Innovation and invention occurs all over the world, pursued formally in organizations and informally by individuals.

Governments and large sophisticated organizations exploit advanced innovation and invention methods, logic, and tools to solve complex and technical needs. Examples include the modern version of the theory of inventive problem solving (TOP-TRIZ), the five-step process transformation of ideal solution elements with a common associations matrix (TILMAG), advanced innovation brainstorming (ABrSt), the five-step innovation heuristic redefinition process (HRP), etc.

Highly intellectual individual innovators and inventors are known to apply such methodologies. In this category exist those who leverage eclectic methodologies in unique ways. The eccentric genius may also be found here. How can one forget cases such as the legendary mathematician Grigory Perelman who withdrew into his mother’s rundown apartment for several years to use his mastery of topology and finish solving the Poincaré conjecture. Afterwards, he declined the European Mathematical Society's prestigious prize, the Fields Medal, and the Clay Millennium Prize of one million dollars. Later, in a rare interview with Komsomolskaya Pravda, Perelman asserted that he had figured out how to manipulate the universe by computing hollowness.

Such genius is beyond us mere mortals. Ergo, this simple primer.

Innovation improves something so that it is better and/or more profitable than it was before. Innovation often begins with a change in thinking that results in something which is different, or a different use for something.

Invention is a creative process in which a person sees beyond what is currently known. Both innovation and invention involve exploration. There are failures and successes; however, a person can learn much from both.

Western Civilization has benefited greatly from innovation and invention as it possessed ideology that asserted innovation and invention were both possible and desirable. For example, the intellectual climate that gave rise to modern science, the principles underlying the scientific method (e.g. testability, verification/falsification), etc. were decisively shaped by Christians operating within the Christian worldview which encouraged the pursuit of knowledge based in a commitment to Christian theology. Competing non-Christian civilizations often suffered material stagnation, in comparison, due to impediments associated with their worldviews.

More recently, throughout the 1950s, 1960s, 1970, 1980s, and 1990s, innovation and invention were integral to American culture and national success. This era brought many new advances and laid a foundation for the entire world which continues today. Across the globe are innovators and inventors busy affecting society. New ideas, new services, and new products are consistently produced while new uses and improvements for existing ideas, services, and products are consistently found. So how might someone new to this topic begin to unlock their creative potential?

First, accept that one’s life is not to be spent in entertainment escapism; but rather to be spent discovering, unlocking, and using the talents God gives us to make our lives and the lives of others better. The anvil of daily activity is for profitability and the betterment of our lives, families, society, and the world.

Secondly, view the creation of new ideas to consider an enjoyable extension of normal daily life. Generating new ideas can be a purely individual activity or a shared experience people do together as a group. The process can be as simple as improving the things that you work with and use so they have more utility for you or as complicated as formally pursuing research and development as part of an organizational effort.

And having a creative mindset as one lives their life need not interfere with family, work, church, or one's personal responsibilities though it is desirable to set aside time for qualifying and developing one’s best ideas. Time management and consistency are important if an idea has been selected for pursuit.

The process of generating new ideas varies and individuals typically do what works best for them. Some are visual thinkers that carry a notepad while others are audio learners that prefer to carry a small hand-held recorder. Some are very methodological and some not so much.

If someone is getting good results and enjoying the process of generating new ideas to make things better, great. However, there are principles and existing approaches that can help a person or group with idea creation and once a new idea, new use, or better way is generated assist in qualifying it to see if it is worth pursuing and developing further.

The most common way that people innovate is when they discover ways to improve what they are doing. Our familiarity with what we know and understand can lead to better ways of doing things. In the following practice activity, see if you can think of an idea for improving something or the way that something is done.

Practice Activity: consider an idea for improving something or the way something is done.

Another common way that people innovate is by applying their abilities or the way something is done in new ways. For example, an artist might find their original work has crossover appeal and utility in fashion, fine dining, marketing, and presentations. An engineer may discover that a design they have worked with in one industry has important ramifications in a completely different industry. The examples are many. In the following activity, try to think of an instance where something you are familiar with might be used in a different way.

Practice Activity: consider a way that something you are familiar with can be used in a new way.

Another common way that people innovate is by bringing together different materials or ideas and making something new out of them. Many engineering and science-based innovations and inventions have been derived in this manner but also such popular consumer items as different flavors of ice cream. In the following activity, try to think of two different materials or ideas that could work together in a way that is not currently being done as far as you aware.

Practice Activity: consider how two different materials or ideas might come together to produce something new.

Another way product and service innovations are accomplished is through disassembly, examination, and assembly into a better product or service. Just for fun, consider the steps you take when assembling a jigsaw puzzle and ask how you might improve those steps to finish the jigsaw puzzle more efficiently.

Still another common way that people innovate is by mapping which involves taking a concept and developing a diagram of related ideas and information.

The way you create an innovation map is to write or draw the subject you intend to innovate in the middle of a blank page and then begin writing ways that you can change or improve the subject, connecting them together as desirable. You create more subtopics from these existing topics generating ever more related layers of innovation ideas. When you are finished, you will have an innovation map around something that you want to change or improve upon.

Practice Activity: consider how the “mind map” below can be used to improve something.

Be thoughtful and observant. Pay attention to how things work. Look for new or better ways of doing things. Look for opportunities and ways to gain a competitive advantage.

Consider the practicality of new ideas. Ideas which are good but impractical for someone to pursue are likely best recorded in a journal and left there. Typically, individuals pursue their best idea which has the most promise and is practical for them to pursue.

With respect to organizations, people who wish to share an idea with an organization will need to follow the organization’s policies for doing so. Understand; however, that organizations make their own decisions and often reject new ideas for good reasons that you may not be aware of.

Entrepreneurs pursue profits and typically qualify their best ideas to see what marketplace potential they have. Of course, there are legalities that must be considered.

But as we are just practicing, let us examine a simple methodology designed to help visualize innovating products and services in subject areas the reader may be accustomed with. Take a minute to familiarize yourself with the following Product/Service Generation Flowchart 001 that I designed.

Typically, successful marketplace ideas for products and services correspond with what people need and want. Suggestions can be derived from human behavior. What people do, why they do them, and how people do things is important to understand. And great ideas are compelling and well-branded, whether the product or service is viable for the long-term or only for the duration of a fad. Learning how to do market research will assist in this.

Product and service ideas may be simple or complex, providing they meet the needs and wants of people in a manner that is desirable, profitable, and legal.

Once a product or service idea is conceived, it must be properly qualified. The idea must be legal, moral, and not violate existing intellectual property law. It must be economically viable and be technologically feasible. It must be marketable and make sound business sense.

Those who are serious about taking products and/or services to market should learn market research and competitive analysis, how to write a business plan, and to calculate costs.

Reader’s note: At the time of this writing, Xmind [https://xmind.com/] offers a free version of their mind mapping application. Also the free version of Obsidian’s [https://obsidian.md/] note-taking and personal knowledge management features with canvassing may be helpful for innovation.

Limit of Liability/Disclaimer of Warranty: While the author and publisher has used their best efforts in preparing this article, they make no representations or warranties with respect to the accuracy or completeness of the contents of this article and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the author nor the publisher shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

Copyright © 2025 Paul L. Pothier. All rights reserved.

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Introduction

Kerin et al (2006) defines marketing as “an organizational function and set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders” (p. 24).

This definition aligns with marketing’s general objective which is to determine (or create) the needs of consumers and satisfy them.

I. Standard marketing topics include:

"1. Market Research: Understanding customer needs, preferences, and market trends through data analysis, surveys, and competitive analysis. This informs product development and positioning.

2. Target Audience Segmentation: Dividing the market into distinct groups based on demographics, behaviors, or needs to tailor marketing efforts effectively.

3. Branding: Creating a unique identity and value proposition for a product or service, ensuring consistent messaging across channels.

4. Marketing Mix (4 Ps):

a. Product: Designing offerings that meet customer needs.

b. Price: Setting a price that reflects value and aligns with market positioning.

c. Place: Ensuring products are available through appropriate distribution channels.

d. Promotion: Communicating value through advertising, social media, email campaigns, and other channels.

5. Digital Marketing: Leveraging online platforms (e.g., social media, SEO, PPC advertising, content marketing) to reach audiences. For example, 68% of online experiences begin with a search engine, highlighting the importance of SEO (source: web analysis, 2024).

6. Customer Relationship Management (CRM): Building long-term relationships through personalized communication and loyalty programs" (xAI, Grok 4, 2025).

II. Current trends, as of 2025, include:

"1. AI-Driven Marketing: Tools like predictive analytics and chatbots enhance personalization and campaign efficiency.

2. Sustainability and Ethics: Consumers increasingly favor brands with transparent, eco-friendly practices.

3. Social Media Influence: Platforms like X drive real-time engagement, with 62% of marketers using social media for brand awareness (source: web analysis, 2025).

4. Omnichannel Strategies: Seamless integration of online and offline touch-points to enhance customer experience" (xAI, Grok 4, 2025).

Chaffey et al (2019) define digital business as “how businesses apply digital technology and media to improve the competitiveness of their organization through optimizing internal processes with digital and traditional channels to market and supply” (p. 612).

They define e-commerce as “all electronically mediated information exchanges between an organization and its external stakeholders” (p. 613).

It’s important to understand that digital business has a greater scope than e-commerce. Again, digital business encompasses all application of digital technology and media in business while e-commerce “can be considered as all electronically mediated transactions between an organization and any third parties it deals with” including non-financial transactions that are “considered to be part of e-commerce” (p. 11-13).

Body

An organization’s marketing activities impact the whole organization. “People, groups, and forces interact to shape the nature of activities. Foremost is the organization itself, whose mission and objectives determine what business it is in and what goals it seeks. Within the organization, management is responsible for establishing these goals. The marketing department works closely with a network of other departments and employees to provide the customer-satisfying products required for the organization to survive and prosper” (Kerin et al, 2006, pp. 8-9).

Organizations, and their marketing departments, operate in a large ecosystem that consists of common components, industry components, and sometimes even components unique to a specific organization. Consider the common components of a business ecosystem shown in Figure 2.1.

Next examine Figure 1-3 to see how expansive an organization’s marketing interactions are. In addition to the ongoing marketing interactions which occur within an organization; note the key people, groups, and forces which exist outside the organization that influence an organization’s marketing activities as well.

For an in-depth general treatment of marketing, the author recommends ISE Marketing (2022) by Kerin & Harley. For an in-depth general treatment digital business and e-commerce, the author recommends Digital Business and E-Commerce Management (2024) by Chaffey et al.

This introductory article will now focus on some key topics regarding digital business and e-commerce which relate to modern marketing.

Now examine Figure 1.7 to view the key aspects of marketing in a digital company.

Areas may have other associated bullet points not listed; however, this graphical representation acts as a starting point introducing key aspects of modern marketing that every organization needs to successfully address.

As organizations moved from mainframe/terminal to LAN/Internet-client/server to today's smart solutions incorporating mobile broadband, big data/analytics, social business, and cloud services; they learned to leverage digital platforms and exploit new services (or services done in new ways).

An example would be data management platforms (DMPs) which collect information that organizations use to adjust products and/or services in line with better marketing strategies (see Ronteau et al, 2023 for a more in-depth look). DMPs employ data aggregation, modeling, and correlation with regard to Internet user behavior and real-time information sharing. DMP providers include Oracle, Yahoo, Google, Microsoft, etc (Bartczak, 2024, p. 46).

Presently, DMPs are being enhanced with the latest breakthroughs in artificial intelligence (AI) and the Internet of Things (IOT) or (A-IOT) when AI and the IOT work together.

AI “is the capability of computational systems to perform tasks typically associated with human intelligence, such as learning, reasoning, problem-solving, perception, and decision-making” while the Internet of Things (IoT) “refers to a network of physical devices, vehicles, appliances, and other objects that are embedded with sensors and software, allowing them to connect and exchange data over the internet. This technology enables devices to communicate with each other and perform tasks autonomously, impacting various industries and everyday life” (see Slama et al, 2023 for an in-depth look at AIoT) ("Artificial Intelligence," 2025; "Internet of Things," 2025).

As stated, an organization’s e-commerce is a subset of its digital business. Figure 1.4 highlights the distinction between buy-side and sell-side e-commerce. Each side represents different aspects of the supply chain in an organization’s digital business with respect to e-commerce (see supply chain management [SCM] for more information about managing supply chains).

“Buy-side e-commerce refers to transactions to procure resources needed by an organization from its suppliers” while “sell-side e-commerce refers to transactions involved with selling products to an organization’s customers” (Chaffey et al, 2019, p. 13).

E-commerce includes business activities such as social media commerce, online retail stores, digital marketplaces, subscription services, business-to-business transactions, etc. which typically present in the following models:

“1. Business-to-Consumer (B2C): Direct sales to consumers.

2. Business-to-Business (B2B): Transactions between businesses, such as wholesale suppliers providing goods to retailers.

3. Consumer-to-Consumer (C2C): Platforms where individuals sell to other individuals.

4. Consumer-to-Business (C2B): Individuals offer services or products to businesses.

5. Direct-to-Consumer (D2C): Brands selling directly to customers without intermediaries” (xAI, Grok 4, 2025).

There are other models besides, such as those around government (e.g. G2C, G2B, and G2G) for example.

The sell-side of e-commerce includes the following functions: transactional e-commerce, services-oriented relationship building, brand-building, publishing/media, and social networking. Digital marketing enhances e-commerce through search marketing, online public relations, online partnerships, offline communications, interactive ads, opt-in email, and social media (Chaffey et al, 2019, pp. 14-23).

Organizations adopt and engage in digital business and e-commerce activities when they perceive a benefit to do so, primarily based on generating profitability or value. This must be balanced against strategic and practical risks such as making a wrong decision that costs the organization in either the present or the future.

Organizations use various strategic and accounting methods to weigh the benefits of adoption against the risks. A traditional example would be the strength, weakness, opportunity, threat (SWOT) analysis while newer examples include stage modeling to assess consumer demand and digital value proposition (DVP) to assess and market content, customization, community, convenience, choice, and cost reduction benefits to consumers. Opportunity analysis for digital business and e-commerce involves various analysis and mapping (see digital marketplace mapping for example) which ultimately should be incorporated into a grand strategy process model.

Another important analysis is the marketplace analysis which helps organizations define the main types of digital business and e-commerce which they will engage in as part of their online ecosystem. They need to weigh strategies such as multichannel strategy versus omnichannel strategy, market structures, architecture/platforms, solution offerings, and revenue models.

A host of factors in the ecosystem must be correctly accounted for including those in the macro-environment which are outside the organization but which indirectly influence its operations as well as the micro-environment consisting of internal factors directly influencing the organization (Chaffey et al, 2019, pp. 25-175).

As stated, the result of necessary analysis should result in a grand strategy process model which “provides a framework that gives a logical sequence to follow to ensure inclusion of all key activities of digital business strategy development” which “ensures that digital business strategy can be evolved as part of a process of continuous improvement” (Chaffey et al, 2019, pp. 192-193).

Consider the following grand strategy models which may be leveraged to assist with this: Jelassi and Enders (2008) digital business strategy framework, Johnson and Scholes (2017) parallel corporate strategy model, McDonald (1999) sequential marketing strategy model, and the Smith (1999) SOSTAC sequential marketing strategy model; each of which has their strengths and weaknesses. Each of these grand strategic models incorporate internal and external strategic analysis (environment, resources), strategic objectives (vision, mission, objectives), strategic definition (option generation, option evaluation, option selection), and strategic implementation (planning, execution, control) (Chaffey et al, 2019, p. 192-247).

With respect to an organization’s grand strategy model, the digital business marketing strategy and the digital marketing plan are often separate. The digital marketing plan implements the digital marketing strategy. In their respective ways, both address customer acquisition, customer conversion, and customer retention and growth. Neither; however, exists in its own silo. Each exists in the context of other plans.

For example, the digital marketing plan exists in conjunction with the digital business strategy and the information systems (IS)/information technology (IT) strategy all of which together are part of the larger organizational (corporate business) strategy.

Also considered in these plans are cost reduction and value chain efficiencies, revenue generation, channel partnership, communications and branding, situational analysis such as customer demand analysis, competitor analysis, audits, etc. Market and product positioning and branding, target market strategies, digital communications, etc are also included (Chaffey et al, 2019, pp. 303-364).

Customer relationship management (CRM) and digital approaches (eCRM) are integral to increase loyalty and improve all aspects of customer service. CRM/eCRM has many parts today having become sophisticated over time (Chaffey et al, 2019, pp. 365-447; 449-521).

Evaluating, implementing, and managing digital business, e-commerce, and customer relationship management is both necessary and complex. Organizations need to do it successfully and in a manner that adopts digital innovations rather than simply adopting technologies (Chaffey, 2019, pp. 522-608).

Conclusion

Today, e-commerce is an integral part of an organization's digital business and marketing activities. An organization’s e-commerce is a subset of its digital business.

Organizations operate in a larger ecosystem. Marketing activities affect an organization's entire supply chain as well as affecting the organization as a whole and externalities related to the organization.

There are many factors that need to be correctly assessed in order for an organization to create and manage their activities successfully; activities that include marketing, digital business, and e-commerce. Standardized analysis methods, tools, strategies, and plans provide a way to accomplish this assuming the necessary expertise is available and utilized properly.

Successful e-commerce typically fields "user-friendly platforms, strategic marketing, efficient operations, and data-driven optimization while prioritizing customer trust and adaptability. These elements enable businesses to attract, convert, and retain customers in a competitive digital marketplace." Aims include "user-centric website design, effective product and market strategies, robust digital marketing, seamless operations and logistics, data analytics and optimization, customer trust and security, and scalability and adaptability" (xAI, Grok 4, 2025).

This concludes a brief introduction to Marketing: Digital Business and E-Commerce.

Bibliography:

Artificial intelligence. (2025, June 26). In Wikipedia, The Free Encyclopedia. https://en.wikipedia.org/w/index.php?title=Artificial_intelligence&oldid=1297509338

Babin, B., & Zikmund, W. (2016). Exploring marketing research (11th ed.). Cengage Learning.

Bartczak, K. (2024). Business models and digital technology: implementation and complexities for digital business. Routledge.

Chaffey, D., Hemphill, T., & Edmundson-Bird, D. (2019). Digital business and e-commerce management (7^th ed.). Pearson.

Chaffey, D., Hemphill, T., & Edmundson-Bird, D. (2024). Digital business and e-commerce management (8th ed.). Pearson.

Enge, E., Spencer, S., & Stricchiola, J. C. (2015). The art of SEO: mastering search engine optimization (3rd ed.). O'Reilly.

Grewal, D., & Levy, M. (2017). Marketing (5th ed.). McGraw Hill.

Iacobucci, D., & Churchill, Jr., G. A. (2010). Marketing research: methodological foundations (10th ed.). South-Western Cengage Learning.

Internet of things. (2025, June 23). In Wikipedia, The Free Encyclopedia. https://en.wikipedia.org/w/index.php?title=Internet_of_things&oldid=1297050038

Kerin, R. A., Hartley, S. W., Berkowitz, E. N., & Rudelius W. (2006). Marketing (8^th ed.). McGraw Hill.

Kerin, R. A., & Hartley, S. W. (2022). ISE marketing (16th ed.). McGraw Hill.

Paul, J., & Aserkar, R. (2008). Export import management. Oxford University Press.

Ronteau, S., Muzellec, L., Saxena, D., & Trabucchi, D. (2023). Digital business models: the new value creation and capture mechanisms of the 21st century. De Gruyter.

