Business Management Theory and Philosophies Explained

Management theory underpins everything accomplished by western enterprises in the twentieth and twenty-first centuries, from auto industrialization to the dot-com boom.¹²

As such, management theory has been an active field since the late 1800s and is closely studied by MBAs and executives alike.

What is management theory?

A management theory attempts to provide one or more ways to solve problems of “management.” “Management” can be defined as:³

Determining a goal, planning and organizing around the goal, and leading and controlling efforts to ensure successful completion of the goal

How is management theory applied in the workplace?

When Henry Ford set 40–hour work-weeks, that was an example of applied management theory. The same could be said of Silicon Valley Unicorns flattening the corporate hierarchy to encourage innovation, or trendy e-commerce companies hitching their wagons to social causes to draw principled talent.

New isn’t syonomous with “better” in management theory; just look at Steve Jobs, who employed a famously autocratic style when the opposite leadership approach was in vogue. Apple had more in common with classical management theories of the 1800s than socially-driven ones popular with most Bay Area companies, but the results can’t be argued with.

In practice, most organizations employ a variety of strategies that match the efficiencies of each style with the recruiting and retention needs of their specific market. Additionally, many management theories established more than a century ago are still in use in Western corporations, such as the LPC and Contingency Theory for matching leaders and teams.

What is the history of management theory?

Historically in the West, many approaches to management and leadership were autocratic and dictatorial in nature.

In effect, the person in charge would bark orders and the people below them would be expected to follow.

In business, things began to change near the end of the 19th century. It was at this point that management theory began with an era often referred to as “Classical Management.”⁴

In the following sections, we’ll take a look at the main eras in the development of management theory, including which business management theories came during each era, who was responsible for prominent theories, and the impacts of each era on modern workplaces.

Summary of the three core management theories

Classical Management Theories

Two main theories were developed during the Classical Management era:

1. Scientific Management theory
2. Administrative Management theory

Scientific Management theory is primarily attributed to Frederick W. Taylor (1856-1915), an engineer who was known for his efforts to improve industrial efficiency. According to the theory of Scientific Management, the scientific method can be applied to production in order to increase efficiency and performance.

From his studies, Taylor created Four Principles of Scientific Management, which are as follows:

1. Gather objective data on work, experiment, and standardize policies and procedures;
2. Scientifically select, train, and develop workers;
3. Work cooperatively with workers; and
4. Fairly divide work and responsibilities and reward workers appropriately.

At approximately the same time as Taylor was developing Scientific Management, Administrative Management theory was also being developed.

Administrative Management theory is primarily attributed to two theorists:

1. Max Weber (1864-1920), a German sociologist who made significant contributions to the areas of management, economics, and sociology.⁵
2. Henri Fayol (1841-1925), a French engineer and executive who is known as the father of Modern Management.

Unlike Scientific Management, which has a focus on lower-level supervision and management of production, Administrative Management has a focus on higher-level duties at the organizational level.

Thus, Administrative Management focuses on using organizational structure, management, and control in order to increase efficiency and performance.

One of Weber’s greatest contributions to management theory was his Theory of Bureaucracy. This theory states that a bureaucracy has the following characteristics:⁶

1. Specialization;
2. Formalized rules;
3. Hierarchical structure;
4. Well-trained employees;
5. Managerial dedication; and
6. Impartiality of management.

Another notable contribution from Weber was his classification system of authority, which included the following types:

1. Traditional;
2. Charismatic; and
3. Rational-legal

One of Fayol’s greatest contributions to management theory was his 14 Principles of Management. These principles included:

1. Division of work;
2. Authority;
3. Discipline;
4. Unity of command;
5. Unity of direction;
6. Subordination of individual interests to the general interests;
7. Remuneration;
8. Centralization;
9. Line of authority;
10. Order;
11. Equity;
12. Stability of tenure of personnel;
13. Initiative; and
14. Esprit de corps

Fayol was also “credited with the original planning-organizing-leading-controlling framework” via his Five Functions of Management. These functions included:

1. Planning;
2. Organizing;
3. Command;
4. Coordination; and
5. Control

Behavioral Management Theories

The era of Behavioral Management began around the mid-1910s, marking a change in perspective from more structural and mechanistic to humanistic. The most notable names of this era include:

1. Elton Mayo (1880-1949), an Australian psychologist who is known as the father of the Human Relations movement.
2. Douglas McGregor (1906-1964), an American management professor who is known for his management and motivational theories.

