Principles of management - prima parte

Session 1: People and economic activities

Stakeholders and company relationships

Companies are in the middle of stakeholders; they have a lot of relationships. Stakeholders have specific expectations from the company because they provide something to the company.

Employees

• Provide labour in terms of:
  • Time dedicated to the firm;
  • Skills made available to the firm;
  • Commitment and energy;
  • Entrepreneurialism and creativity;
  • Results attained.
• Expect the firm/employer to provide:
  • Regular and deferred wages;
  • Consistent with those paid by firms for similar tasks, skills, and results;
  • Agreeable physical and social work condition;
  • Relative stability;
  • Learning experience, initiatives, and incentives;
  • Opportunities for career advancement.

The firm, for its part, has the following expectations of employees: loyalty, high commitment, willingness to change, respect of the law and internal regulation, openness to socialisation.

Shareholders (or risk capital providers)

• Supply financial means in form of:
  • Equity capital
• Expect:
  • Two-fold compensation, represented by dividends and capital gains, for the capital invested;
  • A sufficient liquidity level of the investment (investors are able to sell their shares in a short time and at a fair price);
  • The chance to influence and control the behaviours of the people who govern the firm.

Suppliers

• Provide various types of production factors to the firm, which expects:
  • Consistent level of quality to suit its needs;
  • Reasonable prices and payment schedules which are not too short;
  • On-time delivery;
  • Long-term guarantees;
  • Constructive ideas and proposal.
• Expect:
  • Prior knowledge and minimum fluctuations in the quality, timing, and volumes of goods ordered;
  • A long-standing supply relationship;
  • Prices which allow acceptable margins and reasonable economic conditions.

Very often there are frequent, recurrent exchanges between customers (a firm) and suppliers, for this reason complex, stable relationships are established which include collaboration in developing technological and commercial know-how.

States and government

• Provide services to the firm (such as transportation and infrastructures).
• Expect the firm to pay back taxes.

Customers

They buy goods produced by firms, so the same remarks regarding suppliers also pertain to customers.

Insurance companies

They cover specific risks. Generally speaking, the same observations as above regarding suppliers also apply to insurance companies.

If the company wants to survive, it must find an equilibrium through these expectations, not just satisfy the needs of the owner.

The nature of enterprise: aims and social role

A company is a community of people at the service of society aimed at the production of products or services to satisfy needs. It could be a private entity but of public interest. It should be an educational center, in terms of values and skills. It is oriented to last over time. The final aim of the economic activities undertaken by companies is to satisfy people's needs. For this reason, many economic theories are shaped by underlying hypotheses regarding human beings and their behavior in the economic world. For more than two centuries, economic science has used the model of homo oeconomicus to denote the economic essence of human beings, but such interpretation ignores some essential features of economic reality. Modern economic research tends to adopt a multi-faceted perspective.

Homo oeconomicus vs. human being

Companies that think just for themselves lose their legitimacy because companies rely on human beings. In fact, investors and managers care about environmental and social impact on society and they need to show their commitment to their stakeholders.

Maslow’s pyramid (1943)

As said above, the role of the company in society is to satisfy needs of people in order to make them happy by providing economic goods. Once again there is a theory that explains how people tend to satisfy needs, starting with basic needs and then gradually moving on to higher, more complex needs. According to Douglas McGregor’s work, there are two types of behavior: theory X, people never take on responsibility spontaneously, and theory Y, people spontaneously tend to take on responsibility.

There are other classifications of needs. For instance, there are:

• Natural needs
• Social needs
  • Radical (justice, freedom, equality, etc.)
  • Non-radical (belonging, identification, safety, etc.)

Both natural and social needs can be classified as:

• Essential
• Non-essential

However, as a general rule, human needs are structured in a hierarchy.

Goods

One of the requirements for satisfying needs is the availability of goods. There are two large categories of goods:

• Economic: useful to satisfy people’s needs, but scarce with respect to demand (we need to have a market);
• Non-economic: unlimited in supply (e.g., we don’t need to pay for air).

More specific goods classification:

• Substitute: more goods satisfy the same needs (e.g., pen and pencil).
• Complementary: one good is useful with another good (e.g., pen and paper in order to write).
• Differentiable: uniquely different than other goods (e.g., clothing).
• Commodity: more goods have the same standard and constant characteristic (e.g., raw materials).
• Disposable: consumed shortly after purchase and just one time (e.g., food).
• Durable: used repeatedly over time (e.g., vehicles).
• Private: consumption of the goods possible for only a small group of people.
• Public: consumption by society as a whole.

