based in
reward system
 System 3. Consultative. Leadership involves some trust in subordinates, motivation
is based in rewards but also in some involvement
 System 4. Participative. Leadership involves trust and confidence in subordinates,
motivation is based in rewards for achievements in agreed goals
Managing with and through people:

Guidance on good management:

Ch11 p.418-419: Organization structure and design

Perrow- major dimensions of technology:

 The extent to which the work task is predictable or variable
 The extent to which technology can be analyzed

Variabilityrefers to the numbers of exceptional or unpredictable cases and the extent to

which problems are familiar
Analysis of technologyrefers to the extent to which the task functions are broken down
and highly specified, and the extent to which problems can be solved in recognized ways
or by the use of routines procedures

Routine type of organization: here is minimum discretion at both the technical and
supervisory levels, but the power of the middle management level is high, co-ordination is
based on planning and there is likely to be low interdependence between the two groups

Non-routine type of organization: there is a high level of discretion and power at both the
technical and supervisory levels, co- ordination is through feedback and there is high
group interdependence.

Burns and Stalker- Mechanistic and Organic structure-:

 Mechanistic: a more rigid structure that is unable to deal adequately with rapid
change; therefore, is more appropriate for stable environment conditions.
 Organic: a more fluid structure appropriate to changing conditions
Ch13 until p.481: Organizational control and power
Traditional views of control placed emphasis on the need for conformity of activities with
the organization

 Only partially control can be achieved

 Whatever control is achieved over work behavior is brought about as much
through processes of negotiation, persuasion, manipulation and so on, as through
system “devices” such as rules and official procedures

Elements of an organizational system:

- Planning objectives and targets
- Establishing standards of performance
- Monitoring actual performance
- Comparing actual achievement against the planned target
- Rectifying and taking correction action
Forms of control:
Control is far-reaching, it can serve a number of functions concerned with general results
or specific actions and can be manifested in a number of forms.

Concertive control is not exerted by managers but by value consensus of the team to a
system of normative rules.
Strategies of control in organizations:
Characteristics of an effective control system:
- Be understood by those involved in its operation
- Draw attention to the critical important to the success of the organization
- Conform with the structure of the organization and be related to decision centers
responsible for performance
- Be consistent with the objective of the activity which it relates
- Report deviations from the desired standard of performance as quickly as possible
- Be flexible
- Be subject to a continual review

Power and management control

Power At a broad level, power can be interpreted in terms of control or influence over
the behavior of other people with or without their consent

Types of authority and organizations:

- Traditional organizations: authority is legitimized by custom and a long-standing
belief in the natural right to rule, or is possessed by traditional (“proper”)
procedure
- Charismatic organizations: authority is legitimized by belief in the personal
qualities of the leader, authority is based on the leader´s strength of personality
and inspiration
- Bureaucratic organizations: authority is based on the acceptance of the law of
formal rules and procedures, and on impersonal principles

Power, involvement and compliance:

 Coercive power: relies on the use of threats, or physical sanctions or force
 Remunerative power: involves the manipulation of material resources and rewards
 Normative power: relies on the allocation and the manipulation of symbolic
rewards

 Alienative involvement: occurs where members are involved against their whishes
 Calculative involvement: occurs where attachment to the organization is motivated
by extrinsic rewards
 Moral involvement: is based on the individual´s beliefs in, and value placed on, the
goals of the organization

Coercive power  alienative involvement

Remunerative power  calculative involvement
Normative power  moral involvement

Perspectives of organizational power:

Watson suggests that power operates in 3 levels:
- Level of societies
 - Level of organization culture and structure
- Interpersonal level

Social exchange theory:

Social exchanges are influenced by a web of power relationships and are not always equal.
Individuals will seek to achieve a positive balance for themselves by maximizing benefits
and minimizing costs of exchanges.

Pluralistic approaches to power:

Legitimate (organizational) power: derives from a person´s position within the formal
structure of the organization and the managerial hierarchy of command
Personal (informal) power: derives from the individual and is in the eye of the beholders
who believe in the person has the ability to influence other people or event and to make
things happen

Ch14 p.503-510: strategy, corporate responsibility and ethics

Corporate strategy: the process of management and applications of organizational
behavior
It is by means of the organizations structure that its goals and objectives are attained.

