© 2006 Prentice Hall, Inc. 12 – 1
Chapter One
Basic Management Concepts
and
Industrial Organization

2
What is Management?
Who are Managers ?
Where do they work?
AMU-SC | By: Ashenafi B.
Questions

• What is this little boy doing?
• Do you know where he is going?
• Can you see where he is going?
• Do you know what could happen
if he falls in the water?
• Can you really see what the
consequences are going to be?
• Have you got the big picture in
mind?
3
Cont’d…
AMU-SC | By: Ashenafi B.
 With anything that one does in life, you have to start with the end
in your mind.
 You decide what you want to achieve and then you decide how you
will work towards achieving it. This is what management is!!

Chart the Path
Put Stepping
Stones in Place
So That You and Your
Followers Can Reach Our
Vision
4
Cont’d…
AMU-SC | By: Ashenafi B.

Vision
Reality
Greatness
An activity to manage the creative tension between current reality and
future reality / vision.
NOW FUTURE
5
Courage
Cont’d…
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6
 In general, "management" identifies a special
group of people whose job is to direct the
effort and activities of other people toward
common objectives.
 Simply, management gets things done through
other people by planning, coordinating and
directing the activities of an organization.
 The decisions and judgments made are
normally oriented to the needs/goals of the
organization.
Cont’d…
AMU-SC | By: Ashenafi B.

 Therefore, management is the use of people and
other resources to accomplish the objectives, or to
attain the goals of an organization efficiently &
effectively.
Objective:
 Maximize the potential of their people and coordinate their
efforts to attain some predetermined goals.
Resources:
 Human (i.e. Skills & Knowledge); and
 Non-Human (i.e. Capital, Land, Plant & Equipment,
and Technology).
Cont’d…
AMU-SC | By: Ashenafi B.
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Management as a Unifying Force
Management
Financial
Resources
Plant &
Equipment
Land
Employees
Management is
the process of
bringing human
and non-human
resources
together and
coordinating
them to
accomplish
organizational
goals.
AMU-SC | By: Ashenafi B.
8

9
Manager
Creditors
&
Suppliers
Superiors
Customers
Coworkers &
Peers
Government
Agencies
Subordinates
Community
Manager’s Interactions with Other Groups of People
AMU-SC | By: Ashenafi B.

 Puts together the factors of production to
produce goods and services.
 Make business decisions.
 Take risks for which the reward is profit.
 Acts as an innovator by introducing new
products, new technology and new ways of
organizing business.
Importance of Management
AMU-SC | By: Ashenafi B.
10

How is a manager different from an entrepreneur?
Manager:
 A manager is a person responsible for planning
and directing the work of a group of
individuals, monitoring their work, and taking
corrective actions when necessary.
Entrepreneur:
 He is a person who establishes business unit
and utilizes the other factors of production like
land, labor and capital.
AMU-SC | By: Ashenafi B.
11

Functions of Management
12
 The subject of management can be considered a process
involving certain functions that a manager performs:
Functions
of
Managem
ent
Decision
making
Planning
Organizing
Staffing
Controlling
Directing
AMU-SC | By: Ashenafi B.

Decision making
13
1. Fact gathering
process to lay a
solid foundation
for understanding
the situation;
2. Recognition
of the right
problem;
3. Generate
as many
alternatives
as possible;
4. Select the
best
alternative;
and
5. Communicate
the decision to
others
AMU-SC | By: Ashenafi B.
 Decision can be
defined as an act
involving mental
process at a
conscious level in
choosing a course of
action from available
alternatives for the
purpose of attaining
a desired result.
Fig. Five steps of Decision making

14
Planning involves the predetermining course of
action to be taken in relation to the known event.
It also includes anticipating the possibilities of
future problems that might appear.
It is a systematic activity which determines when,
how and who is going to perform a specific job.
It is rightly said:
 “Well plan is half done”; and
 “Failing to plan means planning to fail.”
Planning
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15
 The increased importance of planning in a
business enterprise results from various
changes in the environment like:
 changes in technology;
 government policy;
 overall economic activity;
 in the nature of competition; and
 in social norms and attitudes.
Cont’d… (why we plan?)
AMU-SC | By: Ashenafi B.

