Chapter 12 People and Organization

Planning

PlanningThe process of anticipating future events and conditions and determining courses of action for achieving organizational objectives. “is the process of anticipating future events and conditions and determining courses of action for achieving organizational objectives.”David L. Kurtz, Contemporary Business (Hoboken, NJ: John Wiley & Sons, 2011), 257. It is the one step in running a small business that is most commonly skipped, but it is the one thing that can keep a business on track and keep it there.“Management Principles,” Small Business Notes, accessed February 2, 2012, www.smallbusinessnotes.com/managing-your-business/management-principles. Planning helps a business realize its vision, get things done, show when things cannot get done and why they may not have been done right, avoid costly mistakes, and determine the resources that will be needed to get things done.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 176; David L. Kurtz, Contemporary Business (Hoboken, NJ: John Wiley & Sons, 2011), 257. Business planning for the small business is discussed in Chapter 5 "The Business Plan", and marketing planning is discussed in Chapter 8 "The Marketing Plan".

Organizing

OrganizingGrouping people and assigning activities so that job tasks and the mission can be properly carried out. “consists of grouping people and assigning activities so that job tasks and the mission can be properly carried out.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 176. Establishing a management hierarchy is the foundation for carrying out the organizing function.

Contrary to what some people may believe, the principle of organizing is not dead. Rather, it is clearly important “to both the organization and its workers because both the effectiveness of organizations and worker satisfaction require that there be clear and decisive direction from leadership; clarity of responsibilities, authorities, and accountabilities; authority that is commensurate with responsibility and accountability; unified command (each employee has one boss); a clear approval process; and, rules governing acceptable employee behavior.”“Traditional Management Principles,” Small Business Notes, accessed February 2, 2012, www.smallbusinessnotes.com/managing-your-business/traditional-management -principles.html. Except for a small business run solely by its owner, every small business needs a management hierarchy—no matter how small. Each person in the business should know who is responsible for what, have the authority to carry out his or her responsibilities, and not get conflicting instructions from different bosses. The absence of these things can have debilitating consequences for the employees in particular and the business in general.“Traditional Management Principles,” Small Business Notes, accessed February 2, 2012, www.smallbusinessnotes.com/managing-your-business/traditional-management -principles.html.

The organizational design and structure of a small business are important parts of organizing, which are discussed in Section 12.2 "Organizational Design".

Staffing

The staffingSelecting, placing, training, developing, compensating, and evaluating employees. function involves selecting, placing, training, developing, compensating, and evaluating (the performance appraisal) employees.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 176. Small businesses need to be staffed with competent people who can do the work that is necessary to make the business a success. It would also be extremely helpful if these people could be retained. Many of the issues associated with staffing in a small business are discussed in Section 12.4 "People".

Directing

DirectingThe managerial function that initiates action. is the managerial function that initiates action: issuing directives, assignments, and instructions; building an effective group of subordinates who are motivated to do what must be done; explaining procedures; issuing orders; and making sure that mistakes are corrected.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 177; David L. Kurtz, Contemporary Business (Hoboken, NJ: John Wiley & Sons, 2011), 257. Directing is part of the job for every small business owner or manager. LeadingThe process of influencing people to work toward a common goal. and motivatingThe process of providing reasons for people to work in the best interests of an organization. work together in the directing function. Leading “is the process of influencing people to work toward a common goal [and] motivating is the process of providing reasons for people to work in the best interests of an organization.”William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 224.

Different situations call for different leadership styles. In a very influential research study, Kurt Lewin established three major leadership styles: autocratic, democratic, and laissez-faire.Kurt Lewin, Ronald Lippitt, and Ralph K. White, “Patterns of Aggressive Behavior in Experimentally Created ‘Social Climates,’” Journal of Social Psychology 10, no. 2 (1939): 269–99. Although good leaders will use all three styles depending on the situation, with one style normally dominant, bad leaders tend to stick with only one style.Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html.

Autocratic leadershipThe leader makes decisions without involving others. occurs when a leader makes decisions without involving others; the leader tells the employees what is to be done and how it should be accomplished.Kurt Lewin, “Lewin’s Leadership Styles,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/lewin_style.htm; Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html. Lewin et al. found that this style creates the most discontent.Kurt Lewin, Ronald Lippitt, and Ralph K. White, “Patterns of Aggressive Behavior in Experimentally Created ‘Social Climates,’” Journal of Social Psychology 10, no. 2 (1939): 269–99. However, this style works when all the information needed for a decision is present, there is little time to make a decision, the decision would not change as a result of the participation of others, the employees are well motivated, and the motivation of the people who will carry out subsequent actions would not be affected by whether they are involved in the decision or not.Kurt Lewin, “Lewin’s Leadership Styles,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/lewin_style.htm; Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html. This leadership style should not be used very often.

Democratic leadershipThe leader involves other people in decision making. involves other people in the decision making—for example, subordinates, peers, superiors, and other stakeholders—but the leader makes the final decision. Rather than being a sign of weakness, this participative form of leadership is a sign of strength because it demonstrates respect for the opinions of others. The extent of participation will vary depending on the leader’s strengths, preferences, beliefs, and the decision to be made, but it can be as extreme as fully delegating a decision to the team.“Participative Leadership,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/participative_leadership.htm. This leadership style works well when the leader has only part of the information and the employees have the other part. The participation is a win-win situation, where the benefits are mutual. Others usually appreciate this leadership style, but it can be problematic if there is a wide range of opinions and no clear path for making an equitable, final decision.Kurt Lewin, “Lewin’s Leadership Styles,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/lewin_style.htm; Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html. In experiments that Lewin et al. conducted with others, the democratic leadership style was revealed as the most effective.Kurt Lewin, Ronald Lippitt, and Ralph K. White, “Patterns of Aggressive Behavior in Experimentally Created ‘Social Climates,’” Journal of Social Psychology 10, no. 2 (1939): 269–99.

Laissez-faire leadership (or delegative or free-reign leadership)Leadership that minimizes the leader’s involvement in decision making, but the leader is responsible for the final decision. minimizes the leader’s involvement in decision making. Employees are allowed to make decisions, but the leader still has responsibility for the decisions that are made. The leader’s role is that of a contact person who provides helpful guidance to accomplish objectives.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 178. This style works best when employees are self-motivated and competent in making their own decisions, and there is no need for central coordination; it presumes full trust and confidence in the people below the leader in the hierarchy.Kurt Lewin, “Lewin’s Leadership Styles,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/lewin_style.htm; Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html. However, this is not the style to use if the leader wants to blame others when things go wrong.Don Clark, “Leadership Styles,” Big Dog and Little Dog’s Performance Juxtaposition, June 13, 2010, accessed February 2, 2012, www.nwlink.com/~donclark/leader/leadstl.html. This style can be problematic because people may tend not to be coherent in their work and not inclined to put in the energy they did when having more visible and active leadership.Kurt Lewin, Ronald Lippitt, and Ralph K. White, “Patterns of Aggressive Behavior in Experimentally Created ‘Social Climates,’” Journal of Social Psychology 10, no. 2 (1939): 269–99; Kurt Lewin, “Lewin’s Leadership Styles,” Changing Minds, accessed February 2, 2012, changingminds.org/disciplines/leadership/styles/lewin_style.htm.