Organizational goals:
Are more specific than the function of an organization. Goals will determine the nature
of its inputs and outputs

Objectives and policy:

 Objectives: the aims to be achieved and the desired of results

 Policy: developed within the framework of objectives. Provides the basis for
decision making

Specific
Measurable
Achievable
Realistic
Timed

SMART Goals
Organizational ideologies and principles:

This organizational ideology determines the “culture” of the organization and provides a
set of principles that govern the overall conduct of the organizations operations, codes of
behavior, the management of people and dealings with other organizations.
 Ethical foundation embodies the basic principles that govern the external and
internal relations of the organizations
 Organizational or operational foundation is concerned with the structure,
operation and conduct of the activities of the organization

Fallacy of the single objective:

Key areas in which objectives should be set in terms of performance and results:
1. Market standing
2. Innovation
3. Productivity
4. Physical and financial resources
5. Profitability
6. Manager performance and development
7. Worker performance and attitude
8. Public responsibility
Ch 15 p.536-544: Organizational culture and change
Organizational culture: in its broadest sense, our understanding of workplace culture is
that it embodies that ethos and values of a particular organization, which are expressed
through the way it operates and the practices it undertakes. If the later are deemed to be
wrong, then the former needs to be addressed in order for any issues to be resolved
effectively. Anything else would be superficial change and unlikely to have a lasting impact

Levels of Culture:

Scheins´ model:
Level 1: Artefacts the constructed
physical and social environment
Level 2: Espoused beliefs and
valuesvalues and beliefs become part
of the conceptual process by which
group members justify actions and
behavior
Level 3: Basic underlying
assumptionsbasic assumptions are
unconsciously held learned responses
Handys´ model:
Power Culture: Role Culture:
central power often associated
source, autocratic with bureaucracies,
clearly designated
roles

Task Culture: Person Culture:

job oriented, the individual is the
project oriented central focus

Deal and Kennedys´ model:

They categorize corporate cultures according to two determining factors in the
marketplace:
- The degree of risk associated with the organization´s activities
- The speed at which organizations and their employees receive feedback on the
success of decisions or strategies

Influences on the development of culture:

 History
 Primary function and technology
 Strategy
 Size
 Location
 Management and leadership
  The environment

The cultural web:

Culture and organizational control:

Cartwright sees culture as a system of management authority. When accepted by
employees, cultural values increase the power and authority of management in three
ways. Employees:
●  identify themselves with their organization and accept its rules when ‘it is the right thing

to do’;
●  internalize the organization’s values when they believe they are right; and

●  are motivated to achieve the organization’s objectives.

Ch 16 p.597 including figure 16.10

Ch 13 until p.377, p.377-387: The Strategy of International

Business
Strategythe actions that the manager takes to attain the goals of the firm
Profitabilitythe rate of return that the firms makes on its invested capital (ROIC), which
is calculated by dividing the net profits of the firm by total invested capital
Profit growthmeasured by the percentage increase in net profits over time
Value creation:
The way to increase the profitability of a firm is to create more value. The amount of
value a firm creates is measured by the difference between its costs of production and the
value that consumers perceive in its products.

Operationsthe different value creation a firm undertakes

Operations: the firm as a value chain

Primary Activities: have to do with the design, creation, and delivery of product; its
marketing; and its support and its after-sale service.
Support Activities: provide inputs that allow the primary activities to occur

Global expansion, profitability, and profit growth

Firms that operate internationally are able to:

1. Expand the market for their domestic product offering by selling those products in
international markets
2. Realize location economies by dispersing individual value creation activities to
those locations around the globe where they can be performed most efficiently
and effectively
3. Realize greater cost economies from experience effects by serving an expanded
global market from a central location, thereby reducing the costs of value creation
4. Earn a greater return by leveraging value any valuable skills developed in foreign
operations and transferring them to other entities within the firm´s global network
of operations

Core competenceskills within the firm that competitors cannot easily match or imitate
Location economieseconomies that arise from performing a value creation activity in
the optimal location for that activity, wherever in the world that might be (transportation
costs and trade barriers permitting). It can create this two effects:
1. Lower the costs of value creation and help the firm to achieve a lost-cost position
2. Enable a firm to differentiate its product offering from those of competitors

One result of this kind of thinking is the creation of a global web of value creation
activities

Experience curvesystematic reductions in productions costs that have been observed to

occur over the life of a product
Learning effectscosts savings that come from learning by doing.
Economies of scalereductions in unit’s cost achieved by producing a large volume of
products

Costs Pressures and Pressures for local responses

Firms that compete in the global market face two types of competitive pressures that
affect their ability to realize location economies and experiences events:
1) Pressure for cost reductions
2) Pressure to be locally responsive
Universal needswhen the tastes and preferences of consumers in different nations are
similar if not identical

 Global standardization strategy: focus on increasing profitability and profit growth

by reaping the costs reductions that come from economies of scale, learning effect,
and location economies; their strategic goal is to pursue a low-cost strategy on a
global scale
  Localization strategy: focus on increasing profitability by customizing’s the firms’
goods or services so that they provide a good match to tastes and preferences in
different national markets
 Transnational strategy: simultaneous achieve low costs through location
economies, economies of scale, and learning effects; differentiate their product
offering across geographic markets to account for local differences; and foster a
multidirectional flow of skills between different subsidiaries in the firm´s global
network of operations
 International strategy: taking products first produced for their domestic market
and selling them internationally with only minimal local customization

Ch14: The organization of international business:

Organizational architecture: the totality of a firm´s organization, including formal
organization structure, control systems and incentives, processes, organizational culture,
and people
Organizational structure: (1) the formal division of the organization into subunits such as
product divisions, national operations, and functions; (2) location of decision-making
responsibilities within the structure; (3) the establishment of integrating mechanisms to
coordinate the activities of subunits, including cross-functional teams and/or pan-regional
teams
 - Control systems: the metrics used to measure the performance of subunits and
make judgements about how good managers are running those sub-units
- Incentives: devices used to reward appropriate managerial behavior
- Processes: the manner in which decisions are made and work is performed within
the organization
- Organizational culture: the norms and values systems that are shared among the
employees of an organization
- People: employees, and the strategy used to recruit, compensate, and retain those
individuals and the type of people that they are in terms of their skills, values, and
orientation

Organizational Structure:
It can be thought in terms of 3 dimensions

1) Vertical differentiation: refers to the location of decision-making responsibilities

within a structure
Centralization Decentralization
Facilitates coordination Gives top managers time to focus on critical
situations by delegating tasks to low level
managers
Ensure that decisions are consistent with Greater degree of individual freedom and control
organizational objectives over their work
Give the top-level managers the means to bring Greater flexibility, rapid response to
about needed major organizational changes environmental changes,
Avoid the duplications of activities Better decisions because they are made in the
spot
Increase control
Centralization vs. Decentralization:
Centralizationproduction and key activities
Decentralizationself-contained subunits within an organization
2) Horizontal differentiation: refers to the formal division of the organization into
subunits
The decision is normally made on the basis of function, type of business, or geographical
area. This is particularly likely the case of multinational firms.

When firms initially expand abroad, they often group all their international activities into
an international division.
Worldwide area structures tend to be favored by firms with a low diversification and
domestic structure based on functions. Under this structure, the world is divided into
geographic areas. An area maybe a country or a group of countries. Each area tends to be
a self-contained, largely autonomous entity with its own set of value creation activities.
Operations authority and strategic decisions relating to each of these activities are
typically decentralized. This structure facilitates local responsiveness; however, it
encourages fragmentation of the organization into highly autonomous entities.

Worldwide product division structure tends to be adopted by firms that are reasonably
diversified, and originally had domestic structures based on product divisions. As with the
domestic product divisional structure, each division is a self-contained, largely
autonomous entity with full responsibility for the overall strategic development and
financial control over the firm.
Global matrix areahorizontal differentiation proceeds along two dimensions: product
division and geographic area. The philosophy is that responsibility for operating decisions
pertaining to a particular product should be shared by the product division and the various
areas of the firm. It’s believed that this dual decision-making responsibility should enable
the firm to simultaneously achieve its particular objectives. In practice the global matrix is
clumsy and bureaucratic.

3) Integrating mechanisms: mechanisms for coordinating subunits

When centralization does not work for firms they tend to look for integrating mechanisms

The need for coordination is lowest in firms pursuing a localization strategy, is higher in
international companies, higher still in global companies, and highest of all in
transnational companies.
Impediments to coordinate the subunits may arise from the different views of the
managers for its own subunit or the others; this can cause miss communication. As well as
different goals per subunits.

Formal Integrating Mechanisms:

- Direct contact: may not be effective if the managers have

differing orientations that act to impede coordination
Knowledge networka network for transmitting information within an organization that
is based not on a formal organization structure, but on informal contacts between
managers within an enterprise and on distributed information systems.

Ch15: Entry strategy and strategic alliances

Strategic alliancesare cooperative agreements between potential or actual competitors

Timing of entry:
First-mover Advantages
Capture demand and establish brand
name
Build sales volume in that place
Create switching costs that tie customers
into their products or services
First-mover Disadvantages
Pioneering costs (costs that a later entrant
can avoid)
Regulations change that diminishes the
investment value of the early entrant
Different foreign business systems

Entry modes:
 Exporting:
Advantages:
1. Avoids the often substantial costs of establishing manufacturing operations in the
host country
2. May help a firm achieve experience curve and location economies

Disadvantages:
1. Export the product form its home base may not be the best option since there if
there is a lower-costs location for manufacturing the product abroad
2. High transportation costs (particularly for bulk products)
3. Tariff barriers
4. Delegation of marketing, sales, and services to another firm in the country where
the product is sold

 Turnkey projects: the contractor agrees to handle every detail of the project for a
foreign client, including the training of operating personnel.
Advantages:
1. A way of earning great economic return from that assets
2. Less risk than conventional FDI

Disadvantages:
1. Firms that enter in a long-term turnkey project will have no longer interest in the
foreign country
2. Create a competitor
 3. Sale of technology to a possible competitor

 Licensing: an arrangement whereby a licensor grants the rights to intangible

property to another entity (the licensee) for a specified period, and in return, the
licensor receives a royalty fee from the licensee
Advantages:
1. The firm does not have to bear the development costs and risks associated with
opening in a foreign market
2. Attractive for firms that are lacking capital and want to develop operations
overseas
3. Attractive to a firm that is unwilling to commit substantial financial resources to an
unfamiliar or politically volatile foreign market
4. For firms that are prohibited to participate in foreign markets do to barriers of
investment
5. When firms possess some intangible property that might have business
applications, but it does not want to develop those applications itself