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 There are different planning techniques that
are executed in different level of an
organization:
 Strategical planning;
 Tactical planning; and
 Operational planning.
Cont’d…
AMU-SC | By: Ashenafi B.

AMU-SC | By: Ashenafi B.
17
Strategic Planning
• Strategic planning is an
organizational management
activity that is used to
set priorities, focus
energy and resources,
strengthen operations to
ensure that employees
and other stakeholders
are working toward
common goals, establish
agreement around
intended outcomes or
results, and assess and
adjust organization’s
direction in response to a
changing environment.

AMU-SC | By: Ashenafi B.
18
Tactical Planning
• It involves breaking down
a long-term strategic plan
into smaller and more
distinct short-term plans.
• Companies and teams
frequently use this type
of plan when they have
long-term goals that
extend further than two
or three years.
Figure: Six Steps of Tactical Planning
Figure: Six Steps of Tactical Planning

AMU-SC | By: Ashenafi B.
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Operational Planning
• An operational plan is a
practical document which
outlines the key
activities and targets an
organization will
undertake during a
period of time, usually
one year.
• It is often linked to
funding agreements as
well as being linked
overall to the
organization’s strategic
plan.

20
Organizing may be defined as the structure and process by
which a group allocates its tasks among its members,
identifies relationships and integrates its activities toward
common objectives.
Organizing function of management brings together human
and physical resources in an orderly manner and arranges
them in coordinated pattern to accomplish planned
objectives.
Each organizational resource (human, material, finance,
etc.) represent an investment from which the management
system must get the return. Therefore, these resources
should be organized properly for efficient and effective use
of the same.
Organizing
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21
 Good communication between the management and
employees,
 Sound basis to evaluate the performance of individuals
and groups,
 Well defined areas of works for each employee,
 Coordination of activities of various individual, groups,
etc.,
 Effective delegation and decentralization,
 Adequate and effective control,
 Difficulty in empire building in any segment of the
enterprise, and
 Stimulation of independent, creative thinking and initiative
on the part of the employees.
Benefits of Organizing Function
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22
There are some principles of organization which are guidelines for
thought to operating managers and researchers in an organization.
These are:
1. Unity of Command (one mission, one boss);
2. Exception Principle (a method, or plan of supervision under
which only significant deviation from normally expected results
are brought to the attention of a supervisor for consideration &
decision);
3. Span of Control (area of activity & number of functions,
people, or things for which an individual or organization is
responsible);
4. Scalar Principle (clear definition of authority);
5. Departmentalization (the process grouping activities); and
6. Decentralization (distribution/delegation of activities).
Principle of Organization
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Reflecting
on plans
and
objectives
Establishin
g major
tasks
Dividing
major
tasks into
subtasks
Allocating
resources
and
directives
for
subtasks
Evaluating
results for
organizing
strategy
 Steps that are important when
organizing an enterprise.
Cont’d…
AMU-SC | By: Ashenafi B.

24
Staffing deals with the workers and is worker-
oriented.
This function includes the process of placing
the right person in the right organizational
position. Or, the process of matching the
people and the job.
It is done by careful preparation of
specifications necessary for the positions and
raising the performance of personnel by
training and retraining of people to fit the
needs of the organizational position.
Staffing
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 Control is the process that measures
current activities (quantitatively if
possible), and guides it toward some
predetermined goal, plan, policy, standard,
norm, decision rule and criterion or
yardstick.
 The essence of control lies in checking and
correcting actions against desired results in
the planning process.
Controlling
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 Controlling includes ensuring that employees
perform the work allocated to them in the
ways laid down, and with no wastage or
duplication of time, effort or materials.
 That involves much more than simply
instructing a given number of employees to
perform work; they must be supervise and
manage, so that their efforts achieve the
desired results.
 This requires that they are motivated,
checked, guided, taught and encouraged.
Cont’d…
AMU-SC | By: Ashenafi B.

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 There are seven principles of control.
Strategic Point Control
Feedback
Flexible Control
Organizational Stability
Self-Control
Direct Control
Human Factor
Cont’d…
AMU-SC | By: Ashenafi B.
1
2
3
4
5
6
7

28
 For the same idea, different organizations use
different terms such as:
 Leading
 Executing
 Supervising
 Ordering and
 Guiding
 What ever terms are assigned to it, the idea of
directing is to put into effect the decisions,
plans and programs that have been worked
out.
Directing
AMU-SC | By: Ashenafi B.

