Management: Challenges for Tomorrow's Leaders , Fifth Edition (with InfoTrac 1-Semester)

edition 5

Management Challenges for Tomorrow’s Leaders

Pamela S. Lewis Queens University of Charlotte Stephen H. Goodman University of Central Florida Patricia M. Fandt University of Washington, Tacoma Joseph F. Michlitsch Southern Illinois University Edwardsville

Management: Challenges for Tomorrow’s Leaders, 5th Edition Pamela S. Lewis, Stephen H. Goodman, Patricia M. Fandt, Joseph F. Michlitsch VP/Editorial Director: Jack W. Calhoun Director of Development/Sr. Publisher: Melissa S. Acunã

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To my family, for your unwavering support of my efforts. PSL To Cynthia and Whitney, for the joy you continue to bring into my life each day. SHG To my family, friends, and students, for your continuing support and encouragement. PMF To my very special people: Jody, Chris, and Carlos. JFM

About the Authors PAMELA S. LEWIS Pamela S. Lewis is president of Queens University of Charlotte in Charlotte, N.C. Prior to becoming president, Dr. Lewis served as the dean of the McColl School of Business at Queens and as dean of the LeBow College of Business at Drexel University in Philadelphia. Throughout her career, Dr. Lewis has distinguished herself through her commitment to providing innovative and high-quality education. Her particular focus has been on increasing community involvement and forging industry and academic partnerships that enhance the relevance and applicability of academic programs. Dr. Lewis, who holds a Ph.D. in strategic planning and international business from the University of Tennessee, has written numerous articles in the areas of strategic planning, international strategy, and entrepreneurship/new venture strategy. Dr. Lewis also has been active in executive education and consulting, serving as a strategic planning consultant for numerous organizations across a wide variety of industries. Dr. Lewis serves on the Board of Directors for three public companies—Sonoco Products Company, C&D Technologies, and Charming Shoppes—as well as on the board of numerous not-forprofits such as Presbyterian Hospital, Charlotte Chamber of Commerce, Communities in Schools, Charlotte Museum of History, and YMCA of Greater Charlotte.

STEPHEN H. GOODMAN Stephen H. Goodman is an associate professor of management information systems at the University of Central Florida. He received his Ph.D in business administration from Pennsylvania State University, where he specialized in operations management and operations research. Prior to his doctoral study he received a B.S. in aeronautical engineering and an M.B.A., also from Penn State. During his academic career, he has taught, researched, and published primarily in production planning and control. He has also served as a coauthor of a textbook in the field of production/operations management. Currently he has a major teaching and research focus in quality management. He is an active member of the Decision Sciences Institute (DSI) and the American Production and Inventory Control Society (APICS), having held offices in each, has engaged in journal review activities, and has conducted professional training classes. He has achieved the distinction of Certified Fellow in Production and Inventory Management (CFPIM) from APICS.

PATRICIA M. FANDT Patricia M. Fandt is professor emeritus at the Milgard School of Business, University of Washington, Tacoma, a faculty associate in educational leadership at the University of North Carolina at Charlotte, and a director with The Geneva Foundation. Dr. Fandt earned her doctorate in management and organizational behavior from Texas A&M University in 1986. Throughout her academic career, Dr. Fandt has published numerous peer-reviewed articles and books on leadership performance, accountability, team dynamics, and organization change. Currently, her research extends from her recently published book The 2nd Language of Leadership and involves the integration of the personality/leadership behavior framework with the impact of change. Her undergraduate and graduate teaching is primarily focused on team development, leadership, and organization change, and she has been recognized with awards for teaching and curriculum development excellence. Dr. Fandt’s industry experience includes a career in marketing as a sales representative with Procter & Gamble, an account manager with Kendall Surgical Corporation, and a regional sales iv

About the Authors

manager in the surgical division of 3M Corporation. She was a flight attendant with Delta Airlines and worked for the Red Cross in Southeast Asia as a dietitian. In the consulting arena, Dr. Fandt has worked with a broad range of companies in health care, service, and technology industries. She consults with several universities on curriculum development and accreditation review.

JOSEPH F. MICHLITSCH Joseph F. Michlitsch teaches strategic management in the School of Business at Southern Illinois University Edwardsville (SIUE) and is chair of the Management and Marketing Department. He holds a Ph.D. in management from the University of Minnesota, an M.B.A. from the University of South Dakota, and a bachelor of science degree in economics from South Dakota State University. He is licensed to present the Stephen Covey 7 Habits of Highly Effective People workshops at SIUE. Dr. Michlitsch publishes in the areas of strategy development, strategy implementation, managerial decision making, and the teaching of management. Outlets for his work include Strategy & Leadership, Industrial Management, Business Insights, Supervisory Management, Journal of Education for Business, Research in Higher Education, Labor Law Journal, Public Personnel Management, Journal of Technical Writing and Communication, and Perceptual and Motor Skills. He also consults in strategy development and the many parts of strategy implementation (organization development, individual development, team building, and communication). Previously, he taught at several colleges in South Dakota and at the University of Minnesota while completing his Ph.D. degree. He worked with the Planning Department at Monsanto Chemical Company, now Solutia, during one sabbatical leave from SIUE, and during a second leave assisted the director of management consulting at Grace & Company in writing the second edition of a strategy book for practitioners.

Brief Contents Part 1 Meeting the Challenges of the 21st Century CHAPTER 1 CHAPTER 2 CHAPTER 3

Management and Managers 2 Evolution of Management Thought 26 Social Responsibility and Ethics 56

Part 2 Planning Challenges in the 21st Century CHAPTER 4 CHAPTER 5 CHAPTER 6

Strategic Management and Planning in a Global Environment 88 Planning in the Contemporary Organization 118 Managerial Decision Making 144

Part 3 Organizing Challenges in the 21st Century CHAPTER 7 CHAPTER 8 CHAPTER 9 CHAPTER 10

CHAPTER 16 CHAPTER 17

401

Organizational Control in a Complex Business Environment 402 Productivity and Quality in Operations 432 Information Technology and Control 464

GLOSSARY 500 ENDNOTES 513 NAME INDEX 541 COMPANY INDEX 543 SUBJECT INDEX 545

289

Communicating Effectively within Diverse Organizations 290 Leading in a Dynamic Environment 318 Exploring Individual Differences and Team Dynamics 342 Motivating Organizational Members 374

Part 5 Control Challenges in the 21st Century CHAPTER 15

183

Organizing for Effectiveness and Efficiency 184 Organizational Design 210 Strategic Human Resource Management 238 Organizational Culture and Change 266

Part 4 Leadership Challenges in the 21st Century CHAPTER 11 CHAPTER 12 CHAPTER 13 CHAPTER 14

Contents Part 1 Meeting the Challenges of the 21st Century 1 CHAPTER 1 Management and Managers 2 Chapter Overview 3 Learning Objectives 3 Facing the Challenge: Can anyone save Nissan Motor Co., Ltd.? 4 Introduction 4 Leaders in Action: The Avon Lady 5

What is Management? 5 What Managers Do 6 Planning 6 Organizing 6 Leading 6 Controlling 6

Role of Managers 6 Interpersonal Roles 7 Informational Roles 7 Decisional Roles 8

Managerial Scope, Levels, and Skills 8 Scope of Responsibility 9 Levels of Management and Relative Importance of Skills 9

Managing in the 21st Century 12 The Internet and Information Technology 12 Increasing Globalization 13 Increasing Diversity 13 Intellectual Capital 14 At the Forefront: Managing in the 21st Century 15 Ethics 15

An Overall Framework 16 Why Study Management? 17 Now Apply It: Are You Ready to Lead in the 21st Century? 18

Implications for Leaders 18 Meeting the Challenge: Carlos Ghosn, Star of Nissan and the Auto Industry 19 Summary 19 Review Questions 20

Discussion Questions 20 Thinking Critically: Debate The Issue 21 Experiential Exercise 21 Ethics: Take A Stand 22 Case: A Day in the Life of Jeremy Jackson 23 Video Case: Timbuk2—The Art of Management 24 CHAPTER 2 Evolution of Management Thought 26 Chapter Overview 27 Learning Objectives 27 Facing the Challenge: “Sony Shock”: Crisis at the Electronics Giant 28 Introduction 28 Environmental Factors Influencing Management Thought 29 Economic Influences 29 At the Forefront: The Golden Goose is a Potato 29 Social Influences 30 Leaders in Action: Publix’s New Flavor 31 Political Influences 31 Technological Influences 32 Global Influences 32

Schools of Management Thought 33 Classical Perspective 33 Behavioral Perspective 39 Now Apply It: Theory X and Theory Y 41 Quantitative Perspective 42 Systems Perspective 43 Contingency Perspective 44

Information Technology and Management Style 45 Future Issues: Diversity, Globalization, and Quality 47 Meeting the Challenge: Sony Makes an Historic Leap 48 Implications for Leaders 48 Summary 49 Review Questions 50 vii

Contents

Discussion Questions 50 Thinking Critically: Debate The Issue 51 Experiential Exercise 51 Ethics: Take A Stand 52 Case: Leon Neon 53 Video Case: Sunshine Cleaning Systems, JIAN, and Archway Cookies—Evolution of Management Thought 54 CHAPTER 3 Social Responsibility and Ethics 56 Chapter Overview 57 Learning Objectives 57 Facing the Challenge: General Electric: Social Responsibility and Ethics 58 Introduction 58 Organizational Stakeholders in a Global Environment 58 Social Responsibility 60 Premises of Corporate Social Responsibility 60 Perspectives of Social Responsibility 61 The Four Faces of Social Responsibility 64 Social Responsibility Approaches 65

Social Responsibility in the Ethics 67

21st

Century 66

Understanding Business Ethics 67 Leaders in Action: Cleaning Up Adelphia Communications 68 Managerial Guidelines for Ethical Dilemmas 70 Now Apply It: Ethics in the Workplace 72 Fostering Improved Business Ethics 72 At the Forefront: Guides to Organization Behavior 74

Does Socially Responsible and Ethical Behavior Pay? 77 Implications for Leaders 77 Meeting the Challenge: Social Responsibility, Ethics, and Profits at GE 78 Summary 78 Review Questions 79 Discussion Questions 80 Thinking Critically: Debate The Issue 81 Experiential Exercise 81 Ethics: Take A Stand 82 Case: Cuttinng Jobs at General Motors 83 Video Case: Organic Valley—An Exercise in Social Responsibility 84 viii

Part 2 Planning Challenges in the 21st Century 87 CHAPTER 4 Strategic Management and Planning in a Global Environment 88 Chapter Overview 89 Learning Objectives 89 Facing the Challenge: Changes at HewlettPackard 90 Introduction 90 Strategic Management and Strategic Planning 90 Strategic Analysis: Assessment in a Global Environment 92 Assessing the Mission of an Organization 92 Now Apply It: Setting Mission and Strategic Goals 93 At the Forefront: The Future “Phone Company” 94 Conducting an External Environmental Analysis 95 Conducting an Internal Analysis 102

Strategy Formulation: Achieving A Competitive Advantage 104 Casting or Reaffirming the Organization’s Vision and Mission 104 Setting Strategic Goals 104 Leaders in Action: Andrew Grove of Intel 105 Identifying Strategic Alternatives 106 Evaluating and Choosing Strategy 108

Strategy Implementation: Focusing on Results 109 Evaluation and Control: Achieving Effectiveness and Efficiency 109 Feedforward Controls 110 Feedback Controls 110

Information Technology and Strategic Planning 110 Meeting the Challenge: Focus and Implementation at Hewlett-Packard 111 Implications for Leaders 111 Summary 112 Review Questions 112 Discussion Questions 113 Thinking Critically: Debate The Issue 113 Experiential Exercise 113 Ethics: Take A Stand 114 Case: Developing a Strategic Plan for The Convenience Stop 115

Contents

Video Case: Kropf Fruit Company— Strategic Management and Planning in a Global Environment 116 CHAPTER 5 Planning in the Contemporary Organization 118 Chapter Overview 119 Learning Objectives 119 Facing the Challenge: Can Motorola Survive? 120 Introduction 120 Managerial Planning 120 What is Planning? 121 At the Forefront: Is Failing to Plan Planning to Fail? 121 Why Should Managers Plan? 122 Now Apply It: Developing a Professional Development Plan 123 Where Should Planning Begin? 124

Strategic And Operational Planning 126 Strategic Planning 126 Operational Planning 128

Contingency Planning for Changing Environments 133 Leaders in Action: Ann Mulcahy: Turnaround at Xerox 134

The Impact of Information Technology on Planning 134 Facilitating the Planning Process 135 Barriers to Effective Planning 135 Overcoming the Barriers to Planning 135

Implications for Leaders 136 Meeting the Challenge: Ed Zander Has a Plan For Motorola 137 Summary 137 Review Questions 138 Discussion Questions 138 Thinking Critically: Debate The Issue 139 Experiential Exercise 139 Ethics: Take A Stand 140 Case: TIXtrader.com 141 Video Case: The Vermont Teddy Bear Company, Inc.—Planning in the Contemporary Organization 142 CHAPTER 6 Managerial Decision Making 144 Chapter Overview 145 Learning Objectives 145

Facing the Challenge: Goodbye Cypress Gardens 146 Introduction 146 Sources of Organizational and Entrepreneurial Decisions 146 At the Forefront: Danger Drives Demand for Armored-Car Makers 148

Steps in the Decision-Making Process 148 Identifying Opportunities and Diagnosing Problems 149 Leaders in Action: Nike Executive Seizes the Moment 150 Identifying Objectives 151 Generating Alternatives 151 Now Apply It: Assessing Your DecisionMaking Skills 152 Evaluating Alternatives 153 Reaching Decisions 153 Choosing Implementation Strategies 153 Monitoring and Evaluating Feedback 154

Models of Decision-Making 155 Rational-Economic Decision Model 155 Behavioral Decision Model 157 Fostering Quality in the Decision-Making Process 159

Group Considerations in Decision Making 159 Participative Decision Making 159 Advantages and Disadvantages of Participative Decision Making 162 Techniques for Enhancing the Quality of Participative Decision Making 163

Classifying Decision Situations 165 Strategic Decision-Making Tools 166 Strategy Selection: The Strategic Decision-Making Matrix 166 Evaluation of Portfolios 167

Ethical and Social Implications in Decision Making 172 Information Technology and the DecisionMaking Tools 173 Implications for Leaders 173 Meeting the Challenge: Hello Cypress Gardens Adventure Park 174 Summary 174 Review Questions 175 Discussion Questions 176 Thinking Critically: Debate The Issue 176 Experiential Exercise 177 Ethics: Take A Stand 177

Contents

Case: Beacon Cleaners 178 Video Case: Next Door Food Store— Managerical Decision Making 180

Part 3 Organizing Challenges in the 21st Century 183 CHAPTER 7 Organizing for Effectiveness and Efficiency 184 Chapter Overview 185 Learning Objectives 185 Facing the Challenge: Proctor and Gamble Stumbles 186 Introduction 186 What Is Organizing? 186 Job Design 187 Core Job Dimensions 188 Now Apply It: Job Design 190 The Evolution of Job Design Perspectives 190

Organizational Relationships 195 Chain of Command 195 Span of Control 196 At the Forefront: No Organizational Chart at Semco. Inc. 197 Line and Staff Responsibilities 197 Authority and Responsibility 198 Leaders in Action: Was Tyco International Too Flexible 201

Implications for Leaders 203 Meeting the Challenge: New and Improved Proctor and Gamble 204 Summary 204 Review Questions 205 Discussion Questions 206 Thinking Critically: Debate The Issue 206 Experiential Exercise 207 Ethics: Take A Stand 207 Case: Designing Jobs and Delegating Authority 208 Video Case: Machado and Silvetti Associates, Inc.—Team Structure 208

CHAPTER 8 Organizational Design 210 Chapter Overview 211 Learning Objectives 211 Facing the Challenge: IBM: Big Blue Has the Blues 212 Introduction 212

Organizational Design 212 At the Forefront: Meg Whitman: Running Tomorrow’s Company 213

Components of Organizational Design 214 Organizational Structure 214 Leaders in Action: Will Your Next TV Be a Dell? 221 Managing Complexity through Integration 222 Now Apply It: Analyzing Organizational Structure 223 Locus of Decision Making 228

Implications for Leaders 230 Meeting the Challenge: IBM: Changing Strategy and Structure 231 Summary 231 Review Questions 232 Discussion Questions 232 Thinking Critically: Debate The Issue 233 Experiential Exercise 233 Ethics: Take A Stand 234 Case: Carolina Carpets 235 Video Case: Lonely Planet—Global Guide 236 CHAPTER 9 Strategic Human Resource Management 238 Chapter Overview 239 Learning Objectives 239 Facing the Challenge: JetBlue 240 Introduction 240 Strategic Human Resource Management 241 Analysis 241 Forecasting 241 Recruiting 242 Selecting 244 Selection Methods 244 Training 247 Appraising 248 Rewarding 250 Leaders in Action: PeopleFirst at Domino’s 251

Legal Environment of Strategic Human Resource Management 253 Important Laws 253 At the Forefront: Speaking Out on Diversity: Progress Energy 256

Labor-Management Relations 257 Implications for Leaders 258

Contents

Meeting the Challenge: JetBlue 259 Summary 259 Review Questions 260 Discussion Questions 260 Thinking Critically: Debate The Issue 261 Experiential Exercise 261 Ethics: Take A Stand 262 Case: Should JJ Be Hired? 263 Video Case: PepsiCo—More Than Just Personnel 264 CHAPTER 10 Organizational Culture and Change 266 Chapter Overview 267 Learning Objectives 267 Facing the Challenge: Aveda: Culture in Balance 268 Introduction 268 Foundations of Organizational Culture 269 At the Forefront: The Container Store 270

Components of an Organization’s Culture 270 Examining Culture through Organizational Artifacts 271 Now Apply It: Culture Clash: Asking the Critical Questions 273

The Impact of Culture on the Organization 273 Leaders in Action: Horst Rechelbacher, Founder of Aveda 274

Changing Organizational Culture 275 The Leadership Challenge of Organizational Change 275 Targets for Change 276

Leading Organizational Change 276 A Framework for Change 276 Phases of Planned Change 277

Implications for Leaders 280 Meeting the Challenge: Aveda: A Culture in Balance 281 Summary 281 Review Questions 282 Discussion Questions 283 Thinking Critically: Debate The Issue 283 Experiential Exercise 283 Ethics: Take A Stand 284 Case: People-Centric Culture at Sargento Foods, Incorporated 285

Video Case: Original Penguin—The Penguin is Cool Again 287

Part 4 Leadership Challenges in the 21st Century 289 CHAPTER 11 Communicating Effectively within Diverse Organizations 290 Chapter Overview 291 Learning Objectives 291 Facing the Challenge: TDIndustries 292 Introduction 292 Communication Complexity 293 Exploring and Achieving Effective Communication 293 Components of the Communication Process 294 Context: Global, Diversity and Technology Impact 294 Sender 294 Message 294 Channel 295 Receiver 296 Feedback 296 Noise 296

Interpersonal Communication 296 Oral Communication 296 Written Communication 297 Nonverbal Communication 297 Technological Communication 298 Now Apply It: E is for E-Mail Etiquette 299 At the Forefront: FedEx Captures the Best of Communication Activities 300

Why Managers Communicate 301 Barriers to Effective Communication 301 Cross-Cultural Diversity 301 Trust and Credibility 302 Information Overload 303 Language Characteristics 303 Gender Differences 303 Other Factors 304

Communication Channels 304 Formal Communication Channels 304 Leaders in Action: Listening and Learning Builds Success 307 Spontaneous Communication Channels 307

Communication Competency Challenges 308 Developing Feedback Skills 308 Advancing Listening Skills 309

Meeting the Challenge: TDIndustries 310 Implications for Leaders 310

Contents

Summary 311 Review Questions 312 Discussion Questions 312 Thinking Critically: Debate The Issue 313 Experiential Exercise 313 Ethics: Take A Stand 313 Case: A Performance Review 314 Video Case: Le Meridien Hotels and Resorts Limited—Communicating Effectively within Diverse Organizations 316 CHAPTER 12 Leading in a Dynamic Environment 318 Chapter Overview 319 Learning Objectives 319 Facing the Challenge: Meg Whitman: Leading eBay 320 Introduction 320 Leadership Significance 321 Leader-Centered Approaches 321 Leader Traits and Skills Focus 321 Leadership Behavior Focus 323 Leadership Power Focus 323 Now Apply It: Newly Promoted: Where Do You Start? 325

Follower-Centered Approaches 327 Self-Leadership Focus 327 At the Forefront: What Goldman Sachs Looks for in Leaders 328 Leadership Substitutes 329

Interactive Approaches 330 Situational Leadership Model 330 Empowerment 331 Transformational Leadership 332

Current Perspectives on Leadership 333 Emotional Intelligence 333 Gender and Leadership 333 Leaders in Action: Kenneth Chenault on Distinguishing Features of Exceptional Leaders 335 Leaders of the Future 335

Implications for Leaders 336 Meeting the Challenge: Meg Whitman: Leading eBay 337 Summary 337 Review Questions 338 Discussion Questions 338 xii

Thinking Critically: Debate The Issue 339 Experiential Exercise 339 Ethics: Take A Stand 340 Video Case: The Buffalo Zoo—Leading In a Dynamic Environment 340 CHAPTER 13 Exploring Individual Differences and Team Dynamics 342 Chapter Overview 343 Learning Objectives 343 Facing the Challenge: Nokia: Creating an Innovative Culture 344 Introduction 344 Appreciating Individual Differences 345 Personality Characteristics 345 Now Apply It: How Resilient Are You? 349 Matching Personalities with Jobs 350

Critical Elements for Designing Effective Teams 356 Characteristics of Groups 356 Leaders in Action: Successful Teams Share a Culture 357 Membership Composition 357 Size 360 At the Forefront: Merck Pharmaceutical: Capitalizing on the Power of Team Rewards 361 Team Goals 361

Processes for Team Effectiveness 362 How Teams Develop and Perform 362

Meeting the Challenge: Nokia: Creating an Innovative Culture 365 Implications for Leaders 365 Summary 366 Review Questions 367 Discussion Questions 367 Thinking Critically: Debate The Issue 368 Experiential Exercise 368 Ethics: Take A Stand 369 Case: TigerEye Tech Builds a Team 370 Video Case: Cannondale I—Exploring Individual Differences and Team Dynamics 372 CHAPTER 14 Motivating Organizational Members 374 Chapter Overview 375 Learning Objectives 375

Contents

Facing the Challenge: You Understand Me: Yum! Brands 376 Introduction 376 Basic Motivation Process 377 Motivational Approaches 377 Needs-Based Approaches of Employee Motivation 378 At the Forefront: Strategically Planning Recognition 381 Process Approaches to Employee Motivation 382 Reinforcement Approaches to Employee Motivation 385 Using Behavior Modification 388

Motivational Challenges for Today’s Managers 388 Participative Management 388 Recognition Programs 389 Money as a Motivator 389 Now Apply It: 391 Rewarding Team Performance 391

International Perspectives 392 Implications for Leaders 392 Leaders in Action: Mary Kay in China 393

Meeting the Challenge: You Understand Me: Yum! Brands 394 Summary 394 Review Questions 396 Discussion Questions 396 Thinking Critically: Debate The Issue 397 Experiential Exercise 397 Ethics: Take A Stand 397 Case: How’s My [Teenager] Driving? 398 Video Case: P. F. Chang’s China Bistro— A Recipe for Success 399

Part 5 Control Challenges in the 21st Century 401 CHAPTER 15 Organizational Control in a Complex Business Environment 402 Chapter Overview 403 Learning Objectives 403 Facing the Challenge: Berner Foods: The Biggest Cheese Maker You Never Heard Of 404 Introduction 405

Control Process for Diverse and Multinational Organizations 405 Setting Standards of Performance 405 Measuring Actual Performance 407 Comparing Actual Performance with Standards 407 Responding to Deviations 408

Designing Quality and Effectiveness into the Control System 408 Design Factors Affecting Control System Quality 409 Criteria for Effective Control 411 Leaders in Action: LINPAC Plastics 413 Selecting the Proper Amount of Control 413 Now Apply It: Checklist for Designing Effective Control Systems 414 Selecting the Focal Point for Control 416 At the Forefront: FAA Proposes New “Black Box” Rules 418

Control Philosophies for Managers 419 Bureaucratic Control 419 Organic Control 419 Selecting a Control Style in Today’s Diverse Multinational Organizations 420

Impact of Information Technology on Organizational Control 421 Mechanisms for Financial Control 421 Financial Statements 421 Financial Ratios 422

Ethical Issues in the Control of a Diverse Workforce 424 Drug Testing 424 Undercover Surveillance 424 Computer Monitoring 425

Implications for Leaders 425 Meeting the Challenge: Berner Foods: Controlling Its Destiny 426 Summary 426 Review Questions 427 Discussion Questions 427 Thinking Critically: Debate The Issue 428 Experiential Exercise 428 Ethics: Take A Stand 429 Case: Motorola’s Control of Quality 429 Video Case: Cannondale—Productivity and Quality in Operations 431 xiii

Part 1 Part Title

CHAPTER 16 Productivity and Quality in Operations 432 Chapter Overview 433 Learning Objectives 433 Facing the Challenge: Summit Industrial Products: Victimized by Its Own Success 434 Introduction 434 What is Operations Management? 434 Manufacturing versus Service Operating Systems 435 Now Apply It: Checklist for Manufacturing/Service Classification 437 Structural Differences among Operating Systems 437 At the Forefront: Xtek Employs Advanced Planning and Scheduling System 439 Operations Management Decision Areas 439 Leaders in Action: Target Laser & Machining: Company on the Move 442

The Role of Productivity and Quality in Operations 447 Fundamentals of Productivity 447 Fundamentals of Quality 449 Total Quality Management as a Tool for Global Competitiveness 452 Prominent Quality Management Philosophers 453

Impact of Information Technology on Productivity and Quality 455 Implications for Leaders 455 Meeting the Challenge: Summit Industrial Products: Improvement through ERP 456 Summary 457 Review Questions 458 Discussion Questions 458 Thinking Critically: Debate The Issue 459 Experiential Exercise 459 Ethics: Take A Stand 460 Case: Inventory Decision Making at Art Source 461 Video Case: Peapod—Preventing Costs from Eating Up Your Profits 463 CHAPTER 17 Information Technology and Control 464 Chapter Overview 465 Learning Objectives 465 Facing the Challenge: Torino, Italy: Lots to Do to Stage the Olympic Games 466 xiv

Introduction 466 Organizational Foundations of Information Systems 467 The Changing Business Environment 467 Integration of Systems 472

Technical Foundations of Information Systems 473 Information System Components 473 Leaders in Action: Beaver Street Fisheries: Poster Child for RFID 475 Information versus Data 476 Characteristics of Useful Information 477 Steps in the Development of High-Quality Information Systems 478 Attributes of Successful Information Systems 481 Now Apply It: Checklist for Successful Information System Design 482

The New Technologies 482 Telecommunications and Networking 483 At the Forefront: Remy International: Centralized Database Key to Success 485 Electronic Commerce 486 Artificial Intelligence 487

Impact of Information Technology on Dynamic Organizations 488 Limitations of Computer-Based Information Systems 489 Implications for Leaders 490 Meeting the Challenge: TOROC Pulls It Together to Stage the Winter Olympics 491 Summary 492 Review Questions 493 Discussion Questions 493 Thinking Critically: Debate The Issue 494 Experiential Exercise 494 Ethics: Take A Stand 495 Case: Safe Haven House 496 Video Case: Cannondale—Information Technology and Control 498 Glossary 500 Endnotes 513 Name Index 541 Company Index 543 Subject Index 545

Preface Each new edition of this book presents us with an opportunity to reflect on significant events that have occurred within the past few years, and to assess their impact on the matter at hand—the study of management. When the journey of this book began in the mid-1990s, we wanted to fill the students with enthusiasm and excitement for the course of study they were about to undertake. The field of management was then, and continues to be now, one of the most important and interesting disciplines of business. We recognized that times were changing, as were the functions and roles of managers. As the 21st century approached we saw a frenzy of activity as the business community prepared itself for the dreaded Y2K problem. Although this glitch in computer date coding resulted in dire predictions of computer system malfunctions, it barely caused a blip on the radar screen when we rang in the new millennium. The economy continued to soar. We saw the rapid ascent and subsequently equally rapid fall of many dot-com organizations. We have seen changes in political administrations and public policy. Early in the new millennium we find ourselves facing an economy that is not riding the crest of the wave that it once surfed. Businesses have had to tighten belts, and business leaders are finding it necessary to turn their full attention to meeting the challenges of a highly dynamic and rapidly changing business environment. U.S. involvement in wars in Iraq and Afghanistan has shaken the confidence of many. We have been introduced to political terrorism on our own home front. The pernicious events of September 11, 2001, have altered the face of business and to some extent, have altered our way of life. Boarding a commercial airplane is no longer the simple task it once was. Meanwhile, many of the major air carriers struggle to remain solvent in the wake of costly security measures. Mother Nature has also played a role in emphasizing the importance of studying management. Since our last edition our nation has suffered several natural disasters that have dramatically affected the availability and movement of resources. Within a six-week span in 2004 hurricanes Charley, Frances, Ivan, and Jeanne wreaked havoc in Florida. As bad as they seemed at the time, they pale in comparison to what blew in from the Gulf of Mexico in 2005. In August of that year Hurricane Katrina inflicted catastrophic damage to the Louisiana, Mississippi, and Alabama Gulf Coast. Antebellum mansions that had stood proudly for one and a half centuries disappeared in the blink of an eye. New Orleans, which had the distinction of being a major U.S. port city, a center for

petrochemical production, and a cultural and tourism icon, lay submerged beneath a pool of toxic water. Such a cataclysmic event was destined to have an economic impact for years to come. Countless businesses would struggle to get back on their feet. Major reconstruction, renovation, and preservation efforts would severely tax material supplies in the construction industry. Damage to U.S. oil refining capacity in Louisiana would push fuel prices to dizzying heights. Less than one month after Katrina, that problem was compounded by hurricane Rita’s blow to Texas and Louisiana refineries. Those same airlines that were reeling under the pressures of heightened security were now struggling with the rising cost of jet fuel and mounting financial losses. Looking beyond the physical destruction and other consequences of Hurricane Katrina, we see signs pointing to the importance of studying management. People around the world were horrified as they helplessly watched the tragic events unfold on their television screens. U.S. citizens could be seen huddled in squalid conditions within evacuation shelters. Others could be seen clinging to rooftops waiting to be rescued. All had to endure days in sweltering heat with little food or water. Meanwhile, leadership at federal, state, and local levels was ineffective in getting relief to those who were suffering. Effective decision making and decisive leadership might have prevented much of the loss of life that resulted. As students of management, and future business and civic leaders, you must prepare to face challenges like these, for the business, social, and political environment is destined to remain on this volatile course. As the times continue to change, so too do the roles of leaders. Change is coming from many directions: the global marketplace has redefined the competitive structure of many industries; the increasing predominance of entrepreneurial and servicebased organizations has altered the structure of our economy; quality management has radically changed the way many organizations do business; and extremist militant groups are doing all in their power to disrupt the world’s free-market economy. Organizations are being restructured and redesigned to be lean, flexible, and adaptable to change; leaders in all areas and at all levels of the organization are expected to be proactive, team-oriented, and focused on results; and diversity in the workforce has become the rule rather than the exception. Succeeding as a leader in the organization of today and tomorrow requires a special set of management skills and competencies. xv

Part 1 Part Title

When we wrote the first edition of this book in the mid-1990s, we claimed that that was an exciting time to begin studying one of the most important and interesting disciplines of business: the field of management. Well, as exciting a time as that was, this is perhaps an even more exciting time to begin studying the field of management. The challenges we saw then pale in comparison to the ones we see today. Management: Challenges for Tomorrow’s Leaders should pique your excitement about this discipline. As you progress through the chapters you will be exposed to the new challenges and contemporary issues that the leaders of today and tomorrow will continually face. Global competition; organizational restructuring; entrepreneurial, service-based, and quality initiatives; and an emphasis on gender, ethnic, and racial diversity in the workforce are just a few of the issues that you and other contemporary managers will confront. Our overriding objective in developing this book was to capture the excitement and challenges that business leaders will face in the environment of the 21st century. In the few short years since the prior edition of this book was prepared, much has happened in the business environment that needed to be captured in this new edition. As authors, we also have had to adapt to change. While significant changes have been made in each chapter, the theoretical content of the chapters remains true to the earlier editions and the pedagogical objective has not wavered. Management: Challenges for Tomorrow’s Leaders still provides comprehensive coverage of traditional and emerging management theory, and has a special focus on honing the leadership skills that will be necessary for survival in the dynamic, global environment of business. The application orientation of the book has also remained strong. A number of features provide you with an opportunity to implement the material you learn and to understand a wide variety of real-world management situations. In short, the book is designed to help you develop an understanding of the field of management and to develop the competencies and skills that will enable you to succeed in the business environment of the future.

Changes in this Edition •

xvi

In the prior editions of this book, each chapter opened with an incident that details a real-life organizational problem or situation that is related to the content of the chapter. This pedagogy was very well received, and continues in this edition. However, each chapter opening, now called “Facing the Challenge,” has been changed to provide fresh illustra-

tions of situations or problems, and how they were dealt with within the realm of the content and theory of the chapter. The challenge is referred to often as the chapter unfolds. At the close of the chapter, “Meeting the Challenge” describes how the problem was solved or the situation was addressed. • The boxed material (highlighted examples) in each chapter has been replaced with updated or new illustrations and applications of contemporary management practice. These highlighted examples fall into the categories of Leaders in Action, At the Forefront, Now Apply It, and of course the Facing the Challenge and Meeting the Challenge so prominent in each chapter. • Every chapter has been updated to reflect many of the changes that have occurred in the business world during the past few years. Along with the major features noted above, many new illustrative examples have been woven into the fabric of each of the chapters. In all, more than 50 new company situations and scenarios have been developed to accompany the theoretical content of the chapters, as well as numerous additional company examples interspersed through the text.

Text Highlights This book includes a number of features designed to prepare students to be leaders in this new millennium. These features focus on: (1) meeting the challenges inherent in a dynamic, rapidly changing business environment, (2) developing the competencies and skills that leaders will need in the future, (3) bridging the gap between management theory and practice, and (4) responding to the contemporary management trends that will affect both organizations and managers in the 21st century. • Challenges for Tomorrow’s Leaders. The underlying, integrating theme that forms the foundation of this book is meeting the leadership challenge as we begin the new millennium. As tomorrow’s leaders, you will be challenged continually to respond to opportunities and threats that arise in the dynamic, global environment of business. You will need to be creative in the way you think about and respond to these challenges. As competitive pressures continue to escalate and consumers around the globe demand increasing levels of quality, you will find it necessary to strive for excellence in all facets of your organizations. Our focus in this book is to prepare you to meet these challenges as they affect the activities in which you will engage and the roles you will play.

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Competencies and Skills. Beyond our theme of meeting the challenge, we have developed this book with an emphasis on the competencies and skills needed by contemporary leaders. As students of management, you must be prepared to translate theory into practice as you move into the workplace. To do so, you will need to develop fully your skills in such important areas as teamwork, critical thinking, problem solving, communication, and adapting to change. Theory and Practice. This book bridges the gap between management theory and practice by using an interdisciplinary, applied approach to the material in the text. Because leaders come from all areas of an organization (for example, production departments, finance and accounting departments, sales and marketing departments), it is important to understand how the concepts of management are applied in the various functional areas of organizations of all sizes. Further, an interdisciplinary approach to the study of management is essential given the blurring of the lines separating the traditional functions of business (for example, management, marketing, and finance) and the increasing predominance of cross-functional work teams within contemporary organizations. Contemporary Management Trends. Finally, we have identified and highlighted several contemporary management trends that present challenges for organizations and leaders today. They include global management, entrepreneurship, service management, quality, team-based management, ethics, and cultural diversity. Rather than adding a separate chapter on each of these trends, we introduce them very early in the text and then integrate the topics into each and every chapter of the book.

ORGANIZATION Part 1 of the text addresses the basic concepts of management, the roles of the manager, and the changing nature of both the contemporary organization and the contemporary manager. The contemporary management trends discussed above are introduced, and a foundation is laid for examining how these trends affect management theory and practice. In addition, the history of management thought is reviewed, and the topics of social responsibility and ethics are addressed in light of their increasing importance in modern organizations. Part 2 explores the managerial function of planning. This section examines the basic principles of the planning process, as well as planning from a strategic perspective. Strategy is examined as a tool for responding to

challenges in today’s highly competitive, global business environment and for achieving quality in every aspect of an organization’s operations. Further, decision making is addressed as a key managerial responsibility, and a number of tools and techniques for decision making are presented. Part 3 of the text focuses on the organizing function of management. More specifically, this section addresses the fundamental principles of organizing, as well as the models of organizational design that are appropriate for contemporary, team-oriented organizations. Issues of organizational culture, change, and human resource management are also addressed in this section. Particular emphasis is placed upon organizing to improve flexibility, facilitate change, utilize team management, and respond to the challenges of a diverse and heterogeneous work environment. Part 4 explores the managerial function of leadership. This section focuses on factors that influence the behavior of people. Separate chapters examine individual and group behavior, what motivates members of the workforce, the nature of leadership, and communicating with others. Special attention is given to developing a leadership style that empowers the members of diverse organizations to excel in everything they do and to work as a team to achieve the goals and objectives of the organization. Part 5 examines the management function of control. The foundational principles of control are addressed, and specific attention is given to productivity, quality control, and information systems control. Control is presented as a principal tool for achieving quality in the products, services, and processes of the organization, as well as a tool for developing a competitive advantage based on enhanced productivity, increased efficiency, and superior quality.

APPLICATION ORIENTED APPROACH Consistent with our application-oriented approach to the presentation of contemporary management trends, we have included the following elements, which are designed to help you become a more effective manager: • Chapter Overview. Every chapter opens with a summary that describes the general content of the chapter. This opening summary highlights the primary topics and concepts to be covered in the chapter and explains why the information is important to the manager of the future. • Learning Objectives. Each chapter contains a welldefined set of learning objectives. These objectives focus on the specific topics covered in the chapter and provide a checklist of important points discussed in xvii

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the chapter. Each learning objective is keyed to the appropriate section of the chapter text, the chapter summary, and the chapter review questions. Facing the Challenge/Meeting the Challenge. An opening Facing the Challenge in each chapter details a real-life organizational problem or situation that is related to the content of the chapter. This incident is referred to often as the chapter unfolds. At the close of the chapter, a Meeting the Challenge describes how the problem was solved or the situation was addressed using the management concepts discussed in the chapter. This allows the student to see how the concepts and theories presented in each chapter are applied to business situations in actual companies. Ethics: Take a Stand. An ethical dilemma related to the material presented in the chapter appears at the end of each chapter. Students evaluate various alternative courses of action in terms of their ethical implications and select one that is both ethical and meets the objectives of the organization. The Ethics: Take a Stand feature highlights the increasing importance of leaders making decisions that are founded on strong individual and organizational ethics. Thinking Critically: Debate the Issue. Each chapter contains a debate topic related to the content of the chapter. Students are asked to work in teams to develop arguments to support a particular position. The instructor selects two teams to present their findings to the class in a debate format. This exercise helps students to develop critical thinking skills, teamwork skills, and oral communication skills. Chapter Video Cases. At the end of every chapter a video case presents a real organization that uses contemporary management practices. Seven of the cases are new for this edition. End-of-Chapter Cases. In addition to the video case at the close of each chapter, a second case details a situation that provides an opportunity for students to apply the concepts and tools presented in the chapter. These cases are designed to help students develop their analytical thinking skills and to apply the knowledge they gained from the chapter to resolve problems or address situations that often occur in contemporary organizations. Chapter Summary. Each chapter closes with a summary of the major points presented in the chapter. This overview of the chapter contents provides students with an overall perspective on the topics covered. Each chapter’s summary is tied directly to that chapter’s learning objectives.

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Review/Discussion Questions. A set of review and discussion questions is provided at the end of each chapter. The review questions relate directly to the content of the chapter and are keyed to the learning objectives. The discussion questions are applicationoriented in that they require students to respond to real-world situations or issues using the knowledge gained from the chapter. Experiential Exercises. Structured experiential exercises are provided at the close of each chapter. These exercises can be used in either large or small class environments and are designed to get students directly involved in the learning process by requiring them to apply management theory to real-world situations. Many of these exercises involve selfassessment and will help students gain a greater understanding of their own management competencies and skills. Now Apply It. In each chapter, Now Apply It provides an opportunity for students to practice the management principles they have studied. For example, students are given the opportunity to use self-assessment instruments to describe their own personal management or leadership styles, and organizational assessment skills to evaluate organizations. Key Terms. Key terms are highlighted throughout the chapter and are defined in the margins. A comprehensive glossary is provided at the back of the text. Highlighted Examples. Throughout the book, organizations that provide examples of contemporary management practices are highlighted. These examples are designed to profile real companies that are confronting management challenges and responding in proactive and innovative ways. Each of the chapters contains the following highlighted examples: Leaders in Action. Business leaders who have achieved excellence through their management practices and leadership skills are featured in Leaders in Action. At the Forefront. Companies that have achieved excellence through their management practices are featured in At the Forefront. Of particular interest are those organizations that have adopted a quality orientation in everything they do.

SUPPLEMENT PACKAGE A professor’s job is demanding. Because of this, we expect professors to demand a lot in return from the publisher and the authors of Management. Both the text-

Preface

book and the accompanying ancillary materials have been developed to help instructors excel when performing their vital teaching function. We also include a number of supplements to aid students in their study of the material.

FOR STUDENTS Service Learning Guide (ISBN 0-324-36203-X) This is for students whose course includes a service learning component. Many schools are now requiring students to do community service as a part of their education. This guide shows instructors and students how to get involved in activities in which students can put their skills and knowledge acquired in the classroom to work for the greater good. Student Study Guide (ISBN 0-324-40527-8) The extended study guide for Management was updated by Tish Matuszek, Troy University. For each chapter, this comprehensive guide includes learning objectives with detailed descriptions; a chapter outline; multiple choice and agree or disagree questions with answers; exercises; and a chapter summary. InfoTrac College Edition InfoTrac College Edition is a fully searchable online database of full-text articles, with anytime, anywhere access, fast and easy search tools, and daily updates. Hundreds of periodicals, both scholarly and popular—Fortune, Newsweek, Sloan Management Review, Entrepreneur, to name a few—are available all at a single site. For more information or to log on, please visit http://www. infotraccollege.com. Just enter your passcode as provided on the subscription card packaged free with every new copy of Management: Challenges for Tomorrow’s Leaders. Lewis Xtra! (http://lewisxtra.swlearning.com) An optional bundle item, Xtra offers students a variety of online learning enhancements, including Xtra! Quizzing; Experiencing Management, an award-winning collection of web-based concept-reinforcement modules; streaming video of each chapter’s video case with questions; and e-lectures for each chapter. Xtra can also be purchased online at http://lewisxtra.swlearning.com.

FOR INSTRUCTORS Service Learning Guide (ISBN 0-324-36203-X) This is for instructors who want to include a service learning component to their courses. Many schools are now requiring students to do community service as a part of their education. This guide shows instructors and

students how to get involved in activities in which students can put their skills and knowledge acquired in the classroom to work for the greater good. Instructor’s Manual with Video Guide (ISBN 0-324-40528-6) The instructor’s manual for Management was prepared by David A. Foote, and provides important information for each chapter. Each chapter of the manual includes the following information: • Learning Objectives. • Chapter Overviews. • Pedagogy Grids to highlight the main points covered in the feature boxes. • Lecture Notes with narratives under each major point to flesh out the discussion and show alternative examples and issues to bring forward. • Detailed Responses to the review questions, discussion questions, Ethics: Take a Stand exercises, cases, and experiential exercises. • A Video Guide describing the video cases that accompany each chapter, including questions for discussion and detailed responses. The video guide was prepared by Cynthia L. Sutton of Metropolitan State College of Denver. • Additional Cases with suggested answers for those instructors who wish to supplement the case material included in the text. Test Bank (ISBN 0-324-40525-1) Special attention was given to the preparation of the test bank because it is one of the most important ancillary materials. Linda Putchinski, University of Central Florida, has updated the fourth edition test bank. The test bank contains over 3,500 multiple choice, true/false, matching, case, and essay questions. ExamView® Testing Software ExamView, a computerized testing program, contains all of the questions in the printed Test Bank. This easy-touse test-creation program is compatible with Microsoft Windows and Macintosh and enables instructors to create printed tests, Internet tests, and LAN-based tests quickly. The QuickTest Wizard lets test generators assemble a test in minutes, using a step-by-step selection process. Blackboard- and WebCT-ready versions of the Lewis Test Bank are also available to qualified instructors. Please contact your South-Western/Thomson Learning sales representative for more information. PowerPoint ™ Presentation Slides Developed by Charlie T. Cook, Jr., University of West Alabama, in close coordination with the text authors, over

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600 slides are available to supplement course content, providing a comprehensive review of each chapter in the book. Available online at http://lewis.swlearning.com. Video Package: Seventeen Chapter Video Cases (ISBN 0-324-40529-4, DVD; 0-324-36200-5 VHS) In this edition we have incorporated seven new video segments that highlight all aspects of today’s management. One video segment ranging from 5 to 30 minutes accompanies each of the chapters and helps to explain the concepts of that chapter. The videos are supported by cases, which are included in the text, and a video guide, which is included in the Instructor’s Manual. The cases and video guide were prepared by Cynthia L. Sutton of Metropolitan State College of Denver. WebTutor™ Advantage (ISBN Blackboard: 0-32436143-2; WebCT: 0-324-36222-6) Save time managing your course, posting materials, incorporating multimedia, and tracking progress with this engaging, text-specific e-learning tool. Visit http://webtutor .thomsonlearning.com. Lewis Web Site (http://lewis.swlearning.com) Broad instructional and student support is provided online at http://lewis.swlearning.com, including downloadable ancillaries, interactive quizzes, news summaries, and more. Instructor’s Resource CD-ROM (ISBN 0-324-40532-4) This CD-ROM provides instructors with “one-stop shopping” for various teaching resources, including the chapter PowerPoint slides, the Instructor’s Manual, and the Test Bank. ManagementNOW This online assessment-driven and student-centered tutorial provides students with a personalized learning plan. Based on a diagnostic pre-test, a customized learning path is generated for each student that targets his or her study needs and helps the student to visualize, organize, practice, and master the material in the text. Media resources enhance problem-solving skills and improve conceptual understanding. An access code to ManagementNOW can be bundled with new textbooks. JoinIn™ on TurningPoint® (0-324-36201-3) Transform any lecture into a truly interactive student experience with JoinIn. Combined with your choice of several leading keypad systems, JoinIn turns your ordinary PowerPoint application into powerful audience response software. With just a click on a hand-held device, your students can respond to multiple choice questions, short polls, interactive exercises, and peer-review questions. xx

You can take attendance, check student comprehension of difficult concepts, collect student demographics to better assess student needs, and even administer quizzes without collecting paper or grading. In addition, we provide interactive text-specific slide sets that you can modify and merge with any existing PowerPoint lecture slides for a seamless classroom presentation. This interactive tool is available to qualified college and university adopters. For more information, contact your Thomson representative or visit http://turningpoint.thomsonlearningconnections.com. Business & Company Resource Center (ISBN 0-75933727-6) Gain online access to global business information—including competitive intelligence, career and investment opportunities, business rankings, company histories, and much more—at no additional cost with the text. View a guided tour at http://www.gale.com/BusinessRC. For college and university adopters only. TextChoice: Management Exercises and Cases TextChoice is the home of Thomson Learning’s online digital content. TextChoice provides the fastest, easiest way for you to create your own learning materials. SouthWestern’s Management Exercises and Cases database includes a variety of experiential exercises, classroom activities, management in film exercises, and cases to enhance any management course. Choose as many exercises as you like and even add your own material to create a supplement tailor-fitted to your course. Contact your South-Western/Thomson Learning sales representative for more information.

Acknowledgments A book such as this does not come to fruition solely by the hands of the authors. Many individuals have had significant involvement with this project, and their contributions must not go unrecognized. Our reviewers made insightful comments and valuable suggestions on the preliminary drafts of this book. Although criticism is sometimes a bitter pill to swallow, we can now look back and agree that the reviewer comments led to modifications that greatly strengthened the final product. We would like to express our gratitude to each of the following reviewers: Fifth Edition Reviewers: Barbara Barrett, St. Louis Community College Bruce Barringer, University of Central Florida Rochelle R. Brunson, Alvin Community College Maxine Christensen, Aims Community College Gerald Ellis, DeVry University

Preface

Gregory Gomez III, Southern Illinois University Edwardsville Mary Kiker, Auburn University, Montgomery Tish Matuszek, Troy University Linda Beats Putchinski, University of Central Florida Joan Reicosky, University of Minnesota, Morris James Saya, College of Santa Fe Gail Thomas, New Hampshire Community Technical College/Laconia Fourth Edition Reviewers: Maha W. Alul, Maryville University Bruce Barringer, University of Central Florida Jerry Biberman, University of Scranton Donna Cooke, Florida Atlantic University Max E. Douglas, Indiana State University Lorena B. Edwards, Belmont University Kathleen Jones, University of North Dakota Thomas R. Mahaffey, Siena College John Mastriani, El Paso Community College Susan S. Nash, University of Oklahoma Charles Stubbart, Southern Illinois University Cynthia L. Sutton, Metropolitan State College of Denver Andrew Ward, Emory University In addition to these manuscript reviewers, other colleagues have contributed greatly by developing several of the high-quality, comprehensive supplements that support this book. These individuals, and their contributions for which we are so grateful, include: Instructor’s Manual Study Guide Test Bank Video Cases PowerPoint Slides

Our executive editor, John Szilagyi, and other individuals at South-Western made valuable contributions to this project. They include Monica Ohlinger, our developmental editor, who played a critical role in linking the huge network of contributors to this project. We also acknowledge the stamina of Bob Dreas, our production project manager, who not only tolerated our continual changes to the manuscript as it moved through production, but actually encouraged us to change whatever was necessary to make this product the very best possible. Our thanks also go to Kim Kanakes, senior marketing manager, for coordinating the outstanding sales and marketing efforts awarded this text. Finally, we’d like to thank our families for their support throughout this project. Their tolerance of our absence from many family activities, their understanding of the time commitment a project like this requires, and their continual encouragement to push on enabled us to endure the long nights and lost weekends that made it possible for us to complete this book. For that support and commitment, we will always be grateful. Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Joseph F. Michlitsch

David A. Foote, Middle Tennessee State University Tish Matuszek, Sorrell College of Business at Troy University Linda Putchinski, University of Central Florida Cynthia Sutton, Metropolitan State College of Denver Charlie T. Cook, Jr., University of West Alabama

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part 1

Meeting the Challenges of the 21st Century

Chapter 1 Management and Managers Chapter 2 Evolution of Management Thought Chapter 3 Social Responsibility and Ethics

Chapter

Management and Managers

CHAPTER OVERVIEW Each year, BusinessWeek publishes “The Best and Worst Managers of the Year”.1 In discussing the accomplishments of the “best” managers, words such as vision, goals, strategy, customerdriven, innovation, strong diverse leadership, and increasing profitability are common. Here are some managers to whom these words apply. Ann Mulcahy took over at Xerox in 2001 and brought the company back to profitability. She says, “it’s getting your people focused on the goal that is still the job of leadership.”2 At PepsiCo, Steven Reinemund is pulling ahead of Coca-Cola3 by introducing many products each year that are purchased by customers throughout the world and by developing managers through mentoring and teaching. Carlos Ghosn brought Nissan Motor Co. from near bankruptcy in 1999 to one of the most profitable car companies in the world.4 Meg Whitman, CEO of eBay Inc., is not only on BusinessWeek’s

list, but is also featured in Fortune as the “most powerful woman in business.”5 What do these managers do to be successful? These managers do “everything” that a manager is supposed to do. That is, they successfully engage in the management functions of planning, organizing, leading, and controlling. This chapter introduces you to overall management. Management is defined and the basic managerial functions are explained. Then things that managers do to carry out the basic functions of planning, organizing, leading, and controlling are discussed. These are the roles that managers play, the scope of their jobs, the levels of management, and the skills that managers need. Next, major changes in the 21st century are discussed. The chapter concludes with an overall framework that will be useful to coordinate learning about management and why it is important to study management.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. 2. 3. 4. 5.

Define what management is. Identify and explain the basic managerial functions. Understand the roles that managers play. Discuss the scope of responsibilities of functional and general managers. Describe the three levels of managers in terms of the skills that they need and the activities in which they are involved. 6. Identify major changes in the 21st century and explain how they will affect management of organizations. 7. Explain the interactions between all the major functions that managers perform and the interactions between planning, organizing, leading, and controlling. 8. Explain why it is important to study management.

Part 1 Meeting the Challenges of the 21st Century

Facing The Challenge Can Anyone Save Nissan Motor Co., Ltd.? hroughout the 1990s, Nissan Motor Co., Ltd. was getting deeper and deeper into trouble. Honda pushed the company out of second-place market share in the Japanese market, and its market share was small in other countries. Worse, costs were too high, and profit was gone. Nissan had losses in 6 of the last 7 years, from 1993–1999. The company had very high debt. There were too many brands that were not differentiated from each other or from the competitors. Nissan had to discount the price of its vehicles heavily in order to sell them. This resulted in excess capacity and further losses because it could not sell enough vehicles. At the same time, because the overall competition was very strong, car companies around the world were merging and acquiring others because a company had to be very large in order to sell enough cars to make a profit. It appeared that Nissan could not survive, so the company tried to get large carmakers such as Ford and DaimlerChrysler for partners or to buy Nissan. This was not successful. Finally, in March 1999, Renault purchased controlling interest in Nissan. The problem was that Renault was not in much better condition than was Nissan. The future for Nissan looked very bleak. Louis Schweizer, CEO of Renault, assigned Carlos Ghosn, then an executive vice president at

Introduction Why did so many of the dot-com companies, or e-business companies, go out of existence very quickly only a year or two after they were founded during the years 1999 and 2000? It seemed that using the Internet and information technology was the way to go. Many of those starting the dot-com companies believed that brick-and-mortar businesses, as traditional businesses were called, would be extinct in a very short time. Rather than many of the traditional businesses going out of existence, many of the dot-com companies went out of existence. A basic reason why this happened is because many of the dot-com managers forgot that a business still has to deliver something of value to customers, actually has to deliver it when the customers want it, and has to do this in a way that will result in profits, at least in the long run.