Good leadership is necessary for all small businesses. Employees need someone to look up to, inspire and motivate them to do their best, and perhaps emulate. In the final analysis, leadership is necessary for success. Without leadership, “the ship that is your small business will aimlessly circle and eventually run out of power or run aground.”Susan Ward, “5 Keys to Leadership for Small Business,” About.com, accessed February 2, 2012, sbinfocanada.about.com/od/smallbusinesslearning/a/leadership1.htm.

Controlling

ControllingThe process of evaluating and regulating ongoing activities to ensure that the goals are achieved. is about keeping an eye on things. It is “the process of evaluating and regulating ongoing activities to ensure that goals are achieved.”William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 224. Controlling provides feedback for future planning activities and aims to modify behavior and performance when deviations from plans are discovered.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 176. There are four commonly identified steps in the controlling process.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 176; William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 224. (See Figure 12.2 "The Controlling Function".) Setting performance standards is the first step. Standards let employees know what to expect in terms of time, quality, quantity, and so forth. The second step is measuring performance, where the actual performance or results are determined. Comparing performance is step three. This is when the actual performance is compared to the standard. The fourth and last step, taking corrective action, involves making whatever actions are necessary to get things back on track. The controlling functions should be circular in motion, so all the steps will be repeated periodically until the goal is achieved.

Figure 12.2 The Controlling Function

Clear Objectives

Objectives “give meaning to the business—and to the work done by employees—by determining what it is attempting to accomplish.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 200–204. Objectives provide direction for organizing a firm, helping to identify the work that must be done to accomplish the objectives. This work, in turn, serves as the basis on which to make staffing decisions.

Coordination

The resources of a small business and its employees must be coordinated to minimize duplication and maximize effectiveness.William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 263. Coordination requires informal communication with and among employees every day. All businesses must continually coordinate the activities of others—an effort that should never be underestimated. Business leaders must make sure that employees have the answers to six fundamental questions:“Reinventing the Strategic Communicator,” Strategic Communication Management, August/September 2001, 32–35, as cited in John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 201.

1. What is my job?
2. How am I doing?
3. Does anyone care?
4. How are we doing?
5. What are our vision, mission, and values?
6. How can I help?

Formal and Informal Organization

When a one-person small business adds employees, some kind of hierarchy will be needed to indicate who does what. This hierarchy often becomes the formal organizationThe details of the roles and the responsibilities of all employees.—that is, the details of the roles and responsibilities of all employees.“Formal Organizational Structure—What Is It?,” The Business Plan, accessed February 2, 2012, www.the-business-plan.com/formal-organizational-structure.html. Formal organization tends to be static, but it does indicate who is in charge of what. This helps to prevent chaos. The formal organizational structure helps employees feel safe and secure because they know exactly what their chain of command is. The downside of a formal organizational structure is that it typically results in a slower decision-making process because of the numerous groups and people who have to be involved and consulted.“Formal Organizational Structure—What Is It?,” The Business Plan, accessed February 2, 2012, www.the-business-plan.com/formal-organizational-structure.html.

The informal organizationAll the connections and relationships that relate to how people throughout an organization actually network to get the job done. is almost never explicitly stated. It consists of all the connections and relationships that relate to how people throughout the organization actually network to get a job done. The informal organization fills the gaps that are created by the formal organization.Marshall Goldsmith and Jon Katzenbach, “Navigating the ‘Informal’ Organization,” Bloomberg BusinessWeek, February 14, 2007, accessed February 2, 2012, www.BusinessWeek.com/careers/content/feb2007/ca20070214_709560.htm. Although the informal organization is not written down anywhere, it has a tremendous impact on the success of a small business because it is “composed of natural leaders who get things done primarily through the power granted to them by their peers.”Charles Hall, Getting Results…for the Hands-On Manager (Saranac Lake, NY: American Management Association, 1986), 40–42. Informal groups and the infamous grapevine are firmly embedded in the informal organization. The grapevine (or water cooler)The informal communications network within an organization, separate from—and sometimes much faster than—formal channels of communication. “is the informal communications network within an organization,…completely separate from—and sometimes much faster than—the organization’s formal channels of communication.”William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 264. Small business owners must acknowledge the existence of the grapevine and figure out how to use it constructively.

Organization Chart

The organization chartA visual representation of the formal organization of a business. is a visual representation of the formal organization of a business. The chart shows the structure of the organization and the relationships and relative ranks of its positions; it helps organize the workplace while outlining the direction of management control for subordinates.“Introduction to Organizational Charts,” OrgChart.net, July 18, 2011, accessed February 2, 2012, www.orgchart.net/wiki/Main_Page. Even the one-person small business can use some kind of organization chart to see what functions need to be performed; this will help ensure that everything that should be done is getting done.“Organization Charts,” Small Business Notes, accessed February 2, 2012, www.smallbusinessnotes.com/managing-your-business/organization-charts.html. Figure 12.5 "Organization Chart for a One-Person Small Business" illustrates a simple organization chart for a one-person retail business.“Organization Charts,” Small Business Notes, accessed February 2, 2012, www.smallbusinessnotes.com/managing-your-business/organization-charts.html.

Figure 12.5 Organization Chart for a One-Person Small Business

Organization charts offer the following benefits:“Introduction to Organizational Charts,” OrgChart.net, March 16, 2011, accessed February 2, 2012, www.orgchart.net/wiki/Main_Page; “Organization Chart,” 12 Manage—The Executive Fast Track, accessed February 2, 2012, www.12manage.com/methods_organization_chart.html.

• Effectively communicate organizational, employee, and enterprise information
• Allow managers to make decisions about resources, provide a framework for managing change, and communicate operational information across the organization
• Are transparent and predictable about what should happen in a business
• Provide a quick snapshot about the formal hierarchy in a business
• Tell everyone in the organization who is in charge of what and who reports to whom

There are, of course, several limitations to organization charts:“Organization Chart,” 12Manage—The Executive Fast Track, accessed February 2, 2012, www.12manage.com/methods_organization_chart.html.

• They are static and inflexible, often being out of date as organizations change and go through growth phases.
• They do not aid in understanding what actually happens within the informal organization. The reality is that organizations are often quite chaotic.
• They cannot cope with changing boundaries of firms due to outsourcing, information technology, strategic alliances, and the network economy.

In its early stages, a small business may choose not to create a formal organization chart. However, organization must exist even without a chart so that the business can be successful. Most small businesses find organization charts to be useful because they help the owner or the manager track growth and change in the organizational structure.William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 247. The real challenge is to create an organizational chart that reflects the real world. Small businesses have a definite advantage here because their size allows for more flexibility and manageability.

