Introduction to management

Introduction to management

To understand management, we need to talk about people. It’s the basic logic of management: people aspiring to a variety of goals at different levels. We have goals and needs as individuals. So management is about the satisfaction through an economic activity, by producing and consuming economic goods (e.g., buying the latest iPhone).

Social bodies in economic societies

This took place in human societies: we have social bodies, they are four and run economic societies: families, who mostly buy services, business firms, non-profit organizations, and public administration.

The economic activities are carried out by individuals for individuals. We talk about human labor, which means you work and you are paid. This is an economic activity. Human is the center of economic studies with their values.

Needs

Needs are defined as the necessity of a good (product or service). There are two types of needs:

• Natural, product of human biology such as food, sleep.
• Social also called ethical, aesthetic, and religious needs

They are affected by the fact that individuals interact with individuals and with groups. There’s another classification into primary and secondary needs. There’s a hierarchy; the Maslow’s hierarchy which are highly dynamic.

Goods

For satisfying our needs, we need goods. There are two types:

• Economic (we are going to focus only on them)
• Non-economic or also called free goods

We call public utilities like water or gas, which they can be transformed into economic goods. There are also private goods, produced by private companies, and public goods, produced by public entities. Health care is a public good, but some hospitals (like San Raffaele in Milan) as a private hospital provide private goods. They can be both public and private (as education).

Economic activities involve processes of production and consumption. All companies carry out economic production activities, but not all companies produce goods and services; for example, banks and insurance companies. We are going to refer only to business firms. The purpose is to produce revenues only for two categories of people: workers and shareholders, who are essential to the existence of the governance of the firm.

Production factors

Economic production is undertaken by combining certain production factors. Production factors are: labor and equity capital originated by savings. Labor of every kind (operations, management, economic governance) is a primary production factor. Capital originated by savings is also very important. These two production factors delineate the two categories of people who have core economic stakes in a firm and should have the right/responsibility to govern it.

Our hypotheses

• People carry out economic activity not as an end in itself but as a means of achieving personal ends.
• People are members of groups, organizations, communities, and social bodies in general, and this fact impacts their goals, values, and individual needs. Economic choices are never made by an individual in a strict sense but by an individual who belongs to any number of social bodies.
• People and social groups make rational economic choices, though their rationality is bounded.
• Human beings, if allowed to work in a context modeled on principles of justice, share solidarity, loyalty, and progress.

Implications

People act to maximize their personal well-being (which is not just material well-being). People do things because they want to feel better about themselves, live better and happier - it doesn't always involve material things. People make choices based on rationality but it is not perfect rationality; it is bounded. People take decisions, and all human activities are about taking decisions... this is what managers do: they take decisions.

Focusing on different types of organization

As we said, people have a natural inclination to join social entities and groups, for two reasons:

• To achieve results that cannot be achieved with individual resources.
• To fulfill the need for sociality through deep, beneficial, interpersonal relationships.

We love to interact with people who have our same values. The social bodies we mentioned are analyzed using the concept of economic activity, knowing that they share the same purpose of satisfying human needs. They can also be analyzed from different perspectives like law, psychology, sociology, taking into consideration the concept of economic activity.

Economic activity is particularly vital in the following social bodies:

• Families
• Firms
• Public Administration (PA)
• Non-profit organizations

They share the common purpose of satisfying human needs. The means they employ is economic activity. All of them have different specific primary goals:

• Families: Satisfying the needs of the family members
• Firms: Producing rewards for employees and shareholders
• PA: Producing and consuming public goods as well as generating rewards for employees (public goods like education, security, etc.)
• Nonprofit organizations: Various combinations of goals entailing production rewards and producing and consuming goods by members of the organization

Families

The family is the basic social entity in society. There isn’t a specific definition of this social body; it is structured mainly on ethical and religious nature. Its prevailing purpose is primarily social, ethical, and religious in nature. In the family, the core economic interests are:

Satisfying the present and future needs of family members by bearing the costs of consumption in a fitting manner, and attaining the relative level of income such as to allow the family unit to participate in the civil process.

Families spend money, they pay for goods and services, so they need to be financially sound.