Renault, to take over Nissan. Although born in Brazil, Ghosn is a Lebanese citizen because his father was from Lebanon. His mother was French. Ghosn’s education began in Lebanon and continued with degrees from the two most prestigious schools in France, Ecole Polytechnique and Ecole des Mines de Paris. Then 30 years old, Ghosn worked for Michelin Tire Co. and went to Brazil to turn around the business there. He later became manager of U.S. operations and in 1996 joined Renault where he acquired the nickname of “le cost killer” for his efforts to improve Renault’s situation. In 1999 Ghosn headed to Japan to take over Nissan. Very quickly, he established a plan to revive Nissan. Is it possible to save a company that is in so much trouble?

Sources: M. Yoshino and M. Egawa, Nissan Motor Co., Ltd., 2002 (Boston: Harvard Business School Publishing, 2002); “Nissan Aims for More Market Share with First New U.S. Plant in 20 Years,” St. Louis Post-Dispatch, 28 May 2003, C1–C3; B. Bremner, G. Edmondson, C. Dawson, D. Welch, and K. Kerwin, “Nissan’s Boss Carlos Ghosn Saved Japan’s No. 2 Carmaker: Now He’s Taking on the World,” BusinessWeek, 4 October 2004, 50–58; G. Edmondson, “Smoothest Combo on the Road,” BusinessWeek, 4 October 2004, 58–60; B. Bremner, “The Gaijin Who Saved Nissan,” BusinessWeek, 17 January 2005, 18.

Amazon.com is an example of a company that has hung on and is now becoming successful. It has been profitable only for a short part of its life, however. Amazon and the other companies that have survived and those that have been started and have become successful recently have figured out how to do it. They are employing basic management and business principles and practices.7 The same issues apply to traditional businesses and other types of organizations. Certainly, not all traditional businesses and organizations are successful either. However, as with the dot-com companies, the more successful ones also employ basic business and management principles well.8 That is why this book is about basic management. It is intended to help you learn about management and to help understand how changes that are likely to occur will affect management in the 21st century. The purpose of this chapter is to introduce you to the field of management. It will set the stage for understanding the foundations of management that are discussed in the rest of the chapters.

Chapter 1 Management and Managers

Leaders in Action 5

The Avon Lady ndrea Jung joined Avon Products in 1994 as president of the Product Marketing Group. She was promoted to president of Global Marketing in 1996, executive vice president and president of Global Marketing and New Business in 1997, and chief executive officer in 1999. The title of chair of the board was added in addition to CEO in 2001. When she became CEO in 1999, she was the first woman to hold that position in the 115-year history of the company. She also took over a company that was in very serious trouble. Profits were sinking, products were not inspiring, competitors were eroding Avon’s sales, and the notion of selling cosmetics door to door with “Avon ladies” seemed out of date. Jung demonstrated that she is a good leader by engaging every major

principle of good overall management with successful results. She started by defining the vision of Avon as the company for women. This includes focus on customers and what they need as well as the many, mostly women, who sell Avon products. Then Jung overhauled almost everything at Avon, from manufacturing, to packaging, to advertising, to selling. The updated selling included rejuvenating the sales representatives’ jobs by adding rewards for representatives who recruited more representatives and by making them partners in Internet sales, which could have replaced the door-to-door representatives. In addition to employing the basic management principles very well, Jung has embraced the Internet as a powerful tool to do business. She has also taken the company global by introduc-

What Is Management? Management has been defined in many ways. Mary Parker Follett, an early management scholar, offered what has come to be known as the classic definition when she described management as “the art of getting things done through people.”9 Although this definition captures the human dimension of management, a more comprehensive definition is needed. Management is defined as the process of administering and coordinating resources effectively, efficiently, and in an effort to achieve the goals of the organization.10 Of course, management includes establishing appropriate overall organizational goals. The degree to which the goals are achieved is defined as effectiveness. Efficiency is achieved by using the fewest inputs (such as people and money) to generate a given output. In other words, effectiveness means “doing the right things” to achieve the appropriate goal, and efficiency means “doing things right.”11 The end result of effective and efficient management will be organizational success.

ing Avon products in many countries, including Japan and most recently China. Diversity is also important to Jung. With 86% of its managers being women, Avon has the largest percentage of women managers of any other Fortune 500 company. These are all good reasons why Fortune magazine ranks Andrea Jung as the third most powerful woman in business.

Sources: G. Brewer, “How Avon’s CEO Implements Diversity,” Sales and Marketing Management 149 (no. 1) (January 1997): 1; N. Byrnes, “Avon: The New Calling,” BusinessWeek, 18 September 2000, 136; K. Brooker, “It Took a Lady to Save Avon,” Fortune, 15 October 2001, 158; J. Tarquinio, “Aging Gracefully at Avon,” Kiplinger’s Personal Finance, September 2004, 49; “50 Most Powerful Women,” Fortune, 18 October 2004, 181–198.

Management occurs within an organiLEARNING zational context. But what is an organizaOBJECTIVE tion? An organization is a group of individuals who work together toward common goals. Organizations can be for profit, such as the business organizations Define what with which we are all familiar (for exammanagement is. ple, Starbucks, Wal-Mart, and Dell), or not for profit, such as churches, fraternities, and public universities. Organizations also include the group that you might put together for a trip or for an intramural softball team. No matter what kind of organization it is, all KEY TERMS organizations are made up of Management people. The efforts of these The process of administering people must be coordinated if and coordinating resources the organization is to accomeffectively and efficiently in plish its goals. Let’s examine an effort to achieve the goals the management process in of the organization. which managers establish overall goals and then achieve Effectiveness them effectively and effiThe degree to which goals ciently. That is, let’s study the are achieved; doing the right managerial process. things.

Part 1 Meeting the Challenges of the 21st Century

What Managers Do

Four overall functions tend to include essentially everything that managers do in the management process. They are planning, organizing, leading, and controlling (Figure 1.1). Although the details of what each manager does varies considerably from manager to manager, from organization to organization, and from time to time, these basic functions have been useful over time to help understand the LEARNING OBJECTIVE broad functions that all managers carry out.12

Identify and explain the basic managerial functions.

PLANNING

Planning includes setting goals and defining the actions necessary to achieve the goals, in light of the situation. That is, the situation must be analyzed and understood and the appropriate goal(s) and actions must be determined in to take advantage of KEY TERMS order opportunities and/or to solve problems. While top-level Efficiency managers establish overall Using the fewest inputs to goals and strategy, managers generate a given output; throughout the organization doing things right. must develop goals, strategy, Organization and operational plans for their A group of individuals who work groups that contribute to work together toward the success of the organization common goals. as a whole. In addition, they Manager must develop a plan for adAn organizational member ministering and coordinating who is responsible for planthe resources for which they ning, organizing, leading, and are responsible so that the controlling the activities of goals of their work groups can the organization so that its be achieved. goals are achieved. Planning Setting goals and defining the actions necessary to achieve those goals. Organizing The process of determining the tasks to be done, who will do them, and how those tasks will be managed and coordinated.

resources, and tasks flow logically and efficiently through the organization. Organizing also includes defining and assigning authority and responsibility for decisions to enable tasks to be carried out effectively. Issues of organizational culture and human resource management are also related to this function. Overall, the organization must be structured in a way that will lead to achievement of its mission and organizational goals and allow it to be responsive to changes in the organization’s environment.

LEADING Managers must also be capable of leading the members of their work groups toward the accomplishment of the organization’s goals. To be effective leaders, managers must understand the dynamics of individual and group behavior, be able to motivate their employees, and be effective communicators. In today’s business environment, effective leaders must also have vision. They must be capable of understanding and predicting what will happen in the future, and they must be capable of sharing that vision and guiding, empowering, and influencing their employees to make the vision a reality. When this is accomplished, the results are very positive. A WorkUSA 2002 survey report found a significant effect in financial results that came from how companies managed their people.13

CONTROLLING Managers must monitor the performance of the organization as well as their progress in implementing strategic and operational plans. Controlling includes establishing and understanding what is required to achieve goals, measuring what actually happened or is being done, identifying deviations between planned and actual results, and taking corrective action if there is a deviation. Such actions may involve pursuing the original plan more aggressively or adjusting the plan to the existing situation. Control is an important function in the managerial process because it provides a method for ensuring that the organization is moving toward the achievement of its goals.

ORGANIZING Organizing involves determining the tasks to be done, who will do them, and how those tasks will be managed and coordinated. Managers must organize the members of their work groups and organization so that information,

Roles of Managers In performing the four overall functions, most of what managers do can be categorized into basic roles. Role refers to the behavior that is expected in a

Chapter 1 Management and Managers

Figure 1.1

The Process of Management 7 Planning

Organizing

Mission and Organizational Goals

Leading

particular situation. For example, think about the behavior that is expected in your role as a daughter or son, as a friend, as an employee, or as a supervisor. Knowing the basic roles that managers play will help us to better understand what managers do. The work of Henry Mintzberg is widely used to explain the roles that managers typically perform. Mintzberg conducted a project in which he studied the actual behaviors of managers. He found that there were ten roles grouped into three categories: interpersonal, informational, and decisional14 (Figure 1.2). Considerable evidence over time supports Mintzberg’s findings.15

INTERPERSONAL ROLES Interpersonal roles involve interactions and relationships with organizational members and other constituents. The three interpersonal roles played by the manager are figurehead, leader, and liaison. As the heads of organizational units, managers must perform certain duties that are primarily ceremonial in nature. For example, managers may have to appear at community functions, attend social events, or host luncheons for important customers. In doing so, managers fulfill their role as figureheads. Because managers are responsible for the success or failure of their organizational units or the organizational overall, they must play the role of leader. In this capacity, managers work with and through their employees to ensure that the organization’s goals are met. Finally, managers must serve as liaisons. That is, they coordinate the activities between individuals and work groups within the organization and develop favorable relationships with outside constituents. Being politically sensitive to important organizational issues helps them develop relationships and networks both within and beyond their organizations.

Controlling

INFORMATIONAL ROLES

LEARNING OBJECTIVE

In their informational roles, managers are responsible for ensuring that the people with whom they work have sufficient information to do their jobs effectively. By the very nature Understand the of managerial responsibilities, managers beroles that come the communication centers of their managers play. units and are a communication source for other work groups within the organization. People throughout the organization depend on the management structure and the managers themselves to disseminate information or provide access to the informa- KEY TERMS tion that they need to do their Leading jobs. Informational roles inMotivating and directing the clude monitor, disseminator, members of the organization and spokesperson. so that they contribute to the As monitors, managers achievement of the goals of continually scan the internal the organization. and external environments of Controlling their organizations for useful Monitoring the performance information. Managers seek of the organization, identifyout information from their ing deviations between subordinates and liaison conplanned and actual results, tacts and may receive unsoand taking corrective action licited information from their when necessary. networks of personal contacts. Role From this information, manThe behavior that is expected agers identify potential opporin a particular situation. tunities and threats for their work groups and organizaInterpersonal role tions. The role of a manager that In their role as disseminainvolves relationships with tors, managers share and distriborganizational members and ute much of the information other constituents.

Part 1 Meeting the Challenges of the 21st Century

Figure 1.2

Mintzberg’s Managerial Roles

8 INTERPERSONAL ROLES • Figurehead • Leader • Liaison

INFORMATIONAL ROLES • Monitor • Disseminator • Spokesperson

DECISIONAL ROLES • Entrepreneur • Disturbance Handler • Resource Allocator • Negotiator

Reprinted by permission of Harvard Business Review. From “The Manager’s Job: Folklore and Fact,” Henry Mintzberg, Harvard Business Review, March–April 1990, 49–61. Copyright © 1990 by the Harvard Business School Publishing Corporation; all rights reserved.

they receive as information monitors. As disseminators, managers pass on important information to appropriate members of their work groups. Depending on the nature of the information, managers may also withhold information from work group members. Most important, managers must ensure that their employees have the information necessary to perform their duties efficiently and effectively. The final informational role played by managers is that of spokesperson. Managers must often communicate information to individuals outside their units and their organizations. For example, directors and shareholders must be advised about the financial performance and strategic direction of the organization; interest groups must be assured that the organization is fulfilling its social obligations; and government officials must be satisfied that the organization is abiding by the law.

DECISIONAL ROLES Finally, managers play the role of decision maker. In their decisional roles, managers process information and reach conclusions. Information in and of itself is nearly meaningless if it is not used to make organizational decisions. Managers make those decisions. They commit their work groups to courses of action and allocate resources so that the groups’ plans can be implemented. Decisional KEY TERMS roles include entrepreneur, disturbance handler, resource allocator, and negotiator. Informational role Recall that in the moniThe manager’s responsibility tor role managers scan the infor gathering and disseminatternal and external environing information to the stakements of the organization for holders of the organization. changes that may present opportunities. As an entrepreDecisional role neur, the manager initiates The role in which a manager projects that capitalize on opprocesses information and portunities that have been reaches conclusions.

identified. This may involve developing new products, services, or processes. Regardless of how well an organization is managed, things do not always run smoothly. Therefore, managers will have to handle disturbances. They must cope with conflict and resolve problems as they arise. This may involve dealing with an irate customer, negotiating with an uncooperative supplier, or intervening in a dispute between employees. As a resource allocator, the manager determines which projects will receive organizational resources. Although we tend to think primarily in terms of financial or equipment resources, other types of important resources are allocated to projects as well. Consider, for example, the manager’s time. When managers choose to spend their time on a particular project, they are allocating a resource. Information is also an important resource. By providing access to certain information, managers can influence the success of a project. Managers also must be negotiators in certain situations. Studies of managerial work at all levels have found that managers spend a good portion of their time negotiating. Managers may negotiate with employees, suppliers, customers, or other work groups. Regardless of the work group, the manager is responsible for all negotiations necessary to ensure that the group is making progress toward achieving the goals of the organization.

Managerial Scope, Levels, and Skills We have looked at the various functions that managers perform and roles that managers play within the organization. To this point, however, we have not distinguished among types of managers. Managers differ with

Chapter 1 Management and Managers

regard to both the scope of their responsibilities and their level within the vertical structure of the organization. All managers need the same basic skills, but the importance of a certain skill may be higher with some types of managers than others.

SCOPE OF RESPONSIBILITY The nature of the manager’s job will depend on the scope of his or her responsibilities. Some managers have functional responsibilities, whereas others have general management responsibilities. Functional managers are responsible for work groups that are segmented according to function. For example, a manager of an accounting department is a functional manager. So are the managers of a production department, a research and development department, and a marketing department. Work groups segmented by function tend to be relatively hom*ogeneous. Members of the group often have similar backgrounds and training and perform similar tasks. Functional managers often have backgrounds similar to those of the people they manage. Their technical skills are usually quite strong because they are typically promoted from within the ranks of their work groups. The greatest challenge for these managers lies in developing an understanding of the relationship between their work groups and the other work units within the organization. Equally important, functional managers must convey information back to their work groups and ensure that the members of their units understand their roles within the organization as a whole. General managers are responsible for ensuring that several functions or parts of the organization work together effectively. In doing so, they must coordinate and integrate the work of diverse parts of the organization. For example, the manager of a supermarket is responsible for managing the overall supermarket by coordinating all the departments within the store. The produce manager, grocery manager, bakery manager, and floral manager all report to the general manager. Because general managers manage diverse departments, their technical skills may not be as strong as the skills of the people they manage. The manager of the supermarket, for example, may not know the difference between a tenderloin or flank steak or have little idea how croissants are made. However, general managers must be able to coordinate various parts of the organization in an effective way.

LEVELS OF MANAGEMENT AND RELATIVE IMPORTANCE OF SKILLS In general, there are three levels of managers: first-line managers, middle managers, and top-level managers. Fig-

ure 1.3 illustrates these managerial levels, as well as the operational employees, or the individuals who are not in the managerial ranks but who actually deliver the prod9 uct or service of the organization. The pyramid shape of the figure reflects the number of managers at each level. Most organizations have more first-line managers than middle managers and more middle managers than toplevel managers. (This will be discussed more in the organizing chapters.) LEARNING Managers at all organizational levels enOBJECTIVE gage in planning, organizing, leading, and controlling. Carrying out these functions requires a set of overall skills. However, managers at different levels in the organization Discuss the scope tend to be more or less involved in certain of responsibilities types of activities, so the degree to which of functional and they are immersed in the basic functions general managers. varies. For example, a study of over 1000 managers examined the extent to which managers at each level engaged in certain activities, elements of planning, organizing, LEARNING OBJECTIVE leading, and controlling, such as managing individual performance, instructing subordinates, planning and allocating resources, coordinating interdependent groups, managing group performance, monitoring the Describe the three business environment, and representing levels of managers one’s staff. The results of the study suggest in terms of the that managers at different levels of the orgaskills that they nizational hierarchy are involved in these acneed and the tivities to varying degrees.16 Consequently, activities in which the degree to which managers at different they are involved. levels employ certain skills also varies. This is shown in Figure 1.4 , summarized in Table 1.1 and discussed next.

First-Line Managers: One-to-One with Subordinates First-line managers supervise the individuals who are directly responsible for producing the organization’s product or delivering its service. They carry titles such as production supervisor, line manager, section chief, or account manager. First-line managers are often promoted from the ranks, based on their ability to deliver the product or service of the organization as well as their ability to manage others who do the same.

KEY TERMS Functional manager A manager who is responsible for managing a work unit that is grouped based on the function served. General manager A manager who is responsible for managing several different departments that are responsible for different tasks. First-line manager The manager who supervises the operational employees.

Part 1 Meeting the Challenges of the 21st Century

Figure 1.3

Managerial Levels

Top Managers Middle Managers

First-Line Managers

Operational Employees

The primary objective of first-line managers is to ensure that the products or services of their organization are delivered to customers on a day-to-day basis. Technical skills tend to be most important for firstline managers. These skills refer to the knowledge and use of the tools, techniques, and procedures that are specific to their particular field. Because first-line managers are also involved in two of the basic activities listed earlier—managing individual performance and instructing subordinates—they also use human skills, the ability to work effectively with others. Managing individual performance involves motiKEY TERMS vating and disciplining subordinates, monitoring perforTechnical skill mance, providing feedback, The ability to utilize tools, and improving communicatechniques, and procedures tions. Instructing subordithat are specific to a particular field. Human skill The ability to work effectively with others. Conceptual skill The ability to analyze complex situations. Middle manager A manager who supervises the first-line managers or staff departments.

Table 1.1

nates includes training, coaching, and instructing employees on how to do their jobs. First-line managers are also involved in tasks that require conceptual skills, the ability to analyze complex situations. This may involve planning, scheduling, and related tasks. However, the first-line manager normally does not get involved in conceptual issues to the degree that a higher-level manager might.

Middle Managers: Linking Groups Middle managers supervise first-line managers or staff departments. They carry titles such as department head, product manager, or marketing manager. Middle managers may come from the ranks of first-line managers in a particular department or from other areas of the organization. These managers are typically selected because they have a strong understanding of the overall strategy of the organization and a commitment to ensuring that

Managerial Level, Main Skill, and Typical Activities

Top Management

Conceptual

Middle Management

Human

First-line

Technical

Monitoring the organization environment. Set strategic direction Planning and allocating resources. Coordinating interdependent groups. Managing group performance. Use appropriate tools, techniques, procedures. Instructing, guiding subordinates. Managing individual performance.

Chapter 1 Management and Managers

Figure 1.4

Skills Needed at Different Levels of Management 11 FIRST-LINE MANAGEMENT

MIDDLE MANAGEMENT

Conceptual

TOP MANAGEMENT

Conceptual

Human Human Human

Human Human

Technical Technical

it is implemented well. Essentially, middle managers perform as linkages between the top managers and related overall strategy and the first-line managers. A primary objective of most middle managers is to allocate resources effectively and manage the first-line managers who supervise the work group so that the overall goals of the organization can be achieved.17 Middle managers tend to be most involved in three basic activities—planning and allocating resources, coordinating interdependent groups, and managing group performance. The importance of these three activities rises sharply as one moves from first-line to middle management, but interestingly, as we will see later, it declines slightly for the top-level management group. Human skills are most important for middle managers because these managers must coordinate the efforts

Managers must be able to organize the members of their work groups and lead them toward the accomplishment of the organization’s goal.

Technical

of members of one’s work group as well as coordinate with other work groups within the organization. Within the work group, middle managers must manage group dynamics, encourage cooperation, and resolve conflicts. When interacting with outside work groups, middle managers serve as liaisons, communicating the needs and issues of their teams to other members of the organization and conveying information from other work groups back to their units. Of course, the other tasks of middle managers also require technical and conceptual skills but perhaps not as much as human skills.18

Top-Level Managers: An Eye on the Outside Top-level managers provide the strategic direction for the organization. They carry titles such as chief executive officer (CEO), president, chief operations officer, chief financial officer (CFO), chief information officer, and executive vice president. Occasionally, top-level managers work their way up the organizational hierarchy from the first-line management level. However, it is also fairly common for organizations to hire top-level managers from other organizations. Regardless of their background, top-level managers should be selected because they have a vision for the organization and the leadership skills necessary to guide the organization toward reaching that vision. Top-level managers must set the strategic direction of the organization in light of organizational resources, assets, and skills and KEY TERMS the opportunities and threats Top-level manager that were found in monitorThe manager who provides ing the external environment. the strategic direction for the Top-level managers need organization. to have strong conceptual

Part 1 Meeting the Challenges of the 21st Century

skills if they are to effectively accomplish these things. Conceptual skills enable managers to process a tremendous amount of information about both the external and the internal environment of the organization and to determine the implications of that information. Conceptual skills also enable top-level managers to look at their organization as a whole and understand how separate work groups and departments relate to and affect each other. Finally, strong conceptual skills enable top-level managers to develop a distinctive personality or culture for their organizations. Some examples of very effective toplevel managers include Herb Kelleher, cofounder and chair of the board at Southwest Airlines; Meg Whitman, CEO of eBay; Howard Schultz,19 founder of Starbucks; Andrea Jung, CEO of Avon Products; Carlos Ghosn, CEO of both Nissan and its parent, Renault, at the same time;20 Jack Welch, former CEO of General Electric;21 and Andy Grove, cofounder of Intel. In fact, Grove was voted the “most influential business leader of the past quartercentury”22 by the prestigious Wharton Business School in 2004. LEARNING As is true of managers at other organiOBJECTIVE zational levels, top-level managers also need human and technical skills. Top-level managers definitely must work effectively with people, inside and outside the organiIdentify major zation, and have technical skills so that changes in the they can understand the financial ramifi21st century and cations and other effects of the technical explain how they parts of the organization. However, most will affect of the tasks of top-level managers tend to management of fall in the conceptual area, requiring an organizations. ability to think and to analyze causes, effects, and consequences.

Managing in the 21st Century The 21st century is still very young, but it has already seen some amazing things. When it began, the economy in the United States was booming and dot-com companies appeared ready to take over from the so-called brick-and-mortar companies. It was said that there was a “new economy” and that everything was different. The old ways of running a business did not apply anymore. In a very short period of time, the economy cooled and many of the dot-com companies became dot-bombs and imploded.23 This was made even

worse by the 9/11 (2001) terrorist attacks. Yes, there were many changes in the economy and in society, there will continue to be changes, and the rate of change continues to increase. However, the same basic business, economic, and managerial principles still apply. An organization still has to provide products or services to its customers that are valued by those customers. Then the customers will pay a price that will allow the organization to be prosperous, so long as it keeps its costs in line. Let’s now discuss important factors that have changed considerably, some in a very short time and some that continue to change. They all have important consequences for managing an organization. These factors are the Internet and information technology, increasing globalization, increasing diversity, intellectual capital, and increased emphasis on ethics.

THE INTERNET AND INFORMATION TECHNOLOGY Jeff Bezos, the founder and CEO of Amazon.com, shocked the business world on January 22, 2002, when he announced that his company had made its first profit ever for the third quarter of the previous year.24 Why was this a shock? Up to that time, most dot-com companies experienced large financial losses and were not close to earning a profit. After the first profitable quarter, Amazon took a loss the next quarter and several after that. However, Amazon.com was profitable during 2003, and its profitability is continuing.25 Finally, dot-com companies were beginning to be financially successful. E-business was working. During 2002, roughly one fourth of e-business companies were profitable.26 In addition to Amazon.com, this included Expedia, Priceline, and WebMD. How did they do it? “It [Amazon.com] earned a profit by getting the basics right: tangible operational efficiencies, heads-down cost cutting, and savvy partnership deals with the likes of Toys R Us Inc. and Target Corp.”27 E-businesses are using basic managerial and business principles and are profitable.28 Traditional, brick-and-mortar businesses also added the use of the Internet, not to replace how they did business but to compliment their existing businesses. Now one can buy products from Wal-Mart, Barnes & Noble, Sears, REI, and the local auto dealership at the stores and on the Internet.29 Of course, the Internet and information technology has changed some of the aspects of how business is conducted. Organizations can have almost instant feedback about results with sophisticated information systems. They can also give needed information to people throughout the organization so that they can perform better. Very tight links can be established between suppliers and organiza-

Chapter 1 Management and Managers

with information-based products and services (for example, concert tickets and airline tickets), competitors can come from anywhere in the world.32

INCREASING GLOBALIZATION

Because technology continues to advance and become more widespread, effective managers should have strong technological skills.

tions that can exchange information to coordinate their operations. Customers can get more information about products and services on the Internet. They can “comparison shop” to see which businesses have the products they want and at what price. One effect of this is the physical arrangement and location of retail stores are changing because informed customers now do not spend time “shopping” inside of the store.30 Blogs, which are essentially an individual’s online personal journal, also contain information about products, services, and organizations. Being personal, some of the information is favorable, some unfavorable, and much of it based on personal tastes and opinions. Organizations are now starting blogs, including the blog set up by Robert Lutz (vice chairman of General Motors), to use for advertising and otherwise sending out positive information.31 All these things increase the bargaining power of customers. The Internet also makes the market for many products and services global. Now a business in most any country can compete with anyone else as long as the product can be shipped easily to customers. Of course,

The Internet makes possible the access to geographic markets that were previously out of reach of many companies. It makes many markets, especially those for many services and those where the product is information, truly global. An important example of this is the high-tech call-centers that many U.S. companies have moved to other countries, especially India.33 In addition to the influence of the Internet in continued globalization, there continues to be more companies moving various parts of their operations to a larger number of countries. For example, many companies have located research labs in China. General Electric has 27 labs there, MicroSoft Corp. has 200 researchers there, and companies such as DaimlerChrysler, Cisco, Intel, and IBM are moving labs to China.34 Globalization also continues on another front: the combinations and partnerships between businesses from various countries. TCL Corp. from Huizhou, China, merged with Thomson from France to create the largest television maker in the world. One of the popular television brands that the company makes is RCA, a brand that got its start in the United States with the RCA Co. Shanghai Automotive Industry Corp. purchased 48.9% of Ssangyong, a truck maker in Korea. Perhaps the most interesting and complex combination of all is the acquisition of controlling interest of the personal computer operations of IBM by Lenovo Group Ltd. from China.35 That deal will allow IBM to gain access to the Chinese market for many of its products and services and allow the Chinese company to move into the United States. The headquarters of Lenovo will be relocated from Beijing to Armonk, New York, which is close to IBM’s headquarters. IBM managers will manage the new Lenovo headquarters. IBM also has an 18.9% ownership in Lenovo.36 The pace and pervasiveness of globalization will continue. Managers at all levels of organizations will need to understand the effects of operating in a global environment.37

INCREASING DIVERSITY Closely connected to the globalization of business has been the globalization of the

KEY TERMS Globalization Various companies moving to multiple countries and doing business in multiple countries.

labor market. Just as goods and services flow relatively freely across national boundaries, so do human resources. The result has been increased diversity of the 14 population base in the United States as well as other countries and increased diversity in the workplace.38 In the broad sense, diversity is defined as differences or variety. That applies to all types of differences. However, as the word is normally used, diversity refers to the heterogeneity of the population and workforce, mostly in terms of gender and race. Diversity presents new challenges for businesses and managers. As we will see in subsequent chapters, organizational success requires a strong organizational culture and group cohesiveness. Achieving this may be more difficult when the workplace includes people with different backgrounds, from different nations, or with different cultural frames of reference. Men, women, Caucasians, Hispanics, African Americans, and others with diverse racial, national, and ethnic backgrounds often have very different perceptions about the same situations. As a consequence, it may be more difficult for diverse groups to reach a consensus on common goals and on the methods for achieving those goals.39 Many organizations today have established training programs to help employees develop an appreciation for diversity and to foster cooperation among culturally diverse groups. Most of these programs focus on valuing, even celebrating, diKEY TERMS versity and the breadth of thought and experience Diversity that results from diverse The heterogeneity of the work groups. Some organizaworkforce, mostly in terms of tions have implemented such gender and race. programs because they feel it is “politically correct” to do Intellectual capital so. Many other organizations, The total of an organization’s however, have implemented knowledge, experience, aggressive diversity-training relationships, processes, programs because they bediscoveries, innovations, lieve that a diverse workforce market presence, and provides a significant comcommunity influence. petitive advantage. For examStructural capital ple, companies such as AllThe accumulated knowledge state Insurance, Qwest, Avon, of the organization represented Wal-Mart, and General Elecby its patents, trademarks and tric view diversity as a key copyrights, proprietary datastrategic tool for ensuring bases, and systems. success in the highly competCustomer capital itive markets.40 The value of established relaThe globalization of busitionships with customers and ness will undoubtedly consuppliers. tinue to escalate. Therefore, isHuman capital sues of diversity will continue The cumulative skills and to influence the thinking and knowledge of the organization. behaviors of managers.

Part 1 Meeting the Challenges of the 21st Century

Diversity of gender and race in the workforce presents a challenge in reaching a consensus on common goals and the methods for achieving these goals.

INTELLECTUAL CAPITAL For most of the 20th century, the critical factors of production were considered to be land, labor, and raw materials. The job of managers was to use these production factors to create products that were more valuable than the sum of their parts. In the 21st century, intellectual capital is becoming a critical resource. More and more products will become intellectual, or knowledgebased (for example, investment services and advice, registering for classes at a school, computer software), and may be better referred to as services. Services such as travel and entertainment are becoming more important, and they rely heavily on knowledge. Even the traditional products will make more use of knowledge in design, production, and marketing of them. According to Gary Hamel, a well-known consultant, we are now an “economy of heads” rather than an “economy of hands.”41 What is intellectual capital? In general, intellectual capital refers to the total of an organization’s knowledge—what its people know, experiences, relationships, processes, discoveries, innovations, market presence, and community influence.42 Thomas Stewart, the author of Intellectual Capital: The Wealth of New Organizations,43 provides a classification for knowledge assets. The three major categories of intellectual capital are • Structural capital: the accumulated knowledge and know-how of the organization represented by its patents, trademarks and copyrights, proprietary databases, and systems. • Customer capital: the value of established relationships with customers and suppliers. • Human capital: the cumulative skills and knowledge of the organization.

Chapter 1 Management and Managers

At the Forefront Managing in the 21st Century ive factors are identified in this chapter as having special importance in the 21st century. Many organizations are engaged in all of these areas, and here are some notable examples: • Internet and Information technology e-Bay and Amazon.com are prime examples of using the Internet and information technology because they are “Internet companies.” Everything they do is on the Internet. Many traditional businesses also conduct part of their business with the help of the Internet (for example, Wal-Mart and Starbucks). Most organizations have a website. • Increasing globalization Essentially all automobile companies operate on a global scale, from selling vehicles in many countries, to having ownership and partnership across the world: DaimlerChrysler, a German and U.S. company; Renault-Nissan, in France and Japan; Ford, who owns Volvo, Land Rover, and Jaguar, in European countries. Avon Products markets its

•

products in many countries (see “Leaders in Action”). Increasing diversity Of Avon’s managers, 86% are women; PepsiCo stresses diversity in its management ranks so that managers can understand markets in different countries; many companies, including Wal-Mart, General Electric, Denny’s Restaurants, and Allstate Insurance, have diversity-training programs. Intellectual capital All companies need to manage their knowledge to keep up in very competitive, fast-moving markets. Some companies deal almost exclusively in knowledge, such as Expedia, Travelocity, and brokerage companies. Others rely heavily on knowledge to deliver products and services, such as Amazon.com and e-Bay. Ethics Ethical behavior of managers and others in organizations has always been important. Because a notable and large number of unethical behavior has occurred in recent years, there is special attention on ethical

Stewart and others contend that contemporary organizations must develop, measure, and manage these intellectual assets if they are to be successful. The management of this overall knowledge, or intellectual capital, is a critical strategic resource for contemporary organizations. Managers must attract the right people and manage them in a way that turns their brainpower into profitable products and services. Some examples of companies that are doing this are Amazon.com, Dell, General Electric, Wal-Mart, and Southwest Airlines.

ETHICS Ethical behavior of managers continues to fill the news. There are headlines in magazines and newspapers such as “They Fought the Law: A Parade of Alleged Corporate Wrongdoers Faced Their Accusers,”44 “Former Charter Executive Pleads Guilty,”45 and “Businesses are Pushing

behavior. Jeffrey Immelt is leading General Electric in becoming more aware so that it won’t sell products to people that might cause physical damage in the long run. Salie Krawcheck, now chief financial officer at CitiBank, cleaned up practices of brokers that were considered unethical in the brokerage business as chief executive officer of Smith Barney, part of CitiBank. Edward Breen took over as CEO at Tyco after Dennis Kozlowski was fired and was tried by the courts for larceny because of the large sums of company money that he allegedly used for his own purposes.

Sources: K. Brooker, “It Took a Lady to Save Avon,” Fortune, 15 October 2001, 158; J. Tarquinio, “Aging Gracefully at Avon,” Kiplinger’s Personal Finance, September 2004, 49; “eBay’s Secret,” Fortune, 18 October 2004, 161–178; “50 Most Powerful Women: Who’s Up? Who’s Down?” Fortune, 18 October 2004, 181–198; H. Hof, “The Wizard of Web Retailing,” BusinessWeek, 20 December 2004, 18; “The Best & Worst Managers of the Year,” BusinessWeek, 10 January 2005, 55–68.

Against Requirements of Sarbanes-Oxley Act.”46 The Sarbanes–Oxley Act is a relatively new law that is one of the more obvious remnants related to the questionable business practices that led to legal problems and charges of unethical behavior of an unusually large number of toplevel managers recently. The law requires businesses to use certain accounting rules that would prohibit the many financial abuses by managers that came to light in recent years. Surprisingly, some managers are resisting the requirements of the Sarbanes–Oxley Act, as the headline above suggests. That may be one reason why stories continue to fill the media about managers, especially the more notorious high-level managers, who engaged in KEY TERMS behavior that most consider unethical and for which the Ethical behavior managers are being tried, or Behavior that is considered have been tried, in court. For by most to be acceptable.

Part 1 Meeting the Challenges of the 21st Century

Figure 1.5

An Overall Framework of Management

16 External Environment

Overall Goals

Overall Strategy

Organizing, Leading

Controlling

Internal Environment

example, Martha Stewart finished her time in jail. Facing court cases are Bernard Ebbers, fired CEO of WorldCom— now MCI; Richard Scrushy, fired CEO of HealthSouth; Kenneth Lay and Jeffrey Skilling, both from the now-extinct company Enron; and others.47 Former Tyco CEO, Dennis Kozlowski, and former CFO, Mark Swartz, were even charged with larceny for their lavish and alleged personal use of the company’s cash.48 The Academy of Management Executive, a publication for both practitioners and academics, published an issue devoted entirely to “Ethical Behavior in Management.”49 Ethics is important in managing organizations. We discuss this topic in Chapter 3, along with social responsibility.

An Overall Framework KEY TERMS External environment The setting in which an organization operates; the markets and industry. Competencies The things that an organization can do well; the skills and abilities.

An overall framework of management is useful to coordinate what we have discussed so far and to set the context not only for the rest of this book but also for how this course fits in your overall study of business and organizations (Figure 1.5). As we discussed earlier, the purpose of an organiza-

tion is to achieve its overall goals. To do that effectively and efficiently, planning must be done to first establish the overall goals and then to set the strategy to achieve the goals. The planning includes understanding the markets and industry (external environment) and the competencies, weaknesses, and operations inside the organization. (The arrows suggest interactions between these factors; the broken line suggests an indirect relationship.) Understanding these things is necessary to establish appropriate goals and strategy. (This is discussed later in more depth in the strategy and planning chapters.) Understanding the competencies, weaknesses, and operations inside of the organization or inside the department for managers other than the chief executive officer, is what organizing and leading are all about. A manager needs to understand the state of organizational design; authority and responsibility; reporting relationships, communication, human behavior, and leadership in the organization; how they interact with each other; and how they all must support the overall strategy. Consequently, other chapters in this book discuss these topics. The other courses that you are studying also are part of the analysis of the external and internal environments of organizations. For example, here is where a manager uses knowledge of such things as economics, political science, government, and sociology to judge the nature of the overall organizational environment. Other courses and disciplines, such as finance, marketing, production, and computer information systems/ information technology, provide knowledge that is needed to assess the competencies, weaknesses, and operations inside the organization. A manager uses knowl-

Chapter 1 Management and Managers

edge from all these other areas in carrying out the basic functions of management: planning, organizing, leading, and controlling. Because the purpose of an organization is to 7 achieve an overall goal or goals, everything that is done in the organization must be evaluated and guided so that it is all directed to achieving the overall goal. This is the overall definition of control. While some procedures need to be established to ensure an overall control system (discussed in Chapter 15 on control), many of its components are parts of the other operations in the organization. For example, job descriptions, authority and responsibility, influence of the manager as leader, communications, and motivation all guide, monitor, and reward what is accomplished. Finally, analysis that goes into understanding all parts of the organization and its environment and overall control require feedback in order to understand consequences of what has been done so far. If the consequences are positive, then the managers in an organization can continue to do what they are doing. The feedback will also help them understand why things worked well. If the consequences are negative, that needs to be known so that corrective action can be taken. The arrows in Figure 1.5, including the larger arrows pointing back, indicate the necessity of feedback. Overall, this framework will help you understand how all the other courses that you take relate to the functions of management. Also, the framework indicates how the functions of management all interact with each other, and together they lead to effective and efficient achievement of an organization’s overall goals.

management of all organizations, from LEARNING Starbucks to Dell Computer Co., from the OBJECTIVE New England Patriots football team to a 17 NASCAR race, from your local church to state government, from your university to the student group of which you are the Explain the president or other officer. The details and interactions the types and levels of roles and skills used between all the across these organizations vary, but the major functions that basics apply. The basics are contained managers perform in planning, organizing, leading, and conand the interactions trolling. between planning, It is relatively easy to see how the above organizing, leading, applies to top-level managers. However, and controlling. what if you are or want to be a middle manager of a first-line manager, and that is the level at which you want to stay? The same question applies to all top-level managers as they move through these levels on their way to the top. Certainly, details of what a marketing manager or an accounting manager does vary, but again, the same basics apply. A firstline production manager at a factory also uses planning, organizing, leading, and controlling, just as do the night manager at the convenience store and the organizer of a softball league. Okay, what if you do not plan on being a manager? First, chances are very high, almost 100%, that even in your first job, no matter what that is, you will be required to do some planning. You probably will also be required—or at the least, find it very useful—to engage in organizing and perhaps controlling. Although you may think it quite unlikely, you probably very soon will be supervising one or more people, calling for leading skills. Even if you do LEARNING not consider official jobs, everyone is a OBJECTIVE member of some type of informal organization, such as a sorority, fraternity, softball league, and so on. These organizations also need to be managed and will benExplain why it is efit from applying management principles. important to study The conclusion is that management is management. universal. The basic functions—planning, organizing, leading, and controlling—are required in every organization. Of course, the details of the roles that managers play, the skills that managers need, and the specifics tools that managers use vary across types of orga- KEY TERMS nizations, levels of managers, Universal types of managers, and speSomething that applies in all cific situations. However, situations. The basic manthe basic functions are the same, so it is useful to study agement principles apply in management. all situations.

Why Study Management? The ideas discussed in this chapter and those that will be discussed in the remaining chapters are useful ideas for managers. But what if you are not a manager or are not thinking about being one? Let’s discuss the reasons why it is important for everyone to study management. For those of you who are managers or want to be managers, it is reasonable to say that it is important to learn about management. The basic functions that managers perform, the roles that managers play, and the skills that managers use are universal. They apply to the

Part 1 Meeting the Challenges of the 21st Century

Now Apply It 18

Are You Ready to Lead in the 21st Century? Use the following scale to rate the frequency with which you perform the behaviors described below. Place the number (1–7) in the blank preceding the statement. Almost Never 1

Irregularly 2

Occasionally 3

Sometimes 4

Usually 5

Frequently 6

____ 1. ____ 2. ____ 3. ____ 4. ____ 5. ____ 6. ____ 7. ____ 8.

I thrive in uncertain situations where the outcome is unknown. I provide guidance to others. I am willing to make mistakes when learning a new process. I recognize the contributions and performance of others. I see change as an opportunity, not a threat. I challenge others to consistently do a better job. I seek new ways to do things better and faster. I motivate others to reach their highest potential.

Almost Always 7

Transfer your scores to the columns below. Circle your highest score. Column A

Column B

Column C

Column D

Question 1 ____ Question 5 ____ Total ____

Question 2 ____ Question 6 ____ Total ____

Question 3 ____ Question 7 ____ Total ____

Question 4 _____ Question 8 _____ Total _____

If your highest score was for column A, you demonstrate Adapting leadership skills. You recognize that change is a natural part of growth and are comfortable in dealing with ambiguity. If your highest score was for column B, you demonstrate Coaching leadership skills. You see the importance of motivating people around you and are willing to help others when necessary. If your highest score was column C, you recognize the role of Learning in being an effective leader. You consistently look for new ways to work more effectively and realize that making mistakes is a part of the learning process. If your highest score was for column D, you demonstrate Empowering leadership skills. You know the importance of developing others and encourage the people around you to reach their potential. Of course, you may show a mixed pattern of leadership skill sets. In any case, examine your answers to these questions. They may reveal information about your management and leadership orientation. Once you have studied all of the chapters in this book, complete this exercise again to see if your responses have changed.

Implications for Leaders All organizations need to be managed. The purpose of all organizations is to achieve their overall goals. Manage-

ment is needed first of all to set the overall goals of the organization. These goals are established by employing the theories, concepts, principles, and tools that are part of planning. Then “everything else” must be coordinated with the overall goals so that they can be achieved. This includes organizing, leading, and controlling. Anyone who wants to be a manager, who is, or will be a manager would be well served to learn about management. Those who implement the principles of management well will lead successful organizations.

Chapter 1 Management and Managers

Meeting The Challenge

Carlos Ghosn, Star of Nissan and the Auto Industry y 2003 Carlos Ghosn enjoyed the status of a celebrity. He is swamped by people seeking his autograph when he tours Nissan manufacturing plants. He is adored in Japan for saving Nissan and is featured in manga comic books. He is the star at auto shows in Paris, New York, and Beijing, where he gets along fine, speaking five different languages. Some people in Lebanon suggested that he run for the presidency of that country because he is a Lebanese citizen. Immediately upon arriving at Nissan in 1999, Ghosn established the revival plan. This included setting up cross-functional teams that studied essentially everything about Nissan and its markets. Nothing was “sacred.” The markets were studied. Vehicles were redesigned, including a goal of 28 new vehicles by 2004. Goals also included cutting costs in purchasing and manufacturing. The sales organization was redesigned to focus on getting cars that people wanted to market. The goals and actions that Ghosn led also included some very sensitive issues. In a country where keiretsu (interrelationships between companies, including cross-ownerships, much like the interlocking directorates in the United States) is very important and group reward is common, Ghosn broke up Nissan’s keiretsu to free cash and to get rid of poor suppliers and implemented a reward system based at least

partly on individual performance. And people were definitely held accountable for performance. Nissan made a profit by 2001, achieving its overall goals a year early! By 2004 Nissan was one of the most profitable car companies in the world and had retaken the number-two spot in market share in Japan back from Honda. In 2005 Ghosn became the CEO of Renault, while continuing as CEO of Nissan. Carlos Ghosn clearly applied the basic functions of management and added many of the details. In addition, he succeeded as a manager and leader by using his deep knowledge and appreciation for the different cultures of the countries in which he lived and worked to introduce changes in Japan that were unusual.

SUMMARY 1. The simple definition of management is “the art of getting things done through people.” A more detailed definition is that management is the process of coordinating resources in an effort to effectively and efficiently achieve the goals of the organization.

2. The process of management involves four primary functions: planning, organizing, leading, and controlling. Planning involves setting goals and defining actions that are necessary to achieve the goals, in light of the situation. Organizing includes determining the tasks to be done, who will do them, and how those tasks will be managed and coordinated to achieve the organization’s goals. Leading means that managers must guide and motivate employees in ways that will lead to effective and efficient achievement of the organization’s goals. Controlling requires establishing what is required to achieve the

goals and to guide operations so that the goals are achieved.

3. According to Henry Mintzberg, managers play three primary roles: interpersonal roles, informational roles, and decisional roles. In their interpersonal roles, managers act as figureheads, leaders, and liaisons. In their informational roles, managers serve as monitors, disseminators, and spokespeople. Managers in their decisional roles function as entrepreneurs, disturbance handlers, resource allocators, and negotiators.

4. Managers’ scope of responsibility varies depending on whether they are functional or general managers. Functional managers are responsible for work groups that are segmented according to function. General managers oversee several different departments that are responsible for different tasks.

Part 1 Meeting the Challenges of the 21st Century

5. Most large organizations have three levels of managers: first-line, middle, and top-level managers. These managers differ in terms of both the skills that they require and the way they spend their time.

doing so, they tend to use conceptual skills more than other skills.

7. Important changes in the 21st century that will affect how managers do their job are increasing use of the Internet and information technology, increasing globalization, increasing diversity of the workforce, increasing use of intellectual capital, and a renewed emphasis on ethical behavior of managers.

6. First-line managers supervise individuals who are directly responsible for producing the organization’s product or service. Although all managers use technical, human, and conceptual skills, first-line managers tend to employ more technical skills relative to human and conceptual skills. Middle managers supervise first-line managers and tend to use human skills more than the other two. Top-level managers provide strategic direction for the organization. In

8. All managers perform the same basic functions in managing organizations: planning, organizing, leading, and controlling. Most people in organizations will perform some managerial functions during their lifetimes.

REVIEW QUESTIONS 1. 2.

Define management. Define the concept of management within an organizational context. Describe the major functions of the management process and why they are important. 3. (LEARNING OBJECTIVE 3) Describe the roles of the manager as outlined by Mintzberg. 4. (LEARNING OBJECTIVE 4) Describe the responsibilities of the functional manager. Describe the responsibilities of the general manager. 5. (LEARNING OBJECTIVE 5) Distinguish among the three levels of managers in terms of the skills (LEARNING OBJECTIVE 1) (LEARNING OBJECTIVE 2)

that they need and the activities in which they are involved. 6. (LEARNING OBJECTIVE 6) What are the major changes in the 21st century, and how will they affect management? 7. (LEARNING OBJECTIVE 7) Explain the meaning of the overall framework presented in the chapter. Explain how the basic management functions interact. 8. (LEARNING OBJECTIVE 8) Explain why it is important to study management.

DISCUSSION QUESTIONS Improving Critical Thinking 1. How is the increasing diversity of the United States influencing the student body at your university? Is the university administration taking proactive steps to ensure diversity on your campus? Does it maintain programs to ensure that diversity is celebrated rather than simply tolerated? With a small group, discuss how diversity in a team must be managed to have the diversity result in better team performance rather than cause difficulties with team performance.

2. Discuss the overall framework for management that is presented in the chapter with one or more other

students. Why does “everything” that an organization does have to be focused on the overall goals of the organization?

Enhancing Communication Skills 3. Write a short paper in which you explain how and why the Internet will affect how businesses operate.

4. Identify a company that you believe has a strong global presence and one that you believe does not. Compare and contrast these organizations. Present your assessment to several classmates orally.

Chapter 1 Management and Managers

Building Teamwork 5. Organize a small group of students in which each student comes from a different country. Discuss each student’s view about the importance of teamwork. Is each student’s view influenced by the country from which he or she came?

6. With a small group of classmates, discuss the importance of leading in overall management. Should you appoint a leader of this discussion group before you begin? What happens if you do not? Does one emerge?

THINKING CRITICALLY: DEBATE THE ISSUE Is Management Universal? Form two small teams or, with the help of your instructor, divide the class into small teams. Half of the teams are to prepare an argument that the basic functions of

management are universal, that the same basic functions are necessary in all organizations. The other half of the teams must prepare an argument that the basic functions are not universal. Have a team present its conclusions, then an opposing team, then the next, and so on.

EXPERIENTIAL EXERCISE 1.1

Test for Success

To stay or not to stay—that is the question. Use the first part of this quiz to figure out whether you are in line for a promotion. If not, the second part will help you determine when the right time is to make a move. Part I: Will I be promoted soon? Answer yes or no to each question.

1. Is your company doing well? Is it posting good financial results, drumming up new business, hiring and promoting others? ______

2. Do you get choice assignments? Are you put on projects that showcase your talents? Are you encouraged to learn new things and increase your skills? ______

3. Are you popular? Does your boss like you? Do you like your boss? Are you getting along well with your peers? ______

4. Is your input solicited? Are you included in key meetings? Do people come to you with questions about matters outside your usual domain? ______

5. Do you have the skills? Can you take the next logical step in your company right now without further training or experience? ______

6. Are you connected with the grapevine? Do others drop hints that you are in good standing? Have you heard any rumors that your boss likes your work? ______

7. Have you groomed a successor? Were you to be promoted, is there someone who could step into your job right away? ______ If your answer is yes, add 10 points each for Questions 1–3 and 5 points each for Questions 4–7. Total points: ________ If you scored higher than 40, you are probably in line for a promotion. If you scored 25 to 40, stay tuned. If you scored less than 25, move to the second part of this quiz. Part II: Is it time to move on? Again, answer yes or no.

1. Have you stopped learning? Are you getting stale? Do you no longer get the chance to increase your skills and broaden your experience? ______

2. Has your status slipped? Are exchanges with your boss becoming increasingly one sided? Do you feel as if you have less freedom to act than in the past? ______

Part 1 Meeting the Challenges of the 21st Century

3. Is your company faltering? Has it lost market share 22

or taken a major hit on its stock price? Has it been sharply criticized by Wall Street, the press, or its own employees? ______

4. Are big changes on the horizon? Has your company merged with another recently? Is any kind of major organizational restructuring underway? Have new high-level executives come in from the outside? ______

5. Are you out of the loop? Have you stopped hearing gossip? Do you feel you are the last to know about key decisions? ______

changed? Do friends and family comment that you look tired or seem unhappy? ______

7. Is your salary stagnating? Are your raises on a downward trend in terms of percentage? ______ If your answer is yes, add 10 points each for Questions 1–3 and 5 points each for Questions 4–7. Total points: ________ If you scored higher than 40, start your search. If you scored 25 to 40, put out feelers. If you scored less than 25, your situation may improve but remain open to outside opportunities.

6. Do you dread going to work? Are you anxious on Sunday nights? Have your eating and sleeping habits

ETHICS: TAKE A STAND Review the section of this chapter that discussed ethics. Select one of the managers mentioned: Dennis Kozlowski, Mark Swartz, Martha Stewart, Kenneth Lay, or others. Search for information concerning what has happened with that person. Was he or she found guilty in court? Serve prison time? Ask another person to do the same. For Discussion

1. Is what this person did ethical or not? Be sure to explain why you believe it is ethical or not.

2. Is what this person did legal or not? Be sure to explain and present evidence as to why you believe it is legal or not.

3. Did what this person did result in negative consequences for the owners of the company? If the person’s behavior and decisions did result in negative consequences for the owners, was that wrong?

CASE

A Day in the Life of Jeremy Jackson Jeremy Jackson is a project manager at Solutions Unlimited, Inc. The company provides information technology and computer systems consulting. Its headquarters are in Boston, with offices in Baltimore and New York City. Jeremy arrives at the office at 7:30 a.m., a typical time for him to get to work. The day begins as usual with a cup of coffee, a quick check of voice- and e-mail messages, and a careful review of his electronic planner for today’s activities. He has a busy but fairly typical day planned, beginning with his team’s meeting at 8:30. At 7:45 he reviews the output from his team’s meeting last week and begins developing today’s meeting agenda. The telephone rings at 8:00. Jeremy’s manager is concerned about the latest contract that the company was awarded, and she has some serious reservations about the company’s ability to complete the work on time. Jeremy tries to reassure her that they will meet the deadlines, but as he is talking, he feels his mind wandering to the team meeting that is set to begin in less than 15 minutes. Jeremy promises his manager that he will put together a short report on the technical progress with regards to the contract and hangs up. With less than 10 minutes to the meeting, Jeremy stares at the blank sheet of paper entitled “Meeting Agenda.” He quickly writes out what he can remember from the last meeting and walks to the meeting room. At 8:30 Jeremy looks at the yawning faces of the group and begins by thanking everyone for coming. Before he can start the meeting, Greg, the team member with the most skill but least formal education, says that they can never meet the new deadline. An argument follows with some group members saying the work can be done and the others disagreeing. After an hour and a half debate, Jeremy ends the meeting and agrees to meet with Greg later in the week to discuss his reservations. Jeremy gets back to his office at 10:10 to discover a voice-mail message inviting him to attend his manager’s meeting with one of the company’s partners during lunch. He had planned to run some errands over lunch but agrees it would be a good idea for him to attend. At 10:45 Greg stops by Jeremy’s office to schedule their meeting for later in the week. He tells Greg that he trusts his knowledge of computers and software and will defer to his judgment if he does not think the deadline can be met. Greg admits that he may have overreacted a bit during the meeting and promises to reassess the proposed scope of work. Jeremy spends the next 45 minutes returning phone messages and replying to e-mail messages. He leaves his office at 11:30 to meet his manager for the 30-minute drive to downtown Boston for lunch. Jeremy and his manager arrive at the restaurant at noon and are greeted by the partner. They enjoy a friendly exchange and settle into their booth. Jeremy immediately senses the concern in the partner’s tone about the newly awarded contract and begins a 2-hour discussion of the project’s merits and feasibility. With both his manager and partner satisfied, he returns to the office at 2:45 and begins returning phone messages. He has a conference call at 3:30 to discuss the project with the client’s management team, and it lasts for 45 minutes. As Jeremy walks down the hall to the break room for a soft drink after the conference call, he remembers that there is a retirement party for Shantaya Lewis in the conference room. Shantaya is leaving after 20 years with the company, the last 6 years as a senior vice president. He decides that he needs to get to that party, especially because Shantaya had been a mentor to him in the past. Also, several of the other senior managers will be at this party. Jeremy returns to his office and answers his waiting voice- and e-mail messages and begins outlining his schedule for tomorrow in his daily planner. At 5:30 he goes home. He has to take his daughter to soccer practice at 6:30 p.m. For Discussion

1. Identify the basic managerial functions in which Jeremy engaged during the day—that is, planning, organizing, leading, and controlling.

