Management and organization

Every business, from a two-person food truck to a bank with 90,000 employees, has to decide what it is trying to achieve, how work will be divided, who will make which decisions and how progress will be checked. Those tasks are the work of management. This lesson introduces the four functions of management, the levels and skills of managers, strategic planning and SWOT analysis, goal setting, organizational structures, and the basics of leadership and decision making.

The four functions of management

Management is the process of achieving an organization's goals by working with and through people and other resources. A classic way to describe what managers do divides the work into four functions that repeat in a cycle:

• Planning: setting goals and deciding how to reach them, including strategy, budgets and schedules.
• Organizing: dividing the work, grouping jobs into teams and departments, assigning authority and allocating resources.
• Leading: motivating, guiding and communicating with people so they work toward the goals.
• Controlling: measuring results against the plan, finding gaps and taking corrective action.

In practice managers move between the functions all day. A restaurant manager might revise next week's staff schedule (planning and organizing), coach a new server through a busy shift (leading) and check food costs against budget at closing (controlling), all on the same day.

Levels of management and the skills they need

Larger organizations have several levels of managers. Top managers, such as the chief executive officer (CEO), chief financial officer (CFO) and other executives, set overall direction and are accountable to the board of directors. Middle managers, such as regional managers, plant managers and department heads, turn strategy into plans for their units and manage other managers. First-line managers, such as supervisors, team leads and shift managers, direct the employees who do the day-to-day work.

Managers need three broad kinds of skill. Technical skills are the knowledge needed to do the work itself, such as knowing how to run a machine or prepare a tax return. Human or interpersonal skills are the ability to communicate with, motivate and work with people. Conceptual skills are the ability to see the organization as a whole, analyze complex situations and think strategically. All managers need human skills; first-line managers rely more on technical skills, while top managers rely more on conceptual skills.

Mission, vision and strategic planning

Planning starts with purpose. A mission statement says what the organization does, for whom and why; a vision statement describes what it hopes to become; and a statement of values describes how people are expected to behave. Good statements are short and specific enough to guide decisions. A mission such as 'to be the best' gives no guidance; 'to give rural families fast, affordable internet' does.

Plans come at several levels. Strategic plans set the organization's long-term direction, usually over three to five years, and are made by top managers. Tactical plans translate strategy into specific actions for departments over one to two years. Operational plans set out the day-to-day and week-to-week work, such as production schedules and staffing rotas. Contingency plans describe what to do if something goes wrong, such as a supplier failure or a cyberattack.

SWOT analysis

A SWOT analysis is a simple tool for strategic planning. It lists the organization's internal strengths and weaknesses and the external opportunities and threats in its environment. The goal is to build strategies that use strengths to seize opportunities, shore up weaknesses and defend against threats.

Setting goals and measuring performance

Goals turn plans into targets people can act on. A widely used guide is that goals should be SMART: specific, measurable, achievable, relevant and time-bound. 'Improve customer service' is not a SMART goal; 'raise our average customer rating from 4.1 to 4.5 stars by June 30 by answering every review within 48 hours' is.

Organizations track progress with key performance indicators (KPIs), the handful of numbers that best show whether goals are being met, such as sales growth, gross margin, customer retention, on-time delivery or employee turnover. Controlling then compares actual KPIs with targets, explains differences and decides what to change.

Organizing: structure and the organization chart

Organizing creates a structure that divides work and coordinates it. Key ideas include:

• Division of labor (specialization): breaking work into specialized jobs, which raises efficiency but can make jobs dull.
• Departmentalization: grouping jobs, for example by function (marketing, finance), by product, by customer type or by geographic region.
• Chain of command: the line of authority from the top to the bottom of the organization, showing who reports to whom.
• Span of control: the number of people who report directly to one manager. Wide spans create flat organizations; narrow spans create tall ones.
• Centralization and decentralization: whether decisions are made mainly at the top or pushed down to managers closer to customers.

An organization chart is a diagram of the structure. In a functional structure, departments are grouped by specialty such as operations, marketing, finance and human resources; it is efficient but can create silos. A divisional structure groups people by product, market or region, each with its own functions; it responds well to different markets but duplicates resources. A matrix structure gives employees two bosses, such as a functional manager and a project manager, which helps on complex projects but can confuse priorities. Many firms also use cross-functional teams and project teams that cut across the formal structure.

Leadership

Leading is the function most people picture when they think of management. Leadership is the ability to influence people toward goals. Researchers have described several styles. Autocratic leaders make decisions alone and expect them to be carried out; this can work in emergencies or with inexperienced teams. Participative or democratic leaders involve employees in decisions, which builds commitment and draws on more knowledge. Laissez-faire or free-rein leaders set goals and leave employees to decide how to reach them, which suits skilled professionals. Transformational leaders inspire people with a vision and encourage them to grow, while transactional leaders focus on clear expectations and rewards. Most effective leaders adapt their style to the situation and the people involved.

Motivation theories help explain why people work hard. Maslow's hierarchy suggests that people seek to satisfy physical and safety needs before social, esteem and self-actualization needs. Herzberg distinguished hygiene factors such as pay and working conditions, which cause dissatisfaction when inadequate, from motivators such as achievement, recognition and responsibility, which drive satisfaction. Expectancy theory says people work hard when they believe effort leads to performance, performance leads to rewards and the rewards matter to them. Each theory points managers toward fair pay, meaningful work, recognition and clear links between effort and results.

Decision making

Managers make decisions constantly. A rational process has six steps: define the problem, identify alternatives, evaluate them against criteria, choose one, implement it and evaluate the results. In reality, managers rarely have complete information or time, so they often settle for the first option that is good enough, a behavior called satisficing. Common traps include confirmation bias (seeking only evidence that supports a favored option), anchoring (relying too heavily on the first number heard), sunk-cost thinking (continuing a failing project because of money already spent) and groupthink (going along with the group to avoid conflict). Asking someone to argue the opposite case and setting decision criteria in advance help.

Delegation is the practical skill that links organizing and leading. Managers who try to do everything themselves become bottlenecks; managers who delegate well assign a clear task and outcome, give the person the authority and resources to do it, agree how progress will be checked and remain accountable for the result. Delegation also develops people, which is one of a manager's most important long-term jobs.