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Updated Nov 10, 2023

Management Theories Every Small Business Owner Should Know

Tejas Vemparala headshot
Tejas Vemparala, Business Operations Insider and Senior Writer

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Business growth is a byproduct of success that necessitates hiring the best employees to handle operations so business owners can focus on the big picture. Hiring is a leap of faith — business owners must trust their teams to take over multiple functions and make decisions that benefit the company. 

Becoming a boss is easy, but being a true leader requires emotional intelligence, a strategic approach and the ability to handle multiple personality types while getting everyone onboard with the business’ mission. 

Fortunately, entrepreneurs and small business owners can benefit from learning about established management theories. These theories can help them define their leadership approach and inspire them to effectively guide and grow their organizations. We’ll outline six prominent management theories and share tips for putting them into practice.

Did You Know?Did you know
Being a good manager requires a willingness to delegate, understanding each employee's strengths and weaknesses and creating a culture of inclusion where everyone feels respected.

Management theories business owners should understand

Managers don’t have to choose one management theory and stick to it. Instead, leaders can determine which theories best fit their organization and select components from each philosophy. You can create a toolkit of effective management strategies and work management systems for you and your staff.

Here’s an overview of six theorists and their groundbreaking work. You may find inspiration for your leadership style and ways to structure your organization. 

1. Frederick Taylor’s scientific management system

Frederick W. Taylor (1856-1915) was among the first to study worker productivity and how best to optimize it. Taylor, who had a background in mechanical engineering, conducted controlled experiments that led him to develop four principles of scientific management, known as “Taylorism.” These principles recommend using the scientific method to determine the most efficient way to perform a task in the workplace instead of relying on workers’ judgment or personal discretion.

Taylor promoted standardization and specialization by suggesting that workplace tasks be broken down into a sequence of smaller steps. He concluded that managers should assign workers to a job that best matches their ability, train them thoroughly and supervise them to ensure they work efficiently. 

However, Taylor’s focus on achieving workplace efficiency ignored the individual’s humanity in favor of finding the optimal way to complete any given task. In its purest form, Taylor’s theory isn’t practiced much today. However, it highlighted workplace efficiency, the value of training programs and procedures and the need for cooperation between workers and managers.

2. Henri Fayol’s principles of administrative management

Henri Fayol (1841-1925), a French mining engineer and executive, is considered one of the most influential contributors to modern management theory. Unlike Taylor, who improved productivity by analyzing workers’ actions, Fayol took a top-down approach.

Fayol examined an organization through the lens of the managers and the situations they might encounter. He believed management has six paramount functions: 

  • Forecast
  • Plan
  • Organize
  • Command
  • Coordinate 
  • Control

Fayol developed 14 principles of administration that outline how managers should organize and interact with employees.

His comprehensive principles, which have become foundational guidelines in many of today’s workplaces, cover topics ranging from the importance of maintaining an orderly and clean facility to the value of promoting employee initiative and successful teamwork.

3. Max Weber’s bureaucratic management theory

Max Weber (1864-1920) was a German sociologist who developed the bureaucratic management theory, which focuses on structuring organizations in a hierarchical fashion with clear rules of governance.

Weber’s principles for creating an ideal bureaucratic system include:

  • Clear division of labor
  • Hierarchical chain of command
  • Separation between an owner’s personal and organizational assets 
  • Meticulous record-keeping and documentation
  • Strict and consistent adherence and enforcement of regulations and rules
  • The selection and promotion of employees based on qualifications, not personal relationships or personalities

Although Weber recognized that bureaucracy threatened individual freedoms, he still saw it as the most efficient and rational way of establishing organizations. Today, the bureaucracy management approach is often perceived as impersonal and overwhelmed by red tape. However, it played a crucial role in universalizing the establishment of standards and procedures, which are at the core of most modern organizations.

4. Elton Mayo’s human relations theory 

Elton Mayo (1880-1949) was an Australian-born psychologist and Harvard Business School industrial researcher who helped lay the foundation for the human relations movement. Mayo conducted experiments aimed at improving productivity among dissatisfied employees at the Hawthorne plant in Chicago in the 1920s.

He changed working conditions, including temperature, lighting, break times and workday length. He observed that, regardless of the change, there was always an increase in productivity. This led Mayo and his team to conclude that the performance boosts weren’t due to environmental changes. Instead, they resulted from the researchers paying attention to the workers — the workers felt valued as part of a unified group collaborating on the study.