In particular, Mayo is best known for his contributions to the Hawthorne Experiments, which looked to “inspire company loyalty, discourage high employee turnover and unionization, and present a good face to the public.” These studies led to numerous discoveries by Mayo, including that:

1. Workplace problems are caused by human and social factors;
2. Workplace policies and procedures influence workers’ attitudes; and
3. Motivation, productivity, and job satisfaction depend more on cooperation, involvement, and recognition than on physical working conditions.

McGregor is best known for his Theories X and Y, which detail two different management styles. The following chart compares and contrasts each of the two perspectives.⁷⁸

Modern Management Theories

Finally, we move to the modern era of management theories.

This era began approximately in the 1940s and primarily includes the following two approaches:

1. Management Science
2. The Organizational Environment

Management Science essentially came as an evolution of Frederick W. Taylor’s Scientific Management, took place during World War II, and has a focus on “using models and data to improve business performance.”

What may be seen as the most significant development in the field was George Dantzig’s simplex method for solving linear programming problems, which helps with management tasks like “allocating resources, scheduling production and workers, planning investment portfolios, and formulating marketing and military strategies.”⁹

Other Management Science techniques include:

1. Nonlinear programming;
2. Network models;
3. Project scheduling;
4. Inventory and supply chain models;
5. Queuing models;
6. Simulation models;
7. Decision analysis;
8. Goal programming;
9. Forecasting; and
10. Many more

Organizational Environment, meanwhile, is based on two main theories:

1. The Theory of Open Systems
2. Contingency Theory

The Theory of Open Systems was theorized primarily by Robert Kahn (1938), an American electrical engineer, and Daniel Katz (1903-1998), an American psychologist.

The Theory of Open Systems states that an organization is always interacting with its environment through a three-step process such that inputs are received from the external environment, transformed through organizational processes, and then output back to the outside environment. In summary:

1. Receiving inputs from its external environment;
2. Processing and transforming inputs through internal organizational subsystems and processes; and
3. Sending outputs back to the outside environment

Considering this open system, the theory then states that management must respond to its external environment. First, management must determine and organize appropriate internal dimensions, capabilities, and structures. Then, they must optimally align these internal characteristics with the external domains in which they can compete and serve customers.

Contingency Theory can primarily be attributed to Paul R. Lawrence (1922-2011), an American sociologist, and Jay Lorsch (1932), an American organizational theorist. This theory states that a business’ organization is contingent upon the nature of the work and varying needs of the people. More specifically, it states that:

1. Businesses with consistent and predictable tasks should be organized with formalized procedures, classical management hierarchies, and directive supervision; while
2. Businesses with inconsistent and/or unpredictable tasks should be less defined and more flexible, allowing for greater participation by all of those who are involved.

Thus, by matching the organization to the task, the task to the people, and the people to the organization, everyone is made to feel competent and motivated to produce.

The impact of management theories today

It is easy to see how all of these management theories have impacted workplaces today.

For starters, Scientific Management’s focus on productivity was clearly an early step in the evolution of Total Quality Management (TQM) systems we see today and in the field of Management Science.

Second, Administrative Management led to numerous future developments, like Sociology and Management as fields of study, the organizational structures of today, and countless management styles.¹⁰

Third, Behavioral Management led to greater human relations, Organizational Behavior and Organizational Psychology as fields of study, and is largely responsible for the improved working conditions, compensation, and benefits that employees now receive.¹¹

Fourth, Management Science continues to improve productivity and business performance in countless organizations by optimizing functions like scheduling, production, and distribution.

And finally, the Organizational Environment has contributed by helping businesses improve organizational structure, design, and competitiveness. So, it is without question that these management theories have had a dramatic impact on industry, society, and each of us as productive individuals.

Summary of management theory development over time

The following chart is a quick and simple summary of the three main eras of management theory, including the primary approaches and figureheads of each era:

While management theory has certainly evolved over time, the wide majority of past theories are still useful to this day. As a result, regardless of where you’re at in your personal and business development, knowledge of these management theories and philosophies will surely have an impact on your decisions as an owner or manager of a business.