Formal authorityThe right to give orders and set policy. is “the right to give orders and set policy.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 203. It is organized according to a hierarchy, typically expressed in the organization chart, where one manager may have authority over some employees while being subject to the formal authority of a superior at the same time. Formal authority also encompasses the allocation of an organization’s resources to achieve its objectives.Samuel C. Certo and S. Trevis Certo, Modern Management: Concepts and Skills (Upper Saddle River, NJ: Prentice Hall, 2012), 276; John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 203. The position on the organization chart will be indicative of the amount of authority and formal power held by a particular individual.

Two major types of authority that the small business owner should understand are line and staff. These authorities reflect the existing relationships between superiors and subordinates.Samuel C. Certo and S. Trevis Certo, Modern Management: Concepts and Skills (Upper Saddle River, NJ: Prentice Hall, 2012), 278. Line authorityHaving direct authority over lower positions in the hierarchy. refers to having direct authority over lower positions in the hierarchy. “A manager with line authority is the unquestioned superior for all activities of his or her subordinates.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 203. The day-to-day tasks of those with line authority involve working directly toward accomplishing an organization’s mission, goals, and objectives.K. J. Henderson, “Features of the Line & Staff Organization Structure,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/features-line-staff -organization-structure-449.html. Examples of positions with line authority are the president, the vice president of operations, and the marketing manager. In a small business, the owner or the top manager will have line authority over his or her subordinates. The extent of line authority beyond the owner or the top manager will depend on the size of the business and the organizational vision of the owner.

Staff authorityAdvisory only; there is no authority to take action and no responsibility for revenue generation. is advisory only. There is no authority to take action (except when someone is a manager of a staff function, e.g., human resources), and there is no responsibility for revenue generation. Someone with staff authority assists those with line authority as well as others who have staff authority. Examples of staff authority are human resources, legal, and accounting, each of which is relevant to a small business. Staff personnel can be extremely helpful in improving the effectiveness of line personnel. Unfortunately, staff personnel are often the first to go when cutbacks occur. As a small business grows, a decision may be made to add staff personnel because the most significant factor in determining whether or not to add personnel is the size of a business. The larger the organization, the greater the need and the ability to hire staff personnel to provide specialized expertise.Samuel C. Certo and S. Trevis Certo, Modern Management: Concepts and Skills (Upper Saddle River, NJ: Prentice Hall, 2012), 278. Small businesses, however, may prefer to hire outside service providers for staff functions such as legal and accounting services because it would be difficult to keep such people busy full time. Remember, cash flow is king.

Centralization and Decentralization

Centralization and decentralization are about the amount of authority to delegate. CentralizationVery little authority; job activities are not delegated to subordinates. means that little or no authority and job activities are delegated to subordinates. A relatively small number of line managers make the decisions and hold most of the authority and power. DecentralizationAuthority and job activities are delegated rather than being held by a small management group. is the opposite. Authority and job activities are delegated rather than being held by a small management group.Samuel C. Certo and S. Trevis Certo, Modern Management: Concepts and Skills (Upper Saddle River, NJ: Prentice Hall, 2012), 283; John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 204.

Depending on various factors, organizations move back and forth on the centralization-decentralization continuum. For example, managing a crisis requires more centralized decision making because decisions need to be made quickly.Zhiang Lin and Kathleen M. Carley, “Organizational Design and Adaptation in Response to Crises: Theory and Practice,” Academy of Management Proceedings, 2001, B1–B6. A noncrisis or a normal work situation would favor decentralized decision making and encourages employee empowerment and delegated authority.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 204. There are no universally accepted guidelines for determining whether a centralized or a decentralized approach should be used. It has been noted, however, that, “the best organizations are those that are able to shift flexibly from one level of centralization to another in response to changing external conditions.”Francis Fukuyama, “Why There Is No Science of Public Administration,” Journal of International Affairs, Fall 2004, 189–201. Given the flexibility and the responsiveness of small businesses that originate from their size, any movement that is needed along the centralization-decentralization continuum will be much easier and quicker.

Unity of Command

Unity of commandNo subordinate has more than one boss. means that no subordinate has more than one boss. Each person in a business should know who gives him or her the authority to make decisions and do the job. Having conflicting orders from multiple bosses will create confusion and frustration about which order to follow and result in contradictory instructions.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 207. In addition, violating the unity of command will undermine authority, divide loyalty, and create a situation in which responsibilities can be evaded and work efforts will be duplicated and overlapping. Abiding by the unity of command will provide discipline, stability, and order, with a harmonious relationship—relatively speaking, of course—between superior and subordinate.“Principles of Management,” Management Study Guide, accessed February 2, 2012, www.managementstudyguide.com/management_principles.htm. Unity of command makes the most sense for everyone, but it is violated on a regular basis.

Division of Labor

The division of laborA job can be performed much more efficiently if the jobholder is allowed to specialize. is a basic principle of organizing that maintains that a job can be performed much more efficiently if the work is divided among individuals and groups so that attention and effort are focused on discrete portions of the task—that is, the jobholder is allowed to specialize.Samuel C. Certo and S. Trevis Certo, Modern Management: Concepts and Skills (Upper Saddle River, NJ: Prentice Hall, 2012), 33; John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 206. The result is a more efficient use of resources and greater productivity. As mentioned earlier, small businesses are commonly staffed with people who wear multiple hats, including the owner. However, the larger the business, the more desirable it will be to have people specialize to improve efficiency and productivity. To do otherwise will be to slow down processes and use more resources than should be necessary. This will have a negative impact on the bottom line.

Span of Control

Span of control (span of management)The number of people or subordinates that a manager supervises. refers to the number of people or subordinates that a manager supervises. The span of control typically becomes smaller as a person moves up the management hierarchy. There is no magic number for every manager. Instead, the number will vary based on “the abilities of both the manager and the subordinates, the nature of the work being done, the location of the employees, and the need for planning and coordination.”Marce Kelly and Jim McGowen, BUSN (Mason, OH: South-Western, 2008), 206. The growing trend is to use wider spans of control. Companies are flattening their structures by reducing their layers of management, particularly middle management. This process has increased the decision-making responsibilities that are given to employees.Ashim Gupta, “Organization’s Size and Span of Control,” Practical Management, January 10, 2010, accessed February 2, 2012, www.practical-management.com/Organization-Development/Organization-s-size-and-span-of-control.html; Marce Kelly and Jim McGowen, BUSN (Mason, OH: South-Western, 2008), 206; David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 275. As a small business grows, there will likely be more management hierarchy unless the small business owner is committed to a flatter organization. Either approach will have implications for span of control.

Scalar Principle

The scalar principleAuthority and responsibility should flow in a clear, unbroken line from the highest manager to the lowest manager. maintains “that authority and responsibility should flow in a clear, unbroken line from the highest to the lowest manager.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 207. Abiding by this principle will result in more effective decision making and communication at various levels in the organization. Breaking the chain would result in confusion about relationships and employee frustration. Following this principle is particularly important to small businesses because the tendency may otherwise be to operate on a more informal basis because of the size of the business. This would be a mistake. Even a two-person business should pay attention to the scalar principle.

