Break-Even Point A company's break-even point is the amount of sales or revenues that it must gen erate in order to equal

its expenses. In other words, it is the point at which t he company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantita tive tool for managers. In its simplest form, break-even analysis provides insig ht into whether or not revenue from a product or service has the ability to cove r the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans. BACKGROUND The break-even point has its origins in the economic concept of the "point of in difference." From an economic perspective, this point indicates the quantity of some good at which the decision maker would be indifferent, i.e., would be satis fied, without reason to celebrate or to opine. At this quantity, the costs and b enefits are precisely balanced. Similarly, the managerial concept of break-even analysis seeks to find the quant ity of output that just covers all costs so that no loss is generated. Managers can determine the minimum quantity of sales at which the company would avoid a l oss in the production of a given good. If a product cannot cover its own costs, it inherently reduces the profitability of the firm. MANAGERIAL ANALYSIS Typically the scenario is developed and graphed in linear terms. Revenue is assu med to be equal for each unit sold, without the complication of quantity discoun ts. If no units are sold, there is no total revenue ($0). However, total costs a re considered from two perspectives. Variable costs are those that increase with the quantity produced; for example, more materials will be required as more uni ts are produced. Fixed costs, however, are those that will be incurred by the co mpany even if no units are produced. In a company that produces a single good or service, this would include all costs necessary to provide the production envir onment, such as administrative costs, depreciation of equipment, and regulatory fees. In a multi-product company, fixed costs are usually allocations of such co sts to a particular product, although some fixed costs (such as a specific super visor's salary) may be totally attributable to the product. Figure 1 displays the standard break-even analysis framework. Units of output ar e measured on the horizontal axis, whereas total dollars (both revenues and cost s) are the vertical units of measure. Total revenues are nonexistent ($0) if no units are sold. However, the fixed costs provide a floor for total costs; above this floor, variable costs are tracked on a per-unit basis. Without the inclusio n of fixed costs, all products for which marginal revenue exceeds marginal costs would appear to be profitable. Figure 1 Simple Break-Even Analysis: Total Revenues and Total Costs In Figure 1, the break-even point illustrates the quantity at which total revenu es and total costs are equal; it is the point of intersection for these two tota ls. Above this quantity, total revenues will be greater than total costs, genera ting a profit for the company. Below this quantity, total costs will exceed tota l revenues, creating a loss. To find this break-even quantity, the manager uses the standard profit equation, where profit is the difference between total revenues and total costs. Predeter mining the profit to be $0, he/she then solves for the quantity that makes this equation true, as follows: Let TR = Total revenues TC = Total costs P = Selling price F = Fixed costs V = Variable costs Q = Quantity of output TR = P Q

TC = F + V Q TR TC = profit Because there is no profit ($0) at the break-even point, TR TC = 0, and then P Q (F + V Q) = 0. Finally, Q = F(P V). This is typically known as the contribution margin model, as it defines the brea k-even quantity (Q) as the number of times the company must generate the unit co ntribution margin (P V), or selling price minus variable costs, to cover the fix ed costs. It is particularly interesting to note that the higher the fixed costs , the higher the break-even point. Thus, companies with large investments in equ ipment and/or high administrative-line ratios may require greater sales to break even. As an example, if fixed costs are $100, price per unit is $10, and variable cost s per unit are $6, then the break-even quantity is 25 ($100 [$10 $6] = $100 $4). Wh en 25 units are produced and sold, each of these units will not only have covere d its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess o f price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits wi ll grow with each unit demanded above this 25-unit break-even level. While it is useful to know the quantity of sales at which a product will cease t o generate losses, it may be even more useful to know the quantity necessary to generate a desired level of profit, say D. TR TC = D P Q (F + V Q) = D Then Q = (F + D) (P V) This has the effect of regarding the desired profit as an increase in the fixed costs to be covered by sales of the product. As the decision-making process ofte n requires profits for payback period, internal rate of return, or net present v alue analysis, this form may be more useful than the basic break-even model. BASIC ASSUMPTIONS There are several assumptions that affect the applicability of break-even analys is. If these assumptions are violated, the analysis may lead to erroneous conclu sions. It is tempting to the manager to set the contribution margin (and thus the price ) by using the sales goal (or certain demand) as the quantity. However, sales