CHAPTER 2

The Evolution and the Environment of Management

CHAPTER OBJECTIVES

After reading this chapter, you should be able to:

1. List the stages of evolution in management
2. Enumerate the various approaches to the study of management
3. Elucidate the environment of management
4. Understand the recent trends in management

India’s Inspirational Managers

The Aditya Birla Group’s history dates back to the 19th century when Seth Shiv Narayan Birla commenced trading in cotton. He expanded the business quickly even during India’s arduous times of the 1850s. During the early part of the 20th century, Ghanshyamdas Birla, the group’s founding father, set up industries in critical sectors such as textiles and fibre, aluminium, cement and chemicals. Understandably, Ghanshyamdas Birla emerged as one of the foremost industrialists of pre-independent India. The business and managerial beliefs and principles of Ghanshyamdas Birla became the beacon light for the entire group. His grandson, Aditya Vikram Birla, was the first to put Indian business on the world map, as far back as 1969, long before the globalization of the Indian economy. Aditya Birla was professional, modern and forward-looking. He believed that a business could be global and successful while still being based in India. His son, Kumar Mangalam Birla, is now the chairman of the Aditya Birla Group.

The business strategies of Kumar Mangalam Birla include among others: (i) achieving accelerated growth, (ii) building meritocracy and (iii) enhancing stakeholder value. Under his stewardship, the Aditya Birla Group enjoys a position of leadership in all the major sectors in which it operates. Today, the Aditya Birla Group is a USD 40 billion corporation and is part of the Fortune 500 list. It has a workforce of over 133,000 employees belonging to 42 different nationalities. A firm practitioner of the trusteeship concept, Kumar Mangalam Birla has institutionalized the concept of caring and giving at the Aditya Birla Group.

The evolution of managerial beliefs and practices, seen through the prism of the Birla family, can provide a perfect setting for discussing the evolution and environment of management in this chapter.

Introduction

Management is a field that has grown steadily over a period of time. It now has a strong theoretical base with a lot of practical relevance. The existing management thoughts are developed by the management thinkers to help businesses stay efficient, effective and viable at different times and conditions. These thinkers constantly searched for the organizational structure and behaviour that can guarantee an organization’s success.¹ They developed concepts, principles and philosophies that helped the managers to get desired results, satisfy customers, generate surplus and create values. Management theories also focused on the best methods of utilizing the organizational resources effectively. Certainly, the present-day management thinking has evolved over a very long period of time.

The primary aim of management thinkers in developing new management theories is to suggest one best way to organize business and solve management problems. Interestingly, most problems of today’s managers are the same as those faced by the managers of earlier periods. Such continuity in the managerial functions makes management practices always relevant and time-tested. Therefore, it is essential to understand the origin and growth of management thoughts that may have valuable lessons for the present and future managers.

Origin of Management

Management is primarily a mental activity. It is a kind of activity that must be done by people alone. It can not be delegated to the care of machines. The nature of management has a direct impact on how well a task is carried out. Even during ancient times, managers played important roles in the accomplishment of mega works such as building monuments, founding cities, creating huge business enterprises and establishing religious and educational institutions. The Egyptian pyramids, the Great Wall of China and the Taj Mahal are a few examples that showcase the managerial skills of the people from the distant past. For instance, the construction of a 481-metre tall pyramid in 13 acres of land at Egypt required systematic engagement and supervision of nearly 100,000 persons for a period of over 20 years. In this context, we shall first see the important milestones in the development of management in the earliest period of time.

Early Management Thought

Management as a field of study is unique because the practice of management is ancient, but its body of knowledge (theory) is comparatively recent. In any case, the basic aim of management always remained the accomplishment of specific goals through effective utilization of physical and human resources. Let us now discuss the origin of the term, manager, before tracing the developments in the earliest stage of management thoughts.

The term, manager, has its roots in different languages. For instance, the Latin word manus—which means, “by hand.” This word was widely used during the Roman Empire to specify officials who had power over people and also the authority to issue orders and directions. The Italian word, maneggiare, meaning, “persons in charge of production facilities,” was popular during the 13th century. The French word, manegerie, appeared during the 15th century as an equivalent of another French word, maneggiare. The English word, manager, made its appearance in the official documents of 1589. This term was used to indicate persons entrusted with the responsibility of the upkeep of a landed estate.²

Earliest Texts on Management

The earliest texts on management are, The Duties of the Vizier, Sun Tzu’s Art of War, Confucius’s (ca. 552−479 BCE) Analects, and Chanakya Kautilya’s Arthashastra. Let us see a brief description of each.

The Duties of the Vizier: This is a 3500-year-old manual, written apparently during the 18th dynasty of ancient Egypt. This book is the first written material that talks about the goals of the management and the tasks of the managers (loosely called, “viziers,” in those days). The viziers, who held top governmental positions in ancient Egypt, were responsible for the efficient management of physical and human resources belonging to the Emperor. They were also responsible for training the younger members of the Emperor’s family in administrative functions and affairs.

Sun Tzu’s Art of War (ca. 600 BCE): This Chinese classic on military strategies was written nearly 2000 years ago by a top-ranked military general during the Western Zhou Dynasty. An authoritative work on military strategies and tactics, this book has found wide applications in the formulation of business and organizational strategies. Even today, this book is the source of inspiration for managers, and offers them advice on how to succeed in a competitive business environment. The basic content of this book has been included in the training manuals of many organizations, especially for executive development programmes.