Disadvantages:
1. Doesn’t give tight control to a firm over manufacturing, marketing, and strategy
that is required for realizing experience curve and location economies
2. Competing in a global market may require using the profits earn in one market in
another
3. Risk associated with licensing technological know-how to firms (technological
know-how constitutes the main competitive advantage of multinational
companies)

 Franchising: a specialized form of licensing. Besides selling the license the

franchiser dictates the rules and basis for the business and gets in return royalties
Advantages:
1. The firm is relieved of many of the costs and risks of opening a foreign market on
its own
2. Build global presence quickly and for low costs

Disadvantages:
1. Inhibit the firm’s ability to take profits out of one country to support competitive
attacks in another
2. Quality control

 Joint Ventures: establishing a firms that is jointly owned by two or more otherwise
independent firms
Advantages:
1. Local partners´ knowledge of the host country competitive conditions, culture,
language, political systems, and business systems
2. Sharing initial development costs and risks
 3. Some countries a joint venture is the only option for entry that market

Disadvantages:
1. Giving control of its technology to the partner
2. Does not give the firm tight to control it needs to realize experience curve or
location economies
3. Shared ownership can lead to conflict and battles for control between the
investing firms if their goals and objectives change or have different views towards
the strategy that should be use

 Wholly owned subsidiaries: the firm’s own 100% of the stock. It can be done via:
a. Greenfield: set up a new operation
b. Acquisition: of an established local firm

Advantages:
1. When the competitive advantage is based on technological competence, a WOS
will be preferred to reduce the risk to lose control over that competence
2. Tight control over the firms’ operations in different countries
3. A WOS required if a firm is trying to realize location and experiences curve
economies

Disadvantages:
1. Highs costs and risks
Pros and Cons of Acquisition:
Pros
Quick to execute
Preempt their competitors
Less risky than greenfield ventures
Cons
Overpay for the assets acquired
Clash between the cultures of acquiring
and acquired firms
Synergies and integrating the operations
of the acquired and acquiring firms take
longer than forecasted

Pros and Cons of Greenfield:

Pros Cons
Gives a firm a greater ability to build the Slower to establish
kind of subsidiary company it wants

Pros and Cons of Strategic Alliances:

Pros Cons
Facilitate entry to foreign market Low costs route to new technology and
markets
Allows firms to share fixed costs of Loose more that it gains
developing new product and processes
A way to bring together complementary
skills and assets that neither company
could develop easily on its own
Establish technological standards for the
industry that will benefit the firm

How to select a good partner (for an alliance):

1. Collect as much pertinent, publicly available information on potential allies as
possible
2. Gather data from informed third parties. These include firms that have had
alliances with the potential partners, investment bankers that have had dealings
with them, and former employees
3. Get to know the potential partner as well as possible before committing to an
alliance. This should include face-to-face meetings between senior managers (and
perhaps middle-level managers) to ensure that the chemistry is right

Ch19: Global Human Resource Management

Human Resource Managementrefers to the activities an organization carries out to use
its human resource effectively

Expatriate manager: a citizen of one country who is working abroad in one of the firms’
subsidiaries
Staffing policy concerned with the selection of employees for particular jobs
Corporate culture the organization´s norms and value system

Types of staffing policy:

- Ethnocentric Staffing policy: all key management positions are filled by parent-
country nationals
Why use Ethnocentric staffing policy?
1. Believe that the host country lacks qualified individuals to fill senior management
positions
2. Best way to maintain a unified corporate culture
3. Create value by transferring core competencies to a foreign operation
Disadvantages:
1. Limits advancement opportunities for host-country nationals
2. Lead to cultural Myopia (the firm’s failure to understand host-country cultural
differences)

- Polycentric Staffing policy: host-country nationals manage subsidiaries while

parent-country national have key positions at headquarters
Advantages Disadvantages
Less likely to suffer cultural myopia Limited opportunities for host-nationals to
gain international experience
This approach is less expensive to implement The gap between host-country and parent-
country managers
 - Geocentric Staffing policy: seeks for the best person for the job, regardless
nationality/gender/ethnicity

Expatriate Failure:
Due to:
- Premature return of expatriates to home country
- Costs of expatriate failure are high for organizations
- Inability to cope with larger responsibilities
- Difficulties with new environment
- Personal or emotional problems
- Inability of spouse to adjust

Mendenhall and Oddou 4 dimensions to predict foreign success:

1. Self-orientation
2. Other-orientation
3. Perceptual ability
4. Cultural toughness

Training for expatriate managers:

- Language training
- Cultural training
- Practical training
Performance Appraisal:
Performance appraisal systems are used to evaluate the performance of managers against
some criteria that the firm judges to be important for the implementation of strategy and
the attainment of competitive advantage

Unintentional bias makes it difficult to evaluate the performance of expatriate managers

objectively. In this case two groups evaluates the performance of the expatriate managers
–host-nation managers and home-office managers- and both are subject to this bias.