Mayo’s work led to the recognition of the importance of psychological and social factors in creating productive organizations. This gave rise to the human relations theory, which concluded that money isn’t employees’ biggest motivation. They’re more likely to be motivated by being part of a group and personal attention than money or even working conditions. This people-oriented management approach requires managers to acknowledge the complexity of human nature and the value of social ties in the workplace.

Although some have questioned the validity of the Hawthorne experiments in recent years, Mayo’s contributions to management theory are the underpinning of today’s focus on group dynamics and team-building efforts to strengthen company cultures.

While human relations centers around employee happiness, human resources prioritizes the business' needs and minimizes risk for the organization.

5. Douglas McGregor’s X and Y theories

Douglas McGregor (1906-1964) was an American social psychologist who introduced his X and Y theories in his 1960 book, The Human Side of Enterprise. He concluded that there are two fundamentally different management styles guided by managers’ perceptions of their team members’ motivations:

  • Theory X: Theory X is authoritarian in nature and is used by managers who assume that employees are apathetic or dislike their work. 
  • Theory Y: Theory Y is a participative management style used by managers who believe that workers are self-motivated, responsible and committed to taking ownership of their work.

While Theory X leads to micromanaging, Theory Y gives rise to a more collaborative and decentralized workplace. McGregor favored Theory Y, which smaller businesses and startups tend to adopt. With Theory Y, employees at all levels are part of the decision-making process and creativity is encouraged. 

Large organizations or those with many staff members may rely more on Theory X to keep everyone focused on meeting organizational goals.

6. Peter Drucker’s ‘knowledge worker’ management theory

Peter Drucker (1909-2005) was an Austrian-American management consultant whose initial writings on politics and society earned him access to the internal workings of one of the largest companies in the world, General Motors. 

After attending every board meeting, interviewing employees and analyzing production and decision-making processes, he published the 1946 book, Concept of the Corporation, which popularized multidivisional structure in tandem with the concept of decentralization and simplification. 

In Peter Drucker’s theory of management, an employee is an asset — not a liability — whose skills must be managed. Skills management is an ongoing process that highlights workers’ skill gaps. Management helps train or provide outside learning so employees can complete necessary tasks.

This management theory became very popular in the latter half of the 20th century as companies began focusing on Drucker’s idea of balancing community and business needs by evaluating various requirements and goals.

Key TakeawayKey takeaway
Drucker introduced the concept of corporate social responsibility as an integral part of business strategy and management.

Implementing a management theory

Knowing various management theories is valuable. However, implementing a management theory is a trial-and-error process that requires patience and flexibility. Before implementing a management theory, consider the following best practices:

  • Consider who you’re managing: Your approach will differ depending on who — and where — you’re managing. Managing a millennial workforce may require a more hands-off style. However, a more established workforce in a rank-and-file production assembly line will need scientific methods to determine optimal results for large-scale production. 
  • Set and measure key performance indicators: Set and measure key performance indicators to determine whether your management methods are working. Implementation success requires metrics and holding yourself accountable. If your management methods aren’t effective, introduce changes.
  • Discuss a plan with your leadership team: Your leadership team will provide insight and clarity as you decide on your approach and key performance indicators (KPIs). They can help you discover new tools for implementing your desired management methods. Asking for advice and guidance is crucial in the initial stages of implementing a management theory.
  • Conduct employee surveys over time: Your employees are the ultimate judge of your management theory’s effectiveness. Their input is valuable. Develop and conduct employee surveys regularly to gauge how your management practices are working. Be flexible enough to pivot if they’re not receptive to specific elements. 

Understand the difference between theory and practice

Several management theories stand the test of time because they’re effective and insightful in the right scenario. Understanding various management theories is crucial for business leaders who want to get the most from their workforce.

While understanding a theory is one thing, implementing it requires trial and error. Listening to your employees is crucial as you navigate management theories and leadership styles. Your employees’ happiness, engagement and productivity are ultimately the most essential elements of your business’ success. 

Paula Fernandes contributed to the reporting and writing of this article.

Tejas Vemparala headshot
Tejas Vemparala, Business Operations Insider and Senior Writer
Tejas Vemparala is an operations coordinator and analyst who specializes in recruiting and hiring candidates for open positions in small businesses in New York City. In his role, he actively seeks out top talent to support local entrepreneurs as they grow their businesses. Tejas understands the challenges small business owners face firsthand as a former food truck owner and operator, where he focused on providing fast casual Indian cuisine to communities throughout the five boroughs. Tejas holds a dual-degree in economics and marketing and imbues his advice to small businesses with his extensive expertise in these areas.
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