2. When did Jeremy act in (a) interpersonal roles, (b) informational roles, and (c) decisional roles? 3. Did Jeremy spend his time appropriately? If so, in what ways? How might he have adjusted what he did to be more effective?

Part 1 Meeting the Challenges of the 21st Century

VIDEO CASE 24

Timbuk2—The Art of Management Founded in 1989 in San Francisco by a bike messenger, Timbuk2 (http://www.timbuk2.com) began life as a niche business with a single product: a high-quality messenger bag. Since then, the company has developed an almost cultlike following from a wide audience. Building on that customer loyalty, the company now makes 30 products carried by quality retailers ranging from chains such as REI, EMS, and Apple to independent specialty retail stores. Today a student or a young professional is as likely as a bicycle messenger to carry one of the company’s stylish and colorful messenger bags or computer cases. In 2002, however, Timbuk2 was on the verge of bankruptcy. Like many small companies, Timbuk2 had grown in a somewhat haphazard fashion. Its loose and mostly consensus-driven management style had served the company well in its early days but no longer worked. Its production operations—manufacturing the messenger bags in response to actual customer orders—were inefficient. The resulting variations in demand led to productivity problems at the San Francisco factory. Flash forward to 2004. The San Francisco plant was now producing twice as many bags, and a revamped website increased online orders by 300 percent. Its expanded product line was a hit with retailers and consumers. As a result, Timbuk2 generated $10 million in revenues, twice 2003’s sales, and posted a profit. How did Timbuk2 transform itself in just two years? Enter Mark Dwight, Timbuk2’s president and chief executive officer. Dwight, who had been product design manager and marketing executive at two major technology corporations, was himself a cyclist. He liked the company’s product and image and saw great potential to build on them. In 2002, he joined with a group of private investors and Pacific Community Ventures, a San Francisco-based venture capital firm, to buy the company. Dwight brought to Timbuk2 a more disciplined management approach, based on his years in large high-tech companies. He hired additional managers with industry experience, prepared a five-year plan, and implemented operational planning and financial controls. Timbuk2’s operations staff tracks and reviews progress based on measurable results at its daily meetings. This helps each manager see how he or she contributes to the company’s success. In the early days of his tenure, however, Dwight faced major challenges—not the least of which was resistance from long-time employees to his very different and less democratic management style and long-term vision for the company. Some employees resigned, unable to adjust to the new work culture. “It was as though our bad habits were genetically coded in the basic fabric of the company,” says Dwight. “We had to make drastic changes that touched everyone inside and outside the company.” Two of those drastic changes involved how and where products are manufactured. Dwight switched Timbuk2 from on-demand to build-to-stock manufacturing that creates inventory. “The build-to-stock concept was resisted by everyone, from the operations manager to the production sewers,” recalls Dwight. “Yet that change alone saved our San Francisco factory from going out of business.” With improved productivity the plant doubled the size of its work force, and the flagship messenger bag manufacturing remains in San Francisco, despite higher labor costs. “There is value in the made-in-USA products, and locally produced bags can be customized to customer requests on a very short lead time,” adds Dwight. “That quick response is a unique advantage.” The new product lines, which include iPod cases, yoga bags, laptop cases, and duffels, are designed in San Francisco but manufactured offshore. The complexity of the construction made them too expensive to produce in the U.S. and still sell them at a reasonable price. Along with these tangible changes, he changed the company’s culture. “Timbuk2 has the fun-loving culture of a start-up and the operational discipline of a mature company,” Dwight says. He acknowledges the importance of idea sharing but cuts off discussion when he has enough information to make a decision, even if there are others who could provide input.

Chapter 1 Management and Managers

At the same time, he is very aware that he can come across as intimidating and dictatorial. “I’m also mindful that this is not a cult of Mark,” Dwight says. “I have a very strong vision for where I think the company is going. But it’s equally important for me to be willing to modify my vision around what these people know.” He seems to have struck the right balance with his employees, who recognize that he drives the decision making that moves the company forward. Take, for example, the “Tag Junkie” program. Dwight led a product development brainstorming session with a group of company employees. Their discussions ran the gamut: product name, design—one strap or two, fabric choices—pricing, whether to buy or make materials, and more. Dwight tossed out ideas and listened to what the others had to say. As one participant says, “We hash it out. Everyone gives their input. And you come out of the room, and you feel like, okay, we’re going to make some progress now.” For Discussion

1. How well does Dwight fulfill a manager’s four primary functions of planning, organizing, leading, and controlling? Which of the traits of BusinessWeek’s “best” managers does he display? Cite specific examples from the case and the video.

2. “I am the experienced executive here, and it’s my charter to manage the company. It’s not a democracy,” says Mark Dwight. How does this statement sum up his approach to management? Is it an effective one?

3. Dwight faced considerable resistance from the existing managers when he assumed control of Timbuk2 and wanted to move production of new products overseas. Describe several ways Dwight can use the different management roles to smooth the transition and win over these employees.

4. Based on the Tag Junkie meeting shown in the video, evaluate Dwight’s leadership abilities. Sources: Adapted from the Timbuk2 video case and “In the Bag,” Fast Company, March 2005, http://www.fastcompany.com; Andrew Tilin, “Bagging the Right Customers,” Business 2.0, May 2005, 56–57; and David Worrell, “Go for the Gold,” Entrepreneur, July 2005, http://www.entrepreneur.com.

Chapter

Evolution of Management Thought

CHAPTER OVERVIEW The concept of management and the basic management functions of planning, organizing, leading, and controlling are not new phenomena. Throughout recorded history, activities have been conducted that most certainly would have required careful attention to these management functions. The Great Wall of China, the Pyramids of Egypt, and many other wonders of the ancient world would not have been possible without management of the activities required to complete them. Endeavors such as these certainly would have required planning, organizing, leading, and controlling. Not only was management important in the past, but it also continues to be important in the present as governments construct massive public works projects, private enterprise engages in the delivery of large-scale projects, and business leaders engage in commerce and industry around the globe. Management will continue to be important as long as humans survive on earth.

Despite management’s lengthy tenure, formal theories on management began to emerge only during the past 100 years or so. In this chapter, we examine the historical evolution of management theories and philosophies and the factors that helped influence their development. This historical tour explores the five major schools of management thought that have emerged over the years. Our trip through time will reveal that the degree of support for and use of these different perspectives have shifted as times, conditions, and situations have changed. Despite this shifting support and use, components of each of these schools of thought still exist in current management thinking. Furthermore, they are likely to continue influencing management thought in the future. If we understand the managerial philosophies of the past and present, we will be better equipped to be successful leaders in the future.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Describe the major influences on the development of management thought. 2. Identify the five major perspectives of management thought that have evolved over the years. 3. Describe the different subfields that exist in the classical perspective of management and discuss the central focus of each. 4. Describe the theories of the major contributors to the behavioral perspective of management. 5. Describe the characteristics of the quantitative perspective of management. 6. Describe the systems perspective building blocks and their interactions. 7. Discuss the nature of the contingency perspective of management. 8. Discuss the future issues that will affect the further development of management thought.

Part 1 Meeting the Challenges of the 21st Century

Facing The Challenge “Sony Shock”: Crisis at the Electronics Giant ention Sony and many people will immediately think “electronics giant.” After all, these are the folks who invented a litany of devices whose names are immediately recognizable to most of us. Sony was established in 1946 as a maker of telecom and measuring equipment, but it was to be Sony’s electronics innovations that began a few decades later that would make the company a household name. Beginning with the Triniton color television in 1968, Sony continued its pioneer developments with such consumer electronics items as the Betamax video cassette player, the Walkman personal headphone stereo player, the world’s first compact disc player, the portable Discman CD player, the Digital8 Handycam 8mm video camcorder, Mavica digital cameras, the first DVD player, WEGA televisions, the Memory Stick flash media player, and several generations of the PlayStation video game console. With over 1000 Sony products, the collection is much too lengthy to list in its entirety. For decades Sony had the reputation of a world leader and a world beater in this industry. When Sony’s electronics were coupled with its more recent acquisitions of CBS records, Columbia Studios, and assorted other media ventures, Sony became a formidable conglomerate. With more than 151,000 employees worldwide (27,000 in the United States), the corporation generated worldwide sales in the neighborhood of $67 billion (more than $18 billion of that in the United States) for the fiscal year that ended in March 2005. Despite those impressive numbers, all was not rosy at Sony in recent years. Between June 2000, when Nobuyuki Idei assumed the role of chairman and CEO of Sony, and

Introduction By early 2005, leadership at Sony finally recognized that the management style and practices that had worked well in the past were no longer capable of maintaining the company as a leader in the consumer electronics industry. Despite some cost-cutting moves in the prior 2 years, Sony’s electronics division seemed to be heading toward its second straight year of red ink. The company was faced with challenges that dictated a major change was

early 2005, Sony’s stock suffered a 60% slide. A big portion of that slide occurred during a 2-day period in April 2003 after a company announcement of a $1 billion quarterly loss. This period when the bottom fell out of its earnings and its shares began to plunge has been referred to in the industry as the “Sony Shock.” Under Idei’s watch, Sony was outmaneuvered by rivals Sharp Corporation and Matsush*ta Electric Industrial Company (maker of the Panasonic brand) in flat-panel televisions and lost its lead in the portable music business to Apple Computer and its popular iPod player. Even Samsung, a once inferior South Korean rival, has embarrassed Sony by leaping ahead in flat-panel televisions. Despite Sony’s pioneer work with digital photography, Canon and Nikon have regained their edge as digital photography has matured. Even in the area of gaming devices, where Sony still thrives, the next generation of its PlayStation will face a much stiffer challenge from rival Microsoft’s nextgeneration Xbox. In early 2005, Sony’s core electronics division was in danger of falling into the red for a second straight year amid tough price competition and a lack of hit products. A fragmenting brand and diverse competition are not the only problems holding back Sony’s electronics business. Its increasingly poor performance can be attributed in part to its failed efforts to combine consumer electronics and media content inside one firm. In early 2005, Sony’s big challenges were to start making electronic devices more profitably and to solve the dilemma of how to get its gadgets and media content working together in a fashion that would make consumers willing to pay a premium price for them.1

necessary. As we saw in Chapter 1, changes are occurring that are causing business leaders to revise their managerial styles and become more creative in their thinking. But change is nothing new—all that is new are the types of change and the speed of change. Management thinking has evolved throughout the centuries to deal with the ever-changing environment. Today, management thinking continues to evolve to meet the challenges raised by rapid and dramatic societal changes. These factors will undoubtedly continue to influence future management developments. Before examining the historical developments in management thinking, let’s first identify those factors that have influenced the evolution of modern management thought.

Chapter 2 Evolution of Management Thought

Environmental Factors Influencing Management Thought Through the years, many environmental factors have caused management theorists and management practitioners to alter their views on what constitutes a good approach to management. These environmental factors can be conveniently categorized as economic, social, political, technological, and global influences. Let’s examine each of these influences and the effects that they have had on the evolution of management thought in turn.

ECONOMIC INFLUENCES Economic influences relate to the availability, production, and distribution of resources within a society. In “At

the Forefront,” we can see the economic imLEARNING pact of declining markets and declining OBJECTIVE prices on one segment of the agriculture in29 dustry. We also see how that segment was able to rebound by introducing a product that seemed to fit a niche market. With the Describe the major advent of industrialization, the goal of most influences on the manufacturing organizations was to find development of the most profitable way to provide products management for newly emerging markets. They needed a thought. variety of resources to achieve this objective. Some resources were material, and some were human, but in each case, they tended to become scarcer over time. When there was a seemingly endless expanse of virgin forests, loggers didn’t think twice about clear-cutting a mountainside. Coal reserves were once stripped away with no thought of depletion. Burning off surplus natural gas was once a common practice. But as resources became scarcer, it became increasingly important that they be managed effectively. Time and circ*mstances

At the Forefront The Golden Goose Is a Potato ural Florida potato farmers have taken a beating in recent years. They were once counted on to provide a fresh product for the East Coast during the off season for potato farmers in Idaho and Washington. However, those states have developed potatoes that can be stored for 6 months or more, severely cutting into the market for Florida potatoes. The trend toward lower-carbohydrate consumption has further cut into demand. In one Florida potato region, the number of potato farmers has dropped from more than 300 to only 38 in the last 25 years. Potato acreage has shrunk from about 32,000 to about 19,000 in the last 10 years alone. With many farmers selling potatoes at prices below the cost of production and much of the farmland being sold to developers, the future of this industry looked bleak. In stepped a savior in the form of potato specialist Chad Hutchinson from the University of Florida’s

Institute of Food and Agricultural Sciences. He introduced a handful of growers to a new potato with some attractive characteristics that had been crossbred in Holland. This Dutch spud has fewer calories and fewer carbohydrates than its U.S. cousin. Furthermore, it requires less fertilizer to grow and has a more uniform and attractive shape. Its golden color was to be an omen. In 2004 six growers seized control of their destinies and formed the SunFresh of Florida Marketing Cooperative, focusing all their efforts on this new potato, which they dubbed the SunLite potato. The numbers are impressive on this boutique tuber. When compared to a typical russet potato, the SunLite has one-third fewer carbohydrates, 25% fewer calories, and perhaps most important to the farmers, sells for almost three times the price of the russet. In the eyes of the farmers, each of these golden-hued beauties truly was a nugget of gold coming

out of the ground. The growers unabashedly proclaim that theirs is a potato that is healthier, tastier, easier on the eyes, and easier on the environment. What a quadruple threat! In Hutchinson’s own words, “It turned out this variety has the whole package. The lower carbs and lower calories will encourage people to try it, but we think they’ll keep buying it because it truly is a gourmet potato with a lot of flavor and a great appearance.” SunLites began appearing in grocery stores in early 2005, and the early results are very encouraging.

Sources: W. Smith, “Farmers See ‘Lite’ Spud as a Salvation,” Orlando Sentinel, 28 January 2005, A1ff.; SunFresh of Florida Marketing Cooperative, Inc., http://www.sunfreshofflorida.com, 16 July 2005; Ellen Boukari, “Low Carb, High Hopes,” http://www.rurdev.usda .gov/rbs/pub/mar05/lowcarb.htm, 16 July 2005.

dictate that supplies will not always be available when needed. Through gradual depletion over time, resources can simply run out. Disruptions of supplies can also occur because of temporary but immediate circ*mstances. Drought in Brazil in early 2005 caused coffee prices to soar.2 The 2003 war in Iraq and the subsequent turmoil in the Mideast have had a pronounced impact on crude oil supplies, causing a steady upward spiral in the price of gasoline. Four major hurricanes in the span of 6 weeks during the summer of 2004 had a sudden and dramatic impact on the management of resources as the storms crisscrossed the state of Florida. These storms led to some of the largest evacuations in U.S. history, causing manufacturers and distributors of construction materials to quickly rethink their manufacturing and distribution strategies so that they could act in a socially responsible manner. The leaders of businesses that engaged in the retail sale of these commodities also found it necessary to manage their resources differently. For example, Home Depot and Lowes closely monitored the tracks of the storms and moved such items as emergency generators, plywood, and building materials around the state in conjunction with each storm’s projected path.3 Then, in the wake of these hurricanes, a scarcity of materials used in lighted advertising signs slowed the repair of many businesses’ only means to mark their locations.4 As bad as these storms seemed at the time, they pale in comparison to the consequences of Hurricane Katrina in 2005. With a huge portion of the Gulf coast wiped out and large sections of New Orleans destined to be rebuilt, the impact on building materials and the petrochemical supplies produced in that area will be felt for years to come.5 In short, scarcity makes it necessary for resources to be allocated among competing users.

SOCIAL INFLUENCES Social influences relate to the aspects of a culture that influence interpersonal relationships. The needs, values, and standards of behavior among people help form the social contract of the culture. The social contract embodies unwritten rules and perceptions that govern interpersonal relationships, as well as the relationships between people and organizations. Business leaders need to be familiar with these perceptions if they are to act effectively. The ethnic, racial, and gender composition of today’s workforce is becoming increasingly diverse. Recognizing and satisfying the varying needs and values of this diverse workforce and society as a whole present a challenge to business leaders. In “Leaders in Action,” we can see how the president of a large supermarket chain responded to the changing ethnic composition in some areas served by

Part 1 Meeting the Challenges of the 21st Century

This Hispanic store front is a reminder that the ethnic, racial, and gender composition of today’s workforces and communities is becomingly increasingly diverse.

his stores. Total conversion to Hispanic-format supermarkets was to be his response. Throughout modern business history, management thinking and practice have been shaped in part by work stoppages, labor insurrections, and strikes by mineworkers, autoworkers, teamsters, and many others. Most of these incidents were precipitated not just by demands for more pay but by safety concerns, welfare issues, and other social considerations. Just recently, General Motors Corporation was pressured into expanding existing jobsecurity protections to effectively give many of its United Auto Workers employees lifetime protection against losing their jobs to subcontracting or efficiency gains.6 Although some of these examples of social influence have a negative flavor, this need not always be the case. In recent years, the social contract of our culture has been changing. Workers have become more vocal in their desire to be treated as more than just muscle to do the job. They are insisting on using their mental abilities as well as their physical skills. As we will see throughout this book, these changes have led to some of the contemporary approaches that empower workers, giving them decision-making authority and responsibility for their activities. This approach has had a positive impact on organizations that have tried it.7 Empowered workers often exhibit pride of ownership for their work and a dedication to quality and excellence in all that they do. From a somewhat amusing perspective, changing individual behavior has had an impact on producers of two breakfast staples. Individual obsession with low-

Chapter 2 Evolution of Management Thought

Leaders in Action 31

Publix’s New Flavor f you ran a successful supermarket chain and you were confronted by a rapidly growing Hispanic population with a skyrocketing buying power, what would you do? Here’s what William Crenshaw, president of Publix Supermarkets, did. He began converting stores into completely Hispanic-format supermarkets. Publix Supermarkets is a Lakeland, Florida, based chain of 853 supermarkets. Publix is the largest supermarket chain in Florida and the ninth largest chain in the United States. Until recently, Publix operated exclusively in Florida, and although the company has begun branching out into neighboring states, the bulk of its stores (626) are located in the Sunshine State. Crenshaw’s decision to begin converting stores was precipitated by demographic studies revealing that Hispanic buying power grew 160% to $542 billion in the last decade of the

20th century, and it was likely to top $650 billion in 2005. In central Florida alone, Hispanics were spending close to $7 billion annually, and that figure was projected to continue rising. These same studies revealed that Hispanics tend to shop more frequently and spend more money than non-Hispanic households. The store conversions involved more than simply beefing up the Hispanic offerings. Stores were shut down while construction crews altered the look and layout of the new prototype supermarkets. Bilingual employees were hired, hard-to-find imports were obtained, and Spanish music was piped through the stores’ loudspeakers. Catering to the growing Hispanic market is not new for Publix. The company recently launched its own house brand of Hispanic foods. Such private-label foods offer savings of 10–30% over

carbohydrate diets has severely impacted sales of both orange juice and Krispy Kreme Doughnuts, causing financial difficulties for companies who process and manufacture those products.8

POLITICAL INFLUENCES Political influences relate to the impact of political institutions on individuals and organizations. At a basic level are the various civil and criminal laws that influence individual and organizational behavior. In addition, the political system has bestowed various rights upon individuals and organizations that also impact behavior. Among these rights are the right to life and liberty, contract rights, and property rights. Finally, government regulations are yet another source of political influence. The laws, rules, and regulations that form the political influences on management in many instances have been the outgrowth of economic and social influences. Environmental regulations have often been precipitated by reckless disregard for the preservation of our natural resources. Child labor laws and OSHA (Occupational Safety and Health Administration) regulations trace their

national or imported brands. But, this new strategy of total conversion of stores to Hispanic format represents a much larger step than the introduction of house brands. “We want to be proactive in anticipating trends,” said Crenshaw. To avoid alienating nonHispanic customers, Publix Sabor (translation; Publix flavor) conversions will only occur where there are other conventional Publix markets nearby. The performance of the prototype Publix Sabor stores will be closely monitored. If the results are favorable, as most insiders predict they will be, the concept will be expanded to additional communities with high Hispanic concentrations.

Sources: S. H. Meitner, “Publix’s New Flavor,” Orlando Sentinel, 4 March 2005, C1ff.; “Publix to Launch Hispanic Food Line,” Orlando Sentinel, 5 January 2005, C1ff.

origin to social outcries over exploitative and dangerous working conditions. Political forces have influenced management thinking in a variety of ways. For example, over the years increasing concern for individual rights has forced management to adapt to a shorter workweek for employees, provide a safe work environment, and make increasing contributions to employees’ welfare. Such political influences can extend across international boundaries in today’s global economy. Nike, Inc. found it necessary to increase wages for its workers in Indonesia in the face of that government’s plan to raise the minimum wage.9 Pressures from the court of public opinion have also prompted Nike and other companies such as Kmart and Wal-Mart to eliminate child-labor practices in foreign countries producing their merchandise. Regulations against monopolies have caused some businesses to restructure and some industries to reorganize. Increased environmental regulation has caused changes in many organizations. Deregulation of banking and trucking has had a dramatic influence on organizations in these industries. Increased bans on smoking in public places and the resulting reduced demand for smoking products has prompted many tobacco farmers to alter

Part 1 Meeting the Challenges of the 21st Century

their choice of crops.10 In short, evolving laws, rules, and regulations have tended to transform the way many organizations conduct business, necessitating changes in their management philosophies and styles over the years.

TECHNOLOGICAL INFLUENCES Technological influences relate to advances and refinements in any of the devices used in conjunction with conducting business. As was noted in Chapter 1, advances in transportation, communication, and information technology have made it possible to conduct business on a global basis. Business leaders in the global economy must be alert to all opportunities for improvement. They must stay abreast of the new technology so that they can make intelligent, informed decisions. The stakes are high because these decisions affect both the human and the technical aspects of operations. Whether or not an organization adopts the new technology may determine whether it retains its competitive edge.11 As we will see in more detail in Chapter 17, electronic commerce (e-commerce) and its associated product sales via the Internet are becoming increasingly critical to the competitiveness of many organizations. As the 20th century wound to a close, Compaq, then the world’s largest personal-computer manufacturer, replaced its CEO and CFO because they failed to adapt quickly enough to this new technology. Compaq’s profits were starting to be squeezed as upstart competitor Dell Computer Corporation dramatically outperformed Compaq by embracing e-commerce more quickly than Compaq.12 Business leaders are seeing constant innovations in communications and information-exchange capabilities, including voice mail, electronic mail, fax transmission of documents, electronic data interchange, and the growth of the Internet. Cellular (cell) telephones and portable computers provide two familiar examples of dramatic technological advances that have occurred in the past few years. Early cell phones were not very portable and required separate battery packs carried over the shoulder in briefcase-sized satchels. Now a host of manufacturers offer battery-powered units that can fit into a shirt pocket or be concealed in the palm of one’s hand. For instance, consider the latest from Motorola, the Moto Razr V3, a razor-thin cell phone that incorporates Bluetooth wireless technology and boasts a huge color screen and many other features in its ultrathin design. These will no doubt shrink even more as technological innovations continue. Notebook-style computers that weigh a few pounds now allow managers to exchange information with their company computers while flying virtually anywhere in the world. Using these same devices, information can be quickly retrieved from almost any source in the world

by means of the Internet. Factories of the future will incorporate such technologies as computer-aided design (CAD), computer-aided manufacturing (CAM), computer-integrated manufacturing (CIM), computerized numerically controlled machines (CNCM), automated storage and retrieval systems (AS/RS), and flexible manufacturing systems (FMS). Innovations such as these are transforming workers’ job responsibilities and, consequently, the way in which they should be managed.13

GLOBAL INFLUENCES Global influences relate to the pressures to improve quality, productivity, and costs as organizations attempt to compete in the worldwide marketplace. The international, or global, dimension of an organization’s environment has had the most profound impact on management thinking in recent years. In the world of business, national boundaries are quickly disappearing. Global competition has begun to affect all businesses. For example, U.S. automakers can no longer claim this country as their exclusive domain. Foreign competitors continually penetrate the U.S. market with high-quality, low-priced cars. To survive, U.S. automakers have found it necessary to compete on the same quality and price dimensions as their foreign competitors and to seek foreign markets of their own.14 As time progresses, even the lines between domestic and foreign automobiles continue to become more blurred. U.S. automobiles continue to incorporate more and more imported components, while “foreign” automobiles are increasingly being manufactured in the United States with U.S.-made parts and U.S. labor. For example, Marysville, Ohio, boasts a Honda manufacturing plant, and Georgetown, Kentucky, claims a Toyota manufacturing plant. Similar situations in electronics and other industries could be cited. In all cases, increasing global competition has caused organizations to focus on using all the skills and capabilities of their workers in an effort to improve quality, productivity, and costs. Although the Sony Corporation described in “Facing the Challenge” is a Japanese corporation, it has manufacturing operations spread around the world. We saw that such increased competition was eroding Sony’s profitability, posing a major challenge to the health of this organization. Increased globalization, coupled with the immediate access organizations have to one another through the Internet, has led to many global partnerships. Small companies that are seemingly isolated in small-town America can easily become suppliers to foreign companies and vice versa. Contemporary and future perspectives on management have been and will continue to be influenced most heavily by the global dimension of the environment.15

Chapter 2 Evolution of Management Thought

Schools of Management Thought Beginning in the late 19th century and continuing through the 20th century, managers and scholars developed theoretical frameworks to describe what they believed to be good management practice. Their efforts have led to five different perspectives on management: the classical perspective, the behavioral perspective, the quantitative perspective, the systems perspective, and the contingency perspective. Each perspective is based on different assumptions about organizational objectives and human behavior. To help place these perspectives in their proper chronological sequence, Figure 2.1 displays them along a historical time line. You might wonder why it is important to study the historical development of management thought. We’ve probably all heard it before in our secondary education: Studying history allows us to learn about mistakes made in the past so that they can be avoided in the future. Fur-

thermore, it allows us to learn of past successes so that they can be repeated in the appropriate future situations. This certainly applies to the study of management history. As Figure 2.1 shows, all these perspectives continue to influence the thinking of business leaders although opinions differ as to how influential each is. Consequently, it is important that future leaders become familiar with the basic concepts of each school of thought. The following sections examine these major perspectives on management thought in more detail.

Systems Perspective

Quantitative Perspective

Behavioral Perspective

Classical Perspective 1900

1925

1950

1975

2000

Identify the five major perspectives of management thought that have evolved over the years.

The oldest of the “formal” viewpoints of management emerged during the late-19th and early-20th centuries and has come to be known as the classical perspective. The classical perspective had its roots in the management experiences that were occurring in the rapidly expanding manufacturing organizations that typified U.S. and European industrialization. Early contributions came from management practitioners and theorists in several corners of the world.

Contingency Perspective

1875

CLASSICAL PERSPECTIVE

Chronological Development of Management Perspectives

Figure 2.1

LEARNING OBJECTIVE

Part 1 Meeting the Challenges of the 21st Century

Figure 2.2

Subfields of the Classical Perspective on Management

Classical Perspective

Scientific Management

Administrative Management

The classical perspective consists of three main subfields: scientific management, administrative management, and bureaucratic management.16 We will see shortly that sciLEARNING OBJECTIVE entific management tends to focus on the productivity of the individual worker, administrative management tends to focus on the functions of management, and bureaucratic management tends to focus on Describe the the overall organizational system. Keep in different subfields mind, though, that things are not as that exist in the sharply defined as this synopsis might sugclassical gest. As Figure 2.2 illustrates, these three perspective of subfields also contain some overlapping elmanagement and ements and components. discuss the central

focus of each.

Scientific Management

Scientific management focuses on the productivity of the individKEY TERMS ual worker. As 19th-century society became more indusScientific management trialized, businesses had diffiA perspective on management culty improving productivity. that focuses on the producFrederick Winslow Taylor tivity of the individual worker. (1856–1915), an American

Bureaucratic Management

mechanical engineer, suggested that the primary problem lay in poor management practices. While employed at the Midvale Steel Company in Philadelphia, Pennsylvania, Taylor began experimenting with management procedures, practices, and methods that focused on worker–machine relationships in manufacturing plants. He contended that management would have to change and that the manner of change should be determined by scientific study. Taylor’s observations led him to formulate opinions in the areas of task performance, supervision, and motivation.17 Task Performance Taylor was convinced that there was an ideal way to perform each separate work task, and he attempted to define those optimal procedures through systematic study. His celebrated “science of shoveling” refers to his observations and experiments on the best way for workers to perform this manual task during the manufacture of pig iron. Taylor experimented with different shovel sizes and designs to find the one that was most comfortable. He varied the size of the load scooped up onto the shovel to find the least fatiguing amount. He experimented with different combinations of work time and rest intervals in an attempt to improve the worker recovery rate. Ranges of physical motion on

Chapter 2 Evolution of Management Thought

the part of the workers were also examined. Based upon Taylor’s suggestions, Midvale was able to reduce the number of shovel handlers needed from 600 to 140, while more than tripling the average daily worker output.18 These types of observations and measurements are examples of time-and-motion studies. Time-and-motion studies identify and measure a worker’s physical movements while the worker performs a task and then analyze the results to determine the best way of performing that task. In the attempt to find the best way of performing each task, scientific management incorporates several basic expectations of management, which include the following:

• • • •

Development of work standards. Standard methods should be developed for performing each job within the organization. Selection of workers. Workers with the appropriate abilities should be selected for each job. Training of workers. Workers should be trained in the standard methods. Support of workers. Workers should be supported by having their work planned for them.

While Taylor is most remembered for his contributions in the area of task performance, his scientific management contributions went well beyond determining the one best way of performing a task. He also maintained strong convictions about supervision and motivation.19 Supervision In the area of supervision, Taylor felt that a single supervisor could not be an expert at all tasks. This was because most supervisors were promoted to their positions after demonstrating high levels of skill in performing a particular function within the organization. Consequently, each first-level supervisor should be responsible only for workers who perform a common function familiar to the supervisor, such as machine operator, material handler, or inspector. Each supervisor’s area of expertise would become an area of authority. In Taylor’s era these supervisors were referred to as foremen, so Taylor called this concept functional foremanship. Several foremen would be assigned to each work area, with each having a separate responsibility for such duties as planning, production scheduling, time-and-motion studies, material handling, and so forth. Motivation In the area of motivation, Taylor felt that money was the way to motivate workers to their fullest capabilities. He advocated a piecework system in which workers’ pay was tied to their output. Workers who met a standard level of production were paid at a standard wage rate. Workers whose production exceeded the standard were paid at a higher rate for all of their production out-

put. Taylor felt that such financial incentives would induce workers to produce more so that they might earn more money. He also felt that management should use financial incentives judiciously. If the increased employee earnings were not accompanied by higher profits generated by the productivity increases, then the incentives should not be used. While Taylor’s views on the power of money as a motivator may have been well suited to the conditions that prevailed in the early part of the 20th century, ample evidence suggests that, with a few exceptions, now it is not usually the most important motivator of workers. In some instances today, it can be something as simple as allowing casual dress that is a prime motivator of workers.20 Although Frederick Taylor is generally acknowledged to be the father of scientific management, the husbandand-wife team of Frank and Lillian Gilbreth also made substantial pioneering contributions to the field.21 Frank Gilbreth specialized in time-and-motion studies to determine the most efficient way to perform tasks.22 He identified 17 work elements (such as lifting, grasping, and positioning) and called them therbligs (roughly the reverse spelling of his last name).23 In one of his more notable studies, Gilbreth used the new medium of motion pictures to examine the work of bricklayers. He was able to change that task’s structure in a way that reduced the number of motions from 18 to 5, resulting in a productivity increase of more than 200%. Contemporary industrial engineers still use Frank Gilbreth’s methods to design jobs for the greatest efficiency. Lillian Gilbreth concentrated her efforts on the human aspects of industrial engineering. She was a strong proponent of better working conditions as a means of improving efficiency and productivity. She favored standard days with scheduled lunch breaks and rest periods for workers. She also strived for the removal of unsafe working conditions and the abolition of child labor. The Gilbreths’ time-and-motion experiments attracted quite a bit of notoriety. In fact, their application of time-and-motion studies and efficiency practices to their personal lives and the raising of their 12 children was eventually chronicled in the long-running Broadway play and subsequent motion picture Cheaper by the Dozen. By the way, many readers are probably familiar with the 2003 and 2005 Steve Martin movies of the same name. It should be noted that these recent motion pictures bear almost no resemblance to the story line of the original classic. About the only thing the three have in common are families consisting of 12 children! Although Taylor and the Gilbreths dominated the scientific management subfield of the classical perspective with their focus on the productivity of the individual worker, their views were not embraced by all classical

Part 1 Meeting the Challenges of the 21st Century

Table 2.1 36

Fayol’s General Principles of Management

1. Division of work. By dividing the work into smaller elements and assigning specific elements to specific workers, the work can be performed more efficiently and more productively. 2. Authority and responsibility. Authority is necessary to carry out managerial responsibilities. Managers have the authority to give orders so that work will be accomplished. 3. Discipline. To ensure the smooth operation of the business, it is essential that members of the organization respect the rules that govern it. 4. Unity of command. To avoid conflicting instructions and confusion, each employee should receive orders from only one superior. 5. Unity of direction. Similar activities within an organization should be coordinated under and directed by only one manager. 6. Subordination of individual interest to the common good. The goals of the overall organization should take precedence over the interests of individual employees. 7. Remuneration of personnel. Financial compensation for work done should be fair both to the employees and to the organization. 8. Centralization. Power and authority should be concentrated at upper levels of the organization with managers maintaining final responsibility. However, managers should give their subordinates enough authority to perform their jobs properly. 9. Scalar chain. A single, uninterrupted chain of authority should extend from the top level to the lowest position in the organization. 10. Order. Materials should be in the right place at the right time, and workers should be assigned to the jobs best suited to them. 11. Equity. Managers should display friendliness and fairness toward their subordinates. 12. Stability of personnel tenure. High rates of employee turnover are inefficient and should be avoided. 13. Initiative. Subordinates should be given the freedom to take initiative in carrying out their work. 14. Esprit de corps. Team spirit and harmony should be promoted among workers to create a sense of organizational unity. Source: Based on Henri Fayol, General and Industrial Management, trans. Constana Storrs (London: Pittman & Sons, 1949).

thinkers. Others focused on the functions of management or the overall organizational structure, as seen in the next two sections.

Administrative Management Administrative management focuses on managers and the functions they perform. This approach to management is most closely identified with Henri Fayol (1841–1925), a French mining engineer whose major views emerged in the early 20th century.24 Fayol made his mark when he revitalized a floundering mining company and turned it into a financial success. He later attributed his success as a manager to the methods he employed rather than to his personal attributes. Fayol was the first to recognize that successful managers had to understand the basic managerial functions. He identified these functions as planning, organizing, commanding (leading), coordinating, and controlling. He also contended that successful managers needed to apply certain principles of management to these funcKEY TERMS tions. Fayol developed a set of 14 general principles of Administrative management management, which are listed A perspective on managein Table 2.1.25 ment that focuses on manMany of Fayol’s princiagers and the functions they ples are quite compatible with perform. the views of scientific man-

agement. For example, the objective of Fayol’s principle on the division of work is to produce more and better work with the same amount of effort. Taylor was attempting the same thing with his shoveling experiments. Fayol’s order principle, stating that everything and everyone should be in their proper place, is consistent with the orderly objective of time-and-motion studies. Some of Fayol’s classical theories and principles may not seem compatible with contemporary management as described in Chapter 1. For example, his principle of centralization of power and authority at upper levels of the organization is contrary to the contemporary management view of allowing frontline workers more autonomy and authority for making and carrying out decisions. Furthermore, contemporary managers rarely demand that the goals of the overall organization take precedence over the interests of individual employees. Contemporary management thinking views employees as a valuable resource whose interests must be considered. Therefore, considerable importance is placed on satisfying the wants, needs, and desires of individual workers. Despite the apparent incompatibility between some of Fayol’s principles and the philosophies of contemporary management, several of his principles continue to be embraced by today’s managers. His managerial functions of planning, organizing, leading, and controlling are routinely used in modern organizations. In fact, these

Chapter 2 Evolution of Management Thought

functions form the framework for the organization of the material in this textbook. In addition, Fayol’s principles on subordinate initiative, harmony, and team spirit are particularly applicable to the modern trend toward encouraging creativity and teamwork in the workplace. Whereas scientific management focuses on the productivity of the individual worker and administrative management focuses on the functions of the manager, bureaucratic management, the final subfield of classical management, shifts its focus to the overall organizational system.26

•

Bureaucratic Management

Bureaucratic management focuses on the overall organizational system and is based upon firm rules, policies, and procedures; a fixed hierarchy; and a clear division of labor. Max Weber (1864–1920), a German sociologist and historian, is most closely associated with bureaucratic management.27 Weber had observed that many 19thcentury European organizations were managed on a very personal basis. Employees often displayed more loyalty to individuals than to the mission of the organization. As a consequence, resources were often used to satisfy individual desires rather than the organization’s goals. To counter this dysfunctional consequence, Weber envisioned a system of management that would be based upon impersonal and rational behavior.28 Management of this sort is called a bureaucracy, and it has the following characteristics: • Division of labor. All duties are divided into simpler, more specialized tasks so that the organization can use personnel and resources more efficiently.

Bureaucratic management involves a division of labor, a hierarchy of authority, rules and procedures, impersonality, and employee selection and promotion.

•

Hierarchy of authority. The organization has a pyramid-shaped hierarchical structure that ranks job positions according to the amount of power and authority each possesses. Power and authority increase at each higher level, and each lower-level position is under the direct control of one higherlevel position, as in Figure 2.3. Rules and procedures. A comprehensive set of rules and procedures that provides the guidelines for performing all organizational duties is clearly stated. Employees must strictly adhere to these formal rules. Impersonality. Personal favoritism is avoided in the operation of the organization. The specified duties of an employee dictate behavior. The rules and procedures are applied to all employees impersonally and uniformly. Employee selection and promotion. All employees are selected on the basis of technical competence and are promoted based upon their job-related performance.29

Weber felt that an organization exhibiting these characteristics would be more efficient and adaptable to change, for such a system would be able to maintain continuity. Regardless of the individual personalities who might enter or leave the system over the years, the formal rules, structure, and written records would allow the organization to continue to operate as it had in the past. Weber believed there were three different types of authority: traditional, charismatic, and rational–legal.30 Traditional authority is based upon custom or tradiKEY TERMS tion. Charismatic authority occurs when subordinates volBureaucratic management untarily comply with a leader A perspective on managebecause of his or her special ment that focuses on the personal qualities or abilities. overall organizational system. Rational–legal authority is Traditional authority based on a set of impersonal Subordinates comply with a rules and regulations that apleader because of custom or ply to all employees. Superiors tradition. are obeyed because of the poCharismatic authority sitions they hold within the Subordinates voluntarily comorganization. Table 2.2 briefly ply with a leader because of describes these three types his or her special personal of authority and provides qualities or abilities. examples of each. Rational–legal authority The term bureaucracy has Subordinates comply with a taken on a negative connotaleader because of a set of imtion today. In many cases, personal rules and regulations negative opinions about a that apply to all employees. bureaucracy are fully justified,

Part 1 Meeting the Challenges of the 21st Century

Bureaucratic Hierarchical Power Structure

Figure 2.3 38

Top Management

High Levels of Power & Authority

Middle Management

First-Line Management

Worker

Middle Management

First-Line Management

Worker

First-Line Management

Worker

Low Levels of Power & Authority

the company had become too “bureaucratic.”31 An inflexible and unyielding imposition of the rules and regulations is in direct conflict with the changing face of contemporary organizations as described in Chapter 1. There we noted that future leaders must typically display a greater reliance on work teams that are empowered to use their creativity, self-motivation, and initiative to make decisions and solve problems as they work toward achieving the organization’s goals.

especially when its rules and regulations are imposed in an inflexible and unyielding manner. Who among us has not been frustrated by an encounter with the bureaucratic “red tape” of some government agency or university office? At a recent Compaq shareholders meeting, frustration over not getting anyone in the company to listen to them was summed up by one angry shareholder who fumed, “Try getting a human being on the phone at Compaq.” These complaints prompted Compaq’s chairman to admit that

Table 2.2

Worker

First-Line Management

Weber’s Three Types of Authority

Type

Description

Examples

Traditional

Subordinate obedience based on custom or tradition

Native American tribal chiefs, royalty (kings, queens, etc.)

Charismatic

Subordinate obedience based on special personal qualities associated with certain social reformers, political leaders, religious leaders, or organizational leaders

Martin Luther King, Jr., Cesar Chavez, Mahatma Gandhi, Billy Graham, Bill Gates (Microsoft), Mary Kay Ash (Mary Kay Cosmetics), Dave Thomas (Wendy’s)

Rational–legal

Subordinate obedience based on the position held by superiors within the organization

Police officers, organizational executives, managers, and supervisors

Chapter 2 Evolution of Management Thought

Even though the trend is toward less bureaucracy, we should not be too quick to bury its basic tenets. Despite its associated rules and red tape, it can still provide some effective control devices in organizations where many routine tasks must be performed. Low-level employees should be able to accomplish such work by simply following the rules. Unfortunately, the rules and red tape of bureaucracy can sometimes be carried to an unhealthy extreme. When General Motors wanted to construct a truck assembly plant in Egypt, the proposal had to pass through many ministries and required a multitude of signatures to gain approval. As a result of this sea of red tape, more than 3 years elapsed before final approval was granted.32 The classical thinkers of the late-19th and early-20th centuries made many valuable contributions to the theory and practice of management. However, their theories did not always achieve desirable results in the situations that were developing in the early-20th century. Changes were occurring in the workplace that gave rise to new perspectives on management. As a result, the behavioral perspective of management, which represents a significant departure from classical thinking, emerged.

BEHAVIORAL PERSPECTIVE During the first few decades of the 20th century, the industrialized nations of the world were experiencing many social and cultural changes. Standards of living were rising, working conditions were improving, and the length of the average workweek was declining. Although these improvements temporarily stopped during the Great Depression and World War II, they did continue during the remainder of the century. One of the most profound changes was the newfound ability of workers to influence managerial decisions through the formation of powerful labor unions. Amid these changes, managers were increasingly finding that workers did not always exhibit behaviors that were consistent with what classical theorists had called rational behavior. Furthermore, effective managers were not always being true to the principles laid down by these traditionalists. Managers were being presented with more and more evidence that human behavior has a significant impact on the actions of workers. Observations and evidence such as this gave rise to the behavioral perspective of management, which recognizes the importance of human behavior patterns in shaping managerial style. The next sections describe the observations and research findings of several of the major contributors to this behavioral perspective.

Mary Parker Follett In the first decades of the 20th century, Mary Parker Follett, an early management scholar, made several signifi-

cant contributions to the behavioral perspective of management. Follett’s contributions were based on her observations of managers as they performed their jobs. She concluded that a key to effective management was coordination. It was Follett’s contention that managers needed to coordinate and harmonize group efforts rather than force and coerce people. She developed the following four principles of coordination to promote effective work groups:33 1. 2. 3. 4.

Coordination requires that people be in direct contact with one another. Coordination is essential during the initial stages of any endeavor. Coordination must address all factors and phases of any endeavor. Coordination is a continuous, ongoing process.

Follett believed that management is a continuous, dynamic process in which new situations and problems are likely to arise as the LEARNING OBJECTIVE process is applied to solve a problem. She felt that the best decisions would be made by people who were closest to the decision situation. Consequently, she thought that it was inappropriate for managers to insist Describe the that workers perform a task only in a speciftheories of the ically prescribed way. She argued that submajor contributors ordinates should be involved in the decito the behavioral sion-making process whenever they are perspective of likely to be affected by the decision. Follett’s management. beliefs that workers must be involved in solving problems and that management is a dynamic process rather than a static principle are certainly in contrast to the earlier views of Taylor, Fayol, and Weber, but they are more consistent with contemporary management philosophy. Follett also made early contributions in the area of conflict management. She felt that managers could help resolve interdepartmental conflict by communicating with one another and with the affected workers. She recognized that conflict could actually be a positive force in an organization, for, if managed properly, it could serve as an integrating factor that stimulates production efforts.34

Elton Mayo Beginning in 1924, studies of several situational factors were being performed at the Western Electric Company’s plant in Hawthorne, Illinois. One of these experiments was designed to demonstrate that increased levels of lighting could improve productivity.35 Test groups and control groups were formed. The test group was

Part 1 Meeting the Challenges of the 21st Century

subjected to a variety of lighting conditions, while the control group operated under constant lighting conditions. The results demonstrated that when illumination 40 levels were increased, the productivity of the test group improved, as was expected. The experimenters were surprised, however, to find a similar increase in productivity when the test group’s level of illumination was dramatically decreased. Equally puzzling was the fact that the control group’s productivity also increased, even though its lighting conditions remained constant. Elton Mayo, a Harvard professor and management consultant, was brought in to investigate these puzzling results. After reviewing the results of these and other newly designed experiments, Mayo and his colleagues explained the results by what has come to be known as the Hawthorne effect. Productivity increases were being caused not by a physical event but by a human behavior phenomenon. Workers in both groups perceived that special attention was being paid to them, causing them to develop a group pride, which in turn motivated them to improve their performance. The Hawthorne studies revealed that factors not specified by management may directly influence productivity and worker satisfaction. It was found, for example, that an informal group leader in a task group may have more power among group members than the formal supervisor. Although the Hawthorne studies were conducted between 1924 and 1933, they did not have much impact until the 1950s because of world events (the Great Depression and World War II).36 It has been said that the Hawthorne studies “represent the transition from scientific management to the early human relations movement” and that they “brought to the forefront the concept of the organizaKEY TERMS tion as a social system, encompassing individuals, Hawthorne effect informal groups, and interThe phenomenon whereby group relationships, as well as individual or group perforformal structure.”37 In short, mance is influenced by the Hawthorne studies added human behavior factors. the human element to manTheory X agement thinking, an element Advocates that a manager that had been missing in the perceives that subordinates classical approaches to manhave an inherent dislike of agerial thought. work and will avoid it if possible. Douglas McGregor Theory Y Advocates that a manager perceives that subordinates enjoy work and will gain satisfaction from their jobs.

Douglas McGregor, whose background and training were in psychology, had a variety of experiences as a man-

ager, consultant, and college president. McGregor was not totally satisfied with the assumptions about human behavior that were to be found in the classical perspective and the early contributions to the behavioral perspective. His experiences and background helped McGregor formulate his Theory X and Theory Y, which pose two contrasting sets of assumptions with which managers might view their subordinates. Table 2.3 provides a summary of the assumptions inherent in these contrasting views.38 McGregor proposed that Theory X managers perceive that their subordinates have an inherent dislike of work and that they will avoid it if at all possible. This theory further suggests that subordinates need to be coerced, directed, or threatened to get them to work toward the achievement of organizational goals. Finally, Theory X assumes that subordinates have little ambition, wish to avoid responsibility, and prefer to be directed. Managers who subscribe to this theory are likely to exercise an authoritarian style, telling people what to do and how to do it. In contrast, Theory Y managers perceive that their subordinates enjoy work and that they will gain satisfaction from performing their jobs. Furthermore, this theory assumes that subordinates are self-motivated and self-directed toward achieving the organization’s goals. Commitment to the organization’s goals is a direct result of the personal satisfaction that they feel from a job well done. Finally, Theory Y assumes that subordinates will seek responsibility, display ambition, and use their imagination, creativity, and ingenuity when working toward the fulfillment of organizational goals. Managers who subscribe to Theory Y are likely to exercise a participatory style, consulting with subordinates, soliciting their opinions, and encouraging them to take part in decision making.39 In Chapter 1, we looked at the ways management and managers are changing. The greater reliance on employees as decision makers, problem solvers, and team players is a strong endorsem*nt for McGregor’s Theory Y assumptions. This chapter’s “Now Apply It” provides a selfassessment exercise that allows you to assess your own tendency toward Theory X or Theory Y assumptions. This exercise can be used to apply the theory to yourself and others with whom you work to assess your management styles.40

Chester Barnard Chester Barnard studied economics at Harvard, and although he never completed the requirements for his degree, he had a very successful management career. He started in the statistical department of AT&T, and by

Chapter 2 Evolution of Management Thought

Comparison of Theory X and Theory Y Assumptions

Table 2.3

41 Factor

Theory X Assumptions

Theory Y Assumptions

Employee attitude toward work

Employees dislike work and will avoid it if at all possible.

Employees enjoy work and will actively seek it.

Management view of direction

Employees must be directed, coerced, controlled, or threatened to get them to put forth adequate effort.

Employees are self-motivated and self-directed toward achieving organizational goals.

Employee view of direction

Employees wish to avoid responsibility; they prefer to be directed and told what to do and how to do it.

Employees seek responsibility; they wish to use their creativity, imagination, and ingenuity in performing their jobs.

Management style

Authoritarian style of management

Participatory style of management

Now Apply It Theory X and Theory Y Complete the following questionnaire. Indicate your agreement or disagreement with each of the statements by placing the appropriate number next to the statement. This is not a test, and there are no right or wrong answers. Use the following scale: Strongly Agree: 5; Agree: 4; Undecided: 3; Disagree: 2; Strongly Disagree: 1 _____ 1. Most people prefer to be directed and want to avoid responsibility. _____ 2. Most people can learn leadership skills regardless of their particular inborn traits and abilities. _____ 3. The best way to encourage high performance is by using rewards and punishment. _____ 4. A leader will lose influence over subordinates if he or she allows them to make decisions without direction and strict rules. _____ 5. A good leader gives detailed and complete

instructions to subordinates, rather than depending on their initiative to work out the details. _____ 6. Because groups do not set high goals, individual goal setting offers advantages over group goal setting. _____ 7. A leader should give subordinates only the information necessary for them to do their immediate tasks. _____ 8. People are bright, but under most organizational conditions, their potentials are underutilized. _____ 9. Most people dislike work and, when possible, avoid it. _____ 10. Leaders have to control, direct, and threaten employees to get them to work toward organizational goals. _____ 11. Most people will exercise self-direction and self-

control if they are committed to the objectives. _____ 12. People do not naturally dislike work; it is a natural part of their lives. _____ 13. Most people are internally motivated to reach objectives to which they are committed. _____ 14. People are capable of innovation in solving organizational problems. _____ 15. Most people place security above all other work factors and will display little ambition. Scoring key: Reverse score items 2, 11, 12, 13 (1 5 5, 2 5 4, 3 5 3, 4 5 2, 5 5 1). Sum all 15 items. A score of more than 55 indicates a tendency to manage others according to the principles in Theory X. A score of less than 35 indicates a tendency to manage others according to the principles in Theory Y. Scores between 35 and 55 indicate flexibility in the management of others.

Part 1 Meeting the Challenges of the 21st Century

1927 he had become the president of New Jersey Bell. Barnard made two major contributions to management thought: One dealt with the functions of executives, and 42 the other was his theory of authority. He felt that executives serve two primary functions. First, executives must establish and maintain a communications system among employees. Barnard regarded organizations as social systems that require employee cooperation and continuous communication to remain effective. Second, executives are responsible for clearly formulating the purposes and objectives of the organization and for motivating employees to direct all their efforts toward attaining these objectives. Barnard’s other major contribution was his theory on authority. According to Barnard, authority flows from the ability of subordinates to accept or reject an order. His acceptance theory of authority suggests that employees will accept a superior’s orders if they comprehend what is required, feel that the orders are consistent with organizational goals, and perceive a positive, personal benefit.41 Many management scholars consider Barnard the father of the behavioral approach to management. In fact, many believe that his work laid the foundation for several contemporary apLEARNING OBJECTIVE proaches to management. As the mid-20th century was approached on the time line shown in Figure 2.1, new problem-solving and decision-making tools were developed, givDescribe the ing rise to a quantitative perspective on characteristics of management. As you will see, the quantithe quantitative tative school provided managers with perspective of sophisticated new analytical tools and management. problem-solving techniques.