Compensation:

Expatriate pay:

- Base salary
- Foreign service premium: extra pay the person receives for working outside his/her
country of origin
- Allowances: hardship, cost-of-living, housing, and education
- Taxation
- Benefits: the company has to make sure the receive the same level of medical
benefits and pension as in their home country

International Labor Relations:

Labor relation practices vary by country
Key issuethe degree by which organized labor can limit the choices of international
business

The role of Human Resource Management is to create harmony and minimize the possible
conflicts

Organized Labor:
Concern: good pay, job security, and good working conditions

Strategy: establish international labor organizations, lobbying for national legislation, or

seeking international regulation of multinationals through organization such as the United
Nations

B4: OPERATION TOOLS

LESSON 1: Introduction  Ideology & strategy
Organizations as open systems in an international environment  Goals and
strategy

It all starts with a mission/vision, main goals and objectives.

Strategic management = the pattern of major objectives, purposes or goals and

essential policies or plans for achieving those goals, stated in such a way as to
define what businesses the company is in or is to be in and the kind of company it
is or is to be.

Goals = a future expectation, some desired future state that the organization wants
to accomplish

Objectives = set out more specifically the goals and aims and desired end result.

Mission and vision

 - Vision = the overall frame of reference of what the organization would like
to reach and how it will look.
- Mission = sets an organization’s purpose, guiding values and principles,
and the way in which it intends to achieve its objectives, while recognizing
the interests of other stakeholders.

Main goals are often aimed at profit maximization.

1. What are the long term risks?
2. What are alternatives to profit maximization?

“Non-profits”: governments, social enterprises, NGOs etc. (where financial

performance is not the main goal, but can still be a measure of effectiveness).

Firms with economic goals:

- Redefinition of maximizing short term profit to owner value i.e. incorporating
the short, middle and long-term through the process of discounting future
cash flows back to present value.
 E.g. investing in long-term employees relations, sustainable production,
long-term R&D processes, customer service etc.

LESSON 2: Organizational structure

Main concepts: changes over time (Stopford and Wells)
Depending on: product diversity and foreign sales & of total, organizations can
follow different paths to:
- Worldwide product
- Area division
- Global matrix

Most common stages: domestic and international division (after international

expansion)
Worldwide Area Division Structure
- Product diversity is low and foreign sales as % of total is high
- Undiversified firms with originally a domestic functional structure
- Self-contained, largely autonomous areas with customization to local
conditions

Worldwide Product Division Structure

- Product diversity is high and foreign sales as % of total is low
- Reasonably diversified firms with originally a domestic product structure
- Self-contained, largely autonomous divisions

LESSON 4: Management and Leadership

Concepts: leaders vs. managers
According to Kent:
- Managers do things right, leaders do the right thing
- Stability (managers) vs. change (leaders)
- Authority (managers) vs. relationship (leaders)

Management can be regarded as:

- Taking place in a structured organizational setting, with prescribed roles
 - Directed towards the attainment of aims and objectives
- Achieved through the efforts of other people
- Using systems and procedures

Theory X and Y = underlying predispositions about people, work and human

nature that conditions the way in which managers approach the performance of
their jobs and the behavior they display.

Theory X (“carrot and stick”):

- Some basic assumptions: employees are lazy, must be controlled and
directed, lacks ambition, etc.
- Central principle: direction and control, centralized system of organization
and exercise of authority.
 Likely to result in an exploitative or authoritarian management style.

Theory Y:
- Some basic assumptions: work is natural, self-direction, self control,
commitment to objectives = function of rewards/achievement, responsibility,
widely distributed capacity for creativity, motivation at all Maslow levels.
- Central principle: integration of individual and organizational goals.
 Likely to result in a democratic/participative management style
 Link with Maslow  Self actualization

Blake & Mouton’s Management-Leadership grid (1964)

Basic elements:
1. Concern for production, amount of emphasis on:
- Accomplishing tasks
- Achieving a high level of production
- Getting results (or profits)
2. Concern for people, amount of emphasis that:
- Managers give to subordinates and colleagues as individuals
- Their needs and expectations
Likert – 4 systems of management (1960’s)
1. Exploitative-Authoritative
- Decision-making and responsibility at upper levels of the
organization.  Hierarchy
- Little to no trust in employees
- Decisions and roles are imposed on employees
- Employees cannot openly discuss decisions and roles with managers
- Employees may engage in counter-productive behavior
- Motivation by punishments and threats – play on fear
- Teamwork and communication are minimal

2. Benevolent-Authoritative
- Decision making extended to middle-managerial levels
- More trust towards employees, though somewhat condescendingly
- The responsibility still lies near the top of the hierarchy
- Limited employee consultation on decisions
- Employees still cannot discuss their roles with managers
- Team members may compete for rewards
- Rewards for performance, but also still a threat of punishment
- Teamwork and communication are minimal