Functional Structure

The functional structureOrganized according to job or purpose in the organization. is overwhelmingly the choice of business start-ups and is probably the most common structure used today. This structure organizes a business according to job or purpose in the organization and is most easily recognized by departments that focus on a single function or goal. (See Figure 12.6 "An Example of a Functional Structure" for an example of a functional structure.) A start-up business is not likely to have an organization that looks like this. There may be only one or two boxes on it, representing the founder and his or her partner (if applicable).“Small Business Management Skills,” How to Start a Small Business, accessed February 2, 2012, www.how-to-start-a-small-business.com/small-business-management-skills .html. As a small business grows, the need for additional departments will grow as well.

Figure 12.6 An Example of a Functional Structure

Source: “Small Business Management Skills,” How to Start a Business, accessed February 2, 2012, http://www.how-to-start-a-small-business.com/small-business-management-skills.html.

The functional structure gives employees and their respective departments clear objectives and purpose for their work. People in accounting can focus on improving their knowledge and skills to perform that work. This structure has also been shown to work well for businesses that operate in a relatively stable environment.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 210; Kristie Lorette, “Organizational Structure Types in Companies,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/organizational-structure-types-companies-2791 .html.

At the same time, the functional structure can create divisions between departments if conflict occurs,Kristie Lorette, “Organizational Structure Types in Companies,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/organizational-structure-types -companies-2791.html. and it can become an obstruction if the objectives and the environment of the business require coordination across departments.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 211.

Divisional Structure

The divisional structureA decentralized version of the functional structure in which functions still exist in an organization but are based on product, geographic area or territory, or customer. can be seen as a decentralized version of the functional structure. The functions still exist in the organization, but they are based on product, geographic area or territory, or customer. Each division will then have its own functional department(s).Kristie Lorette, “Organizational Structure Types in Companies,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/organizational-structure-types -companies-2791.html. (See Figure 12.7 "An Example of a Divisional Structure" for an example of a divisional structure.)

Figure 12.7 An Example of a Divisional Structure

The divisional structure can work well because it focuses on individual geographic regions, customers, or products. This focus will enable greater efficiencies of operation and the building of “a common culture and esprit de corps that contributes both to higher morale and a better knowledge of the division’s portfolio.”Jason Gillikin, “Advantages and Disadvantages of Divisional Organizational Structure,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/advantages-disadvantages-divisional-organizational-structure-611.html. There are, of course, disadvantages to this structure. Competing divisions may turn to office politics, rather than strategic thinking, to guide their decision making, and divisions may become so compartmentalized as to lead to product incompatibilities.Jason Gillikin, “Advantages and Disadvantages of Divisional Organizational Structure,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/advantages-disadvantages-divisional-organizational-structure-611.html.

As a small business starts to grow in the diversity of its products, in the geographic reach of its markets, or in its customer bases, there is an evolution away from the functional structure to the divisional structure. However, significant growth would be needed before the divisional structure should be put into place.

Matrix Structure

The matrix structureBrings together specialists from different areas of a business to work on different projects on a short-term basis. combines elements of the functional and the divisional structures, bringing together specialists from different areas of a business to work on different projects on a short-term basis. Each person on the project team reports to two bosses: a line manager and a project manager. (See Figure 12.8 "An Example of a Matrix Structure" for an example of a matrix structure.) The matrix structure, popular in high-technology, multinational, consulting, and aerospace firms and hospitals, offers several key advantages, including the following: flexibility in assigning specialists, flexibility in adapting quickly to rapid environmental changes, the ability to focus resources on major products and problems, and creating an environment where there is a higher level of motivation and satisfaction for employees.Marce Kelly and Jim McGowen, BUSN (Mason, OH: South-Western 2008), 208; David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 278; Kristie Lorette, “Organizational Structure Types in Companies,” Chron.com, accessed February 2, 2012, smallbusiness.chron.com/organizational -structure-types-companies-2791.html. The disadvantages include the following: the violation of the “one boss” principle (unity of command) because of the dual lines of authority, responsibility, and accountability;Robert C. Ford and W. Alan Randolph, “Cross-Functional Structures: A Review and Integration of Matrix Organization and Project Management,” Journal of Management, June 1992, 2. employee confusion and frustration from reporting to two bosses; power struggles between the first-line and the project managers; too much group decision making; too much time spent in meetings; personality clashes; and undefined personal roles.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 214; William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 259. The disadvantages notwithstanding, many companies with multiple business units, operations in multiple countries, and distribution through multiple channels have discovered that the effective use of a matrix structure is their only choice.Jay R. Galbraith, “Matrix Is the Ladder to Success,” Bloomberg BusinessWeek, August 2009, accessed February 2, 2012, www.BusinessWeek.com/debateroom/archives/2009/08/matrix_is_the_l.html.

Figure 12.8 An Example of a Matrix Structure

Source: “Sample Organization Charts: Matrix Organizational Structure,” Vertex41.com, accessed February 2, 2012, http://www.vertex42.com/ExcelTemplates/organizational-chart.html.

The matrix structure is for project-oriented businesses, such as aerospace, construction, or small manufacturers of the job-shop variety (producers of a wide diversity of products made in small batches).

Virtual Organization

The virtual organization (or network organization)Administration is the primary function performed; other functions—such as marketing, engineering, production, and finance—are outsourced to other organizations or individuals. is becoming an increasingly popular business structure as a means of addressing critical resource, personnel, and logistical issues. (See Figure 12.9 "An Example of a Virtual Organization" for an example of a virtual organization.) Administration is the primary function performed; other functions—such as marketing, engineering, production, and finance—are outsourced to other organizations or individuals. Individual professionals may or may not share office space, the organization is geographically distributed, the members of the organization communicate and coordinate their work through information technology, and there is a high degree of informal communication. The barriers of time and location are removed.Manju K. Ahuja and Kathleen M. Carley, “Network Structure in Virtual Organizations,” Organization Science 10, no. 6 (November 1999): 741–57; Les Phang, “Understanding Virtual Organizations,” ISACA Journal 6 (2001): 42–47; William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 260.

Figure 12.9 An Example of a Virtual Organization

Source: “Supporting Skills,” Eviton, Inc., accessed February 2, 2012, http://eviton.com/organizations.htm.

The positives associated with a virtual organization include reduced real-estate expenses, increased productivity, higher profits, improved customer service, access to global markets, environmental benefits (such as reduced gas mileage for employees, which contributes to reduced auto emissions), a wider pool of potential employees, and not needing to have all or some of the relevant employees in the same place at the same time for meetings or delivering services.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 214; Les Phang, “Understanding Virtual Organizations,” ISACA Journal 6 (2001): 42–47. The negatives include setup costs; some loss of cost efficiencies; cultural issues (particularly when working in the global arena); traditional managers not feeling secure when their employees are working remotely, particularly in a crisis; feelings of isolation because of the loss of the camaraderie of the traditional office environment; and a lack of trust.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 214; Les Phang, “Understanding Virtual Organizations,” ISACA Journal 6 (2001): 42–47.