QUANTITATIVE PERSPECTIVE The quantitative perspective had its roots in the scientific management approaches and is characterized by its use of mathematics, statistics, and other quantitative techniques for management decision making and problem solving. The most significant developments in this school of thought occurred during World War II when military strategists had to contend with many monumentally complex problems, such as determining convoy routes, predicting enemy locations, planning invasion strategies, and providing troop logistical support.42 Such massive and complicated problems required more sophisticated decision-making tools than were available at that time. To remedy this situation, the British and the Americans assembled groups of mathe-

maticians, physicists, and other scientists to develop techniques to solve these military problems. Because the problems often involved the movement of large amounts of materials and the efficient use of large numbers of people, the techniques that they devised could be readily transferred from the military arena to the business arena. The use of mathematical models and quantitative techniques to solve managerial problems is often referred to as operations research. This term comes from the names applied to the groups of scientists during World War II (operational research teams in Great Britain and operations research teams in the United States).43 This approach is also referred to as management science in some circles. Regardless of the name, the quantitative perspective has four basic characteristics: Decision-making focus. The primary focus of the quantitative approach is on problems or situations that require some direct action, or decision, on the part of management. 2. Measurable criteria. The decision-making process requires that the decision maker select some alternative course of action. To make a rational selection, the alternatives must be compared on the basis of some measurable criterion, or objective, such as profit, cost, return on investment, or output rate, to name a few. 3. Quantitative model. To assess the likely impact of each alternative on the stated criteria, a quantitative model of the decision situation must be formulated. Quantitative models make use of mathematical symbols, equations, and formulas to represent properties and relationships of the decision situation. 4. Computers. Although many quantitative models can be solved manually, such a process is often timeconsuming and costly. Consequently, computers are quite useful in the problem-solving process (and often necessary for extremely complex quantitative formulations).44 1.

In the past few decades, giant strides in microchip capability have enabled computer sophistication to advance tremendously. Computer hardware that fits in the palm of one’s hand can outperform hardware that filled rooms a few decades ago. It has been said that today’s average consumers have more computing power in their wristwatches than existed in the entire world before 1961. Similarly, a host of quantitative decision-making tools evolved in this century, including such tools as linear programming, network models, queuing (waiting line)

Chapter 2 Evolution of Management Thought

Figure 2.4

Basic Structure of Systems 43 Inputs

Transformation Process

Outputs

Feedback

models, game theory, inventory models, and statistical decision theory.

SYSTEMS PERSPECTIVE An approach to problem solving that is closely aligned with the quantitative perspective is systems analysis. Because many of the wartime problems reflected exceedingly complex systems, the operations research teams often found it necessary to analyze them by breaking them into their constituent elements. Since any system is merely a collection of interrelated parts, identifying each of these parts and the nature of their interrelationships should simplify the modelbuilding process. Systems can be viewed as a combination of three building blocks: inputs, outputs, and transformation processes. These blocks are connected by material and information flows.45 Figure 2.4 illustrates the interaction of these blocks and flows. Although a more thorough discussion of inputs, outputs, and transformation processes can be found in Chapters 15 and 16, the basic components of the systems model can be briefly introduced here. Inputs can vary greatly depending upon the nature of the system. Such diverse items as materials, workers, capital, land, equipment, customers, and information are potential inputs. Outputs typically consist of some physical commodity or some intangible service or information that is desired by the customers or users of the system. The transformation process is the mechanism by which inputs are converted to outputs. We usually think in terms of a physical transformation process in which material inputs are reconfigured into some desired output. This scenario would be typical of a manufacturing system. Several other types of transformation processes are found in nonmanufacturing types of systems, however.46 For example, in a transportation or distribution system such as Delta Air Lines or United Parcel Service, the transformation process merely alters the location of the inputs, not their form. In storage systems such

as a U-Haul storage facility or a Bank of LEARNING America safety deposit box, the inputs OBJECTIVE change in the time dimension, but not in form or location. Feedback represents information about the status and performance of the system. Describe the Systems are often further distinguished systems by whether they interact with the external perspective environment. Open systems must interact building blocks and with the external environment to survive. their interactions. The interactions can be reflected in the exchange of material, energy, information, and so forth. Closed systems do not interact with the environment. In both the classical and early behavioral perspectives, systems were often thought of as closed. In fact, the quantitative perspective often uses a closed-system assumption to simplify problem structures. Nevertheless, the difficulty of totally eliminating environmental interactions KEY TERMS makes it hard to defend the Systems analysis concepts of open and closed An approach to problem systems in the absolute. Persolving that attacks complex haps more appropriately, we systems by breaking them might view systems as reladown into their constituent tively open or relatively elements. closed.47 Thus, we might think Input of the production department A diverse item such as mateof an organization as a relarial, worker, capital, land, tively closed system. It can equipment, customer, and manufacture products in a information used in creating continuous fashion while products and services. maintaining little interaction

with the external environment. Meanwhile, the marketing department would be more appropriately viewed as an open system because it must constantly interact with external

Output The physical commodity, or intangible service or information, that is desired by the customers or users of the system.

Part 1 Meeting the Challenges of the 21st Century

customers to assess their wishes and desires. Long-run organizational survival requires that all organizations have some interaction with the external environment; 44 therefore, it is appropriate to think of contemporary business organizations as open systems. Most complex systems are often LEARNING viewed as a collection of interrelated subOBJECTIVE systems. Because changes in any subsystem can affect other parts of the organization, it is crucial that the organization be managed as a coordinated entity. If decisions are made independently at the subsystem Discuss the nature of the contingency level, the organization as a whole will ofperspective of ten achieve less-than-optimal performanagement. mance. But when all organizational subsystems work together, the organization can accomplish more than when the subsystems are working alone. This property, in which the whole is greater than the sum of its parts, is KEY TERMS referred to as synergy. Another important propTransformation process erty of systems is entropy, The mechanism by which inwhich refers to their tendency puts are converted to outputs. to decay over time. As is the Feedback case with living systems, orgaInformation about the status nizations must continuously and performance of a given monitor their environments effort or system. and adjust to economic, soOpen system cial, political, technological, A system that must interact and global changes. Survival with the external environment and prosperity often require to survive. that new inputs be sought. A system that does not continuClosed system ally receive inputs from its enA system that does not intervironment will eventually die. act with the environment. Synergy A phenomenon whereby an organization can accomplish more when its subsystems work together than it can accomplish when they work independently. Entropy The tendency for systems to decay over time. Contingency perspective Perspective on management proposing that the best managerial approach is contingent on key variables in a given organizational situation.

CONTINGENCY PERSPECTIVE In the 1960s, managers were becoming increasingly aware that the effectiveness of different management styles varied according to the situation. With this awareness came the emergence of the contingency perspective, which proposes that there is no one best approach to management. This perspective recog-

A manufacturing system represents the transformation process in which inputs are converted to outputs.

nizes that any of the four previously discussed management perspectives might be used alone or in combination for different situations.48 In the contingency perspective, managers are faced with the task of determining which managerial approach is likely to be most effective in a given situation. This requires managers to first identify the key contingencies, or variables, in the given organizational situation. For example, the approach used to manage a group of teenagers working in a fast-food restaurant would be quite different from the approach used to manage a medical research team trying to discover a cure for AIDS. The young fast-food worker might best be managed in a classical, authoritative style. Bureaucratic rules and regulations might be put in place to guide all worker actions and behaviors. Scientific management principles would probably be used to define the best way to perform each work task. Variation from the prescribed method would not and probably should not be tolerated in this situation. This is not the time or place to experiment with different ways to fry the burgers or mix the shakes! It is doubtful that the medical research team would succeed under this approach to management. The team is faced with a very complex, unstructured endeavor that will require the team members to bring together all of their unique problem-solving skills. Such a situation requires that the team be given the autonomy to try out different solutions, pursue different avenues, and take risks that would simply be out of the question for the teenaged burger flippers.

Chapter 2 Evolution of Management Thought

Table 2.4

Production Technology Examples 45

Production Technology

Examples

Small-batch technology

Custom-fabrication machine shop, manufacturer of neon advertising signs, print shop specializing in personal business cards, trophy-engraving shop

Mass-production technology

Manufacturer of automobiles, manufacturer of refrigerators, manufacturer of hair dryers, manufacturer of pencils

Continuous-process technology

Oil refinery, flour mill, soft-drink bottler, chemical processor

Because the contingency perspective proposes that managerial style is situation specific, it has not yet developed to the point where it can dictate the preferred way to manage in all situations. A particularly important factor to consider in the contingency approach is the type of technology being used by the organization. In pioneering contingency studies conducted in the 1960s, Joan Woodward discovered that a particular managerial style was affected by the organization’s technology. Woodward identified and described three different types of technology: 1.

Small-batch technology. Organizations of this type exhibit job-shop characteristics in which workers produce custom-made products in relatively small quantities. Mass-production technology. Organizations of this type exhibit assembly-line characteristics in which standardized parts and components are used to produce large volumes of standardized products. Continuous-process technology. Organizations of this type have a process in which the product flows continuously through the various stages of conversion.

The level of human interaction varies with each of these technology types. Small-batch technology tends to have the most human involvement (that is, it is the most labor intensive) due to the customized outputs. Massproduction technology tends to have less human involvement due to the automated and robotic equipment that typifies assembly-line operations. Continuous-process technology has the lowest level of human involvement as the product flows through the stages of conversion. Consider, for example, how little hands-on human involvement is needed in an ExxonMobil oil refinery as crude oil flows through the various processing stages on its way to becoming gasoline. Examples of each of these production technologies appear in Table 2.4, and all three are discussed more thoroughly in Chapter 16.49

Some of Woodward’s findings showed that bureaucratic management methods were most effective in organizations using mass-production technology. Conversely, organizations using small-batch and continuous-process technologies had little need for the formalized rules and communication systems of the bureaucratic style.50 Continued studies of this type will fill in all the gaps and eventually provide more definitive guidelines as to which managerial style is desirable for a particular situation. Other important factors to consider in defining the contingencies for each situation include environment, organizational size, and organizational culture.51 For example, large organizations may find it necessary to use more structured and rigid rules, regulations, and policies to control organizational activities. On the other hand, smaller organizations may find that they can rely less on the formal structure and allow workers the autonomy to make decisions for the situations and problems that they encounter. In this example, the larger organization would undoubtedly tend toward a more bureaucratic management style, while the smaller organization would display a more behavioral orientation. As Figure 2.5 shows, parts of all of the management perspectives that we have examined might be combined to form a contingency approach.

Information Technology and Management Style In recent years, we have all been witness to the tremendous advances that have occurred in the systems and devices that can process, disseminate, and transfer information. Each of our lives has been affected by cell phones, micro-

Part 1 Meeting the Challenges of the 21st Century

Figure 2.5

Blending Components into a Contingency Perspective

46 Classical Perspective

Behavioral Perspective

Contingency Perspective

Quantitative Perspective

computers, fax machines, specialty software packages, and access to information on the Internet. These same devices and systems can have a profound effect on the choice of a management style. In many instances, they can facilitate the adoption of a particular style. The most obvious areas in which technological advances in information processing facilitate the use of a particular style are the quantitative and systems perspectives. The geometric increase in microchip processing capability makes it easier to develop ultrasophisticated quantitative models of complex management systems. Rapid processing and feedback of information in these system models allow the organization to be managed as a coordinated entity. Perhaps less obvious is the impact that information-processing technology has on the subfields of the classical perspective on management. For ex-

Systems Perspective

ample, classical theories might suggest how many workers should report to a single superior (span of control) and how many hierarchical levels of authority are needed in a particular organization. But these can be altered when each employee has at his or her disposal devices that relay critical decision-making information. In addition, the centralization principle of Fayol may not be desirable in these new situations. When low-level workers are empowered to make decisions and have the needed information readily available, it is not necessary for all decisions to be made at upper levels of management. But technological advances can be a two-edged sword. In addition to facilitating the adoption of a particular management style, they may, at times, force a change. This was the situation at United Parcel Service (UPS) in recent years. The additional workload and

Chapter 2 Evolution of Management Thought

stress to drivers brought on by a new, computerized package-tracing system forced UPS to ease up on its traditional bureaucratic management style.52

Future Issues: Diversity, Globalization, and Quality As you might expect, the theories and ideas that have emerged thus far do not represent the end of the road in the evolution of management thought. The economic, social, political, technological, and global forces that influence management thinking continue to change. A major trend in recent years has been heightened concern for diversity within the workplace. The workforce has become increasingly more varied, and the number of minority-owned businesses has continued to increase. Census Bureau data indicate that the recent growth rate of Hispanic-owned businesses in the United States is triple that of general business growth. In the words of one Commerce Department official, “Entrepreneurship is the flame that heats the American melting pot; it is the vehicle through which racial and ethnic minorities can enter the American mainstream, and it is visibly their most productive method for doing so.”53 The ranks of management need to exhibit a level of diversity that is similar to these levels of workforce and entrepreneurial diversity. Diversity within an organization can have an added side benefit. When government contracts stipulate that minority suppliers must be used, businesses displaying cultural, ethnic, and gender diversity stand a better chance of winning government business. In recent years, Japanese management styles have received considerable scrutiny due to the tremendous successes achieved by Japanese industries. Most readers are surely aware of the degree to which the Japanese have taken control of the global automobile and electronics markets. This success has been achieved in part because of a managerial philosophy that is committed to quality and a just-in-time operating philosophy (a concept that is treated in more detail in Chapter 16).54 This is a concept that has been adopted by virtually all of the world’s other automobile manufacturers. Its benefits are not limited to automakers, however. Many other industries have successfully adopted its principles. The successes of the Japanese management style are not due entirely to the technical operating system, however. Many aspects of the Japanese management style follow the prescriptions for successful management in the

21st century that were discussed in Chapter 1. A focus on quality is certainly central to the Japanese style. It is somewhat ironic that the Japanese emphasis on quality 47 was a result of the teachings of the noted American quality philosophers W. Edwards Deming and Joseph Juran. Another noted American, Armand Feigenbaum, originated the concept of total quality control, which was quickly adopted by the Japanese. LEARNING Many American firms have now embraced OBJECTIVE the concept of quality and have been successful enough to win the coveted Malcolm Baldrige National Quality Award. Some of the more recognizable recent winners of this Discuss the future award include AT&T, Cadillac, Corning, issues that will Eastman Kodak, Federal Express, GTE, IBM, affect the further Motorola, Ritz-Carlton Hotels, Texas Indevelopment of 55 struments, Westinghouse, and Xerox. management It would be difficult to dispute that the thought. Japanese maintain a global focus. Although not as apparent to observers from abroad, their management style also incorporates the concept of workers as decision makers, problem solvers, and team players. These were all identified in Chapter 1 as keys to operating successfully in the 21st century. It should also be noted that the Japanese management style embraces aspects from several of the historically evolving management perspectives discussed in this chapter. The Japanese philosophy includes a strong behavioral component because it recognizes the importance of workers as decision makers and problem solvers. There is also a hint of bureaucratic management in the Japanese philosophy with its tradition of lifelong career commitment to employees. But even that is in a state of evolution. The mounting pressure to streamline in the increasingly competitive global business environment is causing many Japanese organizations to abandon the lifetime employment concept.56 In this chapter’s closing “Meeting the Challenge,” you will learn of Sony’s decisions to terminate many employees in an effort to regain profitability. The Japanese management style spawned the development of Theory Z by William Ouchi, a contemporary management scholar.57 Theory Z is a management approach that advocates trusting employees and making them feel like an integral part of the organization. According to the theory, once a trusting relationship is estab- KEY TERMS lished with workers, producTheory Z tion will increase. Advocates that a manager Many question whether places trust in the employees the Japanese management style and makes them feel like an has developed and evolved integral part of the to the point where it can be organization. considered a major school of

Part 1 Meeting the Challenges of the 21st Century

Meeting The Challenge Sony Makes an Historic Leap hen the announcement hit the newswires on March 7, 2005, it was like a bombshell blast in the electronics industry. The Sony Corporation proposed the creation of a new management structure and a new management team to lead the company. Most notable among the changes was the replacement of Chairman and CEO Nobuyuki Idei with Sir Howard Stringer, the first non-Japanese person to assume the helm of the company. Stringer, a native of Wales with dual British and U.S. citizenship, doesn’t even speak the Japanese language! A few years earlier he had become the first non-Japanese member of the board, placed there in 2003 when the “Sony Shock” of missed profits drove down its share price. Stringer is a former TV journalist, having joined Sony from CBS. He turned around Sony Pictures and then took over control of first the music side of Sony in the United States, then entertainment globally. Where Stringer had recently ruled (in music and pictures), there had been a remarkable turnaround at Sony. Between the beginning of 2002 and early 2005, Sony Pictures Entertainment films generated more than $8 billion in worldwide ticket sales through a steady series of hits. During that span of time, Sony produced 26 films that were number 1 at the box office. The next closest studio had only 15. Under Stringer’s watch, Sony Music was successful in cutting costs and becoming profitable. Upon assuming his new leadership role, Stringer articulated two main goals: (1) to simplify Sony’s management so that it can start making electronic devices

management thought. Perhaps the bigger question is whether we should be calling this style “Japanese management” or something else. Much of what we call the Japanese management philosophy originated in the Japanese automobile industry. However, these manufacturers readily admit that most of their technical innovations and ideas were borrowed from the methods used by U.S. automobile manufacturers in the heyday of Henry Ford. The Japanese simply refined these technical practices and principles, as they did the behavioral and classical components that form the total package. With this awareness, perhaps a name other than “Japanese management” would be more appropriate. Whatever the name, we must still ask whether this management style has evolved to the point where it can be considered a major school of management thought. Probably not yet, for it still must stand the test of time. Nevertheless, in time this philosophy or another might be more thoroughly developed and added to the list of major management schools of thought. Any new philosophy that emerges will undoubtedly contain bits and pieces from

more profitably and (2) to solve the long-running puzzle of how to make Sony’s gadgets and content work together compellingly enough that consumers will pay a premium price for them. “I have said before that without content, most gadgets are just junk,” said Stringer. To facilitate the accomplishment of the first goal, cost-cutting measures would have to be implemented. Some of those cost-cutting measures would be tactics that were foreign to the Japanese management style. Employees would have to be terminated, possibly by as many as 10,000 in Japan alone. Additional options included the abolishment of seniority-based salary systems and the implementation of a U.S.-style incentive pay program based on performance. Industry analysts observed that Stringer’s second goal could only be accomplished if he knocked down the walls of each division’s fiefdom and achieved better integration between Sony’s entertainment services and its consumer electronic devices. This is precisely what Stringer himself envisioned when he commented that “together we look forward to joining our twin pillars of engineering and technology with our commanding presence in entertainment and content creation to deliver the most advanced devices and forms of entertainment to the consumer.” Will Stringer’s management style and changes reverse Sony’s fortunes? Only time will tell. However, if his proven track record of success is any indicator, chances are good that Sony will once again rise to a preeminent position in the consumer electronics industry.58

prior theories, but these will most assuredly be combined with new elements that have evolved in response to political, economic, social, technological, and global influences. Each era presents new problems and challenges, and new management styles arise to deal with them.

Implications for Leaders Over the years, management theorists have developed several views on the best way to manage an organization. Each of these views is based on differing assumptions about organizational objectives and human behavior. To demonstrate quality in the management of an organization, it is important that leaders use the appropriate

Chapter 2 Evolution of Management Thought

management approach. Therefore, tomorrow’s leaders must be • Thoroughly schooled in the different management perspectives that have evolved over the years. • Able to understand the various economic, political, social, technological, and global influences that have affected management thinking over the years and will continue to shape future evolutionary changes in management thought. • Capable of identifying and understanding such key variables as environment, production technology, organization culture, organization size, and international culture as they relate to the organization. • Prepared to select elements from the various management perspectives that are appropriate for the situation.

•

Adaptable to change because future conditions and developments can quickly render the chosen approaches obsolete.

In this chapter, we toured the major historical developments in the evolution of management thought. We saw the emergence of five major perspectives on management and many subfields within those major classifications. This march through time has revealed that certain aspects of every one of these evolutionary views are still appropriate for use in both today’s and tomorrow’s organizations. The successful leaders of tomorrow will be the ones who can blend together the appropriate components from the wide body of management theory.

SUMMARY 1. As agricultural societies were transformed into industrial societies as a result of the Industrial Revolution, managerial thinking was shaped by a variety of economic, political, social, technological, and global influences. Such influences continue to affect the way in which leaders function.

2. In the past century, five major perspectives of management thought have evolved: the classical, behavioral, quantitative, systems, and contingency perspectives. The classical perspective developed in the later part of the 19th century and the first part of the 20th century. The behavioral perspective began to evolve in the first third of the 20th century. Development of the quantitative perspective began in earnest during World War II. The systems perspective began to evolve in the 1950s, and the contingency perspective is the most recent, having begun in the 1960s.

3. The classical perspective includes scientific management, administrative management, and bureaucratic management subfields, each of which has a different focus. Scientific management focuses on the improvement of individual worker productivity. Time-and-motion studies observe and measure a worker’s physical movements in order to determine the best way of performing a task. The expectation in scientific management is that managers will develop standard methods for performing each

job, select workers with the appropriate abilities for each job, train workers in standard methods, and support workers by planning their work. Scientific management proponents believe that financial incentives are the major motivating factor that will induce workers to produce more. Administrative management focuses on the managerial process and the functions of the manager. Fayol identified planning, organizing, leading, coordinating, and controlling as the basic managerial functions. Bureaucratic management has as its primary focus the overall structure of the organization. This subfield emphasizes the division of labor into specialized tasks, a hierarchy of authority in which power and authority increase at higher levels of the organization, a comprehensive set of rules and procedures for performing all organizational duties, a climate of impersonality in which personal favoritism is to be avoided, and an employee selection and promotion process that is based on technical competence and performance.

4. The behavioral perspective of management had several major contributors. Mary Parker Follett emphasized the importance of coordination and harmony in group efforts. Elton Mayo recognized that the human element could play a significant role in determining worker behavior and output. Douglas McGregor proposed Theory X and Theory Y to explain employee attitudes and behavior. Chester Barnard examined the

Part 1 Meeting the Challenges of the 21st Century

functions of executives. He contended that executives are responsible both for establishing and maintaining a communications system among employees and for clearly formulating the purposes and objectives of the organization and motivating employees toward attaining those objectives. Barnard also contributed an acceptance theory on authority, which was a new way of describing how subordinates accept or reject orders from their superiors.

5. The major impetus for the emergence of the quantitative perspective of management was World War II and the many monumentally complex problems associated with the war effort. The quantitative perspective has a decision-making focus in which an alternative course of action must be selected as a solution to some problem. It requires the establishment of some measurable criteria so that alternatives can be compared prior to selection. Quantitative models are used to assess the impact of each alternative on the stated criteria, and computers are often helpful in the problem-solving process.

6. The systems perspective takes a set of inputs and subjects them to some transformation process, thereby generating some type of output. Inputs, transformation processes, and outputs can be quite varied, but the basic structure remains the same. Throughout this process, feedback loops constantly filter information about the status and performance of the system.

7. The contingency perspective of management suggests that there is no one best approach to management. It is a situational approach because the proper managerial style depends on the key variables, or contingencies, within the given situation.

8. In the future, cultural, racial, and gender diversity will have a huge influence on management thinking. In addition, quality and globalization will have an enormous impact on how businesses and industries are managed.

REVIEW QUESTIONS 1.

Describe the major factors that have influenced the evolution of management thought. 2. (LEARNING OBJECTIVE 2) Identify the five major perspectives of management thought. 3. (LEARNING OBJECTIVE 3) Describe the central focus of the scientific management, administrative management, and bureaucratic management subfields of the classical perspective on management. 4. (LEARNING OBJECTIVE 4) Describe the major behavioral perspective contributions of Follett, Mayo, McGregor, and Barnard. (LEARNING OBJECTIVE 1)

Discuss the four basic characteristics of the quantitative perspective of management. 6. (LEARNING OBJECTIVE 6) Describe the various building blocks of a systems perspective and indicate how they interconnect and interact. 7. (LEARNING OBJECTIVE 7) What is the main contention of the contingency perspective of management? 8. (LEARNING OBJECTIVE 8) What future issues are likely to affect further development of management thought? (LEARNING OBJECTIVE 5)

DISCUSSION QUESTIONS Improving Critical Thinking 1. Reexamine Weber’s characteristics of a bureaucracy and Taylor’s opinions in the areas of task performance, supervision, and motivation. Discuss aspects of their views that are similar in nature.

2. Some suggest that Japanese management is just the same old stuff in a new package, whereas others suggest that this style is a new and different departure. Provide arguments in support of both of these views.

Chapter 2 Evolution of Management Thought

Enhancing Communication Skills 3. In your own life experiences, you probably have had some occasion to use aspects of the scientific management approach. Try to recall some physical task that you analyzed to determine the best or most efficient way to perform it. To enhance your oral communication skills, prepare a short (10–15 minute) presentation for the class in which you describe that task and the results of your analysis.

4. Based on your personal observations of well-known authority figures, identify at least two authority figures in each of Weber’s authority types (traditional, charismatic, and rational–legal). To enhance your written communication skills, write a short essay describing these authority figures and why you classified each of them as you did.

Building Teamwork 5. Have you ever been influenced by the Hawthorne effect? Try to recall some incident in which your

performance was affected because you knew you were being watched. To refine your teamwork skills, meet with a small group of students who have been given this same assignment. Compare and discuss your experiences and then reach a consensus on the group’s two most interesting experiences with the Hawthorne effect. The group members whose experiences were judged the most interesting will act as spokespersons to describe these experiences to the rest of the class.

6. Try to recall an encounter that you have had with a bureaucratic organization. Think about both the positive and negative aspects of that experience. To refine your teamwork skills, meet with a small group of students who have been given this same assignment. Compare and discuss your experiences and then reach a consensus on which two experiences represented the most rigid and unwavering bureaucratic response from the organizations. The group members whose experiences were judged to have the most rigid bureaucratic response will act as spokespersons to describe these experiences to the rest of the class.

THINKING CRITICALLY: DEBATE THE ISSUE Bureaucratic Management—Good or Bad? Form teams of four or five students as directed by your instructor. Research the topic of bureaucratic management, identifying both its positive and its negative

aspects. Look for situations in which it works effectively and others in which it seems to be ineffective. Prepare to debate either the pros or cons of this approach. When it is time to debate this issue in front of the class, your instructor will tell you which position you will take.

EXPERIENTIAL EXERCISE 2.1

Theory X and Theory Y

Purpose: To give class members an opportunity to reflect on McGregor’s Theory X and Theory Y concepts. Procedure: Perform the following five steps. Step 1. Divide the class into small teams of approximately three to five students per group. Step 2. Based on team members’ personal observations of businesses with which they have interacted, have each team identify a business where employees seem to fall

into McGregor’s Theory X category and one where employees seem to fall into his Theory Y category. Step 3. Have each team present its observations to the entire class. Step 4. Identify all examples that exhibited overlap among teams. Step 5. Identify whether the overlapping businesses were categorized the same or differently. When differences occurred, try to have the selecting teams explain those differences.

Part 1 Meeting the Challenges of the 21st Century

2.2 52

Fayol’s Principles versus Woodward’s Technology Types: How Do They Fit?

Purpose: To assess how well each of Fayol’s 14 principles fits with Woodward’s three technology types. Procedure: Perform the following three steps. Step 1. Construct a matrix containing 14 rows and 3 columns. Label each of the rows with one of Fayol’s principles and each of the columns with one of Woodward’s technology types. Step 2. Place a rating between 1 and 10 in each of the cells of the matrix. The rating in a cell is to be your subjective

assessment of how well the principle identified by the row fits or applies to the technology type identified by the column. A rating of 1 indicates the least applicable (or worst fit), and a rating of 10 indicates the most applicable (or best fit). Since your ratings for a principle might vary for different companies in the same technology type, try to make each rating an average of your observations, experiences, or knowledge of different companies in each technology type. Step 3. With the aid of your instructor, assemble the ratings from your classmates who have had this same assignment. Compute a class mean rating for each cell of the matrix.

ETHICS: TAKE A STAND In the continuing evolution of management thinking, much attention is currently being paid to what is called the “Japanese style of management,” which is often associated with a just-in-time (JIT) operating philosophy. In a manufacturing environment, JIT proposes many departures from the traditional Western way of operating. In a high-volume, repetitive manufacturing environment, one of the traditional Western ways of thinking advocates a division of labor coupled with a highly specialized workforce. Worker responsibilities are often very narrowly defined, and each worker’s skill expectations are quite specific. In fact, over the years, union contracts have often evolved that specify precisely what a worker can and cannot be expected to do.

The emerging JIT philosophy holds that there is no room in such an environment for highly specialized workers. Instead, multiskilled, cross-trained workers are essential to make the system operate effectively. Often, long-time, specialized workers find that they are out of their element in such situations and are in danger of being phased out. For Discussion

1. Discuss the ethical issues and dilemmas when workers no longer fit the mold.

2. Discuss potential remedies for this problem.

Chapter 2 Evolution of Management Thought

CASE

Leon Neon Shortly after Jose Leon arrived in South Florida among a boatload of Cuban immigrants in 1995, his Miami relatives found a job for him as an apprentice in a local custom glass–manufacturing company. Leon learned the tricks of the trade quite quickly, and within a few years, he was a master at glass blowing, bending, and shaping. Leon was his own boss when he was a farmer in his native Cuba, and he yearned for that same independence in his newly adopted country. By 2000 he was ready to make the leap into entrepreneurship. Recognizing the great need for neon advertising signs and displays in the South Florida area, Leon decided to put his glass-making skills to work. In June 2000 the Leon Neon Company was born when Jose opened a custom neon sign–manufacturing shop. With the help of two apprentices, Leon proved to be very adept at crafting neon signs that many considered to be works of art. Within 2 years, demand for Leon Neon products became so great that Leon found it necessary to move to a larger location and at the same time expand his workforce. Eight glass craftsmen, most of them friends and acquaintances from Leon’s former workplace, were brought into the Leon Neon family. From that point forward, more and more of Leon’s time was devoted to managing his business, and less and less of his time was devoted to his craft. Because each neon sign had unique features for specific customers, the signs could not be manufactured in an assembly-line fashion. Instead, Leon designed small work pods where individual craftsmen would perform the variety of tasks necessary to produce a sign. For example, workers would heat, bend, and shape glass tubing, insert electrical connections, inject the illuminating gasses, and seal off the open ends of the tubing. Leon gave the workers complete autonomy to decide how they would perform these tasks. Early operations of Leon Neon did not go as smoothly as Jose had planned. He noticed that workers seemed to vary considerably in the way they performed these routine tasks; consequently, there was no way to predict accurately the amount of time it would take to manufacture a specific sign. Many times Leon would observe his workers and say to himself, “I wonder what would possess someone to do it that way.” When he asked one of his workers why he was performing a particular task the way he was, the worker responded, “Nobody ever sat us down and told us there was a perfect way.” For Discussion

1. Do you think that Jose Leon provided his workers with too much autonomy in selecting work procedures?

2. Review the principles of scientific management and discuss how they might be used to improve the task performance of Leon Neon workers.

Part 1 Meeting the Challenges of the 21st Century

VIDEO CASE 54

Sunshine Cleaning Systems, JIAN, and Archway Cookies— Evolution of Management Thought During this century, business leaders and management theorists have continually asked the question, “What is the best way to manage?” A search for the answer to this question has revealed that there is no “one best way” to manage. Instead, a variety of management techniques and viewpoints have proven effective. Through experience, business leaders have found three of the most effective viewpoints are found in the behavioral perspective, the contingency perspective, and the quality focus. The success of an individual firm often hinges on its business leaders’ abilities to match its unique circ*mstances to an appropriate overall management viewpoint. Sunshine Cleaning Systems, JIAN, and Archway Cookies are organizations that are leaders in their respective industries. Each company effectively has applied a different overall management viewpoint to create a successful organization. Sunshine Cleaning Systems, which emphasizes the behavioral perspective, is a privately held company with annual revenues of $10 million. The company, founded in 1976 by former major league baseball player Larry Calufetti, employs approximately 1000 people and offers janitorial services, pressure cleaning, and window cleaning. The company sees itself as a “people business” because cleaning is a labor-intensive business requiring a highly dedicated workforce for the company to succeed. To nurture and motivate its employees, Sunshine employs a supportive management style dedicated to helping employees become proficient at and feel good about their jobs. They respect their employees, train them, and establish a mutual trust. As a result, Sunshine has developed a highly dedicated workforce that maximizes its abilities and provides their clients an exemplary level of customer service. Sunshine believes its focus on and support of its employees has enabled the company to achieve these impressive results in a highly competitive industry. JIAN Corporation is an innovative software company located in the Silicon Valley of northern California. The company, created in 1988 by Burke Franklin, is a leader in producing software products for emerging and established businesses. His first product (BizPlan Builder) has sold more than 300,000 copies. JIAN is in a highly competitive industry that requires the firm to respond quickly to changing market demands. As a result, the firm has adopted the contingency approach to management, taking into account changes in important environmental variables: external environment and entrepreneurial employees. To build on JIAN’s strengths, Franklin created a virtual corporation by establishing close partnerships with Bindco and ExecuStaff. Bindco manufactures and distributes JIAN products worldwide, and ExecuStaff provides human resource functions such as recruiting and hiring JIAN employees. Thus, JIAN can maintain a small headquarters staff who concentrate on developing and marketing new software products. JIAN has established a culture of collaberation, teamwork, and open communications enabling it to respond quickly to frequent market changes. Archway Cookies has built its success by emphasizing quality. The company (third largest cookie manufacturer in the United States) manufactures and markets high-quality home style–baked products sold fresh by baking, packaging, and distributing the cookies within 48 hours. This gives Archway a quality advantage over competitors who store their cookies in warehouses before distributing them. Archway’s philosophy on quality is a key part of its mission and culture. Archway managers assert that their employees are an integral part of Archway’s success. Their employees are dedicated to producing high-quality, good-tasting cookies; many employees have worked for Archway all of their working lives. Archway carefully monitors quality in all areas of their operations. For example, they carefully train their employees, monitor the quality of their suppliers’ operations and ingredients, and test the moisture content, color, size, and texture of the cookies. They keep a sample of each batch of cookies to test for shelf

Chapter 2 Evolution of Management Thought

life and to make sure that they don’t run into any unforeseen problems. Archway asserts the ultimate test of quality is how the cookies taste. Sunshine Cleaning Systems, JIAN, and Archway Cookies emphasize various management practices. Their successes have depended largely on their business leaders’ abilities to match their unique characteristics to appropriate management viewpoints. For Discussion

1. Do you believe the leaders of Sunshine Cleaning Systems, JIAN, and Archway Cookies have selected appropriate management viewpoints for their respective firms? Why or why not? How does a firm know if it has selected the wrong approach?

2. How do environmental factors of management thought appear to impact Sunshine, JIAN, and Archway’s managerial approaches?

3. Will a firm’s management viewpoint remain stable over the life of the firm, or should a firm be continually reviewing its approach to management? Explain your answer.

4. Do you see evidence of management viewpoints other than the dominant ones noted in the case or video? Provide examples of other viewpoints illustrated in the three companies.

Chapter

Social Responsibility and Ethics

CHAPTER OVERVIEW As discussed in Chapter 1, ethical behavior of top-level managers, or more likely unethical behavior, continues to get attention. Almost every day brings reports about the latest company that restated its earnings because of questionable accounting practices or about the progress of court cases against former highlevel managers.1 Obvious relationships exist between ethical behavior and social responsibility. For example, some consider it unethical and socially irresponsible for a company to outsource operations and jobs from the United States to another country. The views and beliefs that managers have about social responsibility and ethics are very likely to influence the decisions they make in managing organizations. Managers must know what their views and beliefs are. That is why we discuss social responsibility and ethics before discussing the functions that managers perform.

Presenting social responsibility before ethics seems logical in that social responsibility is a broader issue, many times resulting from the ethical perspectives and values of the people in organizations. To set the framework, we begin with a discussion of the stakeholder view of the firm. With that foundation, we explore the concept of social responsibility, examine four perspectives of social responsibility, and consider strategies for approaching social issues. In addition, recommendations for developing a socially responsive position are offered. With regard to ethics, we consider values and the role that they play in shaping one’s ethical behavior. Approaches for addressing ethical dilemmas are discussed as well. Our examination of ethics concludes with a discussion of ways to encourage and support ethical behavior in an organizational environment. Implications for tomorrow’s managers are also discussed.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Discuss the stakeholder view of the firm and the impact of the globalization of business on social responsibility and ethics. 2. Describe the concept of corporate social responsibility and the primary premises on which it is based. 3. Distinguish between the four perspectives of corporate social responsibility. 4. Identify and evaluate approaches for responding to social issues. 5. Explain what values are, how they form the basis of an individual’s ethical behavior, and how they may vary in a global business environment. 6. Describe how advances in information technology have created new ethical challenges. 7. Identify and discuss the differences in the utility, human rights, and justice approaches to ethical dilemmas. 8. Explain the methods used by organizations to encourage ethical organizational behavior. 9. Describe the different approaches used in ethics-training programs. 10. Discuss what is meant by whistle-blowing in monitoring ethical behavior.

Part 1 Meeting the Challenges of the 21st Century

Facing The Challenge General Electric: Social Responsibility and Ethics or essentially all of its life, General Electric Corporation (GE) has been well known and continues to be one of the most admired companies in the world. Its previous CEO, Jack Welch, is still considered to be one of the best managers ever, if not the best. Fortune magazine named him “manager of the century” in 1999. There was good reason for the popularity and prominence of GE and Jack Welch. Welch was a strong believer in the things that lead to profitability and high returns for stockholders. In the 20 years that he was CEO, he led the company from a market value of $14 billion to $400 billion. The company continues to have the highest market value of any company in the world. How then can one explain why GE was ranked 72nd in social responsibility in a survey conducted of investors, high-level managers, activists, and regulators in the United States and Europe? But is that a problem? GE is still very successful financially. GE has been involved in some practices that are considered questionable; the most notable case is the

Introduction If you are asked to list a company that is known for socially responsible and ethical behavior, General Electric probably would not be the name that came to mind first. (See “Facing the Challenge” box.) In recent years, the company has Discuss the been in the news because of a few things, stakeholder view of especially the slow cleanup of PCBs that the firm and the it dumped into the Hudson River in the impact of the past. However, under the leadership of globalization of its CEO, Jeffrey Immelt, General Electric business on social responsibility and is engaging in many actions that can ethics. easily be labeled as good corporate social responsibility and very ethical. Not everyone will agree about overall level of corporate KEY TERMS the social responsibility and ethical behavior in which General Stakeholders Electric is engaging, but the All those who are affected by company is an example of or can affect the activities of one that is making a very the organization. LEARNING OBJECTIVE

dumping of PCBs, a very toxic substance to people and animals, into the Hudson River over many years. Perhaps more troublesome is the company’s slow pace in cleaning it up. GE’s conducting business with the country of Iran is considered questionable by some also. Jack Welch was known for being a very successful manager and being extremely successful in increasing the financial value of GE. He was not necessarily known for making GE a leader in corporate social responsibility. The current CEO, Jeffrey Immelt, is trying to change that. Is that a good move?

Sources: D. Corbett, “Excellence in Canada: Healthy Organizations Achieve Results by Acting Responsibly,” Journal of Business Ethics 55, no. 2 (December 2004): 125; “Money and Morals at GE,” Fortune, 15 November 2004, 176–182; J. Veiga, “Bringing Ethics into the Mainstream: An Introduction to the Special Topic,” Academy of Management Executive 18, no. 2 (May 2004): 37–38.

serious effort to combine being profitable with being socially responsible and ethical. As we examine social responsibility and ethics, you will see examples that illustrate the benefits of responsible and ethical behavior as well as others that illustrate the negative consequences of irresponsible or unethical behavior. First, however, we must answer a very important question: To whom is business responsible? (Although the ideas discussed apply to all types of organizations, it is easier to discuss the issues by focusing on businesses.) Is it the stockholders of the company? The customers? The employees? Answering this question requires an understanding of the stakeholder view of the firm.

Organizational Stakeholders in a Global Environment Central to the issues of social responsibility and ethics is the concept of stakeholders. Stakeholders are all those who are affected by or can affect the activities of the organization. Although it has long been accepted that a business must be responsible to its stockholders,

Chapter 3 Social Responsibility and Ethics

contemporary social responsibility theory maintains that a business has obligations to all of its stakeholders. This perspective broadens the scope of the business’s obligations beyond a relatively narrow group of shareholders to a much broader set of constituents that includes such groups as government, consumers, owners, employees, and communities throughout the globe. 2 Figure 3.1 illustrates the various groups that can be stakeholders in a given organization. The primary stakeholders are those that have a formal, official, or contractual relationship with the organization. They include owners (stockholders), employees, customers, and suppliers. Peripheral to this group are the secondary stakeholders. This includes other societal groups that are affected by the activities of the organization, and in turn, can have an impact on the organization. Consider, for example, which might represent primary and secondary stakeholders for your college or university. As a student, are you a primary or secondary stakeholder? What about the employers in your community? Are they primary or secondary stakeholders? What about Wal-Mart’s stakeholders? Which stakeholders were affected by General Electric’s actions?

As organizations become involved in the international business arena, they often find that their stakeholder base becomes wider and more diverse. Organizations that must cope with stakeholders from across the globe face special challenges that require a heightened sensitivity to and awareness of economic, political, and social differences among groups. For example, international businesses must be responsive to customers with very different needs, owners with varied expectations, and employees with distinct and perhaps dissimilar motivations.3 Dealing effectively with such groups requires a focus on understanding the global nature of stakeholders and developing strategies that recognize and respond to such differences. As an example of the challenges that come from managing within an international environment, consider the controversy over purchasing products from economically depressed nations. Many people believe that big U.S. corporations take advantage of poorer nations and exploit their labor by purchasing goods at an unreasonably low price. With the stakeholder view of the organization in mind, let’s move on to examine the concepts of social responsibility and ethics. Certainly, these two topics are

The Stakeholder View of the Firm

Figure 3.1

Social Interest Groups Local Community Groups

Consumer Groups

Owners PRIMARY STAKEHOLDERS Suppliers

Organization

Employees

Media

Customers

Environmental Groups American Civil Liberties Union

Society At Large SECONDARY STAKEHOLDERS

Source: From Business & Society, Ethics and Stakeholder Management, 3rd edition, by Carroll. © 1996. Reprinted with permission of South-Western, a division of Thomson Learning: http://www.thomsonrights.com. Fax 800-730-2215.

Part 1 Meeting the Challenges of the 21st Century

Social Responsibility The nature and extent of the obligations that business has to society have been debated for decades. Perspectives on the issue of corporate social responsibility have varied dramatically over the years, and even today, achieving consensus on the subject is difficult.4 In the wake of the collapse of Enron and the actions of many other companies, questions surrounding corporate social responsibility are being asked more intently than ever before. Issues such as hiding debt from investors, losing the retirement pensions of LEARNING loyal employees, artificially inflating revOBJECTIVE enue amounts, moving a company’s headquarters to another country to avoid paying taxes in the United States, outsourcing jobs to another country, and senior execuDescribe the tives selling their stock before the value deconcept of clines are very serious matters that are corporate social more relevant today than ever before. responsibility and What is corporate social responsibilthe primary ity? It is a complex concept that resists prepremises on which cise definition. In a very general sense, corit is based. porate social responsibility can be thought of as the interaction between business and the social enviKEY TERMS ronment in which it exists. More specifically, it refers to Outsourcing the obligation that an organiUsing other companies to zation has to operate in a way provide operations that were that benefits society. Most previously done inside the would agree that all organizacompany. tions should act in a socially reCorporate social sponsible manner. However, responsibility there are many views on the The interaction between definition of what actions benbusiness and the social efit society and to what degree. environment in which it The debate over corporate exists. More specifically, the social responsibility focuses on obligation that an organizathe nature of socially responsition has to society. ble behavior. Does being so-

integrally related, as discussed above. We begin with the broader topic of corporate social responsibility that is an organizational issue relating to the obligation of business to society. Then we discuss the topic of ethics, an issue more relevant at an individual level. Both are important topics that have significant implications for the longterm success of any organization.

As Wal-Mart develops stores in Asia, it must be sensitive to customers and employees who perhaps have different needs and different expectations.

cially responsible mean that the corporation’s actions must not harm society, or does it mean that the corporation’s actions should benefit society? How does one distinguish between nonharm and benefit? These issues are at the heart of the controversy over corporate social responsibility. To gain a better understanding of corporate social responsibility, let’s first examine the two basic premises of the concept. Then, we explore three perspectives of corporate social responsibility as well as a model for evaluating corporate social behavior.

PREMISES OF CORPORATE SOCIAL RESPONSIBILITY Many argue that the controversy over the responsibility of business is inevitable, given the moral and ethical challenges that corporate America has faced over the last several decades. Examples are plentiful of organizations acting “irresponsibly” in the eyes of some segment of society. Whether it involved a violation of worker-safety regulations, insufficient attention to product safety for consumers, or the relocation of a plant (and numerous jobs) to a foreign country with lower labor costs, corporate America has been besieged with accusations of social irresponsibility in recent years. Corporate social responsibility has no doubt been discussed and debated for as long as there have been businesses, but one main piece of work that helps frame the discussions today was established by H. R. Bowen in the early 1950s. He proposed that businesses and managers have an obligation to “pursue those policies, to make those

Chapter 3 Social Responsibility and Ethics

Table 3.1

Four Perspectives of Social Responsibility 61

Type of Responsibility

Societal Expectation

Explanations

Economic

Required by society

Be profitable. Make sound strategic decisions. Provide adequate and attractive returns on investment.

Legal

Required by society

Obey all laws and regulations. Fulfill all contractual obligations. Honor warranties and guarantees.

Ethical

Expected by society

Avoid questionable practices. Respond to spirit as well as letter of law. Assume law is floor of behavior and operate above minimum required. Do what is right, fair, and just.

Philanthropic

Desired/expected by society

Be a good corporate citizen. Give back. Improve quality of life overall.

Source: From Business and Society: Ethics and Stakeholder Management, 6th ed. by Carroll/Buchholtz. © 2006. Reprinted with permission of South-Western, a division of Thomson Learning: http://www.thomsonrights.com. Fax 800-730-2215.

decisions, or to follow those lines of action that are desirable in terms of the objectives and values of our society.”5 Bowen’s assertions rest on two fundamental premises, social contract and moral agent, which can be summarized as follows: • Social contract. Business exists at the pleasure of society, and as a result, it must comply with the guidelines established by society. An implied set of rights and obligations is inherent in social policy and assumed by business. This set of rights and obligations can be thought of as a social contract between business and society. • Moral agent. Business must act in a way that is perceived as moral. In other words, business has an obligation to act honorably and to reflect and enforce values that are consistent with those of society. Furthermore, business can be held accountable as a moral agency. These two premises have provided the foundation for the concept of social responsibility, but they have also served as targets for critics of the concept. In fact, there are several perspectives on social responsibility that differ mainly in their view of these two premises. Let’s examine these perspectives in greater detail.

PERSPECTIVES OF SOCIAL RESPONSIBILITY Four primary perspectives of corporate social re3 sponsibility have emerged over the years: economic responsibility, legal responsibility, ethical responsibility, and philanthropic responsibility.6 The ethical responsibility perspective has been added to the other

three only in recent times, reflecting the increased awareness of the effects of ethics. Table 3.1 outlines the bases of these perspectives. Each perspective views Bowen’s two premises somewhat differently and, consequently, offers a different view of the concept of corporate social responsibility.7

Economic Responsibility

LEARNING OBJECTIVE

3 Distinguish between the four perspectives of corporate social responsibility.

Although many hold the economic responsibility perspective, one of its most outspoken proponents is Milton Friedman. Friedman maintains that the only social responsibility of business is to maximize profits within the “rules of the game.” In his opinion, the only constituents to whom business is responsible are the stock- KEY TERMS holders, and it is the firm’s Social contract responsibility to maximize the An implied set of rights and wealth of this constituent obligations that are inherent group. This is the only social in social policy and assumed contract to which business by business. should be committed. If soMoral agent cially responsible behavior A business’s obligation to act on the part of the corporation honorably and to reflect and serves to reduce the financial enforce values that are conreturn to the stockholders, sistent with those of society. the managers of the business have undermined the market mechanism for allocating resources and have violated the social contract of business as it should be in a free-market society.

Economic responsibility The perspective that says the social responsibility of an organization is to make profits and provide attractive returns on investment.

Part 1 Meeting the Challenges of the 21st Century

Proponents of the economic responsibility perspective also argue that corporations cannot be moral agents. Only individuals can serve as moral agents. When individuals choose to direct their own assets or resources toward the public good, that behavior is appropriate and to the benefit of society. However, when they begin to direct corporate resources toward that end, they have violated their commitment to the owners (that is, the stockholders) of those assets or resources. Critics of the economic responsibility perspective argue that many of today’s business organizations are not merely economic institutions and to view them as such is both unrealistic and naïve. Many large corporations wield significant political power and have tremendous influence on a wide variety of public policies and regulations across the globe. Examples of the enormous power and influence that some business have include General Electric (see “Meeting the Challenge” box), Airbus, Boeing, Procter and Gamble, Wal-Mart, and others. It is even suggested that Wal-Mart’s influence is so strong that it affects wage levels, pricing, and many aspects of business in not only retail but also the entire economy and the world. Some of these effects are considered to be very positive, such as lower prices for consumers, jobs for many employees, and assisting many communities with various types of support. Others are considered very negative: driving some wages below the poverty level, squeezing profits out of suppliers, and lowering the profitability of entire industries.8 Clearly, Wal-Mart and other companies have influence beyond just the economic. Moreover, the activities of many corporations are essential to realizing important social goals such as equal opportunity, environmental protection, and increased global competitiveness in critical industries. Viewing the modern corporation as simply an economic institution is myopic and ignores the reality of the worldwide evolution of business.9

Legal Responsibility Focusing almost exclusively on the social contract premise, proponents of legal responsibility argue that business should act in ways KEY TERMS that are consistent with public policy. Rather than viewing Legal responsibility public policy as simply the The perspective that the laws and regulations with social responsibility of an which business must comply, organization is to obey laws supporters of this philosophy and public policy. define public policy as “the Ethical responsibility broad pattern of social direcThe perspective that an tion reflected in public opinorganization should respond ion, emerging issues, formal to the spirit as well as the legal requirements, and enletter of the law. forcement or implementation

practices.”10 In other words, public policy refers to the overall perceptions and expectations of the public with regard to the interaction between business and society. Some critics of the legal responsibility position argue that it tends to be applied too narrowly. If public responsibility means adhering to existing public policy, which is traditionally considered to be the laws and regulations of the legal system, then this perspective differs little from the economic perspective. Like the economic perspective, this view would imply only that business should comply with the “rules of the game.” If, however, a broader view of public policy is assumed, the legal responsibility perspective begins to suggest some of the things in the ethical responsibility perspective.

Ethical Responsibility The perspective of ethical responsibility says that a business should engage in behavior and actions that not only meet the minimum requirements of law and public policy (the letter of the law) but also fulfill the “spirit of the law.” Laws are normally considered to be the minimum or maximum that is expected or required by society. Ethical responsibility suggests that businesses tune into society and respond to or sometimes encourage major movements in society. Frequently, these major movements will lead to laws and official policy later.11 One example of decisions and behavior that are based on the perspective of ethical responsibility is related to pollution and gas mileage of vehicles. There are laws that require minimum estimated mileage for new cars. Some auto manufacturers have resisted and will continue to resist these minimum requirements. However, other automakers focus on not only producing cars that attain mileages much higher than the minimum required but also on engines that use alternative sources of energy and/or a hybrid engine. Honda and Toyota are the leaders in this area, but Ford also has a vehicle with a hybrid engine.12 Related to the example of going beyond the minimum requirements concerning things associated with pollution and use of fossil fuels is British Petroleum (BP). That company is running a series of advertisem*nts that is highlighting the problem of pollution and alternative energies as one possible solution. Most people think that it is unusual for a fossil-fuels company (oil and gas) to be suggesting the development of fuels and energy sources that could reduce the use of fossil fuels. While working on alternative fuels and sources of energy because it is ethically responsible to do so may be an admirable thing, this also is related to BP’s vision and strategy for the future. (See the chapters that discuss overall strategy and planning.)13 Certainly, the idea that a business might be engaged in certain actions for both a socially responsible and a profit motif concerns some people. They argue that if a

Chapter 3 Social Responsibility and Ethics

Table 3.2

Examples of Corporate Social Responsibility 63

Company

Actions

B.J. Communications, Inc. (public relations firm)

Encourages its employees to get involved in community; provides free services to nonprofit organizations.

Coca-Cola Co.

Uses recycled content in packaging, programs to reduce waste and increase efficiency.

De Beers

Contributes to efforts to fight HIV/AIDS.

Ford, Honda, Lexus, Toyota

Produce at least one vehicle that runs on a fuel-efficient, lower-polluting hybrid engine.

General Electric

Contributes money to Ghana and other countries for hospitals, water-treatment facilities, etc.

Jones Studio, Inc.

Designs environmentally friendly buildings.

Nissan

Donates money to the American Red Cross and matches employee contributions.

One World Health (nonprofit pharmaceutical company)

Markets drugs to developing countries.

People’s Bank

Provides shelter and services to homeless people.

Shell Oil Co.

Uses many minority- and women-owned suppliers.

Starbucks

Works with coffee bean growers to encourage environmentally friendly practices.

Target Stores

Donates approximately $2 million per week to support medical research, literacy, and education.