Confucius’s (ca. 552−479 BCE) Analects or The Sayings of Confucius: This is the compilation of messages of Confucius—China’s first teacher and a great philosopher. The management philosophy and practices of China were greatly influenced by Confucius’s teachings for thousands of years. For instance, Confucius’s value system and order, known as the Five Relationships of Confucianism, the Five Virtues and the Confucian Work Ethic greatly influenced the managerial approach of the Chinese. Specifically, the Five Relationships explains the appropriate behaviour and roles for every member of an organization. The Five Virtues stresses the importance of harmony and a moral framework for the society. The Confucian Work Ethic speaks about the importance of hard work, loyalty and dedication, frugality, and a love of learning for organizational members.³

Chanakya Kautilya’s Arthashastra (332−298 BCE): This 2300-year-old Indian classic discusses statecraft (the art of managing government affairs), economic policy and military strategy. It offers advice on how to establish and maintain socio, economic and political order in the country. This book insists that the administrators should ensure continuous and comprehensive learning. They should learn to (i) look at organizational problems from different perspectives, (ii) think both holistically and strategically and, lastly, (iii) resolve conflicts by engaging various stakeholders and removing the cause of the conflict.

The development in the field of management was slow and uneventful for long periods of time in history. The Industrial Revolution of the 18th century brought about remarkable changes in management thoughts and practices. This period witnessed large-scale replacement of manpower with machine power. This period also seen the employment of unrelated workers in centralized places called factories. The factories required people with managerial skills to create demand for their products, to assign tasks to workers and to direct and coordinate the of workers. This period also saw the emergence of new management styles such as laissez-faire (non-intervention by state) and laissez-passer (unrestricted travel and movement). The renowned economist and management philosopher, Adam Smith’s contributions to management thought came during the earliest period of the Industrial Revolution.

Adam Smith’s The Wealth of the Nations (1776): Adam Smith, the father of liberal economics, created a revolution in economic thought by suggesting that market and competition should be the regulators of any economic activity. He also suggested that the state should adopt a “hands off” policy towards business and economic management. This approach may differently be called as non-intervention, free enterprise or economic liberalism. According to him, wealth consisted of goods that all people could consume. He looked to promote the wealth of the whole nation and not the interest of any class. He suggested that any public policy that “improves the standard of living of the poor and workers is a good policy. Instead, if it hurts their standard of living, it must be a bad policy.” For effective management, he advocated the concept of division of labour. This means that the manufacturing process is divided into several simple operations and then delegated to particular workers or machines to perform. Such division can lead to workers’ specialization and improved organizational productivity and employees’ skill.

Approaches to the Study of Management

The late 19th and early 20th centuries have witnessed some important developments in the field of management. For instance, renowned management theories such as the scientific management theory and the general administrative theory were introduced during this period only. After that several other approaches to management have also been developed by management writers and practitioners. For easier and better understanding, these approaches have been classified into six categories as illustrated in Figure 2.1. They are: (i) classical approach, (ii) behavioural approach, (iii) quantitative approach, (iv) systems approach, (v) contingency approach and (vi) information technology approach. We shall now discuss these approaches.

Classical Approach

The classical approach to management mainly includes the scientific management, the administrative management and the bureaucratic management theories. The primary focus of this approach is on the constant improvement of organizational efficiency through enhanced employee productivity. The classical approach, particularly, the scientific management theory, was generally viewed as a formal and impersonal approach to management.⁴ We shall now discuss the classical approach in detail.

Scientific management—The earliest attempt to study, understand and perform managerial activities in a scientific and systematic manner was made by Frederick Winslow Taylor (1856−1915). Taylor, who joined as a common labourer in 1878, rose to be an engineer and manufacturing manager. During his career, he worked in several companies such as the Midvale Steel Company, Simonds Rolling Machine and Bethlehem Steel Company. In his book, Principles of Management, Taylor insists that there is “one right way” available for performing the job in the most efficient manner. However, this right way to do the job should be determined only by experts who have a scientific understanding of the job. In this regard, he called for redesigning of jobs and change in the attitude of workers towards their job for achieving maximum efficiency. Further, Taylor also employed scientific analysis and experiments to develop that “one right way” in task accomplishment.

The development of “one right way” for different jobs enabled Taylor to achieve nearly 200-percent increase in productivity on a continuous basis in his organization.⁵ Job design, work layout and task scheduling are some aspects of production where his influence is still felt. He has been acknowledged as the father of scientific management for replacing informal rule of thumb and intuition with scientific management principles and techniques. The scientific management principles recommended by Taylor are:⁶

• Replacement of the rule of thumb with true science in management. It involves undertaking a scientific study of tasks to determine the best methods for performing each element of a job.
• Replacement of self-training with scientific training. It involves scientific selection, training, teaching and development of each worker in place of arbitrary selection, self-training and development.
• Hearty cooperation between the employer and employees. It involves ensuring complete cooperation of workers so that all work is carried out in conformity with the scientific principles developed.
• Equal distribution of work and responsibility. It involves dividing the work and responsibility nearly equally between the management and workers instead of assigning all the work and a greater part of responsibility to the workers. For instance, the management can do the work (such as planning the tasks) for which it is better-suited and the workers can execute those tasks.

Factories that implemented Taylor’s principles achieved remarkable improvements in productivity, quality and performance. However, Taylor was criticized on the grounds that his approach to management had resulted in the exploitation of workers, frictions with trade unions, killing of individual initiatives and overemphasis on work measurement.

Management thinkers like Henry L. Gantt, and Frank and Lillian Gilbreth, have worked on the scientific management theory to make it more sensible and acceptable. For instance, Gantt improved on the incentive scheme of Taylor called the differential piece-rate system, by including bonus for workers and their supervisors. As per Gantt’s scheme, the workers are entitled to bonus wages if they complete their daily workload assignment successfully along with their supervisors. Frank and Lillian Gilbreth worked on ways to improve productivity and reduce fatigue. In this regard, they focused on the workers’ movements to identify and eliminate wasteful motion, thus reducing job-related fatigue. They were also involved in the designing and development of proper tools and equipment for achieving optimum work performance.

General administrative theory—Henri Fayol (1841−1925), who suggested good management practices for managers, is regarded as the father of modern operational management. He developed a holistic view of management by looking at it from a total organizational perspective. In his book, General and Industrial Management (1916), Fayol has explained what managers should do and what principles they should follow. In this regard, he first classifies the activities of the organization into six broad categories. These activities are: (i) technical (e.g., production), (ii) commercial (e.g., production and selling), (iii) financial (e.g., mobilizing capital), (iv) security (e.g., protection of properties), (v) accounting (e.g., gathering and dissemination of financial information) and (vi) managerial (e.g., planning and organizing). He then focussed on the “managerial” activity for further analysis.