go als and market demand are not necessarily equivalent, especially if the customer is price-sensitive. Price-elasticity exists when customers will respond positiv ely to lower prices and negatively to higher prices, and is particularly applica ble to nonessential products. A small change in price may affect the sale of ski s more than the sale of insulin, an inelastic-demand item due to its inherently essential nature. Therefore, using this method to set a prospective price for a product may be more appropriate for products with inelastic demand. For products with elastic demand, it is wiser to estimate demand based on an established, ac ceptable market price. Typically, total revenues and total costs are modeled as linear values, implying that each unit of output incurs the same per-unit revenue and per-unit variable costs. Volume sales or bulk purchasing may incorporate quantity discounts, but the linear model appears to ignore these options. A primary key to detecting the applicability of linearity is determining the rel evant range of output. If the forecast of demand suggests that 100 units will be demanded, but quantity discounts on materials are applicable for purchases over 500 units from a single supplier, then linearity is appropriate in the anticipa ted range of demand (100 units plus or minus some fore-cast error). If, instead, quantity discounts begin at 50 units of materials, then the average cost of mat erials may be used in the model. A more difficult issue is that of volume sales, when such sales are frequently dependent on the ordering patterns of numerous c ustomers. In this case, historical records of the proportionate quantity-discoun t sales may be useful in determining average revenues. Linearity may not be appropriate due to quantity sales/purchases, as noted, or t

o the step-function nature of fixed costs. For example, if demand surpasses the capacity of a one-shift production line, then a second shift may be added. The s econd-shift supervisor's salary is a fixed-cost addition, but only at a sufficie nt level of output. Modeling the added complexity of nonlinear or step-function costs requires more sophistication, but may be avoided if the manager is willing to accept average costs to use the simpler linear model. One obviously important measure in the break-even model is that of fixed costs. In the traditional cost-accounting world, fixed costs may be determined by full costing or by variable costing. Full costing assigns a portion of fixed producti on overhead charges to each unit of production, treating these as a variable cos t. Variable costing, by contrast, treats these fixed production overhead charges as period charges; a portion of these costs may be included in the fixed costs allocated to the product. Thus, full costing reduces the denominator in the brea k-even model, whereas the variable costing alternative increases the denominator . While both of these methods increase the break-even point, they may not lend t hemselves to the same conclusion. Recognizing the appropriate time horizon may also affect the usefulness of break -even analysis, as prices and costs tend to change over time. For a prospective outlook incorporating generalized inflation, the linear model may perform adequa tely. Using the earlier example, if all prices and costs double, then the breakeven point Q = 200 (20 12) = 200 8 = 25 units, as determined with current costs. H owever, weakened market demand for the product may occur, even as materials cost s are rising. In this case, the price may shift downward to $18 to bolster price -elastic demand, while materials costs may rise to $14. In this case, the breakeven quantity is 50 (200 [18 14]), rather than 25. Managers should project breakeven quantities based on reasonably predictable prices and costs. It may defy traditional thinking to determine which costs are variable and which are fixed. Typically, variable costs have been defined primarily as "labor and materials." However, labor may be effectively salaried by contract or by manager ial policy that supports a full workweek for employees. In this case, labor shou ld be included in the fixed costs in the model. Complicating the analysis further is the concept that all costs are variable in the long run, so that fixed costs and the time horizon are interdependent. Using a make-or-buy analysis, managers may decide to change from in-house production of a product to subcontracting its production; in this case, fixed costs are min imal and almost 100 percent of the costs are variable. Alternatively, they may c hoose to purchase cutting-edge technology, in which case much of the variable la bor cost is eliminated; the bulk of the costs then involve the (fixed) depreciat ion of the new equipment. Managers should project break-even quantities based on the choice of capital-labor mix to be used in the relevant time horizon. Traditionally, fixed costs have been allocated to products based on estimates of production for the fiscal year and on direct labor hours required for productio n. Technological advances have significantly reduced the proportion of direct la bor costs and have increased the indirect costs through computerization and the requisite skilled, salaried staff to support company-wide computer systems. Acti vity-based costing (ABC) is an allocation system in which managers attempt to id entify "cost drivers" which accurately reflect the appropriate usage of fixed co sts attributable to production of specific products in a multi-product firm. Thi s ABC system tends to allocate, for example, the CEO's salary to a product based on his/her specific time and attention required by this product, rather than on its proportion of direct labor hours to total direct labor hours. EXTENSIONS OF BREAK-EVEN ANALYSIS Break-even analysis typically compares revenues to costs. However, other models employ similar analysis. Figure 2 Crossover Chart of Three Options In the crossover chart, the analyst graphs total-cost lines from two or more opt ions. These choices may include alternative equipment choices or location choice s. The only data needed are fixed and variable costs of each option. In Figure 2