The virtual organization can be quite attractive to small businesses and start-ups. By outsourcing much of the operations of a business, costs and capital requirements will be significantly reduced and flexibility enhanced. Given the lower capital requirements of a virtual business, some measures of profitability (e.g., return on investment [ROI] and return on assets [ROA]), would be significantly increased. This makes a business much more financially attractive to potential investors or banks, which might provide funding for future growth. ROIA performance measure used to evaluate the efficiency of an investment or compare the efficiency of several investments. “is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of investments.”“Return on Investment—ROI,” Investopedia, accessed February 2, 2012, www.investopedia.com/terms/r/returnoninvestment.asp. ROAAn indicator of how profitable a business is relative to its assets and indicates how efficient management is at using its assets to generate earnings. is “an indicator of how profitable a company is relative to its assets…[giving] an idea as to how efficient management is at using its assets to generate earnings.”“Return on Assets—ROA,” Investopedia, accessed February 2, 2012, www.investopedia.com/terms/r/returnonassets.asp.

Identify Job Requirements

A small business owner should not proceed with hiring anyone until he or she has a clear idea of what the new hire will do and how that new hire will help attain the objectives of the business. Workforce planningThe process of placing the right number of people with the right skills, experiences, and competencies in the right jobs at the right time., the “process of placing the right number of people with the right skills, experiences, and competencies in the right jobs at the right time,”“Workforce Planning,” accessed February 3, 2012, www.orgchart.net/wiki/Main_Page. is a way to do that. The scope of this planning will be very limited when a business is very small, but as a business grows, it will take on much greater importance. Doing things right with the first new hire will establish a strong foundation for hiring in the future. Forecasting needs for new people, both current and future, is part of workforce planning. No forecast is perfect, but it will provide a basis on which to make hiring decisions.

As an employer, every small business should prepare a job descriptionThe major areas of an employee’s job or position. before initiating the recruitment process. A good job description describes the major areas of an employee’s job or position: the duties to be performed, who the employee will report to, the working conditions, responsibilities, and the tools and equipment that must be used on the job.William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 159. It is important not to create an inflexible job description because it will prevent the small business owner and the employees from trying anything new and learning how to perform their jobs more productively.“Job Descriptions,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/job-descriptions.html.

Choose Sources of Candidates

Because hiring a new employee is an expensive process, it is important to choose sources that have the greatest potential for reaching the people who will most likely be interested in what a small business has to offer. Unfortunately, it is not always possible to know what those sources are, so selecting a mix of sources makes good sense.

• Internet. The Internet offers a wealth of places to advertise a job opportunity. Monster.com, CareerBuilder.com, and LinkedIn.com are among the largest and most well-known sites, but there may be local or regional job sites that might work better, particularly if a business is very small. A business will not have the resources to bring people in from great distances. If a business has a Facebook or a Twitter presence, this is another great place to let people know about job openings. There may also be websites that specialize in particular occupations.
• Schools and colleges. Depending on the nature of the job, local schools and colleges are great sources for job candidates, particularly if the job is part time. Full-time opportunities may be perfect for the new high school or college graduate. It would be worth checking out college alumni offices as well because they often offer job services.
• Employee referrals. Referrals are always worth consideration, if only on a preliminary basis. The employee making the referral knows the business and the person being referred. Going this route can significantly shorten the search process…if there is a fit.
• Promotion from within. Promoting from within is a time-honored practice. The owner sends a positive signal to employees that there is room for advancement and management cares about its employees. It is significantly less costly and quicker than recruiting outside, candidates are easier to assess because more information is available, and it improves morale and organization loyalty.“When Is It Better to Promote from Within Your Company?,” AllBusiness, accessed February 3, 2012, www.allbusiness.com/human-resources/workforce -management-hiring-recruitment/1502-1.html. On the downside, there may be problems between the person who is promoted and former coworkers, and the organization will not benefit from the fresh ideas of someone hired from the outside.
• Want ads. Want ads can be very effective for a small business, especially if a business is looking locally or regionally. The more dynamic the want ad, the more likely it will attract good candidates. Newspapers and local-reach magazines might be a business’s first thoughts but also consider advertising in the newsletters of relevant professional organizations and at the career services offices of local colleges, universities, and technical colleges.

Review Applications and Résumés

When looking for the best qualified candidates, be very clear about the objectives of the business and the associated reason(s) for hiring someone new. It is also critical to know the law. Some examples are provided here. This would be a good time to consult with a lawyer to make sure that everything is done properly.

1. Employee registration requirement. All US employers must complete and retain Form I-9 for each individual, whether a citizen or a noncitizen, hired for employment in the United States. The employer must verify employment eligibility and identity documents presented by the employee.“Hiring Issues,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/hiring-issues.html.
2. The Civil Rights Act of 1964, the Civil Rights Act of 1991, and the Equal Employment Opportunity Act of 1972. Attempt to provide equal opportunities for employment with regard to race, religion, age, creed, gender, national origin, or disability.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 299. The closest Equal Employment Opportunity Commission (EEOC) district office should be contacted for specific information.
3. Immigration Reform and Control Act of 1986. This law places a major responsibility on employers for stopping illegal immigration.

Interview Candidates

Just as knowing the law is important when reviewing applications and résumés, it is also important when interviewing candidates. Several interview questions are illegal to ask—for example, “Do you have dependable child care in place?” and “Do you rent or own your own home?”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 303. In general, the off-limit topics in most employment interviews include religion, national origin, race, marital status, parental status, age, disability, gender, political affiliation, criminal records, and other personal information such as financial and credit history.“Interviewing Guidelines,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/interviewing-guidelines .html. In short, keep the interview focused on the job, its requirements, and the qualifications of the candidate. Interviewing guidelines can be found at www.smallbusinessnotes.com/managing-your-business/interviewing-guidelines.html or http://www.smallbusinessnotes.com/managing-your-business/general-interview-guidelines.html.

Conduct Employment Tests and Check References

Selection tests have been used to screen applicants for more than one hundred years.“Employment Testing and Selection,” Chron.com, accessed February 3, 2012, smallbusiness.chron.com/employment-testing-selection-4794.html. An effective testing program can improve accuracy in selecting employees; provide an objective means for comparing candidates; and provide information about training, development, or counseling needs. These advantages must be carefully weighed against the disadvantages: the fallibility of tests, the fact that tests can never measure everything, and many tests discriminate against minorities.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 304–305. Each small business owner must decide whether employment tests make sense for his or her business. However, Daniel Kehrer of Work.com claims that employee testing is essential to reducing employee turnover for small businesses because preemployment screens are four times greater at predicting employee success than interviews. He notes further that high turnover rates are much more expensive for small businesses than large companies.“Employment Testing and Selection,” Chron.com, accessed February 3, 2012, smallbusiness.chron.com/employment-testing-selection-4794.html. Just be sure that all employment tests can be linked to a business necessity.“Employment Testing and Selection,” Chron.com, accessed February 3, 2012, smallbusiness.chron.com/employment-testing-selection-4794.html.