Firms

The firm is an organization; therefore, it is a social body. The primary economic goal of the firm is the production of monetary and non-monetary rewards. These rewards contribute to the income and assets of the families of employees and shareholders. Firms produce and sell products and/or services. Combining work and savings capital and paying taxes on profits are typical of all types of firms (s.p.a, cooperative, s.r.l., s.n.c., all from a legal point of view).

What if a family owns a firm? They are called family businesses, but it is indeed a firm.

Public Administration (PA)

Public organizations are different. One thing unique about PA is that there’s no market price; these services have no price, so no revenues. Instead, they use money collected from taxation to maximize the general interest or to provide public goods. There’s a mission to achieve (provide education or health care, and for this reason, they are called mission-driven organizations). Like public schools, they are free, but who covers the cost? Through taxation. Also, health care in Italy is part of the general interest. We have what’s called a contribution-based system when there's no emergency, and so you have to pay a ticket because we have a "codice bianco".

About pensions, we pay indirectly through taxations. There’s a plurality of entities, small or big; European Unit, School, municipality, hospital, ASL, Agencies, Police, Army, Navy, Airforce, etc. Part of management is called public management; it is the analysis of managerial implications/rules of PA. Some public interests can be run by private firms.

Nonprofit organization

They are in between public and private; they are private but they address public issues. They are called not for profit, but they can produce profits that must be invested inside the nonprofit organization. People who take part in nonprofit organizations are called members. We must remember there are no shareholders. They are volunteers and also workers; you can decide to volunteer yourself at Caritas to feed the poor, but Caritas has workers who are paid. Those who want to work in a non-profit only because they share the same values. That’s why we call them Value-driven organizations. For example, when you play a sport, most coaches are not paid; some of them receive an amount of money, but they do this because they love the sport.

Nonprofit organizations can be at a local level and also at an international level (Greenpeace, Amnesty). The purpose is not to be profit.

Video: He analyzes a very important message, the purpose of a company.

First point

In other words, the first point was that it is not to be profit and the second topic was about the presence of stakeholders and shareholders. They are the owners of the company because they own the shares and receive the dividends, and also they are one of the stakeholders but not necessarily the most important. The video said that shareholders became too important; they maximize their return in the short run. It’s not wrong, but it could negatively affect the organizations. The point is when they act for their own purpose. The result is that companies started to have a short vision in order to maximize the profits with the risk of undermining some other dimensions; workers have the right to work in a safe environment! Naturally, it is expensive because to protect them, they have to spend money on safety.

Video: To understand how each single organization organizes themselves is unique in form. Steve Jobs said that the key success factors of organizations are given by individuals. When you work in a company made by people, they have to interact and discuss with each other and give the best ideas out of them.

In the first and second line, we can see the goals of each single social body. In the third line, we see those social bodies interact with other actors, also called core stakeholders (portatori di interesse), meaning they have interests, within or outside organizations. You become a stakeholder by simply existing and carrying out economic activities. The fourth line tells us about the presence of non-core stakeholders; for example, in a company, there’s customers. They are less central and relevant. They are those figures that revolve around an economic activity, immersed in its environment who have an interest in economic activity itself of different nature.

The ecosystem

The so-called business environment, where is it situated it. Each single organization, made by people, interacts with other actors inside its business environment (ambiente competitivo). They collect input, some raw material (materie prime) and produce output. (The PA input; if we consider a public hospital, we can say pharmaceuticals drugs are input because the doctors give them to patients; the Ferrovie dello Stato, public, and Italo, private, are competitors so there’s competition in some way, but we cannot say there’s always competition between PA and a private one.) We use this name because every organization is alive.

The basic framework

We consider the firm only for a moment, we see there’s a primary and secondary stakeholders which it interacts with each other. If you were a manager in charge of managing a firm, do you think the stakeholders were important? Yes, because they influence the firm, the collaboration between stakeholders makes your firm a successful one. So it’s very important to take care and map the stakeholders: who are they? What are their interests and how can I satisfy them? We can say that people act to maximize their personal well-being, so if customers are happy in your restaurant, they will come back and increase your business. We always have to think of the bigger picture and in the long run.

By understanding the system of stakeholders that revolve around a company, the company itself can understand its nature, propose and place in the business environment. You need to have a valid purpose to improve the world and then concentrate on satisfying macrogroups of stakeholders.