, the total costs (variable and fixed costs) for three options are graphed. Opti on A has the low-cost advantage when output ranges between zero and X units, whe reas Option B is the least-cost alternative between X and X units of output. Abo ve X units, Option C will cost less than either A or B. This analysis forces the manager to focus on the relevant range of demand for the product, while allowin g for sensitivity analysis. If current demand is slightly less than X Option B w ould appear to be the best choice. However, if medium-term forecasts indicate th at demand will continue to grow, Option C might be the least-cost choice for equ ipment expected to last several years. To determine the quantity at which Option B wrests the advantage from Option A, the manager sets the total cost of A equa l to the total cost of B (FA + VAQ = FB + VB Q) and solves for the sole quantity o f output (Q) that will make this equation true. Finding the break-even point bet ween Options B and C follows similar logic. The Economic Order Quantity (EOQ) model attempts to determine the least-total-co st quantity in the purchase of goods or materials. In this model, the total of o rdering and holding costs is minimized at the quantity where the total ordering cost and total holding cost are equal, i.e., the break-even point between these two costs. Figure 3 Economic Order Quantity: Ordering and Holding Costs As companies merge, layoffs are common. The newly formed company typically enjoy s a stock-price surge, anticipating the leaner and meaner operations of the firm . Obviously, investors are aware that the layoffs reduce the duplication of fixe d-cost personnel, leading to a smaller break-even point and thus profits that be gin at a lower level of output. APPLICATIONS IN SERVICE INDUSTRIES While many of the examples used have assumed that the producer was a manufacture r (i.e., labor and materials), break-even analysis may be even more important fo r service industries. The reason for this lies in the basic difference in goods and services: services cannot be placed in inventory for later sale. What is a v ariable cost in manufacturing may necessarily be a fixed cost in services. For e xample, in the restaurant industry, unknown demand requires that cooks and table -service personnel be on duty, even when customers are few. In retail sales, cle rical and cash register workers must be scheduled. If a barber shop is open, at least one barber must be present. Emergency rooms require round-the-clock staffi ng. The absence of sufficient service personnel frustrates the customer, who may balk at this visit to the service firm and may find competitors that fulfill th e customer's needs. The wages for this basic level of personnel must be counted as fixed costs, as t hey are necessary for the potential production of services, despite the actual d emand. However, the wages for on-call workers might be better classified as vari able costs, as these wages will vary with units of production. Services, therefo re, may be burdened with an extremely large ratio of fixed-to-variable costs. Service industries, without the luxury of inventoriable products, have developed a number of ways to provide flexibility in fixed costs. Professionals require a ppointments, and restaurants take reservations; when the customer flow pattern c an be predetermined, excess personnel can be scheduled only when needed, reducin g fixed costs. Airlines may shift low-demand flight legs to smaller aircraft, us ing less fuel and fewer attendants. Hotel and telecommunication managers adverti se lower rates on weekends to smooth demand through slow business periods and av oid times when the high-fixed-cost equipment is underutilized. Retailers and ban ks track customer flow patterns by day and by hour to enhance their short-term s cheduling efficiencies. Whatever method is used, the goal of these service indus tries is the same as that in manufacturing: reduce fixed costs to lower the brea k-even point. Break-even analysis is a simple tool that defines the minimum quantity of sales that will cover both variable and fixed costs. Such analysis gives managers a qu antity to compare to the forecast of demand. If the break-even point lies above anticipated demand, implying a loss on the product, the manager can use this inf