Checking references is a much more difficult proposition. It is a good idea to check references after the interview to objectively evaluate the candidate’s qualifications, experience, and other information presented during the interview. Not checking references can result in poor hiring choices.“How to Request References,” University of Texas at Austin Human Resource Services, accessed February 3, 2012, www.utexas.edu/hr/manager/hiring/references.html.

Unfortunately, many former employers are reluctant to reveal anything other than an employee’s date of hire and departure and job title,“Hiring Issues,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/hiring-issues.html. but others may be willing to discuss an employee’s job performance, work ethic, attendance, attitude, and other things that may be important to the prospective employer.Alison Doyle, “Reference Check Questions,” About.com, accessed February 3, 2012, jobsearch.about.com/od/referencesrecommendations/a/refercheck.htm.

As important as it is to check references, it is a process that is fraught with legal risk, so check with an attorney before moving forward.

Select a Candidate and Negotiate an Offer

After any desired follow-up interviews are conducted, it is time to select a candidate and negotiate an offer. There are three main issues to consider: compensation, job performance and expectations, and accommodations for disabilities.

CompensationWages, salaries, and benefits. includes wages, salaries, and benefits. Although wages and salaries are often used interchangeably, they are different. WagesPayments based on an hourly pay rate or the amount of output. are payments based on an hourly pay rate or the amount of output. Production employees, maintenance workers, retail salespeople (sometimes), and part-time workers are examples of employees who are paid wages.David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 294–95.SalariesCalculated weekly, biweekly, or monthly and usually paid to office personnel, executives, and professional employees. are typically calculated weekly, biweekly, or monthly. They are usually paid to office personnel, executives, and professional employees.David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 295. Every small business should do its best to offer competitive wages and salaries, but a small business will generally not be able to offer wages and salaries that are comparable to those offered by large corporations and government. Employee benefitsHealth and disability insurance, sick leave, vacation time, child and elder care, retirement plans and other perks paid entirely or in part by a company that represent a large component of each employee’s compensation., such as health and disability insurance, sick leave, vacation time, child and elder care, and retirement plans, are paid entirely or in part by the company; they represent a large component of each employee’s compensation.David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 296. Most employees have come to expect a good benefits program, even in a small business, so “the absence of a program or an inadequate program can seriously hinder a company’s ability to attract and keep good personnel.”“Employee Benefits,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/employee-benefits.html. Not surprisingly, small businesses are also not in a position to offer the same level of benefits that can be offered by large corporations and the government. However, small businesses can still offer a good benefits program if it includes some or all the following elements: health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, leave, and perks.“Employee Benefits,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/employee-benefits.html. In addition, small businesses can offer benefits that only a small business can offer—for example, the flexibility to dress casually, half days on Friday, and bringing one’s pet to work. Other ideas include gym memberships or lunch programs. These things have proven to increase employee loyalty, and they will fit the budget of even the smallest business.“Improve Your Employee Retention Rate,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/improve-your -employee-retention-rate.html.

Set Performance Expectations

It is in the best interests of a business for prospective new employees to know and understand their performance expectations. This means that a business must determine what these expectations are. New employees should understand the goals of the organization and, as applicable, the department in which they will be working. It should also be made clear how the employee’s work can positively impact the achievement of these goals.“Setting Clearer Performance Expectations,” SmallBusinessLand.com, accessed February 3, 2012, www.smallbusinessland.com/article/setting-clearer -performance-expectations.html.

Make Accommodations for Disabilities

If a business is hiring someone with a disability and has fifteen or more employees, it is required by the ADA (enacted in 1990) to make reasonable workplace accommodations for employees with disabilities. Though not required, businesses with fewer than fifteen employees should consider accommodations as well.

A tax credit is available to an eligible small business, and businesses may deduct the costs (up to $15,000) of removing an architectural barrier. Small businesses should check with the appropriate government agency before making accommodations to make sure that everything is done correctly.

Retention

Employee retention rates play an important role in the cost of running a business. The first few years of an employee’s service are the most costly because money will be spent on recruiting and training the employee. It is only after the employee has been working for some time that he or she will start making money for the business.“Improve Your Employee Retention Rate,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/improve-your -employee-retention-rate.html.

Because of the costly and time-consuming nature of hiring new employees, many companies today increasingly emphasize retaining productive people.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 295. Even the smallest of businesses should be concerned about retention because high turnover will be disruptive to the operations of the business and, as a result, may lessen the quality of the customer experience and customer satisfaction.

A good training and orientation program at the outset of employment can set the stage for increased retention. TrainingA continual process of providing employees with skills and knowledge they need to perform at a high level. “is a continual process of providing employees with skills and knowledge they need to perform at a high level.”John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 309. This continuing process is important. According to Inc.com, “the quality of employees and the continual improvement of their skills and productivity through training, are now widely recognized as vital factors in ensuring the long-term success and profitability of small businesses.”“Training and Development,” Inc.com, accessed February 3, 2012, www.inc.com/encyclopedia/training-and-development.html. Training programs will vary greatly depending on the size and the nature of the business. However, all training programs must be based on both organizational and individual needs, spell out the problems that will be solved, and be based on sound theories of learning.John M. Ivancevich and Thomas N. Duening, Business: Principles, Guidelines, and Practices (Mason, OH: Atomic Dog Publishing, 2007), 309. Many training and management development programs are not for amateurs, but the extent to which a small business can provide professionally delivered programs will be budget and needs related. In some instances, training is performed by someone who is currently doing the job—for example, using a particular machine, operating the cash register, stocking merchandise, and learning office procedures and protocols. Nothing additional is required.

Employee incentive programs are particularly important for small businesses because benefits satisfaction in small businesses typically lags behind benefits satisfaction in large corporations. A recent study“Building a Better Benefits Program without Breaking the Budget: Five Practical Steps Every Small Business Should Consider,” MetLife, 2010, accessed February 3, 2012, www.metlife.com/assets/institutional/services/insights-and-tools/ebts/small-market -whitepaper-v2.pdf. revealed that 81 percent of employees who are satisfied with their benefits are also satisfied with their jobs, whereas 23 percent of employees who are dissatisfied with their benefits are very satisfied with their jobs (Figure 12.11 "Benefits Satisfaction in Small Businesses").

Figure 12.11 Benefits Satisfaction in Small Businesses

Source: “Building a Better Benefits Program without Breaking the Budget: Five Practical Steps Every Small Business Should Consider,” MetLife, 2010, accessed February 3, 2012, http://www.metlife.com/assets/institutional/services/insights-and-tools/ebts/small-market-whitepaper-v2.pdf.