Ryan D. (2017). Understanding digital marketing: marketing strategies for engaging the digital generation (4th ed.) Ashford Colour Press Ltd.

Slama, D., Ruckert, t., Thrun, S., Homann, U., & Lasi H. (eds). (2023). The digital playbook: a practitioner's guide to smart, connected products and solutions with AIoT. Springer.

xAI. (2025). Grok (version 4) [DeepSearch]. https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

Copyright © 2025 Paul L. Pothier. All rights reserved.

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Introduction

Strategic Management “is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives (David & David, 2017, p. 5).

When done correctly, strategic management assists organizations with developing plans to gain competitive objectives and meet long-term objectives. Both the external environment and internal capabilities must be considered.

The strategic management process model outlines the strategic process and associated ratios, tools, and sub-models that are used to accomplish this.

Historical Information

Though strategic management has its earliest roots in the military and political strategies of antiquity, modern strategic management as a formal discipline first took shape in the late 19th and early 20th centuries.

By the 1930s and 1940s, the work of innovators such as Frederick Taylor and Henri Fayol were improving operational efficiency and administration. By the 1950s, innovators such as Peter Drucker were promoting the benefit of early systematic goal-setting processes.

“The 1960s marked the birth of strategic management as a distinct field, driven by the growth of large corporations and the need for systematic planning in an increasingly complex business landscape” (xAI, Grok 3, 2025).

Alfred Chandler published Strategy and Structure in 1965 which argued that the structure of an organization should follow its strategic goals.

Igor Ansoff, often referred to as the father of strategic management, published Corporate strategy; an analytic approach to business policy for growth and expansion in 1965 which introduced the first modern corporate strategy model and the Ansoff Matrix, a tool for analyzing growth strategies. The following image, from page 27, articulates his original vision of strategy formulation decision-making.

In the 1970s, the Boston Consulting Group developed their own growth-share matrix to help organizations allocate resources strategically. It was also in the 1970s that analytical tools such as the SWOT analysis (which analyzes strengths, weaknesses, opportunities, and threats) became widely used.

During the 1980s and 1990s, strategic management matured emphasizing competition and internal capabilities. The Strategic Management Society formed in 1981 while innovators such as Michael Porter introduced the Five Forces model which analyzes industry competitiveness; and Jay Barney championed the Resource-Based View (RBV) which assists organizations in using their internal resources and capabilities to gain competitive advantages emerged.

Further advances include the concept of core competencies by C. K. Prahalad and Gary Hamel to leverage unique strengths in strategy management.

From the turn of the new millennium to the present, modern developments emerged encouraging flexibility and responsiveness introducing topics such as dynamic capabilities which help organizations adapt and innovate; a greater emphasis placed on globalization and technology; as well as integrating environmental and social considerations.

The Strategic Management Process Model

As stated in the introduction, strategic management formulates, implements, and evaluates cross-functional decisions to enable organizations to achieve their objectives. This is accomplished using a strategic management process which “consists of three stages: strategy formulation, strategy implementation, and strategy evaluation (David & David, 2017, p. 5).

David & David (2017) defines strategy formulation, strategy implementation, and strategy evaluation as follows:

I. “Strategy formulation: Stage 1 in the strategic management process; includes developing a vision/mission, identifying an organization’s external opportunities/threats, determining internal strengths/weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue.

II. Strategy implementation: Stage 2 of the strategic management process. Activities include establishing annual objectives, devising policies, motivating employees, allocating resources, developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance.

III. Strategy evaluation: Stage 3 in the strategic management process. The three fundamental strategy evaluation activities are (1) review external and internal factors that are the bases for current strategies, (2) measure performance, and (3) take corrective actions; strategies need to be evaluated regularly because external and internal factors constantly change” (p. 634).

These three stages are incorporated into the standard strategic management process model and implemented around the world by governments and organizations, in diverse ways.

Review the following flowchart of the strategic process model and note each objective.

Each objective in the strategic process model is introduced with the most widely used tools that correspond with each objective in the strategic process:

I. Vision and mission statements.

1. Vision statement: A vision statement should answer the question of what an entity is to become. It is a purposeful brief declaration articulating an entity’s aspirations and desired future state. The vision statement should align with the entity’s core values and provide direction for strategic planning and decision-making.

2. Mission statement: A mission statement should declare an entity’s reason for existing. It should define an entity’s purpose, core activities, and primary objectives briefly articulating what the entity does and how the entity accomplishes that. The mission statement should align with the entity’s core values and provide direction for strategic planning and decision-making.

II. External and internal audits.

1. External audit: “The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm as well as threats that should be avoided.” The audit should “identify key variables that offer actionable responses” (David & David, 2017, p. 61).

Multiple dimensions of an entity's external environment are assessed. Frameworks like PESTEL (Political, Economic, Social, Technological, Environmental, Legal) in conjunction with tools such as SWOT (Strengths, Weaknesses, Opportunities, and Threats) are employed to discover the key variables so that actionable responses can be formulated. The external audit process is structured and involves data collection, environmental scanning, competitive analysis, synthesis and interpretation, reporting and integration, and action planning (e.g. product development, marketing strategy, resource allocation, mergers and acquisitions, risk management, etc.) (xAI, Grok 3, 2025).

Common tools used in the external audit include SWOT (Strengths, Weaknesses, Opportunities, and Threats), competitive analysis, Porter’s five-forces model, the competitive profile matrix (CPM), industry analysis, and the external factor evaluation (EFE) matrix.

2. Internal audit: Entities have strengths and weaknesses in functional areas. The internal audit assesses them with an eye toward enhancing governance, risk management, and operational efficiency. “Internal strengths and weaknesses, coupled with external opportunities and threats and clear vision and mission statements, provide the basis for establishing objectives and strategies. Objectives and strategies are established with the intention of capitalizing on internal strengths and overcoming weaknesses… the process of performing an internal audit closely parallels the process of performing an external audit” (David & David, 2017, p. 90-92).

Key components of a successful strategic management internal audit include developing an internal audit strategy, taking a risk-based approach, gaining stakeholder engagement, integrating with organizational strategy, assessing and leveraging technology and innovation, ensuring a skilled audit team is employed, and evolving with organizational and regulatory changes as they occur (xAI, Grok 3, 2025).

Key internal audit techniques include analytical procedures, control testing, substantive testing, performance audits, strategic audits, root cause analysis, and the documentation of processes by maintaining a performance management manual to outline audit processes, roles, and improvement tools (xAI, Grok 3, 2025).

The areas to audit include strategy and culture, management, marketing, finance and accounting, production/operations, research and development, management information systems, and value chain analysis (David & David, 2017, pp. 92-121).

Common tools used in the internal audit include SWOT (Strengths, Weaknesses, Opportunities, and Threats), computing key financial ratios. (see Table 4.4 in David, 2017, p. 106 for ratio calculations), liquidity ratios, leverage ratios, activity ratios, profitability ratios, growth ratios, the internal factor evaluation (IFE) Matrix, etc.

III. Long-term objectives: “Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually from 2 to 5 years… objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units” (David & David, 2017, p. 130-131).

Financial objectives deal with revenues, earnings, dividends, profit margins, return on investment, earnings per share, stock price, cash flow, etc. Strategic objectives deal with market share, on-time delivery, design-to-market, costs, quality, geographic coverage, technology, leadership, development, marketing, etc. Trade-offs must be assessed and determined as they arise. Integration strategies include vertical, horizontal, forward, and backward. Strategies may include intensive strategies (e.g. market penetration, market development, and product development); diversification strategies (e.g. related diversification and unrelated diversification); defensive strategies (e.g. retrenchment, divestiture, and liquidation). The tactics and means for facilitating and achieving strategies must be carefully considered (David & David, 2017, pp. 131-158).

Common tools used in long-term objective strategic planning include the balanced score card and Porter’s five generic strategies.

IV. Generate, evaluate, and select strategies: “Strategy analysis and choice largely involve making subjective decisions based on objective information... strategy analysis and choice seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives.” (David & David, 2017, p. 168).

All participants in the strategy analysis and choice activity should have the firm’s external and internal audit information, vision and mission statements, and relevant information available to them as they engage in analyzing strategies.

Review the following Strategy-Formulation Analytical Framework from (David & David, 2017, p. 170) and note each stage with its associated steps.

Stage 1 (input stage): EFE Matrix, IFE Matrix, and CPM.

Stage 2 (matching stage): SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and GSM.

Stage 3 (decision stage): QSPM.

Other considerations involve organizational cultural aspects, internal politics, and governance issues. The tools listed in the three stages can enhance the quality of strategic decisions.

V. Implementing strategies (part 1). Management, operations, and human resources are all involved in implementing strategies. “Implementing strategy affects an organization from top to bottom, including all of the functional and divisional areas…” (David & David, 2017, p. 206).

As strategy implementation is initiated the focus becomes action, responsibility, efficiency, operations, motivation and leadership, coordination, in a people-oriented manner. Policies and structure are used. Evaluations are performed to see how well things adhere with strategy formulation, how well things are going, and what problems need to be resolved.

V. Implementing strategies (part 2). Marketing, finance/accounting, research and development, and management information systems are central to successful strategy implementation. Products and services must be marketed effectively with adequate working capital available. A host of issues and methods (product positioning mapping, earnings per share/earnings before interest and taxes (EBP/EBIT) analysis, etc.) are involved as is the need for cooperation among all functional and divisional managers.

VI. Measure and evaluate performance. “The best formulated and best implemented strategies become obsolete as a firm’s external and internal environments change. It is essential, therefore, that strategists systematically review, evaluate, and control the execution of strategies… erroneous strategic decisions can inflict severe penalties and can be exceedingly difficult, if not impossible, to reverse. Therefore, most strategists agree that strategy evaluation is vital to an organization’s well-being; timely evaluations can alert management to problems or potential problems before a situation becomes critical” (David & David, 2017, p. 280).

Strategy evaluation consists of three activities:

1. Analyze the basis of the strategy.

2. Compare expected results with actual results.

3. Take corrective action as needed.

Common tools used in strategy evaluation include the balanced score card, auditing, etc.

Other Considerations

These include the rule of law, business ethics, social responsibility, environmental concerns, sociocultural norms, and global and international issues.

As previously stated, when done correctly strategic management assists organizations with developing plans to gain competitive objectives and meet long-term objectives.

For those looking to gain a much more thorough and in-depth understanding, the later editions (16^th edition and above) of David & David’s Strategic Management: A Competitive Advantage Approach (Concepts & Cases) are highly recommended. These editions also take the readers through each step of each objective in the strategic process that has been introduced here, in conjunction with the usage of the most common tools associated with each objective. Additionally, instructions for preparing and presenting strategic management cases (i.e. strategic management case analysis and presentation) are provided, with real world examples illustrated, and finally completed strategic management sample cases included.

Conclusion

“The history of strategic management reflects a journey from early management theories and military strategy to a formalized discipline in the 1960s and 1970s, with significant advancements in the 1980s through figures like Porter. Over time, it has evolved to address the complexities of modern business, incorporating insights from competition, resources, and innovation. This ongoing evolution ensures its relevance in guiding organizations through an ever-changing landscape” (xAI, Grok 3, 2025).

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Introduction

Programming that assists users with decision making is common. From on-line websites (e.g. online retailers, search engines, organizational websites, etc.) to device applications for smartphones and computers, programming that assists users with making decisions is pervasive. What makes decision support systems (DSS) different from such programming embedded in a non-DSS website or application is that DSS are dedicated systems that assist users with decision making.

Decision Support Systems (DSS) are computer-based information systems that support decision-making activities. They play a crucial role in helping organizations navigate complex decisions by providing relevant data and analytical tools to make informed decisions.

DSS systems are used by governments, organizations, and associations. They are common in sectors such as government, healthcare, energy, insurance, finance, agriculture, technology, transportation, retail, etc. A DSS system may range from a simple application, which may or may not have a web interface, that leverages a single database all the way up to complex artificial intelligence (AI) assisted global systems that leverage a great many databases.

From data-driven systems which manage data and provide better automation to collaboration and communication systems to model-driven intelligence building systems that answer the "what if” questions which need to be analyzed, DSS is employed across sectors and agencies around the world. Increasingly, new artificial intelligence (AI) breakthroughs are enhancing the effort helping decision-makers decide where significant time and resources might better be utilized. DSS is aiding the latest Enterprise Resource Planning (ERP) software, diagnostic systems, groupware systems, communication systems, and document management systems.

Historical Information

Early DSS evolved from work done at the Carnegie Institute of Technology in the 1950’s onwards and the technical work on interactive computer systems done by the Massachusetts Institute of Technology (MIT) from the 1960s onwards. In the 1980’s executive information systems (EIS), group Decision support systems (GDSS), and organizational Decision support systems (ODSS) came into being. Different DSS models were developed and implemented. After 1990, data warehousing and on-line analytical processing (OLAP) broadened the field. With the Internet revolution came web-based analytical applications, and more recently the rapid development of artificial intelligence (AI) is integrated with DSS which has resulted in Intelligent Decision Support Systems (IDSS) that enhance traditional DSS capabilities. IDSS attempts displays of intelligent behavior by exploiting rule-based expert systems, knowledge-based systems, or neural network systems. Decision Support Systems (https://www.sciencedirect.com/journal/decision-support-systems) is the most well-known peer-reviewed scientific journal covering the latest research on theoretical and technical advancements in DSS.

It was in the late 1970s; that many vendors, practitioners, and academics promoted computer-based DSS. However, like early innovations in artificial intelligence, the initial optimism and high expectations for the subsequent early systems touted across computer-based publications and the press were disappointing. Yet, the process had begun and would mature over the years. In the case of DSS today, when implemented correctly, sophisticated relational databases can be used to analyze multi-sourced data and turn that data into actionable insights with predictive modeling (including with AI assistance).

However, implementing DSS correctly is complicated and organizationally political. It requires the right leadership and the right team members to properly determine and catalogue the objectives, form realistic expectations for the organization and DSS projects, and develop specific implementations before even beginning DSS projects.

Models and Types

Today, different types of DSS are being applied to a wide range of sectors. Experts in DSS, such as Daniel J. Power (https://dssresources.com), discuss the most common types of DSS in their articles and books. These include communication-driven DSS used for collaboration; data-driven DSS used by management, staff, and suppliers to gain information; document-driven DSS to search and identify documents and information; knowledge-driven DSS that are a broad range of systems used to provide advice or choose products/services; and model-driven DSS which are sophisticated systems that help analyze decisions and options. The following examines two structurally different DSS classifications: model-driven DSS and data-driven DSS.

Chan and Chowdhury (2005) state, “The two types of decision support systems as described in the current literature are:

i. Model-driven DSS: They are primarily stand-alone and use a model to perform "what-if" and other kinds of analysis.

ii. Data-driven DSS: Allows users to extract and analyze useful information from large databases by using statistical or other analytical tool to find hidden patterns and relationships in large databases to infer rules. This way of analyzing data is also known today as data mining or Knowledge discovery in databases or data warehouses” (p. 173).

The model-driven DSS can be one of several types. The most common of these are the strategic, operational, and tactical types. Strategic types support top management’s strategic planning functions such as devising an e-commerce venture, developing corporate objectives, planning for mergers and acquisitions, plant location selection, environmental impact analysis, and non-routine capital budgeting. Operational types are used to support day-to-day activities. Typical decisions involve e-commerce transactions, approvals of personal loans, production scheduling, inventory control, maintenance planning and scheduling, and quality control. Operational types normally use only internal data. Tactical types are used mainly by middle-management to assist in allocating and controlling resources. Examples include the selection of a web server, labor requirement planning, sales promotion planning, plant-layout, and capital budgeting. Tactical types are usually used in the accounting department and their time horizon varies from one month to less than two years. Some external data is needed but internal data makes up most data used in model-driven DSS types (Aronson, Liang & Turban, 2004, p. 115-116; Laudon & Laudon, 2004).

DSS typically possesses database access and a DSS software system consisting of software tools and mathematical/analytical modeling. Combining this modeling with behavioral modeling is providing descriptive and empirical information in new ways that is merging with new areas such as AI, human-computer interaction research, etc. (Marakas, 2004).

But there is no all-inclusive taxonomy of DSS. A passive DSS system aids the process of decision making, but that cannot bring out explicit decision suggestions or solutions. An active DSS brings out such decision suggestions or solutions. A cooperative DSS allows the user to modify, complete, or refine the decision suggestions the system offers before sending them back to the system for validation. A model-driven DSS centers on accessing and manipulating a statistical, financial, or simulation model. These use data and parameters to aid users but may not be data intensive. Communication-driven DSS supports multiple working on shared tasks.

A data-driven DSS centers on accessing and manipulating a series of internal company data over time and sometimes also external data. A document-driven DSS manages, retrieves and manipulates unstructured information in a variety of electronic formats. A knowledge-driven DSS provides specialized problem-solving expertise stored as facts, rules, procedures, or in similar structures. Enterprise-wide DSS are linked to large data warehouses that serve many managers in a company while single-user DSS are small systems that reside on an individual manager's PC (“Intelligent Decision Support System,” 2024).

Both off-the-shelf and proprietary systems exist. DSS might support a small group of managers using a single computer or a large group of managers in a networked environment (i.e. Enterprise-Wide DSS). Saunders (1998) explained stating:

“The objective of development in decision analysis has been to improve the ability of the human decision maker to make timelier and better-quality decisions. Toward this end, extensive algorithmic techniques have been developed for properly framing the decision environment.”

Saunders then makes it clear that the sophisticated techniques implemented in DSS tend to produce results that decision makers prefer; however, they are underutilized because of the time it takes to understand and utilize them. It is possible to support management activities in many different ways. The key to remember is that managers want the right information, at the right time, in the right format, and at the right cost. DSS continues to improve in these and other respects.

Hosapple and Whinston (1996) assert that DSS includes a body of knowledge that describes some aspects of the decision-maker's world, that specifies how to accomplish various tasks, that indicates what conclusions are valid in various circumstances, and so forth, DSS has an ability to acquire and maintain descriptive knowledge (i.e. record keeping) and other kinds of knowledge as well (e.g. procedure keeping, rule keeping, etc.), DSS has an ability to present knowledge on an ad hoc basis in various customized ways as well as in standardized reports, DSS has an ability to select any desired subset of stored knowledge for either presentation or deriving new knowledge in the course of problem recognition and/or problem solving, and DSS can interact directly with a decision maker or a participant in a decision in such a way that the user has a flexible choice and sequence of knowledge-management activities. Data-driven DSS are intended to be interactive, real-time systems that are responsive to unplanned as well as planned information requests and reporting needs. While, as stated, model-driven DSS are usually focused on modeling a specific decision or a set of related decisions.

There are various ways to classify DSS applications; however, not every DSS fits neatly into a single category. Some representative classifications are Alter’s output classification, Holsapple and Whinston’ classification, text-oriented DSS, database-oriented DSS, spreadsheet-oriented DSS, solver-oriented DSS, rule-oriented DSS, compound DSS, intelligent DSS, and several other classifications of DSS. Each of these classifications incorporates specific approaches to DSS design. In each of these DSS classifications, models play a major role in DSS and can incorporate many different methods including analysis, influence diagrams, decision tables and trees, mathematical programming, linear programming, heuristic programming, simulation, etc. (Aronson et al., 2004, p. 127-134).

One of the greatest areas of continuing improvement in DSS revolves around the user interface. Biometric related measurements, calculations, and recognition that is related to human characteristics and features are increasingly integrated including voice, speech, fingerprint and face, handwriting recognition, etc. New user-interface developments are in development such as interactive holographic displays that will probably have a major effect on how DSS is ultimately used.