 A manager’s assigned to predefined job duties and authority
needed to fulfill, those duties are what determine
management level.
Top
Management
Middle
Management
Supervisory
Management
Management Hierarchy
AMU-SC | By: Ashenafi B.
29
Figure: three distinct
levels of management

Top Management
 Made up of individuals who have the
possibility of making the decisions and
formulating policies that affect all aspect
of the firm’s operations.
 President,
 Vice President,
 Chief Executive Officers,
 Executive Vice President, etc.
Cont’d…
AMU-SC | By: Ashenafi B.
30

Middle Management
 Includes all managers above the
supervisory level but below the level where
overall company policy is determined.
 Middle managers manage supervisors.
 Regional Sales Manager
 Academic Deans (Universities)
 Director of Nursing (Hospitals)
Cont’d…
AMU-SC | By: Ashenafi B.
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Supervisory Management
 Supervisors manage workers who
perform the most basic job duties
required in the business firm.
 Sales Manager
 Academic Department Chairperson
(Universities)
 Nursing Supervisors (Hospitals)
Cont’d…
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32

33
 It serves as a linkage by which the other
functions explained are tied together.
 There are three types of communications
in an organization.
AMU-SC | By: Ashenafi B.
Communication Among Managerial Hierarchy
1. Vertical
2. Horizontal
3. Informal

34
Organization charts show the
flow of authority and the
channels through which the
vertical and downward
communication flows;
Horizontal type whereby,
managers on the same level of
an organization coordinate their
activities without referring all
matters to their superior; and
The informal type of
Communication
Types of Communications
AMU-SC | By: Ashenafi B.

Skills of a Good Manager
35
The Dual Aspects of any Manager's Job
 The modern 'world of industry' is very complex, and
this complexity has led to what is called
“specialization” and to the "division of labor” by which
different people specialize in performing − and become
specialists in − different types of work.
 It follows, therefore, that the “technical” or
"functional”, i.e. the specific work of different
managers can and does vary enormously.
AMU-SC | By: Ashenafi B.

36
 Nevertheless, all those different types of
managers, and all others, should have considerable
knowledge of the technical aspects of their jobs in
addition to being proficient managers of people.
 It is, in any case, not easy to train, supervise and
control the work of others without knowing what
they are or should be doing.
Cont’d…
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37
 So the duties of any manager or supervisor comprise
two quite different aspects:
1) Technical or functional aspect: which is concerned
with the work to be performed by his/her
enterprise or department or section; and
2) Managerial aspect: which is concerned with the
people who are to perform that work in his/her
enterprise or department or section.
Cont’d…
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38
 Some estimates show that a managing director may spend
between 80% to 90% of his/her working hours on managerial
matters and only 10% to 20% of his/her time on the technical
activities.
 Whilst senior/middle managers may spend approximately 50%
of their work time on managerial activities and 50% on
technical activities; and
 Supervisors and foremen may spend some 70% to 75% of their
time on technical activities and only 25% to 30% of their time
at work on the supervision of their subordinates.
Cont’d…
AMU-SC | By: Ashenafi B.

39
Cont’d…
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40
Human relations Skills
 Are the abilities needed to resolve conflict, motivate,
lead, and communicate effectively with other workers.
 Equally important at all levels of management.
Conceptual Skills
 Are the abilities needed to view the organization from a
broad perspective and to see the interrelations among its
components.
 Are most important in strategic (long-range) planning;
therefore they are more important at top level executives.
Additional Management Skills
AMU-SC | By: Ashenafi B.

41
Cont’d…
AMU-SC | By: Ashenafi B.

Personal Qualities Needed for Managerial Success
42
Some of the more important personality traits of a
successful manager are the following:
1. Ability to Think Clearly and Logically:
 A manager needs to be able, as the result of training, to
approach each situation and problem positively and
objectively, without prejudgment or being distracted by
irrelevancies.
 This requires him/her to think in a clear, orderly fashion and
to marshal and arrange logically in his/her mind all the facts
and information available to him/her.
AMU-SC | By: Ashenafi B.