Fayol believed that management is a unique activity applicable to all kinds of institutions and activities, including business organizations, government and households. According to him, there are six primary managerial functions. They are: forecasting, planning, organizing, commanding, coordinating and controlling. To perform these functions effectively, he suggested 14 principles of management. These principles are:

1. Division of labour: This refers to the splitting up of the productive process into different components or parts. Division of labour leads to specialization as each worker performs the same tasks with increased frequency. This specialization, in turn, helps them in achieving higher output with the same efforts.
2. Authority: It is the right to give orders. Authority is essential for managers to get the work done through workers. However, the managers’ authority must be accompanied by the corresponding responsibility.
3. Discipline: It is the workers’ observance of rules and regulations of the organization and also their agreements made with the management. In this regard, Fayol insisted on fair and clear agreements, well-judged punishments and presence of good supervisors at all levels.
4. Unity of command: It refers to employees receiving instructions from only one supervisor while executing their tasks. In the event of an employee receiving orders from multiple supervisors or managerial authority, employee discipline and organizational stability may be affected.
5. Unity of direction: It refers to the presence of one head (leader) and one plan to guide all the organizational or group activities that have the same purpose and common goal. This should avoid any possible confusion and inconsistency in the messages and instructions given to the employees.
6. Subordination of individual interest to general interest: It means that the interest of an individual employee should not take precedence over the overall organizational interest. If there is any conflict between the interest of an individual employee and that of the organization, employees should sacrifice their own interest for the sake of the well-being of the organization as a whole.
7. Remuneration: It refers to the fixation of remuneration in such a way that it satisfies not only the employees but also their employers. While compensating the employees for their work, the business conditions of the organization, value of employees and mode of payment should be given adequate consideration.
8. Centralization: It is the degree to which employees are involved in decision making. Each organization has a certain degree of centralization depending on its size and the skill levels of its managers. The degree of centralization increases when the subordinates are less involved in decision making. In contrast, the degree of decentralization increases when employees are more involved in such decisions.
9. Scalar chain: It refers to the line of authority that flows from the top management to the lowest ranks in the organizational structure. In normal circumstances, all messages and orders must pass through a scalar chain. Yet, when quick communication is required, a direct link (called gang plank) may be established by sidestepping the scalar chain.
10. Order: It refers to the arrangement of people and material in the organization. Order may be classified into human order and material order. A proper place for everyone and everyone in his/her place is the meaning of human order. A proper place for everything and everything in its place is the meaning of material order.
11. Equity: It refers to the warmth, justice, kindness and friendliness in the relationship between the employee and employer. In this regard, managers must treat all employees equally and impartially to inspire their confidence and faith.
12. Stability of tenure of employees: It refers to the time to be allowed to employees to become familiar with their jobs and to be efficient in performing them. Organizational plans and policies must allow sufficient time for employees to settle in their jobs.
13. Initiative: It refers to the capability of the employees to design, develop and act on the plans successfully. Management must encourage employees to take initiatives within the limits of their authority to invent new ideas, try new experiments and develop better techniques of job performance.
14. Esprit de corps: It refers to team spirit, harmony and unity among employees. Management must believe in the principle, “Union is strength,” and develop a sense of belonging and oneness among the employees.

Fayol’s theory is widely viewed as a systematic theory of management. His techniques can be used for all functional areas of management, even though he is marginally more concerned with the activities of top-level managers.

Bureaucratic management theory—Max Weber (1864−1920) introduced a new organizational form in which hierarchy of authority and a system of rules are considered to be vital. This is called bureaucracy. According to Weber, bureaucracy is the exercise of control on the basis of knowledge.⁷ According to him, bureaucracy will discourage decisions based on favouritism and family connections, and encourage decisions based on knowledge, experience and expertise. Clearly, rational–legal authority of managers is critical to decision making in bureaucratic organizations. Bureaucracy also strives at making effective use of authority to achieve organizational goals. The common characteristics of a bureaucratic organization are hiring based on qualification, merit-based promotions, chain of command, division of labour, neutrality in the application of rules and regulations, reports and records in written form, and separation of ownership from management.⁸

Ideally, bureaucratic organizations can reduce the importance of charisma, improve the control of superiors over subordinates, allow subordinates to challenge the decision of superiors by referring to existing rules, facilitate consistency in administration and ensure organization’s long-term stability. However, this style of management can be effective only in those organizations where the superiors have more knowledge and technical competence than their subordinates.

The classical approaches to management enable us to understand the management of people, process and physical assets in a systematic manner. However, it failed to study and consider the differences in the behaviour of people and the changes in organizational environment. Similarly, it over-emphasized the technical aspects of a job without adequately considering the persons who actually perform such a job. All this necessitated the development of other approaches to management.

Behavioural Approach

In contrast to the classical approach which focuses on the technical aspects of management, the behavioural approach emphasizes on improving the management through the psychological makeup of the organizational members. This approach insists on the importance of understanding the human resources (people) and their thinking patterns. This approach is also known as the human resource approach. This approach looks to solve the labour−management conflicts likely to arise out of classical approaches to management.⁹ The focus areas of the behavioural approach are conflict prevention, team work, motivation, leadership and communication. The three important studies that contributed greatly to the development of behavioural approaches are: (i) Hawthorne studies, (ii) theory X and theory Y and (iii) Maslow’s hierarchy of needs theory. We shall discuss the Hawthorne studies in this chapter. The remaining two studies are discussed later in Chapter 16: Motivation and Morale.

