Modern Thinking

Quantitative and Analytical Management Tools

Quantitative tools are used by management to determine where a company is doing well or struggling compared to the industry and competitors.

Learning Objectives

Give examples of quantitative and analytical management tools that assist organizations in better understanding workflow, financials and employee efficiency

Key Takeaways

Key Points

  • Many quantitative and analytic tools are available for managers to better understand workflow processes, financial management, and employee efficiency.
  • A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility.
  • Simulation is the imitation of a real-world process or system over time.
  • Trend charts are often used in management to display data over time to explore any potential trends, either positive or negative, that require additional attention by management. It is important to use statistical confidence intervals when utilizing this type of forecast.
  • Benchmarking allows a manager to see how different aspects of a business are performing compared to national, regional, and industry standards. It also allows management to explore how the company is performing compared to its competitors.
  • Financial projections and net-present- value (NPV) analyses are also commonplace when deciding upon new operations quantitatively—where the company predicts profitability in today’s dollars.

Key Terms

  • decision tree: A visualization of a complex decision-making situation in which the possible decisions and their likely outcomes are organized in the form of a graph that resembles a tree.
  • benchmarking: A technique that allows a manager to compare metrics, such as quality, time, and cost, across an industry and against competitors.

Managers can use many different quantitative and analytic tools to better understand workflow processes, financial management, and employee efficiency. These tools, such as decision tress, simulation, trend charts, benchmarking, and financial projections, help managers improve their decision-making abilities, determine how the business is performing relative to competitors, and discover opportunities for improvement. Using these tools to create quantitative and measurable metrics helps an organization see exactly where it is performing well and where it is performing poorly.

Types of Quantitative Tools

Decision Tree

A decision tree is a branching graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. Decision trees are commonly used in operations research (specifically in decision analysis) to help identify a strategy most likely to reach a specified goal. They can also be used to map out a thought process or the possible consequences of a decision. A manager may use this tool when deciding between different projects or investments.

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Decision tree: Decision trees are used to determine the consequences and potential outcomes of an investment or a project. This decision tree shows the money lost or gained at each step along multiple potential paths of action. The path that results in the highest financial gain by the end is generally the one that should be chosen.

Simulation

Simulation is the imitation of a real-world process or system over time. The act of simulating something first requires that a model be developed; this model represents the key characteristics or behaviors of the selected physical or abstract system or process. A simulation could be used to study investment decisions by actively playing out what may happen in certain situations.

Trend Chart

Trend charts are often used to display data over time to explore any potential trends (either positive or negative) that require additional attention by management. Many metrics are analyzed using trend charts, including employee productivity, financial metrics, operational efficiency, and comparisons between competitors. Trends are only ever in the past, however, and utilizing confidence intervals when projected with trends is critical to their effectiveness.

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Trend chart: A trend chart shows changes in spending, prices, efficiency, or any other metric that management is interested in analyzing over time. This chart of U.S. defense spending from 2000–2011 shows that overall spending increased from $300 billion to $700 billion due to increases in both the Department of Defense (DOD) budget and overseas (war-related) spending.

Benchmarking

Benchmarking allows a manager to see how different aspects of a business (usually quality, time, and cost) are performing compared to national, regional, and industry standards. It also allows a manager to explore how the company is performing compared to competitors. In the process of benchmarking, management identifies the best firms in the industry, or in another industry where similar processes exist, and compares the results and processes of the target firms to management’s own results and processes. In this way, management learns how well the targets perform and, more importantly, the business processes that explain why these firms are successful.

Financial Projections

Managers can also use financial analysis as a management tool. When investing in a project or an acquisition of any kind, a manager will always want to know how quickly the investment will bring in a profit. For example, when a company invests in a new building, management will calculate how long it will take for the building to generate enough income to cover the upfront cost of the building and therefore start bringing in profits. This calculation is sometimes called a payback period. Payback period intuitively measures how long something takes to pay for itself. All else being equal, shorter payback periods are preferable to longer payback periods. This is often referred to as an NPV, or a net present value, where the company calculates the future value of the project in today’s dollars. It is critical to remember that a dollar today and a dollar tomorrow have a different value.