43
2. The Abilities to Make Decisions and to Act
Decisively:
 These follows on from the foregoing, and also
require a measure of self-confidence; a belief
in one's own ability to succeed in solving
problems in the right way, and in one's own
ability to deal effectively with different
situations and sets of circumstances.
Cont’d…
AMU-SC | By: Ashenafi B.

44
3. The Ability to Use Initiative:
 From time to time a manager is bound to come across problems
or situations which are outside his/her range of experience or
outside the normal scope of his/her responsibly.
 In such circumstances, particularly if action is urgently
needed, the manager must not simply leave the matter until
his/her senior is available or wait to be told what to do, but
must initiate - that is, lead the action without waiting to be
prompted.
Cont’d…
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45
4. Ability to Handle Conflicts:
 A good manager is calm, able to listen, is positively
responsive to criticism and is able to handle conflicts and
differences in a constructive manner.
 In order to handle conflicts well, a manager must be
confident, self-assertive, fair and dominant. He/she
should be highly tolerant of stress, as conflicts generally
lead to stress and tension. This would require a sound
mind in a sound body.
Cont’d…
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46
5. Ability to Adapt Changes and be Flexible:
 Any manager must be able to adapt to changes and,
if necessary, to cope with changed circumstances,
and ensures that his/her subordinates also do so.
 Adaptability to different situations and flexibility of
mind are also necessary in the routine, day-to-day
running of a section, department or an entire
enterprise.
Cont’d…
AMU-SC | By: Ashenafi B.

47
6. Ability to Be Emotionally Stable:
 In dealing with different problems and situations, some of which
might be irritating, annoying, worrying or hating − or include
emotional displays (e.g. tearful women, angry voices, etc.) by
others, a manager must be sufficiently mature to keep calm and
collected.
 He must be able to keep control over his own emotions and his
temper whatever may the provocation be, and be able to
concentrate his attention on the matter in hand, thinking clearly,
logically, and avoiding hasty reactions.
Cont’d…
AMU-SC | By: Ashenafi B.

48
7. Stamina and Concentration:
 Mental fitness to work long and hard without undue stress or
strain.
 Besides mental alertness, a manager needs to be able to
concentrate his/her mind on the matter in hand even under the
most tiring circumstances and/or when he is under pressure; to
focus or keep one's mind intently fixed over a long period can
be tiring, particularly as there will be many different matters
requiring attention and concentration during a manager's
working day.
Cont’d…
AMU-SC | By: Ashenafi B.

49
8. Drive and Determination:
 A manager needs the urge and enthusiasm to
stimulate action, not only by him/herself, but by
other people as well.
 He/she also needs the determination to keep going
whatever the difficulties, adapting his/her actions
and decisions to overcome problems encountered,
and pressing on to a successful conclusion.
Cont’d…
AMU-SC | By: Ashenafi B.

50
9. Leadership:
 Leadership is the ability of a person to exert a
positive influence over the thoughts, behavior and
actions of others, and then to direct their
thoughts, behavior and actions towards a common
goal or objective.
Cont’d…
AMU-SC | By: Ashenafi B.

© 2006 Prentice Hall, Inc. 12 – 51
Part-II
Industrial
Management (IM)

AMU-SC | By: Ashenafi B.
52
 It is a combination of two words: ‘Industrial’ and
‘Management’. Industrial refers to industry.
 Industry is defined as the application of complex &
sophisticated methods to the production of economic goods &
services.
 In recent context, “Industry” does not simply refer to
activities related to manufacturing, trade or business. It has
a broader meaning and includes all sorts of operating or
working organizations, such as business, educational,
governmental and religious.
 On the other hand, management is a process used to
accomplish organizational goals.
Industrial Management (IM)

 Therefore, IM may be defined as:
“The branch of engineering that deals with the creation and
management of systems that integrates people, materials, and
energy in productive ways.” or,
It facilitates creation of management systems and integrates the
same with people and their activities to ensure efficient and
effective utilization of resources.
 The subject emphasizes studying the performance
of machines and so also the people.
 IM, therefore, is structured approach to manage
the operational activities of an organization.
AMU-SC | By: Ashenafi B.
53
Cont’d…

