I. Introduction to Management

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I. Introduction to Management
OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING
NORMAL UNIVERSITY
Prof. Dr. Birgitta Wolff, Marjaana Rehu,
M.A. Otto-von-Guericke-University, Germany

• Some Basics

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Outline

• 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

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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
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1.Why to Study Management at a Universtity?1.1
The Function of Intellectual Maps
Example 1 (from Geography) The Globe as a Model
of the Earth Function Answer questions such
as Where is Africa?
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1. Why to Study Management at a Universtity?1.1
The Function of Intellectual Maps
Example 2 City Map of Magdeburg Function Answe
r questions such as How do I get from the
university to Hasselbachplatz?
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1. Why to Study Management at a Universtity?1.1
The Function of Intellectual Maps
Example 3 Campus Plan Function Answer
questions such as How do I get from Building 22
to the Faculty of Computer Science?
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1. Why to Study Management at a Universtity? 1.2
Selecting the Adequate Scale and Mode of a Model
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?
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1. Why to Study Management at a Universtity? 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.)

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1. Why to Study Management at a Univertity? 1.2
Selecting the Adequate Scale and Mode of a Model
Example Porters model of five competive forces
Potential Entrants
Threat of new entrants
Industry Competitors
Bargaining Power
Bargaining Power
Buyers
Suppliers
Rivalry Among Existing Firms
Threat of Substitute Products or Services
Substitutes
(Source M. E. Porter Competitive Advantage, New
York Free Press 1985, p. 5)
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1. Why to Study Management at a Univertity? 1.2
Selecting the Adequate Scale and Mode of a Model
Example Porters model of five competive forces
rev. (Family business)
Potential Entrants
Threat of new entrants
Industry Competitors
Bargaining Power
Bargaining Power
Buyers
Suppliers
Rivalry Among Existing Firms
The Owners Spouse
Threat of Substitute Products or Services
Substitutes
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2. Basic Terminology2.1 Why Engage in Economic
Activities?
to serve a market (provide products,
services) fulfill ones 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 ones 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.
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2. Basic Terminology 2.2 What is a Firm?

• A Pool of resources
• financial resources
• human resources

Source www.nokia.fi

• Ownership of Resources Property rights
• use rights
• alienability rights (BSZ 43)

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2. Basic Terminology 2.2 What is a Firm?
A Coalition of resource owners Individual
goal income/utility maximization Collective
goal profit maximization
Source www.nokia.de
Two levers of Profit Maximization Revenue
maximization Cost minimization

Profit Maximization
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2. Basic Terminology 2.3 What is Efficiency?
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)

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3. Economics as a Therory of Decision-Making 3.1
Economic Model of Individual Behavior

• (BSZ 16 30ff.)
• Utility Maximization
• one works according to ones 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)

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3. Economics as a Therory of Decision-Making 3.2
Modelling Decision Making

• 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)

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3. Economics as a Therory of Decision-Making 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

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3. Economics as a Therory of Decision-Making 3.2
Opportunity Costs

• 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.

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3. Economics as a Therory of Decision-Making 3.4
Managerial Decisions as a Result of
Organizational Architecture

• ... 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)

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3. Economics as a Therory of Decision-Making 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
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3. Economics as a Therory of Decision-Making 3.5
Managerial Decisions by Areas of Action
How to produce Which resources When
How to finance business Incorpor-ation
How many to hire Qualif-ication
Guar-antees Customer relation-ship
Demand What at which prices
Inform-ation System Accounting
Ongoing relation-ships Revenue
Product Target Group
Collect-ion of revenue

Operative Financial Plan
Business Idea
Market Research
Financial Plan
Production Plan
After Sale Services
Staffing
Sale
Resale
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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.