And as hardware continues to reduce in size and increase in power and capability, with quantum computing research continuing, very small powerful and practical hardware will become available for DSS (aided by AI).

DSS will become faster and more intelligent with web-based DSS extending access. In fact, web-based technologies continue to change MIS, including DSS, on many different levels. Just as the power and capabilities of the World Wide Web (WWW) have already had a dramatic impact on DSS development, application, and use patterns; future developments will improve it much more. Table 1 introduces some of the many web impacts of modeling in today’s real world DSS environment (Aronson et al., 2004).

Management and Risk

An example of DSS simulation is design simulation. DSS software can be used to experiment with multiple what-if scenarios for real-world scenarios. In an information technology (IT) example, networks and network applications are simulated allowing IT to find the best solution before committing significant time and investment resources. Areas such as network traffic, new transport technologies, topology changes, and new applications can be tested for results before organizations commit to purchasing them.

A large corporation might partner with a specialized IT vendor to design a network for many employees in many geographically dispersed sites. Tools such as Decision Guru, a modeling and simulation tool from MIL 3 Inc. might be used to design a network backbone linking thousands of nodes at every site into a network capable of supporting data, video, voice, etc. all in a manner that allows for future network growth using cost efficient bandwidth methods saving considerable time and money while avoiding costly impacts and poor performance. A side benefit that any organizations can benefit from in simulation is that it builds credibility with the organization decision-makers, before decisions are made, by providing quantifiable data to support successfully modeled recommendations that deliver promised service levels (Aronson et al., 2004, p. 190).

This highlights how managers fit into DSS. Once a manager believes it is possible to gain advantages from DSS, then a creative search process may be pursued to identify rewards, problems, etc. There are many case studies on the Internet where various DSS planning processes and analysis frameworks are examined by organizations. DSS should provide systematic methods of search and evaluation that is linked to strategic business planning that is ongoing and open-ended. And managers need to collect competitive intelligence, fund DSS research and development projects, conduct brainstorming sessions, follow best practices and exercise intuition.

With respect to Information Systems (IS) and DSS, the planning process needs to examine the technical infrastructure to determine what is currently possible and examine enhancements that will facilitate and enable new capabilities. IS planning should involve broad consultation and both problem-oriented and opportunistic search. DSS does not always solve specific problems but DSS may create new capabilities. Evaluating DSS opportunities is sometimes difficult because of problems with assessing costs and benefits. However, in some situations the analysis may be simply directed to a build versus buy decision because industry-specific packages are available. This type of DSS may be needed but it probably will not provide a competitive advantage for the organization.

DSS projects have various levels of risk associated with them. When DSS projects have ambiguous objectives and low structure, the projects have higher levels of risk because the costs and scope of work of the project are hard to define. Also, because the objectives of the project are ambiguous, it can be difficult to assess the return on the investment. DSS projects with a higher degree of structure and more clearly defined objectives generally are lower risk. More detailed planning is possible for projects with specific objectives. The size or scope of a DSS project in terms of the number of users served and the size of databases developed also impacts the risk of the assessed projects. Small DSS projects in terms of scope or dollar expenditures tend to be of lower risk than large projects. Finally, the sophistication of the technology and the experience of the developers using the technology influence the overall project risk. However, the ultimate decision to invest in a DSS project should not be based solely on project risk.

Project risks are not the only concern. Technology risks include picking the wrong vendor, using a new technology too early in the technology life cycle, or using a technology that soon becomes obsolete. The inability to predict human behaviors and reactions, and the basic human instinct to resist change makes people the greatest risk when building new systems. No matter how wonderful a proposed DSS, if people resist the change, then the new system can struggle. To gain an advantage, a new DSS must work as planned and a company's stakeholders must perceive its strategic significance for the firm.

All categories and types of DSS focus on improving the effectiveness of decision-makers and managers should routinely ask how a proposed computerized DSS will do this. They must ask and answer questions such as in what ways will managerial effectiveness be increased.

Benefits and Challenges

The following are common benefits cited by many for DSS:

1. Improve personal efficiency. One of the ways to help people become more effective decision-makers is to help them become more efficient in manipulating data. At a minimum, this should allow a person either to perform the same task in less time or to perform the same task more thoroughly in the same length of time. The result of automating the clerical component of decision-related tasks is often to improve consistency and accuracy, and to allow people to spend more of their time on the substantive rather than clerical aspects of their jobs.

2. Expedite problem solving and improve decision quality. A data-driven DSS can provide faster turnaround in retrieving decision relevant information; improve consistency and accuracy; and it may provide better ways of viewing or solving problems. DSS users can obtain answers to non-routine questions more or less immediately. Decision-makers can consider more alternatives. Suggestion DSS may reduce the variability in the application of guidelines and policies. Model-driven DSS can help managers conduct what-if analyses and modify their assumptions and scenarios in financial planning. Also, group DSS can reduce the length of feedback loops and the need to redo analyses. Problems seem to get resolved faster. Also, some managers perceive DSS provide an impartial source of information that encourages fact-based decision-making. This perception expedites problem solving.

3. Facilitate interpersonal communication. DSS provide users with tools of persuasion to help them argue to do something based on analysis or to show that a good job had been done. Many types of DSS can provide managers in an organization with a vocabulary and a process for decision making and discussion.

4. Promote learning or training. Quite frequently learning occurs as a by-product of initial and ongoing use of a DSS. Two types of learning seem to occur: learning of new concepts and the development of a better factual understanding of the business and decision-making environment. Some DSS serve as de facto training tools for new employees. Some suggestion DSS and management expert systems reduce the expertise needed by an employee to perform satisfactorily and help newcomers gain expertise. They also preserve expertise that might be lost through loss of an acknowledged expert.

5. Increase organizational control. Some DSS provides summary data for purposes of overall organizational control. Summary data can be monitored, retained and analyzed. Managers need to be very careful about how decision-related information is collected and then used for organizational control purposes. Trying to gain increased control of employee decision behavior can be counter-productive if employees feel threatened or spied upon when they are using a DSS.

DSS can have positive benefits, but DSS can create negative outcomes in some situations. For example, some DSS development efforts lead to power struggles over who should have access to data. Also, managers may have personal motives for advocating development of a DSS. A DSS can increase the visibility of its sponsor and have positive rewards if it is successful. Some IS staff support DSS implementations so they can experiment with new technology or expand staff rather than because they believe in the proposed DSS. Isolating and identifying hidden agendas is difficult, but DSS proponents in IS and management must attempt to examine them. The successful development and use of DSS requires that people accept the DSS and that they are motivated to help make the project a success. Hidden agendas can hurt the motivation of all the people involved in a DSS development project (Powers, 2005).

And some opportunities are better than others. The key task for managers is to understand new technologies and then be able to develop only those systems that create positive business results, while rejecting those that use technology for the sake of technology. Using IS/IT to gain competitive advantage has risks. Organizations must continuously improve their information technology to gain and maintain competitive advantage. Companies that invest significant time and money to achieve an advantage want a system that has sustainability. When competitors can quickly respond with similar or better systems the result is a higher cost of doing business for everyone involved. To create sustainability, an organization can preempt its competitors by being first to market. This creates surprise, respect, and time advantages. Alternatively, sustainability may be achieved through intimidation. Creating a system that is large, complex, or risky can ward off duplicators. True sustainability can only be achieved through continual development and enhancement of a strategic system (Powers, 2005).

Another consideration is quality control. People’s lives are increasingly being affected by the use of DSS and the acceleration of AI making quality control critical. These systems must meet industry defined standards as well as customer requirements. Careful analysis and an on-going review of data, modeling, and output is necessary to ensure DSS quality control.

If managers are trying to develop a strategic DSS; they should ask how it affects company costs, customer and supplier relations and managerial effectiveness. Managers should also attempt to assess how the strategic DSS will impact the structure of the industry and its competitors. Organizations should identify their goals, the potential reactions of competitors, and evaluate if the impact of the DSS is good for the industry as a whole or has adverse effects such as, more price sensitivity and lower margins. Ultimately, DSS must be used to gain competitive advantages (Powers, 2005).

A DSS can create competitive advantages if three criteria are met. First, the DSS needs to be implemented and become a real strength in the organization. Second, the DSS should be unique and proprietary to the organization. Third, the DSS advantages needs to be sustainable for at least three years. Managers who search for strategic investments in information technology to gain advantages over competitors must remember these three points.

The widespread usage of computer technology has changed the way companies do business. Information technology has altered relationships and how companies do business with each other, their suppliers, customers, etc.

Powers (2005) discusses two ways that IT can affect competition: alter industry structures and support cost and/or differentiation strategies. One approach to identifying opportunities that change structure positively is done by examining five competitive forces. They are the power of buyers, the power of suppliers, the threat of new entrants, the threat of substitute products, and the rivalry among existing competitors. So how a company uses information technology can affect each of the five competitive forces and can create the need and opportunity for change.

For example, information technology has altered the bargaining relationships between companies and their suppliers, channels, and buyers. Information systems can cross company boundaries. These inter-organizational systems have become common and, in some instances, they have changed the boundaries of the participating industries. DSS can reduce the power of buyers and suppliers. DSS can erect new barriers that reduce the threat of entrants. DSS can help differentiate products and services and reduce the threat from substitutes. Also, DSS can help managers reduce the cost of rivalry actions and in some cases reduce the need for competitive actions and reactions.

Powers (2005) states:

“Some firms have no competitive advantage. Firms can achieve a competitive advantage by making strategic changes and firms can lose a competitive advantage when competitors make strategic changes. Information systems and information technologies are changing rapidly and are viewed by many managers as ‘strategic weapons’ for gaining competitive advantage. These systems are also known as Strategic Information Systems. Many authors have proposed definitions for a Strategic Information System (SIS). For example, Strategic Information Systems have been defined as systems designed to change goals, products, services, or environmental relationships of organizations. Some authors argue that any information system that helps an organization gain a competitive advantage is a Strategic Information System. Both of the previous definitions should guide managers in their search to use technology to support decision making. Decision support systems that create changes in products, services or relationships are especially important for gaining an advantage over competitors.”

So DSS can help organizations create cost advantages and offer benefits which include improving personal efficiency and flattening organizations, accelerate problem solving while increasing organizational control. Managers should search for situations where decision processes seem slow or tedious and where problems reoccur or solutions are delayed or unsatisfactory and resolve them. Also, DSS can increase efficiency and eliminate value chain activities. Technology advancements can sometimes continue to lower process costs and rivals who imitate an innovative DSS may nullify or remove any advantage. DSS offers differentiation advantages. Offering DSS to customers can differentiate a product and possibly provide a new service. Differentiation increases profitability when the price premium charged is greater than any added costs associated with achieving the differentiation. Successful differentiation means a firm can charge a premium price, and/or sell more units, and/or increase buyer loyalty for service or repeat purchases. In some situations, competitors can rapidly imitate the differentiation and then all competitors incur increased costs for implementing the DSS. Finally, DSS can be used to help a company better focus on a specific customer segment and hence gain an advantage in meeting that segment’s needs. MIS and DSS can help track customers and DSS can make it easier to serve a specialized customer group with special services. Some customers will not pay a premium for targeted service or larger competitors also target specialized niches using their own DSS (Powers, 2005).

However, for these possibilities to become a reality, the need to extract the right data from many internal and external sources must first become a reality. Further complicating data collection is the need to sometimes collect raw data in the field. But regardless of how the data is collected, it must be qualified and filtered. Data quality (DQ) is an extremely important issue.

There are many methods for collecting raw data. Examples include studies, surveys, observations, interviews, sensors, scanners, point-of-purchase inventory control, field PDA’s, etc. Whichever methods an organization uses, the quality and integrity of the data is critical. Organizational data is the heart of any decision making system. DQ is a critical factor in the quality of decisions based on it. Data in organizations is frequently found to be inaccurate, incomplete, or ambiguous. This costs organizations money in many ways and degrades the usefulness of DSS.

Further Considerations

DSS is constantly evolving and new developments continue to act as drivers. Web-based IS/IT developments, business intelligence, integration with other MIS systems such as ERP, increasing complexity, developing technology such as voice processing, fuzzy logic, neural networks, better supply-chain management, wireless, groupware, AI are all in play (Aronson et al., 2004, p. 841).

These developments create opportunities to deliver more quantitative and qualitative information for decision-makers than ever before. Exploiting these opportunities and successfully implementing innovative DSS means that managers need to redesign business processes, integrate the technologies and associated information into decision-making processes, evaluate costs and benefits, and manage new types of business relationships. DSS projects must be evaluated in this broad context.

To accomplish this; however, requires leveraging the know-how to properly understand and evaluate DSS projects before implementation as well as understanding the costs. DSS projects can be expensive. When a DSS objective is under consideration, managers and IS/IT staff must become effective with the proposed DSS by working with the relevant tools and perhaps engaging in a small scope project before beginning a serious development project. Having access to DSS expertise in the form of an experienced prequalified DSS vendor is also a good idea. It takes time and money to build successful DSS systems. Organizations may have to spend some of both on a prototype or a departmental data mart. DSS is a significant investment. In firms with multi-million dollar IS/IT budgets, DSS prototype and data mart projects are needed and they should be viewed as such.

Generally, a detailed qualitative analysis of a proposed DSS at its initiation stage is what managers should be looking for. There are some cases; however, where financial analysis and other tools can be useful in evaluating a major DSS project. Managers should typically expect to discover what the expected results and benefits of a proposed DSS system rather than just relying on anticipated return on investment (ROI) as if DSS were a business-as-usual type of system. Looking at both the ROI from a DSS project and the possible results the proposed system might deliver are both important when speaking of DSS.

Certainly, using ROI and NPV to justify DSS projects is common; however, again such analysis does not, in and of itself, truly reflect the value of most DSS systems. Costs and benefits of DSS ripple to other parts of the organization. In many ways the real benefits are created by the changes enacted in the organization; often more than by the DSS system itself. Therefore, demanding a positive ROI from DSS projects is not a higher priority than demanding positive results. Ideally, building DSS is an investment in improving the performance of a company and such projects should benefit employee and corporate development experiences (Powers, 2005).

Conclusion

In conclusion, DSS has been around for decades and continues to improve. Many methodologies and designs are available. Many different components make up DSS systems. These components include people, activities, technology and procedures that achieve predefined purposes. The key to DSS success is to have the right design, accessing the right information for the right reasons, and being used appropriately by the correct people in a target organization. DSS projects should not be undertaken lightly and past financial methods of accounting for a system’s success should be considered but reprioritized beneath seeing what positive results the system will bring to the organization with the understanding that technology advances in all areas and better ways of doing business will continue to drive DSS evolution in a manner that increases the significance of successful DSS implementations.

Furthermore, privacy and ethical issues must be seriously considered and appropriate decisions made to determine what data belongs where and who should and should not have access to it. Security is paramount. Data must be secured and the rule of law must be followed. Global concerns such as accounting and currency issues, culture, impersonal electronic communication, various countries regulations, language, disparate telecommunications infrastructures, and even time zones must be considered.

Yet the outlook of DSS is bright and organizations seeking competitive advantages will be challenged to make better use of DSS as a strategic management tool for their organizations. It will cost time and money, but the organization that does it right will reap rewards beyond those obtained directly from the DSS system. When done properly, the DSS should bring indirect benefits to the whole organization.

Bibliography:

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King, W. R., Apte, U., Karmarkar, U., Kulkarni, U., Power, D. J., Sharda, R., Lazakidou, A. A.,

Nambisan, S., Devedzic, V., Gasevic, D., Yang, C. C., Chau, M., Wang, J., Chen, H., Memon, N., Xu, J. J., Hicks, D. L. Chen, H., Wang, Y., Jones, M. C. (2007-2017). Annals of information systems (21 book set). Springer.

Kulkarni, U., Power, D. J., Sharda, R. (2007). Decision support for global enterprises. Springer.

Laudon, J. P., & Laudon K. C. (2004). Management information systems: Managing the digital firm (8th ed.). New York: Prentice Hall.

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Power, D. (2002) Decision support systems: concepts and resources for managers. Quorum Books.

Power, D. (2007, March 10). A Brief History of Decision Support Systems. DSS Resources. https://dssresources.com/history/dsshistory.html version 4.1.

Power, D. (2013) Decision support, analytics, and business intelligence (2nd ed.). Business Expert Press.

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Turban, E., Aronson, J., & Liang T. (2001). Decision support systems and intelligent systems (6th edition). Pearson.

Turban, E., Aronson, J., & Liang T. (2005). Decision support systems and intelligent systems (7th edition). Pearson.

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Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

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Introduction

Management Information Systems (MIS) are structured to integrate people, processes, data, and technology in ways that assist organizations by improving efficiency, facilitating communication and coordination, enhancing decision-making, supporting strategic planning, etc. in ways that increase value.

MIS components include hardware, software, data, procedures, human resources, etc. while MIS functions include data collection and storage, data processing, reporting, decision support, coordination and control, etc.

MIS systems themselves take various forms such as:

“1. Transaction Processing Systems (TPS): Handle routine, high-volume transactions, such as payroll or order processing.

2. Decision Support Systems (DSS): Provide analytical tools for complex, non-routine decisions, often incorporating modeling and forecasting.

3. Executive Information Systems (EIS): Deliver high-level, summarized data for top management to monitor organizational performance.

4. Enterprise Resource Planning (ERP) Systems: Integrate core business processes, such as finance, human resources, and supply chain, into a unified system.

For example, a retail company might use an MIS to track inventory levels, monitor sales performance, and forecast demand, generating daily reports for store managers and providing real-time dashboards for regional directors, as illustrated in professional case studies” (xAI, Grok 3, 2025).

From a managerial perspective, an organization's MIS supports managers by providing them with rapid, accurate, and relevant information about the organizations operations, performance, and present state.

MIS should not be viewed solely as a technological system but rather a holistic approach that integrates business, technology, and human resources.

MIS is evolving rapidly, driven by technological advancements and changing business needs. These include the integration of artificial intelligence to create expert systems, an increased focus on quality, a greater adoption of governance and analytics, federated search, automation of business processes, RPA technologies, cloud deployments, increased systems integration, aggregated information from different sources, and speed of access (Malak, 2025).

Management Information Systems - Historical Information

Laudon & Laudon (2009, p. 164) divide the modern history of MIS into five time periods as follows:

1. First era (mid-1960s to mid-1970s) – Mainframe and minicomputer computing

2. Second era (mid-1970s to mid-1980s) – Personal computers

3. Third era (mid-1980s to late 1990s) – Client/server networks

4. Fourth era (late 1990s to the present) – Enterprise computing

5. Fifth era (the present going forward) – Cloud computing

“The first era (mainframe and minicomputer computing) was ruled by IBM and their mainframe computers for which they supplied both the hardware and software… As technology advanced, these computers were able to handle greater capacities and therefore reduce their cost. Smaller, more affordable minicomputers allowed larger businesses to run their own computing centers in-house/on-site/on-premises.

The second era (personal computers) began... as microprocessors started to compete with mainframes and minicomputers and accelerated the process of decentralizing computing power from large data centers to smaller offices. In the late 1970s, minicomputer technology gave way to personal computers and relatively low-cost computers… This proliferation of computers created a ready market for interconnecting networks and the popularization of the Internet.

The third era (client/server networks) arose as technological complexity increased, costs decreased, and the end-user (now the ordinary employee) required a system to share information with other employees within an enterprise.

The fourth era (enterprise computing) enabled by high speed networks, consolidated the original department specific software applications into integrated software platforms referred to as enterprise software. This new platform tied all aspects of the business enterprise together offering rich information access encompassing the complete managerial structure” (“Management Information System,” 2025).