Hawthorne studies—The engineers of the Western Electric Hawthorne Works conducted a scientific experiment to examine the impact of lighting on employee productivity. In this regard, an experimental group and a control group were formed to compare and contrast employee performances to understand the influence of illumination on productivity. The lighting levels remained normal for the control group throughout the experiment. However, it was changed at regular intervals for the experimental group in the expectation that productivity would change in tune with the lighting levels. Contrary to the expectations, productivity was actually increasing for both the groups in all lighting conditions. Surprisingly, the productivity of the experimental group was showing an increasing trend even under poor lighting conditions. Meanwhile, the control group also reported higher productivity even without any changes in lighting conditions. The results puzzled the engineers and compelled them to look for reasons beyond lighting for the changes in the productivity levels of employees.

At this stage, Elton Mayo (1880−1949), a Harvard Business School professor, and his team became a part of the study group. Under Mayo’s supervision, a second experiment was carried out to determine the influence of a few other external environmental factors such as wages, rest timings and refreshments on employee productivity. As a part of this experiment, six female employees were brought together to form a group with no prior information to them about the proposed study. They were given increased wages, convenient rest timings, flexible workdays and workweeks. As a result, the group’s productivity increased significantly. Later, these benefits were gradually withdrawn in the expectation that the productivity rate will decline but this was not happening at all. The researchers failed to establish any direct relationship between external factors and productivity. Therefore, they concluded that group atmosphere, group relations, group attitude and collective group decisions have a better influence on group behaviour than pay, perquisites and work setting, such as rest timings and length of workdays and weeks.

The results of the Hawthorne studies drastically improved the importance of “people” in an organization. This pioneering study compelled organizations to take a closer look at the social factors that influenced employee behaviour and organizational productivity and performance. This study also helped the management understand the role and relevance of trade unions as the representatives of the employees.

Systems Approach

In this approach, management views the organization as a complex and unified system composed of several interrelated and independent subsystems. Generally the production department, marketing department, finance department, etc. are the subsystems of an organization. All these subsystems are unified in a planned way to achieve the organizational goals and objectives. As per this approach, changes in any one subsystem can make different degrees of changes in other subsystems. For instance, price reduction strategy of the marketing manager may require cost reduction by the production department and low-cost borrowing by the finance department. It is thus not possible for the managers of departments to make decisions without understanding their impact on the other departments and also on the organization as a whole. Understandably, the system-based approach usually calls for frequent communication not only among the members of the same department but also with the representatives of other departments.

The systems approach also allows management to view the whole organization as a subsystem of the larger external environment. For instance, a cement company may see itself as a part of the cement industry. Again, the cement industry can be viewed as a subsystem of the national economy. Thus, each element of a business can be a subsystem (of a larger element) as well as a system (for the smaller elements that make it up).

As a system, organizations can be classified into two categories: the open system and the closed system. When an organization interacts with its external environment and gets influenced by such interactions, it is called an open system. Business organizations mostly operate on an open system basis. For instance, they receive inputs from the external environment, transform them through a conversion process and send them as output to the external environment. Figure 2.2 shows the working of the systems approach.

In the systems approach, inputs from the external environment may include people, capital, physical resources, technical and managerial skills. The transformation of input into output is done through the managerial functions of planning, organizing, staffing, directing and controlling. Finally, the output to the environment can be in the form of product, services, profit and satisfaction to various stakeholders.

In contrast, when organizations keep little or no interaction with their external environment, it is called a closed system. No organization can remain closed to the external influences or interactions, except for certain institutions like prisons and monasteries.

Contingency or Situational Approach

The basic philosophy of the contingency approach is that there is no one best way for managing people in situations. The appropriate management strategy usually varies from one situation to another. The effectiveness of the management approach depends on the congruence of a number of factors such as the organizational goals, nature of activities, level of technology, the prevailing environment and people’s attitude. For instance, a managerial strategy that succeeds in boosting the employee morale and organizational performance in one organization or situation may fail to have the same effect in another situation or organization. Since there is no universally applicable solution to managerial issues, it is essential for managers to be flexible in evolving appropriate strategies. They must actively consider the differences in the individuals and situations before choosing a specific course of action for solving managerial problems. Due to increasing customer diversity, employee diversity, legal and ethical regulations, and technological and environmental changes, this approach has gained more popularity among the managers in recent times.¹⁰

Quantitative or Operations Research Approach

The application of mathematical and statistical models, information models and computer simulations for managerial problem solving and decision making is the essence of the quantitative approach. This approach is also called management science approach since it is generally viewed as an extension of Taylor’s scientific approach. This approach may be defined as “an approach to management that uses rigorous quantitative techniques to help managers make maximum use of organizational resources.”¹¹ The mathematical techniques adopted for the quantitative approach are linear and non-linear programming, queuing theory, chaos theory, economic ordering quantity, etc. The primary purpose of applying these techniques in management is to improve the quality and accuracy of the managerial decisions. Total quality management is one such area where quantitative techniques have proven to be extremely useful.

Total quality management—Total quality management (TQM) is basically a philosophy and set of guidelines for continuously improving the organization. It focuses on the effective utilization of quantitative techniques and people to constantly exceed customer needs and expectations. TQM can be defined as “a total organizational approach for meeting customer needs and expectations that involves all managers and employees in using quantitative methods to improve continuously the organization’s processes, products and services.”¹² The quantitative methods normally employed in TQM are statistical process control, ISO 9000 series, Pareto analysis, matrix diagram, histograms, decision tree diagram, critical path analysis and fishbone diagram.

Information Technology (IT) Approach

The IT approach is the latest addition to the management approaches. This approach became popular after managers began to rely heavily on information technology tools and the Internet for efficient management of physical and human resources. They depend on e-mails, intranets, PowerPoint presentations, video conferencing, etc. for information sharing. Information technology has brought about changes in the very nature of the management task itself.¹³ It has also helped managers to replace a manually maintained database with an IT-enabled database. Of late, organizations are making use of social networking sites such as Facebook and Twitter for communicating business and product information with their consumers.¹⁴

With increasing changes in the nature of organizations and the role of managers, newer understanding of management is constantly emerging. For instance, increasing globalization, cultural diversity, ethical and social responsibilities, technological development, quality consciousness and employee attrition have created new grounds for changing the existing approaches and/or developing new approaches. The existing organizational environment can also influence the style and performance of managers in organizations. For instance, approaches of managers operating in a relatively stable and mature environment are usually different from those operating in a more dynamic and turbulent environment. In this context, we shall now see the influence of organizational environment in detail.