Given the importance of benefits to employees, small businesses need to be very creative about what kinds of incentives are offered to their employees. One of the biggest incentives may be the flexibility and camaraderie that are not available in larger businesses,“Employee Incentives for Small Business,” Yahoo! Voices, May 24, 2007, accessed February 3, 2012, voices.yahoo.com/employee-incentives-small-business -359161.html. but to increase employee retention and attract the best and brightest, there will need to be more.Sharon McLoone, “How Do I…Offer Employee Incentives,” Washington Post, December 4, 2008, voices.washingtonpost.com/small-business/2008/12/how_do _ioffer _employee_incenti.html. Creating a sense of community, offering leadership opportunities, creating a culture of recognition, and constantly offering opportunity can be powerful incentives.“Employee Incentive Programs on a Small Business Budget,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/employee-incentive-programs-on-a-small-business-budget.html. They can be very effective at increasing employee retention, particularly when there is insufficient money to provide large raises. People want to enjoy their jobs as well as earn money, and they may care about their community and passions equally as much as their salaries. This is an opportunity for small businesses because “smaller companies may be better positioned to provide work-life balance that makes for happier, healthier employees.”“Report: Cost-Effective Benefits Strategies for Small Businesses,” ESBJournal.com, October 19, 2010, accessed February 3, 2012, esbjournal.com/2010/10/report-cost-effective-benefits-strategies-for-small-businesses.

Termination

Termination or firing will always be unavoidably painful,“Employee Termination,” Inc.com, accessed February 3, 2012, www.inc.com/encyclopedia/employee-termination.html. but it is a managerial duty that is sometimes necessary. In small businesses, terminations are usually carried out by the owner. They should be done promptly to preserve the health of the business.“Employee Termination,” Inc.com, accessed February 3, 2012, www.inc.com/encyclopedia/employee-termination.html. Terminations can be termination at willThe employer doesn’t need to give a reason for termination as long as the termination is not unlawful or discriminatory. or termination for causeA person is fired (terminated) for a specific reason..

• Termination at will. Employment at will means that a person does not have an employment contract. The person is employed “at the will” of the employer for as little or as long as the owner desires. It also means that a person can stop working for an employer at any time. An employer “doesn’t need to give a reason for termination of an ‘at will’ employee, as long as the termination isn’t unlawful or discriminatory…Termination can be due to a merger, workforce reduction, change in company direction and business focus, poor company performance, or any number of other legitimate reasons.”“Employees: Job Termination Rights FAQs,” Lawyers.com, accessed February 3, 2012, labor-employment-law.lawyers.com/wrongful-termination/Employees-Job -Termination-Rights-FAQ.html#10.
• Termination for cause. When someone is terminated for cause, that person is being fired for a specific reason,Alison Doyle, “Terminated for Cause,” About.com, accessed February 3, 2012, jobsearch.about.com/od/jobloss/g/terminatedforcause.htm. one of which may be behavior. Common causes for termination include but are not limited to stealing, lying, falsifying records, embezzlement, insubordination, deliberately violating company policies or rules, absenteeism and tardiness, unsatisfactory performance, changed job requirements, sexual harassment, and failing a drug or alcohol test.Alison Doyle, “Terminated for Cause,” About.com, accessed February 3, 2012, jobsearch.about.com/od/jobloss/g/terminatedforcause.htm; “Employee Termination,” Inc.com, accessed February 3, 2012, www.inc.com/encyclopedia/employee-termination.html. Sexual harassment is a form of sex discrimination that violates Title VII of the Civil Rights Act of 1964. According to the EEOC, sexual harassment is “unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance or creates an intimidating, hostile or offensive work environment.”“Facts about Sexual Harassment,” US Equal Employment Opportunity Commission, June 27, 2002, accessed February 3, 2012, www.eeoc.gov/facts/fs-sex.html.

When an employee has been terminated, the small business owner should inform the other employees. As a general rule, the less said to coworkers and other employees about an employee’s termination, the better. People will be curious, but do not infringe on the terminated employee’s privacy or say something that might leave a person open to legal action.“Employee Termination: Informing Other Employees,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/employee-termination-informing-other-employees.html. The best approach is to inform immediate coworkers, subordinates, and clients by simply telling them that the company no longer employs the employee. Do not mention any details but do include an explanation of how the terminated employee’s duties will be carried out in the future.“Employee Termination: Informing Other Employees,” Small Business Notes, accessed February 3, 2012, www.smallbusinessnotes.com/managing-your-business/employee-termination-informing-other-employees.html.

When Is Outsourcing a Good Idea?

Outsourcing is a good idea when it allows a small business “to continue performing the functions it does best, while hiring other companies [many of which may be other small businesses] to do tasks that they can handle more competently and cost-effectively.”David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 303. Traditionally, payroll and personnel services have been outsourced by small businesses, but small businesses now use outside providers for a much greater range of services, including the following:Joanna L. Krotz, “Tips for Outsourcing Your Small-Business Needs,” Microsoft, accessed February 3, 2012, www.microsoft.com/business/en-us/resources/management/recruiting-staffing/tips-for-outsourcing-your-small-business-needs .aspx?fbid=WTbndqFrlli#T.

• Accounting and bookkeeping. A growth area here is outsourcing accounts receivable. This enables a small business to sell off its accounts receivable and invoices to a financing company.Peter Emerson, “Accounts Receivable Outsourcing,” Streetdirectory.com, accessed February 3, 2012, www.streetdirectory.com/travel_guide/162839/banking/accounts_receivable_outsourcing.html. As a small business grows, the process of collecting accounts receivable may become too cumbersome to handle without collection agencies becoming involved.“When Does Outsourcing Accounts Receivables Make Sense,” Streetdirectory.com, accessed February 3, 2012, www.streetdirectory.com/travel_guide/16826/outsourcing/when_does_outsourcing_accounts_receivables_make_sense.html.
• Specialist and expert help. Elance offers a range of services for small businesses. It has access to thousands of professionals around the world who can provide services such as graphic design, multimedia presentations, engineering, sales and marketing, writing, and translation.Joanna L. Krotz, “Tips for Outsourcing Your Small-Business Needs,” Microsoft, accessed February 3, 2012, www.microsoft.com/business/en-us/resources/management/recruiting-staffing/tips-for-outsourcing-your-small-business-needs .aspx?fbid=ZR0tpRAO-q#T.
• Public relations and marketing services. These services are costly, require specialized expertise, and are not usually full-time needs.“When Does Outsourcing Accounts Receivables Make Sense,” Streetdirectory.com, accessed February 3, 2012, www.streetdirectory.com/travel_guide/16826/outsourcing/when_does_outsourcing_accounts_receivables_make_sense.html. Many service providers specialize in the needs of small businesses.
• Virtual assistants. These people are independent entrepreneurs who provide administrative, creative, or technical support. A growing phenomenon, they work on a contractual basis via online or electronic communications. Virtual Office Temps and VirtualAssistants.com are examples of companies that can connect virtual assistants with any company that is interested.Adapted from Joanna L. Krotz, “Tips for Outsourcing Your Small-Business Needs,” Microsoft, accessed February 3, 2012, www.microsoft.com/business/en-us/resources/management/recruiting-staffing/tips-for-outsourcing-your-small-business-needs .aspx?fbid=ZR0tpRAO-q#T.
• Creating benefits package. A tremendous amount of time and creativity would be required for a smaller company to create a benefits package that is competitive in the marketplace.“Benefits Packages for Emerging Businesses: Creating Long-Term Value for Your Employees,” Monster Hiring Center, accessed February 3, 2012, grahambippart.files.wordpress.com/2010/03/benefitsfinal_6_12_07.pdf. Given the vast complexities of health care, including health-care laws that differ by state, outsourcing this activity makes good sense.