The fifth era (cloud computing) ushered in a model where computing resources and applications are obtained on-demand over the Internet. Cloud software allows customers to use software hosted by vendors; cloud infrastructure allows customers to use processing, storage, networking, and other computing resources over the Internet to run their information systems; and cloud platform offerings allow customers to develop their own applications (Laudon & Laudon, 2009).

Note that this fifth era is increasingly being enhanced by the Industrial Revolution 4.0 which is associated with subjects like “AI (Artificial Intelligence), Big Data, IoT (Internet of Things), Sensors, CPS (Cyber-Physical Systems, i.e. robots), and Blockchain. So, in overall summary, cutting-edge techs like Cloud computing, Augmented Reality (AR), Virtual Reality (VR), Additive manufacturing (3D printing), Smart manufacturing, Advanced robotics, edge computing, Data analytics, Cyber-physical systems, cybersecurity solutions, Smart supply chain management, Image processing, ML-based Object detection technology, Nanotechnology, Quantum computing, Cognitive computing, Digital twins, Natural language processing (NLP), and Advanced analytics, and every other thing that is relevant to automation in industries, businesses, and other sectors to reduce cost, time and labor” 1 (Rashid et al., 2024).

Management Information Systems

The quality of management in an organization has many aspects from management structure to the effectiveness of the managers themselves; whether they are senior, middle, or operational management.

Laudon & Laudon (2020) points out that, “Management’s job is to make sense out of the many situations faced by organizations, make decisions, and formulate action plans to solve organizational problems.” In addition to effectively managing on-going day-to-day activities, “managers perceive business challenges in the environment, set the organizational strategy for responding to those challenges, and allocate the human and financial resources to coordinate the work and achieve success. Throughout, they must exercise responsible leadership” (p. 22).

They also manage new products and services, restructure when needed, and must successfully navigate the future as well executing correct approaches to these challenges.

Management’s responsibility encompasses an organization’s business processes and the right systems to support those processes as well as correctly analyzing and understanding the results and how they can be improved. Systems linking the enterprise together assist with this and include accounting systems, data systems, networking and telecommunications systems, etc. Beyond those, familiar MIS systems include enterprise resource planning systems (ERP), supply chain management systems (SCM), customer relationship management systems (CRM), knowledge management systems (KMS), and decision-support systems (DSS), etc.

MIS toolboxes exist to assist management in charge of organizations. Tools also exist to assist with external entities and services. For example, value chain models examine support activities of an organization and associated external entities (also see the value web). Economic tools are also utilized. An example would be the Porter model which assists in identifying competitive forces.

For an organization, MIS represents the management and control of information in an organization. Correctly analyzing, assessing, understanding, and applying the information associated with an organization is of such value to present and future success that it is difficult to overstate.

MIS naturally extends to the organization’s information systems (IS), information technology (IT) and information and communications technology (ICT), etc. with new and emerging technologies offering opportunities for analysis by organizations to consider how they might gain better utility, gain competitive advantages, expand, and restructure. Well publicized examples include emerging progress in fields such as artificial intelligence (AI), cloud computing, e-commerce and digital markets, social tools, mobile technologies, location-based services, enterprise and social networking (including in e-commerce), the Internet of Things (IOT), management of big data, etc.

Analyzing trends in how organizations are implementing new and emerging technologies assists in this. An example is the trend toward the rapid digital firm in which core business processes through digital networks span the organization and can link multiple organizations with “significant business relationships with customers, suppliers, and employees digitally enabled and mediated” (Laudon & Laudon, 2020, p. 13).

These trends highlight the growing interdependence between management and the technological resources leveraged by organizations to accomplish objectives and do so in a manner that overcomes the limitations of time and space. A simple example can look like this:

However MIS is applied, the objective is to support organizational operations and decision-making by providing relevant, timely, and accurate information.

Specifically, the core objectives of MIS are:

“1. Facilitate Decision-Making: MIS provide structured data and analytical tools to support informed decisions at strategic, tactical, and operational levels, enabling managers to address complex business challenges effectively.

2. Enhance Operational Efficiency: By automating data collection, storage, and processing, MIS streamline business processes, reduce manual efforts, and improve productivity across organizational functions.

3. Ensure Data Accuracy and Accessibility: MIS centralize data management to maintain consistency, reliability, and accessibility of information, ensuring stakeholders have trustworthy data for planning and execution.

4. Support Strategic Planning: MIS deliver insights through reports, forecasts, and trend analyses, aligning organizational activities with long-term goals and competitive strategies.

5. Improve Communication and Coordination: MIS enable seamless information flow across departments, fostering collaboration and ensuring alignment of objectives within the organization.

6. Enhance Organizational Control: By providing performance metrics and monitoring tools, MIS help track progress, identify deviations, and implement corrective actions to maintain operational control” (xAI, Grok 3, 2025).

These objectives assist organizations with using technology to manage resources, projects, and activities; gain competitive advantages; and adapt to changing business environments in a manner which achieves operational excellence while fostering customer and partner intimacy/loyalty.

That is not to say it is easy; especially when designing, building, and implementing new systems while overcoming associated organizational challenges.

Security Considerations

Every organization must make both physical security and information systems security a top imperative. In MIS, “security refers to the policies, procedures, and technical measures used to prevent unauthorized access, alteration, theft, or physical damage to information systems. Controls are methods, policies, and organizational procedures that ensure the safety of the organization’s assets, the accuracy and reliability of its records, and operational adherence to management standards” (Laudon & Laudon, 2020, p. 328).

Security must be ensured on every level both with respect to the organization and also its interaction with external entities. Laudon & Laudon (2020) introduce securing information systems in chapter eight of part two in much better detail.

Conclusion

MIS is a broad interactive discipline which is applied by organizations to meet objectives. While the scope of MIS implementations varies, for example an MIS implementation in a government agency or a multinational corporation will differ from that of a small or medium size business, the core objectives of MIS should be met in all MIS implementations. These consist of facilitating decision-making, enhancing operational efficiency, ensuring data accuracy and accessibility, supporting strategic planning, improving communication and coordination, and enhancing organizational control.

Bibliography:

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Bidgoli, H. (2017). MIS7: management information systems. Cengage.

Blackwell, A. F. (2024). Moral codes: designing alternatives to AI. MIT Press.

Chapple, M., & Seidl, D. (2024). CompTIA security+ (9th ed.). Wiley.

Docter, Q., & Buhagiar, J. (2022). CompTIA A+ (5th ed.). Sybex.

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Kurose, J. F., & Ross, K. W. (2012). Computer networking: a top-down approach (5th ed.). Pearson.

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Lammle, T. (2022). CompTIA network+ (5th ed.). Sybex.

Laudon, K. C., & Laudon, J. P. (2004). Management information systems: managing the digital firm (8th ed.). Pearson.

Laudon, K. C. & Laudon, J. P. (2009). Management information systems: managing the digital firm (11th ed.). Prentice Hall.

Laudon, K. C., & Laudon, J. P. (2015). Essentials of MIS (11th ed.). Pearson.

Laudon, K. C., & Laudon, J. P. (2020). Management information systems: managing the digital firm (16th ed.). Pearson.

Malak, H. A. (2025, Feb 17). 10 Incredible Information Management Trends in 2025. Information Management Simplified. https://theecmconsultant.com/information-management-trends/

Management information system. (2025, June 1). In Wikipedia, The Free Encyclopedia. Retrieved June 5, 2025, from https://en.wikipedia.org/w/index.php?title=Management_information_system&oldid=1293431267

Mutschler, C., Munzenmayer, C., Uhlmann, N., & Martin, A. (2024). Unlocking artificial intelligence: from theory to applications. Springer.

O'Brien, J. A., & Marakas, G. M. (2006). Management information systems (7th ed.). McGraw-Hill.

O'Brien, J. A., & Marakas, G. M. (2011). Management information systems (10th ed.). McGraw-Hill.

Rashid, A. B., Ashfakul, M. D., & Kausik, K. (Volume 7, 2024). AI revolutionizing industries worldwide: A comprehensive overview of its diverse applications. https://doi.org/10.1016/j.hybadv.2024.100277.

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Vermesan, O., Wotawa, F., Nava, M. D., & Debaillie B. (2023). Industrial artificial intelligence technologies and applications. River Publishers.

xAI. (2025). Grok (version 3) [DeepSearch]. https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

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Introduction

"Human Resources Management (HRM) refers to the strategic and operational processes involved in managing an organization's workforce to achieve its objectives. It encompasses the planning, acquisition, development, and maintenance of human capital while ensuring compliance with legal and ethical standards. HRM focuses on optimizing employee performance, fostering a positive workplace culture, and aligning workforce capabilities with organizational goals” (xAI, Grok 4, 2025).

These processes include recruitment and selection, training and development, performance management, compensation and benefits, employee relations, compliance and risk management, etc. HRM strives to integrate these processes for organizational success.

HRM has evolved into a structured and formal social science that solves issues surrounding how best to manage the domains of people, organization, workplace, and strategy.

History

Before the Industrial Revolution, which began in the middle of the 18th century, workers were managed through diverse methods. Due to the rapid growth of factories and large-scale employment resulting from the Industrial Revolution, modern formal and structured means of managing labor arose.

At first, the focus was on discipline and productivity. As time went on voters agitated for changes such as improved working conditions, a reduction in child labor, and basic benefits for workers. By the 20th century, such advances were accompanied by emerging labor laws and societal expectations which resulted in the emergence of personnel management and modern approaches to human resources.

By the mid-20th century, advances in work-related applications of social sciences (e.g. sociology, psychology, etc.) resulted in more human-centric approaches. After World War II, employers began to more heavily invest in safety and training, employee benefits, etc. to attract and retain workers. Later came the US Civil Rights Act of 1964 and social welfare legislation.

Eventually, in the 1970s and 1980s, HRM aligned with organizational strategic management. As modern globalism emerged, HRM adapted to more diverse and wide-spread workforces.

Today, HRM "is characterized by its strategic, technology-driven, and employee-centric approach, shaped by digital transformation, changing workforce expectations, and global challenges.

The history of HRM reflects a progression from task-oriented labor oversight to a strategic, employee-focused discipline. From the Industrial Revolution’s welfare initiatives to today’s technology-driven, inclusive practices, HRM has adapted to economic, social, and technological shifts. It continues to evolve, balancing organizational goals with employee well-being in an increasingly complex global landscape" (xAI, Grok 4, 2025).

Body

HRM is a broad social science. Consider the following;

Jackson et al. (2018) segment the social science of Human Resources Management (HRM) as follows and is recommended reading to gain competency in each segment:

1. Managing human resources.

2. Formulating and implementing HRM strategies.

3. Ensuring fair treatment and legal compliance.

4. Using job analysis and competency modeling.

5. Managing talent through workforce planning, recruitment, and retention.

6. Selecting employees to fit the job and the organization.

7. Training and developing a competitive workforce.

8. Conducting performance management.

9. Developing an approach to total compensation.

10. Using performance-based pay to achieve strategic objectives.

11. Providing employee benefits.

12. Promoting and improving employee safety, health, and well-being.

13. Understanding unionization and collective bargaining.

14. Managing human resources globally.

HRM strives to interact with organizational stakeholders successfully. With respect to HRM, stakeholders are those affected by an organization’s human resource policies, practices, and outcomes.

This includes internal stakeholders (e.g. employees, managers, senior leadership, etc.); and external stakeholders (e.g. shareholders and investors, government and regulatory bodies, unions and employee associations, customers and clients, suppliers and business partners, etc.).

Jackson et al. (2018) exhibit 1.1 presents examples of stakeholders and their concerns.

Exhibit 1.1 - Stakeholders and examples of their concerns (Jackson et al., 2018, p. 5).

In addition to human resource duties (e.g. manage employees, manage work environment, ensure compliance with labor laws, etc.); HRM takes a structured approach in working to normalize stakeholder requirements and expectations, aligning the sphere of HRM with organizational strategy, ensuring compliance, assisting with risk management, participating in advocacy, engaging in conflict resolution, etc.

This structured approach presents as an HRM framework that integrates the various functions into a cohesive system.

Jackson et al. (2018) exhibit 1.2 presents an integrative framework example for managing human resources effectively.

Exhibit 1.2 - An integrative framework for managing human resources effectively (Jackson et al., 2018, p. 14).

As previously stated, this HRM integrative framework does not stand by itself however. Rather, it operates as part of a broader organizational strategy that is designed by those in the organization responsible for the organization’s strategic management. This strategic management is conducted to achieve beneficial organizational objectives. An example of such an objective would be to gain and retain retain competitive advantages for the organization.

Again, HRM strategies align with the organization’s broader strategic management objectives. Jackson et al. (2018) exhibit 2.1 provides a view of how strategic management influences human resource management strategies in the context of external and internal environments.

Exhibit 2.1 - Human resource management strategies in the context of external and internal environments (Jackson et al., 2018, p. 40).

Note that the external environment in exhibit 2.1 also extends to the global landscape, even for many small firms today.

Jackson et al. (2018) states, “The global landscape refers to the differences, similarities, and interactions of the external environments around the world, which includes globalization. Thus, to understand the global landscape companies must understand the different socio-cultural landscapes, legal and political landscapes, demographic landscapes, and economic landscapes around the globe and how they interact” (p. 574).

Jackson et al. (2018) 14.3 displays what navigating the global landscape with an integrated HRM system looks like presently. Be aware that “two aspects of the global landscape that impact the management of human resources globally are regional trade zones and international organizations” (p. 574).

Exhibit 14.3 - Navigating the global landscape with an integrated HRM system (Jackson et al., 2018, p. 575).

Conclusion

This introduction has presented Human Resources Management (HRM) from a macro or big picture view to familiar a general audience with the overall theme of the social science. A great amount of detail exists underneath such a macro introduction and it is recommended that the reader revisit the segmentation of HRM provided by Jackson et al. and consider obtaining a newer edition of the textbook to gain the desirable competency that a detailed examination of each segment provides.

“Human Resources Management (HRM) is a critical function that strategically manages an organization’s workforce to achieve its objectives while fostering employee well-being and ensuring compliance with legal and ethical standards.

By integrating key HR functions—such as recruitment, training, performance management, compensation, and employee relations—HRM aligns workforce capabilities with organizational goals, balances the needs of diverse stakeholders, and adapts to internal and external environmental factors.

An effective HRM framework promotes organizational success, enhances employee satisfaction, builds stakeholder trust, and mitigates risks through ethical and compliant practices. In a dynamic business landscape, HRM’s role in driving strategic alignment, fostering adaptability, and leveraging technology remains essential for sustainable growth and competitive advantage” (xAI, Grok 4, 2025).

Bibliography:

Armstrong, M., & Taylor, S. (2014). Armstrong's handbook of human resource management practice (13th ed.). Ashford Colour Press Ltd.

Cascio, W. F. (2016). Managing human resources: productivity, quality of work life, profits (10th ed.). McGraw Hill.

Dessler, G. (2008). Human resource management (11th ed.). Pearson.

Gerhart, B., Hollenbeck, J., Wright, P., & Noe, R. (2022). Human resource management: gaining a competitive advantage ISE (13th ed.). McGraw-Hill.

Jackson, S. E., Schuler R. S., & Werner, S. (2018). Managing human resources through strategic partnerships (12th ed.). Thomson.

Milkovich, G., Newman, J., & Gerhart, B. (2014). Compensation (11th ed.). McGraw-Hill.

xAI. (2025). Grok (version 4) [DeepSearch]. https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

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Introduction

Titman et al. (2019) broadly define finance as “the study of how people and businesses evaluate investments and raise capital to fund them” (p. 36).

A more descriptive response would be to view finance as a subject of managing, allocating, and utilizing monetary resources which involves acquiring, investing, and managing money to maximize value and achieve financial objectives. It also includes assessing the “time value of money, risk and return, diversification, and financial markets” which include financial instruments (e.g. stocks, bonds, and derivatives) as well as integrating “tools like financial analysis, forecasting, and valuation to guide decision-making” (xAI, Grok 4, 2025).

Accounting topics commonly align with one or more of the three accounting classes: financial accounting; managerial accounting; and financial management.

Financial accounting addresses the recording and reporting of financial transactions and the preparation of financial statements (e.g., income statement, balance sheet, cash flow statement, etc.) for the benefit of an entity and external stakeholders such as investors, creditors, regulators, and tax authorities. It adheres to standardized frameworks such as Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) globally (Kieso, et al, 2016).

Managerial accounting is “the provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary financial and non-financial information that helps company managers make the best possible decisions” (Mowen et al, 2018, p. 4). This involves “the process of collecting, analyzing, interpreting, and presenting financial and non-financial information to assist management in decision-making, planning, and control within an organization. Unlike financial accounting, which focuses on preparing standardized financial statements for external stakeholders, managerial accounting is internally focused and provides tailored information to support strategic and operational decisions” (xAI, Grok 4, 2025).

Financial management focuses on “strategic planning, organizing, directing, and controlling financial activities within an organization to achieve specific financial objectives. It involves the efficient and effective management of monetary resources to maximize value, ensure liquidity, and mitigate risks. Financial management encompasses a range of activities, including budgeting, forecasting, investment decisions, risk management, and the oversight of financial operations” (xAI, Grok 4, 2025).

This article introduces financial management.

Reader’s note: A finance calculator https://www.calculator.net/finance-calculator.html and financial calculators https://www.calculator.net/financial-calculator.html are available at calculator.net.

History

The origins of financial management extend into antiquity, beginning with the emergence of trade and resource allocation. For example, clay tablets dating to about 3000 BC were discovered recording transactions in early forms of accounting. The Code of Hammurabi dates to about 1750 BC describing early financial governance. In antiquity, from ancient Egypt to ancient China to classical Greece (and later the Roman Empire), similar archaeological discoveries have unearthed artifacts demonstrating civilizations engaging in early accounting and finance.

The globalism of the Renaissance and the Age of Exploration resulted in more advanced financial systems and finally the first stock exchange in Amsterdam in 1602 and the Bank of England in 1694.

The Industrial Revolution increased the scale of enterprises and capital requirements ushering in the Modern Era. Intellectuals began publishing their theories on economics with an aim toward strategic finance. Stock exchanges and financial markets were established around the world.

The 20th century brought institutionalization, specialization, the creation of powerful government regulatory agencies, and the professionalization of financial management. Modern intellectuals introduced new financial management theory; for example, Harry Markowitz’s risk-return optimization and the capital asset pricing model (CAPM). Modern globalism expanded standard financial management practices internationally. Computerization brought complex financial modeling and data analysis.

And finally, the beginning of the 21st century has brought new legislation and financial instruments such as blockchain, cryptocurrencies, algorithmic trading, etc (xAI, Grok 4, 2025).

Body

As stated, finance involves the study of evaluating investments and raising capital to fund them.

Titman et al. (2019) lists “the three basic questions addressed by the study of finance:

1. What long-term investments should the firm undertake? This area of finance is generally referred to as capital budgeting.

2. How should the firm raise money to fund these investments? The firm’s funding choices are generally referred to as capital structure decisions.

3. How can the firm best manage its cash flows as they arise in the day-to-day operations? This area of finance is generally referred to as working capital management (p. 36).”

The three common business types are:

1. The sole proprietorship which is owned by a single individual entitled to all of the profits and responsible for all of the debts. There is no separation between the business and the owner with respect to liability.

2. A partnership is composed of two or more people who co-own a business for profit. A co-owner may be a general partner involved in the firm’s day-to-day activities with the same liability that a sole proprietor has. Or, they may be a limited partner who’s invested in the business (i.e., silent partner) but not involved in running the business possessing a liability limited to the amount of their investment.