The Organizational Environment

Environment, in simple terms, means the totality of the surrounding conditions. The environment of an organization is typically classified into internal environment and external environment. Internal environment refers to the internal forces and factors that influence the organizational activities and choices, and employee behaviour. It is shaped by the leadership styles, organizational philosophy, principles, rules and regulations and organizational culture. Members of internal environment are employees, shareholders and the board of directors.

External environment refers to the forces and factors that remain outside the organization yet influence its performance, activities and choices. External environment can further be classified into task environment and general environment. Task environment is an immediate external environment that has a direct influence on the organization’s performance and activities. Members of task environment who interact with the organization are customers, suppliers, trade unions, government, competitors and pressure groups. General environment is an outer layer of the external environment. It has an indirect influence on organizational activities. General environment is composed of socio–cultural environment, economic environment, legal environment, political environment, technological environment and industrial environment. Figure 2.3 illustrates the components of the management environment.

The organizational environment, in which a business operates, will have a deep impact on the managers’ way of thinking and working. For instance, organizations operating in a highly uncertain and competitive environment will require highly creative, open-minded, independent thinking and dynamic managers. In contrast, these characteristics may not be equally important for those managers who work in a stable and mature environment. Let us now see the important elements of the various organizational environments in detail.

Internal Environment

The internal environment is normally shaped by forces that remain within the boundaries of the organization. The internal environment of an organization can influence the behaviour of its members. It can also decide how well an organization responds to the developments in its external environment. We shall now see the important elements of an internal environment, namely, employees and shareholders besides organizational culture.¹⁵

Employees—In every organization, employees are one of the important stakeholders of the organization and also the critical determinants of its environment. This is because they affect or get affected by the existing internal environment. The styles, actions and perceptions of managers can be shaped by the nature and type of the organization’s workforce. For instance, managers usually take cues from the workforce before deciding their responses to an emerging situation.

Shareholders—They are the ultimate owners of an organization. They provide capital, take risk and get a share in the profit or loss of the business. Generally, shareholders have both direct and indirect influence on the organizational environment. They directly influence the environment through their voting rights by approving the major corporate decisions. They indirectly influence the environment through the board of directors elected by them, who manage the routine affairs of the organization. It is important for the managers to give utmost importance to the interest of the shareholders. Understandably, managers operate under an environment created jointly by the shareholders and other internal stakeholders.

Organizational culture—Organizational culture is the blend of values, beliefs, traditions, past practices, languages and norms of an organization formed over a period of time. Each organization develops its own, unique and inimitable culture. This culture offers the organization a distinct identity, exclusiveness and a sense of pride. It also helps in developing a sense of oneness and common behaviour among the members of the organization. This culture profoundly shapes the internal organizational environment within which managers plan and perform. Certainly, organizational culture has a specific and definite impact on the corporate policies and managerial and financial structure and actions.¹⁶

The task environment—Task environment is created by the forces that interact frequently with the organization. As such, the actions of the customers, suppliers, competitors, distributors, trade unions and pressure groups shape this environment. This is vital to the accomplishment of the organizational goals because it directly and constantly influences managers’ decisions and actions. We shall now see the role of each of the important constituents of the task environment.

Customers—This term refers to the individuals and institutions that buy goods and services from an organization. Obviously, customers are the most important constituents of the task environment as they determine the ultimate success or failure of an organization. All the activities of the organization are understandably directed towards the satisfaction of these customers. But they often keep the task environment shaky by changing their tastes and preferences. It is hence essential for managers to keep in mind the needs of the customers while making decisions. They must also change their plans, strategies and actions depending upon the nature and conditions of their customer base.

Suppliers—This term refers to all those who supply production inputs to the organization in the form of raw materials, labour, equipment, etc. It also includes those who provide financial inputs to the business, such as banks and insurance companies. To ensure a smooth and steady conduct of the business operation, the cooperation and commitment of the suppliers are important for managers. Managers must develop a long-term relationship with their suppliers based on mutual trust and understanding.

Competitors—Competition is a basic characteristic of any industry. Organizations compete with their rivals in the industry for selling goods or services to the same set of customers as that of their rivals. Through their plans and actions, competitors typically force an organization and its managers to act or react in the market. In this way, they can influence the environment of the managers. However, the nature and extent of such an influence on the organizational environment is determined by the conditions of the industry.

Distributors—Distributors of products or services of an organization also influence the environment of managers. The distributors’ list normally includes wholesalers, stockists, brokers, agents and retailers. Distributors engage themselves in product acquisition, product movement and product transaction (selling).¹⁷ Based on their experience in sales promotion, customer service and advertising, distributors pass vital information to managers about the market characteristics, including the changing tastes and preferences of the customers. They can also help managers decide the right products, right quantity and right promotion techniques for a market.

Trade unions—Trade unions affect the organizational environment of the managers through their influence over the employees affiliated with them. Trade unions provide a common platform for employees to come together and increase their bargaining power. These unions also represent the workers while negotiating with the management in any collective bargaining process. In India, trade unions play a vital role in determining the wages and salaries, welfare facilities, health and safety and working conditions of the employees. However, the ability of the unions in affecting the organizational environment has considerably declined in the post-globalization market with the emergence of many union-free organizations.

Pressure groups or special interest groups—They are organized groups of members who believe in the same cause and shared sympathy. They work together to influence individuals and institutions that have the power to make decision. For instance, anti-smoking groups may exert pressure on the government to ban or regulate the sale of tobacco in the country. In this way, these group may bring pressure on the activities of the tobacco companies. It is therefore important for managers to take notice of the activities of the pressure groups that attempt to influence the company or its products.