Operations-Management Tools

Six Sigma and Lean are two popular operations-management theories that help managers improve the efficiency of their production processes.

Learning Objectives

Give examples of operations management tools that assist the organization in overseeing, designing and controlling production processes

Key Takeaways

Key Points

  • The main tools of operations management come from two popular theories of organizing business: Six Sigma and Lean.
  • Six Sigma relies on particular quality -management methods, such as statistical analytics, and creates a special infrastructure of employees within an organization (e.g., “Black Belts,” “Green Belts”) who are experts in these methods.
  • Lean is a production theory that considers the expenditure of resources for any goal other than the creation of value for customers wasteful, and thus a good target for elimination.
  • By leveraging operational paradigms constructed to deliberately capture value through maximizing efficiency, managers can lower costs for companies and prices for consumers.

Key Terms

  • Six Sigma: A process-improvement method that focuses on statistical methods to reduce the number of defects in a process.
  • Lean: Lean is a production strategy focused on eliminating all unnecessary waste in production.

Operations management is a type of management that oversees, designs, and controls a company’s production processes. This type of management is also tasked with redesigning business operations in the production of goods and/or services, if that is necessary. Operations managers are responsible for ensuring that business operations are efficient, both in terms of conserving resources and in terms of meeting customer requirements. They manage the process that converts inputs (materials, labor, and energy) into outputs (goods and services). In order to accomplish this task, managers utilize various tools, two of the most influential being Six Sigma and Lean.

Six Sigma

Six Sigma is a strategy designed to improve the quality of process outputs. The Six Sigma program accomplishes this by identifying and removing the causes of defects (errors) and by minimizing the variability present in manufacturing and business processes.

This strategy relies on particular quality-management methods, such as statistical analytics, and creates a special infrastructure of employees within an organization (e.g., “Black Belts,” “Green Belts”) who are experts in these methods. Each Six Sigma project in an organization follows a defined sequence of steps and has quantified financial targets such as reducing costs or increasing profits. Among the tools used in Six Sigma are process mapping, trending charts, calculations of potential defects, ratios, and statistics. Best practices for work within a team are also used.

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Six Sigma: Six Sigma is a tool used by many managers when determining how to reduce the number of defects created by their processes.

Lean

Lean is similar to Six Sigma, but is slightly less focused on defect rate and more focused on eliminating the amount of waste and excessive steps in an operation. Lean is a production theory that considers the expenditure of resources for any goal other than the creation of value for the customer wasteful, and thus a target for elimination. Beginning from the perspective of the consumer of a product or service, “value” is defined as any action or process that a customer would be willing to pay for. Lean employs tools to evaluate production workflow and determine where there is waste. Examples of this waste would be excess motion, inventory, and overproduction.

Examples of Six Sigma and Lean

In many ways, Lean manufacturing and Six Sigma is reminiscent of Henry Ford and systematic process improvements. The overarching theme is simply to minimize time expenditures on behalf of employees and maximize output with the same amount of input. Toyota (and the concept of kaizen) is a fantastic example of Lean manufacturing and what is called just-in-time (JIT) inventory management. Toyota became famous in manufacturing for timing every specific element of the manufacturing process to ensure that minimal warehousing was required, delivering each new add-on component at precisely the time it would be needed and in exactly the location it would be installed. This created a process flow that minimized space usage (lowering costs), optimized timing, and created widespread consistency of operational flow.

Lean and Six Sigma are the two main tools for managers in operations management. Both of these operational strategies offer managers an extensive toolbox with which to analyze how efficiently their production is running. These tools analyze workflow, evaluate the presence and cause of waste, and decrease defects in products or services, all of which make a company more efficient.

The Systems Viewpoint

Systems thinking is an approach to problem solving that considers the overall system instead of focusing on specific parts of a system.

Learning Objectives

Define the systems view as it applies to business strategies and overall organizational control

Key Takeaways

Key Points

  • Systems thinking is an approach to problem solving that views problems as part of an overall system. This is opposed to problem-solving strategies that only focus on specific parts or outcomes of a problem.
  • Systems thinking approaches problems as a set of habits or practices within a framework. It is based on the belief that the component parts of a system are best understood in the context of their relationships with each other rather than in isolation.
  • Systems thinking is opposed to fragmented thinking, which involves thinking about specific problems without considering the context, environment, and effects of similar problems.