3. A corporation may be privately or publicly held. In either case, shares are issued and the owners are the shareholders (i.e., stockholders). Corporations legally function separately and apart from their owners. Owner liability is restricted to their investment in the corporation; corporations have continuity; and the corporate structure is better for raising capital.

The following illustrates how finance fits into a corporation:

Financial managers (e.g., CFO, treasurer, controller, etc.) ultimately work for the owners of the corporation (e.g., shareholders, stockholders) to maximize their wealth within legal boundaries.

Borrowers, savers, investors, and institutions interact in financial marketplaces. These marketplaces include commercial banks, insurance companies, investment banks, investment companies, primary (for new securities) and secondary (for previously issued securities) securities markets, etc.

It is these security markets that bring investors and business together. The types of securities offered investors are debt securities and equity securities. Debt securities typically pay interest over a period of time to investors while equity securities (typically common or preferred stock) result in ownership of the corporation when purchased. Stock markets facilitate these transactions.

These represent the bulk of investor transactions; however, there are many other financial instruments available to investors besides in financial marketplaces.

In the United States, firms are required to adhere to Generally Accepted Accounting Principles (GAAP). GAAP are a "standardized set of accounting rules, standards, and procedures established to ensure consistency, transparency, and comparability in financial reporting within the United States... primarily issued by the Financial Accounting Standards Board (FASB) and provides a framework for preparing and presenting financial statements, ensuring that businesses follow uniform guidelines when reporting financial information" (xAI, Grok 4, 2025).

GAAP facilitates consistency, transparency, a principle-based approach, is mandatory, and covers core components (e.g. revenue recognition, balance sheet classification, expense recognition, etc.). Outside the U.S., the International Financial Report Standards (IFRS) is the framework most often found.

The analysis of financial statements are integral to assessing the state of an organization; it’s current performance, to monitor and control operations, and plan and forecast future performance. The most common are as follows:

1. Income statement (i.e. profit and loss statement): This “summarizes a company's revenues, expenses, and net income or loss over a specific period. Its primary purpose is to provide a clear picture of a company's financial performance, detailing how revenue is transformed into net income through various expenses and costs” (xAI, Grok 4, 2025).

Specifically, an income statement measures profitability, tracks revenue and expenses, supports decision-making, facilitates performance comparison, and ensures compliance.

2. Balance sheet: This “is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It details the company's assets, liabilities, and shareholders' equity, offering a clear view of what the company owns, owes, and the residual value attributable to its owners” (xAI, Grok 4, 2025).

The balance sheet summarizes a company's financial position, assesses liquidity and solvency, supports decision-making, facilitates comparisons, and is needed for regulatory compliance.

3. Cash flow statement: This “is a financial statement that provides a detailed summary of a company's cash inflows and outflows over a specific period. It tracks the movement of cash and cash equivalents, offering insight into how a company generates and uses cash to meet its operational, investing, and financing needs” (xAI, Grok 4, 2025).

Specifically, a cash flow statement measures the movement of cash with respect to operating activities, investing activities, and financing activities. It assesses liquidity, compliments other financial statements (together financial statements provide a comprehensive view of a company's performance and liquidity), supports decision-making, and assists with transparency and compliance.

4. Statement of shareholder’s equity: This “is a financial report that outlines the changes in a company’s equity accounts over a specific period. It details the movements in shareholders' equity, which represents the residual interest in the company’s assets after deducting liabilities, providing insight into how equity is affected by various transactions and events” (xAI, Grok 4, 2025).

Specifically, a statement of shareholders' equity tracks changes in equity accounts (e.g., common stock, additional paid in capital, retained earnings, treasury stock, and accumulated other incomes [foreign currency translation, pension adjustments, etc.]); reflects financial activities, provides transparency to stakeholders, supports financial analysis, and assists with regulatory compliance.

In addition to financial statements, financial ratios are employed to "evaluate a company's financial performance, operational efficiency, and overall stability by comparing relationships between various financial statement items. They serve several critical purposes in financial analysis, enabling stakeholders to make informed decisions… They provide a standardized framework for stakeholders to interpret complex financial data efficiently and effectively." (xAI, Grok 4, 2025).

Despite limitations; financial ratios are used to assess performance, facilitate comparisons, evaluate financial health, support decision-making, identify trends and anomalies, and are used in setting benchmarks and goals. Examples include liquidity ratios, capital structure ratios, asset ratios, management efficiency ratios, probability ratios, market value ratios, etc.

Titman et al (2019, pp. 43-45) lists the five basic principles of finance as:

1. Money has a time value. The value of money changes over time.

2. There is a risk-return tradeoff. Additional risk requires additional return.

3. Cash flows are the source of value. The amount of cash which can be taken from a business.

4. Market prices reflect information. Investors respond to information when buying and selling.

5. Individuals respond to incentives. The principle of self-interest.

Financial managers compare benefits and costs in different time periods in manifold ways. They compound interest, time, and rates; and calculate the value of of money over time. Terms such as ordinary annuity, annuity due, amortized loan, etc. reflect this.

Financial managers calculate rates of return and risk in various ways within systematic and non-systematic contexts. They also need an understanding of markets/market portfolios and financial theories.

With respect to debt, debt securities provide value to lenders through interest payments on outstanding loan amounts and the repayment of loan balances. Both private and public debt markets exist. With respect to stock and dividends, common stock has no maturity date and common dividends have no minimum or maximum. Preferred stock is more complex but does not have a fixed maturity date. Preferred stock dividends are fixed; however, unlike common stock which may not even pay a dividend. There are various means by which corporations distribute cash. Capital gains is another. These are the profits realized from the sale or disposal of a capital asset when the sale price exceeds the asset’s original purchase price (or cost basis).

With respect to capital budgeting, as potentially profitability projects and investments are identified, key equations are used to assess their suitability. The three most important are the Net Present Value (NPV), Internal Rate of Return (IRR) and the payback period, respectively.

Incremental cash flows are evaluated, project cash flows for expansion are calculated, comparisons are made. Risk is assessed using various analysis such as sensitivity, scenario, and simulation. An example are the various forms of break-even analysis. Financial managers also calculate capital costs and capital structure.

Financial planning occurs, which is a firm’s guide to the future. Financing requirements must be determined. Capital management must be correctly accomplished. So must risk management to the degree it is possible.

Also involved in financial management are international concerns. These include foreign exchange markets and currency exchange, interest rate and purchasing, and capital budgeting for direct foreign investment.

Conclusion

"Financial management is essential for ensuring the efficient allocation, utilization, and oversight of financial resources within an organization or for an individual’s personal finances. It encompasses planning, organizing, directing, and controlling financial activities to achieve specific objectives, such as profitability, stability, and growth. Below is a detailed explanation of why financial management is necessary, presented in a formal, structured, and concise manner, adhering to your preference for clear and professional language" (xAI, Grok 4, 2025).

When financial management is done right; it optimizes resource allocation, ensures financial stability, supports strategic decision-making, manages risks, enhances profitability and value creation, ensures compliance and accountability, facilitates growth and expansion, assists with future planning, and improves stakeholder confidence.

As this is but an introduction; a recent edition of Titman, et al’s Financial Management is suggested for understanding the content of this subject while the latest edition of Schaum's Outline of Financial Management (with answers) is recommended to work through financial management problems for competency.

Bibliography:

Benedict, A., & Elliott, B. (2011). Financial accounting: an introduction (2nd ed.). Pearson.

Britton, A., & Waterston, C. (2006). Financial accounting (4th ed.). Prentice Hall.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting (16th ed). Wiley.

Markowitz, H. (2008). Harry Markowitz selected works. World Scientific.

McCulloch, J. R. (1888). The works of David Ricardo. London.

Mitchell, R. E. (2014). A concise history of economists' assumptions about markets: from Adam Smith to Joseph Schumpeter. Praeger.

Phillips, F., Libby R., Libby, P. A., & Mackintosh, B. (2015). Fundamentals of financial accounting (4th ed.). McGraw-Hill.

Rich, J. S., Jones, J. P., Mowen, M. M., & Hansen D. R. (2010). Cornerstones of financial accounting. Cengage.

Shim, J. K., & Siegel, J. G. (2009). Schaum’s outlines of financial management. McGraw Hill.

Simko, P., Ferris, K., & Wallace, J. (2017). Financial accounting for executives & MBAs: texts and cases. Cambridge Business Publishers.

Smith, A. (1759). The theory of moral sentiments. London.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. London.

Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2007). Financial reporting, financial statement analysis, and valuation: a strategic perspective (6th ed.). Thomson.

Titman, S., Keown, A. J., & Martin, J. D. (2019). Financial management: principles and applications (13^th ed.). Pearson.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting with international financial reporting standards (4th ed.). Wiley.

Wild, J., Kwok, W., Venkatesh, S., Shaw, K. W., & Chiappetta B. (2016). Fundamental accounting principles (2nd ed.). McGraw-Hill.

xAI. (2025). Grok (version 4) [DeepSearch]. https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

Copyright © 2025 Paul L. Pothier. All rights reserved.

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Suggested Prerequisites

Accounting is indispensable to people, organizations, societies and governments and the many fields which incorporate the discipline, including the subject of this introductory essay: managerial economics.

Also critical to managerial economics are specific identifiable formulas with a basis in various math disciplines (e.g. calculus, linear algebra, statistics and probability, optimization theory, game theory, econometrics, and differential equations) which generally are incorporated into research and statistics for the purpose of managerial economics.

A brief summary of each discipline:

1. Financial accounting. “Financial accounting is a branch of accounting that focuses on the systematic recording, summarizing, and reporting of an organization's financial transactions in accordance with established standards and regulations. It primarily serves external stakeholders, such as investors, creditors, regulators, and tax authorities, by providing transparent and standardized financial information about the organization’s performance and financial position” (xAI, Grok 3, 2025).

2. Management accounting. “Management accounting involves the preparation and analysis of financial and non-financial information to support internal decision-making, planning, and control within an organization. Unlike financial accounting, which focuses on external reporting and compliance with standards such as GAAP or IFRS, management accounting is tailored to the needs of managers and is not subject to regulatory requirements. It provides insights to optimize operations, allocate resources, and achieve strategic objectives” (xAI, Grok 3, 2025).

3. Research and statistics. “The role of research and statistics in this field [i.e. managerial economics] is critical, as they provide the empirical foundation for analyzing data, testing economic theories, and optimizing managerial decisions” (xAI, Grok 3, 2025).

4. Managerial economics. “Managerial economics is a branch of economics that applies economic theories, principles, and analytical tools to business decision-making. It bridges the gap between economic theory and practical management, enabling managers to make informed decisions to achieve organizational objectives, such as profit maximization, cost minimization, or market competitiveness” (xAI, Grok 3, 2025).

Managerial Economics – Historical Information

Managerial economics emerged as a distinct field in the late 1940s and early 1950s when economics began to be systematically applied to business. In 1951, Joel Dean released Managerial Economics introducing tools that managers could apply to business such as "demand analysis, cost theory, and pricing strategies." "His work marked the formal recognition of managerial economics as a field, bridging the gap between theoretical economics and real-world business applications" (xAI, Grok 3, 2025).

In the preface of his innovative book, Dean (1951) stated the "purpose of this book is to show how economic analysis can be used in formulating business policies... In developing an economic approach to executive decisions, this book draws upon economic analysis for the concepts of demand, cost, profit, competition, and so on..." (p. vii).

The field expanded in the 1960s and 1970s. William J. Baumol "proposed the sales maximization hypothesis, suggesting that organizations often prioritize revenue growth over pure profit maximization—a departure from traditional economic assumptions. This theory provided a more nuanced understanding of business behavior." Oliver Williamson published "work on transaction cost economics" exploring "how organizations decide between in-house production and outsourcing" (xAI, Grok 3, 2025).

Advanced tools and sophisticated methodologies came into being during the 1980s and 1990s. For example, "game theory emerged as a key tool for analyzing competitive strategies and interactions between organizations, while econometrics enabled managers to leverage statistical data for forecasting and decision-making. Additionally, insights from behavioral economics started to influence the field, offering explanations for how psychological factors affect consumer and managerial choices" (xAI, Grok 3, 2025).

Presently, managerial economics has evolved into "an essential discipline for modern business management" blending together multiple academic disciplines such as microeconomics, statistics and research, and much more from other fields. (xAI, Grok 3, 2025).

Managerial Economics

Truett & Truett (2004, p.3) state that the central themes of managerial economics are:

1. Identifying problems and opportunities.

2. Analyzing alternatives from which choices can be made.

3. Making choices that are best from the standpoint of the organization.

They articulate these central themes in ten economic principles for managers as follows:

1. The role of Managers is to make decisions.

2. Decisions are always among alternatives.

3. Decision alternatives always have costs and benefits.

4. The anticipated objective of management is to increase the organization’s value.

5. The organization’s value is measured by its expected profits.

6. The organization’s sales revenue depends on demand for its products/services.

7. The organization must minimize cost for each level of change.

8. The organization must develop a strategy consistent with its market.

9. The organization’s growth depends on rational investment decisions.

10. Successful organizations deal rationally and ethically with laws and regulations.

These principles should guide managers in their work and decision-making.

And, it needs to be stated that organizational decision-makers engaging in managerial economics should have a working competency in basic demand and supply analysis.

A critical factor for organization revenue is the demand for its products/services. Understanding the demand function means knowing the demand for quantity over time and how that is affected by pricing, consumer, and advertising variables which can be plotted using a demand curve that is associated with total revenue, average revenue, and marginal revenue. Elasticity is examined. Elasticity measures how sensitive economic variables are to each other as a quantification of responsiveness (Truett & Truett, 2004, pp.33-85).

Consumer behavior is considered. Methods to quantify this focus on utility (e.g. cardinal utility approach, ordinal utility, marginal rate of substitution, and consumer equilibrium).

A key concern is the information needed to make decisions for operations to increase revenue, maximize profit, and expand their market. “Obviously, the more closely the organization can estimate demand conditions for its product, the more likely it is to determine correctly its profit-maximizing rate of output and price, or whether to produce a particular product at all” (Truett & Truett, 2004, p. 98).

Market research (e.g. surveying, experimentation, etc.) is employed, along with demand estimation with regression analysis, to predict future demand for a product or service.

Linear regression analysis is used to examine the relationship between a dependent variable and one or more independent variables for predicting outcomes and understanding relationships between variables.

Organizations need accurate revenue data and such tools to estimate an organization’s demand function (among other things). Then, they can engage in long-run and short-run economic forecasting.

“Forecasting refers to the process of analyzing available information regarding economic variables and relationships and then predicting the future values of certain variables of interest to the organization or economic policymakers” (Truett & Truett, 2004, p. 142).

Two types of data are used in economic forecasting:

1. Time series data: sequences of data points from time intervals.

2. Cross-sectional data: data for a specific point in time.

Factors which affect economic variables can be classified as trend factors, seasonal factors, cyclical factors, and other factors. Five common forecasting techniques used in economics are trend analysis, ARIMA models, barometric forecasting, surveys, and econometric models. Keep in mind that such forecasting do not result in completely accurate forecasts; however, when used correctly much can be learned to aid in decision-making.

The two main factors of concern to for-profit organizations are revenue and cost. Production analysis, which examines the processes for producing goods and services to maximize revenue and minimize costs, is a natural result of these concerns (Truett & Truett, 2004, pp. 176-219).

Central to production analysis is cost (e.g. cost of production). Knowledgeable managers understand that the level of cost relative to revenue determines the organization’s overall profitability. There are many types of costs (explicit/historical and implicit/opportunity), of course, including “historical costs, opportunity costs, fixed costs, variable costs, incremental costs, private costs, and social costs” (Truett & Truett, 2004, p. 223).

Though information about costs may be lacking, fixed costs and how costs vary with respect to output should be understood. Managerial economics employs various tools to aid in cost analysis in the long-run and short-run. Of course, products and services that people desire should be produced, marketed well, and priced correctly.

The next feature of managerial economics is profit analysis which uses tools to measure the difference between revenue and cost with a focus on examining how to maximize the difference (i.e. profit maximization). Profit analysis is critical to decision makers looking to improve profitability.

Another important mathematical tool is linear programming which is used for optimizing problems with a linear objective function and linear constraints that are in the form of inequalities.

Also of great interest is an understanding of market structures with respect to input price determination:

1. Where both the firms buying the input and the suppliers of the input are perfectly competitive.

2. Where there is only one buyer of the input (monopsony) but the suppliers view the market as perfectly competitive.

3. Where there is only one buyer and one seller of the input (bilateral monopoly).

“In the case of a perfectly competitive market for an input, the market price and equilibrium quantity are determined by market demand and supply. In the case of a monopsonistic input market, the market price and equilibrium quantity are determined by the quantity of the input utilized by the one buyer of the input… Finally, in the case of bilateral monopoly, the market price and equilibrium quantity of an input are determined through a bargaining process… For a firm interested in employing the profit-maximizing quantity of a variable input: Employ the input until its marginal revenue product equals its marginal cost” (Truett & Truett, 2004, p. 531-532).

Theoretical models which aid organizations in self-analysis include examinations of perfect competition and monopoly; monopolistic competition and oligopoly; game theory and strategy; etc. Multiple products, types of markets, and pricing strategies must be considered.

And with respect to the “decision rule that a firm must follow in order to determine the quantity of a variable input that it should utilize to maximize profit: Employ a variable input, input _L, up to the point where MRP_L = MC_L. If P_L is constant for all levels of input _L employed by the organization, MC_L = P_L and the firm should utilize the input until MRP_L = P_L” (Truett & Truett, 2004, p. 531; "Marginal Product of Labor: MP_L, MRP_L and Profit Maximization," 2025).

Multiple variable inputs and material costs need to be considered.

Managerial economics also focuses on management’s analysis of investment opportunities (e.g. capital budgeting), which may include new pursuits. Methods are used to estimate costs, revenues, compounding and discounting, risk and risk adjustment, etc.

Finally, the organization must factor the public sector (i.e. public sector analysis) and the legal and regulatory environment.

Conclusion

“Managerial economics serves as a vital discipline that integrates microeconomic principles with practical business decision-making. It provides managers with a structured framework to address complex business challenges by applying tools such as demand analysis, cost analysis, pricing strategies, and an understanding of market structures. These concepts enable firms to allocate scarce resources efficiently, optimize operations, and maximize profitability.

In practice, managerial economics empowers managers to make informed, data-driven decisions that enhance business performance. For example, demand forecasting helps predict customer behavior, while cost analysis ensures resources are used effectively. Pricing strategies and insights into market dynamics allow firms to remain competitive in diverse and evolving markets. Despite challenges such as limited data or the unpredictability of real-world conditions, the benefits (e.g. improved efficiency, better resource allocation, and strategic planning) far outweigh the limitations.

Ultimately, managerial economics is indispensable in today’s complex business environment. It equips managers with the analytical tools needed to navigate uncertainty, align decisions with organizational goals, and maintain a competitive edge. By bridging economic theory and managerial practice, it plays a crucial role in driving organizational success and sustainability” (xAI, Grok 3, 2025).

This introduction to managerial economics merely skims the surface, certainly with respect to the depth of the mathematical and statistical formulas the discipline employs. However, it should suffice to rapidly introduce the layperson to the theme of the subject, which is the purpose of this article.

Reader’s note:

This 12-minute presentation from ThinkEduca’s “Leader’s Talk” series is helpful to those being introduced to managerial economics for the first time. Click here to watch the video on YouTube.