ormation to make a variety of decisions. The product may be discontinued or, by contrast, may receive additional advertising and/or be re-priced to enhance dema nd. One of the most effective uses of break-even analysis lies in the recognitio n of the relevant fixed and variable costs. The more flexible the equipment and personnel, the lower the fixed costs, and the lower the break-even point. It is difficult to overstate the importance of break-even analysis to sound busi ness management and decision making. Ian Benoliel, CEO of management software de veloper NumberCruncher.com, said on Entrepreneur.com (2002): The break-even point may seem like Business 101, yet it remains an enigma to man y companies. Any company that ignores the break-even point runs the risk of an e arly death and at the very least will encounter a lot of unnecessary headaches l ater on. FURTHER READING: Benoliel, Ian. "Calculating Your Breakeven Point." Entrepreneur.com (25 March 20 02). <<a href="http://www.entrepreneur.com/article/0,4621,298145,00.html">http:/ /www.entrepreneur.com/article/0,4621,298145,00.html>. "Breakeven Analysis." Business Owner's Toolkit. Available from <<a href="http:// www.toolkit.cch.com/text/P06_7530.asp">http://www.toolkit.cch.com/text/P06_7530. asp>. Deal, Jack. "The Break-Even Point and the Break-Even Margin." BusinessKnow-How.c om. Available from <<a href="http://www.businessknowhow.com/money/breakeven.htm" >http://www.businessknowhow.com/money/breakeven.htm>. Garrison, Ray H., and Eric W. Noreen. Managerial Accounting. Boston: Irwin/McGra w-Hill, 1999. Horngren, Charles T., George Foster, and Srikant M. Datar. Cost Accounting: A Ma nagerial Emphasis. Upper Saddle River, NJ: Prentice Hall, 1997. Render, Barry, and Jay Heizer. Principles of Operations Management. Upper Saddle River, NJ: Prentice Hall, 1997. Source: Encyclopedia of Management, 2006 Gale Cengage. All Rights Reserved. Full copyright.

Management Levels Managers are organizational members who are responsible for the work performance of other organizational members. Managers have formal authority to use organiza tional resources and to make decisions. In organizations, there are typically th ree levels of management: top-level, middle-level, and first-level. These three main levels of managers form a hierarchy, in which they are ranked in order of i mportance. In most organizations, the number of managers at each level is such t hat the hierarchy resembles a pyramid, with many more first-level managers, fewe r middle managers, and the fewest managers at the top level. Each of these manag ement levels is described below in terms of their possible job titles and their primary responsibilities and the paths taken to hold these positions. Additional ly, there are differences across the management levels as to what types of manag ement tasks each does and the roles that they take in their jobs. Finally, there are a number of changes that are occurring in many organizations that are chang ing the management hierarchies in them, such as the increasing use of teams, the prevalence of outsourcing, and the flattening of organizational structures. TOP-LEVEL MANAGERS Top-level managers, or top managers, are also called senior management or execut ives. These individuals are at the top one or two levels in an organization, and hold titles such as: Chief Executive Officer (CEO), Chief Financial Officer (CF O), Chief Operational Officer (COO), Chief Information Officer (CIO), Chairperso n of the Board, President, Vice president, Corporate head. Often, a set of these managers will constitute the top management team, which is composed of the CEO, the COO, and other department heads. Top-level managers ma ke decisions affecting the entirety of the firm. Top managers do not direct the day-to-day activities of the firm; rather, they set goals for the organization a

nd direct the company to achieve them. Top managers are ultimately responsible f or the performance of the organization, and often, these managers have very visi ble jobs. Top managers in most organizations have a great deal of managerial experience an d have moved up through the ranks of management within the company or in another firm. An exception to this is a top manager who is also an entrepreneur; such a n individual may start a small company and manage it until it grows enough to su pport several levels of management. Many top managers possess an advanced degree , such as a Masters in Business Administration, but such a degree is not require d. Some CEOs are hired in from other top management positions in other companies. C onversely, they may be promoted from within and groomed for top management with management development activities, coaching, and mentoring. They may be tagged f or promotion through succession planning, which identifies high potential manage rs. MIDDLE-LEVEL MANAGERS Middle-level managers, or middle managers, are those in the levels below top man agers. Middle managers' job titles include: General manager, Plant manager, Regi onal manager, and Divisional manager. Middle-level managers are responsible for carrying out the goals set by top mana gement. They do so by setting goals for their departments and other business uni ts. Middle managers can motivate and assist first-line managers to achieve busin ess objectives. Middle managers may also communicate upward, by offering suggest ions and feedback to top managers. Because middle managers are more involved in the day-to-day workings of a company, they may provide valuable information to t op managers to help improve the organization's bottom line. Jobs in middle management vary widely in terms of responsibility and salary. Dep ending on the size of the company and the number of middle-level managers in the firm, middle managers may supervise only a small group of employees, or they ma y manage very large groups, such as an entire business location. Middle managers