General Environment

The broad factors and situations that affect almost all organizations and industry are called general environmental factors. Though this environment remains external to the organization, it still has an indirect influence on the managerial decision-making process. For instance, changes in the general environment may create new challenges, opportunities or threats to the managers. Therefore, managers must continuously examine the forces in the general environment on a proactive basis. This should in turn help them in improving the organizational preparedness and adaptability. We shall now see the important external factors that constitute the general environment of an organization.

Social environment factors—A social environment is created, in general, by the educational levels, attitudes, beliefs and values of the people who live in a specific region. The social environment of an organization consists of beliefs and behaviour of the employees, customers, suppliers, shareholders and all others who interact with the organization. Each society has a distinct cultural identity that separates them from others. Employees, as members of the society, bring in their societal values to the organization. These values, in turn, directly and indirectly influence the management activities of an organization.

In India, many organizations have a diversified workforce since the employees typically reflect the diverse characteristics of the Indian population. These employees represent different regions, ethnic groups and ideologies. A culturally and ethnically diverse workforce poses direct challenges for organizations and decisively influences the environment of managers. Thus, the social environmental factor is a major phenomenon in Indian industrial organizations. Let us now briefly discuss the factors that influence the social environment of business organizations.

• Demographics: The population size, age structure, income distribution and geographic distribution are a few important factors that determine the demographic environment of any organization. The demographics of the Indian workforce are broadly varied and diversified in nature. The composition of the workforce in Indian industrial organizations has undergone a tremendous change in recent decades. For instance, the marginalized sections of the society such as women, physically challenged, minorities and people belonging to the scheduled castes, schedule tribes and backward communities have joined organizations in sizeable numbers. It is, therefore, important for managers to clearly understand the environmental influence of different demographics on the organization and its activities.
• Educational status: Education is another factor that greatly influences the social environment, which, in turn, affects the behaviour of the employees. When employees are well-educated, they are termed as knowledge workers. Educational status profoundly influences the environment of an organization. For instance, firms with a large proportion of knowledge workers may require the managers to come up with innovative plans and programmes to meet the high expectations of the workers.

Technological environment factors—A technological environment is created when the knowledge of science is applied effectively for practical use. This kind of environment is often affected by the rate and direction of technological changes. Technological environment effected primarily by new products, processes and materials. In India, the technological environment is undergoing changes at such a rapid pace that managers are finding it very difficult to cope with such changes. Since the impact of technology on the managerial environment is substantial, it is necessary for managers to carefully study the technological environment of their organizations. They should specifically look for newly emerging technologies that can improve the competitiveness of the organization.

Political environment factors—The important factors that determine the political environment of a nation are the nature of political organizations and systems, prevailing political ideologies and political stability. We shall discuss them briefly here:

• Nature of political organization and system: A political organization may refer to governmental organizations, while a political system refers to the process of decision making within the political organization and the extent of concentration of power. The extent of democratization of the decision-making authority and the efficiency of political institutions can determine the political environment.
• Prevailing political stability: Organizations normally get better attention from the government during periods of political stability. Consequently, the chances of industrial peace are better during stable periods. Alternatively, any long spell of political instability would negatively impact the economy and the industry.
• Political ideologies: The philosophies of political parties are called political ideologies. Political ideologies guide the approach of political institutions towards industrial activities, particularly those involving the rights of the employees. Ideologies may also determine the government policies and intervention strategies, attitude towards trade unions, labour legislations and attitude towards foreign firms.

The prevailing political environment usually influences the functioning of the management in many ways. For instance, tax policies and trade regulations are usually influenced by the political dimensions of the external environment. It is therefore necessary for managers to develop and enhance their awareness of the political environment.

Legal environmental factors—The legal environment greatly influences the operations of managers. This environment is normally shaped by the prevailing laws. These laws are generally classified into three categories. They are: (i) administrative laws, which include the regulations issued by the government, (ii) case laws, comprising court decisions and (iii) constitutional laws, which include the fundamental rights of the citizens in the constitution.

These laws and provisions create a definite legal environment. Managers have to plan and execute their actions without violating the existing legal provisions. Since ignorance of legal aspects of managers can bring legal disputes and litigations, managers should be familiar with the laws and provisions that affect their organization and its operations.

Economic environmental factors—Economic environment refers to the nature and direction of the economy in which an organization competes or may compete.¹⁸ An economic environment is formed by the combination of economic factors like national income, population, cyclic fluctuations in economy, labour market conditions, trade cycle, interest rate and globalization of economy. These factors can also influence the behaviour of consumers, competitors, suppliers and employees. Naturally, the factors that create the economic environment greatly influence the functioning of managers. They therefore should scan, monitor, forecast and assess the health of the economy constantly.

Globalization is an important economic factor with a critical influence on the external environment of Indian organizations. The new economic policy of 1991 brought in several economic reformist measures to India in the form of globalization, liberalization and privatization. The process of globalization has really changed the economic landscape of the country. As a result of globalization, many Indian firms have become truly global organizations with their operations reaching out to newer markets and countries. Similarly, many foreign firms began to operate in India without any major issues. Thus, globalization led to intensified competition at both the national and international arena.

Globalization has influenced the organizational environment in several ways. For instance, globalization of operations enabled many organizations to achieve lower costs and better technology. Consequently, the importance of cost and technology as tools of competitive advantage in the market has sharply declined. Truly, globalization has brought in several opportunities and, with it, challenges for managers. It has sharply increased the skill requirements of employees. Apparently, globalization has changed the approaches and the role of managers by creating a profound influence on the organizational environment.