Afterwards, to gain a deeper understanding, consider viewing a scholarly lecture series on the topic of managerial economics such as this one by Chris Azevedo (professor of economics at the University of Central Missouri):

https://www.youtube.com/playlist?list=PLTjEimbqDkpDSuxBF8M_AJCVxhgkBXAZN

Bibliography:

Baumol, W. J. (1977). Economic theory and operations analysis. Prentice-Hall.

Baumol, W. J., & Blinder, A. S. (2009). Economics: principles & policy. South-Western Cengage Learning.

Baye, M. R. (2000). Managerial economics & business strategy. McGraw-Hill.

Benedict, A. (2011). Financial accounting: an introduction. Pearson.

Brewer, P. C., Garrison, R. H., & Noreen, E. (2023). Managerial accounting. McGraw-Hill.

Dean, J. (1951). Managerial economics. Prentice-Hall.

Frank, R. H., & Bernanke, B. S. (2007). Principles of macroeconomics. McGraw-Hill.

Gillespie, A. (2016). Foundations of economics. Oxford University Press.

Hansen, D. R., & Mowen, M. M. (2005). Management accounting. Thomson.

Jehle, G. A., & Reny P. J. (2001). Advanced microeconomic theory. Addison-Wesley.

Mankiw, N. G., & Ball, L. M. (2011). Macroeconomics and the financial system. Worth Publishers.

Mansfield, E., & Yohe, G. (2004). Microeconomics: theory/applications. W. W. Norton & Company.

Marginal product of labor: MP_L, MRP_L and profit maximization. (2025, May 1). In Wikipedia, The Free Encyclopedia. https://en.wikipedia.org/wiki/Marginal_product_of_labor#MPL,_MRPL_and_profit_maximization

Petersen, C. H., & Lewis C. W. (1999). Managerial economics. Prentice-Hall.

Phillips, F., Libby, R., Libby, P. A., & MacKintosh, B. (2015). Fundamentals of financial accounting. McGraw-Hill.

Prince, J. T., & Baye, M. R. (2021). Managerial economics and business strategy (9th ed.). McGraw Hill.

Salvatore, D. (2012). Principles of microeconomics. Oxford University Press.

Sikdar, S. (2006). Principles of macroeconomics. Oxford University Press.

Simko, P. J., Ferris, K. R., & Wallace, J. S. (2017). Financial accounting for executives & MBAs. Cambridge Business Publishers.

Spiceland, D. J., Thomas, W., & Herrmann, D. (2022). Financial accounting. McGraw-Hill.

Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2007). Financial reporting, financial statement analysis, and valuation: a strategic perspective. Thomson.

Thomas III, L. G. (1986). The economics of strategic planning: essays in honor of Joel Dean. Lexington Books.

Titman, S., Keown, A., & Martin, J. (2017). Financial management: principles and applications. Pearson.

Truett, L. J., & Truett, D. B. (2004). Managerial economics: analysis, problems, cases. Wiley.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting: with international financial reporting standards. Wiley.

Williamson, O. E. (1975). Markets and hierarchies: analysis and antitrust implications. The Free Press.

xAI. (2025). Grok (version 3) [DeepSearch]. https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

Copyright © 2025 Paul L. Pothier. All rights reserved.

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Introduction

Accounting topics commonly align with one or more of the three accounting classes: financial accounting; managerial accounting; and financial management.

Financial accounting addresses the recording and reporting of financial transactions and the preparation of financial statements (e.g., income statement, balance sheet, cash flow statement, etc.) for the benefit of an entity and external stakeholders such as investors, creditors, regulators, and tax authorities. It adheres to standardized frameworks such as Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) globally (Kieso, et al, 2016).

Managerial accounting is “the provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary financial and non-financial information that helps company managers make the best possible decisions” (Mowen et al, 2018, p. 4). This involves “the process of collecting, analyzing, interpreting, and presenting financial and non-financial information to assist management in decision-making, planning, and control within an organization. Unlike financial accounting, which focuses on preparing standardized financial statements for external stakeholders, managerial accounting is internally focused and provides tailored information to support strategic and operational decisions” (xAI, Grok 4, 2025).

Financial management focuses on “strategic planning, organizing, directing, and controlling financial activities within an organization to achieve specific financial objectives. It involves the efficient and effective management of monetary resources to maximize value, ensure liquidity, and mitigate risks. Financial management encompasses a range of activities, including budgeting, forecasting, investment decisions, risk management, and the oversight of financial operations” (xAI, Grok 4, 2025).

This article introduces managerial accounting.

Managerial accounting positions in firms involve both line and staff roles and positions. Three of the most visible roles are the chief financial officer (CFO), the controller (i.e., chief accounting officer), and the treasurer. The CFO oversees financial management and reporting which are key aspects of managerial accounting; the controller supervises all accounting functions and reports to the chief operating officer (COO) and general manager; the treasurer is responsible for the finance function of managerial accounting, raising capital, managing cash and investments, etc. (Mowen et al., 2018, p. 15).

Business accounting systems should be able to deliver both financial accounting (see EBS 6) and managerial accounting information.

History

Managerial accounting was rudimentary before the industrial era. Primarily, it was focused on record keeping for trade and commerce in which merchants tracked costs, revenues, and profits.

In the industrial revolution (late 18th and 19th centuries), more systematic approaches emerged to better manage areas such as costs (e.g., cost accounting). The early 20th century brought a formal standardization, led by figures like Frederick Taylor, emphasizing efficiency and productivity which impacted workflows, labor costs, and production processes. Standard costing and budgeting were employed.

The mid-20th century brought production and economic expansion resulting in precise cost control and resource allocation. Techniques like break-even analysis and cost-volume-profit (CVP) analysis were used. Divisional structures emerged alongside tools such as responsibility accounting. The introduction of computers provided the speed necessary for detailed and timely reports.

The late 20th century saw strategic focus and new techniques (Just-In-Time inventory [JIT], Total Quality Management [TQM], etc.) in a globally competitive environment. Activity-based costing (ABC) under Robert Kaplan and others emerged along with new techniques (e.g. Balanced Scorecard, etc.) as accounting shifted to align with strategic goals.

Enterprise Resource Planning (ERP) systems were adopted in the 1990s integrating managerial accounting data with other business functions resulting in real-time reporting and analysis.

In the early 21st century, technology and data-driven decision-making has resulted driven by big data, cloud computing, and advanced analytics with real-time data analysis, forecasting, and scenario planning. The use of artificial intelligence (AI) and automation to predict costs, optimize pricing, and automate routine accounting tasks so that managerial accounts can focus on strategic analysis. Also, global businesses are increasingly aligned with international frameworks to ensure consistency across operations (xAI, Grok 4, 2025).

Body

Mowen et al. (2018) states that “managerial accounting information is needed by a number of individuals. In particular, managers and empowered workers need comprehensive, up-to-date information for the following activities: 1) Planning, 2) Controlling, and 3) Decision-making” (p. 5).

The planning involves using financial and non-financial information to support decision-making, budgeting, and performance evaluation within an organization.

This planning (define objectives, gather data, develop plans, implement plans, monitor and adjust) includes budgeting (master budget, flexible budgets, and zero-based budgeting); forecasting (quantitative and qualitative methods), cost analysis and control (fixed vs variable costs, direct vs indirect costs, cost-volume-profit analysis); strategic planning (balanced scorecard, SWOT analysis, and performance measurement and variance analysis (variance analysis, key performance indicators).

The controlling “refers to the process of monitoring, evaluating, and regulating business activities to ensure alignment with organizational plans, goals, and budgets. It focuses on providing managers with timely and relevant information to assess performance, identify deviations, and implement corrective actions” (xAI, Grok 4, 2025).

This includes performance measurement (key performance indicators, responsibility accounting); variance analysis (favorable and unfavorable variance); cost control (cost monitoring, standard costing, activity-based costing); budgetary control (static budgets, flexible budgets, rolling budgets); internal reporting and feedback (management reports, balanced scorecard).

This also includes establishing standards and targets; measuring actual performance; comparing actual vs planned performance, analyzing variances; taking corrective action; and providing feedback.

Objectives include operational efficiency; supporting decision-making, mitigating risk; and performance accountability.

Tools to accomplish managerial accounting control are varied and include software offerings, analytical tools, and visual tools.

Decision making involves choosing between alternatives and is intertwined with planning and control.

In addition to the above, it is important for businesses to maintain a customer orientation as a key focus. Firms can realize competitive advantages by creating better customer value and/or lower cost. “Customer value is the difference between what a customer receives and what the customer gives up when buying a product or service.” This can manifest as a range of tangible and intangible benefits (Mowen et al., 2018, p. 9).

Strategic positioning, correct management of the value chain, taking a cross-functional perspective, engaging in total quality management, employing time competitively, fostering efficiency, etc. all result in positive outcomes and create customer value (Mowen et al., 2018, pp. 10-12).

Mowen et al., (2018) states: "One of the most important yet difficult tasks of managerial accounting is to determine the cost of products, services, customers, and other items of interest to managers. Therefore we need to understand the meaning of cost and the ways in which costs can be used to make decisions, both for small entrepreneurial businesses and large international businesses" (p. 32).

Managers classify costs, how costs are used, assign costs to cost objects, prepare external reports, predict cost behavior, and employ all this in decision making. Costs are known as direct (traced to cost objects) or indirect (not easily be traced to cost objects). In external reporting, costs are either product costs (cost of goods sold) or period costs (expenses in the period incurred).

Costs are placed in three categories, depending on how they react to activity changes: variable (proportional to activity), fixed (remain the same as activity), and mixed (variable and fixed [Y=a+bX where X is the activity, Y is the total cost, a is the fixed cost element, and b is the variable cost per unit of activity]).

When the relation between cost and activity is linear, the variable and fixed elements of a mixed cost can be estimated using the high-low method.

The income statement is primarily used for external reporting as it organizes costs using product and period. In the contribution format, the income statement organizes costs using variable and fixed.

In decision making; differential cost and revenue, opportunity cost (the benefit lost when an alternative is selected over another alternative), and sunk cost (past cost that cannot be altered) are vital. The latter (i.e. sunk cost) are always irrelevant for making decisions though and should be ignored.

The following paraphrases (including quotes) Noreen et al. (2017):

Managers classify costs, how costs are used, assign costs to cost objects, prepare external reports, predict cost behavior, and employ all this in decision making. Costs are known as direct (traced to cost objects) or indirect (not easily be traced to cost objects). In external reporting, costs are either product costs (cost of goods sold) or period costs (expenses in the period incurred).

Costs are placed in three categories, depending on how they react to activity changes: variable (proportional to activity), fixed (remain the same as activity), and mixed (variable and fixed [Y=a+bX where X is the activity, Y is the total cost, a is the fixed cost element, and b is the variable cost per unit of activity]).

When the relation between cost and activity is linear, the variable and fixed elements of a mixed cost can be estimated using the high-low method.

The income statement is primarily used for external reporting as it organizes costs using product and period. In the contribution format, the income statement organizes costs using variable and fixed.

In decision making, differential cost and revenue (differ between alternatives), opportunity cost (the benefit lost when an alternative is selected over another alternative), and sunk cost (past cost that cannot be altered) are vital. The latter (i.e. sunk cost) are always irrevelant for making decisions though and should be ignored,

Cost-volume-profit (CVP) analysis models how profits respond to prices, costs, and volume which allow managers to find answers to important questions (e.g., break-even volume; margin of safety; changes made to prices, costs, and volume; etc.). CVP and profit graphs are useful for how costs and profits respond to changes in sales.

The contribution margin ratio is the ration of the total contribution margin to total sales and can be used to estimate what impact a change in total sales has on net operating income.

Break-even analysis estimates how much sales would have to be to break even. The unit sales to break even can be estimated by dividing the fixed expense by the unit contribution margin. Target profit analysis works by dividing the sum of the target profit and fixed expense by unit contribution margin. The margin of safety is the amount current sales exceed break-even sales.

The degree of operating leverage estimates what impact a given percentage change in sales has on net operating income. And changes in the sales mix affects the break-even point, margin of safety, etc.

Job order costing costs products when many different products or services are used. Materials requisition forms and labor time tickets assign direct materials and direct labor costs in a job order costing system.

Manufacturing overhead costs use a predetermined overhead rate. All of the costs are recorded a job cost sheet. The predetermined overhead rate is calculated by dividing the estimated total manufacturing cost for the period by the estimated total amount of allocation base for the period (e.g. direct labor hours, direct machine hours, etc.). Overhead is applied to jobs by multiplying the predetermined overhead rate by the amount of the allocation base for the job.

The predetermined over rate is based on estimates so the actual overhead cost may differ. This difference is underapplied or overapplied overhead which, for the period, can either close out to Cost of Goods Sold or allocated between Work in Process, Finished Goods, and Cost of Goods Sold. Inventories must be adjusted accordingly.

Variable and absorption costing are alternative methods of determining unit product costs. Under variable costing only those manufacturing costs that vary with output are treated as product costs (e.g. direct materials, variable overhead, ordinary direct labor, etc.). Fixed manufacturing overhead is treated as a period cost and expensed on the income statement as incurred. Absorption costing treats fixed manufacturing overhead as a product cost (along with direct materials, direct labor, and variable overhead) with a portion of fixed manufacturing overhead assigned to each unit as it is produced. In both cases, selling and administrative expenses are treated as period costs.

Segmented income statements evaluate profitability and performance. Using a contribution approach, variable and fixed costs are separated. The sales amount required for a segment to break even is computed by dividing the segment's traceable fixed expenses by its contribution margin ratio.

Traditional cost accounting can result in cost distortions for decision making as all manufacturing costs are allocated to products, nonmanufacturing costs caused by products are not assigned to products, and there's too much reliance on unit level allocation bases (e.g., direct labor and machine hours) resulting in overcosting high volume products and undercosting low volume products.

Activity based costing is concerned with overhead. It estimates the costs of resources consumed by cost objects and assumes these cost objects generate activities that in turn consume resources. Direct labor and materials; however, are accounted for the same in both traditional and activity based costing.

With respect to capital budgeting, the payback method of evaluating capital investment projects focuses on the payback period (the length of time it takes for a project to recover its initial cost). The faster an investment can be recovered, the more desirable it is.

Using the time value of money principle in the net present value method, future cash flows are discounted to their present value which if negative means rejecting the project. The discount rate in the net present value method is based on a minimum require rate of return. If the internal rate of return is less than the minimum rate of return, the project is rejected. Of course, more funds may be allocated to make projects desirable. The simple rate of return is found by dividing a project's accounting net operating income by the initial investment.

Various types of operating budgets relate to each other. The sales budget is the foundation for a master budget. The sales budget drives the production budget which drives the various manufacturing cost budgets. All of these budgets drive the cash budget and the budgeted income statement and balance sheet.

Actual revenues and costs differ from budgeted revenues and costs, the difference can be isolated.

Performance can be benchmarked with the difference to actual performance being the variance. Variance is reported to management regularly for both quantity and price elements of direct materials, direct labor, and variable overhead.

To evaluate performance, business units are called cost centers, profit centers, and investment centers which are evaluated using standard cost and flexible budget variances. Return on investment (ROI), residual income, and EVA are used to evaluate their performance. A balanced scorecard supports the organization's strategy.

Pricing products and services needs to be determined. Supply and demand principles must be considered. Cost plus formulas are often used to set prices but alternative pricing methods are available. In any case, the actual cost of a product should not exceed its target cost.

Also, a distinction should be made between absolute profitability and relative profitability. A segment is profitable if dropping it would result in lower absolute profits. A relative profitability measure ranks segments and are necessary if a constraint forces trade-offs between segments (Noreen et al., 2017).

Conclusion

“Managerial accounting plays a critical role in enabling organizations to make informed strategic and operational decisions. By providing detailed financial and non-financial information tailored to internal stakeholders, it supports budgeting, cost analysis, performance evaluation, and resource allocation. Through tools such as variance analysis, activity-based costing, and forecasting, managerial accounting enhances efficiency, optimizes profitability, and aligns operations with organizational objectives. Its forward-looking approach and focus on internal decision-making distinguish it from financial accounting, ensuring managers have actionable insights to navigate complex business environments. In conclusion, managerial accounting is an indispensable discipline that empowers businesses to achieve sustainable growth and competitive advantage through data-driven decision-making” (xAI, Grok 4, 2025).

As this is but an introduction; a recent edition of Mowen, et. al’s Managerial Accounting or Noreen et al’s Managerial Accounting for Managers is suggested for a comprehensive delve into this subject while the latest edition of Schaum Outline’s Managerial Accounting (with answers) is recommended to work through managerial accounting problems for competency.

Reader’s note: A finance calculator https://www.calculator.net/finance-calculator.html and financial calculators https://www.calculator.net/financial-calculator.html are available at calculator.net.

Reader’s note: As of the date of this article, the online course provider Udemy offers low cost courses in management accounting and related areas.

Bibliography:

Easton, P. D., Halsey, R. F., McAnally, M. L., Hartgraves, A., & Morse, W. J. (2013). Financial & managerial accounting for MBAs (3rd ed.). Cambridge Business Publishers.

Hilton, R. W., & Platt, D. E. (2017). Managerial accounting: creating value in a dynamic business environment (11th ed.). McGraw-Hill.

Institute of Management Accountants. (2025). Imanet.org. https://www.imanet.org/

Jiambalvo, J. (2013). Managerial accounting (5th ed.). John Wiley & Sons.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting (16th ed). Wiley.

Mowen, M. M., Hansen D. R., & Heitger, D. L. (2018). Managerial accounting: the cornerstone of business decision making (7^th ed). Cengage.

Noreen, E. W., Brewer P. C., & Garrison, R. H., (2017). Managerial accounting for managers (4th ed.). McGraw-Hill.

Shim, J. K., & Siegel, J. G. (2011). Schaum’s outlines of managerial accounting (2nd ed.). McGraw Hill

Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J. V. (2015). Financial & managerial accounting: the basis for business decisions (17th ed.). McGraw-Hill.

xAI. (2025). Grok (version 4) [DeepSearch]. https://grok.com/

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Introduction and History

Robbins (2005) defines organizational behavior (OB) as:

“a field of study that investigates the impact that individuals, groups, and structure have on behavior within organizations for the purpose of applying such knowledge toward improving an organization’s effectiveness” (p. 9).

OB is a field of study, which means it is a distinct area of expertise with a common body of knowledge. OB targets three determinants of behavior within organizations which are individuals (micro-level), groups (mesa-level), and structure (macro-level) which it examines using the methods of other academic disciplines. Of course, the output of organizational behavior studies, which finds application in organizations, reflects these contributions (inputs) from other academic disciplines. Inputs affect output.

Whenever people interact in organizations, many factors come into play. Organizational studies attempt to understand and model these factors. Like all social sciences, OB seeks to control, predict, and explain. The field of study is concerned with what people do in an organization, how what they do affects the organization, and how the organization might respond to realize better outcomes.

OB is a large subject that isn’t easily communicated in a linear manner. Most guides on the topic are extensive. While the roots of organizational theory can be traced back to antiquity, organizational studies are generally considered to have begun as an academic discipline with the scientific management of the 1890s. Subsequently, research was turned into business practices.

One of the first people to capture on paper the processes and practices of organizations was Henri Fayol (1841-1925). A mining engineer and manager by profession, Fayol defined the nature and working patterns of late nineteenth-century and early twentieth-century organization in his 1909 book titled L'exposee des principles generaux d'administration (i.e. General and Industrial Management). In it, he laid down what he called the 14 principles of management.