Economic activity in organizations

Economic activity mainly takes place in organizations. Such activity emerges clearly and intensely in the form of revenues, costs, consumption, savings, investments, cash flows, debt and credit relations, assets, and capital. Economic activity is particularly vital in the following social bodies: families, firms, the State, and branches of public administration, and nonprofit organizations.

Primary goals of these bodies

• Families: satisfying the needs of family members;
• Firms: producing rewards for employees and shareholders;
• State and public administration: producing and consuming public goods as well as generating rewards for employees;
• Nonprofit organizations: various combination of goals entailing producing rewards and producing and consuming goods by members of the organization.

Specialization in the modern economic system

One of the most apparent aspects of the modern economic system is specialization, intended by three levels. They start to specialize to render the system more efficient.

1. Macro:
   • Profit production for individuals
   • No profit solve community problems
   • Families consume
   • Public administration production for collectivity
2. Specialization inside companies (classifying industries based on the needs they satisfy): e.g., insurance, banks, education, computer, food.
3. Inside companies there are groups of activities run by different people:
   • Administration
   • Production
   • Sales
   • Communication
   • Logistics, etc.

Advantages and disadvantages of specialization

There are clear advantages inherent to specialization:

• Higher quality
• Less effort
• High speed and efficiency
• Learning processes by repeating the same activity

Unfortunately, there are also disadvantages:

• Demotivation: when specialization leads to assigning very isolated, simple, and repetitive tasks to individual employees, the effect is negative.
• Needs of coordination: the more differentiated people’s technical and managerial orientation, the more frequent tension and conflict will be.
• Specific investments and rigidity: specialized skills are the product of specific investments which may substantially be lost when the investment-related activity is no longer conducted. Also, when a given activity needs to be modified, the time and cost of change can be very high.

Questions: Session 01 - People and Economic Activities

1. The nature of enterprise: aims and social role
2. The role of profit in the enterprise’s life.
3. The main stakeholders’ categories of an enterprise.
4. The homo oeconomicus and human being.
5. The responsibilities of management in firms.
6. Explain the concept of entrepreneurship and its differences with management.
7. Discuss the pyramid of needs.
8. Economic and non-economic goods.
9. Explain some categorizations of economic goods.
10. Key features of the four classes of social entities.
11. The levels of specialization in modern economic activities.
12. The main advantages connected to specialization.

The nature of enterprise: aims and social role

An enterprise is a body composed of a community of people at the service of society aimed to produce products and services that can satisfy the needs of society. The three main characteristics of companies are the following: it could be a private entity; it should be an educational center, in terms of skills to provide and share and values to promote; it is oriented to last over time, to satisfy the needs of society as long as possible.

The role of profit in the enterprise’s life

The revenues of a firm are necessary to pay employees for their work, give dividends to shareholders, and reinvest them for the maintenance and development of the enterprise.

The main stakeholders’ categories of an enterprise

An enterprise is a community of people aimed to produce goods and services to satisfy the needs of society. For this reason, companies are in the middle of other communities of people, which provide something to companies and expect back something else. These other bodies are called stakeholders. The most important categories of stakeholders are employees and shareholders. The employees provide labor to the company (in terms of time dedicated, skills made available to the company, commitment, creativity, and results obtained), and expect back a salary consistent with those who work in the same field, agreeable work conditions, opportunities for advancement of their career, relative stability, and the possibility to have learning experiences. Instead, the shareholders provide the equity capital (also called risk capital) to the company and expect back a form of compensation (represented by the dividends and the capital gains), a sufficient liquidity level for investments, and the possibility to influence and control the people who govern the company. Other stakeholders are suppliers, who provide production factors, such as raw materials, to the company and expect back a long-lasting supply relationship and prices which allow acceptable margins and reasonable economic conditions. For its part, also the company has some expectations from suppliers; for instance, it expects on-time delivery, reasonable prices, and the chance to schedule payments, consistent quality with the price paid, and long-term guarantees. Other stakeholders are customers, State and governments, and insurance companies. One of the possible difficulties of a company could be the equilibrium between stakeholders’ contributions and expectations.