3. Consultative
- Decision-making extended to lower-levels when it significantly affects
their role
- Substantial trust in employees
- Responsibility often shared with some team members
- Decisions can be formed through employee consultation processes
- Employees discuss job-related issues horizontally, sometimes
vertically
 - Teams are more co-operative – communication and teamwork are
good
- Motivation primarily through rewards, but sometimes punishment

4. Participative
- Decision-making, responsibility and values are free-spread across all
tiers
- Complete confidence and trust in all employees
- Decisions are formed through group participation and consultation
- Commination is free and managers actively try to understand issues
- Employees are co-operative and openly accountable
- Motivation is provided through monetary rewards and involvement in
goal-setting
- Teamwork, satisfaction and therefore productivity, are high

Criticism on the 3 discussed theories

- Many variables are influencing the behavior of so called managers (mood,
day, what happened earlier that day, impression etc.)  This influences
behavior so also the way they act and thus on how they perceive
employees.
- What about the employee?
- Outside the organization  Business cycle, competitors, unrest, society as
a whole (culture)  Different countries view different ways of management
as ‘normal’.

Underlying philosophies that are likely to make for the successful management of
people  Leading to better performance and more content staff (link to motivation,
engagement, culture, goals).

LESSON 5: Managing HR Globally

Research suggests that a strong fit between HR practices and strategy are
required for high organizational performance and profitability.
 The right strategy + the right organizational architecture = superior
organizational performance.

Strategic role of global HRM:

Transnational strategy imposes different requirements for staffing management
development and compensation practices from a localization strategy.

Staffing policies – 3 types:

1. Ethnocentric = all key management positions filled by parent-country
nationals.
2. Polycentric = host-country nationals manage subsidiaries while parent-
country nationals have key positions at headquarters.
3. Geocentric = seeks the best people for key jobs, regardless of nationality.

HR activities such as staffing, performance evaluation, compensation etc. can be

affected by country differences in labor markets, culture and legal systems.

Staffing policy = the selection of employees for particular jobs – people with the
right knowledge and skills and shared beliefs and values as the organization.
 Can be a tool for promoting a desired organizational culture.
Expatriate failure
Expats = citizens of one country who are working in another country.
 Cost of expat failure (premature return of expats to home country) are high for
organizations.

Some reasons for expatriate failure:

- Inability to cope with larger responsibilities
- Difficulties with new environment
- Personal or emotional problems
- Inability of spouse to adjust

Ensuring successful expatriate postings:

- Expat selection (mindset)
- Training and management development (cultural, language, practical
training)
- Repatriation = soft landing (packing and transporting your belongings,
selling your foreign property, purchasing or renting accommodation for your
return and finding employment should all be priorities).
- Reverse culture shock

International bias can lead to difficulties in evaluating the performance of expatriate

managers. Why?
- Cultural differences (ex: participatory management vs. autocratic
management)
- Home-office managers lack experience working abroad and familiarity with
its challenges.

International Labor Relations – Organized Labor

Their concerns: good pay, job security, good working conditions.
Their strategy: establish international labor organization, lobbying for national
legislation, seeking international regulation of multinationals  Efforts however,
have not been very successful.

LESSON 6: International strategies

Global expansion can increase profitability by:
- Market expansion  Sell more of the same product/sell new products
- Local economies  Performing a value creation activity in the optimal
location for that activity (political/cultural).
- Experience effects  Learning effects and economies of scale, basically
learning by doing are important during startup period.  Spread fixed costs
over large volume/lowering unit costs/bargaining power.
- Leveraging valuable skills within the global network.  Lower costs or
enhance perceived value.

Competitive pressures:
1. Pressures for cost reductions which force the firm to lower unit costs.
 2. Pressures to be locally responsive require the firm to adapt its product to
meet local demands in each market, however, this strategy can raise costs.

Pressures for cost reductions are the greatest:

- For commodity-type products that fill universal needs where price is the
main competitive weapon.
- When major competitors are based in low-cost locations.
- Where the is persistent excess capacity.
- Where consumers are powerful and face low switching costs.

Pressures for local responsiveness arise from:

- Differences in consumer tastes and preferences
- Differences in traditional practices and infrastructure
- Differences in distribution channels
- Host government demands (e.g. political, economic)

The four international strategies:

1. Global standardization  increase profitability and profit growth by
reaping the cost reductions from economies of scale, learning effects and
location economies.
- Goal: low-cost strategy on a global scale
- When: strong pressures for cost reductions and demands for local
responsiveness are minimal.
 Not try to customize their product/marketing  Motorola/Intel.
2. Localization  increase profitability by customizing goods or services so
that they match tastes and preferences in national markets.
- When: substantial differences across nations with regard to
consumer tastes, preferences and cost pressures are not too intense
(although eye on costs is important).
3. Transnational  Achieve low costs through location economies,
economies of scale and learning effects.
- Product differentiation to account for local difference and foster a flow
of skills between different international subsidiaries.
- When: both cost pressures and pressures for local responsiveness
are intense.
4. International  Take products first produced for the domestic market and
sell them internationally with only minimal local customization.
- When: there are low cost pressures and low pressures for local
responsiveness.
 B4 F&A
LESSON 1: Management accounting and cost types
Management Accounting
Why do we have management accounting?
- To compute how efficient business operations are
- To optimize costs and profits (planning)
- To control whether plans (budgets) are met
- To make a managerial decision on what to do in the future