Fayol’s 14 principles are: division of work; authority and responsibility; discipline; unity of command; unity of direction; subordination of individual interest; remuneration; centralization; scalar chain; order; equity; stability; initiative; and esprit de corps. He considered these principles essential for prediction, planning, decision-making, process management, control and coordination.

In 1911, Frederick Taylor (1856-1915) published the first edition of The Principles of Scientific Management. Proponents of scientific management believed that rationalizing the organization with precise sets of instructions and time-motion studies would lead to increased productivity and studies of different compensation systems were carried out. He stressed “science, not rule of thumb; harmony, not discord; cooperation, not individualism; maximum output, in place of restricted output; [and] the development of each man to his greatest efficiency and prosperity” (Taylor, 1919, p. 140).

Taylorism represented the peak of this movement which sought to secure the maximum prosperity for both employers and employees using scientific management principles; a focus that would have been a welcome change to the real wage stagnation, underemployment, labor force displacement, etc. that has been a problem for many U.S. private-sector workers in the years leading up to 2025 that resulted from non-symbiotic labor exploitation to maximize shareholder wealth. Mass offshoring of domestic jobs to foreign nations, mass outsourcing of domestic work to foreign firms, the mass importation of foreign labor, machinations of oligarchy and a slide toward plutocracy from hard lobbying, etc. were all utilized. (This was especially hard on U.S. citizens suffering from physical health issues that still needed sustainable work but were deemed unfit and easily replaced due to the manipulated domestic labor demand vs labor supply and unfair trade environment that largely prevented capitalistic-driven domestic solutions from manifesting to provide them accommodation). As this topic runs outside of the scope of this article, it needs to be addressed in greater depth in a future dedicated article which should also detail areas such as the new accelerating trend of replacing workers with AI automation.

Another pioneer was Max Weber (1864-1920) with his posthumous 1921 seminal publication titled Economy and Society: An Outline of Interpretive Sociology. As one of the founders of sociology, Weber employed the discipline to construct a comparative methodology that articulated rational action in different contexts with a focus on bureaucracy.

After World War I, organizational studies began to analyze how human factors and psychology affected organizations (i.e. the Hawthorne Effect). This human relations movement focused more on teams, motivation, and the actualization of the goals of individuals within organizations however. Some of the more prominent early scholars included: Chester Barnard, Henri Fayol, Mary Parker, Follett, Frederick Herzberg, Abraham Maslow, David McClelland, and Victor Vroom.

The Second World War brought further changes and the invention of large-scale logistics and operations research led to a renewed interest in systems and rationalistic approaches to the study of organizations. Then in the 1960s and 1970s, the field was strongly influenced by social psychology and the emphasis in academic study was on quantitative research. Starting in the 1980s, cultural explanations of organizations and change became an important part of study. Qualitative methods of study became more acceptable, informed by anthropology and sociology.

Today, OB organizational studies departments are within business schools and industrial psychology and industrial economics programs. Some central areas of studies include how certain phenomena manifest in organizational settings. It is also important to note the role OB plays globally, including how OB is employed to normalize interactions between parties from diverse backgrounds with different cultural values.

Models, Theories, and Types

Robbins (2005) defines a model as “an abstraction of reality, a simplified representation of some real-world phenomenon” (p. 26). Models, also frequently referred to as theories [the two terms are used interchangeably], serve the useful purpose of systematically frame working understanding in attempting to describe systematically interrelated concepts or hypotheses that claims to explain and predict phenomena. A basic OB model consists of three levels analogous to building blocks. Each level builds on top of the level beneath it. Group concepts grow out of the individual foundation and organization systems grow from group concepts as Robbins demonstrates in Exhibit 1-7 on page 26.

There are many theories in OB including theories to describe what motivates people, effective leadership styles, conflict resolution, power acquisition, etc. Wood (1996) offers a very useful model for exploring behavioral events. He suggests that different levels of analysis can be applied when examining the significance of an organizational issue. He proposes eight, namely: individual, team, inter-group, organizational, inter-organizational, societal, international, and global.

Robbins (2005) states that, “In some cases, we have half a dozen or more separate theories that purport to explain and predict a given phenomenon” (p. 588). Interestingly, each reflects science at work. Theories attempting to explain common phenomena only show that the discipline of OB is growing and evolving.

The Manager and Organizational Behavior

To managers, OB is not just of theoretical interest, the discipline underpins practical organizational activities. For example, a discussion with an under-performing team member requires an understanding of individual motivation; running an effective meeting requires an appreciation of group dynamics, dealing with colleagues, and suppliers; customers from another country call to discuss a matter of cultural difference; helping two team members resolve a difference involves conflict resolution and negotiation skills; and so on.

Let us use a quick example. Say there was a new member of your team at work who attended the corporate induction program, but who is under performing? How might you account for their lower-than-expected level of performance? Depending on how you viewed that individual and who you listened to, here are some reasons you might come up with:

1. They just do not have the ability for the job (Individual level).

2. Their colleagues are not being supportive (Team level).

3. The induction program prepared by the Training department was of poor quality on this occasion (Intergroup level).

4. The company's training budget has been slashed (Organizational level).

And so on, the point being that the level of explanation chosen determines a view of the causes of the problem and affects the actions taken and solutions employed to solve it.

Inappropriate intervention at the wrong level can make a problem worse rather than better. Robbins (2005) states that decision making occurs as a reaction to a problem” and that “every decision requires the interpretation and evaluation of information” (p. 143). Consider the following in that light:

1. People tend to pick their favorite level of analysis to explain events, and then behave accordingly. This is often particularly true of external consultants brought into perform a "quick fix."

2. People are most familiar with, and often prefer, explanations at the individual level of behavior. Trying to change people by sending them on a training course is simpler than changing structures or upgrading technology. However, such explanations are often too simplistic, inaccurate, or incomplete.

3. As a general principle, any organizational problem can be usefully analyzed at ever-higher levels of abstraction. By considering a problem progressively at the individual, group, intergroup, and organizational levels, a deeper understanding of its causes can be gained. As a result, the tools needed to tackle the problem can be chosen more accurately, and applied more effectively.

Therefore, looking at a problem systematically will always yield a better understanding than simply leaping in with fixed preconceptions. OB is characterized by a view that organizations can be best explored by approaching them from a range of different perspectives. Just as there is no one best way to run and organize a business, so there is no one best perspective from which a total understanding of organizations can be gained; however, OB draws its strength from these rich and various perspectives seeking to detect which approach is most effective for a particular organization on a particular issue. Making the right OB choice yields positive results.

There are a number of factors that can affect an organization’s performance. These include:

1. The formal statements of philosophy, values, charter, and credo.

2. The behavior modeled by management.

3. The criteria used for reward, status, selection, promotion, and termination.

4. The stories, legends, myths, and parables about key people and events.

5. What leaders pay attention to, measure, and control.

6. Leaders’ reactions to critical incidents and crises that threaten.

7. Survival, challenge norms, and test values.

8. How the organization is designed and structured.

9. Organizational systems and procedures; and the competitive marketplace.

It is how organizations manage these elements during periods of transition that often seems to determine whether they achieve their goals.

Take Dell Computer Corporation, for example. They are one of the computer industry's biggest success stories and have successfully transitioned through the Internet paradigm. Dell was quick to take advantage of the Internet and technology and do it in a customer orientated manner. This resulted in a greater market share, much of it at the expense of competitors (see Compaq). Dell focused on the customer while maintaining a healthy sense of urgency and crisis. They were opportunistic, customer-focused, and rapid.

Their customer focus linked to strategic savvy, an ongoing commitment to innovation, and speed. To accomplish this required a commitment to internal organizational processes. A healthy, competitive culture where people partner through shared objectives and a common strategy emerged in the organization. They summed up their approach as follows:

1. Mobilize your people around a common goal.

2. Invest in long-term goals by hiring ahead of the game and communicating this commitment to your people.

3. Don't leave the talent search to the human resources section.

4. Cultivate a commitment to personal growth.

5. Build an infrastructure that rewards mastery.

6. Keep in touch with people at all levels of the company.

An example of a company that did not navigate the future well was Encyclopedia Britannica's loss of market share to Microsoft's Encarta (itself discontinued since 2009).

Loyalty surveys have shown that there is often more variation within organizations than between them highlighting that there can be both poorly-engaged and well-engaged groups within an organization. Top management may not even be aware who in their company is effectively engaging and who is not.

There are further key themes that seem to echo through companies that are successful and navigate the future well. Robbins (2005) includes:

1. Companies mirror their founders. Organizations start with founders and entrepreneurs whose personal assumptions and values gradually create a certain way of thinking and operating, and if their companies are successful, those ways of thinking and operating come to be taken for granted as the ‘‘right’’ way to run a business.

2. It is usually crisis, not periods of comfort, that propel significant cultural change. When all is going well for a business, changing the formula is often the last thing on anybody’s mind.

3. Achieving business success requires a sense of purpose first and good management practices.

4. Organizations achieve success in very different ways and by focusing on what is most important to them. In some cases, the need is to focus on dangers within the organization. There is no such thing as the ideal set of organizational behaviors or management practices, except in relation to what the organization is trying to do.

5. Successful companies are those that came up with a way forward which is timely, credible, simple, and – most crucial of all – able to be readily applied. In the final analysis, organizational success comes down to implementation. The best ideas poorly executed are worthless.

Of course, organizational structure and leadership are critical. In addition to organizational structure, issues such as what mix of transactional and transformational leadership are implemented in an organization affect behavior in an organization.

Technology and Organizational Behavior

So much can be offered regarding how technology has affected OB and communications that to properly address that topic is beyond the scope of this paper. There are some very key points; however, that need to be stated.

The first is in decision-making. Typically, leadership makes all the big strategic decisions about what the company is going to do. The difference is that decision-making in the technology age is often a more collaborative process. Another facet of decision-making in many actual technology companies is they grow too fast to be managed closely from the center. Decisions, once taken centrally, are rapidly devolved to those working in the business to determine the method and manner of implementation.

The next is in internal communications. This is not a problem in the early days when the organization consists of a small group of highly motivated people who spend a lot of time in each other’s company, and who therefore automatically keep themselves and each other in the picture. However, business growth needs to be fueled by new blood. These are people who were not part of the original setup and therefore processes and systems need to be introduced to ensure that everybody is kept informed – it no longer happens naturally. For Internet businesses, the speed of growth means that the need for more formalized communication systems can kick in very quickly.

Next, the working day now lasts 24 hours. Information technology has the capacity not only to change where knowledge and power reside in the organization; it also changes time. The ‘‘working day’’ has less meaning in a global village where communication via e-mail, voicemail, and facsimile transmissions can be sent or received at any time of day or night.

Paradoxically, as the working day has expanded, so time has contracted. Companies compete on speed, using effective co-ordination of resources to reduce the time needed to develop new products, deliver orders or react to customer requests. Add to that how growth has decoupled from employment (meaning that technology often makes jobs go away and keeps companies in a permanent state of change), and one can see how this has transformed creating transparent workplaces at every organization level through giving employees a near-comprehensive view of the entire business. These technologies surrender knowledge to anyone with the requisite skills who can access the know-how.

Finally, the rise of the virtual organization formed by a cluster of interested parties to achieve a specific aim – perhaps to bring a specific product or idea to market – and then disappear when the aim has been achieved. The concept is not just a useful tactic for corporate downsizing, it also carries ideological weight. The manager who can cope is best prepared to handle the ongoing change occurring in organizations today.

Furthermore, technology affects OB when sweeping new systems are implemented. Enterprise resource planning systems aim to manage all aspects of a business including: production planning, purchasing, manufacturing, sales distribution, accounting and customer service, for example, and are complex systems that are difficult and costly to implement successfully. They influence all the most all the key players in an organization.

Edwards & Humphries (2005) offer an excellent window into what can happen in organizations when this occurs in case example regarding PowerIT, Ltd.’s attempt to implement a sweeping ERP system. They stated that:

“Although the initial perception of the team was that the chief executive officer and financial director had been committed to the project... interviews with the employees at managerial and shop floor levels indicated that there was little active involvement in, or acknowledgment of, the project by the chief executive officer and other senior managers. Therefore, at operational levels the project was not seen as a "high-priority" activity. This perception had ramifications on the way people interacted with the business development manager and related to the project. Although the business development manager had a good technical skills set, he lacked the social skills required to operate effectively in a traditional manufacturing environment. There were obvious personality clashes and conflicts between the business development manager and other managers (and hence their staff)” (p. 154).

Antagonism, conflict, and power struggles eventually ensued between and on every managerial level in the organization. A specialized team was created, an investigation launched, and finally recommendations were made that brought the situation under control for the organization. However, the important relationship between good OB and communication skills to a successful implementation of sweeping new technologies/systems should be clear.

Management Issues

Robbins (2005) defines leadership as “the ability to influence a group toward the achievement of goals” (p. 332). Robbins notes that this influence may be formal as a manager in an organization or a person may assume a leadership role simply because of the position they hold in the organization. Not all leaders are managers nor are all managers leaders.

Trait theories are theories that consider personal qualities and characteristics that differentiate leaders from non-leaders. The approach of listing leadership qualities, assumes certain traits or characteristics will tend to lead to effective leadership. Although trait theory has an intuitive appeal, difficulties may arise in proving its tenets, and opponents frequently challenge this approach. The strongest versions of trait theory see leadership characteristics as innate, and accordingly label some people as "born leaders" due to their psychological makeup.

As a result of these behavioral theories of leadership, leadership development involves identifying and measuring leadership qualities, screening potential leaders from non-leaders, then training those with potential.

Initiating structure refers to the extent to which a leader is likely to define and structure his or her role and those of subordinates in the search for goal attainment while consideration involves the extent to which a leader is likely to have job relationships characterize by mutual trust, respect for subordinate’s ideas, and regard for their feelings.

An employee-oriented leader emphasizes interpersonal relations while a production-oriented leader emphasizes the technical or task aspects of the job. A development-oriented leader is one who values experimentation, seeks new ideas, and generates and implements change. In fact, there is a managerial grid proposed that outlines 81 different leadership styles.

The Fiedler contingency model believes a key factor in leadership success is the individual’s basic leadership style. The goal is to match leaders and situations and Robbins discusses many other models in chapter eleven on how leaders can be successful and in chapter twelve discusses how effective managers must develop trusting relationships with followers and exhibit transformational leadership qualities using vision and charisma to carry out those visions.

No matter how one defines leadership, it typically involves an element of vision, except in cases of involuntary leadership. The vision provides direction to the influence process. A leader (or group of leaders) can have a vision of the future to aid them to move a group successfully towards this goal.

Differences in the mix of leadership and management can define various management styles. Some management styles tend to de-emphasize leadership. Included in this group one could include participatory management, democratic management, and collaborative management styles. Other management styles, such as authoritarian management, micro-management, and top-down management, depend more on a leader to provide direction.

Note, however, that just because an organization has no single leader giving it direction, does not mean it necessarily has weak leadership. So, in contrast to individual leadership, some organizations have adopted group leadership. In this situation, more than one person provides direction to the group. Some organizations have taken this approach in hopes of increasing creativity, reducing costs, or downsizing. Others may see the traditional leadership of a boss as costing too much in team performance.

In some situations, the maintenance of the boss becomes too expensive - either by draining the resources of the group, or by impeding the creativity within the team, even unintentionally. A common example of group leadership involves cross-functional teams. As a compromise between individual leadership and an open group, leadership structures of two or three people or entities also occur commonly.

Emotional intelligence (EI) is a predictor of leadership. The five components of EI are self-awareness, self-management, self-motivation, empathy, and social skills. These allow an individual to become a star performer. Without EI, a person can have training, a great mind, long term vision, and terrific ideas but still will not make a great leader. Robbins (2005) states that “the evidence indicates that the higher the rank of a person considered to be a star performer, the more EI capabilities surface as the reason for their effectiveness” (p. 368).

Generally, psychological research indicates that IQ is a reliable measure of cognitive capacity, and is stable over time. In the area of EI that distinction is murky. Current definitions of EQ are inconsistent about what it measures: some (such as Bradberry and Greaves 2005) say that EQ is dynamic; it can be learned or increased; whereas others (such as Mayers) say that EQ is stable. Under Mayer's view, emotional knowledge would be the level of perception and assessment that an individual has of their emotions at any given moment in time.

An understanding of power and politics within organizations is essential. How power is derived, its dependencies, bases of power, tactics and strategies, and how power functions in groups are all important to being a successful manager and leader.

And many other factors such as perception and communications must be taken into consideration as well. For example, Robbins (2005) describes the functions of communication as serving “four major functions within a group or organization: control, motivation, emotional expression, and information” (p. 299).

Communication acts to control member behavior in various ways both thru formal and informal channels and plays a role, as does power and politics, in addressing conflict and negotiation.

The most important point here is that whichever of these scenarios a manager works in; they must bring the right leadership skills to bear, appropriately and effectively, if they are to become a truly successful manager.

Conclusions

OB is a field of study interested in individuals, groups, and structures using methods such as economics, sociology, political science, anthropology, and psychology and seeks to control, predict, and explain. OB models, theories, and types are important for bringing systemization to the field.

Managers must understand OB as a discipline that underpins practical organizational activities and understand how to use the underlying technology. Also, managers need to understand the management issues involved in OB and related fields to be good managers (and leaders for example). OB plays a critical factor in both the success of an organization and a manager. The successful manager wisely incorporates what works, with respect to OB, into their managerial toolkit.

Reader’s Note:

As stated, the output of organizational behavior studies reflects contributions (inputs) from other academic disciplines. When faulty and fallacious ideologies and worldviews corrupt these disciplines resulting in contributions (inputs) that are faulty, fallacious, etc.: the output and subsequent application that depends on them is flawed.

The author may prepare a future article on organizational behavior specifically identifying key contributions (inputs) which are faulty, fallacious, etc. which became embedded in Western culture and are resulting in the escalating deterioration of behavioral outcomes over time; presently observed within Western societies, governments, institutions, and organizations.

Suitable correction and replacement of such inputs, with case examples, can be presented from a correct objective perspective of the orthodox Christian worldview, fixed in biblical truth, in which actual truth corresponds with actual reality. The article could be part of a new Christian Practical Application Series (CPAS).

The following exhibit (i.e. Exhibit 1-3) is explanatory for what the author is proposing. It is an overview of major contributions (inputs) to the study of organizational behavior:

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Colquitt, J. A., LePine, J. A., Wesson, M. J., & Gellatly, I. R. (2016). Organizational behavior: improving performance and commitment in the workplace. McGraw Hill.

Corey, G. (2020). Theory and practice of counseling and psychotherapy (10th ed.). Brooks/Cole.

Edwards, H. M. & Humphries, L. P. (2005, October). Change management of people & technology in an ERP implementation. Journal of Cases on Information Technology. Hershey, 7, 144-162.

Fayol H. (1949). General and industrial management. Pitman.

Fletcher, I. (2011). Free trade doesn’t work: what should replace it and why (2nd ed.). Coalition for a Prosperous America.

Foreign-born workers were a record high 18.1 percent of the U.S. civilian labor force in 2022: The Economics Daily: U.S. Bureau of Labor Statistics. (2023, June 16). Www.bls.gov. https://www.bls.gov/opub/ted/2023/foreign-born-workers-were-a-record-high-18-1-percent-of-the-u-s-civilian-labor-force-in-2022.htm

French, R. (2006). Driven abroad: the outsourcing of America. RDR Books.

Gooding, D. & Lennox, J. (2018). Doing what's right: whose system of ethics is good enough? Myrtlefield House.

Gooding, D. & Lennox, J. (2020). The Bible and ethics: finding the moral foundations of the Christian faith. Myrtlefield House.