may be employees who were promoted from first-level manager positions within th e organization, or they may have been hired from outside the firm. Some middle m anagers may have aspirations to hold positions in top management in the future. FIRST-LEVEL MANAGERS First-level managers are also called first-line managers or supervisors. These m anagers have job titles such as: Office manager, Shift supervisor, Department ma nager, Foreperson, Crew leader, Store manager. First-line managers are responsible for the daily management of line workersthe e mployees who actually produce the product or offer the service. There are firstline managers in every work unit in the organization. Although first-level manag ers typically do not set goals for the organization, they have a very strong inf luence on the company. These are the managers that most employees interact with on a daily basis, and if the managers perform poorly, employees may also perform poorly, may lack motivation, or may leave the company. In the past, most first-line managers were employees who were promoted from line positions (such as production or clerical jobs). Rarely did these employees hav e formal education beyond the high school level. However, many first-line manage rs are now graduates of a trade school, or have a two-year associates or a fouryear bachelor's degree from college. MANAGEMENT LEVELS AND THE FOUR MANAGERIAL FUNCTIONS Managers at different levels of the organization engage in different amounts of time on the four managerial functions of planning, organizing, leading, and cont rolling. Planning is choosing appropriate organizational goals and the correct directions to achieve those goals. Organizing involves determining the tasks and the relat ionships that allow employees to work together to achieve the planned goals. Wit h leading, managers motivate and coordinate employees to work together to achiev e organizational goals. When controlling, managers monitor and measure the degre e to which the organization has reached its goals. The degree to which top, middle, and supervisory managers perform each of these

functions is presented in Exhibit 1. Note that top managers do considerably more planning, organizing, and controlling than do managers at any other level. Howe ver, they do much less leading. Most of the leading is done by first-line manage rs. The amount of planning, organizing, and controlling decreases down the hiera rchy of management; leading increases as you move down the hierarchy of manageme nt. Exhibit 1 Time Spent on Management Functions at Different Management Levels MANAGEMENT ROLES In addition to the broad categories of management functions, managers in differe nt levels of the hierarchy fill different managerial roles. These roles were cat egorized by researcher Henry Mintzberg, and they can be grouped into three major types: decisional, interpersonal, and informational. DECISIONAL ROLES. Decisional roles require managers to plan strategy and utilize resources. There are four specific roles that are decisional. The entrepreneur role requires the manager to assign resources to develop innovative goods and services, or to expa nd a business. Most of these roles will be held by top-level managers, although middle managers may be given some ability to make such decisions. The disturbanc e handler corrects unanticipated problems facing the organization from the inter nal or external environment. Managers at all levels may take this role. For exam ple, first-line managers may correct a problem halting the assembly line or a mi ddle level manager may attempt to address the aftermath of a store robbery. Top managers are more likely to deal with major crises, such as requiring a recall o f defective products. The third decisional role, that of resource allocator, inv olves determining which work units will get which resources. Top managers are li kely to make large, overall budget decisions, while middle mangers may make more specific allocations. In some organizations, supervisory managers are responsib le for determine allocation of salary raises to employees. Finally, the negotiat or works with others, such as suppliers, distributors, or labor unions, to reach agreements regarding products and services. First-level managers may negotiate with employees on issues of salary increases or overtime hours, or they may work with other supervisory managers when needed resources must be shared. Middle ma nagers also negotiate with other managers and are likely to work to secure prefe rred prices from suppliers and distributors. Top managers negotiate on larger is sues, such as labor contracts, or even on mergers and acquisitions of other comp anies. INTERPERSONAL ROLES. Interpersonal roles require managers to direct and supervise employees and the o rganization. The figurehead is typically a top of middle manager. This manager m ay communicate future organizational goals or ethical guidelines to employees at company meetings. A leader acts as an example for other employees to follow, gi ves commands and directions to subordinates, makes decisions, and mobilizes empl oyee support. Managers must be leaders at all levels of the organization; often lower-level managers look to top management for this leadership example. In the role of liaison, a manger must coordinate the work of others in different work u nits, establish alliances between others, and work to share resources. This role is particularly critical for middle