Key Terms

  • fragmented thinking: Thinking about problems as isolated events instead of considering problems as resulting from a system as a whole.

Systems thinking is the process of understanding how people and situations influence one another within a closed system. In nature, air, water, movement, plants, and animals interact with one another and survive or perish in relationship with each other. In business, management also involves systems thinking.

Organizational Systems

Organizational systems consist of people, structures, and processes working together to make an organization healthy or unhealthy. The end product of effective systems management is synergy, in which the end product has more value than the individual sum of its parts. Systems generally contain the following aspects:

  • Inputs (e.g., people, time, energy, information)
  • Processes or reactions (e.g., tools, software, analyses)
  • Outputs (e.g., products, reports, plans)
  • Feedback mechanisms (e.g., information, reports)
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Systems thinking: Focus on the interaction of isolated problems with one another: just as separate gears work with each other, problems in one area can effect other areas in a system as well.

Problem Solving

When problem-solving, advocates of systems thinking must consider specific problems within an overall system rather than reacting to specific issues or specific outcomes. In systems thinking, problems are conceptualized as a set of habits or practices that exist within a framework. Practitioners of systems thinking believe that the component parts of a system can best be understood, and best analyzed, in the context of their relationships with other parts of a system.

This method is opposed to a reductive framework that attempts to focus closely on a single problem. In this type of fragmented thinking, problems are addressed without considering the context, environment, or the impact of similar problems. Fragmented thinking often results in solutions that cannot be applied to multiple situations and are unlikely to remain relevant over time. This means management will be putting out more fires because the root problem is unresolved.

Here is an example of systems thinking: say that a single department, Human Resources, is beset with problems in workflow and efficiency. A manager who uses systems thinking to fix this problem looks at Human Resources in the context of all of the workflow in the company to see whether the “Human Resources problem” could actually be a company-wide issue. Only a systems-thinking approach can lead to this realization because systems thinking provides insight into how problems that manifest in a specific location can spring from distant, seemingly unrelated locations. This helps managers get an accurate understanding of the problem and facilitates a superior response to the problem.

Example

Here is an example of systems thinking: say that a single department, Human Resources, is beset with problems in workflow and efficiency. A manager who uses systems thinking to fix this problem looks at Human Resources in the context of all of the workflow in the company to see whether the “Human Resources problem” could actually be a company-wide issue. Only a systems-thinking approach can lead to this realization because systems thinking provides insight into how problems that manifest in a specific location can spring from distant, seemingly unrelated locations. This helps managers get an accurate understanding of the problem and facilitates a superior response to the problem.

The Contingency Viewpoint

The contingency viewpoint of management proposes that there is no standard for management; instead, management depends on the situation.

Learning Objectives

Recognize the potential flexibility and value that can be captured through considering contingencies and alternatives from a managerial perspective

Key Takeaways

Key Points

  • The contingency viewpoint is a more recent development in organizational theory that attempts to integrate a variety of management approaches, proposing that there is no one best way to organize a corporation or lead a company.
  • Debating which one of the previous approaches to management is the “best” approach is irrelevant in contingency theory, since the heart of the contingency approach is that there is no “one best way” for managing and leading an organization.
  • The contingency viewpoint focuses on management’s ability to achieve alignments and good fits between employees and circumstances by considering multiple solutions to determine the best one for each particular problem.
  • The focal point, and modern relevance, of this perspective is the concept of adaptability. Technology and globalization evolve the business environment so rapidly that adaptable strategies are more appropriate than static ones, making contingencies key to success.

Key Terms

  • Contingency Viewpoint: A theory of management that proposes that there is no standard for management practice, instead it should depend on the situation.

The contingency viewpoint is a more recent development of organizational theory that attempts to integrate a variety of management approaches by proposing that there is no one best way to organize a corporation or lead a company. Instead, the optimal course of action is contingent or dependent upon the specific internal and external situation management may find itself in.