• Legal services. A small business may need to consult an attorney for a variety of reasons, including the following:

  • Choosing the business structure
  • Constructing a partnership agreement
  • Obtaining a corporate charter
  • Registering a corporation’s stock
  • Obtaining a trademark, a patent, or a copyright or intellectual property
  • Filing for licenses or permits at the local, state, and federal levels
  • Purchasing an existing business or real estate
  • Hiring employees, independent contractors, and other external suppliers (outsourcing)
  • Extending credit and collecting debts
  • Creating valid contracts
  • Initiating or defending against lawsuits
  • Keeping current on and compliant with business law and regulations (e.g., advertising, employment and labor, finance, intellectual property, online business law, privacy law, environmental regulations, and the Uniform Commercial Code)
  • Protecting intellectual property
  • Protecting ideas or inventions from others’ infringement“Business Law and Regulations,” US Small Business Association, accessed February 3, 2012, www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/business-law-regulations; “Small Business Planner: Protect Your Ideas,” US Small Business Administration, accessed February 3, 2012, www.sba.gov/smallbusinessplanner/start/protectyourideas/index.html; adapted from William M. Pride, Robert J. Hughes, and Jack R. Kapoor, Business (Boston: Houghton Mifflin, 2008), 159.

  However, the cost of a full-time attorney would probably be prohibitive. Outsourcing these services is an appropriate choice. Some legal firms offer small businesses a flat monthly fee instead of charging them by the hour,Rob Johnson, “Legal Advice…on a Budget,” Wall Street Journal, November 15, 2010, accessed February 3, 2012, online.wsj.com/article/SB10001424052748703615104575329193640764492.html?mod=wsj_SmallBusiness _MIDDLETopStories. a practice that is very helpful to the small business budget.

When Is Outsourcing a Bad Idea?

Although outsourcing has benefits, there are times when it is a bad idea. For example, sales and technology development are operations that are generally best handled in-house because they are full-time needs that are at the heart of any business.“When Does Outsourcing Accounts Receivables Make Sense,” Streetdirectory.com, accessed February 3, 2012, www.streetdirectory.com/travel_guide/16826/outsourcing/when_does_outsourcing_accounts_receivables_make_sense.html. Outsourcing might actually end up being the more expensive alternative, leading to a financial loss instead of a gain. An example would be the cost of a highly specialized expert.“When Outsourcing Is Not a Good Idea,” Streetdirectory.com, accessed February 3, 2012, www.streetdirectory.com/travel_guide/16669/outsourcing/when_outsourcing _is_not_a_good_idea.html. In addition, when outsourcing overseas, the small business owner and/or managers may not be prepared to manage projects across time differences and cultural barriers and may not have clear guidelines, expectations, and processes in place to manage product or service quality.“The Benefits of Outsourcing for Small Businesses,” New York Times, January 1, 2008, accessed February 3, 2012, www.nytimes.com/allbusiness/AB5221523_primary.html.

Virtual or Telecommuting Employees

Another boon to office productivity and adding to the bottom line is the virtual or telecommuting employeeAn employee who works at home, on the road, or in a satellite location for all or part of his or her regular workweek.. This is an employee that works from a location other than the traditional office. They can work from anywhere.Ruth Mayhew, “What Are the Advantages & Disadvantages of Virtual Offices and Telecommuting?” Chron.com, accessed May 30, 2012, http://smallbusiness .chron.com/advantages-disadvantages-virtual-offices-telecommuting-1167.html. There is no agreement on the number of US workers that are already telecommuting. However, it has been estimated that 40 percent of the US workforce hold jobs that lend themselves to telecommuting.“Analysis Shows Telecommuting Can Cut Persian Gulf Oil Use by Almost Half,” Telecommunte Connecticut, accessed May 30, 2012, http://www.telecommutect.com/employers/telecommuting_saves_gas.php; Peter Suciu, “Telecommuting Can Save Employers Money, Too,” AllBusiness.com, March 9, 2011, accessed February 3, 2012, www.allbusiness.com/labor-employment/working-hours-patterns -telecommuting/15480193-1.html.

The advantages of virtual employees include the following:“Flexible Telecommuting Has Many Benefits for Your Small Business,” AllBusiness.com, March 9, 2011, accessed February 3, 2012, www.allbusiness.com/labor-employment/working-hours-patterns-telecommuting/11493648-1.html; Peter Suciu, “Telecommuting Can Save Employers Money, Too,” AllBusiness.com, March 9, 2011, accessed February 3, 2012, www.allbusiness.com/labor-employment/working-hours-patterns-telecommuting/15480193-1.html; James Ware and Charles Grantham, “Flexible Work: Rhetoric and Reality,” Tech Republic, accessed February 3, 2012, www.techrepublic.com/whitepapers/flexible-work-rhetoric-and-reality/384538.

• Companies could save $6,500 annually per employee.
• Virtual employees tend to be happier, healthier, and less stressed compared to their office-bound coworkers.
• Virtual workers are significantly more productive than their office-bound colleagues. The differential is estimated at 15 percent.
• Virtual employees almost always give back more than 50 percent of the time they save by not commuting.
• Some virtual workers actually put in more time per week than those who commute.

From the perspective of the virtual employee, the advantages of telecommuting are as follows: no distractions from coworkers; no stress from office politics; spending more time with the family; saving money on transportation, parking, and clothing; and avoiding traffic or saving time by not commuting.Arnold Anderson, “Advantages of Telecommuting Jobs,” Chron.com, accessed May30, 2012, http://smallbusiness.chron.com/advantages-telecommuting-jobs-765.html.

Virtual employees offer terrific advantages to the small business owner who is always looking to cut costs and attract high-quality employees. However, it is not something that works for everyone and every kind of business. For example, a restaurant cannot have a virtual waiter…at least not yet. A small business that wants to use virtual employees must create the appropriate infrastructure—that is, technology, security, policies, behavioral protocols, performance management, and so forth—to provide the best support for telecommuting workers in how, where, and when they do their jobs.Stegmeier Consulting Group, “The Business Case for Web Commuting: How to Reduce Workplace Costs and Increase Workforce Performance,” Computer World, accessed February 3, 2012, www.computerworld.com/pdfs/Citrix_Business _Case_Web_Commuting.pdf. For support with telecommuting challenges, small business owners can tap into The Alternative Board, an organization with three thousand small- and midsized-business owners.“Flexible Telecommuting Has Many Benefits for Your Small Business,” AllBusiness.com, March 9, 2011, accessed February 3, 2012, www.allbusiness.com/labor-employment/working-hours-patterns-telecommuting/11493648-1.html.