managers, who must often compete with other managers for important resources, yet must maintain successful working relation ships with them for long time periods. INFORMATIONAL ROLES. Informational roles are those in which managers obtain and transmit information. These roles have changed dramatically as technology has improved. The monitor e valuates the performance of others and takes corrective action to improve that p erformance. Monitors also watch for changes in the environment and within the co mpany that may affect individual and organizational performance. Monitoring occu rs at all levels of management, although managers at higher levels of the organi zation are more likely to monitor external threats to the environment than are m iddle or first-line managers. The role of disseminator requires that managers in

form employees of changes that affect them and the organization. They also commu nicate the company's vision and purpose. Managers at each level disseminate information to those below them, and much inf ormation of this nature trickles from the top down. Finally, a spokesperson comm unicates with the external environment, from advertising the company's goods and services, to informing the community about the direction of the organization. T he spokesperson for major announcements, such as a change in strategic direction , is likely to be a top manager. But, other, more routine information may be pro vided by a manager at any level of a company. For example, a middle manager may give a press release to a local newspaper, or a supervisor manager may give a pr esentation at a community meeting. MANAGEMENT SKILLS Regardless of organizational level, all managers must have five critical skills: technical skill, interpersonal skill, conceptual skill, diagnostic skill, and p olitical skill. TECHNICAL SKILL. Technical skill involves understanding and demonstrating proficiency in a partic ular workplace activity. Technical skills are things such as using a computer wo rd processing program, creating a budget, operating a piece of machinery, or pre paring a presentation. The technical skills used will differ in each level of ma nagement. First-level managers may engage in the actual operations of the organi zation; they need to have an understanding of how production and service occur i n the organization in order to direct and evaluate line employees. Additionally, first-line managers need skill in scheduling workers and preparing budgets. Mid dle managers use more technical skills related to planning and organizing, and t op managers need to have skill to understand the complex financial workings of t he organization. INTERPERSONAL SKILL. Interpersonal skill involves human relations, or the manager's ability to intera ct effectively with organizational members. Communication is a critical part of interpersonal skill, and an inability to communicate effectively can prevent car eer progression for managers. Managers who have excellent technical skill, but p oor interpersonal skill are unlikely to succeed in their jobs. This skill is cri tical at all levels of management. CONCEPTUAL SKILL. Conceptual skill is a manager's ability to see the organization as a whole, as a complete entity. It involves understanding how organizational units work togeth er and how the organization fits into its competitive environment. Conceptual sk ill is crucial for top managers, whose ability to see "the big picture" can have major repercussions on the success of the business. However, conceptual skill i s still necessary for middle and supervisory managers, who must use this skill t o envision, for example, how work units and teams are best organized. DIAGNOSTIC SKILL. Diagnostic skill is used to investigate problems, decide on a remedy, and implem ent a solution. Diagnostic skill involves other skillstechnical, interpersonal, c onceptual, and politic. For instance, to determine the root of a problem, a mana ger may need to speak with many organizational members or understand a variety o f informational documents. The difference in the use of diagnostic skill across the three levels of management is primarily due to the types of problems that mu st be addressed at each level. For example, first-level managers may deal primar ily with issues of motivation and discipline, such as determining why a particul ar employee's performance is flagging and how to improve it. Middle managers are likely to deal with issues related to larger work units, such as a plant or sal es office. For instance, a middle-level manager may have to diagnose why sales i n a retail location have dipped. Top managers diagnose organization-wide problem s, and may address issues such as strategic position, the possibility of outsour cing tasks, or opportunities for overseas expansion of a business. POLITICAL SKILL. Political skill involves obtaining power and preventing other employees from tak ing away one's power. Managers use power to achieve organizational objectives, a