Perspective on Previous Theories

The contingency approach claims that past theories, such as Max Weber’s bureaucracy theory of management and Taylor’s scientific management, are no longer practiced because they fail to recognize that management style and organizational structure are influenced by various aspects of the environment, known as contingency factors. Debating which one of the previous approaches to management is the “best” approach is irrelevant in contingency theory, since the heart of the contingency approach is that there is no “one best way” for managing and leading an organization.

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Possibilities: The basic premise behind contingency theory is that there are limitless possibilities that companies must be prepared to adapt to strategically.

An Outline of Contingency Theory

By its nature, contingency theory avoids static rules. There are, however, common contingencies that businesses must react to, including technology, competition, governments, unions, consumer interest groups, new markets and consumers, and economic factors. Fred Fiedler takes this a step further to identify three leadership styles and empirical situation measurements to assess the degree of favorability a given contingency offers:

  1. The leader -member relationship, which is the most important variable in determining the situation’s favorableness.
  2. The degree of task structure, which is the second most important input into the favorableness of the situation.
  3. The leader’s position power obtained through formal authority : this is the third most important dimension of the situation.

In other words, leadership needs to ensure that it is able to assess a situation, determine the task structure, and obtain a position of formal authority in order to be able to adequately manage a contingency situation.

An example of the contingency viewpoint in action is a manager facing a situation with an employee who regularly shows up late to work. A manager could have a written protocol for this situation in which there is only one option: give the employee notice. Under the contingency viewpoint, however, the manager may decide to better understand the situation by talking to the employee about why s/he is late to work and then deciding on the most effective and appropriate course of action. The value in this lies in the information the manager acquires about the employee: maybe there are extenuating circumstances that can be relatively easy to work around. In this case, the contingency approach allows the employee to keep her/his job and saves the manager from going through the time and trouble to dismiss one employee and hire another.

A leader’s ability to manage under the contingency viewpoint depends largely on the nature of the environment and how the organization relates to the environment. Therefore, the organizational structure is a major component of the approach that management may take in resolving problems under contingency theory.

Quality Control and Assurance

Quality assurance and quality control are intended to ensure that products are created with the fewest number of defects possible.

Learning Objectives

Discuss quality control (QC) and quality assurance (QA) as integral components of an effective organizational management structure

Key Takeaways

Key Points

  • Quality assurance (QA) refers to planned and systematic activities implemented in a quality system to fulfill the quality requirements for a product or service.
  • Quality control (QC) is a process by which products are tested to uncover defects and the results are reported to management, which makes the decision to allow or deny product release.
  • Quality control and quality assurance work together to make sure that a company’s products have the lowest possible error rate.
  • As global markets expand, and as outsourcing becomes common practice, QC and QA are increasingly important strategic initiatives. When companies do not control their manufacturing process, they must invest in controlling the quality of their vendors.

Key Terms

  • Failure testing: Failure testing involves determining the point of stress level in which a product will fail.

Quality assurance and quality control are two methods of planning and implementing structured methods in a work process to ensure that products are created with the highest possible quality and with the smallest number of defects and problems.

Quality Assurance

Quality assurance (QA) refers to the planned and systematic activities implemented in a quality system to fulfill the quality requirements for a product or service It is a systematic measurement compared to a set standard, with process monitoring used to prevent errors. This can be contrasted with quality control, which is focused on process outputs. Two key principles of QA are:

  • Fit for purpose: The product should be suitable for its intended purpose.
  • Right the first time: Mistakes should be eliminated.

QA includes managing the quality of raw materials, assemblies, products, components, services related to production, management processes, production processes, and inspection processes. The critical takeaway here is that QA equates to process observations.

Quality assurance is measured through failure testing and statistical control. Failure testing determines the stress levels under which a product will fail by exposing it to unanticipated stresses, like intense vibration, temperature, and humidity. Stress testing uncovers problems that can be fixed with simple changes to improve the product. Statistical controls ensure that an organization is producing quality products at the lowest possible defect rate. Many organizations use Six Sigma levels of quality, so the likelihood of an unexpected failure is less than four in one million.

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Assembly line and quality control: Many processes, such as assembly lines, help ensure quality assurance and control by streamlining the production process.