Sources: “Corporate Volunteerism Awards Small Company: B.J. Communications,” Business Journal (Phoenix, AZ), 9 May 2003, 29; E. Schrage, “Supply and the Brand,” Harvard Business Review (June 2004): 20; J. Hempel, “Nonprofit Drugs for the Poor,” BusinessWeek, 9 May 2005, 16; J. Snider, R. P. Hill, and D. Martin, “Corporate Social Responsibility in the 21st Century: A View from the World’s Most Successful Firms,” Journal of Business Ethics 48, no. 2 (December 2003): 175–188; L. Armstrong, “Are You Ready for a Hybrid?” BusinessWeek, 25 April 2005, 118–126; “People’s Bank,” Fairfield County Business Journal, 14 October 2002, 24; R. Bates, “De Beers Honored for AIDS Work,” Jewelers Circular Keystone, August 2004, 42; Target Stores advertisem*nt, St. Louis PostDispatch, 15 May 2005, A7; “Valley Forward Selects Honorees for Environmental Excellence,” Business Journal (Phoenix, AZ), 15 September 2000, 8.

company does something that is profitable, then it does not really “qualify” as a socially responsible action.14

Philanthropic Responsibility The fourth perspective of social responsibility is that of philanthropic responsibility. Proponents of this perspective argue that corporate social responsibility should not be simply an obligation on the part of business to meet the minimum expectations of society. Rather, modern corporations should proactively seek to act in ways that improve the welfare of society. Philanthropic responsibility implies a proactive and tangible effort to contribute to the well-being of society. The philanthropic responsibility perspective also recognizes the moral agency aspect of corporate social responsibility. While proponents of this perspective agree with the economic responsibility proponents that morality is an individual rather than an organizational obliga-

tion, they maintain that the organization is responsible for creating and maintaining an environment in which moral behavior on the part of individual organizational members is encouraged and supported. Many have endorsed the philanthropic perspective, arguing that profitability and social responsibility are not antagonistic concepts but rather are interdependent. In fact, some argue that there are several trends that are converging to shape a new social imperative in the 21st century. These trends include a deepening consumer con- KEY TERMS science, an increase in socially Philanthropic responsibility conscious investing, more use The perspective that organiof ecologically friendly “green” zations should be good corpractices and products, and the porate citizens; organizations growing impact of global me15 should seek to improve the dia (Table 3.2). Despite the welfare of society. increasing acceptance of or at

Part 1 Meeting the Challenges of the 21st Century

least attention to the philanthropic perspective, however, this philosophy sparks some interesting and legitimate questions. One of the most pervasive has been the question of how much philanthropic responsibility is enough. At what point do the efforts of the organization come at the expense of profitability? Evaluating the social behavior of organizations can be quite difficult given the diversity of perspectives regarding social responsibility. The following section describes one framework for evaluating the extent to which organizations demonstrate socially responsible behavior.

THE FOUR FACES OF SOCIAL RESPONSIBILITY In a very general sense, an organization’s social behavior can be categorized according to two dimensions: legality and responsibility. As illustrated in Figure 3.2, four combinations of legal and responsible behaviors are possible (1) legal/responsible, (2) legal/irresponsible, (3) illegal/ responsible, and (4) illegal/irresponsible.16 Although one would hope that all organizations would operate in a legal and responsible manner, the evidence suggests otherwise. In fact, there are far too many examples of firms that have behaved in an illegal or irresponsible way. Why would a company choose to behave

Figure 3.2

illegally or irresponsibly? Let’s consider a situation where that might happen. Suppose a manufacturing company has been notified of a new pollution regulation that will affect one of its plants. The cost of complying with the regulation is $1.2 million, but the fine for failing to comply is $125,000. Assume that the likelihood of being caught in noncompliance is 10%, and even if the organization is caught, there will be little publicity. Although noncompliance would be both illegal and irresponsible, a cost–benefit analysis might suggest that the organization not comply with the regulation. Is this an appropriate decision? Ideally, everyone would say that this is not an appropriate decision. It is irresponsible and illegal. Yet some companies facing such a situation might make that choice. When the penalty associated with breaking the law is less costly than complying with the law, an organization may make an inappropriate decision. Look at the same idea applied to a personal action. Assuming that the speed limit on the highway was established on a very rational basis, then to drive above the speed limit is irresponsible behavior. Of course, it is illegal, by definition of “speed limit.” Why might you engage in this illegal/irresponsible action? Consider the other two quadrants in the model. Can you think of examples of organizations that have acted legally but irresponsibly? Illegally but responsibly? Under

The Four Faces of Social Responsibility

Legal/Responsible

Legal/Irresponsible

Illegal/ Responsible

Illegal/Irresponsible

Source: Printed from Business Horizons, D. R. Dalton and R. A. Cosier, “The Four Faces of Social Responsibility.” May/June 19–27, 1982 with permission from Elsevier.

Chapter 3 Social Responsibility and Ethics

what conditions might an organization choose to act in such ways? Consider the incidents profiled in Table 3.2. Do all of these incidents fall in the legal/responsible quadrant? Also consider these incidents from the four perspectives of social responsibility. Do some of the incidents fall into more than one perspective? Is it acceptable if an incident fits both the philanthropic and economic responsibility categories? Organizations typically will behave in ways that are consistent with their overall strategy for responding to social issues. Social responsibility strategies may range from doing nothing to making an attempt to benefit society in tangible ways. The following section identifies four different strategies for social responsibility and examines reasons why an organization might choose a particular strategy.

SOCIAL RESPONSIBILITY APPROACHES

Text not available due to copyright restriction

distinct approaches are identified along this continuum: reaction, defense, accommodation, and proaction.17

As we know, organizations take very different approaches to corporate social responsibility. Some organizations do little more than operate to ensure profitability for their stockholders, while others maintain aggressive and proactive social responsibility agendas. Table 3.3 illustrates a continuum of social responsibility strategies that range from being reactive to proactive. Four

Reaction An organization that assumes a reaction stance simply denies responsibility for its actions. There are two classic cases of that, both still controversial today, even after more than 50 years have passed. One is the case of asbestos; the other is tobacco. Approximately 50 years ago, a company then known as Johns Manville, a large producer of asbestos, discovered evidence to suggest that asbestos inhalation causes a debilitating and often fatal lung disLEARNING OBJECTIVE ease. Rather than looking for ways to provide safer working conditions for company employees, the firm chose to conceal the evidence. Why? That’s hard to say, but evidence Identify and suggests that the company was more conevaluate cerned about profitability than about the approaches for health and safety of its employees. Presumresponding to ably, top executives at Manville thought it social issues. would be less costly to pay workers’ compensation claims than to develop safer working conditions. Manville’s irresponsibility did not go without notice, KEY TERMS however. Eventually, as a result of litigation, the company was Reaction forced to pay a $2.6 billion setAn approach to corporate tlement, which forced a reorsocial responsibility that ganization that left the comincludes an organization pany on very shaky ground. denying responsibility for its Stockholders lost 97.5% of actions.

The Enron Corporation has become a well-known touchstone for violating many dimensions of social and ethical responsibility.

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their ownership of the company as a result of this and the resulting company, called Manville Corporation, has to make annual contributions to a trust fund set up for future claims.18 To this day, people who believe they may have an ailment caused by exposure to asbestos continue to sue producers and sellers of products containing asbestos. This has gone far beyond just employees working with asbestos who claim damages. The situation now includes customers of products that contain asbestos.19 Tobacco was handled in a similar manner. Even though some cigarette producers had evidence over 50 years ago that nicotine in tobacco was addictive, they hid the evidence. As summarized in a claim by the U.S. Justice Department, “cigarette makers fraudulently denied the health risks and addictiveness of smoking, marketed to teens and falsely touted the benefits of light cigarettes.”20 Even after the landmark settlement between tobacco producers and most states in which tobacco companies agreed to pay billions of dollars over many years, there continues to be court cases related to smokers’ health being damaged and to disagreements about the requirement of tobacco companies paying up to $10 billion over 25 years for smoking-cessation programs.21

Defense Organizations that pursue a defense approach respond to social challenges only when it is necessary to defend their current position. They tend to admit responsibility but fight it. Actually, most tobacco companies probably have moved from reaction to defense. Most have now admitted that nicotine is addictive, and some are cooperating with the requirements of the settlement mentioned above, KEY TERMS including producing advertisem*nts that suggest stopDefense ping smoking.22 However, the An approach to corporate actions tend to be the least social responsibility that an that is required by the settleorganization takes only when ment. it is necessary to defend its current position. Accommodation An approach to corporate social responsibility that adapts to public policy in doing more than the minimum required. Proaction An approach to corporate social responsibility that includes behaviors that improve society.

Accommodation

Organizations using an accommodation approach to corporate social responsibility readily adapt their behaviors to comply with public policy and regulation where necessary and, more important, attempt to be responsive to public expectations. Consider, for example, financial services companies

that are required by regulation to disclose certain information. Although virtually every financial services company meets the minimum requirements of disclosure regulation, some companies maintain a more proactive code for voluntary, on-demand disclosure of appropriate information.23

Proaction Organizations that assume a proaction approach to corporate social responsibility subscribe to the notion of philanthropic responsibility. They do not operate solely in terms of profit; nor do they consider compliance with public policy to be sufficient. These organizations proactively seek to improve the welfare of society. Here are a few examples. Since its beginning, McDonald’s has helped sick children and their families through the Ronald McDonald Houses; Mary Kay Cosmetics focuses on women’s health issues such as breast cancer; Target Stores supports medical research, literacy, education, and the arts through support of live-theater students; Ford, Honda, and Toyota all produce at least one vehicle with a hybrid engine, and other automakers are working on hybrid engines and/or fuel cells—both of which will increase gas mileage and produce fewer pollutants.24 These are only a few examples of businesses that are attempting to better conditions overall. (See Table 3.2 for more examples.) Which approach is the best? Should all organizations assume a proaction approach with respect to corporate social responsibility? Not necessarily.

Social Responsibility in the 21st Century Evidence suggests a growing emphasis on social responsibility in the future. The issues surrounding asbestos, tobacco, global warming, outsourcing of jobs, the collapse of Enron and questionable actions of top-level managers in many other companies, and similar issues will only intensify the emphasis on social responsibility as employees, customers, and investors demand accountability from the actions of corporate leaders. Organizations that wish to attract socially conscious consumers know they must be socially conscious themselves if they are to meet the needs of those consumers. Similarly, organizations that have invested in their communities and have demonstrated more socially responsible behaviors often find it easier to attract highquality workers. All of this is summed up in Fortune mag-

Chapter 3 Social Responsibility and Ethics

azine’s “America’s Most Admired Companies” because one of the eight categories used to select the companies is “Social Responsibility.” Further, the rankings of the most admired companies are done by over 12,000 senior managers and other business and financial leaders. In addition, Fortune’s ranking of “The 100 Best Companies to Work For” and BusinessWeek’s selection of “The Best and Worst Managers of the Year” include management of people and overall evaluations that include various types and levels of corporate social responsibility.25 Social responsibility is important throughout the world. In England, there is the “Queen’s Awards for Enterprise.” This award not only shows the prevalence of social responsibility but also suggests the future in that the awards now include a category for “Sustainable Development” because “business as usual” is no longer acceptable or not sustainable. Sustainable development is defined as doing business in such a manner that new environmental, social, and economic demands are met.26 In addition to “everything else,” this does include making a profit. Similarly, the future of social responsibility, now commonly called corporate social responsibility, and conveniently referred to as CSR, tends to be seen by many as “business practices with a positive impact on People, Planet and Profit.”27 Notice the capital letters. We may be getting closer to what was suggested in 1984 in “The Ten Commandments of Corporate Social Responsibility,”28 in Table 3.4. Now we turn our attention to ethics. A person’s beliefs and values related to ethics influence the decisions and actions in which one engages in organizations and thereby influence the type and degree of corporate social responsibility.

Ethics Ethics is everyone’s business, from top-level managers to employees at the lowest levels of the organization. One of management’s most important challenges is to conduct business ethically while achieving high levels of economic performance. Why ethical problems arise in business and what can be done about them are the issues that are addressed in this section.

UNDERSTANDING BUSINESS ETHICS Would you “bend” the accounting rules to show higher revenue for your division when you are under strong

Table 3.4

The Ten Commandments of Corporate Social Responsibility

• I Take corrective action before it is required. Compliance with self-imposed standards is almost always preferable to compliance with standards that are imposed by outside constituencies. • II Work with affected constituents to resolve mutual problems. • III Work to establish industry-wide standards and selfregulation. • IV Publicly admit your mistakes. Few things are worse for a company’s image than being caught trying to cover up socially irresponsible behavior. • V Get involved in appropriate social programs. • VI Help correct environmental problems. • VII Monitor the changing social environment. • VIII Establish and enforce a corporate code of conduct. • IX Take needed public stands on social issues. • X Strive to make profits on an ongoing basis. An organization cannot provide jobs and employ workers if it is not in a position to make consistent profits. Source: L. Alexander and W. Mathews, “The Ten Commandments of Corporate Social Responsibility,” Business and Society Review, 1984; 50, 62–66.

pressure from your supervisor to increase sales? Should you pay a bribe to obtain a business contract in a foreign country? Is it acceptable to allow your company to dispose of hazardous waste in an unsafe fashion? Can you withhold information that might discourage a job candidate from joining your organization? Is it appropriate to engage in instant messaging with your friends while on company time? These are just a few examples of ethical and moral dilemmas that you probably will face at various times during your career in an organization. Ethical behavior has always been important, but the many high-profile cases that occurred over the last several years keep concern about ethical behavior in the news. Damage is still being repaired from the more notorious cases of unethical behavior at Enron, WorldCom, Tyco, Arthur Andersen, and Adelphia Communications (see the “Leaders in Action” Box.). The managers and companies involved are still being discussed in attempts to learn more about ethical and unethical behavior and what tends to influence it.29 Let’s now explore more about ethics. Ethics reflect established customs and morals and fun- KEY TERMS damental human relationships Ethics that may vary throughout the Reflects established customs world. Often ethical issues and morals. are controversial because they

Part 1 Meeting the Challenges of the 21st Century

Leaders in Action 68

Cleaning Up Adelphia Communications delphia Communications Corporation was an important player in the cable television business, even as it prepared to exit bankruptcy protection. That exit included an agreement to sell itself to Time Warner Inc. and Comcast Corporation. Imagine being the person who is in charge of cleaning up the huge mess left by the founder, John Rigas, and his son, Timothy. They were accused and convicted of stealing billions of dollars from the company by using fraudulent accounting practices and doing many things that were certainly unethical; many were illegal. The offenses were so serious that prosecutors in the case requested sentences of 215 years. Eighty-yearold John received a 15-year sentence; Timothy received a 20-year sentence. Vanessa Wittman signed on to be chief financial officer of Adelphia several years ago. Her job was to prepare

the company to emerge from bankruptcy protection. In doing so, she had to deal with the Securities and Exchange Commission (SEC), the Justice Department, and angry shareholders and creditors, all the while trying to understand all the fraudulent accounting that had taken place under the management of the Rigases. By all accounts, she did an admirable job. She quickly arranged an operating budget that was the foundation for a line of credit of $1.5 billion. This was needed to keep the cable lines in good and upgraded condition to retain their value during constant fierce competition. Wittman negotiated a financial settlement of $725 million with the SEC and the Justice Department to settle claims of accounting fraud. During her 16-hour days, in addition to everything else, she supervised 100 accountants who sifted through 7 million entries to prepare new and accurate accounting statements.

raise emotional questions of right and wrong behaviors. For our purposes, we define ethical behavior as behavior that is morally accepted as “good” and “right” as opposed to “bad” or “wrong” in a particular setting. Right behavior is considered ethical behavior, and wrong behavior is considered unethical. Corporate executives are concerned with business ethics because they want their companies to be perceived as “good” and “right” in their interactions with stakeholders. In many cases, the goal is to avoid illegal or unethical corporate behavior leading to adverse governmental or societal reactions such as warnings, recalls, injunctions, monetary or criminal penalties, adverse public opinion, or loss of contracts.30 In the business world, however, the difference between right and wrong behavior is not always clear—particularly when organizations operating in an internaKEY TERMS are tional, multicultural environment.31 Although many unEthical behavior ethical behaviors are illegal in Behavior that is morally the United States, some may accepted as good or right as be within the limits of the law opposed to bad or wrong.

Because the major parts of the company have been sold as a result of the exit from bankruptcy protection, what does someone like Vanessa Wittman do next? With her previous experience at Andersen Consulting, Morgan Stanley, Microsoft, and a few other companies, she certainly will be a valuable manager for many companies. Or, perhaps she may take on the assignment to “clean up the mess” at another company in bankruptcy or other trouble. In recent years, major breaches in ethical behavior have created companies in that condition.

Sources: D. Searcey and L. Yuan, “Adelphia’s John Rigas Gets 15 Years,” Wall Street Journal, 21 June 2005, A3. P. Grant and S. Young, “Federal Prosecutors Request 215-Year Sentences for Rigases,” Wall Street Journal, 13 June 2005, C4; T. Lowry, “The CFO behind Adelphia’s Rescue,” BusinessWeek, 11 April 2005, 68–69.

in other countries. The three international ethical issues that have been subject to the greatest scrutiny by the media, government, and other social agencies are corruption (for example, bribery and improper payments), inadequate labor conditions, and environmental responsibility.32 For many years, international social activists have been calling for U.S. corporations to develop global codes of ethics that would be applied in all international markets. Recent surveys suggest that U.S. companies have moved boldly in that direction, developing global ethical principles to guide their overseas organizations.33

Foundations of Ethics Although ethical behavior in business does reflect social and cultural factors, it is also highly personal and is shaped by an individual’s own values and experiences. In your daily life, you face situations in which you can make ethical or unethical decisions. You make your choices based on what you have learned from parents, family, teachers, peers, friends, and so forth. From what you have learned, you developed a set of values that influence your ethical decisions.

Chapter 3 Social Responsibility and Ethics

Values are the relatively permanent and deeply held preferences of individuals or groups; they are the basis on which attitudes and personal choices are formed. Values are among the most stable and enduring characteristics of individuals. Much of what we are is a product of the basic values that we have developed throughout our lives. An organization, too, has a value system, usually referred to as its organizational culture. (We discuss organizational culture in more detail in Chapter 10.) To better understand the role of values as the foundation for ethical behavior, let’s look at a basic values framework. Rokeach developed a values framework and identified two general types of values: instrumental values and terminal values.34 Instrumental values, also called means-oriented values, prescribe desirable standards of conduct or methods for attaining an end. Examples of instrumental values include ambition, courage, honesty, and imagination. Terminal values, also called ends-oriented values, prescribe desirable ends or goals for the individual and reflect what a person is ultimately striving to achieve. Terminal values are either personal (such as peace of mind) or social (such as world peace). Examples of terminal values are a comfortable life, family security, self-respect, and a sense of accomplishment. Although values are an individual characteristic, there are some similarities between members of groups. For example, business school students and professors tend to rate ambition, capability, responsibility, and freedom higher than do people in general. They tend to place less importance than the general public on concern for others, helpfulness, aesthetics, cultural values, and overcoming social injustice.35 In most cases, the ethical standards and social responsibility of an organization or business reflect the personal values and ideals of the organization’s founders or dominant managers.36 Over the years, those values and ideals become institutionalized and become integral to the organization’s culture. For example, Herb Kelleher’s personal values and ethics formed the basis of the culture of Southwest Airlines.37 Bill Gates set the foundation for the culture at Microsoft. At WalMart, the influence of its founder, Sam Walton, continues to strongly influence the company years after Sam Walton passed away.38 In each case, these individuals were the source of their organizations’ experiences, values, and principles. They were the behavioral role models for the organizations’ ethical behavior and commitment to social responsibility. An organization’s culture and the practices of its senior managers can influence the ethical behavior of not only its employees but also other individuals and entities associated with the organization. Therefore, the challenge

facing an organization is how to successfully develop, sustain, review, and adapt its ethical standards and its commitment to socially responsible behavior.39

Business Ethics

LEARNING OBJECTIVE

5 Explain what

Business ethics is not a special set of ethical values are, how rules that differ from ethics in general. Busithey form the basis ness ethics is the application of the general of an individual’s ethical rules to business behavior. If a society ethical behavior, deems dishonesty to be unethical, then anyand how they may one in business who is dishonest with emvary in a global ployees, customers, creditors, stockholders, business or competition is acting unethically. environment. Businesses pay attention to ethics because the public expects a business to exhibit reasonable levels of ethical performance and social responsibility. Many ethical rules opLEARNING erate to protect society against various types OBJECTIVE of harm, and business is expected to observe these ethical principles. High ethical standards also protect the individuals who work in an organization. Employees resent invaDescribe how sions of privacy, being ordered to do someadvances in thing against their personal convictions, or information working under hazardous conditions. Nortechnology have mally, businesses that treat their employees created new ethical with dignity and integrity gain rewards in challenges. the form of improved productivity. People feel good about working for an ethical company because they know they are protected along with the general public. In contrast, most employees do not feel good about working for companies that demonstrate unethical behaviors. Recent improvements in information technol6 ogy have raised new issues with regard to business KEY TERMS ethics. From an employee perspective, concerns about inforValues mation privacy have escalated Relatively permanent and in recent years, as business deeply held preferences upon organizations and government which individuals form attiagencies have gained greater tudes and personal choices. access to private information Instrumental value about individuals.40 From an A standard of conduct or organizational perspective, unmethod for attaining an end. ethical acts by employees are Terminal value increasing as a result of access A goal an individual will ultito information technology in mately strive to achieve. the workplace. In fact, accord-

ing to a recent study conducted by International Communication Research, nearly half of

Business ethics The application of general ethics to business behavior.

Part 1 Meeting the Challenges of the 21st Century

American workers engaged in unethical behavior as a result of technology. Such behaviors include accessing personal files, sabotaging data, and using the computer for personal reasons.41 Another area of concern raised by sophisticated information technology relates to businesses providing customer information to other organizations. Such concerns have led some companies to publicly express their promise to protect their customers’ privacy.42

Pressures to Perform In the past few years, the negative and questionable ethical practices of many public figures and corporations have attracted considerable media attention. Many such incidents have been mentioned in Chapter 1 and earlier in this chapter. Because of pressure to keep the price of the stock up or to keep revenues rising, managers have “bent” various accounting rules or simply broke them to please stockholders. Another reason why managers may have done these things is because they could gain very large bonuses by increasing revenues or the price of the stock. Unethical behavior is often blamed on the emphasis on materialism as well as on LEARNING economic and competitive pressures to OBJECTIVE perform. In today’s environment of intense competition, some have even questioned whether ethics is a liability that limits an organization’s ability to succeed. Yet, most Identify and would agree that good ethics makes good discuss the business sense. In fact, long-term costs to differences in the unethical behavior can have very negative utility, human consequences for any organization.43 rights, and justice The pressures to perform are approaches to nowhere more evident than in the sports ethical dilemmas. industry. Coaches often feel pressure from demanding fans and/or owners—so much so that they are tempted to “bend the rules” to ensure a KEY TERMS winning season. But according to Penn State University head Ethical dilemma football coach Joe Paterno, A situation in which a person that’s just not necessary. Demust decide whether or not spite a few less than stellar to do something that, alrecords in recent years for though benefiting oneself or Coach Paterno’s teams, he is the organization, may be still widely known for having considered unethical and winning teams and for mainperhaps illegal. taining a highly principled football program. He is up Utility approach front with all players about his A situation in which decisions personal commitment to do are based on an evaluation of the right thing in each and the overall amount of good every circ*mstance. For many that will result.

years, Coach Paterno’s “investments” in a solid ethical environment in his football program have earned his teams tremendous respect from fans and others. Managers must continually choose between maximizing the economic performance of the organization (as indicated by revenues, costs, profits, and so forth) and improving its social performance (as indicated by obligations to customers, employees, suppliers, and others). Many ethical trade-offs are conflicts between these two desirable ends—economic versus social performance. Making decisions in such situations is not merely a matter of choosing between right and wrong or between good and bad. Most of the alternatives are not so clearcut. Individuals who effectively manage these ethical trade-offs have a clear sense of their own values and the values of their organization. They have developed their own internal set of universal, comprehensive, and consistent principles upon which to base their decisions.

MANAGERIAL GUIDELINES FOR ETHICAL DILEMMAS An ethical dilemma is a situation in which a person must decide whether to do something that, although beneficial to oneself or the organization or both, may be considered unethical. Ethical dilemmas are common in the workplace. In fact, research suggests that managers encounter such dilemmas in their working relationships with supervisors, subordinates, customers, competitors, suppliers, and regulators. Common issues underlying the dilemmas include honesty in communications and contracts, gifts and entertainment, kickbacks, pricing practices, and employee terminations. Organizations need a set of guidelines for thinking about ethical dilemmas. These guidelines can help managers and employees identify the nature of the ethical problem and decide which course of action is the most likely to produce the most ethical results. The following three approaches—utility, human rights, and justice—provide managerial guidelines for handling ethical dilemmas.

Utility Approach The utility approach emphasizes the overall amount of good that can be produced by an action or a decision. It judges actions, plans, and policies by their consequences. The primary objective of this approach is to provide the greatest good for the greatest number of people. It is often referred to as a cost–benefit analysis because it compares the costs and benefits of a decision, a policy, or an action. These costs and benefits can be economic (expressed in dollars), social (the effect on society at large),

Chapter 3 Social Responsibility and Ethics

Human Rights Approach

Child labor in countries outside the United States presents a serious human rights dilemma. The degree to which human rights are protected and promoted is an important ethical benchmark for judging the behavior of individuals and organizations.

or human (usually a psychological or emotional impact). This type of results-oriented ethical reasoning tries to determine whether the overall outcome produces more good than harm—in other words, more utility, or usefulness, than negative results. The utility approach supports the ethical issues of profit maximization, self-interest, rewards based on abilities and achievements, sacrifice and hard work, and competition.44 The main drawback to the utility approach is the difficulty of accurately measuring both costs and benefits. For example, some things, such as goods produced, sales, payrolls, and profits, can be measured in monetary terms. Other items, such as employee morale, psychological satisfactions, and the worth of human life, do not easily lend themselves to monetary measurement. Another limitation of the utility approach is that those in the majority may override the rights of those in the minority. Despite these limitations, cost–benefit analysis is widely used in business. If benefits (earnings) exceed costs, the organization makes a profit and is considered to be an economic success. Because this method uses economic and financial outcomes, managers sometimes rely on it to decide important ethical questions without being fully aware of its limitations or the availability of other approaches that may improve the ethical quality of decisions. One of these alternative approaches is the impact of the decisions on human rights.

The human rights approach is a second method for handling ethical dilemmas. This approach to ethics 71 holds that human beings have certain moral entitlements that should be respected in all decisions. These entitlements guarantee an individual’s most fundamental personal rights (life, freedom, health, privacy, and property, for example). These have been spelled out in such documents as the U.S. Bill of Rights and the United Nations Declaration of Human Rights.45 A right means that a person or group is entitled to something or is entitled to be treated in a certain way. The most basic human rights are those claims or entitlements that enable a person to survive, make free choices, and realize his or her potential as a human being. Denying those rights to other persons and groups or failing to protect their rights is considered to be unethical. Respecting others, even those with whom we disagree or whom we dislike, is the essence of human rights, provided that others do the same for us. The human rights approach to ethical dilemmas holds that individuals are to be treated as valuable ends in themselves simply because they are human beings. Using others for your own purposes is unethical if, at the same time, you deny them their rights to their own goals and purposes. For example, an organization that denies female employees an opportunity to bid for all jobs for which they are qualified is depriving them of some of their rights. The main limitation on using the human rights approach as a basis for ethical decisions is the difficulty of balancing conflicting rights. For example, using a polygraph test to evaluate an employee’s honesty to protect the organization’s financial responsibilities may be at odds with the employee’s right to privacy. Rights also clash when U.S. multinational corporations move production to a foreign nation, causing job losses at home while creating new jobs abroad. In such cases, whose job rights should be protected? The degree to which human rights are protected and promoted is an important ethical benchmark for judging the behavior of individuals and organizations. Most people would agree that the denial of a person’s fundamental rights to life, freedom, privacy, growth, and human dignity is generally unethical. Thus, the protection of such rights be- KEY TERMS comes a common denominator for making ethical decisions.46 Human rights approach A situation in which decisions Justice Approach are made in light of the moral A third method of ethical decientitlements of human sion-making concerns justice. beings.

Part 1 Meeting the Challenges of the 21st Century

Now Apply It 72

Ethics in the Workplace Ethics in the workplace is a critical issue that affects all employees. The following three scenarios highlight specific potential ethical issues. As you read these scenarios, consider how you might react. Scenario 1 John is a production manager at a toy-manufacturing plant. In his role, he selects vendors for a number of the materials used in the production process. You know that John usually picks suppliers with whom he has a good relationship, even when they are not the lowest bidder. Most recently, you have noticed that a very large purchase was made from a vendor that regularly hosts John at the local pro-basketball games. You know another vendor has

a significantly lower price, and you wonder whether John’s decisions are biased. When you ask him about it, he explains that having a good relationship with your supplier ensures good-quality service, which is more important than price. Scenario 2 Janice travels frequently for her company, and, because she is a bit disorganized, maintaining accurate expense records has never been her strength. She tends to tuck receipts in her suit pockets, briefcase, bag, or even books she may be carrying. Many of the receipts (especially those from taxi drivers) are blank because Janice has failed to note the amount of her expenditure at the time she made

Under the justice approach, decisions are based on an equitable, fair, and impartial distribution of benefits (rewards) and costs among individuals and groups. Justice is essentially a condition characterized by an equitable distribution of the benefits and burdens of working together, according to some accepted rule. For society as a whole, social justice means that a society’s income and wealth are distributed among the people in fair proportions.47 A common question is, Is it fair or just? For example, employees want to know whether pay scales are fair; consumers are interested in fair prices when they shop. When new tax laws are proposed, there is much debate about their fairness: Where will the burden fall, and will all taxpayers pay their fair share? Using the justice approach, the organization considers who pays the costs and who gets the benefits. If the shares seem fair, then the action is probably just. Determining what is just and what is unjust can be a KEY TERMS complex issue, especially if the stakes are high. Because disJustice approach tributive rules usually grant A situation in which decisions privileges to some groups are based on an equitable, based on tradition and cusfair, and impartial distribution tom, sharp inequalities beof benefits and costs among tween groups can generate individuals and groups.

it. Janice turns in her receipts sporadically, guessing at the expenditures she has made. You, as her office mate, note the sloppy fashion in which Janice reports her expenses and bring it to her attention. Janice responds by saying that she is sure that it all balances out in the end. Scenario 3 Robert is the equivalent of a “class clown” in the office. He is always telling jokes, playing silly pranks, and otherwise entertaining the office staff. While most of Robert’s antics are harmless, he occasionally tells ethnic jokes that could be offensive to others. When you mention this to Robert, he tells you to “lighten up.” No one else in the office seems to be offended.

social tensions and clamorous demands for a change to a fairer system. As with the utilitarian approach, a major limitation of the justice approach is the difficulty of measuring benefits and costs precisely. Another limitation is that many of society’s benefits and burdens are intangible, emotional, and psychological. People unfairly deprived of life’s opportunities may not willingly accept their condition. Few people, even those who are relatively well off, are ever entirely satisfied with their share of society’s wealth. For these reasons, the use of the justice approach can be tricky. Although everyone is intensely interested in being treated fairly, many are skeptical that justice will ever be fully realized. Despite these drawbacks, the justice approach to ethical dilemmas can still be applied in many business situations.

FOSTERING IMPROVED BUSINESS ETHICS More and more organizations are recognizing that their culture and values are affecting how people at all levels behave and how they make decisions. The predominant belief is that a manager’s leadership will influence behaviors of people in the organization, either positive or negative. Managers must become the ethics leaders in their organizations.48

Chapter 3 Social Responsibility and Ethics

To foster improved business ethics in an organization, action must be directed at five levels: the international, societal, association, organizational, and individual levels. The most fundamental effort is directed at the individual. Agreements among nations help foster ethical behavior at the international level. Laws established by international governing bodies such as the World Trade Organization and the United Nations help shape ethical behavior across nations. Nongovernmental organizations (NGOs) also play an important role in promoting ethical behavior on a global basis. NGOs are nonprofit, voluntary citizens’ groups that are organized on a local, national, or international level to address international issues. You can learn more about NGOs and their activities by visiting http://www.ngo.org. Societal ethics are fostered to the extent that laws and regulations discourage unethical behavior, and systems exist for recognizing and rewarding behaviors that epitomize strong ethical values. For example, the Foreign Corrupt Practices Act governs the actions of U.S. firms engaged in international business activities. Award programs, such as the Business Ethics Award given annually by the Center for Business Ethics at Bentley College, help reinforce the value of ethical behavior within our society. At the association level, groups can join together and establish codes of ethics for their industry or profession and provide mechanisms for monitoring and disciplining members who violate the code. For example, the Society of Professional Journalists, an organization of 13,500 people involved in journalism, has developed a code of ethics that provides guidance for journalists across the world. Not only has the association established such a code, but it also invites online debate about proposed changes to the code. This debate has evolved to include discussions of both real and hypothetical ethical issues in the journalism profession. At the organizational level, improving business ethics requires leaders who can model the expected ethical behavior, set realistic goals for workers, and encourage ethical behavior by providing an organizational environment that rewards such behavior and punishes violators. Leadership is perhaps the most important ingredient in developing an ethical organizational culture. At the individual level, the challenge for organizations is to develop employees’ awareness of business ethics (Table 3.5) as well as to help them confront complex ethical issues. Employees find it helpful when their organization publicly announces what it believes in and expects in terms of employee behavior.49 In the next section, we examine two of the most common ways in which organizations foster ethical behavior: (1) creating codes of conduct and (2) developing

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ethics-training programs. In general, such activities must reflect relevant employee concerns and must be tailored to specific needs and value statements.

Codes of Ethics

LEARNING OBJECTIVE

8 Explain the

A code of ethics describes the general methods used by value system, ethical principles, and organizations to specific ethical rules that a company tries to encourage ethical apply. It can be an effective way to encourage organizational ethical business behavior and raise an organibehavior. zation’s standards of ethical performance. Such a document may be called a code of ethics, code of conduct, credo, declaration of business principles, statement of core values, or something similar. In response to the ethical problems that have been arising in the United States, many companies and professional societies are now publishing codes of conduct. In fact, about 90% of Fortune 500 firms and almost half of all other firms have ethics codes.50 Typically, a code of ethics covers a wide range of issues and potential problem areas that an organization and its members may encounter. It is a set of carefully articulated statements of ethical principles rooted in the organization’s goals, objectives, organizational history, and KEY TERMS traditions. A code contains explicit statements and preCode of ethics cepts intended to guide both The general value system, the organization and its emprinciples, and specific rules ployees in their professional that a company follows.

Part 1 Meeting the Challenges of the 21st Century

At the Forefront

Guides to Organization Behavior elow are statements from the websites of two companies. Do you think that these statements are good guides to behavior that would be profitable, socially responsible, and ethical, all at the same time?

Bristol Technology (http://www.bristol.com/careers/)

“We look to hire ‘the best.’ The attributes we think are most important are: • Intelligence • A Sense of Urgency • Integrity”

“Bristol’s Core Values

Southwest Airlines (http://www .southwest.com/about_swa/ mission.html)

• • • • •

“The Mission of Southwest Airlines The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friend-

Earn profits and respect. Show respect for fellow Bristolites. Create a superior work environment. Spend company money wisely. Think BIG, be aggressive, and win!”

behavior. A code helps employees know what is expected when they face uncertain ethical situations. It becomes the basis for establishing continuity and uniformity in managerial action and can be a unifying force that holds the organization together so that its employees can act in a cohesive and socially responsible manner. (See the “At the Forefront” box.) An organization’s code of ethics can serve several purposes. First, it creates employee awareness that ethical issues need to be considered in making business decisions. Second, it demonstrates that the organization is

Table 3.6

Subjects Addressed by a Majority of Global Codes of Ethics

• Bribery/improper payments • Conflict of interest • Security of proprietary information • Receiving gifts • Discrimination/equal opportunity • Giving gifts • Environment • Sexual harassment • Antitrust

• Workplace safety • Political activities • Community relations • Confidentiality of personal information • Human rights • Employee privacy • Whistle-blowing • Substance abuse • Nepotism • Child labor

Source: R. Berenbeim, “Global Corporate Ethics Practices,” Conference Board Research Report, 121243-99-RR, 1999.

liness, individual pride, and Company Spirit.” “To Our Employees We are committed to provide Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.”

fully committed to stating its standards and incorporating them into daily activities. Third, a code can contribute to transforming an “us–them” relationship between the organization and its employees into an “us–us” relationship.51 A code’s impact on employee behavior is weakened if the code’s purpose is primarily to make the company look good or if it is intended to give the company’s top executives a legal defense when illegal or unethical acts are committed by lower-ranking employees. A code of ethics can resemble a set of regulations (“Our employees will not . . .”), aspirations (“Our employees should . . .”), or factual statements (“Our organization is committed to . . .”), but all effective codes appear to share at least three characteristics: 1. They generally govern activities that cannot be

supervised closely enough to ensure compliance. 2. They ask more of employees than would otherwise

be expected. 3. They can serve the long-term interest of the

organization. In today’s global business environment, a growing number of organizations are establishing global ethics codes. Companies such as Shell, Sara Lee Corporation, and General Electric have led the way in developing comprehensive codes of ethics that are disseminated on a worldwide basis. Table 3.6 outlines the major issues addressed by a majority of global codes of ethics.

Chapter 3 Social Responsibility and Ethics

Merck & Company has been particularly aggressive with regard to developing a comprehensive and relevant code of ethics. The company has long subscribed to a belief that core values and an adherence to the highest standards of ethical behavior are key to global success, and Merck is committed to ensuring that the company culture reflects this philosophy. How did the company achieve this? First, the company conducted an organizational analysis that involved participation of over 10,000 employees in 21 countries. Based on the feedback from the interviews and surveys of these employees, an ethics code was drafted. The final document, which was translated into 22 languages, was tested with focus groups in each major geographic region of the company. Ultimately, the company’s code was distributed to employees across the globe, who simultaneously participated in ethics training. Key to Merck’s success was ensuring that the code was embraced by the leadership of the company. By selecting leaders throughout the organization and across the globe who subscribe to and support fully its core values and code of ethics, Merck has created an organizational culture that is based on ethical standards.52 After the many questionable practices by various managers at Citigroup related to helping companies such as Enron and WorldCom hide questionable and illegal practices, Chuck Prince, CEO, is attempting a similar approach to improve ethical behavior at Citigroup.53 Ethics statements and social responsibility policies are not sufficient by themselves to cause people to behave in a socially responsible manner. A 20-page policy statement by General Dynamics failed to prevent a widespread lapse in ethical conduct involving government contracts. The real challenge for top-level management is to create an environment that sustains, promotes, and develops ethical behavior and a commitment to social responsibility. The effort must begin at the highest levels of the organization. Unless top-level management, beginning with the CEO, provides leadership, commitment, and role modeling, no organization can hope to attain high ethical standards or consistently behave in a socially responsible manner. Toplevel management must also ensure that the organization’s expectations of ethical behavior and social responsibility are clearly conveyed to its employees and to all parties involved with the organization—that is, the stakeholders. This requires extensive communication among all parties and the establishment of systems within the organization to reinforce ethical behavior.54

Ethics Training Programs Many organizations and associations provide ethics training for employees. In fact, a recent Conference Board report suggests that 78% of companies that have an ethics code reinforce it with ethics training.55 The combination of a widely distributed code of ethics

and comprehensive ethics training for all LEARNING employees can greatly enhance the ethical OBJECTIVE environment within an organization. 75 The reasons for ethics training vary widely from organization to organization. Some of the most prominent reasons inDescribe the clude avoiding adverse publicity, potential different lawsuits, illegal behavior, and monetary and approaches used criminal penalties. Many organizations also in ethics-training use ethics training to gain a strategic advanprograms. tage, increase employee awareness of ethics in business decision making, and help employees become more attentive to ethical issues to which they may be exposed.56 Ethics-training programs have been shown to help employees avoid rationalizations often used to legitimize unethical behavior. Among the rationalizations often advanced to justify organizational misconduct are believing that (1) the activity is not really illegal or immoral, (2) it is in the individual’s or the corporation’s best interest, (3) it will never be found out, or (4) the company will condone it because it helps the company. Ethics-training programs can help managers clarify their ethical framework and practice self-discipline when making decisions in difficult circ*mstances. Hershey Foods, General Electric, and Abbott Laboratories are among the prominent companies with training programs for managers, supervisors, and anyone else likely to encounter an ethical question at work.57 The content and approach of ethics-training programs may differ depending on the organization’s goals. Case studies, often specific to the business functions of the organization’s audience, are the most widely used approach. Other popular approaches include presenting rules or guidelines for LEARNING deciding ethical issues (such as the Golden OBJECTIVE Rule or the utilitarian approach), developing a checklist to aid managers in making ethical decisions, or using cognitive approaches that attempt to develop higher levels of ethiDiscuss what is cal understanding such as the one shown in meant by whistleTable 3.7.58

Whistle-Blowing

blowing in monitoring ethical behavior.

One method of evaluating the ethical conviction of the organization is to observe its approach to professional dissent or, as it is more commonly called, whistle-blowing. KEY TERMS Whistle-blowing occurs when an insider reports alleged Whistle-blowing organizational misconduct to Reporting alleged organizathe public. A whistle-blower is tional misconduct or wrongsomeone who exposes organidoing to the public.

Part 1 Meeting the Challenges of the 21st Century

conflict. The company spends much time and money defending itself and may damage general employee morale by seeming to be unsympathetic to legitimate Table 3.7 76 concerns expressed by employees. The whistle-blower also suffers. Many times, whistle-blowers are subject to 1. Develop a written policy on ethics and communicate it regularly to your employees. retaliatory action by disgruntled employers, and they often are blackballed for not being team players. Even if the 2. Make sure that all employees understand the policies and procedures in place for determining ethical behavior. whistle-blower wins, the costs can be high: legal expenses, 3. Establish fair and consistent rules for disciplining violators. mental anguish, ostracism by former coworkers, or a 4. Develop and continually monitor audit systems to prevent and damaged career. detect violations of the law or corporate policy. To avoid the costs for both the company and the 5. Create a safe environment where employees can report employee but to encourage reports of serious wrongdosuspected violations anonymously without fear of retribution. ing, many companies have become more receptive to 6. Allow those accused of violating ethics policies the employee complaints. Some organizations have estabopportunity to explain or defend their behavior. lished regular procedures for professional dissent, such as hotlines that employees can use to report dangerous zational wrongdoing in order to preserve ethical stan- or questionable company practices or the use of omdards and protect against wasteful, harmful, or illegal budspersons who can act as neutral judges and negotiators when supervisors and employees disagree over a acts. Whistle-blowing has become a staple on the front policy or practice. These things are being done because pages of newspapers and magazines and an all-too- most observers of wrongdoing do not report it.61 Confifrequent segment on 60 Minutes.59 An employee—or, dential questionnaires are another device to encourage more often, a former employee—of a big corporation or potential whistle-blowers to report their concerns begovernment agency goes public with charges that the or- fore they become a big issue. In these ways, progressive ganization has been playing dirty. The next step is a law- companies attempt to lessen the tensions between the suit that sets out the details of the misconduct and company and its employees and maintain the conficharges that the whistle-blower was at best ignored and dence and trust between them. Anonymous reporting of financial wrongdoing is acat worst harassed, demoted, or fired. Doubtless, some whistle-blower suits are brought by tually a requirement of the Sarbanes–Oxley legislation.62 employees with an ax to grind or who see an opportu- It does appear to be working well because the number of nity for large monetary gain. For example, under complaints of wrongdoing to the Department of Labor the False Claims Act, whistle-blowers can receive up are those protected by Sarbanes–Oxley.63 Table 3.8 shows a model whistle-blower policy deto 25% of any money recovered by the government from a business that has gained it illegally in transactions veloped by the Conference Board.64 The policy can with the government. A classic case that illustrates the work if managers emphasize that ethics is more than magnitude of potential payoffs for whistle-blowers an ideal statement. Employees must have confidence was that of Christopher M. Urda. Urda was awarded $7.5 in the company’s ethics system and believe that exposmillion in July 1992 for providing evidence that his - ing internal wrongdoing is part of their job. Whistleemployer, then a unit of Singer Corporation, cheated the blowers who raise real issues should be rewarded.65 Whatever technique is used, it should permit indiPentagon out of $77 million in the 1980s.60 Generally, employees are not free to speak out pub- viduals to expose unethical practices or lapses in licly against their employers because there is an expecta- socially responsible behavior without disrupting the tion that organizational problems are handled internally. organization. There are several well-known cases of whistleOrganizations face countless ethical issues and internal conflicts in their daily operations. Choices must be made blowers in recent years. One is Sherron Watkins, then where there are differing opinions and beliefs. Mistakes a vice president at Enron, who wrote a letter to the are made and waste does occur, but usually corrective chairman, Ken Lay, in which she said, “I am incredibly nervous that we will implode in a wave of accounting action is taken. Although whistle-blowing typically exposes unethi- scandals.”66 Of course, that is exactly what happened. A cal practices, how it is done and how it is handled second noteworthy whistle-blower is Cynthia Cooper, may also be ethically questionable. The costs of whistle- an internal auditor at WorldCom. She found $3.8 blowing are high for both the company and the whistle- billion of “accounting irregularities” in WorldCom’s blower. The company’s reputation is damaged whether it books and reported it to the Board of Directors. One wins or loses, which can create considerable internal month later, that company filed for bankruptcy protec-

A Manager’s Guide for Developing a Strong Ethics Policy

Chapter 3 Social Responsibility and Ethics

tion.67 Finally, Coleen Rowley made a public statement that high-ranking managers of the FBI did not pay attention to clear evidence that could have predicted the 9/11 terrorist attacks. Time magazine named these three people “Persons of the Year” for 2002.68

Does Socially Responsible and Ethical Behavior Pay? There has been research over the years on this question. Several studies report a positive statistical correlation between socially responsible and/or ethical behaviors and financial performance of companies. A few studies suggest the opposite. We must keep in mind, however, that statistical correlation by itself does not show cause and effect. It may be that socially responsible and ethical behaviors do lead to financial success, or it may be that financial success leads to the behaviors. Overall, the interactions between specific behaviors and financial performance are too complex to find a direct cause and effect.69 Even if there is not a direct link between socially responsible and ethical behavior and financial performance, there are many incidents of the high cost of negative behavior. A few examples: the multibillion dollars that tobacco companies must pay to states;70 the $2 billion fine that Citigroup paid for its actions related to Enron;71 the total failures of Enron itself and the accounting firm, Arthur Andersen, for its role in the Enron case; the high costs related to a large number of court cases; the costs of keeping various former managers in prison; and the very large decreases in market values of many companies, such as the 80% decline in the value of Krispy Kreme.72 These costs probably do have an overall negative effect on the economy. If in no other way, these costs eventually show up in prices and various taxes.73

Implications for Leaders We have explored two important concepts in this chapter: social responsibility and ethics. Achieving social responsibility and business ethics at an organizational level is a challenge that tomorrow’s managers will face.

Table 3.8

A Model Whistle-Blower Policy

• Publicize a reporting policy that encourages reporting of valid complaints of wrongdoing. • Establish a reporting procedure that allows anonymous complaints (required by Sarbanes–Oxley, at least for financial wrongdoing) or complaints to someone outside of the chain of command. • Investigate the situation immediately. • Go public. Publicize the outcomes of investigations. This shows employees and other stakeholders that complaints are taken seriously. Sources: N. Swartz, “Whistleblower Complaints Growing,” Information Management Journal 38, no. 3 (May/June 2005): 8; T. Mohr and D. Slovin, “Making Tough Calls Easy,” Security Management 49, no. 3 (March 2005): 51–56; L. Driscoll, “A Better Way to Handle Whistle-Blowers: Let Them Speak,” BusinessWeek, 27 July 1992, 36.

Tomorrow’s leaders must be highly cognizant of the importance of strong character for leadership effectiveness. Character can be best demonstrated by acting ethically and fully considering the impact of decisions on the community at large. Toward that end, keep the following tips in mind as a leader: • Explore ways in which the organization can be more socially responsive. • Recognize the effect of the organization’s actions on its stakeholders. • Make sure that a code of ethics is put in place and followed. • Ensure that whistle-blowing and ethical concerns procedures are established for internal problem solving. • Involve employees in the identification of ethical issues to help them gain understanding and resolve issues. • Determine the link between departments and issues affecting the company and make them known to employees in the departments. • Integrate ethical decision making into the performance appraisal process. • Publicize, in employee communications and elsewhere, executive priorities and efforts related to ethical issues. By following these guidelines, managers will be taking a major step toward achieving a high level of social responsibility in the organization and increasing employee awareness of ethical issues. Managers of the future will be expected to address important social issues proactively and to maintain a high standard of ethical behavior.

Part 1 Meeting the Challenges of the 21st Century

Meeting The Challenge Social Responsibility, Ethics, and Profits at GE n the fall of 2004, Jeffrey Immelt, CEO of General Electric (GE), presented a list of the four things that he believed it would take to keep GE successful; virtue, execution, growth, and great people. Virtue was listed first. The other three seem quite reasonable. It would be very unusual for any business to even list virtue as necessary for overall success, let alone list it first. Then Immelt said that GE being a good citizen is imperative to business. General Electric is now involved in a wide variety of actions that generally fall into the categories of corporate social responsibility and ethical behavior. The company is helping the country of Ghana with hospitals, water systems, and teaching health workers management skills. It invests in exploring wind power as a source of energy. GE is auditing its supply chain to try to not do business with companies that operate sweatshops. The company grants domestic-partner benefits. It is careful not to sell products to countries that might use them for questionable purposes, such as ultrasound machines to select the sex of a baby that could lead to abortions. GE refuses to conduct business in Myanmar because of that country’s violations of human rights. What is Immelt’s plan? He believes that it is imperative to “be a good neighbor.” More and more managers and academics believe now that there is a link between socially responsible and ethical behavior and long-term sustainable business success. Think about

how GE’s contributions in Ghana and other African countries might lead to future markets for GE’s products and services; how the company’s treatment of employees with regard to domestic benefits and no sweatshops might help attract great people. It appears that the things that Immelt and GE are doing have at least a reasonable chance of leading to profitability in the long run. In fact, that is what Immelt is counting on. Now what about doing business in Iran? GE does not conduct business directly with that country. Its wholly owned subsidiaries in France and Italy do. This is totally legal. However, some still question this practice. Immelt believes that by working with countries such as Iran, reform in that country can be achieved better and sooner than by ignoring the country. GE is still a very successful and well-known company. Immelt continues to manage the company for profit, as did Jack Welch. Immelt believes that being socially responsible and ethical are linked to profitability in the long run.

SUMMARY 1. The concepts of social responsibility and ethics require an understanding of the stakeholder view of the organization. Whereas the traditional view of socially responsible behavior considers only the stockholders, contemporary theory recognizes a much broader group of constituents—stakeholders. Stakeholders include any individual or group that is affected by or can affect the organization. As the business environment becomes more and more global, the stakeholders of many organizations have become more diverse. As a company’s operations become more international, managers will be required to understand and respond to a broader group of stakeholders.

2. Corporate social responsibility has been the subject of much controversy and debate over the last several decades. Although the concept defies precise definition, in a very general sense, social responsibility refers to the interaction between business and the social environment in which it exists. The concept of social responsibility rests on two premises: social contract and moral agent.

3. Four perspectives of corporate social responsibility have significant support from both practitioners and academics. The economic responsibility perspective suggests that the only social responsibility of business is to maximize profits within the “rules of the game.” The economic responsibility perspec-

Chapter 3 Social Responsibility and Ethics

tive argues that business has an obligation to act in a way that is consistent with society’s overall expectations of business. The ethical responsibility perspective suggests that business not only follow the letter of the law but also the spirit of the law. Supporters of the philanthropic responsibility perspective suggest that businesses act proactively to improve the welfare of society.

day’s business environment. Additional ethical issues may arise as technology improvements continue.

7. Three primary approaches can be taken in dealing with ethical dilemmas. The utility approach emphasizes the overall amount of good that can be produced by an action or a decision. The human rights approach holds that decisions should be consistent with fundamental rights and privileges such as those of life, freedom, health, privacy, and property. Under the justice approach, decisions are based on an equitable, fair, and impartial distribution of benefits (rewards) and costs among individuals and groups.

4. There are four approaches for responding to social issues. (a) reaction, (b) defense, (c) accommodation, and (d) proaction. A reaction approach results in fighting the requirements. Defense includes doing only what is required. Accommodation suggests a progressive approach—do more than is required. Proaction suggests that a business be a leader in the industry in order to better society.

8. Organizations often develop codes of ethics along with training programs to encourage and reinforce ethical business behavior. A code of ethics describes the organization’s general value system, its ethical principles, and the specific ethical rules that it tries to apply.

5. Values are the relatively permanent and deeply held desires of individuals or groups. They form the foundation of an individual’s ethical behavior. Instrumental, or means-oriented, values describe desirable standards of conduct or methods for attaining an end. Terminal, or ends-oriented, values describe desirable ends or goals for the individual and reflect what a person is ultimately striving to achieve. People from different international and cultural environments may hold very different values and thus have different perspectives on ethical issues.

9. Several approaches can be used in ethics training programs. These approaches include case studies, the presentation of rules or guidelines for deciding ethical issues, and cognitive approaches that attempt to develop higher levels of ethical understanding.

10. A whistle-blower is someone who exposes organizational wrongdoing in order to preserve ethical standards and protect against wasteful, harmful, or illegal acts. Organizations should develop and maintain policies and procedures that encourage reports of wrongdoing yet discourage employees from making frivolous or unjustified allegations against others.

6. As information technology has become more sophisticated, new ethical issues have emerged. Issues regarding privacy of individual information and the personal use of computers in the workplace are just two of the technology-related ethical concerns in to-

REVIEW QUESTIONS 1.

Describe the stakeholder view of the organization. How does the stakeholder view differ from the stockholder view, and what are the implications of these differences for the concept of corporate social responsibility? 2. (LEARNING OBJECTIVE 1) How has the globalization of the business environment impacted issues of social responsibility and ethics? 3. (LEARNING OBJECTIVE 2) Define the concept of corporate social responsibility. What are the two premises advanced by Bowen in his original definition of social responsibility? (LEARNING OBJECTIVE 1)

Compare and contrast the four perspectives of corporate social responsibility. 5. (LEARNING OBJECTIVE 4) Evaluate the four different approaches for dealing with social responsibility. Describe how these approaches differ, and give an example of a company that has pursued each approach. 6. (LEARNING OBJECTIVE 5) What are values? Why are they the basis of an individual’s ethical behavior? How might values vary across multinational, multicultural environments? (LEARNING OBJECTIVE 3)

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7. 80

Describe how advances in information technology have created new ethical challenges. 8. (LEARNING OBJECTIVE 7) Describe the utility, human rights, and justice approaches to ethical dilemmas and explain how they differ. 9. (LEARNING OBJECTIVE 8) What is a code of ethics? Describe several goals an organization can have for developing a code of ethics. (LEARNING OBJECTIVE 6)

10.