Management accounting
- Is used by internal managers
- Is future-oriented
- Helps management with decision making
- May be different from one company to the other
- Runs parallel to the cure business process of the company

Management accounting is used for planning and control

Planning
The role of planning:
- Reflects a company’s goals
- Provides guidance for decisions
- Is used to develop financial
plans (budget)
Control
The role of control:
- Measures performance
- Compares actual performance
with plans (budgets)
- Helps to take corrective action
Cost types
In order to apply Management Accounting, companies must fully understand the
nature and scope of their costs.

An important distinction in costs is that between Direct Costs and Indirect Costs.
Manufacturing cost types
1. Direct materials = raw materials and component parts that become an
integral part of finished products. These can be traced directly and
conveniently to products.
 If materials cannot be traced directly and conveniently to products, the
materials are considered indirect and are part of manufacturing overhead.
2. Direct labor = includes the payroll costs (direct labor hours x wage rate) of
direct workers.  The employees who work directly on the goods being
manufactured.
 The costs of employees who do not work directly on the goods are
considered indirect labor and are part of manufacturing overhead.
3. Manufacturing overhead = all manufacturing costs other than direct
materials and direct labor.
Examples of manufacturing overhead:
- Indirect materials
- Indirect labor
- Depreciation expense for machinery and equipment
 Manufacturing Overhead does not include selling or general and
administrative expenses!
 Product vs. Period costs
Product costs (or manufacturing costs) Period costs (or non-manufacturing
- Cost of Direct Materials costs)
- Cost of Direct Labor Examples:
- Manufacturing Overhead Cost - Salary of administrative
(or Indirect product costs) personnel working in an office
- Sales expenses
- Depreciation of office computers
- Interest expense
- Income tax expense
- Etc.

Product Costs (or Manufacturing Costs) are costs that:

- Are linked (directly or indirectly) to the production of goods or services.
- When incurred, are booked on one of the three inventory accounts on the
balance sheet: Raw Material Inventory, Work in Process Inventory,
Finished Goods Inventory
- Are booked as expenses on the Income Statement only when the
associated goods or services are sold (“Cost of Goods Sold”)

Period costs (or non-manufacturing costs) are costs that:

- Are not linked to the production of goods or services.
- When incurred, they are booked as Other Operating Expenses on the
Income Statement.

LESSON 2: Cost types + 3 inventory accounts, Flow of Costs through

accounting statements
Various computations help companies track and understand the cost structure in
their production processes. The most important are:
- How much Raw Material did we use?
- How did the Inventory Balances change?
- What were the Cost of the Goods completed during this period (= Cost of
Finished Goods Manufactured)?
- What were the Cost of Goods Sold?
LECTURE 3: Cost types

The Three Inventories

1. Raw materials
2. Work in process
3. Finished goods
 All inventories work the same:
Begin balance + what comes in during the period – what goes out during the
period = end balance.

Managers control costs by managing activities. Understanding the relationship

between activities and costs will result in better decisions to control costs.

Manufacturing costs include:

- Direct material
- Direct labor
- Manufacturing overhead
Cost flow for manufacturer
Step 1. Start of manufacturing

Step 2. Completion of products

Step 3. Sale of products

Two types of manufacturing industries:

1. Process industry = manufacturing industries that produce a large number
of fully identical products. Ex. food and beverages.  Mass-produced.
2. Job order industry = manufacturing industries that produce individual and
customized products. Products are often large, unique, high-cost items. Ex.
airplanes, a bridge, customized furniture, movies (but also companies that
provide an unique service to a client: hospital, law firm, consultants).  Built
to order rather than mass produced.

Job Order Industry:

Direct costs (material and labor) are easy to allocate, as they can be traced directly
to each individual item.
 Problem: Jobs typically require different amounts of manufacturing overhead.
How to allocate these reasonably?

Cost Allocation in Job Order Industries

The predetermined overhead rate (POHR) used to apply overhead to jobs is
determind before the period begins.

POHR = Estimated total manufacturing overhead cost for the upcoming period
Estimated total units in the activity base for the coming period

 Ideally, the activity base is a cost driver that causes overhead.

Terminology
Overhead Application Rate = A means of assigning indirect production costs to
work in process during the period.

Predetermined Overhead Rate = The rate used to apply manufacturing overhead

costs to products or job orders. The rate expresses an expected relationship
between overhead cost and an activity base related to the production process.