AMU-SC | By: Ashenafi B.
54
The ultimate objective of IM is to produce the right quantity of
goods with right quality at the right time. These are attained
through management of:
1) Manufacturing Cost:
The unit cost of the product should be estimated carefully and
every effort should be made to stick to the cost standard.
 Reduction in the variable & fixed costs.
 Increase in the volume of production, so that the fixed
costs may be spread over, more production resulting in
the per unit absorption.
 The allocation of the fixed overheads should be made on
scientific basis.
Objectives of IM

AMU-SC | By: Ashenafi B.
55
2) Machinery and Equipment:
i. Selection and acquisition of machinery and equipment
according to production process requirement.
ii. Utilization of machinery and equipment through repair,
maintenance and maximum occupancy of the machines.
3) Materials:
 The materials objectives must be prescribed in terms of
units, birr value and space requirements. The per unit
materials costs should be specified and efforts should be
made to increase the inventory turnover of all types of
inventories - raw materials, work-in-progress and finished
goods.
Cont’d…

AMU-SC | By: Ashenafi B.
56
4) Manpower:
 Manpower must be closely allied with the objectives of
selection, placement, training, rewarding and utilization of
resources. Usually, these objectives are considered in terms
of employee turnover rates, safety measurements, industrial
relations, absenteeism, etc.
5) Others, like Manufacturing service (i.e. installation of
important facilities), product quality (i.e. by product
specification or consumers) and manufacturing schedule.
Cont’d…

Scope of IM & EE
 Initially, the scope and application of industrial
management was restricted to manufacturing industry.
 Later on, it spread to non-manufacturing activities such
as construction & transportation, farm and air-line
operations and maintenance, public utilities, government
& military operations.
 Where as engineering economics helps to make informed
financial evaluation, decision and financial report of
engineering projects, investment, lease/buy decisions.
AMU-SC | By: Ashenafi B.
57

AMU-SC | By: Ashenafi B.
58
Major Applications of IM

AMU-SC | By: Ashenafi B.
59
Concept/Summary of Industrial Management
IM is the
organizational
process that
includes
strategic
planning,
setting
objectives,
managing
resources,
deploying the
human and
financial
assets needed
to achieve
objectives,
measuring
results, and
recording and
storing facts.

© 2006 Prentice Hall, Inc. 12 – 60
Organizational
Structure

Organization:
 A deliberate arrangement of people brought
together to accomplish a specific tasks.
 Common characteristics of organization:
- Goal,
- People & Resource, and
- Structure
 Therefore, an organization is a stable, formal
social structure that takes resources from the
environment and processes them to produce an
outputs.
What is Organization?
AMU-SC | By: Ashenafi B.
61

Based on purposes for which they are formed:
1. Profit-oriented Organization (Product/Services)
 Return on investment, or for making money.
2. Non-profit-oriented Organization
 For offering services like;
 Educational Institutions, Hospitals, social welfare agencies like
red cross.
3. Mutual Benefit Organizations
 To advance members’ interest like;
 Political parties, labor unions, trade associations.
AMU-SC | By: Ashenafi B.
62
Types of Organization

63
 An organizational structure is a system that
outlines how certain activities are directed in order
to achieve the goals of an organization. These
activities can include rules, roles, and
responsibilities.
 It also determines how information flows between
levels within the company.
 Planned organizational structure must not be
overlooked in the establishment of a new business.
AMU-SC | By: Ashenafi B.
Organizational Structure

AMU-SC | By: Ashenafi B.
64
Step-1
• The activities which will be necessary to achieve
the objectives of the business must be
established.
Step-2
• The various related activities should be grouped
together into departments; the most logical grouping
is by 'function', that is, by type of activity:
production, marketing, finance, etc.
Cont’d…
• The stages in the setting up of an effective organizational structure
are:

AMU-SC | By: Ashenafi B.
65
Step-3
• The activities of a particular department
will be further divided, and grouped
together into sections;
Step-4
• An organization chart should be produced to
depict the proposed organization;
Cont’d…

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66
Step-5
• Based on estimates of the volume of work,
which will be performed by each section,
the number of staff required must be
determined.
• Depending on the type of work to be
performed and on other factors, the
numbers of supervisors, junior and middle
managers per section and department must
be given thought.
Cont’d…