What are the common approaches used in ethics training programs? 11. (LEARNING OBJECTIVE 10) Explain what is meant by whistle-blowing. What are the benefits that come from whistle-blowing? What are some of the problems it might cause? (LEARNING OBJECTIVE 9)

DISCUSSION QUESTIONS Improving Critical Thinking

suggest any changes? Write up your suggestions and discuss them with a small group or your class.

1. Consider the implications of self-regulation versus government-imposed regulation. Why is it preferable for an industry to be self-regulated?

2. Describe an ethical dilemma that you have experienced at work or as part of a business or social organization. What was your response? If you faced a similar dilemma now, would your response differ?

Enhancing Communication Skills 3. Select an organization with which you are familiar or that you are interested in researching. Evaluate the social responsibility approach of that company with regard to the following social issues: (a) environmental protection, (b) worker health and safety, and (c) product safety. Has this company been in a reaction, defense, accommodation, or proaction mode with regard to these social issues? Make an oral presentation of your findings to the class.

4. Using current business periodicals or newspapers, find an example of an organization that has faced an ethical problem. How did it solve the problem? Did the organization have a code of ethics? Write a summary of your findings as a way to demonstrate your understanding of the issue and practice your written communication skills.

5. Examine the policy your college or university has for handling academic dishonesty. How is dishonesty defined? How appropriate is the policy? Would you

Building Teamwork 6. As part of a small group, consider the following argument: If one looks far enough into the future, the interests of all stakeholders converge. That is, all stakeholders ultimately benefit from a strong economy, well-paid employees, and a healthy and clean environment. Thus, organizations should not find a conflict between their primary stakeholders (stockholders) and their secondary stakeholders (the community at large). Is this statement true? Why or why not? Provide an example of an organizational situation that supports your position.

7. In small groups or as directed by your instructor, select a company that is considering relocating its major manufacturing plant from a domestic site to a country with lower labor costs. What are the social considerations that are most relevant for this company? Evaluate how this decision would be viewed by proponents of each of the four perspectives of social responsibility (economic responsibility, legal responsibility, ethical responsibility, and philanthropic responsibility).

8. As part of a small group, develop a code of ethics for an organization to which one or more of you belong, such as a fraternity, a sorority, a business association, or your college. What are the key issues that need to be addressed? Share your code with the class and the organization.

Chapter 3 Social Responsibility and Ethics

THINKING CRITICALLY: DEBATE THE ISSUE 81

Is Philanthropic Responsibility the Only True Type of Corporate Social Responsibility? Form two teams with four to five students on each team. The assignment for one team is to build a well-supported case for why philanthropic responsibility is in fact the best perspective to follow for corporate social responsibility. Be sure to include both short-run and long-run issues. Also, regardless of your own view, make an objective case for this approach to corporate social responsibility. The second team’s assignment is to build a wellsupported case for why philanthropic responsibility is not the best perspective. Be sure to explain why. If this per-

spective differs from your personal view, make an objective argument for why the philanthropic perspective is not the best. Have each team state its case in a set amount of time. Try to listen carefully to the arguments of the team that is presenting the case opposite of yours. After you hear the other team’s presentation, did it change your mind? How easy or difficult was it to make a case for one of these perspectives if it differed from your personal perspective? Discuss with your team members how your personal perspective, or values, related to something could affect how you behave as a manager in a situation that might be handled better with an approach that is different from your personal views.

EXPERIENTIAL EXERCISE 3.1

Observing and Reporting Unethical Behavior

_____ 9. Filing for reimbursem*nts or for other expenses that were not actually incurred. _____ 10. Using the company car for personal business.

For each of the following statements, place an O on the line if you have observed someone doing this behavior. Place an R on the line if you reported this behavior within the organization. O 5 Observed; R 5 Reported _____ 1. Coming to work late and getting paid for it.

_____ 11. A student copying a friend’s homework assignments. _____ 12. A student cheating on an exam. _____ 13. A student falsely passing off a term paper as his or her own work.

_____ 2. Leaving work early and getting paid for it.

Complete the following questions either individually or in small groups as directed by your instructor.

_____ 3. Taking long breaks or lunches and getting paid for them.

1. From items 1 through 10, select the three behaviors

_____ 4. Calling in sick when one is not ill. _____ 5. Using the company copier or fax for personal use. _____ 6. Using company postage for personal correspondence. _____ 7. Taking company supplies or merchandise for personal use at home. _____ 8. Accepting gifts, meals, or trips from customers or suppliers in exchange for giving them business.

that you consider the most unethical. Who is harmed by and who benefits from these unethical behaviors?

2. Who is harmed by and who benefits from the unethical behaviors in items 11 through 13? Who is responsible for changing these behaviors? Develop a realistic plan to accomplish this goal.

3. If you observed unethical behavior but didn’t report it, why didn’t you? If you did report the behavior, why did you? What was the result?

4. What other behaviors that you consider unethical have you observed or reported?

Part 1 Meeting the Challenges of the 21st Century

3.2 82

What Good Is an Honor System?

Working in a small group of three to five individuals, read the following scenario and then answer the questions that follow. Try to come to a consensus with your group members about your responses. Report your answers to your instructor or to the whole class. I went to a small liberal arts college where they had a very strict honor system. For example, if you saw another student cheating, you were supposed to report it. In reality, some students did cheat, but only rarely did other students report the problem. There seemed to be several reasons for this: (1) It was a hassle to get involved because you had to go to meetings, fill out forms, and answer numerous questions; (2) nobody wanted to be considered a “tattletale”; and (3) even if you were sure the person had cheated, you had to have very specific evidence to support the charge. Ten years later, I am out of college and law school and practice law with a large firm. We have an honor system

here, too, but bringing a complaint against another professional is difficult: (1) It takes time and energy to get involved; (2) no one trusts or likes a person who turns in a peer; and (3) evidence to support a complaint is often poor or difficult to obtain. For Discussion

1. What are the ethical dilemmas students face while going to college? What examples can you provide from your own or others’ experience to support this?

2. Discuss the ethical dilemmas lawyers face in performing their jobs. Give some specific examples (consider recent news reports or stories from current television shows).

3. Discuss ethical dilemmas faced by other professional groups such as accountants, professors, engineers, and psychologists.

4. Discuss the pros and cons of an honor system.

ETHICS: TAKE A STAND Sharing music files and even video files is fairly common. There are approved ways to do this—for example, iTunes from Apple or burning a CD at some Starbucks and WalMart stores. Of course, there are “unapproved” ways; many include sharing files between friends. Another area where sharing files will occur, or already has, is books and printed material. Some libraries are putting all books into electronic files. Once that is accomplished, then it is very easy to share files. For Discussion

1. Focus on books being put into electronic files. Look up the current law that guides this practice. State what it is.

2. If books are in electronic files, is it legal, according to the current law, to share the files? If so, what are the restrictions? That is, must one pay a certain fee to the publisher or author?

3. Assume that the law says that it is illegal to share books that are in electronic files; if you want a copy of the book, you must purchase your own electronic file. From your personal perspective, do you think it is still acceptable or even responsible behavior to share files? Explain why or why not.

Chapter 3 Social Responsibility and Ethics

CASE

Cutting Jobs at General Motors In his speech at the 2005 annual stockholder’s meeting of General Motors (GM), the chief executive officer, Rick Wagoner, announced a restructuring of the company. The restructuring included studying the product mix in an attempt to increase sales and stop the decline in market share that has been going on since the 1970s. It also included cutting 25,000 jobs, approximately 14% of the workforce, and closing some manufacturing plants by 2008. Probably all observers of the U.S. auto industry believe that GM simply does not produce cars that customers want anymore. GM is desperately trying to change that. However, even if the company succeeds, it still cannot get back enough market share to cover all of the huge fixed costs that GM has. Certainly, this cannot be accomplished in the next few years. In the meantime, the auto-manufacturing part of GM continues to lose money, $1.3 billion in the first quarter of 2005 alone. The cost of producing a GM car is too high. In addition to plants running at less than full capacity, the costs that GM has to pay for worker and retiree health benefits alone adds $1600 to the cost of each car. Restrictive work rules add more costs or at least make it very expensive to make changes. For example, if GM temporarily closes capacity, workers receive up to 95% pay during the layoff. If manufacturing plants are closed, the union contract requires full pay and benefits for workers. GM is asking union leaders for various concessions. The company has suggested that if concessions are not granted within a very short time, GM may reduce health benefits of retirees without union approval. Of course, the union objects to that. As for plant closings, the union rules concerning that will have to be relaxed by the union or renegotiated with the new labor contract in 2007. Wagoner’s announcement of cutting jobs says that the cuts would require “an acceleration” from normal attrition. That means that GM will find some incentives for people to retire early or they might just be fired. For Discussion

1. Based on GM’s current condition, do you think it is ethical to reduce the number of employees? Why or why not?

2. What responsibility does GM have toward its employees? Does GM have the same responsibility to the employees of its suppliers?

3. Should GM have taken any additional steps to save money before announcing the restructuring plans?

4. In light of these actions, can GM still be a socially responsible company? If so, how? Sources: L. Hawkins and K. Lundegaard, “GM Warns UAW on Health Benefits,” Wall Street Journal, 16 June 2005, A3; J. White and L. Hawkins, “GM Plans to Cut 25,000 Jobs by ’08 in restructuring,” Wall Street Journal, 8 June 2005, A1, A6; D. Welch and D. Beucke, “Why GM’s Plan Won’t Work,” BusinessWeek, 9 May 2005, 85–93; “How to Keep GM Off the Disassembly Line,” BusinessWeek, 9 May 2005, 116; E. Thornton, D. Welch, K. Kerwin, and G. Edmondson, “Carving Up the Caremakers?” BusinessWeek, 2 May 2005, 34–35; S. Carty, “GM May Be Ripe for an Extreme Makeover,” USA Today, 28 April 2005, B1–2; D. Welch, “Running Out of Gas,” BusinessWeek, 28 March 2005, 29–31.

Part 1 Meeting the Challenges of the 21st Century

VIDEO CASE 84

Organic Valley—An Exercise in Social Responsibility With more and more small family farms being threatened with extinction, a group of seven farmers set out in 1988 to create a solution, one which has grown into the largest organic farming cooperative in America, and one of the largest organic brands in the nation. Under the leadership of George Siemon, the farmers founded Organic Valley, a farming cooperative whose philosophy and decisions have always been based on the same concerns—the health and welfare of people, animals, and the earth. It is the only organic brand solely owned and operated by organic farmers who share a belief that a new sustainable approach to agriculture can help rural farm communities survive. Over the years, the original founding farmers have been joined by 682 others in states ranging from California to Maine—producing milk, eggs, meat, soy, juice, and produce—and the cooperative continues to grow, family farm by family farm. The support and resources of being part of a large and successful farming cooperative comes in handy in an industry where large corporations have swallowed over 600,000 family farms since 1960. It provides its farmer-owners with independence for their families and their way of life, because the farmers know they can rely on a stable income. As a result, Organic Valley has become the most successful organic farmer–owned cooperative in the world, drawing organic farmers from all over who visit the cooperative’s headquarters in Wisconsin to learn the secrets of what makes this cooperative model so successful. An elected board of directors, regional representatives, and the farmers themselves are involved in all decisions made by the cooperative, giving every farm family a voice in its future. The farmers participate in all aspects of the production process, such as approving the plants, testing the quality and flavor of their products, and approving packaging and transportation. They also decide how to allocate profits and, most importantly, establish pricing. A quarterly newsletter makes sure members are kept informed and up to date on legislative and other changes affecting the organic food industry. Farmers like Paul Deutsch, owner of Sweet Ridge Organic Dairy in Wisconsin, support Organic Valley’s mission to keep family farmers farming. Deutsch came to organic farming after working in a regular dairy in Madison, and realizing that conventional dairy farming operations didn’t work for him. He didn’t like the way the cows were managed—which resulted in animal behavior and health issues—and decided there had to be a better way. Reading about the Organic Valley farming cooperative in the newspaper inspired him to buy a farm and some young-stock—small calves—with the goal of establishing an organic dairy farm that would be ready to sell milk to Organic Valley within two years. Deutsch knows if a cow is not healthy and in a positive state of mind, she will not produce to the best of her genetic ability. Watching some of his cows graze contentedly in a grassy pasture, Deutsch notes that on his farm the animals are free to walk around in the sun, eat a healthy diet free from chemical additives, and consequently are far less agitated when they come to the barn for milking—so milk production is high. But what makes organic farming different from conventional farming? Organic farmers are required by law to manage their property in a way that is more environmentally conscious. They take pains to isolate their crops and animals from pesticides and herbicides, and they increase the health of land and livestock by means of natural inputs. They shun antibiotics, growth hormones, and steroids in favor of other, more holistic methods of managing the health of crops and animals. So why pay more for organic food products? When you buy from the Organic Valley Family of Farms, more of your dollar goes directly to the farming families who are bringing pure high-quality products to market. Your purchase of Organic Valley products supports sustainable family farms, which might not otherwise be able to continue farming with their commitment to humane animal treatment, responsible stewardship of the environment, and the safeguarding of critically important natural resources—soil, air, and water.

Chapter 3 Social Responsibility and Ethics

For Discussion

1. Social responsibility refers to the interaction between business and the social environment in which it exists. Describe how the Organic Valley farming cooperative’s approach to doing business supports the concept of social responsibility and the premise on which it is based. Which of the four approaches for responding to social responsibility does it exemplify?

2. Paul Deutsch is an example of a farmer-owner. Discuss how the farmer-owners support the farming cooperative’s mandate of operating a socially responsible business. Cite specific examples from the case and video.

3. Organic farmers from all over the world visit Organic Valley’s corporate headquarters to learn what makes the Organic Valley cooperative farming model so successful. In speaking with these visitors, what would you tell them about Organic Valley’s perspective on corporate social responsibility and response to social issues?

4. Do you think it is worth paying more for organic products so that farmers like Paul Deutsch can continue to focus on environmentally conscious and socially responsible farming? Why is this important? Sources: Adapted from the Organic Valley video case; Judy Ettenhofer, “Organic Valley a Big Success,” The Capital Times, 29 July 2004, Web edition, http://www.madison.com; Craig Maier, “Duckworths Part of Organic Valley Success Story,” Juneau County Star-Times, 22 January 2005, http://www.star-times.scwn.com; Organic Valley corporate Web site, http://organicvalley.coop.com.

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part 2

Planning Challenges in the 21st Century

Chapter 4 Strategic Management and Planning in a Global Environment Chapter 5 Planning in the Contemporary Organization Chapter 6 Managerial Decision Making

Chapter

Strategic Management and Planning in a Global Environment

CHAPTER OVERVIEW In Chapter 1, we learned that management is about administering and coordinating resources in a way that results in effectiveness and efficiency, achieving the organization’s goals in an efficient manner. In Chapter 2, we learned valuable lessons from experiences of managers through time. Then in Chapter 3, we explored social responsibility and ethics, important foundations that will influence managers as they manage—as they plan, organize, lead, and control in a way that will accomplish the organization’s goals. Now we have learned about the basics on which we can build our understanding of management. This chapter first recalls the overall framework of management that was presented in Chapter 1 and presents it in a way that focuses on overall planning, or strategic planning, which refers to the process of making plans and decisions that are focused on long-run performance. (Review Figure 1.5.) It discusses strategic analysis, which includes analyzing the external and internal environments of organizations along with

establishing the overall purpose, or mission, of an organization. Then developing strategy for the organization is discussed. Essentially, this refers to a skill or knowledge that helps an organization accomplish something better than its competitors and, thus, gives the organization a competitive advantage over its competitors. Implementation of the overall strategy and evaluation and control of it are briefly discussed as a way to introduce the rest of the book. Strategies can be categorized as either grand or generic strategies, and they should be implemented in light of the organization’s mission, vision and goals as well as its strengths, weaknesses, opportunities, and threats. The most common ways to evaluate strategies are portfolio assessment models and decision matrices. The topics in the remaining chapters explain the many things that make up implementation of the overall strategy and evaluation and control so that the overall strategy can be achieved successfully.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Define strategic management and describe its purpose. 2. Explain the four stages of the strategic management process. 3. Identify and explain the components of strategic analysis, as well as explain the value of conducting this analysis. 4. Explain how an organization can develop a competitive advantage. 5. Explain the purpose of strategy formulation and describe the two levels of strategic alternatives. 6. Explain the role of strategy implementation. 7. Explain the importance of evaluation and control of strategy and its implementation. 8. Discuss the importance of strategic planning.

Part 2 Planning Challenges in the 21st Century

Facing The Challenge

Changes at Hewlett-Packard ewlett-Packard (HP) had a long history of being a very successful company over many years, first in the area of mainframe computers and later in PCs, printers, consulting—especially managing information technology (IT) services for companies— and related products and services. In 1999 HP hired a new CEO, Carly Fiorina, who came from a successful career at several previous companies; the latest was Lucent Technologies. Her challenge was to revitalize the company. She wanted HP to be the leading technology company in the world. HP’s success was acceptable, but it was facing increasing challenges. There was a proliferation of products resulting in many brands that were not known and not profitable. Major business customers such as Ford and Boeing were not pleased that they had to interact with many different HP sales teams, rather than deal with one team that could handle all their needs. Dell was now the dominant producer of PCs and was coming into the printer market, two of HP’s major product areas. Fiorina made some quick changes in cutting the small and nonprofitable brands. She reorganized parts of the company into broader units, for example, by combining printers and PCs. She reorganized sales so that major business customers could interact with one sales force. Then, she completed the merger between HP and Compaq, intended to strengthen HP overall. However, many investors and some members of the HP Board of Directors had serious reservations. She made predictions to financial analysts that were positive. The predictions turned out to be too positive.

An article written by Stewart Alsop in Fortune in early 2002 suggested what might be the real problem or at least the outcome of the problems at HP. In the article, Alsop explained the many difficulties he had with purchasing a PC for his son, including the product not being in stock at the retailer, high-pressure salespeople, difficulty with repair, and major bureaucracy in purchasing the PC and later repair. Perhaps if HP had so much trouble with the actual sale of a product, there were serious problems. These problems included conflicts between HP’s culture and Fiorina’s intended changes, a negative reaction from managers when she dismissed top-level managers whom she said were not performing profitably, and changes in the competitive environment that resulted in HP not being dominant in any product area except for printers. And Dell was attacking there. In early 2005, Fiorina was dismissed. After several months, HP hired a new CEO, Mark Hurd. In discussing his selection as CEO, business publications were suggesting that perhaps Fiorina’s strategy for HP was too broad. Will Hurd have better success?

Introduction

LEARNING OBJECTIVE

1 Define strategic management and describe its purpose.

An organization needs a mission, a focus that guides its operations, and a plan to accomplish the mission. The mission and plan, together known as overall strategy, then must be implemented to achieve success. Perhaps Hewlett-Packard (HP) (“Facing the Challenge”) did have a good mission: to be the leading technology company in the world. Perhaps its difficulties were in problems with the plans for achieving that mission, or perhaps the problem was that the plan was not implemented. Then again, perhaps the mission was too broad and did

Sources: C. Loomis, “Shy Carly’s Big Bet Is Failing,” Fortune, 7 February 2005, 50–64; B. Elgin, “Carly’s Challenge,” BusinessWeek, 13 December 2004, 98–108; G. Anders, “The Carly Chronicles,” Fast Company (February 2003): 66–73; P. Tam, “The Economy: H-P’s First Results Including Compaq Stir Doubts,” Wall Street Journal, 27 August 2002, A2; S. Alsop, “If You Can’t Get This Right,” Fortune, 7 January 2002, 36.

not give enough guidance that would focus day-to-day operations so that they could target something meaningful. After you read this chapter, look at what HP is attempting to do currently. (See the “Meeting the Challenge” box.) Do its mission and plans fit the competitive situation better now than they did in the situation described in the “Facing the Challenge” box?

Strategic Management and Strategic Planning The terms strategic management and strategic planning are sometimes used interchangeably. However, there is an important difference. Strategic management refers to overall, long-run management.

Chapter 4 Strategic Management and Planning in a Global Environment

Figure 4.1

The Strategic Management Process 91

STRATEGIC ANAYSIS

STRATEGIC FORMULATION

IMPLEMENTATION OF STRATEGY

EVALUATION AND CONTROL

Assess mission and external and internal environments.

Establish strategy tactics.

Carry out day-to-day operations.

Assess operations and make sure that the mission will be achieved.

FEEDBACK Make adjustments, corrections, changes as necessary.

That includes planning, organizing, leading, and controlling effectively and efficiently over the long run—that is, successful management overall. Strategic planning deals with the planning function of management. Figure 4.1 illustrates these ideas. It also presents strategic management and its parts, planning, and other functions as processes. That is, one part of management leads to and interacts with another, and all parts may need adjusting and changing depending on the outcomes. We now turn our attention to strategic plan2 ning, which refers to the process of making plans and decisions that are focused on long-run performance. The resulting comprehensive plan that provides overall direction for the organization is known as a strategic plan. Although the level of sophistication and formality of the strategic planning process will differ among organizations, the process itself is similar across all organizations.1 As Figure 4.1 indicates, the strategic management process is carried out in four stages. Although strategic planning deals directly with the first two stages, planning is also related to the other stages. Furthermore, the feedback lines in the model suggest that the strategic planning process is interactive and self-renewing, continually evolving as changes in the environment or in the organization create a need for revised strategic plans. The strategic analysis phase of the strategic planning process addresses the question, What is the current position of the organization? Accordingly, the mission and external and internal environmental conditions faced by the organization are evaluated during this phase of the process. The information gathered during the strategic analysis serves as a foundation for the formulation of the organization’s strategic plan. Strategy formulation deals with establishing strategy and tactics necessary to achieve the mission of the organization. This includes both short-run and long-run

strategies and tactics. Strategies are developed with the intention of bridging the gap between the current and desired position of the organization. The strategy implementation phase of the process involves doing the things necesLEARNING OBJECTIVE sary to ensure that the strategy of the organization is achieved effectively and efficiently. Implementation includes the day-to-day operations and involves all other managerial functions being exercised. Explain the four The final stage of the strategic planstages of the ning process is evaluation and control. strategic management This phase is designed to monitor the orgaprocess. nization’s progress toward implementing its plans and achieving its goals. Strategic control mechanisms identify deviations between actual and KEY TERMS planned results so that manStrategic management agers can make the adjustOverall, long-run management. ments necessary to ensure that organizational goals can Strategic planning be achieved in the long term.2 The process of making plans The strategic planning and decisions that are focused process is the focus of the reon long-run performance. mainder of this chapter. AlStrategic plan though the strategic planning A comprehensive plan that process can and should be approvides overall direction for plied at both the corporate and the organization. business levels (see Chapter 5), Strategic analysis this chapter focuses on develAn assessment of the exteroping strategies at the business nal and internal environments level. In other words, this chapof an organization. ter highlights the process of

strategic planning as it relates to determining how to operate a specific business (businesslevel strategy), rather than

Strategy formulation Establishing strategy and tactics necessary to achieve the mission of the organization.

Part 2 Planning Challenges in the 21st Century

Strategic Analysis: Assessment in a Global Environment The purpose of a strategic analysis is to assess the current condition of the organization and the environment in which it operates.3 Until you understand where an organization is in its development and the factors that it faces in the markets in which it operates, it is impossible to determine where it could and should be. Strategic analysis requires three primary activities: (1) assessing the mission of the organization, (2) conducting an external environmental analysis, and (3) conducting an internal environmental LEARNING OBJECTIVE analysis.4 Figure 4.2 illustrates these three components of a strategic analysis. As you will learn in the following section, an organization’s mission expresses its fundamental purpose for exisIdentify and explain tence by describing its target markets, the components of what the target markets want in terms of strategic analysis, products and services, sometimes exas well as explain pressed as the customers’ wants that are the value of satisfied, and basically how these wants conducting this will be satisfied. An assessment of an oranalysis. ganization’s external and internal environments involves the identification of its primary strengths, weaknesses, opportunities, and KEY TERMS threats. Such an assessment is often referred to as a SWOT Strategy implementation analysis—S (strengths), W Doing the things necessary to (weaknesses), O (opportuniensure that the strategy of ties), and T (threats). By unthe organization is achieved derstanding the mission of effectively and efficiently. the organization, as well as its Evaluation and control current SWOTs, managers are The methods by which the prepared to identify and asperformance of the organizasess the strategic alternatives tion is monitored. that are appropriate for the organization. Let’s examine Mission the components of a strategic The reasons for which the analysis more closely. organization exists.

ASSESSING THE MISSION OF AN ORGANIZATION The mission of an organization reflects its fundamental reasons for existence, usually expressed in a mission statement.5 An organizational mission is a statement that provides strategic direction to the members of an organization and keeps them focused on common goals. A mission statement should be a “living” document that provides critical information for the members of the organization.6 Although mission statements vary greatly among organizations, every mission statement should describe three primary aspects of the organization: (1) its target markets (who), (2) its primary products and services (what), and (3) an outline of the overall strategy for delivering these products and services to satisfy the customers in the target markets (how), thereby ensuring long-term success. This information serves as the foundation on which strategies are built. For example, if the mission of your university is to meet the educational needs of individuals in your state by offering innovative programs in the arts, science, business, engineering, and health care, the strategy of the university should be developed to fulfill that mission. Although some management experts have questioned the real value of mission statements,7 most believe missions to be of critical importance in setting the strategic direction of an organization and for providing

addressing how to determine what business(es) to be in (corporate-level strategy). The specific activities associated with each stage of the strategic planning process are discussed in the following sections.

A SWOT analysis discussion helps managers to identify the strategic alternatives that are appropriate for an organization’s internal and external environments.

Chapter 4 Strategic Management and Planning in a Global Environment

Figure 4.2

The Components of Strategic Analysis 93

Mission Assessment

External Environment Analysis

a foundation for the development of business strategy.8 In fact, one study indicated that mission-driven companies outperformed their rivals by an average of 30% in key financial measures.9 The results of a Gallup poll strongly support the value of mission statements. Of the people surveyed in that poll, 60% said that when they understood the mission of their company it made their job feel important, which caused them to be engaged in their work. Although no direct measure was included in the poll, people engaged in their jobs probably leads to higher productivity and profitability.10 Of course, the key to all of this is that people must understand the mission and how their jobs fit and help achieve the mission. The achievement of some of the most successful companies can be attributed to the commitment of their managers to providing a compelling mission for their organizations. Examples of managers who have done this exceptionally well include Sam Walton (WalMart), Bill Gates (Microsoft), Herb Kelleher (Southwest Airlines), Jeff Bezos (Amazon.com), and Steve Jobs

Internal Environment Analysis

(Apple Computer Company and Pixar), who shaped their views of a particular market environment into a mission that could be understood and acted on by all members of their organizations. Their commitment to developing and communicating the mission of the organization contributed greatly to the success of their companies.11 The main reasons why there are different views concerning the value of mission statements are that they are difficult to construct and, even if stated well, they might not be communicated to nor understood by people in the organization. Organizations state missions differently. However, in addition to the mission, many include “philosophy,” “values,” “principles” and/or vision. (See Table 4.1.) What do you think of the mission statement that Newport News Shipbuilding wrote in 1886 and etched in bronze? “We shall build good ships here—at a profit if we can—at a loss if we must—but always good ships.”12 The company still uses this mission statement today. “At the Forefront” shows examples of missions that may need to change.

Now Apply It Setting Mission and Strategic Goals Review Experiential Exercise 4.1, “Developing a Conceptual Image Document.” This is similar to an external and internal analysis in preparation for a personal plan. You may also wish to read The 7 Habits of Highly Effective People by Stephen

Covey, especially the chapter that deals with establishing a personal mission statement. Now, write your personal mission statement. Remember that it should be focused on what you want to be, who you want to be, or

what you want to achieve in the long run. After you have written your personal mission statement, write down several strategic goals, major, longterm goals that you will need to achieve to reach your mission.

Part 2 Planning Challenges in the 21st Century

At the Forefront

The Future “Phone Company” • • •

•

• • •

Do you get phone service from an Internet provider? Does your house have a “landline”? Is your television service provided by a satellite company, a cable company, or your telephone company? Do you take pictures with or watch television on your mobile phone? Do you post to your blog from your mobile phone? Does caller ID information for home phone calls display on your television screen? Can you access the Internet from your television equipment? Will your phone company provide electricity and natural gas soon? Is your refrigerator connected to your phone service or the Internet? Can it order milk and other things when you are running low?

Defining mission as who customers are, what customers want, and how to provide it seems to be very practical. To identify and understand these things is difficult enough when the industry in which a company operates is relatively simple and stable. Many industries have become more complex over time, probably none more so than the phone service industry—or what once was the phone service industry. Consider the following: •

Sprint Nextel has mobile phones that wirelessly connect to broadband Internet service, offers GPS navigation, and has walkie-talkie capability. Of course, Sprint Nextel wants to be the sole provider for your home or business, so it may also provide a landline and, perhaps, television service.

•

• •

•

Verizon has mobile phones with color screens that display weather and sports scores from the Internet. Its high-speed DSL offers quick access to the Internet and its color screen may make it possible to offer television service. In the meantime, access to the Internet with large data bases made it easier for Verizon to sell its phone directory business. This business was sold because it is in a commodity type industry where it is difficult to differentiate the product. Time Warner offers some customers a package that includes Internet, phone, and television service. In some markets, caller ID can be shown on television screens. Comcast offers a complete package—cable television, Internet access, and phone service, both landline and mobile. SBC purchased AT&T and will be known as AT&T which provides both landline and mobile phones with high-speed Internet service. Motorola is producing mobile phones that can connect to your Internet and cable TV service. Some phones can keep you in touch with television service away from home. Google may offer phone service over its Internet network. Cablevision Systems Corp. is working to offer phone and Internet service along with cable television. Apple has an iPod that shows videos, most downloaded from the Internet along with music, and also serves as a phone. Might Apple enter into providing

•

phone service as it did with distributing music? Dell is making and selling televisions. With the merging of television, Internet, and phone service, will Dell enter the phone service business? Intel is making components for digital televisions along with components for computers and Internet-related services. Would it make sense for Intel to enter the phone and/or television service business?

While all this is happening, wireless mobile phone service providers are ranked below health-maintenance and cable TV providers in customer satisfaction. The service is just not reliable and there are far too many “dropped calls” and static. In addition, there are serious questions about whether one electronic device can hold all the technology that would be required to deliver phone, television, and Internet service. This is now true of mobile phones, but is also true of computers and televisions that are expected to deliver all services while at the same time, be light-weight and small.

Source: J. Granelli, “Cell phone operators try to reduce the static,” St. Louis Post-Dispatch, December 7, 2005, B4; D. Searcey, J. Drucker, and S. Ali, “As telecom shifts, providers seek new connections,” Wall Street Journal, December 6, 2005, A1, A8; D. Searcey and D. Berman, “Verizon to shed phone-book unit,” Wall Street Journal, December 5, 2005, A3; “It’s time to reinvent the yes-man,” Fortune, November 28, 2005, 1; C. Rhoads, “Handset sales help Motorola return to profit,” Wall Street Journal, July 20, 2005, A1.

Chapter 4 Strategic Management and Planning in a Global Environment

Table 4.1

Ford Motor Company’s Mission Statement 95

Ford Motor Company Our Vision “To become the world’s leading consumer company for automotive products and services.” Our Mission “We are a global family with a proud heritage passionately committed to providing personal mobility for people around the world. We anticipate consumer need and deliver outstanding products and services that improve people’s lives.” Our Values “Our business is driven by our consumer focus, creativity, resourcefulness, and entrepreneurial spirit. We are an inspired, diverse team. We respect and value everyone’s contribution. The health and safety of our people are paramount. We are a leader in environmental responsibility. Our integrity is never compromised and we make a positive contribution to society. We constantly strive to improve in everything we do. Guided by these values, we provide superior returns to our shareholders.” Source: Ford Motor Credit http://www.ford.com/en/company/about/overview.htm, June 30, 2005.

By providing strategic direction, the mission suggests guidance not only for current operations but also the future. This guidance for the future is called a vision. Vision can be considered from two perspectives. One is the vision statement that is intended to guide the organization into the future, what the organization wants to become or where it wants to be. The other way to look at vision is from the perspective of a skill. One frequently hears the statement that a manager must have vision. What does that mean? It means that a manager can predict problems and opportunities that are likely in the future. How can this be accomplished? How can this skill be acquired, or can it be acquired? If a manager learns to carefully analyze the external and internal environments of an organization (discussed below), that manager can probably predict what is more or less likely to happen. This skill is important for all managers to develop and is even critical for top-level managers. With a supportive organizational culture, discussed in a later chapter, most or all people in an organization can learn to predict what might happen, at least to some degree.13

CONDUCTING AN EXTERNAL ENVIRONMENTAL ANALYSIS Strategic analysis requires a thorough understanding of the external environment in which an organization operates. The purpose of an external analysis is to identify those aspects of the environment that represent either an opportunity or a threat to the organization.

Opportunities are those environmental trends on which the organization can capitalize and improve its competitive position. External threats are conditions that jeopardize the organization’s ability to prosper in the long term. Figure 4.3 illustrates the primary dimensions of a global KEY TERMS external environment. The exStrategic direction ternal environment is divided Direction of the organization into two major components— toward success in the long run. the general environment and the task environment. The Vision general environment includes The ability to predict opportuenvironmental forces that are nities and threats in the future. beyond the influence of the Vision statement organization and over which it A statement representing has no or little control. Forces what the organization wants in the task environment are to become and where it within the organization’s operwants to be in the future. ating environment and may be Opportunities influenced to some degree. Environmental trends on which the organization can capitalize. General Environment Threat An organization’s general enviA condition in the environronment includes economic, ment that may cause trouble sociocultural, technological, for the organization. and political–legal factors. A General environment strategic analysis must consider Those environmental forces the global dimensions of all outside of the organization these factors as well as their over which the organization domestic effects. Table 4.2 on may have no control. page 97 lists examples of trends

Part 2 Planning Challenges in the 21st Century

Figure 4.3

Dimensions of the Global External Environment

GENERAL ENVIRONMENT

TASK ENVIRONMENT Economic forces

Sociocultural forces Competitive Availability THE structure of ORGANIZATION of the resources industry

Customer profile Political-legal forces

in each of these areas that might represent an opportunity and/or a threat that would influence an organization’s strategic plan.14 Economic Environment The economic environment contains components of the general environment and is represented by the general state of both the domestic and the world economy. The health of the economy is reflected by variables such as total gross domestic product (GDP), growth in the GDP, interest rates, the inflation rate, the consumer price index, wage rates, and unemployment rates. Similar measures can be used to evaluate the world economy. KEY TERMS World trade and foreign direct investment trends are also useTask environment ful for such an analysis. Those environmental forces A favorable economic cl*that are within the firm’s opmate represents opportunities erating environment and over for growth for most busiwhich the organization may nesses. For example, in times have some degree of control. of economic prosperity, people Economic environment typically spend more money The economic components of on consumer goods. They tend the general environment. to eat out more frequently,

Technological forces

travel more often, and purchase more products and services. So hotels, restaurants, and retailers are just some of the organizations that would typically find growth opportunities when economic conditions are positive. However, the demand for some products and services grows during times of economic decline. For example, mobile homes, bologna, and car-repair services are products and services that tend to be in greater demand during poor economic times. Other products and services are essentially recession proof and remain in relatively constant demand irrespective of the economic conditions. Consider Denstply, for example, the world’s largest manufacturer of products used by dentists. Even during the economic downturn that began in the summer of 2000, Dentsply experienced steady sales and profitability. According to CEO John Miles, the demand for dentistry service remains relatively steady irrespective of economic conditions. This means that the demand for products from his company tends to be very stable, which has implications for his company’s strategic plan.15 With increasing globalization, as discussed in Chapter 1, managers must pay attention to the economic environments in many countries. Economic conditions in other countries may affect demand for products and services as

Chapter 4 Strategic Management and Planning in a Global Environment

Table 4.2

Sample Issues in the General Environment 97

Economic

Sociocultural

Technological

Political–Legal

• • • • •

• • • •

•

• •

• • •

Inflation rates Unemployment rates Wage rates Exchange rates Stock market fluctuations Per capita income GDP trends Economic development

• • • •

Norms and values Demographic trends Age groups Regional shifts in population Household composition Diversity Ecological awareness Life expectancy

well as many other aspects of operations. For example, wage and unemployment rates may give some companies an advantage or disadvantage in competition. A company might outsource some of its operations to another country that has cheaper wage rates, assuming that the appropriate skill levels are there. Outsourcing is a common occurrence, and it probably will increase.16 The economy can be a strong determinant of the demand for many goods and services, and it can affect many other components of the operations of an organization. Consequently, forecasts of economic activity will influence the strategic plans of most organizations. Sociocultural Environment The sociocultural environment is represented by the attitudes, behavior patterns, and lifestyles of the individuals who ultimately purchase the products or services of the organization. Components of the sociocultural environment influence not only what products and services are wanted but also many things related to how these products and services are produced and sold. As the aspects of the sociocultural environment change, so must the strategy of organizations that are affected by such changes. Although some sociocultural trends cross national boundaries (such as the popularity of jeans among young people), not all developments occur on a global basis. In fact, many aspects of the sociocultural environment are specific to certain groups of people in one country, to a certain country, or to groups of countries. Consequently, organizations that operate internationally often must cope with multiple heterogeneous sociocultural environments and therefore must develop strategies to deal with different environmental conditions.

• • • • •

Spending on research and development Internet availability Availability of information technology Production technology trends Productivity improvements Telecommunications infrastructure

• • • •

Tax laws Environmental protection International trade regulation Antitrust regulation Federal Reserve policy Intellectual property and patent laws

There are many sociocultural components and trends. Some of the most important are the following: • Changes in age groups In all developed countries, the fastest-growing age group is people over 50 years old. In the United States, these people make up the largest age group and are known as “baby boomers,” and many of them are “woofies” (well-off old folks). Campbell Soup Company recognized that older consumers eat more soup than their younger counterparts and responded. CBS, once plagued by declining viewership ratings, refocused on its traditional market of older viewers and is enjoying high television network ratings. Yet other companies, Levi’s, for example, find the aging baby-boomer market to represent a strategic threat. Since older people do not wear jeans as much as younger people, Levi’s is trying to shed its image of serving the aging baby boomers and associate its products with the very different emerging youth market. However, the company is having trouble getting Generation Y (born after 1980) to prefer the Levi brand. Generation Y could be even larger than the baby-boomer group.17

•

Increase of niche markets Many factors have combined to encourage customers to demand products and services matched closely to what they want. KEY TERMS Dell Computer company can assemble a computer Sociocultural environment that fits the exact specifiThe attitudes, behavior patcations of the customer. terns, and lifestyles of individL’Oreal produces a range uals who purchase products of cosmetics with many of and services of organizations. its brands aimed at a

Part 2 Planning Challenges in the 21st Century

specific market.18 Mobile phone services can offer packages of calling and related electronic services that meet specifications of customers. Advances in such things as customer knowledge and information and marketing have made these things possible along with advances in production and operations that allow mass customization.19 Without mass customization (matching products and services to small markets in a way that still allows efficiency and operating on a large scale), organizations could not accomplish serving small niche markets profitably.

•

Household composition It is estimated that before 2010 the most common household type in the United States will be single-person households. The composition of the household affects demand for many products and services.20

•

Increasing diversity Between 1996 and 2050, it is predicted that the percent of the racial categories in the United States will change as follows: Caucasians, from 83% to 75%; Hispanics, from 10% to 25%; African Americans, from 13% to 15%; Asians, from 4% to 9%; and American Indians, possibly a slight increase. Hispanics can be of any race, so the total percentage adds to over 100%.21 People in various ethnic groups are increasingly being identified as target markets.

•

Environmental awareness Although it is difficult to track the effects of environmental awareness on purchases and the way companies operate, there probably is a gradual increase in its effects. Several years ago, McDonald’s switched from Styrofoam containers to cardboard ones, under pressure from schoolaged children. Many cities and communities offer some sort of recycling of at least some materials. There is KEY TERMS some effect of “going green,” using recycled products Technological environment and/or those that can be reChanges in technology in the grown and do not pollute.22 external environment. And, while some still dispute B2B whether “global warming” is An initialism representing real, many people now believe business-to-business that something has to be done transactions. to reduce the use of products B2C and services that contribute An initialism representing to the pollution that causes business-to-consumer global warming. interactions. Political–legal environment The part of the external environment that includes political and legal issues that affect organizations.

Technological Environment Technological forces are the third component of the general environment. The technological environment

includes changes in technology that affect the way organizations operate or the products and services they provide. Clearly, the most significant technological advances of the recent past have been related to information technology. Not only have new software applications, such as enterprise resource planning (ERP) systems, revolutionized many organizational processes, but the advent of the Internet has also changed the way organizations operate and consumers purchase goods and services. Business-to-business (B2B) e-commerce has enabled more efficient supply-chain management strategies for virtually all organizations, and business-to-consumer (B2C) e-commerce has radically changed the retail industry, from books to music to apparel. Even greater changes will be likely in the years to come. The success of virtually all organizations today depends, at least in part, on their ability to identify and respond to technological changes. Both UPS and Fed Ex, for example, have made tremendous inroads in its industry by investing heavily in technology and utilizing the Internet as a sales channel. Both companies offer customers a wide array of services made possible by advanced information technology. The result is that UPS and Fed Ex together deliver the majority of products purchased on the Internet.23 Technology improvements have also affected the health care industry dramatically. Computer-based and Internet-based technologies make possible innovative new monitoring products that enable clinicians to better track daily patient measurements, store and retrieve historical data, and generate patient reports. No longer will health care professionals have to be at each patient’s bedside because they will be able to monitor patients from remote sites.24 From a more creative perspective, consider how improvements in technology have affected the entertainment industry. A “digital convergence” of Hollywood and Silicon Valley has made possible the production of movies such as Shrek, Shrek2, Finding Nemo, and the Incredibles taking the movie industry to a new level of creativity and innovation.25 The music industry has been heavily impacted as well. The availability of music in a digital format has created new challenges and opportunities for artists and music producers.26 Clearly, technology is impacting all kinds of industries, organizations, products, and services.27 Political–Legal Environment The final component of an organization’s general environment is its political–legal environment. The political–legal environment includes the regulatory parameters within which the organization must operate. Tax policy, trade regulations, minimum-wage legislation, and pollution

Chapter 4 Strategic Management and Planning in a Global Environment

standards are just a few kinds of political–legal issues that can affect the strategic plans of an organization. Below are a few examples. How do you think McDonald’s and other fast-food restaurants would be affected by increases in the minimum wage? How about retail apparel stores like Gap and American Eagle? Given an increase in the minimum wage, these companies would likely look for new ways to maximize the efficiency of their human resources. In addition, new pricing strategies might be necessary in light of increased labor costs. A major legal effect of the corporate corruption, which first came to light with the Enron scandal and escalated quickly with the Arthur Andersen, Worldcom, Adelphia, and Tyco debacles, is the Sarbanes–Oxley Act of 2002 that became law in the United States. That law requires organizations to follow tighter accounting rules and Section 404 of that law requires CEOs of companies to state that the accounting is accurate. As a result, thousands of publicly traded companies had to adjust the way they conducted business to meet those regulations.28 In an effort to abate the economic decline that began in 2000, the Federal Reserve established fiscal policies, mostly reducing basic interest rates, meant to stimulate economic activity.29 Of course, the Federal Reserve continues to monitor the economy and sets policies accordingly to keep the economy healthy. All these policy and regulatory changes had implications for the strategic plans of many organizations.

An organization, such as a car dealership, must know its customers’ demographic and psychographic characteristics.

Like the other parts of the general environment, the political–legal environment of an organization often varies dramatically from nation to nation. As a consequence, organizations that operate internationally must develop a strategy for dealing with multiple political– legal systems.

Task Environment In addition to general environmental issues, organizations must be aware of trends in the task environment. Critical variables in the task environment include customer profiles, the competitive structure of the industry, and the availability of resources. Customer Profiles Would there be a need for an organization that had no customers, the stakeholders who purchase the products and services of a company? Even though organizations have multiple stakeholders, without customers, there is no revenue and eventually no profits. Therefore, it is imperative to have an in-depth understanding of the characteristics, needs, and expectations of the organization’s customers. An organization’s customer may be another company in the production chain, or it may be the individual consumer. When an organization’s customers are mainly industrial or wholesale clients, it needs information about the types of organizations that are using its products and services, their specific needs and expectations, their financial health, and the extent to which they depend on the organization’s products and services.30 When an organization’s customers are individuals, their specific wants and expectations must be understood. Demographic and psychographic characteristics such as average age, income level, gender, and marital status can help. Psychographic characteristics related to the consumer’s lifestyle and personality may also be critical determinants of buying behavior. Historically, a number of prominent companies, including American Express, have learned the hard way that understanding customers is KEY TERMS essential for success in fastCustomer profile changing, highly competitive A description of customers markets. At one time, Amerithat will help managers can Express seemed to turn a understand what products deaf ear to consumers who and services that customers wanted more innovative prodwish to purchase. uct features and retailers who wanted better rates. As a Competitive structure result, American Express lost The nature and type of market share to its two largest competition between competitors, MasterCard and competitors in an industry.

Part 2 Planning Challenges in the 21st Century

Figure 4.4

Five Forces Model of Industry Analysis

100 Threat of new entrants

Bargaining power of suppliers

RIVALRY AMONG COMPETITORS

Bargaining power of customers

Threat of substitutes

Source: Reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, March/April 1979: 137–145. Copyright © 1979 by the Harvard School Publishing Corporation; all rights reserved.

Visa.31 Today, however, American Express is back with a variety of credit card options and an aggressive Internet strategy that could make it a powerful player in online banking and smart cards.32 Other companies—Amazon.com, for example— have always prioritized the customer. Jeff Bezos, founder and CEO of Amazon.com, describes his company as having a culture of “customer obsession.” That customer obsession has earned Amazon.com its place as the Internet’s most powerful merchant.33 Even though Southwest Airlines says that its employees come first, the company clearly understands who its target customers are and what they want in terms of a traveling experience on an airline. Of course, Southwest then expects its employees to deliver that traveling experience KEY TERMS to its customers.34 (See “At the Forefront” in Chapter Five forces model 3 for how Southwest incorA model developed by porates this into its mission Michael Porter that uses five statement.) forces to assess the competiAs with all parts of mantive structure of an industry. agement, the globalization of

the marketplace has complicated the process of customer analysis. With customers spread across the globe, the relevant dimensions for analysis are more difficult to identify, evaluate, and predict. Therefore, managers in international organizations must take special care to ensure that they have a clear understanding of their customers in each national market served. Competitive Structure of the Industry One of the best-known and widely used tools for assessing the competitiveness of an industry is Michael Porter’s five forces model (Figure 4.4). The nature and degree of competition is influenced by interactions among the five main factors. • Bargaining power of customers It is of course crucial for an organization to know who its customers are and what they want. However, an organization must also know how much bargaining power customers have because it will affect the final price and other conditions under which the customer will purchase the product or service. The bargaining power of customers has generally increased over time because customers have more information available to them,

Chapter 4 Strategic Management and Planning in a Global Environment

especially with help of the Internet. For example, how much information can you get when you prepare to buy a new car?

•

Threat of substitute products or services If another product or service can satisfy what customers want, then the level of competition in an industry increases because now an organization has to try harder or try other things to influence the customer to purchase its product or service rather than that of a competitor. When other products or services are seen as substitutes by customers, it is easy for customers to switch to the products or services of competitors; that is, switching costs are low. On the other hand, when a customer is loyal to one product or brand, others are not seen as substitutes. Generally, customers are willing to pay a higher price in those cases. For example, many people perceive Harley-Davidson Motorcycles to be superior to others and will pay a higher price.35

•

Bargaining power of suppliers The concept here is the same as bargaining power of customers. Just as it is important to have loyal customers, it is also important, sometimes absolutely necessary, to have strong and positive working relationships with key suppliers. However, even in those cases, the bargaining power that suppliers have will influence the details of the working relationship.

•

Threat of new entrants New organizations coming into the industry or businesses already in the industry that are now entering specific markets also tend to increase the degree of competition. An organization that has products, services, or efficiencies that are highly valued by customers normally will be able to stand up to increased competition.

•

Rivalry among competitors The strategies of various competitors and the way various high-level managers compete influence the degree of rivalry in an industry. The more strengths that competitors have or the more aggressive they are in their tactics, the higher the competitiveness in an industry will be.

The five forces model can guide managers through an analysis of the important factors in an industry. That analysis will help them understand the overall nature and degree of competition.36 As the model suggests, in addition to knowing about customers and suppliers, companies need to understand a great deal about each other. Consider the degree of competitive analysis that takes place between Coca-Cola and Pepsi, Anheuser-Busch and Miller, or Nike and Reebok. These companies make it their business to know

as much about their competitors as they know about themselves. In doing so, they are better able to anticipate what their competitors might do and how these actions might influence the marketplace. Competitive analysis has become increasingly complex as more and more industries have become global. Some organizations simply overlook important international competitors because they are “hard to see.”37 Even if such competitors are easily identified, it is often difficult to obtain information about them because few international organizations are subject to the same disclosure regulations as U.S. organizations. Nevertheless, competitive analysis is an essential aspect of the strategic planning process, and managers must commit the time and energy necessary to gain a clear understanding of their competitors both domestically and globally. Resource Availability Resource availability is the final component of the organization’s task environment. The term resource can be applied to a broad range of inputs and may refer to raw materials, personnel or labor, and capital. To the extent that high-quality, low-cost resources are available to the organization, opportunities exist to create marketable products or services. When any resource is constrained, the organization faces a threat to its operations. Thus, strategic plans will be affected by the availability of the resources needed, both domestically and globally, to produce goods and services. Consider, for example, the labor shortage experienced in the United States as it entered 2000. While the labor supply was inadequate in nearly every worker category, the scarce supply of professional and technical personnel was particularly problematic. Employers, desperate to attract qualified workers, turned to more creative methods of compensation in an effort to address the problem.38 Nonmonetary forms of compensation, such as flexible work arrangements, were often more effective in attracting workers than enhanced salary packages. For organizations that had the flexibility to design creative compensation programs, the labor shortage might have actually provided an opportunity to “out-hire” their more traditional competitors. KEY TERMS Yet, how quickly times can Competitive analysis change. With the recession of Analysis conducted to 2001–2002, labor shortages understand the strengths and abated as corporation after weaknesses of competitors. corporation announced layoffs in response to weakening deResource mand for their products and An input that an organization services. As staffs were recan use to achieve its duced, those who remained in strategy.

101

102

their jobs were expected to do more and more to make up for the loss of their coworkers. In fact, the most recent recession was the first since World War II in which the productivity of the labor force rose rather than fell. According to a study by the Bureau of Labor Statistics, this rise in productivity was due in part to the fact that nearly 20% of the workforce reported spending more than 49 hours a week at work.39 An organization must also analyze and understand the situation related to all of its other resources. The availability, relative quality, cost, and other conditions of resources can have a significant impact on the strategic plans of virtually all organizations. Once an organization understands who its customers are, what they want, the competitive structure of the industry, and the state of the resources available, it is ready to conduct an analysis of the internal environment to understand its strengths and weaknesses. Why conduct the external analysis first? Simply stated, changes in external environmental conditions can affect the value of any particular organizational strength. Consider some historical examples of this phenomenon: General Electric’s capabilities in transistor technology were devalued with the introduction of semiconductors; American Airlines’ strong relationship with the Civil Aeronautics Board became far less valuable when the airline industry was deregulated; and the advent and growth of the personal computer devalued IBM’s capability in the mainframe computer business. Most recently, consider how advances in e-commerce have affected the competitive advantages of traditional bricks-and-mortar bookstores such as Borders and Barnes & Noble.40 Although internal strengths are clearly an important source of competitive advantage, organizations must be sensitive to the ways in which changing external environmental and competitive conditions might affect the relative value of any particular strength.

CONDUCTING AN INTERNAL ANALYSIS The purpose of an internal analysis is to identify assets, resources, skills, and processes that represent either strengths or weaknesses of the organization. Strengths are aspects of the organization’s operations that represent distinctive competencies that lead to competitive adKEY TERMS can vantages, whereas weaknesses are areas that are in need of Internal analysis improvement.41 Assessment of the strengths Essentially, to understand and weaknesses of an strengths and weaknesses, the organization.

Part 2 Planning Challenges in the 21st Century

Resource availability is the final component of the organization’s task environment. When high-quality, low-cost resources are available, an organization can create marketable products or services.

entire organization must be examined. The most obvious areas to consider are marketing, operations, finance, and human resources (Table 4.3). It is crucial to understand whether the organization is even producing products and services that customers want. If it is, then the organization must produce them how and when the customers want them and do so in an efficient manner so that profits can be earned. It is also obvious that it takes employees with the right skills to do this. Other areas that may not be as obvious but nevertheless important are the organization’s structure, research and development, information systems and technology, purchasing, engineering, organizational culture, and overall control. All these areas can have very strong influences on the products and services and how they are delivered to customers.42 Notice that only some of the topics and areas to be analyzed of the internal components of an organization are discussed in this book. Topics that deal with organizational structure, culture, communication, leadership, motivation, control, and closely related issues are discussed later in this book. All other topics are included in other courses in your program. You will learn in those courses the important principles, theories, concepts, and tools that are part of those disciplines. The framework for strategic management and strategic planning presented in this chapter shows you how all other areas of an organization must fit together in arriving at an overall strategy and mission.