The homo oeconomicus and the human being

At the basis of every economic theory, there is an analysis of the behavior of the human being in the economic world. For more than two centuries, economic science had used the homo oeconomicus model to denote the economic nature of human beings. In such interpretation, the homo oeconomicus is identified as completely autonomous and with egoistical behavior: his only aim is to maximize his own income and wealth, and this tendency is mitigated only by his desire for free time where he can enjoy the wealth he has accumulated. Furthermore, he is capable of perfect rationality and has no problem in taking the right decision. But this theory ignores some essential features of economic reality. Nowadays, the most used model is the one based on human beings. Also in the economic world, human beings are members of social groups, which means that they share values like loyalty and respect. Their aim is not just to accumulate wealth, but to reach personal goals, not necessarily intended as money. Moreover, his rationality is bounded and the choices are never made by a single individual in a strict sense, but more frequently by a group or an individual influenced by a group. Companies that think just for themselves lose their legitimacy because companies rely on human beings. In fact, investors and managers care about environmental and social impact on society and they need to show their commitment to their stakeholders.

The responsibility of management in firms

Management is important in firms because of its coordinative role. In fact, management is about the good running and growth of an organization.

Explain the concept of entrepreneurship and its differences with management

The entrepreneurship is a process which leads an individual (or a group) to invest personal resources, such as time, relationship, reputation, and money, for the creation and management of a new organization designed to pursue an innovative opportunity, with regard to a specific socio-economic context. Moreover, not always the inventor of something coincides with the entrepreneur. A perfect example is Laszlo Biro, who invented the concept of the pen with a spherical tip, and Marcel Bich, who realized the potential of the pen and undertook to realize a cheap model, in this way everyone could use it, and founded the BIC company. We can resume the entrepreneurship by saying that its objects are problems and needs, opportunity recognition and support, whereas the aim is facilitating factors to opportunity recognition and innovation. Management, instead, is about the good running and growth of a single organization, that is how to organize it and which strategy to apply.

Discuss the pyramid of needs

The role of the company in society is to satisfy the needs of people in order to make them happy by providing economic goods. There is a theory that explains how people tend to satisfy needs, starting with basic needs and then gradually moving on to higher, more complex needs. According to Maslow’s pyramid, needs are divided into three main categories, starting from the bottom:

• Basic needs: physiological needs (air, food, water, etc.) and safety needs (shelter, job security, insurance, etc.)
• Psychological needs: love and belonging needs (friends, family, etc.) and esteem needs (fame, recognition, dignity, etc.)
• Self-fulfilment need: self-actualization (confidence, freedom, etc.)

Economic and non-economic goods

Economic goods are useful to satisfy needs, but are scarce with respect to people’s demand, so we have to pay for them; whereas non-economic goods are those that are unlimited in supply, such as air.

Explain some categories of economic goods

We can classify economic goods (goods scarce with respect to people’s demand and that are necessary to pay for) in some categories:

• Substitute goods: two different goods satisfy the same need (pen and pencil)
• Complementary goods: two or more goods that can satisfy a specific need only if they are used together (the need of writing is satisfied by both pen and paper)
• Differentiable goods: uniquely different than other goods (e.g., clothing)
• Commodity goods: more goods have the same standard and constant characteristic (e.g., raw materials)
• Disposable goods: consumed shortly after purchase and just one time (e.g., food)
• Durable goods: used repeatedly over time (e.g., vehicles)
• Private goods: consumption of the goods possible for only a small group of people
• Public goods: consumption by society as a whole

Key features of the four classes of social entities

Economic activity mainly takes place in organizations and is particularly vital in the following social bodies:

• Families: satisfying the needs of family members
• Firms: producing rewards for employees and shareholders
• State and public administration: producing and consuming public goods as well as generating rewards for employees
• Nonprofit organizations: various combinations of goals entailing producing rewards and producing and consuming goods by members of the organization

The levels of specialization in modern economic activities

Specialization in the modern economic system occurs at three levels:

1. Macro:
   • Profit production for individuals
   • No profit solving community problems
   • Families consume
   • Public administration production for collectivity
2. Specialization inside companies, classifying industries based on the needs they satisfy (e.g., insurance, banks, education, computer, food)
3. Inside companies, there are groups of activities run by different people:
   • Administration
   • Production
   • Sales
   • Communication
   • Logistics, etc.

The main advantages connected to specialization

Advantages of specialization include:

• Higher quality
• Less effort
• High speed and efficiency
• Learning processes by repeating the same activity

However, there are also disadvantages such as:

• Demotivation: when specialization leads to assigning very isolated, simple, and repetitive tasks to individual employees, the effect is negative.
• Needs of coordination: the more differentiated people’s technical and managerial orientation, the more frequent tension and conflict will be.
• Specific investments and rigidity: specialized skills are the product of specific investments which may substantially be lost when the investment-related activity is no longer conducted. Also, when a given activity needs to be modified, the time and cost of change can be very high.