Video: Give additional information about different strategies, of why stakeholders mapping and analysis are so important.

Specialization

We can classify different organizations according to different specialization. Specialization is a keyword in the new competitive area. The high degree of specialization in modern economic activities can be seen on three different levels, from a general one, to a specialized one and the uniqueness of a company one:

• First level: Specialization on macro class of organizations. Firms produce and sell, families consume, PA produces and consumes. They are the four social bodies. It is not enough.
• Second level: Specialization within each macro class. Different types of firms, different types of PA (and nonprofit too). Families are not that different from an economic type of view (yes in a legal point).
• Third level: Analyzing the economic activities, each single organization is different.

Each single organization is unique if we consider the concept of economic activity. We go from the general differences to specific differences. The economic specialization is connected to the way a company decides to interact with consumers, to satisfy their needs.

We are going to consider the economic activities that take place in the firm. In previous classes, we said people carry out economic activities to satisfy every type of need. The economic activity is the production and consumption of economic goods; it takes place in a variety of organizations.

The firm

This is the model we are going to use to analyze the economic activities in a firm. The economic activities must always be in the center of the stylized model! We have the environment, the inputs (like raw material) transformed into outputs (like products); we call it the box, which is composed of these six elements, that we are going to analyze, and tell us what happened within the organization. They transform the inputs into outputs, the raw material into products.

Environment

• Stakeholders & Governance Structure
• Personnel
• Organizational Structure & Mechanisms
• Physical and Technological Arrangements
• Economic Resources & Liabilities
• Assessments and Decisions by Input Providers and Output Beneficiaries

Stakeholders & governance structure

We have to answer these key questions before discussing them:

• What are the institution’s goals?
• Who should set them?
• Who actually does?
• What are the rights and responsibilities of different stakeholders?

(Example: Latteria Soresina e Grana Padano)

Each single organization has its own stakeholders. The main question is who is in charge of doing what? Who takes the decision?

Here we have again the definition;

Primary stakeholder are those who established the institution to pursue a common goal and whose economies would be affected by the institution’s demise. Include also customers and clients.

Governance structure

It’s the decision-making process or it refers to rules and procedures for making decisions and for balancing each group’s contributions and rewards (topics like composition, appointment systems, prerogatives, duties, and mutual relationships of the general stakeholders meeting, the board of directors). It’s important to map them and answer the questions, more specifically:

• Stakeholders and stakeholder groups
• Their relative importance
• Contributions expected from each group
• Rewards expected by each group
• Distribution of strategic decision-making rights and responsibilities among different groups
• Structures, rules, and procedures for determining and balancing each group’s contributions and rewards
• Structures, rules, and procedures for making decisions on strategic issues
• “Institutional” relations with other entities

Economic activities

As we already said, this is the core of the box. Economic activities include all the actions run by the personnel, the people (because organizations are made by individuals). We can classify those actions like:

• Activity is a set of elementary actions (a purchase includes such actions like choosing a supplier, signing a contract, placing an order, receiving the supply, being in charge of a certain product as we call it the product manager because a company produces different products, or market manager…)

These are three new definitions:

1. Process: A set of activities that share the same nature (purchasing, manufacturing, marketing) and the same object (product X or market A). Example: I’m in charge of manufacturing Parmigiano Reggiano in the production facilities in Parma, someone in another place.
2. Function: The set of all processes that share the same nature, regardless of the objects; accounting, planning, marketing, strategies, etc. They become more specific.
3. Strategic business unit (SBU): The most relevant definition is the set of all processes that share the same object. (The person in charge of selling the meat, or the fish, etc. The SBU is who is in charge of selling a sort of products). The set of all processes concerning product X, regardless of their nature. All the activities to promote the same product is a strategic business unit!

So a function and SBU are a set of all processes but SBU share the same object and function! The function of marketing; for only one product we call it an SBU.

Organizational structure and mechanisms

A company should be organized. Usually, when we talk about it we use an organigram as a way to show how a company is organized. Every single rectangle represents strategic business units and on the top there’s the head of the company (the CEO, CFO, COO). Each single organizational structure or unit defines:

• The institution’s organizational units; how many?
• The tasks and responsibilities assigned to each unit; what do they do?
• The relationships among such units; the more the high you go