Chapter 4 Strategic Management and Planning in a Global Environment

Table 4.3

Internal Factors for Analysis 103

Marketing

Operations

Finance

Human Resources

Other Factors

Product, service

Productivity

Profitability

Skills

Organization culture

Brand equity

Quality

Revenue

Selection

Overall control

Market research

Facilities

Asset utilization

Training and development

Information system

Sales force

Supply chain

Debt/leverage

Leadership

Information technology

Market share

Technology

Equity

Motivation

Organizational structure

Size of market

Purchasing

Per unit costs

Communication

Distribution channels

Safety

Profit margins

Rewards

Price

Ecological issues

Cash flow

Promotion

Strengths and weaknesses of an organization must be aligned with the competitive situation. That is, if the organization has a weakness in an area that is important, the weakness must be repaired. On the other hand, a strength that is not important in the competitive environment is not really a strength, at least not in this situation. Further, an organization might have a strength, but so do the competitors. Let’s look at this deeper. A strength is more valuable if it represents a 4 distinctive competency that can lead to a competitive advantage. A distinctive competency is a unique skill or knowledge that an organization can use to accomplish something better than its competitors. Accomplishing something better than its competitors gives the organization an advantage over its competitors, a competitive advantage. A distinctive competency can be developed if the skill or knowledge has four characteristics: It adds value to the customer, it is rare, it is difficult to imitate, and it is organized.43 First, to develop into a distinctive competency, the customers of the product or service must see it as adding some value for them. For example, Wal-Mart’s customers expect products to be on the shelf and to have a relatively low price. The company’s information technology and inventory control system ensures that both of these are accomplished. Similarly, Southwest Airlines’ operations get customers to where they want to go quickly and at a relatively low price.44 Starbucks’ coffee drinks and other drinks are perceived by Starbucks customers to very good and to be

part of a “Starbucks experience.” Consequently, customers readily pay relatively high prices for Starbucks products.45 Second, if a competency can be achieved by all competitors, no one has an advantage. Therefore, it must be rare. Patents for companies such as LEARNING DuPont, Monsanto, and Pfizer can keep a OBJECTIVE competency rare, at least until the patent expires. Southwest Airlines’ target markets and point-to-point flights were rare for a long time. Other airlines are attempting to copy Explain how an Southwest now, but it still is not sure that organization can 46 they can. develop a Third, if a competency is difficult to competitive imitate, then an organization can develop a advantage. competitive advantage. Southwest Airlines has a culture, in which its operations are embedded, that make it very difficult for other airlines to imitate. Other airlines could KEY TERMS imitate using only one type of Distinctive competency airplane or reduce some costs. A unique organizational skill However, it seems impossible or knowledge that will help to copy the organizational culan organization accomplish ture that keeps all parts of something better than its Southwest operating together competitors. very effectively and efficiently. Competitive advantage On the other hand, Xerox An advantage over assumed that no one could competitors. develop its expertise in

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104

duplicating equipment. Companies such as Canon and Kodak clearly did, and Xerox lost its dominance.47 Finally, if competencies are well organized, they all work together to achieve overall results very effectively and probably efficiently. Again, look at Southwest Airlines. Essentially everything that Southwest does is well planned, tightly coordinated, and focused on its target market. Although some airlines may be catching up, Southwest has enjoyed a competitive advantage over a long period of time because its competencies add value, are rare, are difficult to imitate, and are well organized. Another example of a company that also, in one way or another, meets all four tests is Wal-Mart. Clearly, what WalMart does adds value in the eyes of customers. While the basics of some of its operations are not rare, Wal-Mart’s size certainly is. The size gives it efficiencies that others cannot match. That makes it difficult to imitate. And, of course, Wal-Mart is well organized throughout. The competencies of these companies are distinctive; they are better than the competitors. Because of this, these companies have a competitive advantage.48 Southwest Airlines and Wal-Mart accomplished this in some of the toughest industries.49

Strategy Formulation: Achieving a Competitive Advantage Once the strategic analysis is completed and the position of the organization has been assessed, corporate and business strategy can be formulated. Strategy formulation includes (1) casting or LEARNING reaffirming the organization’s vision and OBJECTIVE mission, (2) setting strategic goals, (3) identifying strategic alternatives, and (4) evaluating and choosing the strategy that provides a competitive advantage and optiExplain the mizes the performance of the organization purpose of strategy in the long term.

formulation and describe the two levels of strategic alternatives.

CASTING OR REAFFIRMING THE ORGANIZATION’S KEY TERMS VISION AND MISSION Strategic goal The result that an organization seeks to achieve in the long term.

As we discussed earlier, central to any strategic plan are the vision and mission for the or-

ganization. Whereas a mission statement describes the products and services (what), target markets (who), and strategies (how) for an organization, a vision statement describes what the organization aspires to be in the long term. It is a description of the way in which the organization wants to be perceived by others at some future date. Based on the strategic analysis, an organization must either reaffirm its mission and vision, adjust it, or change it. Most organizations will conclude that it is appropriate to reaffirm the mission and vision. However, it may be necessary occasionally to change the mission. Intel did this in the mid-1980s when it found that Japanese producers had become very good at making memory chips that resulted in making that industry very unattractive for Intel. (See the “Leaders in Action” box.) Intel switched its focus to microprocessors.50

SETTING STRATEGIC GOALS Once the vision and mission of the organization have been established, strategic goals can be determined. Strategic goals are statements of the results that an organization wishes to achieve in the long term. Such goals relate to the mission and vision of the organization and specify the level of performance that it desires to achieve. Most organizations establish their goals to reflect their perception of success. In many organizations, managers look at profit as an indicator of success, and maximizing profit becomes their primary strategic goal. However, the late Peter Drucker, a prominent management theorist, warns against focusing solely on profit as a measure of success. He suggests that a preoccupation with profits alone can lead to short-term thinking and reactive management behavior. Rather, success should be operationalized more broadly and should include such things as market standing, innovation, productivity, physical and financial resources, profitability, managerial performance and development, worker performance and attitudes, and public responsibility.51 It is important to recognize that strategic success can vary greatly across organizations and between industries. Two organizations may measure and evaluate success in dramatically different ways. For example, a growthoriented company may stress market-share gains, whereas an organization that operates in a mature, slowgrowth industry may place its emphasis on maximizing bottom-line profitability. Strategic goals by definition are focused on relatively broad accomplishments over the long run. Frequently, several more specific, shorter-term goals are necessary to achieve the overall goal. Similarly, goals need to be set at all levels of the organization—those at the lowest levels

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Leaders in Action 105

Andrew Grove of Intel ndrew Grove must have accomplished a great deal in order to be designated “the most influential business leader of the past quarter-century” in early 2004 by the Wharton School. Or course, that title fits nicely with the fact that many management experts see him as a great role model for future top-level managers. Grove is a cofounder of Intel, the company that is the “Intel Inside” many personal computers (PCs) and now mobile phones and other digital electronic devices. Intel started out being a company that produced memory chips. It did very well in that industry until Japanese companies began to dominate the industry in the mid-1980s. That is when Grove decided that Intel should change its focus. Grove literally fired himself from the company and reentered with the new Intel mission of being a microprocessor company. It was a large change of direction. With excellent adaptation to the changing competitive situation, Intel became very

successful as a microprocessor company, with the exception of the defective Pentium chip in 1994. However, Grove and Intel handled that very serious crisis quite well. Although this hurt Intel’s reputation with some users, the overall outcome probably strengthened the brand with most customers. Then in 1997, Grove became the chairman of the board of Intel. From that time until his retirement from the board in early 2005, he established an outstanding record of selecting, developing, and managing a Board of Directors. This was especially important in light of the many questionable and illegal practices that sunk major businesses in the early 2000s. He separated the roles of the CEO and chair of the board, frequently held by one peson. He selected outside board members—members who were not also managers in the company. Grove has developed a board that truly guides, or governs, the company rather than is simply a “rubber stamp” on the one hand or a meddling board on the other. Intel’s board

working together to achieve the ones at the next level, and so on up to the mission. No matter at what level in the organization, goals must be SMART. That is, they need to be specific, measurable, achievable, results oriented and have a time line, or deadline. Having these characteristics increases the probability that they can be achieved.52 Without these characteristics, goals essentially become meaningless. • Specific: “To increase productivity per employee by 10% over last year” defines what is expected. “To do the best you can” does not. How do you know when you have done the best you can? • Measurable: If a goal is not measurable, one will never know when it is achieved. Of course, some goals are difficult to measure. For example, “to increase customer satisfaction” might be difficult to measure. However, more specific goals, perhaps the number sold of a certain product or the total dollar amount of sales to a customer, could be defined that

•

is one of only 22 out of 2121 boards that have been rated a perfect 10 (on a 1 to 10 scale, 10 being highest), by Governance Metrics International, an organization that rates board performance. Grove has excelled in every role that he played at Intel. Management experts say that he has the abilities and skills to understand very complex situations, to establish strategies, to set clear and high expectations, and then to guide and influence people to achieve. Grove believes that a CEO must manage to ensure that the company’s success outlasts the tenure of the CEO. That is why he manages for the “quarter-century” or beyond—to manage the company so that it is successful in the long run.

Sources: “Jim Collins on Tough Calls,” Fortune, 27 June 2005, 89–94; J. Garten, “Andy Grove Made the Elephant Dance,” BusinessWeek, 11 April 2005, 26; “The Best Advice I Ever Got,” Fortune, 21 March 2005, 104; B. Schlender, “Inside Andy Grove’s Latest Crusade,” Fortune, 23 August 2004, 68–78.

would give an indication of increased customer satisfaction. Achievable: There are varying beliefs concerning whether achievable (or realistic or attainable) should be a characteristic of a goal. Certainly, if people do not believe that they can achieve a goal, they might not even try. On the other hand, a goal that is set too low is not motivational either. Recent research on this issue is based on the idea of goal commitment—the degree to which a person is committed to achieving the goal. A KEY TERMS manager can use various SMART motivational, communiThe acronym standing for the cation, and leadership characteristics that goals techniques to influence should possess; specific, the degree to which emmeasurable, achievable, reployees can be committed sults oriented, and time line. to goals. First, the man-

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ager can specify and clarify expectations. Then the manager can use encouragement recognition as well as other things that might assist and encourage the employees to achieve the goal. Under these circ*mstances, goals that might otherwise seem too high and unachievable can be seen as quite achievable. General Electric and Goldman Sachs use this approach and label some goals “stretch goals,” goals that are designed to be relatively high.53 Some therefore suggest that the “A” in SMART should be “audacious,” especially at the top of the organization.54

106

•

Results oriented: The goal should focus on a final outcome, not just on activity. For example, “to increase advertising expenditure to $3 million dollars during the next year” may not necessarily lead to success. Rather, it might just result in increased expenses. The increase in advertising expenditures must be linked to some measurable change in sales. Time line: Without a deadline, one does not know when the goal is to be achieved. “To increase employee productivity by 10%” has no meaning if there is no time associated with it. “To increase employee productivity by 10% during the next 12-month period in order to reduce per unit cost by 2%” is better.

IDENTIFYING STRATEGIC ALTERNATIVES The third stage of the strategy formulation process involves identifying strategic alternatives. These alternatives should be developed in light of the organization’s mission and vision; its strengths, weaknesses, opportunities, and threats; and its strategic goals. Strategy can be defined in a variety of ways. The following sections describe two ways to define strategic alternatives—grand strategies and generic strategies.

Grand Strategies Many organizations define their strategic alternatives in terms of grand strategies. A grand strategy is a comprehensive, general approach for achieving the strategic goals of an organization.55 Grand strategies fall into three KEY TERMS broad categories: stability, growth, and retrenchment Stretch goals strategies. Goals that are intended to be high. Stability Strategy A staGrand strategy A comprehensive, general approach for achieving the strategic goals of an organization.

bility strategy is intended to ensure continuity in the operations and performance of the organization. At the business level, stability strategies require

very little if any change in the organization’s product, service, or market focus. Organizations that pursue a stability strategy continue to offer the same products and services to the same target markets as in the past. They may, however, attempt to capture a larger share of their existing market through market penetration or improve bottomline profits through greater operational efficiency. Market penetration is the initial strategy of most start-up organizations. At the outset, organizations enter a specific geographic market with a particular set of products and services. Stability is the primary goal of organizations at this stage of development because they are focused on generating the sales and revenues to succeed in their businesses. Once the market they serve has been fully penetrated, the organization may move on to pursue the next category strategies—growth. Growth Strategy A growth strategy is designed to increase the sales and profits of the organization. At the business level, growth strategies involve the development of new products for new or existing markets or the entry into new markets with existing products. The purpose of growth strategies is to increase the sales and profits of the organization in the long term and to position the organization as a market leader within its industry. In many cases, growth strategies focus on being innovative, seeking out new opportunities, and taking risks. Such strategies are suitable for organizations that operate in dynamic, growing environments in which creativity, innovation, and organizational responsiveness are often more important than efficiency. Sony is an example of a company that pursues a growth strategy by offering a steady stream of new, innovative products. Some new product innovations even displace existing products, but they all contribute to the organization’s long-term growth in sales and profits. Over the last several decades, many organizations have pursued a growth strategy by entering the international marketplace. When an organization has fully penetrated the domestic marketplace, international markets provide an opportunity to grow sales further. Retrenchment Strategy The purpose of a retrenchment strategy is to reverse negative sales and profitability trends. At the business level, retrenchment strategy focuses on streamlining the operations of the organization by reducing costs and assets. Such reductions may require plant closings, the sale of plants and equipment, spending cuts, or a reduction in the organization’s workforce. Furthermore, new systems, processes, and procedures must be designed to support the new, leaner organization. If the retrenchment strategy is successful, stability or growth strategies may be considered in the long term.

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Figure 4.5

Generic Strategies Matrix 107

Broad target market

COST LEADERSHIP

Competitive scope

Narrow target market

DIFFERENTIATION

BEST-COST PROVIDER

FOCUSED LOW COST

FOCUSED DIFFERENTIATION

Cost efficiency

Preferred product or service

Competitve Advantage

During the economic troubles of 2001–2002, made more difficult by the 9/11 terrorist attacks, many companies in the United States pursued retrenchment strategies, at least for the short run. For example, airlines grounded roughly 20% of their fleets and began the painful process of layoffs and restructuring.56 Aerospace companies that served the airline industry also had to retrench their operations. Boeing laid off 30,000 workers, approximately one third of its workforce, and cut production by nearly half. Suppliers of tires, engines, and other parts of aircrafts, such as Goodrich and General Electric, also shaved thousands of jobs. But it was not just the airlines and aircraft manufacturers who were hurt. The hotel business was negatively affected, as were car rental companies. In fact, ANC Rental, the parent company of Alamo Rent A Car and National Car Rental, was forced into bankruptcy following the September 11, 2001, tragedy. 57

Generic Strategy A generic strategy reflects the primary way in which an organization competes in its market. Michael Porter, a well-known Harvard professor, identified generic strategies that can be used to describe the strategy of most organizations. Porter originally identified three strategies; cost leadership, differentiation, and focus. Initially the focus strategy included focused low cost and focused

differentiation, which are shown separately in Figure 4.5, but are usually thought of as separate strategies now. At the time, Porter suggested that a company had to choose either low cost or differentiation; to attempt both would cause a company to achieve neither and be “stuck in the middle.”58 However, over time, many industries have changed, requiring a company to accomplish the benefits of both low cost and differentiation. Also, some companies have actually used a low-cost approach as a way to differentiate themselves from competitors—for example, Southwest Airlines and Edward Jones.59 Therefore, a strategy usually called best-cost provider depicts a strategy that combines the advantages of both low cost and differentiation. 60 Porter defines the generic strategies along two primary dimensions—competitive scope and competitive advantage provided by the strategy. Competitive scope refers to the target market chosen by the organization. The organization’s focus in how it intends to serve its customers and manage its operations in order to outperform its competitors is called KEY TERMS competitive advantage. Generic strategy The fundamental way in Cost Leadership Stratwhich an organization comegy The basic reason for why petes in the marketplace. an organization would pursue

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a cost leadership strategy is that a relatively low price is important to customers. That is, if customers do not see important differences between products or services from different companies, then they expect a lower price. When there is downward pressure on price, profit margins are squeezed, making it necessary for organizations to reduce the per unit cost of the product or service. To do so, the organization must be highly efficient so that it can achieve a low-cost position in the industry. Costs may be minimized by maximizing capacity utilization, achieving size advantages (economies of scale), capitalizing on technology improvements, or employing a more productive workforce. Examples of companies that use cost leadership include Bic pens, Timex watches, and, of course, Wal-Mart. Each has concentrated on maximizing the efficiency of all its systems, achieving a lower-cost structure than its competitors. This allows these companies to sell for the relatively low prices that are demanded by customers and still be profitable. Differentiation Strategy If an organization can produce a product or service that is perceived by customers as better in some way than what competitors offer, then that organization should pursue a differentiation strategy. When customers believe that a certain type or brand of product or service is better than another, the organization can charge a higher price based on the differentiated product or service feature. Distinctive characteristics may include exceptional customer service, quality, dependability, availability, innovation, or image. Many organizations pursue a differentiation strategy. Examples of products that have succeeded through such a strategy include Cross pens, watches, Starbucks KEY TERMS Movado coffee, and Jaguar automobiles. Cost leadership strategy Focus Strategy A focus A strategy for competing on strategy occurs when an orgathe basis of low per unit cost. nization targets a specific, narDifferentiation strategy row segment of the market and A strategy for competing by thereby avoids competing with offering products or services other competitors that target a that are different from those broader segment of the marof competitors. ket. Companies that pursue a Focus strategy focus strategy may compete in A strategy for competing by their niche market with either targeting a specific and nara cost leadership (focused low row segment of the market. cost) or a differentiation (foBest-cost provider strategy cused differentiation) strategy. A strategy based on achieving Therefore, the focus strategy the benefits of both low-cost appears in two boxes of the and differentiation strategies. matrix shown in Figure 4.5.

Examples of products that have succeeded based on a focus strategy include BMW motorcycles, A&W root beer, and White Castle hamburgers. Prime examples of organizations that have used such a strategy within the grocery store industry are Fiesta Mart, a Texas-based grocery store chain that caters to Hispanic consumers, and Whole Foods, a store that focuses on organic products and the health-conscious consumer. Best-Cost Provider Strategy The best-cost provider strategy is used when it is important for an organization to achieve the advantages of both differentiation and low cost. In markets where customers want some type of differentiation but also are not willing to pay a significantly higher price, a company must work to provide a differentiated product but also must keep per unit costs low because there a ceiling on price, if not downward pressure on price. One example of a best-cost provider strategy is Toyota’s Lexus brand of cars. This is especially true with the ES model. Although the Lexus is considered a luxury car, it is in the midrange of prices for cars. Customers who purchase Lexus cars definitely do so because they consider it to be a very good car with an image with which they identify. It is a differentiated product for them. However, there are many cars of very similar quality. Therefore, there is a ceiling on how high the price can go. Because the features that help differentiate a Lexus do cost more and there is a ceiling on price, profits can be squeezed. Lexus must work to both keep its cars differentiated plus keep per unit costs down or at least keep them from rising.61

EVALUATING AND CHOOSING STRATEGY Designing strategy can be a challenging task. When determining an optimal strategy for the organization, managers can draw on a variety of tools and techniques to generate, evaluate, and choose among strategic alternatives. Among the most popular evaluation and decisionmaking techniques are portfolio assessment models and decision matrices. Portfolio assessment models provide a mechanism for evaluating an organization’s portfolio of businesses, products, or services. These models classify the organization’s portfolio of holdings into categories based on certain important criteria such as growth rate or competitive position. Based on that classification, the organization’s portfolio is assessed as to the appropriateness of the mix of business units, products, or services. The optimal strategy for each business unit, product, or service may

Chapter 4 Strategic Management and Planning in a Global Environment

vary according to its position in the portfolio. Popular portfolio assessment models include the Boston Consulting Group (BCG) growth-share matrix and the General Electric industry attractiveness–business strength matrix. Both of these portfolio assessment models will be discussed in Chapter 6. Decision matrices help managers choose among strategic alternatives. A decision matrix provides a method for evaluating alternative strategies according to the criteria that the organization’s managers consider most important such as contribution toward sales growth, market share growth, profitability, and the like. Managers rate strategic alternatives according to the established criteria and select the alternative that has the best overall rating. Chapter 6 also provides a detailed discussion of decision matrices that can be used to make strategic choices. Once the strategy formulation stage of the strategic planning process is complete, it is time to begin implementing the strategy. Strategy implementation is a critical and complex component of the strategic management and strategic planning processes.

Strategy Implementation: Focusing on Results The importance of strategy implementation should never be underestimated because the bestformulated strategy is virtually worthless if it cannot be implemented effectively. If an organization is to achieve the best results from its strategic planning efforts, it must ensure that its strategy is put into action. That many times is even more difficult than establishing the strategy. Why is that so? Often, managers simply underestimate and undermanage the strategy implementation process.62 Organizations that achieve strategic success commit a tremendous amount of time, energy, and effort to making sure that the strategy is implemented effectively.63 That, however, does not mean that the strategy needs to be long and drawn out. In fact, successful companies such as Barclays Bank, Cisco, 3M, and Southwest Airlines “keep it simple,” making it specific with very direct and clear language that states what the company will and will not do.64 A direct, specific, clear strategy is a good foundation for people to understand what they are to do because implementation of strategy involves “everything” in the organization as the organization carries out its day-to-day operations. Everything that the people in an organization

do should be directly or at least indirectly focused on achieving goals and, ultimately, the mission of the organization. Of course, the implementation of strategy must 109 also be planned. The planning part of implementation includes the necessity for establishing strategies at other levels of the organization and in all parts of the organization. For example, each major part of an organization should have its mission and overall goals, which must be aligned with the organization’s overall mission and goals. There also needs to be guidelines in the form of other plans, policies, procedures, rules, and the like. Although all these things are important, the organization also needs a culture that supports everything that the organization intends to do and helps keep focus on the overall mission.65 These are discussed in the next chapter. As with internal analysis, the remaining chapters of this book and other courses in your program deal with other aspects of managing an organization. Assuming that the overall mission and strategy of an organization are proper, everything in an organization must be aligned with them to achieve success. The remaining chapters of this book discuss the important topics of the organizational structure, the right people and related human resource practices, the organizational culture, good communication, leadership, motivation, and the effective control that must be in place to guide everything to success. Important principles, theories, concepts, and tools needed for other parts of LEARNING implementation will be learned in other OBJECTIVE courses in your program. For example, knowledge of marketing, finance, production, information systems and information technology, economics, accounting, and Explain the role of other knowledge will be needed to successstrategy fully achieve the overall mission of an orgaimplementation. nization. As you study the other topics in this book and those in your other classes, think about where and how they fit into overall strategic management.

Evaluation and Control: Achieving Effectiveness and Efficiency The last stage of the strategic planning process is evaluation and control. This involves evaluating progress toward the mission in order to understand what works and what does not and to guide operations of the organization so

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that the mission is achieved. Although this is conceptually logical, it is made very practical by the provisions of Sarbanes-Oxley Act, discussed earlier. Because Section 404 of that law requires CEOs to not only certify financial reports as accurate but also take responsibility for anything that is erroneous or misleading in the reports, managers must be sure that overall control is in place.66 As was discussed in the overall framework to studying management in Chapter 1, many aspects of evaluation and control are built into the functions that managers perform. Job descriptions, performance appraisals, communications with managers, the organizational culture, and the like all guide behavior of the people as they perform the operations of the organization. Other details of control are discussed in Chapter 15. There, we discuss evaluaLEARNING tion and control from a strategic perspecOBJECTIVE tive (comprehensive and long run). In general, control mechanisms can be either feedforward or feedback controls. Let’s examine what each involves.

Explain the importance of evaluation and control of strategy and its implementation.

FEEDFORWARD CONTROLS

Feedforward controls are designed to predict changes in the external environment or the internal operations of the organization that may afLEARNING OBJECTIVE fect its ability to fulfill its mission and meet its strategic goals. Feedforward controls are designed to identify changes in any condition, internal or external, upon which the strategy of the organization Discuss the was based. importance of Consider, for example, a large constrategic planning. struction company that plans to develop 500,000 acres of residential property over the next 3 years. By the end of KEY TERMS the first year of the company’s plan, the economy Feedforward control begins to deteriorate, and inA control designed to predict terest rates, inflation, and unchanges in the external enviemployment begin to rise. If ronment or the internal operfeedforward controls are in ations of the organization that place and are designed to demay affect an organization’s tect changes in the economic ability to fulfill its mission. conditions on which the conFeedback control struction company’s plan is A control that compares the based, the company will actual performance of the know to adapt its strategy organization to its planned to the changing economic performance. conditions.

FEEDBACK CONTROLS Feedback controls compare the actual performance of the organization to its planned performance. These controls usually target the goals established in the organization’s strategic and operational plans. One of the primary benefits of feedback control is that it focuses the attention of managers on the results for which they are responsible in the organization’s plan. This may discourage managers from spending too much time on situations and issues that are unrelated to the overall goals of the organization. Often, feedback controls evaluate financial results such as revenues, profitability, stock price, and budget variances. Other feedback controls monitor nonfinancial results such as customer relations, product and service quality, productivity, and employee turnover. Organizations should maintain both feedforward and feedback controls. Relying on only one type of control could be a mistake because these controls focus on different issues that could affect the organization’s plans. Just as organizations establish different goals and pursue different strategies, they should develop control systems to meet their specific strategic needs. An organization’s control system must be in alignment with its strategic initiatives.67 For example, an organization pursuing a growth strategy is unlikely to develop the same control system as one that is pursuing a retrenchment strategy. The growth-oriented firm would monitor such variables as forecasts for demand, sales levels, sales growth, increases in market share, and brand awareness. In contrast, the organization pursuing retrenchment would monitor such variables as supply costs, productivity, sales per employee, sales-to-assets ratios, gross and net margins, and other indicators of efficiency and bottom-line profitability.

Information Technology and Strategic Planning The increasing availability and sophistication of information technology have had a tremendous impact on the ability of organizations to develop effective strategic plans. Such technology has made both internal and external sources of information more readily available to managers who are responsible for strategic planning. For example, tracking the sales of individual products in specific regions and at various price levels is much simpler given the information technology available today.

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Meeting The Challenge

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Focus and Implementation at Hewlett-Packard n less than 3 months after he became CEO of HP, Mark Hurd is gaining the reputation for focusing on execution—that is, making the strategy work. He has reversed the combination of the printer division with the PCs division and is rethinking the sales force organization, two major parts of the previous strategy. In addition, he is hiring new managers who have credentials as being “operations types.” The overall strategy before was broader and attempted to gain synergies between HP’s divisions. Hurd is choosing much more focus. Not only is the printer division separate again, but it is also focusing on the most attractive segments of the printer market: discontinuing the printers that are not in attractive, profitable segments. Similarly, Hurd intends to reorganize the overall sales force so that

Similarly, information regarding such things as marketshare fluctuations, profitability, and productivity measures is more readily available, and operational activities such as purchasing, inventory management, and human resource management are more easily monitored. Competitive intelligence, a method by which companies track the strategies and actions of their competitors, has been enhanced greatly through the use of comprehensive databases and analytical tools. New approaches to meeting the needs of customers have emerged as companies use information technology to better understand their customers’ profiles and track their preferences.68 Clearly, a well-designed management information system can provide accurate, timely information to managers throughout the organization.69 Strategic planning is a critical organizational activity that will affect the long-term performance of most organizations. We conclude by exploring the implications of strategic planning for the manager and leader of tomorrow.

Implications for Leaders Successful leaders must have excellent strategic thinking and planning skills. It is much easier to influence employees to follow your strategy when they have a clear understanding of the present and a vision for the future. As you

smaller groups can focus on the specific products and markets, something that is in line with narrower product groups. Hurd is also looking at the entire organization to identify areas where costs can be cut. Will this rethinking of HP’s strategy changing from a focus on being the best technology company in the world to a focus on specific markets, products, and implementation be successful?

Sources: P. Burrows, “The Un-Carly Unveils His Game Plan,” BusinessWeek, 27 June 2005, 36; P. Tam, “H-P’s New Chief Separates PC Unit from Printer Arm,” Wall Street Journal, 14 June 2005, A3, A6; P. Burrows, “Why HP Is Pruning the Printers,” BusinessWeek, 9 May 2005, 38–39.

engage in strategic planning, keep the following tips in mind: • Understand the realities of the external environment in which you operate. • Understand the importance of a thorough and accurate assessment of the current situation of the organization. • A plan will be only as good as the analysis on which it is based. • Strategic vision is critical for ensuring a common strategic direction for the organization. • Make sure that the mission statement is a working document that provides direction for the members of the organization. • Strategic goals serve as targets for achievement. Make sure that they are specific, measurable, results oriented, and have a established time for their achievement. • Strategy should be designed to provide the organization with a distinctive competitive advantage in the long run. • A strategic plan is meaningless if it is not implemented well. • Provide for evaluation and control to be sure that operations are on track for accomplishment of the organization’s mission. In this chapter, you have learned about the process of strategic planning and how it fits into overall strategic management. This process provides a strong foundation for the development and implementation of effective strategy.

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SUMMARY 112

1. Strategic planning is the process by which an orga-

include cost leadership, differentiation, focused low cost, focused differentiation, add best-cost provider.

nization makes decisions and plans actions that affect its long-term performance. The purpose of strategic planning is to move the organization from where it is to where it wants to be.

6. Strategy implementation is the action phase of the

2. The strategic planning process consists of four pri-

7. Strategic evaluation and control involves monitor-

mary stages: (a) strategic analysis, (b) strategy formulation, (c) strategy implementation, and (d) evaluation and control.

strategic planning process as it puts the strategy of the organization into effect. ing the organization’s progress toward implementing its plans and achieving its goals. Strategic control mechanisms identify deviations between actual and planned results so that managers can make the adjustments necessary to ensure that organizational goals can be achieved in the long term. In general, control mechanisms can be either feedforward or feedback controls.

3. The purpose of strategic analysis is to assess the current condition of the organization. Strategic analysis requires three primary activities: (a) assessing the mission of the organization, (b) conducting an external environmental analysis to identify the opportunities and threats facing the organization, and (c) conducting an internal environmental analysis to identify the strengths and weaknesses of the organization.

8. Information technology can be used to improve the strategic planning efforts of most organizations. From data collection to support strategic analysis to the monitoring of performance indicators, management information systems provide managers with data that can enhance the effectiveness of the strategic planning process.

4. Strategy formulation requires the development or reaffirmation of an organizational mission and vision, the determination of strategic goals, the identification of strategic alternatives, and the evaluation and selection of a strategy that distinguishes the organization from its competitors.

The rapidly changing business environment creates many challenges for managers who must plan strategically. Managers of the future must remember the basic principles of strategic planning as they attempt to ensure the competitiveness of their organizations through the development of effective strategy.

5. Strategy can be described as grand strategies or generic strategies. Grand strategies include stability, growth, and retrenchment. Generic strategies

REVIEW QUESTIONS 1.

(LEARNING OBJECTIVE 1)

Define strategic

management.

Describe the process of strategic management. How are the four stages of the process interrelated? 3. (LEARNING OBJECTIVE 3) What is involved in conducting a strategic analysis? More specifically, how does one (a) develop or assess an organizational mission, (b) identify the opportunities and threats facing an organization, and (c) identify the strengths and weaknesses of an organization? 4. (LEARNING OBJECTIVE 4) Explain how an organization can establish a competitive advantage. 5. (LEARNING OBJECTIVE 5) What is the purpose of strategy formulation? What roles do vision and goals play in formulating strategy? (LEARNING OBJECTIVE 2)

Describe the three grand strategies and the generic strategies. Give examples of organizations that have pursued each of these strategic alternatives. 7. (LEARNING OBJECTIVE 6) What role does strategy implementation play in the strategic planning process? What aspects of a firm’s organizational system need to be in alignment with its strategy? 8. (LEARNING OBJECTIVE 7) Describe the elements of strategic evaluation and control. 9. (LEARNING OBJECTIVE 8) How has information technology affected the strategic planning process in contemporary organizations? (LEARNING OBJECTIVE 5)

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DISCUSSION QUESTIONS 113

Improving Critical Thinking 1. If an organization has competencies but they are not

justment for most organizations? To practice your written communication skills, write a one-page summary of your response.

distinctive, can it develop a competitive advantage? Explain why or why not.

2. How has the emergence of a global marketplace complicated the process of strategic analysis for organizations that pursue international strategies?

Building Teamwork 5. Discuss the following with a group of four or five students. Describe the effect each of the following would have on an organization:

Enhancing Communication Skills

a. Ineffective implementation of a good strategy

3. Consider an organization that you have worked for

b. Effective implementation of a poor strategy

at some time or that you currently work for. Would you classify that organization as having a stability, growth, or retrenchment strategy? Do the organization’s culture, leadership, and control systems match its strategy? To improve your oral communication skills, prepare a brief presentation for the class.

4. Under what conditions might an organization choose to shift from a cost leadership strategy to a differentiation strategy? Would this be a difficult ad-

c. Ineffective implementation of a poor strategy 6. Form teams of four or five students. For each of the following strategies, identify an organization (beyond those cited in the text) that can be characterized as pursuing each strategy: (a) cost leadership, (b) differentiation, and (c) best-cost provider. Why did you choose these particular organizations? Be prepared to discuss your selections with the class.

THINKING CRITICALLY: DEBATE THE ISSUE Mission Statements at the Department Level It was suggested in the chapter that after an organization establishes its overall strategy, including mission, strategic goals, and other plans, the same should be established in each major part of the organization. Form teams of

four to five students. Half the teams should prepare to argue that it is necessary for each department in an organization to state its mission. The other half should prepare to argue that it is not necessary, rather it is difficult or even impossible. Each team must fully explain and support its position. Your instructor will select two teams to present their arguments to the class in a debate format.

EXPERIENTIAL EXERCISE 4.1

Developing a Conceptual Image Document

Developing a conceptual image document is similar to creating a personal strategic plan. It helps you identify your personal goals while considering your strengths and

weaknesses. When completed thoughtfully, this document can help you make decisions that are crucial for achieving your career goals. Answer the following questions based on your current situation. For example, for “Who am I?” you might list that you are a son or daughter, a brother or sister, a student, or an employee or you

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might answer it from a philosophical perspective. After you have answered all questions, form teams of four to five to discuss your answers.

4.2

Developing a Strategic Analysis

3. How do I do it?

Form a team with at least four other people. As a group, assume that you are the executive committee for the College, or School, of Business at your university. Develop a strategic analysis for your college or school. In doing so, address the following:

4. For whom do I do it?

1. Assess the mission statement of the college or

1. Who am I? 2. What do I do?

school.

5. What are my strengths? 6. What are my weaknesses? 7. What do I want to be doing 3 years from now? 8. When I retire, what accomplishment will be most

2. Identify the opportunities and threats facing the college or school.

3. Identify the strengths and weaknesses of the college or school.

important to me?

Present your analysis to the class. How does your analysis compare to the analyses of other groups in your class? Did you have to make assumptions about the internal and external environment of the college or school? How might those assumptions affect the strategic plan?

ETHICS: TAKE A STAND Mitch Carlson works for a large construction company that specializes in office buildings for businesses and governments. The company operates in most of the large cities in the United States and has subsidiaries in three other countries. Mitch manages several construction sites in a large city in one of the other countries.

In the city in which Mitch manages construction sites, it is considered normal business practice for the manager of the construction site to offer gifts, usually in the form of cash, to the inspector. In the United States, gifts or payments that are required in order to pass inspection are considered to be bribes and are therefore illegal.

As in the United States, the three countries and the local governments in various cities in each country have building codes that must be followed. The codes cover such things as design and size of the buildings, electrical systems, and plumbing systems. As construction of a building progresses, inspectors from the local governmental units must check and approve the stages before construction can continue. For example, the plumbing inspector must approve the plumbing installation before walls can be enclosed. The same is true for the electrical inspector and other inspectors checking that other rules and specifications are being followed. If one of the stages does not earn the approval of the inspector, the entire construction project can be halted until the inspection passes.

One of the construction sites that Mitch manages is scheduled for an inspection of the electrical installation. Chances are high that if Mitch does not offer a cash gift, the building will not pass inspection. For Discussion

1. What are the ethical issues facing Mitch Carlson? 2. Is it ethical to follow one standard in one country and a different standard in another country?

3. If you were Mitch Carlson, how would you handle this situation?

Chapter 4 Strategic Management and Planning in a Global Environment

CASE

Developing a Strategic Plan for The Convenience Stop Carolyn Richards started her business, The Convenience Stop, 10 years ago. The Convenience Stop is a typical convenience store–gas station combination, as is typical of those businesses. The business is located close on the intersection of two fairly busy streets in an area that at the time was being developed with new houses and small strip malls. The original Convenience Stop was quite successful. Carolyn had a good combination of products and services: gasoline, snack foods, a small assortment of grocery items, beer and soda, and local newspapers. As the community grew with new housing developments and roads, Carolyn added new stores. She now has 15 in the area. Two of the stores are located near busy exits of an interstate highway. The others are located at busy street intersections, much like the location of her first store. As new stores were added, Carolyn wanted to be sure that the stores had the products that customers wanted, but she also wanted some uniformity across the stores in order to gain consistency and stability to make overall management easier. Also, if all stores carried the same products, she could negotiate better deals with suppliers. However, sometimes carrying the same products at all the stores did not work. In some stores, certain items did not sell well. In others, customers asked for things such as breakfast items because no restaurants or fast-food restaurants were nearby. Carolyn believes that it is time to do a complete reanalysis of her business in order to manage it better overall. She has called you because you are a management consultant. For Discussion

1. How might Carolyn have avoided the current situation? 2. Using the terms introduced in the chapter, develop an agenda for a strategic planning meeting with Carolyn. Where do you think she should start?

3. Develop several alternative actions that The Convenience Stop could take in terms of product and services offered at each store. Are there any partnerships that might work for the company?

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Part 2 Planning Challenges in the 21st Century

VIDEO CASE 116

Kropf Fruit Company—Strategic Management and Planning in a Global Environment Kropf Fruit Company is a family-owned business consisting of orchards, storage, and packing facilities. In the early 1990s, the owners of Kropf faced a critical decision. Increasingly dynamic market conditions favored large fruit processors over medium-sized processors such as Kropf. This trend developed from a consolidation in the grocery store industry, resulting in fewer retailers purchasing fruit. To identify a new strategy, Kropf analyzed their SWOT based on their mission. Kropf’s strengths included being a family business, good market fit, willingness to adapt to changing markets, grower support, and good relationships with growers. Their weaknesses included low-yielding trees producing less popular fruit, inability to supply the demand, no equipment to sort a wide variety of sizes and grades of fruit, no temperature-controlled storage so that fruit could be made available year-round, and no funding for expansion. Opportunities (stated as alternative solutions that may benefit Kropf) included building a packing facility, obtaining expanded storage, and exporting fruit (due to worldwide demand). Kropf’s threats included a limited number of grocery stores, larger fruit packers (for example, Dole), and imported fruit (for example, mango). As a result of analyzing their mission and SWOT, the owners of Kropf were left with two strategic options: (1) remain a medium-sized processor or (2) expand and become a major player. Both options involved risk. Remaining a medium-sized processor meant that the company would continue to face unfavorable market conditions and younger family members might not have a future in the business. Becoming a major player would allow the company to compete with other large growers and processors for major grocery store accounts. During the planning process, the owners remained open to suggestions from their stakeholders such as their growers, customers, and employees. The owners of Kropf decided to expand its operations and double in size over the next 10 years. They developed their storage and packing facilities by updating to the newest technologies. This allowed them to lower their overhead so that fruit could be packed and stored at the lowest possible cost. In addition, Kropf needed to increase their acreage and all varieties of fruit by at least 50%, which also served to attract new growers. Although the owners of Kropf have worked long and hard and the firm has suffered some growing pains, the expansion has been successful in many ways. They have provided an example for their neighbor growers who are following their example and growing with Kropf. Their expansion allows them to talk with some of the largest U.S. retailers who now treat Kropf similarly to Chiquita or Dole. In the 2 years since their initial expansion, their domestic and export sales have grown 30% and 300%, respectively. Two constant challenges in their growth have been implementing short-term operating plans such as tailoring the varieties of the crops to meet the various demands of each customer and creating new markets for their fruit. Moreover, Kropf recognizes that their success depends on their relationship with growers and packers throughout the state. Therefore, they continue to support their growers by providing chemicals and fertilizer, half of the boxes, trucks, and advice that the growers might need. Of course, Kropf also stores, packs, and markets the growers’ fruit. Other important aspects of their strategic and operational plans include forecasting worldwide demand for its fruit and guarding against adverse weather conditions. Finally, Kropf’s leaders have found that they must carefully coordinate their activities to successfully manage their day-to-day activities as well as their phenomenal growth. At this point, the owners of Kropf are satisfied with their expansion efforts accomplished through careful planning and implementation. Kropf’s 10-year growth package includes major steps scheduled to be implemented every 2 years. They’ve already talked to their lending association about their plans for future expansion of their facilities.

Chapter 4 Strategic Management and Planning in a Global Environment

For Discussion

1. Describe how Kropf progressed through the four stages of the strategic planning process. 2. Identify any aspects of the four stages of the strategic planning process that are not addressed in the case or video. Do you believe these aspects also needed to be addressed? Explain.

3. Who and what alerted them to the potential dangers of remaining a medium-sized fruit processor? Do you believe Kropf’s future success might have been different if no one had alerted them? Explain.

4. Describe whether Kropf’s strategic and operational plans support each other in achieving business success. Based on the information provided, would you have proposed similar goals? Explain.

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Chapter

Planning in the Contemporary Organization

CHAPTER OVERVIEW In Chapter 4, we discussed strategic planning, which deals with establishing comprehensive plans for the long run. We discussed strategic analysis, establishing mission and vision, formulating plans and strategic goals (strategy), implementing the plans, and evaluating and controlling to make sure that the mission and strategic goals are accomplished. It was also mentioned in Chapter 4 that planning and implementation required plans at all levels of the organization. In this chapter, we discuss why planning is important and explain the difference between strategic planning and planning at other organizational levels, called operational planning. Planning is important because it ensures that the organization is both effective and efficient in its activities; it provides the members of an organization with guidance and direction in how to deliver products and services to its customers. Most organizations engage in both strategic and

operational planning. Strategic planning has three levels: corporate, business, and functional. Operational planning deals with the process of determining the necessary day-to-day activities to achieve the long-term goals of the organization. We also discuss the types of operational plans. These include standing plans that deal with organizational issues or problems that recur frequently and single-use plans that address specific organizational situations that typically do not recur. Finally, we discuss common barriers to effective and efficient planning and how to overcome them. The barriers to effective planning include demand on the manager’s time, ambiguous and uncertain operating environments, and resistance to change. Overcoming these barriers involves learning to apply managerial functions, such as organizing and leading, more effectively; involving employees in decision making; taking advantage of a diversity of views, and encouraging strategic thinking among employees.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Describe the managerial function of planning and explain why planning is critical for effective leadership. 2. Explain the benefits and costs of planning. 3. Discuss the potential advantages and disadvantages of top-down and bottom-up planning. 4. Define strategic planning and describe the three levels of strategic planning. 5. Define operational planning and distinguish between standing and single-use plans. 6. Describe individual planning systems such as management by objectives and the Balanced Scorecard. 7. Define contingency planning and identify the circ*mstances under which contingency planning would be appropriate. 8. Discuss how advances in information technology have affected operational planning. 9. Describe common barriers to effective planning and explain ways to reduce these barriers.

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120

Facing The Challenge Can Motorola Survive? otorola Inc. has a very long, proud, and successful past. It built some of the first radios for cars, walkie-talkies for use by the military in World War II, equipment used for communication between astronauts on the moon and NASA headquarters on earth, and was a leader in mobile phones. In fact, until 1998 Motorola had secured over 50% of the global market for mobile phones. In 1998 Nokia surpassed Motorola’s share of the global mobile phone market. Then Samsung pushed Motorola to third place for a time during 2004. Profits were shrinking. During the early 2000s, the company cut 60,000 jobs, 40% of the people it had in 2000. The reasons: Customers saw Motorola as “shoddy” quality, outdated products, and a boring styling; and the company had a late shifting from analog to digital technology. The organizational culture did not stress keeping up with customer preferences and the nature of competition in the industry. The organizational structure worked to insulate one business unit from another rather than help them coordinate and communicate with each other. The reward system was based on

Introduction Edward Zander certainly has an interesting vision for Motorola (see the “Facing the Challenge” box). If achieved, it would get Motorola back to a position that it enjoyed for a long time in the past. But why did Motorola fall out of a leading position in its industry? As with most situations, “it’s not just one thing.” Apparently, Motorola did not keep up to date with understanding customers and the changes in technology and competitors in the industry. It also set up plans, policies, rules, an organizational structure, reward system, and an organizational culture, all of which interfered with keeping up rather than helping to keep up. As you read this chapter, think of the types of plans that Zander needs to get Motorola back to a successful position. Then, think about what Motorola needs to do as you read the rest of the chapters, especially those dealing with organizational structure, motivation, and organizational culture. Planning provides a foundation for all organizational activities. Through planning, managers coordinate

financial incentives geared to the performance of each business unit separately, which added to the conflict rather than cooperation between parts of the company. Many employees saw the company as a huge bureaucracy with business units at war with each other. CEO Christopher Galvin, grandson of the founder, Paul Galvin, tried to turn things around. He spun off a semiconductor business because it did not fit the focus of the company and cut costs to try to get back the profitability. However, in early 2004, he left the company. The Board of Directors then selected a new CEO, Edward Zander, formerly the second in command at Sun Microsystems, Inc. Zander’s vision is to get Motorola back to the top of the communication industry.

Sources: C. Rhoads, “Motorola’s Modernizer,” Wall Street Journal, 23 June 2005, B1, B5; B. Stone, “Motorola’s Good Call,” Newsweek, 14 March 2005, 42–43; E. Corcoran, “Making Over Motorola,” Forbes 174, no. 12 (December 2004): 103–108; R. Crockett, “Reinventing Motorola,” BusinessWeek, 2 August 2004, 82–83; “Hello, Moto,” Economist 370, no. 8357 (January 2004): 58.

organizational activities so that the goals of the organization can be achieved. Organizational success depends on the ability of managers to develop a plan that brings together, in a logical way, the diverse set of tasks that occur within the organization. In its simplest form, planning involves understanding the current situation of the organization, knowing what results the organization desires to achieve, devising the means to achieve those results, and guiding and controlling operations so that the results are achieved (Figure 5.1). Organizational leaders must understand the importance of planning and be prepared to provide guidance to other organizational members in devising and implementing plans.

Managerial Planning Planning is an essential but potentially complex managerial function. To gain a better understanding of the planning function, we discuss a few key issues: What is planning, why should managers plan, and where should the planning process begin?

Chapter 5 Planning in the Contemporary Organization

Figure 5.1

Planning as a Linking Mechanism 121

Goals

Plans

WHAT IS PLANNING? We already discussed strategic planning in the previous chapter. Here, we focus on the planning that provides the details necessary to achieve the overall mission and strategic goals. This planning is the process of outlining the activities that are necessary to achieve the goals of the organization. Through planning, managers determine how organizational resources are to be allocated and how the activities of the organization will be assigned to individuals and work groups. The output of the planning process is the plan. A plan is a blueprint for

Control

action; it prescribes the activities necessary for the organization to realize its goals.1 The purpose of planning is simple—to ensure that the organization is both effective and efficient in its activities. In a broad sense, an organization must develop a plan that ensures that the appropriate products and services are offered to its customers. More specifically, planning gives guidance and direction to the members of the organization about their role in delivering those products and services.2 As indicated in

LEARNING OBJECTIVE

1 Describe the managerial function of planning and explain why planning is critical for effective leadership.

At the Forefront Is Failing to Plan Planning to Fail? he success rate of new businesses is less than 5% over the first 24 to 30 months. It is even less than that for new products and services, from idea to a marketable product or service. The success rate of new businesses and new products and services will probably decrease because speed to the marketplace is becoming more important because of the effects of competition related to globalization and technology development. How can the success rate be increased, or can it? A major study of 233 business start-ups found that planning actually

helped new businesses to survive, at least past 30 months. That is significant because approximately 95% of them normally do not survive that long, as indicated above. The study found that planning helped the business to “get off the ground,” by guiding overall management, and also helped the new businesses with product development—a base of success. Specifically, planning helped new businesses make better decisions that included clearer understanding of what needed to be done. In addition to the typical components of plans, the study found that

goals were a major factor that guided operations, providing measures and a timetable. Interestingly, planning helped do all of this in less time than it might take without planning because analysis was conducted well beforehand.

Sources: B. Matherne, “If You Fail to Plan, Do You Plan to Fail?” Academy of Management Executive 18, no. 4 (November 2004): 156; F. Delmar and S. Shane, “Does Business Planning Facilitate the Development of New Businesses?” Strategic Management Journal 24, no. 12 (2003): 1165–1185.

Part 2 Planning Challenges in the 21st Century

Figure 5.1, plans and the guidance, or control, in implementing them lead to accomplishment of goals. 122

WHY SHOULD MANAGERS PLAN? Planning is a critical managerial function for any organization to be successful. In fact, it has often been said that “failing to plan is planning to fail.”3 A classic example of this is the acquisition of Pillsbury by General Mills in the recent past. General Mills believed that the merger could help it break into fast-growing food categories with new products to augment its tried and true, yet quite mature, cereal product lines (Cheerios, Wheaties, and Chex). But it took far longer and at a greater cost than expected, largely because of a failure to plan effectively. Integrating Pillsbury into the General Mills organization proved to be more challenging than expected, so much so that new product development efforts had to be delayed. Competitors, sensing the turmoil at General Mills, took advantage of the company’s lack of focus, launching many new products that cut into General Mills’ market share. By the time the merger was complete, General Mills’ profits had declined significantly, the stock price had LEARNING fallen, and the company had lost its marOBJECTIVE ket leadership position in the cereal business to Kellogg. With the integration of Pillsbury finished, General Mills finally started to achieve the benefits of acquiring the Pillsbury Company.4 Explain the Although there are benefits to planbenefits and costs of planning. ning, there certainly are costs also. Each will be discussed.

Benefits of Planning Ideally, planning leads to superior performance for the organization. From a general perspective, the planning process offers four primary benefits: It provides (1) a “road map,” (2) better coordination, (3) a focus on forward thinking, and (4) more effective control systems.

KEY TERMS Planning Setting goals and defining the actions necessary to achieve those goals. Plan A blueprint for action that prescribes the activities necessary for the organization to realize its goals.

A Road Map “If you don’t know where you are going, any road will take you there”5 (paraphrase of Cheshire Cat to Alice in the movie Alice in Wonderland). Of course, you do not know where you will end up. Organizations are created for a purpose, so that will not do. Organizations are set up to arrive at a certain place. That is reflected in their

missions and strategic goals. Assuming that an organization has a good mission, it then needs a map that will help select the best or at least better roads that will guide the organization to the mission. Planning is constructing and/or selecting a good map. Many studies have dealt with the relationship between planning and performance, especially financial performance of an organization. The results have been mixed. Some studies find that planning does “pay.” Others have found that it does not.6 However, all the studies focused on whether or not a formal planning process was involved. It is quite possible that a formal planning process, involving formal meetings and processes and a formal plan, may not lead to better performance for several reasons. One reason is that even with a formal plan, if it is not followed or implemented, it will not lead to success. Another reason is that a formal process does not guarantee a good plan. Still another reason is that organizational members can undertake very effective planning without necessarily going through an elaborate process. It might be that the people in an organization have learned to think strategically, as was suggested in both Chapters 1 and 4.7 Herb Kelleher, cofounder and now chair of the board of Southwest Airlines, says that his company does not do planning. At the same time, he says that Southwest must always understand its industry, its customers, and its employees—every aspect of conducting successful operations, now and in the future. Also, essentially everything that the company does is clearly and directly linked to the overall strategic goals of Southwest. Southwest is the most financially successful airline in the United States, and its financial success is high compared to many companies overall. Here is an example of a company that does planning very well yet does not get bogged down in the formalities and details of planning that can decrease, or destroy, the benefits of planning. It has a clear mission and a very good road map to get there.8 The important issue with planning is not whether an organization does it formally or not. It is whether the organization has a clear mission and a road map that members of the organization understand. Complete the exercise in the “Now Apply It” box to help understand this. Better Coordination Planning provides a muchneeded foundation for the coordination of a broad range of organizational activities. Most organizations consist of multiple work groups, each of which is responsible for contributing to the accomplishment of the goals of the organization. A plan helps both to define the responsibilities of these work groups and to coordinate their activities. Without such a mechanism for coordination, directing the efforts of organizational

Chapter 5 Planning in the Contemporary Organization

Now Apply It 123

Developing a Professional Development Plan Developing a professional development plan helps you focus on your primary career objectives. The planning process includes three major activities: goal setting, developing a plan of action, and monitoring your progress. Start by identifying a professional goal. This goal can be either short term (such as making the dean’s list) or long term (such as owning your own business). With that goal in mind, develop a list of three things that you can do to achieve it. Finally, develop a method to control your progress. How can you make sure that your plan is being implemented properly? Goal: Establish a professional goal. ______________________________________________________________________________________________ Plan: Delineate activities that will help you attain your professional goal. 1. ____________________________________________________________________________________________ 2. ____________________________________________________________________________________________ 3. ____________________________________________________________________________________________ Control: Identify ways to monitor the implementation of your plan. 1. ____________________________________________________________________________________________ 2. ____________________________________________________________________________________________ 3. ____________________________________________________________________________________________

members and groups toward common organizational goals would be difficult. At a broader level, consider the coordination needed to establish global brand recognition for a particular product. Global brand recognition requires that the product’s market position, advertising strategy, personality, look, and feel must be essentially the same from one country to another. Many companies, such as IBM, Visa, and Coca-Cola seek to achieve a consistent brand image across the dozens of international markets that they serve. These companies, like many other global organizations, use the planning process to help build consistency in their brands across international markets. Using the same planning template, terminology, and process helps managers coordinate their efforts to achieve the same brand attributes and identity throughout the global marketplace.9

perform more effectively and efficiently in the future than in the past. Today’s highly competitive and dynamic business environment demands that managers be forward thinking, but many companies find it challenging to anticipate the changes that will affect their businesses. Consider, for example, the music industry. It wasn’t so long ago that the distribution channels for music were easy to understand and to control. But with the arrival of digital media for distributing music, the entire industry has changed dramatically. Stores that sold recorded music in the form of CDs, tape cassettes, and even some vinyl records now face tremendous challenges from all forms of downloads of music. Digital media made it possible for Wal-Mart, Starbucks, iTunes, and others to compete with stores that traditionally sold music. How will music, movies, and even books, be distributed in the future?