AMU-SC | By: Ashenafi B.
67
Step-6
• The special knowledge or talents required by
departmental and sectional managers must be
laid down. Coupled with, this is the necessity
to lay down the extent and the limits of
authority and tile duties of all those who will
hold managerial positions and the authority
to delegate must be provided.
Cont’d…

AMU-SC | By: Ashenafi B.
68
Step-7
• The equipment necessary for the proper functioning of
each section and department must be decided upon, and
provision made for its positioning when considering the
layout of the accommodation for each unit.
Step-8
• To ensure effective coordination of all parts of
the enterprise, effective procedures and systems
of communication must be devised and installed.
Cont’d…

69
 Well known types of organizational structures are
namely:
I. Line;
II. Functional;
III. Line and Staff;
IV. Matrix Organization;
V. Divisional Organization; and
VI. Project Organization;
AMU-SC | By: Ashenafi B.
Types of Organizational Structure

I. Line Organizational Structure
70 AMU-SC | By: Ashenafi B.

II. Functional Organization Structure
71 AMU-SC | By: Ashenafi B.

III. Line and Staff Organization
72
 In this case, the line managers control the primary functions, such
as marketing and production, which are directly concerned with
achieving the objectives of the business; whilst the staff managers
are generally involved with secondary functions which assist the
smooth and efficient running of the primary functions.
AMU-SC | By: Ashenafi B.

73
MANAGING
DIRECTOR
WORKS
MANAGER
SALES
MANAGER
ACCOUNTS
MANAGER
PERSONNEL
MANAGER
EMPLOYMENT
OFFICER
TRAINING
OFFICER
SUPERVISORS
& CLERKS
SUPERVISORS
& CLERKS
L L L S
L L L
S S
L – Line relationship:
S – staff relationship:
Responsibility and authority shown by _________
Staff advisory relationship shown by ----------
AMU-SC | By: Ashenafi B.
Cont’d…
SECTION
MANAGERS
SUPERVISORS &
OPERATORS
SECTION
MANAGERS
SUPERVISORS &
SALESMEN
SECTION
MANAGERS
SUPERVISORS &
CLERKS

V. Matrix OS (i.e., Mostly for Project)
74
 These are temporary organizational structures formed for
specific projects for a specific period of time and are
dismantled, once the required goal is achieved.
 The specialists are selected primarily on the basis of task-
related skills and expertise rather than decision making
experience or planning ability.
 These structures are very useful when:
 The project is clearly defined in terms of objectives to be
achieved and the target date for completion of the project.
 The project must be separate and unique and not be a part of
daily work routine of the organization.
 There must be different types of activities which require skills
and specialization and must be coordinated to achieve the desired
goal.
 The project must be temporary in nature and not extended into
other related projects.
AMU-SC | By: Ashenafi B.

75 AMU-SC | By: Ashenafi B.
Cont’d…

76
 It provides an agency with the flexibility to work on critical projects.
 The structure brings together the specialized talent that is often necessary to
complete a project with great efficiency.
 Decision making is decentralized to a level where information is processed
properly and relevant knowledge is applied.
 Extensive communication networks help to process large amount of information.
 With decisions delegated to appropriate levels, higher management levels are
not over loaded with operational decisions.
 Resource utilization is efficient, because key resources are shared across
several important programs or products at the same time.
 Employee learns the collaborative skills needed to function in an environment
characterized by frequent meeting and more informal interactions.
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Advantages of Matrix Organization

77
 Reporting for two supervisors which creates
confusion.
 The mistaken belief can arise that matrix
management is the same thing as group decision
making − in other words every one must be
consulted for every decision.
 Too much democracy can lead to not enough
action.
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Disadvantages

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VI. Project Organization

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79
VII. Divisional Organization

© 2006 Prentice Hall, Inc. 12 – 80

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81
 Production is the method of turning raw materials, or inputs
in to finished goods or products in a manufacturing process.
 Resources are of several types:
 material,
 Men/employees,
 machine hours,
 energy consumed,
 space utilized and etc.
Production
or

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Four Factors of Production
Land
Entrepreneurship
Capital
Labour
• Production is a co-operative process and not a job of any
single factors.