Natural Environment

In recent times, damage to the natural environment has become a major issue affecting the organizational environment. Pollutions that cause damage to the environment are generally classified into two categories. They are: (i) domestic varieties, which include water contamination, air pollution, unsafe disposal of solid and hazardous waste, soil degradation and deforestation and (ii) global varieties, which include ozone depletion, global warming, etc. Due to the increasing public awareness on the environmental effects, managers are now compelled to think of their actions and decisions from the environmental perspective too. They are expected to focus on specific environmental areas such as sustainable development, energy conservation, pollution prevention, biodiversity, afforestation, occupational health and safety.

To be successful, managers must recognize the impact of organizational environment on employees, customers, the general public and also on their own roles and functions. They should also constantly assess the organizational environment by examining its characteristics and components. In this way, they can detect the changes in the environment early and make proactive plans to meet them successfully. For instance, when the environment is highly uncertain, managers should be prepared for making frequent changes to their plans, actions and decisions. In contrast, when the environment is stable, managers may emphasize on continuity, hierarchy of authority and rules and procedures.¹⁹

Recent Trends in Management

Management as a concept and practice has undergone several changes in recent years. These changes are actually the outcome of developments in the external environment of organizations. The emergence of knowledge management, Six Sigma practices, mergers and acquisitions, information technology-enabled outsourcing and world-class organizations are some of the developments that have significantly influenced the managerial styles and approaches. We shall now see these developments briefly.

Knowledge Management

Knowledge management (KM) is a process that aims at identifying and capturing the knowledge that exists across the organization. It may be defined as the systematic and active management of ideas, information and knowledge residing in the employees of an organization.²⁰ Knowledge may include databases, documents, policies, procedures and people’s expertise and experience. KM looks to fulfil the information needs of a business effectively and rapidly by systematically and comprehensively gathering, storing, analysing and distributing necessary information. Knowledge management thus focuses on the creation of an environment that facilitates the development and sharing of people’s knowledge and their capacity to act. Effective knowledge management can help an organization reduce the time required for information search by employees and also ensures better business decisions throughout the organization. It also helps the organization gain competitive advantage over its rivals in the business. Box 2.1 delineates the knowledge management practices of Tata Consultancy Services (TCS).

KM involves people, technology and processes and aims at the continuous discovery and effective use of explicit knowledge (available on paper, in documents and databases) and tacit knowledge (people’s skills, experience, talents, etc.) of the organization. KM, as a technique, offers the following benefits:

• It helps the organization in creating a value from its intangible assets, such as people’s experience, expertise and other information sources.
• It involves the classification and categorization of information and also allows the members of the organization to have faster access to such information.
• It enables the organization to compete in the market on the basis of the strength of its employees’ knowledge.
• It facilitates the process of bringing the right knowledge to the right people at the right time with the aim of improving organizational performance and productivity.²¹
• It compels managers to learn new technologies, new measures and new opportunities to keep the organization fit and competitive.

Six Sigma

Six Sigma is a business management strategy for improving the quality of the product or the service output of an organization. It seeks to achieve high quality standards by identifying and removing the causes of defects in the manufacturing and business processes. In this regard, it uses a set of quality management methods by adopting statistical methods, and employing specially-trained quality experts within the organization. These quality experts are generally categorized as Black Belts, Green Belts, etc. Six Sigma practices encourage managers to adopt a definite sequence of steps in manufacturing and also quantify financial targets in the form of profit increase or cost reduction. Generally, the quality of a manufacturing process can be described by a sigma rating indicating its yield or the percentage of defect-free products it creates. A Six Sigma process is one in which 99.99966% of the products manufactured are statistically expected to be free of defects (3.4 defects per million). This technique has produced excellent results for Motorola, USA, where it was developed and experimented. Box 2.2 discusses the Six Sigma initiatives of the Indian company, Crompton Greaves Ltd.

Mergers and Acquisitions

The term “mergers” refers to the combination of two or more companies in which the assets and liabilities of the selling company are absorbed by the buying company. The term “acquisition” means the purchase of a plant, division or the whole of a company by another company. Mergers and acquisitions (M&A) are extensively used as a technique for restructuring business. The process of merger and acquisition has been on the rise in India in recent years. Since the introduction of economic reformist policies in 1991, Indian companies use M&A as a strategy to consolidate their business interests and also to counter increased competition in the global market.

VCCEdge, a financial research provider, reports that the M&A deal value during January 2010 alone stood at USD 2.8 billion, a whopping 126-per cent rise over the same period last year. Factors like technological changes, efficiency of operations, favourable economic and financial environments in the form of strong economic growth, rising stock prices and relatively low interest rates usually contribute to M&A activities.²²

When organizations undergo mergers and acquisitions, it is the responsibility of the managers to keep the employees focused on their jobs. They should also ensure that the strategic business goals and plans are achieved. In this regard, managers must work purposefully to stabilize the organization, secure the confidence and cooperation of the employees of the firms involved in the merger process and sustain employee energy and performance over a long term.²³

IT-enabled Outsourcing

In recent times, many changes in organizations are enabled by the developments in information technology (IT). Managements ensure maximum utilization of Internet-based IT-enabled services to improve organizational effectiveness and customer satisfaction. Business process outsourcing (BPO) is an important form of IT-enabled service. Organizations outsource some of their business activities such as call centres, back office operations, revenue claims processing, legal databases, content development, payrolls, logistics management, basic accounting or HR services and web services to reduce cost. This enables managers to deal with new forms of offices wherein part of the office work is performed in far-off places outside the office and is electronically managed. When IT-enabled services are introduced in organizations, managers initially act as change agents and perform the role of business change managers.²⁴ They then learn to manage employees in an IT-enabled environment.

With the advent of the knowledge process outsourcing (KPO) business, many Indian companies have entered the industry in large numbers. According to Eval-ueserve, one of the leading Indian KPOs, the knowledge process market in India is estimated to be worth anywhere between USD 2.5 billion and USD 3 billion per year. This is now estimated to grow up to USD 12 billion by 2012. This indicates the future prospects of this fast growing industry in India.²⁵ Managers in KPOs face tough challenges in satisfying and retaining their employees. It is hence necessary for them to provide an open work environment and facilitative leadership.