nd this skill can often reach goals with less effort than others who lack politi cal skill. Much like the other skills described, political skill cannot stand al one as a manager's skill; in particular, though, using political skill without a ppropriate levels of other skills can lead to promoting a manager's own career r ather than reaching organizational goals. Managers at all levels require politic al skill; managers must avoid others taking control that they should have in the ir work positions. Top managers may find that they need higher levels of politic al skill in order to successfully operate in their environments. Interacting wit h competitors, suppliers, customers, shareholders, government, and the public ma y require political skill. CHANGES IN MANAGEMENT HIERARCHIES There are a number of changes to organizational structures that influence how ma ny managers are at each level of the organizational hierarchy, and what tasks th ey perform each day. Exhibit 2: Flat vs. Tall Organizational Hierarchy FLATTER ORGANIZATIONAL STRUCTURES. Organizational structures can be described by the number of levels of hierarchy; those with many levels are called "tall" organizations. They have numerous leve ls of middle management, and each manager supervises a small number of employees or other managers. That is, they have a small span of control. Conversely, "fla t" organizations have fewer levels of middle management, and each manager has a much wider span of control. Examples of organization charts that show tall and f lat organizational structures are presented in Exhibit 2. Many organizational structures are now more flat than they were in previous deca des. This is due to a number of factors. Many organizations want to be more flex ible and increasingly responsive to complex environments. By becoming flatter, m any organizations also become less centralized. Centralized organizational struc tures have most of the decisions and responsibility at the top of the organizati on, while decentralized organizations allow decision-making and authority at low er levels of the organization. Flat organizations that make use of decentralizat ion are often more able to efficiently respond to customer needs and the changin g competitive environment. As organizations move to flatter structures, the ranks of middle-level managers are diminishing. This means that there a fewer opportunities for promotion for f irst-level managers, but this also means that employees at all levels are likely to have more autonomy in their jobs, as flatter organizations promote decentral ization. When organizations move from taller to flatter hierarchies, this may me an that middle managers lose their jobs, and are either laid off from the organi zation, or are demoted to lower-level management positions. This creates a surpl us of labor of middle level managers, who may find themselves with fewer job opp ortunities at the same level. INCREASED USE OF TEAMS. A team is a group of individuals with complementary skills who work together to achieve a common goal. That is, each team member has different capabilities, yet they collaborate to perform tasks. Many organizations are now using teams more frequently to accomplish work because they may be capable of performing at a lev el higher than that of individual employees. Additionally, teams tend to be more successful when tasks require speed, innovation, integration of functions, and a complex and rapidly changing environment. Another type of managerial position in an organization that uses teams is the te am leader, who is sometimes called a project manager, a program manager, or task force leader. This person manages the team by acting as a facilitator and catal yst. He or she may also engage in work to help accomplish the team's goals. Some teams do not have leaders, but instead are self-managed. Members of self-manage d teams hold each other accountable for the team's goals and manage one another without the presence of a specific leader. OUTSOURCING. Outsourcing occurs when an organization contracts with another company to perfor m work that it previously performed itself. Outsourcing is intended to reduce co

sts and promote efficiency. Costs can be reduced through outsourcing, often beca use the work can be done in other countries, where labor and resources are less expensive than in the United States. Additionally, by having an out-sourcing com pany aid in production or service, the contracting company can devote more atten tion and resources to the company's core competencies. Through outsourcing, many jobs that were previously performed by American workers are now performed overs eas. Thus, this has reduced the need for many first-level and middle-level manag ers, who may not be able to find other similar jobs in another company. There are three major levels of management: top-level, middle-level, and first-l evel. Managers at each of these levels have different responsibilities and diffe rent functions. Additionally, managers perform different roles within those mana gerial functions. Finally, many organizational hierarchies are changing, due to changes to organizational structures due to the increasing use of teams, the fla ttening of organizations, and outsourcing. FURTHER READING: DuBrin, Andrew J. Essentials of Management. 6th ed. Peterborough, Ontario: Thoms on South-Western, 2003. Jones, Gareth R., and Jennifer M. George. Contemporary Management. 4th ed. New Y ork, NY: McGraw-Hill Irwin, 2006. Mintzberg, Henry. "The Manager's Job: Folklore and Fact." Harvard Business Revie w, July-August 1975, 5662. . The Nature of Managerial Work. New York: Harper & Row, 1973. Rue, Leslie W., and Lloyd L. Byars. Management: Skills and Applications. 10th ed . New York, NY: McGraw-Hill Irwin, 2003. Williams, Chuck. Management. Cincinnati, OH: South-Western College Publishing, 2 000. Source: Encyclopedia of Management, 2006 Gale Cengage. All Rights Reserved. Full copyright.