Cost driver = An activity base that can be traced directly to units produced and
that can be used as an denominator in computing an overhead application rate.
Examples: machine hours incurred during the period, direct labor hours.
Reasons to use a Predetermined Overhead Rate
- Using a predetermined rate makes it possible to estimate total job costs
sooner.
- Necessary to calculate the cost price
- Necessary to take corrective action before or during the production
process
- Not all products and services consume an equal amount of overhead
- Actual overhead for the period is not known until the end of the period.
Therefore the best you can do is make an estimate.

LESSON 4:
Job order costing
For whom?
- For companies that tailor their goods/services to the unique needs of their
clients.
 - Built to order rather than mass-produced

Examples
- Building an unique bridge
- Providing unique services to every client (law firm, hospital, consultancy, IT)

Problem
- It’s easy to allocated Direct Material and Direct Labor to individual jobs. But
how to allocate Manufacturing Overhead reasonably?

Solution: Apply a Manufacturing Overhead Appliciation Rate

Step 1. Choose an activity base that is easily traceable, such as Direct Materials,
Direct Labor (or Direct Labor Hours) or Machine Hours. Sometimes, it is a
combination of activity bases. Ideally, this is a cost driver that causes overhead.

Step 2. Calculate the Manufacturing Overhead Application Rate (also called

Predetermined Overhead Rate (POHR)):

Step 3. Apply the overhead:

Manufacturing overhead
- All manufacturing costs other that Direct Materials and Direct Labor
- Cannot be traced directly and conveniently to specific jobs or units
- Assigned to specific jobs or units using a predetermined overhead rate

Examples:
- Depreciation on tools and equipment
- Property taxes on the factory
- Electricity used in the factory
- Salary of supervisor

T-account
How to book actual Manufacturing Overhead costs

Over- or Underapplied overhead

Traditional Cost Measurement Systems

- Overhead application based on the same cost driver. Ex. machine hours,
direct labor hours.
 Works only for companies that manufacture products in a similar manner.

Why is that a problem?  Does not work well for companies that use very different
processes to manufacture different products.
- Manufacturing Overhead incorrectly allocated
 - Cost Price is incorrect
- Management Information is incorrect
 Leading to incorrect decisions

Solution: Activity Based Costing

Benefits of ABC:
- It helps to understand better which activities drive the overhead costs
- It helps to set a realistic sales price
- It helps to evaluate the profitability of each production process and each
product line
In order to assess the fit of the international strategy, hill assesses two pressures, the
pressure for local responsiveness, and the pressure for cost reductions. Which
international strategy is advised, based on the theory, assuming the pressure for cost
reductions is high and the pressure for local responsiveness is relatively low?
 Global standardization strategy.

Decision making in strategic entry planning includes the matter of timing of entry. Which
disadvantage, in theory, is associated with a late timing of entry?
 Late entrants cannot pre-empt rivals and capture demand

A company culture can be typified in many different ways. Handy describes four main
types of organizational culture: power, role, task and person culture. Suppose a firm is
described as ‘’seeks to bring together the right resources and people and utilizes the
unifying power of the group. Influence is widespread and based on more on expert
power’’ which main cultural type is typified here according to the grid by handy?
 task culture

An international company states the following regarding their management system: at

every workplace, we value and encourage curiosity, innovation, and ideas from everyone.
Which management system from the management systems of likert (textbook Mullins) is
NOT aligned with this quote?
 System 1 Exploitive authoritative.

An international organization is described as follows: there are 4 units directly under Top
management: purchasing, manufacturing, marketing, and finance. Which type of structure
is described here?
 Functional structure.

The value chain of a globally active video production company includes activities that
create ‘’heartwarming and inspiring stories that bring people together’’ and aspires to
create ‘’enduring characters and magical experiences that help people make lifelong
memories’’ To which part of the value chain does this specifically belong? Base your
choice on the value chain as described in the textbook by Hill (international business).
 The primary activities.

Suppose an international firm decides to decentralize the marketing. This would obviously
benefit better decision making. Closer to the spot and the local market. What would be an
additional advantage of decentralization?
 People are more motivated to their jobs.
What is stated in the fifty-fifty rate of motivation as put forward by Adair (in Mullins)?
 50 per cent comes from within the person and 50 per cent comes from the
environment.

Porter (in Hill) describes two basic strategies for creating value and attaining a competitive
advantage. Low cost and/or differentiation. Among all rivals in an industry, who creates
superior value?
 The one with the greatest gap between value and cost.

Let us assume for a moment a market with a considerable amount of competition. This
forces firms to carefully consider value creation and low cost by studying their ‘’ efficiency
frontier’’. Assume a firm has created a significant value already. Suppose they want to
increase the value even a little bit further, what is the danger they then face?
 Increasing value by relatively small amount requires significant additional costs.

What is true about ‘’learning effects’’ according to the textbook by Hill?

 Learning effects disappear after a while.

Suppose a multinational enterprise has a very charismatic leader, and his/her leadership is
key in the development of the organization. Which source of power is involved here,
according to French and Raven (textbook Mulllins)
 referent power