World-class Organizations

World-class Organizations (WCO) are those organizations that are recognized as global leaders in their respective industries having a dominant presence in the market. The general characteristics of WCOs are: (i) customer-centred approach, (ii) continuous improvements, (iii) flexibility, (iv) innovative programmes for HR management, (v) a democratic environment and (vi) technological support.²⁶ To make their organization world-class, managers should focus on continuous learning, total quality, customer satisfaction, customer relationship management, employee equality, cost reduction, simplicity and employee involvement.

Besides these trends, present-day managers are increasingly focusing on areas such as performance benchmarking, scenario planning (planning for several alternative futures), price optimization, core competencies (abilities that distinguish the company from its rivals and also delivering unique value to customers), customer segmentation, change management programmes, customer relationship programmes, satisfaction and loyalty management (employee, customers and investors satisfaction) and decision rights tools (giving the decision makers a sense of ownership of their decisions).²⁷

Summary

1. The earliest texts on management are The Duties of the Vizier, Sun Tzu’s Art of War, Confucius’s Analects and Chanakya Kautilya’s Arthashastra.
2. Approaches to management include: (i) classical approach, (ii) behavioural approach, (iii) systems approach, (iv) contingency or situational approach, (v) quantitative or operations research approach and (vi) information technology approach. F. W. Taylor’s scientific management, Fayol’s general administrative theory and Max Weber’s bureaucratic management theory are the important contributions to the classical approach. The behavioural approach was greatly enriched by the Hawthorne studies of Elton Mayo.
3. The organizational environment is typically classified into internal environment and externalenvironment. Internal environment is formed by employees and shareholders besides organizational culture. External environment is classified into task environment and general environment. Task environment is formed by the actions of the customers, suppliers, competitors, distributors, trade unions and pressure groups. General environment is formed by social environment factors like technological environment factors, political environment factors, legal environmental factors, economic environmental factors and natural environment.
4. Recent trends in management include the emergence of knowledge management, Six Sigma practices, mergers and acquisitions, IT-enabled outsourcing, and world-class organization.
5. Knowledge management is the systematic and active management of ideas, information and knowledge in the employees of an organization.
6. Six Sigma is a business management strategy that seeks to achieve high quality standards by identifying and removing the causes of defects in manufacturing and business processes.
7. Merger refers to the combination of two or more companies in which the assets and liabilities of the selling company are absorbed by the buying company. Acquisition refers to the purchase of a plant, division or the whole company by another company.
8. World-class organizations are those organizations that are recognized as global leaders in their respective industries and have a dominant presence in the market.

Review Questions

Short-answer questions

1. Write a note on Sun Tzu’s Art of War.
2. State the essence of bureaucratic management theory.
3. What do you mean by the contingency approach?
4. Define the term TQM.
5. What is the information technology approach to management?
6. Why is natural environment an important component of the organizational environment?
7. Point out the uses of knowledge management.
8. Examine the importance of Six Sigma as a quality enhancement initiative.
9. Write a note on IT-enabled outsourcing in management.
10. What do you mean by world-class organizations?

Essay-type questions

1. Describe the earliest stages in the history of management in brief.
2. Critically examine the contribution of F. W. Taylor to the development of management thought.
3. Explain the general principles laid down by Henri Fayol for effective management.
4. Discuss the importance of the Hawthorne experiment in the development of the behavioural approach in management.
5. Give a brief account of the significance of the systems approach to the study of management.
6. What is situational approach to management? State also the salient features of this approach.
7. Describe how the contingency approach is suitable for studying management.
8. Explain how modern managers can use the quantitative approach to management.
9. Discuss in detail the environmental factors influencing management.
10. Critically examine the recent trends in management with suitable examples.
11. Examine the meaning, significance and utility of knowledge management.

Case Study

Unchanging Management Practices in a Dynamic Environment

Kingstree, a consumer electronics and durables company, was once one of India’s most high-profile companies and a market leader in the television industry with a sizeable market share. This company had featured among the top five TV brands of the country. The chairman of this company, Chakraborthy, strongly believed in the traditional family-centred organizational set-up with a tall structure for making well-planned and calculated decisions. This company had adopted the “primogeniture” method, that is, the method in which the eldest son is selected for the top managerial job. Many important managerial positions were also held by the family members of the founder chairman Chakraborthy. This company sourced technology from many foreign companies and had invested its funds in manufacturing facilities and several new ventures in unrelated areas that had long gestation periods. For long, Kingstree held the view that borrowing technology was a cheaper and wiser option when compared to developing technology through research and development (R&D) initiatives. The top management believed that large and continuous investments in R&D did not make any business sense. Kingstree diversified its business using borrowed technology with great success. During its zenith, Kingstree had many famous brands and also made a group profit of around ₹ 2,300 crore.

All was well for this company till the advent of economic liberalization in the early 1990s. The removal of the regulatory framework allowed large and leading global brands to enter the fray and give tough competition to all the existing Indian brands, including Kingstree. The rise of technologically superior and resourceful foreign companies created huge volatility in the market. In such a business environment characterized by intensified competition, the performance of Indian brands began to decline sharply. However, many domestic competitors of Kingstree quickly responded to this new and emerging situation and were able to stage a quick comeback through their more focused strategies and R&D initiatives. But Kingstree miserably failed to come up with a clear and coherent strategy to face the challenges. To make matters worse, Chakraborthy who had led the company for 30 years stepped down due to some family feud, handing the reins to his eldest son. The transition, especially its timing, did not go down well with many executives as they felt that the founder family’s influence, interests and values have overriding importance in the company. Kingstree, which had already begun faltering, now faced the risk of being completely wiped out if it failed to cope witht the changes in its organizational environment caused by leadership transition as well as economic liberalization and globalization.

Questions

1. How do you assess the overall situation at Kingstree from the management perspective?
2. What needs to be done in the short and long terms to put Kingstree back on track?
3. In your opinion, what management styles may be suitable for this company to successfully cope with the changes in the external environment?

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