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 Effectiveness is a function of decision making process,
resulting in a setting up of aims, goals, objectives and
plans.
 It is about doing the right task, completing activities and
achieving goals.
 Efficiency is concerned with how well the assigned task, as
set out in the objectives, is being carried out.
 It is about doing things in an optimal way, for example doing
it the fastest or in the least expensive way. It could be the
wrong thing, but it was done optimally.
Effectiveness and Efficiency
• To be able to increase manpower effectiveness and
efficiency at all levels of an organization, what is required
is motivation, training and education.

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84
Cont’d…

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85
 Industrial Management is concerned with productivity (i.e.
the effectiveness and efficiency of an organization).
 Productivity means the efficient use of resources consumed
for achieving the objective of an organization (i.e.
production).
 In most businesses, competition for the available market,
forces the management of each enterprise to seek
competitive advantage through the use of:
 product improvements;
 lower costs;
 lower selling prices for the same or better quality of
products; and
 better service to customers.
Productivity

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86
Cont’d…
input
of
value
output
of
value
=
ty
Productivi
/Partial-Measure
 Productivity is defined as the ratio of value of output to the value
of input (within specified period & quality).

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87
 Productivity index is used to compare the productivity during
the current year with the productivity during the base year.
 Base year is any year which the company uses for
comparative study.
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝑰𝒏𝒅𝒆𝒙 =
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒃𝒂𝒔𝒆 𝒚𝒆𝒂𝒓
 The three major sources of information for constructing
various types of productivity index are:
1. Product Identification Information
2. Accounting Information
3. Work Measurement Information
Productivity Index

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 The outputs and inputs of the company must be
expressed in a common unit preferably in monetary
value, say ETB value.
 To compare productivity, indices are to be
adjusted to the base year and must be stated in
terms of base year ETB value. This is referred to
as deflating the input and output factors.
 Deflators are used to nullify the effect of
changing price from one year to another.
𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑷𝒓𝒊𝒄𝒆
𝑩𝒂𝒔𝒆 𝒀𝒆𝒂𝒓 𝑷𝒓𝒊𝒄𝒆
Deflator (i.e., Value/Price Adjustor)

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 An increase in production does not necessarily by itself
indicate an increase in productivity.
 If the input of resources goes up in direct proportion to
the increase in output, the productivity remains the same.
 If input increases by a greater percentage than output,
higher products will be achieved at the expense of
reduction in productivity.
 In short, higher productivity means to produce more with
the same expenditure, or with a minimum increase in
expense, or the same amount is produced at less cost in
terms of resources.
Cont’d…

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90
 Or, productivity can be improved/increased by:
a) by decreasing I/P but maintaining same O/P;
b) by increasing O/P with same I/P; and
c) by Increasing O/P and decreasing I/P to change the
ratio favourably.
 Productivity should not be confused with the cost
of manufacture, although a plant with higher
productivity will use less resources and its product
is likely to be cheaper.
Cont’d…

AMU-SC | By: Ashenafi B.
91
 Productivity can be measured as follows:
Land Productivity:
 Better seed, fertilizer and better method of cultivation may
increase the yield from two quintals to three quintals. Hence,
land productivity has increased by 50 percent.
Material Productivity:
 If a skillful worker is able to produce 300 formworks from
400 pieces of 2m  1m sheet metal, while an unskillful worker
can only produce 250 out of the same material, then with the
skillful worker the material was used with 20 percent greater
productivity.
Productivity Measurement

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92
Machine Productivity:
 If a machine tool has been producing 100 pieces per a working day,
and through the use of improved cutting tool and/or proper
maintenance procedure its output in the same period is increased to
120 pieces, the productivity of that machine has been increased by
20 percent.
Productivity of Man:
 If a shoe maker has been producing 30 pieces of leather parts per
hour, and if improved methods of work enable him to produce 40
pieces per hour the productivity of that man has increased by 33.3
percent.
In general, a low level of productivity implies a low growth of
economy. A low growth of economy meant, low income leading to
low standard of living and a low level of savings, resulting in low
level of investment.
Cont’d…

Standard of living
Economic Growth
Productivity Growth Employment
Growth
TFP Growth Capital Intensity
Growth
+
+
Cont’d…

