I. Introduction to Management Some Basics OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL...

I. Introduction to Management

Some Basics

OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURGBEIJING NORMAL UNIVERSITY

Prof. Dr. Birgitta Wolff, Marjaana Rehu, M.A.Otto-von-Guericke-University, Germany

Prof. Dr. Birgitta WolffMarjaana Rehu, M.A.

Beijing, Sept. 2002 2

Outline

1. Why study management at a university?

2.1 The function of „intellectual maps“

2.2 Selecting the adequate scale and mode of a model

2. Basic terminology

2.1 Why engage in economic activities?

2.2 What is a firm?

2.3 What is efficiency?

3. Economics as a theory of decision-making

3.1 Economic model of individual behavior

3.2 Modelling decision-making

3.3 Opportunity costs

3.4 Managerial decsions as a result of organizational architecture

3.5 Managerial decisions by „areas of action“



1. Why Study Management at a Universtity?

Alternatives:

Polytech, Apprenticeship, Trainee Program, Learning by Doing, Natural Talent, ...

Costs:

Time, Effort, Money, ...

Benefits:

Learn to use and even draw „intellectual Maps“

Source: www.msn.de



Example 1 (from Geography):

The Globe as a Model of the Earth

Function:

Answer questions such as

„Where is Africa?“

1.Why to Study Management at a Universtity?

1.1 The Function of „Intellectual Maps“



Example 2:

City Map of Magdeburg

Function:


„How do I get from the university to Hasselbachplatz?“

1. Why to Study Management at a Universtity?




Example 3:

Campus Plan

Function:


„How do I get from Building 22 to the Faculty of Computer Science?“





Different Scales!

Scale depends on question/problem

Also: Different Modes

E.g.: Street Map, Hiking Map, Map of Canals/Rivers...

Mode depends on question/problem

However, are there

„Maps“ in Social Sciences?


1.2 Selecting the Adequate Scale and Mode of a Model



Are there „Maps“ in Social Sciences? Models or conceptual framework (BSZ 11)

Idea of a Model:

Leave out some aspects of reality in order to understand others better.

Important:

Distinction of relevant and irrelevant aspects with respect to a given problem.

(Example of alternative models of human behavior: BSZ 30ff.)





Example:

Porter‘s model of five competive forces

Potential Entrants

(Source: M. E. Porter: Competitive Advantage, New York: Free Press 1985, p. 5)

BuyersSuppliers

Substitutes

Bargaining Power

Bargaining Power

Threat of new entrants

Threat of Substitute Products or Services

Rivalry Among Existing Firms

Industry Competitors

1. Why to Study Management at a Univertity?




Example:

Porter‘s model of five competive forces rev.

(Family business)

Potential Entrants

BuyersSuppliers

Substitutes

Bargaining Power

Bargaining Power

Threat of new entrants

Threat of Substitute Products or Services

Industry Competitors

Rivalry Among Existing Firms

The Owner‘s Spouse

1. Why to Study Management at a Univertity?




to serve a market

(provide products, services)

fulfill one‘s own needs

(use income to buy things)

Example: Selling cars to customers (serving a market), earning money while doing so and using the money to buy desired items (fulfill one‘s own needs)

Adam Smith (Wealth of Nations): „It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.“

2. Basic Terminology

2.1 Why Engage in Economic Activities?



A „Pool of resources“:

• financial resources

• human resources

Ownership of Resources: „Property rights“

• use rights

• alienability rights (BSZ 43)


2.2 What is a Firm?

Source: www.nokia.fi



A „ Coalition of resource owners“:

Individual goal: income/utility maximization

Collective goal: profit maximization

Two levers of Profit Maximization:

Revenue maximization

Cost minimization

Profit Maximization

Source: www.nokia.de


2.2 What is a Firm?



Effectivity:

the ability of a process to achieve a given objective, to reach a target

Efficiency:

the ability to reach a given target at lowest possible cost

Example:

Street cleaning can be done slowly... or fast (at a given quality and hourly wage)

Efficiency comes in two forms (two levers, see previous slide):

- if the input is given, the output is to be maximized (Revenue maximization)

- if the output is given (target set), the amount of resources used to produce is to be minimized (Cost minimization)


2.3 What is Efficiency?



(BSZ 16; 30ff.)

• Utility Maximization

- one works according to one‘s individual preferences

- one wants to benefit as much as possible

• Bounded Rationality

- limits of human mental abilities, that prevent people from being able to foresee all possible contingencies and process all information

- opportunism: self-interest seeking with guile (Williamson)

3. Economics as a Therory of Decision-Making

3.1 Economic Model of Individual Behavior



Decision-making under constraints:

• Individuals have unlimited wants; however, the resources available are limited

• Individuals assign priorities to their wants and choose to invest their scarce resources into the most preferred option among the alternatives

„In essence, economics provides a theory to explain the way individuals make choices“ (BSZ 6)


3.2 Modelling Decision Making



Economic methods:

e.g. Analysis of marginal costs and benefits (BSZ 16)

Action should be taken if marginal benefits exceed the marginal costs

Example: Working overtime?

When one values leisure time more than the amount of money one earns in the job, the marginal costs of working are higher than the marginal benefits

Individual will select „leisure“


3.2 Modelling Decision Making



Individuals face trade-offs Notion of opportunity costs

„The opportunity costs of using a resource for a given purpose is its value in ist best alternative use“ (BSZ 17)

Examples:

• Ferdinand Pièch (Volkswagen AG) has to decide if to produce small, highly profitable cars, or big, prestigeous cars, such as Bugattis, or Lamborghinis, at a loss?

• You decide if you will work on an assignment or go partying.


3.2 Opportunity Costs



„... three critical aspects of organization:

• The assignment of decision rights within the company

• The methods of rewarding individuals

• The structure of systems to evaluate the performance of both individuals and business units“

(BSZ 5)


3.4 Managerial Decisions as a Result of Organizational Architecture



Who should make a decision?

„Successful organizations assign decision rights in a manner that effectively links decision-making authority with the relevant information to make good decisions“ (BSZ 11)

Nobel Price 2001 in Economics for Akerlof, Spence, and Stiglitz


3.4 Managerial Decisions as a Result of Organizational Architecture



Business Idea

Market Research

Financial Plan Staffing

Production Plan

Operative Financial

PlanSale

After Sale Services Resale

Product

Target Group

Demand:

What at which prices

How to finance business

Incorpor-ation

How many to hire

Qualif-ication

How to produce

Which resources

When

Inform-ation System

Accounting

Collect-ion of revenue

Guar-antees

Customer relation-ship

Ongoing relation-ships

Revenue


3.5 Managerial Decisions by „Areas of Action“



Furter Readings

Brickley, J. A./Smith, C. W. Jr./Zimmerman, J. L. (2001): Organizational Architecture, 2nd ed., Irwin Book Team.

Reekie, W. D./ Crook, J.N. (1995): Managerial Economics, 4th ed. Prentice Hall: New York, etc.

I. Introduction to Management Some Basics OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL...

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