Greenberg, J. (2008). Behavior in organizations (10th ed.). Pearson.

Gunnoe, M. L. (2022). The person in psychology and Christianity: a faith-based critique of five theories of social development. IVP Academic.

Hira R., & Hira A. (2005). Outsourcing America: what's behind our national crisis and how we can reclaim American jobs. American Management Association.

Humphreys, J.H. and Einstein, W.O. (2003). Nothing new under the sun: Transformational leadership from a historical perspective. Management Decision, 41, 85-96.

Johns, G., & Saks, A. M. (2017). Organizational behavior: understanding and managing life at work (10th ed.). Pearson.

Jones, S. L. & Butman, R. E. (2011). Modern psychotherapies: a comprehensive Christian appraisal (2nd ed.). IVP Academic.

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Lennox, J. (2013). Miracles: is belief in the supernatural irrational? Veritas.

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Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

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Introduction

Accounting topics commonly align with one or more of the three accounting classes: financial accounting; managerial accounting; and financial management.

Financial accounting addresses the recording and reporting of financial transactions and the preparation of financial statements (e.g., income statement, balance sheet, cash flow statement, etc.) for the benefit of an entity and external stakeholders such as investors, creditors, regulators, and tax authorities. Financial accounting adheres to standardized frameworks such as Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) globally (Kieso, et al, 2016).

Managerial accounting is “the provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary financial and non-financial information that helps company managers make the best possible decisions” (Mowen et al, 2018, p. 4). This involves “the process of collecting, analyzing, interpreting, and presenting financial and non-financial information to assist management in decision-making, planning, and control within an organization. Unlike financial accounting, which focuses on preparing standardized financial statements for external stakeholders, managerial accounting is internally focused and provides tailored information to support strategic and operational decisions” (xAI, Grok 4, 2025).

Financial management focuses on “strategic planning, organizing, directing, and controlling financial activities within an organization to achieve specific financial objectives. It involves the efficient and effective management of monetary resources to maximize value, ensure liquidity, and mitigate risks. Financial management encompasses a range of activities, including budgeting, forecasting, investment decisions, risk management, and the oversight of financial operations” (xAI, Grok 4, 2025).

This article introduces financial accounting.

Reader’s note: A finance calculator https://www.calculator.net/finance-calculator.html and financial calculators https://www.calculator.net/financial-calculator.html are available at calculator.net.

Reader’s note: If you are brand new to the topic of accounting; it is recommended that you read a brief, easy-to-understand introductory book titled “Accounting Made Simple” by Mike Piper, CPA.

History

Financial accounting can be traced as far back as ancient Mesopotamia around 7000 BC where clay tokens and tablets were used to record transactions, facilitate trade, and aid in taxation involving goods. By 3000 BC, Egypt was using basic debit-credit accounting principles.

In the Roman Empire, a more formalized system of accounting emerged through the use of the codex accepti et expensi, a ledger system that separated cash receipts (accepti) from payments (expensi).

However, it was not until the late 13th century that the Italian mathematician Luca Pacioli (the “father of accounting”) codified double-entry bookkeeping in his 1494 treatise Summa de Arithmetica, Geometria, Proportioni et Proportionalita.

The Industrial Revolution of the 18th and 19th centuries brought accrual accounting to match revenues with expenses over time, departing from cash-based methods, and accounting bodies were formed such as the Society of Accountants in Edinburgh (1854) and the Institute of Chartered Accountants in England and Wales (1880). Legal mandates, such as the U.K. Companies Acts of 1844 and 1862, began to require financial statements for auditing purposes.

In 1939, the American Institute of Accountants (now AICPA) endorsed Generally Accepted Accounting Principles (GAAP) and in 1973 the International Accounting Standards Committee (now the International Accounting Standards Board [IASB]) issued International Financial Reporting Standards (IFRS) which are presently adopted by over 140 countries.

More recently, financial accounting has integrated with enterprise resource planning (ERP) systems, blockchain for immutable ledgers, and artificial intelligence for predictive analytics (xAI, Grok 4, 2025).

Assumptions and Principles

Accounting incorporates assumptions from which principles are derived.

Examples of assumptions include: 1. the economic entity assumption (the business is treated as a separate distinct entity); 2. the going concern assumption (the business will exist for a long time); 3. the monetary unit assumption (money is the common denominator of all business activity); and 4. the periodicity assumption (businesses report activities by time periods).

Examples of principles include: 1. the historical cost principle (the value of an asset is the cost of an asset); 2. the revenue recognition principle (revenues are recorded on the date that goods or services are transferred, not actually received); 3. the matching principle (expenses are recorded in the same time period as the revenues they help to generate); and 4. the full disclosure principle (financial statements must include any information that has a significant effect [past, present, or future] on the financial status of the business).

The assumptions and principles listed are part of a standardized framework of accounting rules, standards, and procedures that companies in the United States must follow when preparing and reporting their financial statements named Generally Accepted Accounting Principles (GAAP). Note that outside of the United States, the International Financial Reporting Standards (IFRS) is commonly used.

The Accounting Equation

It is customary to start accounting introductions with the accounting equation: Assets = Liabilities + Owner’s Equity.

“Assets: Resources owned or controlled by the entity that have probable future economic benefits (e.g., cash, accounts receivable, inventory, property, plant, and equipment).

Liabilities: Present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits (e.g., accounts payable, loans, accrued expenses).

Equity (also called Owners’ Equity, Shareholders’ Equity, or Net Assets): The residual interest in the assets of the entity after deducting all its liabilities. It represents the owners’ claims on the business and includes contributed capital, retained earnings, and other reserves.retained earnings, and other reserves.

This equation must always remain in balance after every transaction, forming the foundation of double-entry bookkeeping. Every debit has a corresponding credit that affects the equation in a way that preserves equality. The balance sheet is simply a detailed presentation of this equation at a specific point in time.

This relationship is the cornerstone of financial accounting and ensures that the financial position of an entity is accurately represented.” (xAI, Grok 4, 2025).

Financial Statements

Financial statements consist of ten elements that show the amounts, claims, and changes to an organization’s resources. They are: assets, liabilities, equity, revenues, expenses, gains, losses, comprehensive income, investment by owners, and distributions to owners.

Under GAAP and IFRS, there are four basic financial statements of a business for which each serves a distinct purpose in presenting the financial position, performance, and cash flows of the business.

“1. Balance Sheet (Statement of Financial Position): Provides a snapshot of the company’s financial position at a specific point in time (usually the end of a reporting period).

Key components:

a. Assets (what the company owns)

b. Liabilities (what the company owes)

c. Equity (owners’ residual interest: Assets − Liabilities)

It answers the question: “What resources does the company control, how are they financed, and what is the net worth at this moment?”

2. Income Statement (Statement of Profit or Loss / Comprehensive Income): Measures the company’s financial performance over a period of time (e.g., month, quarter, year) by showing revenues earned, expenses incurred, and the resulting profit or loss.

Key components:

a. Revenue/Sales

b. Cost of sales and operating expenses

c. Other income/expenses, taxes, and non-controlling interests

d. Net income (or loss)

It answers the question: “How profitable was the business during the period?”

3. Cash Flow Statement (Statement of Cash Flows): Explains the change in cash and cash equivalents during the period by classifying cash movements into three main activities.

Key sections:

a. Operating activities (cash generated or used by core business operations)

b. Investing activities (cash used or received from purchases/sales of long-term assets and investments)

c. Financing activities (cash from issuing or repaying debt, equity transactions, and dividends)

It answers the question: “Where did cash come from and how was it used during the period?” This is critical because profitability (income statement) does not necessarily equal cash generation.

4. Statement of Changes in Equity (Statement of Owners’ Equity or Statement of Retained Earnings): Reconciles the opening and closing balances of equity accounts over the period, showing how net income, dividends, share issuances/repurchases, and other comprehensive income items affect owners’ equity.

Key components:

a. Beginning equity balance

b. Net income (or loss) transferred from the income statement

c. Dividends or distributions

d. Issuance or repurchase of shares

e. Other comprehensive income (e.g., revaluation gains, foreign currency translation)

f. Ending equity balance

It answers the question: “How did the owners’ stake in the company change during the period?”

In addition, IFRS or certain GAAP requirements include Notes to the Financial Statements and, where applicable, a Statement of Comprehensive Income. The notes are an integral part of the financial statements, providing detailed explanations, accounting policies, and additional disclosures necessary for a fair understanding of the four primary statements.

Together, these statements provide a complete, interrelated picture of a business’s financial health, performance, liquidity, and solvency, enabling stakeholders (investors, creditors, management, regulators) to make informed economic decisions” (xAI, Grok 4, 2025).

Financial statements are typically produced in the following order: 1. Income Statement (shows total revenues, expenses, and resulting net income for a given period of time); 2. Statement of Changes in Equity (shows the beginning capital for the period, plus any investments and withdrawals); Balance Sheet (provides a snapshot of the company’s financial position [assets, liabilities, equity] at a specific point in time); and 4. Cash Flow Statement (explains the change in cash and cash equivalents during the period).

And, financial statements for a particular business will follow the accounting period that it has chosen. This may either be a fiscal year or a calendar year. A fiscal year is a 12-month accounting period chosen that may begin on any date. A calendar year is a 12-month accounting period that runs from January 1 to December 31.

Business Entities

Business entities are typically either a sole proprietorship, a partnership, or a corporation. A sole proprietorship is owned by a single person; a partnership is owned by more than one person; and a corporation (e.g. C corporation, S corporation, limited liability corporation, etc.) is owned by its shareholders (people who own shares of stock in the corporation).

Owner’s equity appears on financial statements per the type of business entity. For example, a corporation will use a statement of retained earnings that will reflect issues such as dividends rather than a statement of owner’s equity.

Merchandising Businesses Versus Service Businesses

“The fundamental accounting distinction arises from the presence or absence of merchandise inventory. Merchandising entities must track the cost of inventory purchased and sold, giving rise to the Cost of Goods Sold (COGS) account and the concept of gross profit.

This requires detailed inventory records and a multi-step income statement. Service entities, by contrast, have little or no inventory of goods for resale; their primary cost is labor and overhead directly tied to delivering the service.

Consequently, service entity accounting is simpler as there is no Cost of Goods Sold (COGS) calculation, no inventory valuation issues (first-in-first-out FIFO, last-in-first-out LIFO, etc.), and typically a single-step income statement that subtracts all operating expenses directly from service revenue.

These structural differences affect financial ratios (e.g., inventory turnover, gross margin percentage), tax considerations, and internal management reporting, making merchandising accounting more inventory-centric while service accounting focuses predominantly on labor and overhead cost control” (xAI, Grok 4, 2025).

Cash Basis versus Accrual Basis

Cash Basis Accounting is an accounting method in which revenues and expenses are recognized and recorded only when cash actually changes hands.

Accrual Basis Accounting is the accounting method required by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) in which revenues and expenses are recognized and recorded when they are earned or incurred, regardless of when cash is actually received or paid.

1. Cash basis is cash-flow oriented and simpler, but it can misrepresent economic reality over multiple periods.

2. Accrual basis follows the matching principle (revenues matched with the expenses incurred to generate them) and is considered the more accurate method for assessing long-term profitability and financial position, which is why it is mandated for most external financial statements.

The Accounting Cycle

Most companies perform a series of steps that make up the accounting cycle.

“The accounting cycle is a systematic, standardized process that organizations use to record, classify, and summarize financial transactions during a specific accounting period (typically a month, quarter, or year) and to prepare accurate financial statements. It ensures that all economic events are properly captured and reported in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).

The accounting cycle consists of the following steps, performed in sequence:

I. Identify, Analyze, and Record Transactions:

1. Review source documents (invoices, receipts, contracts, etc.) to determine which events qualify as accounting transactions and affect the financial position of the entity.

2. Record Journal Entries (Journalizing)

3. Enter the transactions in chronological order in the general journal using double-entry accounting (debits must equal credits).

4. Post to the General Ledger

5. Transfer the journal entries to the appropriate T-accounts in the general ledger, updating each account’s balance.

6. Prepare an Unadjusted Trial Balance

7. List all ledger account balances at the end of the period to verify that total debits equal total credits before any adjustments.

8. Record Adjusting Entries

9. Make necessary accrual-basis adjustments at the end of the period for items such as:

a. Accrued revenues and expenses

b. Prepaid expenses (e.g., insurance, rent)

c. Unearned (deferred) revenues

d. Depreciation and amortization

e. Allowance for doubtful accounts

II. Prepare an Adjusted Trial Balance:

1. Compile an updated trial balance that incorporates the adjusting entries to confirm arithmetic accuracy after adjustments.

III. Prepare Financial Statements:

1. From the adjusted trial balance, produce the four primary financial statements (in the following usual order):

a. Income Statement (Profit & Loss)

b. Statement of Comprehensive Income (if applicable)

c. Statement of Changes in Equity

d. Balance Sheet (Statement of Financial Position)

e. Cash Flow Statement

III. Record Closing Entries:

1. Close temporary (nominal) accounts—revenues, expenses, gains, losses, and dividends/withdrawals—to Retained Earnings (or the appropriate equity account) so that these accounts begin the next period with zero balances.

2. Prepare a Post-Closing Trial Balance

3. Verify that only permanent (real) accounts (assets, liabilities, and equity) remain with balances and that debits still equal credits. This serves as the starting point for the next accounting period.

After the post-closing trial balance is confirmed, the cycle repeats for the subsequent period. In many modern systems using accounting software, steps 2 through 6 are largely automated, but the conceptual sequence and the need for adjusting and closing entries remain essential for accurate financial reporting. This structured process maintains the integrity of financial records and enables stakeholders to rely on timely, accurate, and comparable financial statements” (xAI, Grok 4, 2025).

To summarize; a business will identify the information that needs to be tracked which is typically contained in source documents (such as invoices, etc.). The source documents are analyzed to determine how they will be recorded in the accounting system and then recorded in the required journals and the general ledger. Afterwards, a trial balance is generated to ensure the total amount of debits equal the total amount of credits.

In accrual basis accounting, adjusting entries are performed as necessary to ensure that all revenues and expenses generated during the accounting period have been correctly recorded. After all adjusting entries are recorded, an adjusted trial balance is prepared and financial statements are produced.

Finally, revenue and expense accounts must be “closed” so that these accounts begin with a zero balance at the beginning of the next accounting period. This is accomplished by recording closing entries and generating a post-closing trial balance (to verify that debits equal credits). The ledger will then be ready for recording transactions for the next accounting period.

Financial Ratios

At this point, it is time to introduce financial ratios. “Financial ratios are calculated from items appearing on a company’s financial statements (balance sheet, income statement, and cash flow statement) to evaluate various aspects of its operating performance, financial health, and value. They are widely used by internal management, investors, creditors, analysts, and regulators for the following key purposes:

1. Performance Evaluation: ratios measure how effectively a company is generating profits and utilizing its assets. They allow management and stakeholders to assess operational efficiency and profitability trends over time or against industry peers.

2. Financial Health and Risk Assessment: they reveal the company’s solvency (ability to meet long-term obligations), liquidity (ability to meet short-term obligations), and overall financial stability. Creditors and bond rating agencies rely heavily on these ratios when deciding whether to extend credit or at what interest rate.

3. Investment Decision Making: investors and equity analysts use valuation and profitability ratios to determine whether a stock is overvalued, undervalued, or fairly priced relative to earnings, cash flow, assets, or peers.

4. Credit Analysis and Lending Decisions: banks and other lenders examine liquidity, leverage, and coverage ratios to assess default risk and set loan covenants (e.g., requiring the borrower to maintain a minimum current ratio or maximum debt-to-equity ratio).

5. Benchmarking and Peer Comparison: ratios standardize financial data so companies of different sizes can be compared directly. Industry averages and competitor ratios serve as benchmarks to identify relative strengths and weaknesses.

6. Trend Analysis and Forecasting: by tracking ratios over multiple periods, users can identify improving or deteriorating trends and project future performance.

7. Management Control and Strategic Planning: internal managers set targets for key ratios (e.g., return on assets, inventory turnover) and use them in budgeting, incentive compensation plans, and operational improvement initiatives” (xAI, Grok 4, 2025).

Reader’s note: The Corporate Finance Institute provides a free downloadable “Financial Ratios ebook” to peruse the most commonly used financial ratios: https://corporatefinanceinstitute.com/assets/CFI-Financial-Ratios-Cheat-Sheet-eBook.pdf

Conclusion

Financial accounting is the branch of accounting that focuses on the systematic recording, summarization, and reporting of an entity’s financial transactions and economic events in accordance with established standards ensuring transparent, standardized, and verifiable financial reporting that enables assessment of the financial and economic health and performance of an organization.

As this is but an introduction; a recent edition of Kieso, et al’s Intermediate Accounting is suggested for expanded content while a recent edition of Schaum’s Outline of Financial Accounting (with answers) is recommended to work through financial accounting problems for competency.

Bibliography:

Benedict, A., & Elliott, B. (2011). Financial accounting: an introduction (2nd ed.). Pearson.

Britton, A., & Waterston, C. (2006). Financial accounting (4th ed.). Prentice Hall.

Individual Software Inc. (2023). Professor Teaches QuickBooks 2023 Tutorial Set - Interactive Training for Intuit’s Quickbooks versions 2023, 2022 and 2021, Accounting Fundamentals and Business planning. Individual Software, Inc. [Computer Software]. https://www.individualsoftware.com/product/professor-teaches-quickbooks-2023/

Corporate Finance Institute. (2025). Financial Ratios eBook. https://corporatefinanceinstitute.com/assets/CFI-Financial-Ratios-Cheat-Sheet-eBook.pdf

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting (16th ed). Wiley.

Mostyn, G. (2017). Basic accounting concepts, principles, and procedures (2nd ed.), volume 1. Worthy and James Publishing.

Mostyn, G. (2017). Basic accounting concepts, principles and procedures (2nd ed.), volume 2. Worthy and James Publishing.

Phillips, F., Libby R., Libby, P. A., & Mackintosh, B. (2015). Fundamentals of financial accounting (4th ed.). McGraw-Hill.

Piper, M. (2008). Accounting made simple. Simple Subjects, LLC.

Rich, J. S., Jones, J. P., Mowen, M. M., & Hansen D. R. (2010). Cornerstones of financial accounting. Cengage.

Shim, J. K., & Siegel, J. G. (2011). Schaum’s outline of financial accounting (2nd ed.). McGraw-Hill.

Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2007). Financial reporting, financial statement analysis, and valuation: a strategic perspective (6th ed.). Thomson.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting with international financial reporting standards (4th ed.). Wiley.

Wild, J., Shaw, K., & Chiappetta, B. (2016). Fundamental accounting principles (23rd ed.). McGraw Hill.

xAI. (2025). Grok (version 4). https://grok.com/

Fair Use: Copyright Disclaimer Under Section 107 of the Copyright Act in 1976; Allowance is made for “Fair Use” for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statue that might otherwise be infringing. All rights and credit go directly to its rightful owners. No copyright infringement intended.

Notice: Content on this page (including reviews, business, theology, and technology commentary) is provided for informational and opinion purposes only and does not constitute professional, legal, financial, medical, or pastoral advice. Reviews may include quotations or summaries under fair use. All views expressed are those of the author alone. While every effort is made to ensure accuracy, no warranties are provided. Use and rely on this content at your own risk. For important decisions, consult qualified professionals. For copyright takedown requests or corrections, please email ppothier@substack.com with the subject “Takedown/Correction” and include full details. Effective: 2026-05-08.

Copyright © 2025 Paul L. Pothier. All rights reserved.

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