Example-1
Total
tangible
output
Total
tangible
input

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95
 Products X and Y are being manufactured by a company using
materials A and B. Both materials are equally suitable. Product X is
expected to sell at 75 Birr per unit (Birr/unit) and product Y at 35
Birr/unit. The operating data is given below:
Compare the partial productivity of material, labour, and electric
energy and total productivity in using materials A and B. Comment on
the relative advantage of using either of the materials.
Material A Material B
Output of Product X 200 units 400 units
Output of Product Y 300 units 200 units
Quantity of raw material usage 1000 kg 1000 kg
Labour usage 300 man-hours 250 man-hours
Electric energy consumption 1000 kWh 1500 kWh
Cost of raw material per kg 22 Birr 33 Birr
Labour cost per man-hour 10 Birr 10 Birr
Electric energy per kWh 2.0 Birr 2.0 Birr
Example-2

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96
Solution (Example-2)

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97
Solution (Example-2)

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98
 Productivity is affected by many external and
internal factors.
 Some of the external factors influencing
productivity are:
 The national and international policies;
 Organizational policies;
 Infrastructure supports;
 Cultural practices;
 The availability of technology and natural
resources;
 Climate, and
 Incentives and information.
Productivity Improvement

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99
 Internal factors that are identified as hindering
the rise of productivity are:
 Unsuitable personnel policies leading to a low level of
satisfaction and involvement;
 Poor maintenance system and low level of maintenance
awareness;
 Improper selection and training of personnel;
 Inappropriate choice of design, tools, materials and
equipments;
 Undefined standardization and quality policies;
 Inadequate plant layout and materials handling systems;
 Poor planning, controlling and communication systems; &
 Unsafe and unhealthy working environment.
Cont’d…

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100
A. Short-term Strategy
 The first strategy is improving organizational
planning and control.
 By implementing planned maintenance of machinery
and effective production system, plants would show
an increase in machine productivity and reduction in
maintenance cost.
 The second action is increasing manpower efficiency
and effectiveness at all levels.
 As we know, effectiveness and efficiency are the
main tools (pillars) of productivity.
Productivity Improvement Strategy

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101
 The third short-term line of attack is improving
operation methods.
 The techniques of method study involve breaking
a process into detailed components. The study
may result in elimination of an activity,
combination of several activities, change of
sequence of activities, shortening duration of
activities and etc.
 In fact, to achieve this, effective implementation
of engineering method is required.
Cont’d…

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102
B. Medium-term Strategy
 At this stage the firm may require capital to simplify and
improve the products, and reduce variety.
 The analysis consists of common sense questions to come up
with effective solutions like substitution of alternative
materials, elimination of parts where special designs have
been specified, redesign, etc.
C. Long-term Strategy
 Properly selected new machineries, well organized
departments and proper layout will undoubtedly contribute
to an increase in productivity.
 Furthermore, research and development is the backbone for
productivity increment.
Cont’d…

© 2006 Prentice Hall, Inc. 12 – 103
PRODUCTIVITY
IMPROVEMENT
TECHNIQUES
Material
Based
Techniques
Technology
Based
Techniques
Investment
Based
Techniques
Employee
Based
Techniques
Management
Based
Techniques
Product
Based
Techniques
Task
Based
Techniques
R
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value
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Increasing
contribution
Increasing
profit
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M
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Quality
control
Material handling
improvement
Material reuse
and recycling
Work study
Job evaluation
Scheduling
Ergonomics
Job safety
Computer Aided
data processing
Product
design
R &
D
Product
standardization
P
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Training and
education
Financial
Incentives
Resource Mgt.
Material Mgt.
Maintenance Mgt.
Cost Mgt.
Production Mgt.
Marketing Mgt.
Productivity
Improvement
Techniques

AMU-SC | By: Ashenafi B.
104
1. Define Industrial Management and explain its
concept briefly. (2%)
2. Briefly explain the characteristics (i.e. major
skills) of a manager? (3%)
3. Describe the various techniques of improving
productivity. (3%)
4. Justify the following statement: (2%)
"Productivity is a means for increasing the
welfare and wealth of the nation."
Quiz!! (weight: 10%)

© 2006 Prentice Hall, Inc. 12 – 105
The End!!