Quality Control

Quality control (QC) is the process of testing finished products to uncover defects and reporting the results to management, which makes the decision to allow or deny product release. It differs from quality assurance, which attempts to improve and stabilize a product, and eliminate any flaws, during production.

Controls also include product inspection: every product is examined visually before the product is sold into the external market. Inspectors are provided with lists and descriptions of unacceptable product defects, such as cracks or surface blemishes. Efficient quality control depends on top-notch visual examination of products, employee training, and organizational culture.

Quality control and quality assurance work together to make sure that companies produce products that have the lowest possible error rate, so there will be fewer customer complaints and no need to rework the product in the future.

Outsourcing

Due to the high degree of vendor dependency, many corporations find their manufacturing processes are conducted outside of their organization. This can lead to difficulties in maintaining process quality. In this situation, a corporation needs to invest in QC professionals to maintain organizational standards. The primary takeaway here is that QC is not simply an internal concern for many businesses, but also an external vendor selection criteria.

Evidence-Based Management

Evidence-based management emphasizes the importance of managers using the scientific method to make decisions.

Learning Objectives

Discuss the modern organizational theory perspective on utilizing evidence-based strategies, as is common in many science disciplines, to make business decisions

Key Takeaways

Key Points

  • Evidence-based management is rooted in evidence-based medicine, a movement to apply the scientific method to medical practice. Evidence-based management is an emerging movement to explicitly use current best practices in managerial decision -making.
  • Evidence-based management bases managerial decisions and organizational practices on the best available scientific evidence.
  • While there is a rich body of academic literature pertaining to tried-and-true managerial strategies, real-world application of such resources is relatively rare.
  • Promoting evidence-based management is challenging because it can conflict with traditional definitions and expectations of management.
  • Little shared terminology exists between managers of different companies, which makes it difficult for managers to hold discussions on evidence-based practices. The adoption of evidence-based practices is likely to be organization -specific instead of happening across organizations.

Key Terms

  • terminology: The set of terms actually used in any business, art, science, or the like; nomenclature; technical terms; such as, the terminology of chemistry.

Evidence-based management ( EBMgt or EBM) is an emerging movement that explicitly uses current best practices in managerial decision-making. Evidence-based management is rooted in evidence-based medicine, which is the rigorous statistical and experimental process that new pharmaceuticals go through prior to being deemed safe to use. This results in treatments that are the maximally effective and safe for patients. Applying this to business simply means utilizing the scientific method, which integrates rigorous and objective hypothesis testing, in order to identify best practices.

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Research and Evidence-Based Management: Evidence-Based Management is modeled after Evidence-Based Medicine, which emphasizes the importance of scientific research in decision-making.

The Scientific Method

Evidence-based management bases managerial decisions and organizational practices on the best available scientific evidence. Practicing EBMgt requires managers to collect data, run tests, generate hypotheses, and objectively interpret the findings to create an accurate depiction of the efficacy of a given managerial style or decision. This is quite challenging, because management is much less tangible and measurable than many other scientific disciplines.

An example of EBMgt in practice could be a group of managers in an organization trying to determine how to improve job satisfaction. They could conduct a comprehensive and objective (therefore blind) survey across a large number of organizations, collecting enough data on the organizational reimbursements for employees, employee satisfaction, and company cultures to determine if a positive company culture is more relevant than salary to job satisfaction. After collecting n number of responses, this data could be assessed statically for a confidence interval, revealing the conclusion to be either significant or insignificant to future management decisions.

Integration with Organizations

While there is a rich body of academic literature pertaining to tested and true managerial strategies, real-world application of such resources is relatively rare. MBAs and degree holders in business have some exposure to this literature, but rarely move it from the theoretical realm to actual practice. Motivating real-life applications of these studies for management could prove advantageous for companies looking to improve their managerial effectiveness.

An important component of evidence-based management is helping managers understand the importance of backing up decisions with sound scientific reasoning. Unfortunately little shared language or terminology exists between managers, which makes it difficult for managers to hold discussions of evidence-based practices. For this reason, the adoption of evidence-based practices is likely to be organization-specific, where leaders take the initiative to build an evidence-based internal culture.