OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY Prof Dr Birgitta

OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG BEIJING NORMAL UNIVERSITY Prof. Dr. Birgitta Wolff, Marjaana Rehu, M. A. Otto-von-Guericke-University, Germany I. Introduction to Management Some Basics Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002

Outline 1. Why study management at a university? 2. 2. 1 The function of „intellectual maps“ 3. 2. 2 Selecting the adequate scale and mode of a model 4. 2. Basic terminology 5. 2. 1 Why engage in economic activities? 6. 2. 2 What is a firm? 7. 2. 3 What is efficiency? 8. 3. Economics as a theory of decision-making 9. 3. 1 Economic model of individual behavior 10. 3. 2 Modelling decision-making 11. 3. 3 Opportunity costs 12. 3. 4 Managerial decsions as a result of organizational architecture 13. 3. 5 Managerial decisions by „areas of action“ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 2

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 Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 3

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? “ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 4

1. Why to Study Management at a Universtity? 1. 1 The Function of „Intellectual Maps“ Example 2: City Map of Magdeburg Function: Answer questions such as „How do I get from the university to Hasselbachplatz? “ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 5

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? “ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 6

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? Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 7

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 30 ff. ) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 8

1. Why to Study Management at a Univertity? 1. 2 Selecting the Adequate Scale and Mode of a Model Potential Entrants Example: Porter‘s model of five competive forces Suppliers Threat of new entrants Bargaining Power Industry Competitors Bargaining Power Buyers Rivalry Among Existing Firms Threat of Substitute Products or Services Substitutes (Source: M. E. Porter: Competitive Advantage, New York: Free Press 1985, p. 5) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 9

1. Why to Study Management at a Univertity? 1. 2 Selecting the Adequate Scale and Mode of a Model Potential Entrants Example: Porter‘s model of five competive forces rev. (Family business) Suppliers Threat of new entrants Bargaining Power Industry Competitors Bargaining Power Buyers Rivalry Among Existing Firms Threat of Substitute Products or Services The Owner‘s Spouse Substitutes Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 10

2. Basic Terminology 2. 1 Why Engage in Economic Activities? 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. “ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 11

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) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 12

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 Profit Maximization Cost minimization Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 13

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) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 14

3. Economics as a Therory of Decision-Making 3. 1 Economic Model of Individual Behavior (BSZ 16; 30 ff. ) • 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) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 15

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) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 16

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“ Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 17

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. Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 18

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) Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 19

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 Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 20

3. Economics as a Therory of Decision-Making 3. 5 Managerial Decisions by „Areas of Action“ Product Target Group How to Demand: finance business What at which Incorporprices ation How many to hire Qualification Business Market Financial Idea Research Plan Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. How to produce Guarantees Inform. Which ation resources System When Ongoing relation. Collect- Customer ships relationion of Accounting revenue ship Revenue Production Operative Staffing Financial Plan Beijing, Sept. 2002 Sale After Sale Services Resale 21

Furter Readings Brickley, J. A. /Smith, C. W. Jr. /Zimmerman, J. L. (2001): Organizational Architecture, 2 nd ed. , Irwin Book Team. Reekie, W. D. / Crook, J. N. (1995): Managerial Economics, 4 th ed. Prentice Hall: New York, etc. Prof. Dr. Birgitta Wolff Marjaana Rehu, M. A. Beijing, Sept. 2002 22