Focus on Forward Thinking The planning function forces managers to think ahead and consider resource needs and potential opportunities or threats that the organization may face in the future. Although the identification of organizational problems and solutions is an important part of the planning process, its overriding focus should be on preparing the organization to

More Effective Control Systems An organization’s plan provides a foundation for control of the processes and progress of the company. The implementation of the activities prescribed by the plan can be evaluated, and progress toward the achievement of performance objectives can be monitored. Controls provide mechanisms for ensuring that the organization is moving in the

Part 2 Planning Challenges in the 21st Century

Costs of Planning Despite these benefits, planning also entails costs.11 These costs can be significant and may discourage managers from planning. Management Time Done properly, the planning process requires a substantial amount of managerial time and energy. Managers must work with their employees to evaluate existing resources, identify opportunities to improve the operations of the work group, and establish organizational goals. Some work groups may find that planning requires an assessment of external information related to the products, prices, and strategies of competing firms. The collection, analysis, and interpretation of Distribution channels for music have changed dramatically since the advent of digital media. such information can be time-consuming and costly.12 Interestingly, a study of planning in new businesses found that planning actually speeds up making deciNevertheless, taking the time to plan effectively may be sions.13 The reason is that planning helps people undermore important to the success of the initiative than the stand assumptions and consequences before things loss of time it takes to do so. (See the preceding discushappen, and it also helps identify missing information. In sion about planning leading to speedier decisions.)15 addition to saving time directly, it may also allow manIn the business environment of the 21st century, agers to make decisions very quickly when the competispeed in response time is critical for success in most intive environment requires it. dustries. Nimble competitors will seize opportunities Organizations participating in the global business that are missed by those who are too slow at the planenvironment often find that planning is more complex ning process. According to Barbara Kux, once vice presand time-consuming than it is for the domestic market. ident of Switzerland’s Nestlé S.A., global managers have International firms must analyze multiple economies, to be able to analyze, plan, and execute quickly to stay market forces, customer profiles, and other such varion top in the international marketplace. As she exables. Yet taking the time to plan carefully may be the key plained, “The first trait of a global manager is to be to the success of an international initiative. nimble. Move fast, but don’t hip-shoot. Do some analysis, but not too much analysis, and then act . . . it’s better Delayed Decision Making Another potential to be 70 percent right and move fast than to be perfect cost of planning is that it may delay decision making. and wait.”16 This is particularly true when planning processes require time-consuming acquisition of information and data.14 Further, some managers argue that planning directs WHERE SHOULD PLANNING the focus toward evaluating rather than doing—that BEGIN? is, paralysis by analysis. This can delay the organization’s response to changes in the in- Planning is carried out at various levels of the organizamarketplace, or inter- tion and for various departments, work groups, and KEY TERMS dustry, nal operations. The delay can individuals at each level. Although it must be initiated be particularly detrimental at the top level of the organization, information is Paralysis by analysis when an organization’s suc- needed from all levels. Eventually, people at all organiWhile planning, spending so cess depends on its ability to zational levels need to understand their part in the much time on analysis that respond to change quickly. plans, at a minimum. Beyond that, people at all levels nothing is accomplished. © SUSAN VAN ETTEN

124

right direction and making progress toward achieving its goals.10 For example, General Mills could have likely benefited from a well-developed control system to ensure that its efforts to integrate Pillsbury into its operations were proceeding as planned. Such a control system may have alerted management to some of the integration problems in time to make some adjustments to their plan.

Chapter 5 Planning in the Contemporary Organization

Table 5.1

Top-Down and Bottom-Up Planning 125 Top-Down

Bottom-Up

Organizational level

CEO, Board of Directors

People/department closest to product, service, customer.

Role of organizational unit

As the plan moves down the hierarchy, units determine actions needed to support the plan.

Units develop goals and plans. As plans move up the hierarchy, they are evaluated and adjusted for accuracy and feasibility.

Specificity of plan

Begins broad, becomes more specific as it moves down the hierarchy.

Begins specific and probably fragmented; becomes cohesive and integrated as it moves up the hierarchy.

Potential advantages

Plans are driven by top-level managers who are most knowledgeable about all factors affecting the organization.

Those closest to customers, suppliers, and operating systems provide focus of plans.

Potential disadvantages

Top-level managers may be removed from the front line.

Lower-level managers may lack understanding of all factors affecting the organization.

might be included to varying degrees in the actual planning process. Two overall perspectives on planning are 3 presented, the top-down approach and the bottom-up approach, to help us think about the potential advantages and challenges of involving people at different levels in the organization. Table 5.1 illustrates the differences between these two perspectives. Of course, the planning process in most organizations probably lies somewhere between the two extremes, including advantages and challenges from each perspective. The top-down perspective involves the CEO and/or Board of Directors who determine the general direction of the organization and establish a master plan to achieve its overall goals. The master plan establishes the parameters within which the organization’s work groups develop their plans. Managers develop plans for their work groups based on what their units must accomplish to support the master plan. The bottom-up perspective involves people at the lowest levels of the organizational hierarchy and/or those who are most directly involved in the delivery of the organization’s products and services, and they establish their goals and plans. The managers and employees at the operational level begin the planning process by estimating sales potential, describing needed product and service modifications or new product and service developments, and identifying potential problems or opportunities in the supply of input resources. As these plans move up

through the organization, they are developed further, refined, and evaluated for accurateness and feasibility. Finally, the Board of Directors and top-level executives bring together all the plans of the organization’s work groups to develop a cohesive and LEARNING well-integrated master plan that establishes OBJECTIVE 17 the overall direction of the organization. Both the top-down and bottom-up approaches to planning have advantages and disadvantages. The primary advantage of topDiscuss the down planning is that the top-level managers, potential who presumably are most knowledgeable advantages and about the organization as a whole, drive the disadvantages of development of the plan. Although one might top-down and argue that the people at other levels of the bottom-up organization know more about how the orgaplanning. nization actually operates, top-level management has a more comprehensive understanding of the wide variety of internal and external factors that affect the overall success of KEY TERMS the organization. Top-down Having those closest to Planning that starts at the the operating system, custop-level of the organization. tomers, and suppliers provide the focus for the planning Bottom-up process does have advantages. Planning that starts at the These individuals may have a lower levels in the better understanding of the organization.

Part 2 Planning Challenges in the 21st Century

competitive and operational challenges faced by the organization than the top-level executives, who are far removed from the front line. 126 Which approach is better? The answer to that question depends on the specific circ*mstances facing the organization. Perhaps most important, these planning perspectives, or approaches, are not mutually exclusive. Organizations must take advantage of the benefits of both approaches and minimize the disadvantages. Charming Shoppes, Inc., a speciality retailer of women’s apparel, uses both approaches simultaneously. While the board of directors and the top-level management team are focused on growing the company LEARNING OBJECTIVE through acquisition strategies, such as the recent acquisitions of Catherine’s and Lane Bryant, the managers and employees of the functional areas of the business are developing plans for integrating the operations Define strategic and systems of the merged companies. planning and Now that we have discussed impordescribe the three tant basic issues related to planning, let’s levels of strategic examine the two primary types of planplanning. ning that occur in most organizations: strategic and operational planning.

Strategic and Operational Planning In general, most organizations engage in both strategic and operational planning. Although strategic and operational

planning differ in a number of ways, they are also interrelated. Let’s explore both of these important types of planning.

STRATEGIC PLANNING As we discussed in Chapter 4, planning that is strategic in nature focuses on enhancing the competitive position and overall performance of the organization in the long term. It defines the markets in which the organization competes, what the customers in those markets want, and how the organization will deliver products and services to satisfy what customers want.18 The purpose of strategic planning is to move the organization from where it is to where it wants to be and, in the process, to develop and maintain a competitive advantage within the industries in which it competes.19

Levels of Strategic Planning Strategic planning occurs at three primary levels within the organization: the corporate, business, and functional levels.20 Each level can be distinguished by the focus of the strategic planning process, the participants in the process, the specificity of the strategy, and the time horizon of the plan. Table 5.2 summarizes the key differences in these three levels of strategic planning; the discussion that follows elaborates on each.

Corporate Strategic Planning Strategic planning that occurs at the top level of the organization focuses on developing corporate strategy. Corporatelevel strategy addresses the question, What business should we be in? It is relevant for organizations that operate in single or multiple lines of business. Corporate

Levels of Strategic Planning

Table 5.2

Time Horizon

Level

Focus

Specificity

Participants

Corporate strategy

To develop a mix of business units that meets the company’s longterm growth and profitability goals.

Broad

Board of directors Top-level executives

5–10 years

Business strategy

To develop and maintain a distinctive competitive advantage that will ensure long-term profitability.

More specific than the corporate strategy

Top-level executives Managers within the business unit

1–5 years

Functional strategy

To develop action plans that ensure that corporate and business strategies are implemented.

Very specific

Middle-level managers Lower-level managers

1–2 years

Chapter 5 Planning in the Contemporary Organization

strategic planning involves assessing the organization’s portfolio of businesses to determine whether an appropriate mix exists.21 The objective is to develop a mix of business units that meets the long-term goals of the organization. Diversification is often at the core of corporate strategy.22 Diversification occurs when an organization chooses to add a new business unit to its portfolio of businesses. A company may pursue a strategy of diversification if it wishes to reduce its dependence on its existing business units or to capitalize on its core competencies by expanding into another business. Diversification can be unrelated (entering markets or industries that are different from the ones in which it operates) or related (adding a business or product that is related to the mission or core competencies). While PepsiCo’s portfolio of products and companies was not totally unrelated, it decided to sharpen its overall focus in the late 1990s. Consequently, PepsiCo spun off Kentucky Fried Chicken, Taco Bell, and Pizza Hut into a separate, independent company and its softdrink bottling company into another. PepsiCo acquired Cracker Jack, Tropicana, Gatorade, and Quaker granola bars (Gatorade and granola bars came with its acquisition of Quaker Oats Company) to joins its Lay’s snacks, Aquafina, Lipton, Doritos, and Mountain Dew and Pepsi beverages to fit a corporate strategy with a tighter focus on convenience foods and beverages. This is related diversification that benefits from a clear focus and sharing of PepsiCo’s competencies in marketing convenience foods.23 Because corporate strategy defines the very nature of the organization, it is formulated by the organization’s top-level managers and usually must be approved by the Board of Directors. In developing their strategic plans, however, these individuals rely to a great extent on information provided by middle- and lower-level managers. Corporate strategy is relatively broad and general in nature and may extend as far as 5 to 10 years into the future. While many would argue that it is impossible to formulate strategy 10 years into the future in today’s rapidly changing business environment,24 it is important for corporate leaders to have a strategy for the long-term future of the organization—even if that strategy has to be adapted and adjusted in light of environmental and competitive changes that occur over the years. Business Strategic Planning Business-level strategy defines how each business unit in the organization’s corporate portfolio will operate in its market arena. Strategy formulated at this level addresses the question, How do we compete in our existing line(s) of business?

Carrying the PepsiCo example further, the portfolio of products might be divided into division, or departments, of soft drinks, snack foods, sports drinks, 127 and Quaker Oats. While coordinating with corporate managers and other division managers, the top-level managers in the soft-drinks division would focus on the overall management of soft-drink products. The managers of the other divi- KEY TERMS sions would focus on their Corporate-level strategy divisions. Decisions and actions at the Assume that an organizatop level of the organization tion held a group of unrelated that define the portfolio of products or companies—say, business units that an for example, an airline, a hotel organization maintains. chain, and a rental car comDiversification pany. In that case, businessAdding new products, level strategy would mean services, or businesses to an that the manager of each busiorganization. ness would focus on all aspects Unrelated diversification of the one business, the manAdding products, services, or ager of the airline company businesses that are different on the airline business, and from the ones an organization so on. currently has. Business strategy should be formulated by the individuRelated diversification als who are most familiar with Adding products, services, or the operations of the business businesses that have some unit. Consequently, the Board relationship to the ones an of Directors and corporate organization currently has or executives are typically not inshare a core competency. volved with strategy formulaBusiness-level strategy tion at the business level. Focused plans that define Instead, this responsibility lies how each business unit in an with the top-level executives organization’s corporate portand managers within the spefolio will operate in its market cific business units, and usually arena. the CEO of the business unit is Strategic business unit responsible for the outcomes of (SBU) 25 the business unit. In this situA part of an organization that ation, the business unit is reis responsible for its ferred to as a strategic business outcomes. unit (SBU). For example, PepFunctional-level strategy siCo has a manager who is reStrategy at the department sponsible for the Tropicana and level that specifies such Gatorade group and another things as the production, for Frito Lay Snacks.26 research and development, financial, human resource Functional Strategic management, and/or marketPlanning Functional strateing activities necessary to gic planning leads to the develimplement the organization’s opment of functional strategy. corporate and business Functional-level strategy specstrategies. ifies the production, research

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Table 5.3

Examples of Functional Strategies

128 Human Resource Strategies • Recruit for management positions. • Design commission structure. • Develop training program. • Design benefit package.

Finance Strategies • Secure debt financing. • Evaluate capital structure. • Initiate and manage budget process. • Review and revise credit policies.

Marketing Strategies • Develop market research study. • Identify additional distribution channels. • Create promotional program. • Evaluate pricing structure.

Production Strategies • Evaluate robotics system. • Redesign quality control processes. • Locate alternative sources of supply. • Develop inventory management system.

and development, financial, human resource management, and marketing activities necessary to implement the organization’s corporate and business strategies.27 Table 5.3 lists some of the areas in which functional planning occurs and gives examples of functional strategies LEARNING in each area. OBJECTIVE Strategy formulation at the functional level addresses the question: What needs to be done functionally to implement our business and corporate strategies? Whereas an organization’s business Define operational and corporate strategies address what planning and distinguish should be done, functional strategy fobetween standing cuses on how things will get done. and single-use Inside the Frito Lay part of PepsiCo, plans. the production department will have to prepare to manufacture the products, and the marketing department must develop appropriate KEY TERMS pricing, promotion, and advertising plans. Each activity Operational planning represents functional strategy. The process of determining Functional strategic planthe day-to-day activities that ning is carried out by middleare necessary to achieve the and lower-level managers, who long-term goals of the orgadevelop functional strategies to nization. ensure that their units are supOperational plan porting the corporate and An outline of the tactical acbusiness strategies of the orgativities necessary to support nization. Strategic planning at and implement the strategic the functional level is more plans of the organization. specific than corporate and business strategic planning, Standing plan and functional strategies typiA plan that deals with organically span a shorter time frame, zational issues and problems usually 1 or 2 years at most. that recur frequently.

OPERATIONAL PLANNING Operational planning focuses on determining the day-to-day activities that are necessary to achieve the long-term goals of the organization. Operational plans outline the tactical activities that must occur to support the ongoing operations of the organization. They are more specific than strategic plans, address shorter-term issues, and are formulated by the middle- and lower-level managers who are responsible for the work groups in the organization. In general, plans can be categorized as standing or single-use plans, depending on whether they address recurring issues or are specific to a given set of circ*mstances. Most organizations maintain both standing and single-use plans because both are applicable to a broad range of organizational situations. Although standing and single-use plans are usually developed for work groups within the organization, operational planning can also occur for individual organizational members.

Standing Plans Standing plans are designed to deal with organizational issues or problems that recur frequently. By using standing plans, management avoids the need to “reinvent the wheel” every time a particular situation arises.28 In addition, such plans ensure that recurring situations are handled consistently over time. This may be particularly important for an organization with a highly diverse workforce. Individuals from different cultural and social backgrounds may react to certain situations differently. Standing plans ensure that such situations will be handled in prescribed ways. Standing plans can, however, limit employees’ flexibility and can make it more difficult to respond to the customer, if customers require different things over time

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management. A university’s administration maintains policies about admittance to certain academic programs, grade appeals, and permissible course waivers or substitutions. These policies provide a framework for decision making that guides the decision maker in evaluating the specific circ*mstances surrounding each individual case. Therefore, policies do not state specifically what the decision will be. Rather, they state the boundaries of the decision and/or what must be considered in the decision. In doing these things, policies do guide decisions so that they will be similar in situations that are similar. You will see how policies are necessary to delegate authority when we discuss that in Chapter 7.

Universities maintain policies about admittance to academic programs, grade appeals, and course waivers that guide each decision maker in evaluating specific circ*mstances in individual student cases.

or from customer to customer. Therefore, standing plans work best in situations that are stable and there is little change. Standing plans include policies, procedures, and rules. Each provides guidance in a different way. Policies Policies are guidelines that govern how certain organizational situations will be addressed. They provide guidance to managers who must make decisions about circ*mstances that occur frequently within the organization. For example, human resource management departments maintain policies concerning sick leave, vacation leave, and benefit options. Production departments establish policies for procurement and inventory

Procedures Procedures are more specific and action oriented than policies and are designed to give explicit instructions on how to complete a recurring task. Most companies maintain some sort of procedures manual to provide guidance for certain recurring activities. Many use a standard operating procedures (SOPs) manual to outline the basic operating methods of the organization. For example, human resource management departments develop procedures for filing benefit claims, documenting the reasons for sick leave, and requesting vacation time. Production departments establish procedures for identifying and evaluating suppliers and ordering supplies, operating the inventory management system, and identifying and implementing specific quality-control criteria. Universities maintain specific procedures for applying for admittance to certain programs, appealing grades, and requesting course waivers and/or substitutions. Rules Rules are the strictest type of standing plan found in organizations.29 Rules are not intended to serve as guidelines for making organizational decisions; instead, they provide detailed and specific regulations for action.30 For example, a human resource management department may have rules governing the number of sick days an employee may take with pay, the months in which KEY TERMS vacation time can be scheduled, and the length of time an Policy organizational member must A guideline for decision makbe employed before qualifying ing within the organization. for benefits. The production Procedure department may have rules An instruction on how to governing the percentage of complete recurring tasks. supplies that can be purchased SOP from a single supplier, the Standard operating procedure. method in which inventory Rule must be accounted for, and the A detailed and specific reguway in which products of sublation for action. standard quality are handled.

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A university may have rules to govern the minimum grade point average necessary for admission to a given academic program and the specific courses that may be substituted for one another. Experiential Exercise 5.1 provides an opportunity for you to evaluate and adapt standing plans for an organization with which you are familiar. Based on this exercise, you should see the potential value of establishing standing plans to cope with recurring organizational situations.

Single-Use Plans Single-use plans are developed to address a specific organizational situation. Such plans are typically used only once because the specific situation to which they apply does not recur. Consider, for example, the plan of SAP Americas, a leading provider of enterprise resource planning (ERP) and e-commerce solutions, to LEARNING build a new corporate headquarters. A soOBJECTIVE phisticated plan was necessary to finance, construct, and move into the new building. This was a single-use plan because SAP would not need to build such a building or Describe individual relocate its employees again for a very long planning systems time. such as The most common types of single-use management by plans are programs, projects, and budgets. objectives and the Each offers a different degree of comprehenBalanced siveness and detail. Programs are the most Scorecard. comprehensive plans; projects have a narrower scope and, in fact, are often undertaken as a part of a program; and budgets are developed to support programs or projects.

KEY TERMS

Single-use plan A plan that addresses specific organizational situations that typically do not recur. Program A single-use plan that governs a comprehensive set of activities designed to accomplish a particular set of goals. Project Directs the efforts of individuals or work groups toward the achievements of a specific goal. Budget A plan that specifies how financial resources should be allocated

Programs Programs are single-use plans that govern a relatively comprehensive set of activities designed to accomplish a particular set of goals. Such plans outline the major steps and specific actions necessary to implement the activities prescribed by the program. The timing and sequencing of the efforts of individuals and units are also articulated in the plan. Many organizations today have implemented diversity programs. Such programs are designed to recruit and hire a more diverse workforce as well as to educate employees on

issues related to diverse work environments. For example, Allstate Corporation took proactive steps to recruit minority candidates and to provide diversity training for managers and employees at all levels of the organization. This program was developed to meet Allstate’s goal of having a productive and diverse workforce that reflects the organization’s customer base.31 Projects Projects direct the efforts of individuals or work groups toward the achievement of specific, welldefined goals. Projects are typically less comprehensive and narrower in focus than programs and usually have predetermined target dates for completion. Many projects are designed to collect and analyze information for decision-making purposes or to support more comprehensive planning efforts, such as programs. For example, the marketing department at Allstate might be asked to undertake a project to heighten awareness of Allstate among minority populations. This project would have a narrower scope than the overall diversity program, but it would be undertaken to support Allstate’s overall efforts to create a more diverse employee base. Similarly, the food services group might take on a project to create a diversity week, featuring different cultural foods, entertainment, and artwork in the company lounge. Again, the project would be of narrower scope than the diversity program as a whole, but it would contribute to the overall diversity goals of the company. Budgets Budgets often are undertaken as a part of other planning efforts because they specify the financial resource requirements associated with other plans such as programs and projects. In addition, budgets serve as a mechanism for controlling the financial aspects of implementing the plan.32 Allstate would undoubtedly establish a budget to support the implementation of the overall diversity program and to ensure that it is carried out in an effective and efficient manner. In fact, the size of that budget might provide some insight as to the importance of the project to the organization. Although all the types of standing and single-use plans discussed here can be used for specialized planning purposes, they are often interrelated. For example, projects are often subcomponents of more comprehensive programs or are undertaken in an effort to develop or implement policies, procedures, and rules. In fact, most organizations engage in all of these forms of planning over time.

Individual Plans 6

Increasingly, organizations are looking for ways to translate broader organizational plans to the level

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Figure 5.2

Management by Objectives: The Cycle 131

Preparation of next period’s objectives by employee Mutual setting of objectives by employee and supervisor

End-of-period review by employee and supervisor

Intermittent review of ongoing performance as needed

Action planning and job performance by employee

Mutual agreement on criteria for measuring accomplishment of objectives

Source: K. Davis and J. Newstrom, Human Behavior at Work: Organizational Behavior (New York: McGraw-Hill, 1989), 209. Reproduced with permission of the McGraw-Hill Companies.

of individual employees. Two approaches for doing so are management by objectives and the Balanced Scorecard. Management by Objectives A special planning technique, management by objectives (MBO), provides a method for developing personalized plans that guide the activities of individual members of the organization (the words objectives and goals are used interchangeably). The MBO approach to planning helps managers balance conflicting demands by focusing the attention of the manager and the employee on the tasks to be completed and the performance to be achieved at an individual level.33 Figure 5.2 outlines the primary steps in an MBO program. As the figure illustrates, MBO programs are circular and self-renewing in nature. The process begins when employees, in conjunction with their managers, establish a set of goals that serve as the foundation for the development of their work plans. Once a set of mutually agreeable goals has been determined, criteria for assessing work performance are identified. Next, employees formulate and implement the action plans necessary to achieve their goals and review their progress with their managers on an intermittent basis. At the end of the MBO period, the performance of the employees is

compared to the goals established at the beginning of the period. Performance rewards should be based on the extent to which the goals have been achieved. Once the MBO cycle is complete, employees begin formulating goals to drive the next MBO-planning period. As originally conceived, MBO programs provide three primary benefits: 1.

MBO programs provide a foundation for a more integrated and system-oriented approach to planning. Establishing goals and action plans for individual employees forces managers to examine how the activities of each individual in the work group contribute to the achievement of the overall goals of the group. As an MBO system works its way up the hierarchy of the organization, it provides a mechanism for ensuring KEY TERMS systemwide coordination of work efforts. Management by objectives The MBO approach to (MBO) planning requires comA method for developing indimunication between vidualized plans that guide employees and their the activities of individual managers because they members of an organization.

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In addition to these general benefits, MBO systems offer the more specific advantages listed in Table 5.4.34 These benefits include such things as higher individual performance levels, prioritized goals, and greater opportunities for career development for both managers and employees.35 At the same time, however, a number of potential disadvantages are associated with the use of MBO systems (see Table 5.4). These systems require a significant commitment on the part of management and, as a result, may divert attention away from other important activities. Many systems require excessive paperwork that complicates the administrative processes within the organization. Furthermore, some argue that MBO programs focus attention on short-run goals rather than on issues that are relevant to the long-term success of the organization. Finally, goals may be difficult to establish and put

into operation in some cases. As a consequence, MBO systems may not be suitable for all job designs.36 The increasing diversity of the workforce has created new challenges for those involved in MBO programs. Although MBO systems work well for many employees from the United States, people from other cultures may not adapt well to this type of planning. The MBO

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must agree on the performance goals outlined in the plan. This increased communication often serves to build stronger relationships between managers and their employees. MBO systems lead to more participatory work environments in which employees feel they have a voice and can have input into how their jobs should be designed and what their performance targets should be. Furthermore, employees gain a greater understanding of the organization when they are forced to plan their activities in line with the organization’s overall goals.

While MBO systems work well for many employees from the United States, people from other cultures may not adapt well to this type of planning. Managers must be sensitive to the diversity of their work teams.

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concept is predicated on an employee’s desire to be reasonably independent and willingness to work toward predetermined goals—both of which are relatively common characteristics of workers in the United States. In many other cultures, however, such attitudes toward work are not common. MBO programs may be far less effective when used with individuals from such cultures. Consequently, managers must be sensitive to the diversity of their work teams and may need to modify the MBO concept to suit different individuals. In general, MBO systems can be an effective tool. Although they can be cumbersome if implemented throughout every unit of an organization, these programs can be beneficial to overall management when used selectively. MBO includes all aspects of management from planning as well as guiding employees in terms of communication, leadership, and motivation, and it helps with control. Siemens Company is an example of a firm that has embraced the MBO approach to planning. Corporate executives credit this system for the high level of commitment of Monsanto employees to the overall plans and strategy of the firm.37 Balanced Scorecard More recently, organizations have developed systemwide performance measurement processes that align individual goals with the strategic goals of the organization. One widely popular process, the Balanced Scorecard (BSC), has been used in a variety of organizations across both the private and public sectors.38 The BSC process allows an organization to translate its strategy into operational actions at every level. Thus, employees can ensure that their individual action plans and goals are consistent with the overall strategic direction of the organization. Many organizations, including AT&T, UPS, CIGNA, and the Department of Defense, have successfully developed and implemented BSCs to help measure progress toward their strategic objectives. Table 5.5 provides an overview of the BSC system.

Contingency Planning for Changing Environments Contingency planning is a popular LEARNING approach in today’s rapidly changing OBJECTIVE business environment.39 Virtually all organizations face strategic and operating conditions that are subject to change and could therefore benefit from a contingency Define contingency approach to planning. This approach is planning and especially useful when an organization’s efidentify the fectiveness is highly dependent on a set of circ*mstances business conditions that are particularly under which volatile.40 contingency Contingency planning requires flexibilplanning would be ity. There are at least two variations on how appropriate. this can be achieved. Both variations rest on sound strategic analysis, as discussed in Chapter 4. One variation is the development of two KEY TERMS or more plans (the idea of Balanced Scorecard “plan B”), each of which is A planning system that aligns based on a different set of the goals of individual emstrategic or operating condiployees with the strategic tions that could occur. Which goals of the organization. plan is implemented is deterContingency planning mined by the specific circumDevelopment of two or more 41 stances that come to pass. For plans each based on different example, an organization may conditions. plan to begin production at a

new plant facility in June 2007, but managers should develop a contingency plan that ensures

Plan B Referring to a second contingency plan.

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Leaders in Action 134

Ann Mulcahy: Turnaround at Xerox nn Mulcahy is on BusinessWeek ’s 2005 list of “The Best Managers.” The reasons why include not only her turnaround of the troubled company, but also her use of sound management to develop and manage a successful company. When she became CEO of the company in 2001, Xerox was in serious trouble. Competitors such as Canon and Hewlett-Packard had taken much of the copier market away (Dell would join the group later). The company had high debt and was close to bankruptcy, it was being investigated by the Securities and Exchange Commission for accounting

practices, and the previous CEO left after failing to change the sales force into a successful unit. Mulcahy began by getting a better understanding of the competition and customers. Then she streamlined the company to better fit the situation, cutting costs wherever possible, including reducing the number of employees. Her plans also involved selecting a new chief financial officer, managing cash flow better to stay financially solvent, encouraged faster decision making, and implemented a Six Sigma Program to improve efficiency. The company has met financial expectations of investors during

uninterrupted production in the event that the plant opening is delayed for some reason. The plan probably should include making a decision at some specified time if demand does not grow enough to need the new plant. As another example, consider the airline industry. Herb Kelleher, chairman of the board of Southwest Airlines, says that it is virtually impossible to employ traditional long-range planning in the airline industry. Things change too much and too quickly—schedules, routes, competitors, and fares change continually. Therefore, contingency planning is particularly important in that industry. Nevertheless, it is important to note that effective contingency planning requires that potential changes in strategic and operating conditions are somewhat predictable. Do you think that LEARNING Southwest had a contingency plan to deal OBJECTIVE with the chaos that hit the airline industry in the wake of 9/11/2001? Should the company have had such a plan? A second variation of contingency Discuss how planning rests on the skill and ability of advances in people in the organization to think strateinformation gically and flexibly. That means that the technology have people must be informed continually and affected understand the important trends, causes, operational effects, and interactions of the conditions planning. in both the external and internal environments of the organization. This skill and

the past several years and has new products coming to market. Whether turning a company around or managing any company well, Mulcahy says the most important job of a manager is the same. That job is to get everyone in the company focused on the goal.

Sources: “The Best Advice I Ever Got,” Fortune, 21 March 2005, 104; “The Best Managers,” BusinessWeek, 10 January 2005, 62; A. Harrington and P. Bartosiewicz, “50 Most Powerful Women: Who’s Up? Who’s Down?” Fortune, 18 October 2004, 183.

ability is called having “prepared minds”42 by some. If people in the organization are prepared, they can think strategically, as was suggested while discussing vision in Chapter 4 (long term and comprehensively), and can make decisions to keep aligned with what is happening in the industry. Of course, this does not rule out having plan B; rather, it probably includes having a second plan, at least in the heads of the people, if not written down. Royal Dutch/Shell, an early pioneer in the area of contingency planning, has developed a sophisticated system of scenario planning to support the creation of its contingency plans.43 The company creates a set of scenarios that reflect potential changes in the world that would affect its operations. Contingency plans can be developed based on the conditions in each scenario. If you would like to read more about Royal Dutch/Shell’s scenarios, visit the web site at http://www.shell.com/scenarios.

The Impact of Information Technology on Planning 8

As we have learned, operational plans include standing plans such as policies, procedures, and

Chapter 5 Planning in the Contemporary Organization

rules. Advances in information technology in recent years have supported the more efficient development of such plans as well as more effective implementation. Consider, for example, how a university might use information systems to communicate policies, streamline procedures, and monitor compliance with rules. Policies related to such things as admission to certain programs, grade appeals, permissible course waivers, and substitutions can be communicated to students via the Internet or a campus local area network. This enables students to have online, real-time access to important information rather than having to wait for the next year’s catalog to be distributed. Class registration procedures have also been improved through the use of information technology. At many universities, students can register via the Internet. This is a dramatic improvement over the long registration lines of days gone by. Monitoring compliance with rules such as minimum grade point average, prerequisite completion, and course substitution is also more efficient with the use of information technology. Database systems that maintain individual student records allow university administrators to readily identify students who are in violation of university rules.

Facilitating the Planning Process Although most managers admit that they need to plan, many would also admit that they do much less planning than they should. This situation is a result of a number of barriers to planning.

from the time they arrive at work until they leave. Although this constant troubleshooting may seem to leave few opportunities for planning, the hectic nature of the manager’s day in itself suggests that planning is very much needed. Through better planning, such as policies, rules, and the like, managers can develop operational systems that are more effective and less problematic and demanding of their time.

Ambiguous and Uncertain Operating Environments Environmental complexity and volatility are other commonly cited reasons for not planning. Managers who are uncomfortable with ambiguity may find it difficult and frustrating to plan under conditions of uncertainty. Yet, while it may be difficult to develop plans under such circ*mstances, effective managers make an effort to do so. Organizations that operate in rapidly changing and complex environments often find that planning provides a mechanism for coping with such conditions.

Resistance to Change Finally, managers may hesitate to plan because they are resistant to change. Organizational members may associate planning with a need to change the way they do their jobs. Their hesitancy to change may discourage them from initiating the planning process.44 Given the current focus on quality and continuous improvement, resistance to change can have very detrimental results for the organization in the long term.

OVERCOMING THE BARRIERS TO PLANNING As discussed previously, achieving success through planning requires the participation of a broad range of organizational members. Consequently, organizations must develop and maintain a culture that encourages planning and rewards those who plan effectively. Here are important things that can help.

BARRIERS TO EFFECTIVE PLANNING Why do some managers fail to plan effectively? They do so for a number of reasons, all of which may be overcome by developing an organizational culture that encourages and supports the planning process. However, this requires a clear understanding of the main reasons why managers fail to plan effectively.

Demands on the Manager’s Time Some managers may simply be too busy “putting out fires” to take the time to plan properly. Managers often feel as though they face a continuous stream of problems

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Learn to Apply the Managerial Functions Better

LEARNING OBJECTIVE

9 Describe common barriers to effective planning and explain ways to reduce these barriers.

Better planning can be achieved by not only learning how to plan more effectively and efficiently but also by applying better the other managerial functions that are discussed in this book: organizing, leading, communicating, motivating,

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and developing/teaching employees. A few specific examples are the following: • Learn to identify what is really important as opposed to what is urgent but not important.45 Much time could be saved by not paying attention to urgent but not important things. • Use well-thought out goals, policies, procedures, and rules. • Delegate authority well. • Communicate expectations clearly. • Teach employees to be more self-guiding.

Involve Employees in Decision Making Seek information from employees and keep them informed about expectations. Input from all levels of the organization is essential to the success of the organization’s planning. Managers should solicit the opinions and views of their employees when formulating plans, and they should encourage individual members of the organization to communicate about the planning efforts of the unit and the organization. Discouraging employees from sharing information that might be important to the planning process will result in less effective organizational plans.46

Take Advantage of a Diversity of Views Diverse views and perspectives lead to a broader assessment and evaluation of organizational problems and opportunities. In fact, this can be one of the primary benefits of maintaining a diverse workforce.47 Organizations that encourage a wide range of different ideas and views and have learned to manage diverse groups are more likely to produce plans that are comprehensive and fully developed. It is imperative to learn to manage diverse work groups well.

Encourage Strategic Thinking Developing an organizational culture that encourages strategic and results-oriented thinking will lead to more effective planning.48 Thinking is a skill and, as is the case with most skills, can be developed through training and practice.49 Employees should be provided with the training necessary to develop strategic thinking skills and given the opportunity to practice those skills in their work environment. Furthermore, individuals should be rewarded for thinking strategically when developing their plans.50

Implications for Leaders Tomorrow’s manager will face many challenges in developing effective strategic and operational plans. Planning has become increasingly difficult as the pace of change in the business environment has accelerated. Although change makes the planning process more difficult, it also makes planning more critical. Managers of the future must be forward thinking and focused on achieving the goals of their work groups and their organizations through effective planning. Managers need effective planning skills, which are among the key competencies that ensure an organization’s success. The ultimate objective of the planning process is the development of good plans. Plans are good if they can be implemented successfully and result in the accomplishment of the goals for which they were designed. Managers are more likely to develop good plans when they

•

Recognize and communicate the importance of planning in achieving organizational success. • Understand the difference between and the relationships among strategic and operational planning initiatives. • Involve those responsible for implementing the plan to understand their role. If appropriate, involve them in the planning process itself. • Use contingency planning as a means of maintaining flexibility in rapidly changing business environments. • Utilize technology to enhance the effectiveness and efficiency of the planning process. • Remove the barriers to planning at the work group and individual levels. • Reward those who think strategically and follow through with operational planning. In this chapter, we have examined the managerial function of planning. Our focus, at both the strategic and operational levels, has been on achieving organizational success through planning.

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Meeting The Challenge

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Ed Zander Has a Plan for Motorola he year 2004 was one of the most profitable ever for Motorola. Continuing with the changes that were started by former CEO Christopher Galvin, Edward (Ed) Zander worked on updating Motorola’s out-of-date image. This included a modern “batwings” logo combined with effective advertising and the new RAZR mobile phone that became very popular immediately after it was introduced in late 2004. However, without other changes, the new phone, advertising, and logo would not have accomplished much. To realize his vision of bringing Motorola back to the top of the communication industry, Zander’s strategic goal is to transform the company into a unified technology company. To realize this ambitious vision and strategic goal, Zander is working out long-term and short-term plans. The new RAZR phone is part of the short-term plans, more specifically, the execution of existing plans. Execution includes Zander’s insistence that Motorola puts the customers first again, making products that they want. Of course, that is based on keeping up with understanding the markets and industry. Execution also includes tearing down the stifling bureaucracy that resulted in people and departments fighting with each other rather than cooperating when it was necessary to produce and sell products that

customers wanted. The company is being reorganized around customers and markets, including a simplified sales force to better serve the customers. Also, new polices and rules now encourage cooperation between people and departments where it is needed to understand and serve the markets. A new bonus plan is based on cooperation, customer satisfaction, and product quality. The short-term plan is working well. The true test is whether Zander can establish a long-term strategy and plan to rebuild the company. That will certainly include new products and services and probably more changes to the company, including some parts of the organizational culture and getting costs down relative to the revenue generated. Sources: C. Rhoads, “Handset Sales Help Motorola Return to Profit,” Wall Street Journal, 20 July 2005, A1; C. Rhoads, “Motorola’s Modernizer,” Wall Street Journal, 23 June 2005, B1, B5; B. Stone, “Motorola’s Good Call,” Newsweek, 14 March 2005, 42–43; E. Corcoran, “Making Over Motorola,” Forbes 174, no. 12 (December 2004): 103–108; R. Crockett, “Reinventing Motorola,” BusinessWeek, 2 August 2004, 82–83; W. Schaff, “Restructuring Pays Off for Motorola,” Information Week, 26 July 2004, 72; “Hello, Moto,” Economist 370, no. 8357 (January 2004): 58.

SUMMARY 1. Planning is an important managerial function through which managers outline the activities necessary to achieve the goals of the organization. The purpose of planning is to ensure organizational effectiveness and efficiency in both the short term and the long term.

2. When done well, planning is essential. When not done well, it can interfere with success and can be costly.

3. Most organizations today plan from an integrative perspective, incorporating aspects of a top-down approach and a bottom-up approach.

4. There are three levels of strategic planning—corporate, business, and functional—and they vary with

respect to focus, specificity, time horizon, and the participants in the planning process.

5. Operational planning determines the day-to-day activities that are necessary to achieve the long-term goals of the organization. Standing plans, which include policies, procedures, and rules, are developed to address issues that recur frequently in the organization. Single-use plans address a specific issue or problem that the organization experiences only once.

6. Individual planning systems guide the behaviors and actions of individual organizational members. Management by objectives (MBO) and the Balanced Scorecard (BSC) focus the attention of the manager and the employee on the tasks to be completed and the performance to be achieved at an individual level.

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7. Contingency planning involves the development of

9. Common barriers to planning are demands on the

a set of plans that are designed for the varied strategic or operating conditions the organization might face. Contingency planning is most appropriate for organizations operating in environments that are subject to frequent or significant change.

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manager’s time, ambiguous and uncertain environmental conditions, and resistance to change. Overcoming the barriers to planning requires the development of an organizational culture that supports and encourages planning.

8. Advances in information technology have improved both the effectiveness and efficiency of the planning function.

REVIEW QUESTIONS 1.

2. 3.

Describe the managerial function of planning, explaining what it is and why managers should plan. (LEARNING OBJECTIVE 2) Explain the benefits and costs related to planning. (LEARNING OBJECTIVE 3) What are the advantages and disadvantages associated with top-down and bottom-up planning? (LEARNING OBJECTIVE 4) Define strategic planning. What are the three levels at which strategy is formulated, and how do they differ in terms of (a) focus, (b) participants, (c) specificity, and (d) time horizon? (LEARNING OBJECTIVE 5) What is operational planning, and how does it differ from strategic planning? (LEARNING OBJECTIVE 5) Describe standing and single-use plans and identify the various types of plans that fall into these two categories. (LEARNING OBJECTIVE 1)

Describe the two types of individualized planning systems outlined in the chapters. What are some advantages and disadvantages of these types of planning? 8. (LEARNING OBJECTIVE 7) What is contingency planning? Under what circ*mstances would it be most appropriate to use a contingency approach to planning? 9. (LEARNING OBJECTIVE 8) How have advances in information technology affected operational planning? 10. (LEARNING OBJECTIVE 9) What are the common barriers to planning? What might a manager do to reduce the barriers to planning? (LEARNING OBJECTIVE 6)

DISCUSSION QUESTIONS Improving Critical Thinking

Enhancing Communication Skills

1. Evaluate the benefits of MBO as an employer and as

3. Consider an organization with which you have been

an employee. Would you want to participate in an MBO program? Why or why not?

2. Planning can begin at the top of the organization and flow downward or start at the bottom of the organization and move upward. As an employee of an organization, would you prefer a top-down or bottom-up approach to planning? What would you consider to be the advantages and disadvantages of each from an employee’s perspective? From an employer’s perspective?

affiliated as an employee or a member, such as a business, church, sorority, and the like. Describe the planning system of this organization. Was it effective? If not, why? What might the managers of the organization have done to ensure better planning? To improve your oral communication skills, present your analysis of this situation to the class.

4. How might the planning process for a new business venture differ from the process in an established business? How would it differ for small versus large

Chapter 5 Planning in the Contemporary Organization

businesses? To practice your written communication skills, prepare a one-page written summary of your response.

6. Identify and evaluate some of the standing plans at your university or college that directly affect you as a student. From your perspective, do the policies, procedures, or rules that you identified help or hinder the students? Why do you think the administration at your school believes that it is necessary to have well-defined standing plans? What would happen if none of the plans that you identified existed? Form teams of four to five students, answer the preceding questions and present your responses to the class.

Building Teamwork 5. We know that planning occurs at the strategic and operational levels. Is it more important to plan at one level than at the other? Why or why not? Discuss this question in teams of four to five students and develop a position that you can present to the class.

THINKING CRITICALLY: DEBATE THE ISSUE Strategic Planning or Corporate “Rain Dancing”: Can We Plan for the Unknown? Developing an effective strategy involves carefully assessing both the external environment of an organization and the internal organizational processes. A careful assessment of the environment allows managers to predict where future business opportunities and problems will exist. Some have argued that in light of the dramatic changes in global markets, advances in technology, and the political unrest in much of the world, prediction is

not possible. Therefore, strategic planning should be approached as more of an art than a science. Form teams of four to five students as directed by your instructor. Half of the teams should prepare to argue that strategic planning is more of a science and should be approached methodically, while the other teams should prepare to argue that strategic planning is more of an art form and should be approached less formally. It would be helpful for teams to draw from personal experiences or current events to illustrate their positions. Your instructor will choose two teams to present their findings to the class in a debate format.

EXPERIENTIAL EXERCISE 5.1

Evaluating Standing Plans

Policy

Purpose Effect Proposed Change

Effect

Purpose Effect Proposed Change

Effect

Purpose Effect Proposed Change

Effect

1. Choose an organization with which you are familiar. This can be a company for which you work or have worked or a social organization with which you are associated, such as a church, sorority, or fraternity, or even your university. Identify three policies, procedures, and rules that exist within that organization. Evaluate the purpose and effect of each. Would you change the plan in some way? If so, indicate your proposed change and explain the effect that you believe it would have on the functioning of the organization. A format similar to the following can be used to summarize your assessment.

2. 3. Procedure

1. 2. 3. Rule

1. 2. 3.

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ETHICS: TAKE A STAND 140 Intelligent Systems (IS) is a software development company that develops applications that help organizations with various aspects of planning. One product helps companies with inventory management, another with record keeping and tracking related to personnel, and others. The company has been successful with some of its products, but it has been some time since it has developed a successful product. The CEO of IS has just met with the managers who report directly to him, including John Field, the chief technology officer of the company, concerning the readiness of new software that is designed to help organizations analyze various aspects of their competitors. After the meeting, the CEO announces to the other managers in the company that a marketing, public relations, and sales plan for the product will be developed within a month. The product is scheduled to be released in 2 months. A press release announcing these things to the public will be released in a week. Patricia Wilson, the technology manager at IS, has just learned about these plans. She immediately contacts John Field, her supervisor. She tells John that it is impossible to have the software ready for release within 2 months. She believes that it will need at least 6 months to have the software fully developed and ready for customers. Also, she tells John that the developers have

encountered some very challenging technical problems that may make it impossible to develop the product as originally conceived. Patricia believes that it is too early even discuss this product in public. John suggests that she relax. This is the way things are done at the top. It’s important to keep the investors happy, and the best way to do that is to make sure they believe that the company is making progress in developing new products. He tells Patricia to just keep working along and let him worry about what the investors and the public at large believe about Intelligent Systems. He believes that the investors need to hear that a new product is coming out soon. Otherwise, their jobs might be in jeopardy. For Discussion

1. Did Patricia do the right thing in contacting her boss about the announcement of the new product?

2. What do you think about John’s response to Patricia? 3. What are Patricia’s alternative courses of action at this point, and what are the implications of each? If you were Patricia, what would you do?

4. Do you believe it is ethical to do what this company is proposing to do in announcing the new product?

Chapter 5 Planning in the Contemporary Organization

CASE

TIXtrader.com Growing up in the Southeast, Randy Lee had two passions—music and sports. Some of his best memories were traveling with his dad to a large city in a neighboring state to watch major league baseball and football games. Inevitably, Randy and his dad would arrive at the stadium in plenty of time to negotiate with others to trade tickets for better seats. They would always have a couple of extra tickets to sell in case they needed more money to pay for their upgraded seats. When Randy attended college in the same city, he found himself again negotiating ticket sales and trades for music concerts. He became so well known that many students and even some professors approached him for tickets to sold-out shows and sporting events. Randy majored in computer science, and after graduation, he moved back home to work in a small IT department with a manufacturing company. Although working full time, Randy never lost his passion for sporting events and concerts. After a couple of months, Randy developed a website, TIXtrader.com, for customers who wanted to trade concert tickets over the Internet. His business strategy was fairly simple. He developed a message board for users who were interested in buying, selling, or trading tickets to contact each other. For this service, he would charge a yearly membership fee. What started out as a part-time endeavor quickly grew. Randy resigned from his IT position after only 6 months to devote his energy to running the business full time. Customers from several surrounding states had bought memberships, and he eventually began hiring employees to help with the growing workload. Seven years after he started TIXtrader.com, his hometown had turned into a city. Corporate sponsors lobbied for and were awarded expansion franchises in two major league sports. This was on top of two minor league teams that were already there. The minor league teams generated a lot of excitement and fan support, and he had already expanded his company’s services to provide a bulletin board for these sports fans. Now, with the major league teams on their way, Randy was both excited and overwhelmed. TIXtrader.com’s staff had grown from 1 to 17 full-time employees over the last 7 years. Randy estimated that his company’s size would need to double, if not triple, to handle the increased demand for tickets with year-round sports games and concerts. Although exciting, these changes created a unique set of challenges for Randy. He realized that he needed a comprehensive plan that would include policies, procedures, and rules for him and his growing number of employees. Employees were starting to “get in each other’s way,” and there were no clear ways to conduct business, let alone teach everything to the increasing number of new employees. For Discussion

1. Do you think Randy might need some plans to help with hiring and training new employees? Outline a plan that includes the steps that should be followed to improve hiring and training of employees.

2. Write the policies, procedures, and/or rules that you think would be useful related to handling a transaction after a customer has traded tickets. Should TIXtrader.com allow tickets to be retraded after a customer has made one trade? Should there be any restraints concerning how late a ticket can be traded before an event occurs to which the tickets apply? Write policies, procedures, or rules for each question. Explain why you wrote a policy, a procedure, or a rule for each case.

3. Write polices and/or rules concerning the price of the membership that users of the website pay. Should members who make a large number of trades during a year be required to pay more or less than those who trade infrequently? Explain your conclusion.

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VIDEO CASE 142

Vermont Teddy Bear Company, Inc.—Planning in the Contemporary Organization The first Vermont Teddy Bears were made in 1981 by founder and former CEO John Sortino’s wife and sold mostly to friends. Two years later, Sortino sold his teddy bears from a pushcart on a downtown pedestrian mall in Burlington, Vermont. It took 4 days to sell his first bear and a year to sell 200 bears. Today, the Vermont Teddy Bear Company is the leading manufacturer of hand-crafted, U.S.-made teddy bears. Each year more than 150,000 people visit the Vermont Teddy Bear Company to see how teddy bears are made, make their own teddy bears, or purchase a premade and dressed bear. Annually, the company sells more than 450,000 bears for its Bear-Gram gift delivery service and employs over 274 full-time employees. Bear-Gram gifts are a creative alternative to sending flowers. Vermont Teddy Bear has been named “Best Small Company in U.S.A.” by Dun & Bradstreet and listed as one of Inc. Magazine’s 100 fastest-growing privately owned U.S. companies. They are a five-star merchant with a 98% “Top Service” rating from Yahoo! customers and named as one of the “best of the best” online stores by BizRate.com. The company has been growing at an annual rate of around 50% with about $39 million in revenues. Their corporate sales comprise the Company’s fastest-growing segment. The company’s increasing skill in demand forecasting has played a role in their recent success. Forecasting consumer demand for over 140 different teddy bears is complicated. Nevertheless, forecasting is the first important step in the production-planning process influencing how many raw materials to order, how to schedule production, and whether and how much to outsource the work. Product demand is influenced by factors internal and external to the firm. Internal factors include their decision-making processes, variety of products, services provided, and how much to spend on advertising to see profitable returns. External factors include popular cultural trends, region, holiday seasons, and special occasions. Snowboarding, a popular trend, was identified through their regular brainstorming meetings, and they added the Snowboarding Bear to their line. Seasonal trends are related to gift-giving holidays such as Valentine’s Day. Recently, the company introduced the Elvis Bear in honor of the 100th birthday of the teddy bear. Licensed by Elvis Presley Enterprises, Inc., this teddy bear is dressed in a white polyester jumpsuit with tassels and a pair of silver metallic sunglasses. After determining forecast objectives, Vermont Teddy Bear uses a multistep forecasting process. They focus on forecasting revenues by analyzing many different markets, numbers, and sales methods. This provides a quarterly forecast for each product of their dynamic product mix that changes weekly. Generally, they forecast 6 months out, allowing time for purchasing, substitutions, receipt of raw materials, production, and distribution of the bears. The company uses detailed information from 3 years of the same quarter to identify trends. They also take qualitative factors into account such as which bear is featured on their catalog cover, where each bear is located in the catalog, whether a bear may appeal to collectors, and changes in pricing. Finally, they monitor and compare actual performance to forecasted performance for each product, sales method, and other relevant factors. Forecast information is used by all their departments. Demand forecasting at Vermont Teddy Bear Company is an evolving process that changes as the company continues to grow. Now that they have transitioned from entrepreneurial to be more managerial, Vermont Teddy Bear plans to expand forecasting to track different operational costs associated with the Bear-Gram versus retail versus wholesale lines of business. The Vermont Teddy Bear Company uses a comprehensive demand forecasting process to aid in decision making. Forecasting will continue to be an important factor in the company’s continuing success. According to Vermont Teddy Bear’s CEO, Elisabeth Robert: “We’ve grown . . . and maintained our profitability as we’ve invested in two new gift delivery services offering our customers gift products in addition to teddy bears. Looking ahead to continued growth in the core Bear-Gram® business as well as new opportunities with our PajamaGramSM and TastyGramSM gift services we are excited about our evolution as a gift company and our prospects for the future.”

Chapter 5 Planning in the Contemporary Organization

For Discussion

1. How has the Vermont Teddy Bear Company benefited from demand forecasting? What are the costs?

2. What levels of strategic planning are involved in forecasting product demand for Vermont Teddy Bears? Explain.

3. Do you think the Vermont Teddy Bear Company needs to prepare contingency plans? Explain. 4. What barriers to effective planning might Vermont Teddy Bear experience? Explain how each barrier is overcome or lessened by the company.

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Chapter

Managerial Decision Making

CHAPTER OVERVIEW Consider all the decisions necessary to carry out any major effort—from launching a space satellite to marketing and producing a new line of automobiles. The leaders responsible for these decisions rely on good decision-making skills. A manager’s responsibility as a decision maker is very important. Although all managers are called upon to make decisions, the kinds of decisions that are required will vary with their level of authority and type of assignment. Poor decisions can be disastrous to a department and an organization. Good decisions facilitate the smooth flow of work and enable the organization to achieve its goals. This chapter introduces concepts and models that focus on the demands of managerial

decision making. Managers and leaders may not always make the right decision, but they can use their knowledge of appropriate decisionmaking processes to increase the odds of success. Skill in decision making is a distinguishing characteristic of most successful managers. We explore how leaders in organizations make decisions by discussing the seven steps in the decision-making process and examining two commonly used models of decision behavior. Because leaders are frequently involved with groups and teams, we focus on the participative model of group decision making by looking at techniques that leaders can use to improve this process. We conclude by examining several strategic decision-making tools.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Describe the nature of the decision-making process and explain each of its seven steps. 2. Describe the rational–economic model of decision making. 3. Discuss the behavioral decision model and its related concepts of bounded rationality, intuition, satisficing, and escalation of commitment. 4. Describe the participative approach to decision making. 5. Discuss the advantages and disadvantages of participative decision making. 6. List the various techniques used to improve participative decision making. 7. Discuss the basic classifications for managerial decisions. 8. Describe the nature of strategic decision making as well as the strategic decision-making matrix approach for strategy selection. 9. Identify the differences between the growth-share matrix and the industry attractiveness/business strength matrix approaches for evaluating business portfolios.

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Facing The Challenge Goodbye Cypress Gardens hen the topic of central Florida amusem*nt parks and attractions comes up, most people immediately think of the assortment of Disney parks (Magic Kingdom, EPCOT, MGM Studios, and Animal Kingdom), Universal Studios (and its sister Universal Islands of Adventure), and Sea World. But, these are mere infants next to the granddaddy of them all—Cypress Gardens. On January 2, 1936, Dick Pope opened the gates on his showplace for 8000 varieties of flowers and plants from over 90 countries around the world. Guests could take a leisurely stroll through the grounds and drink in the beauty. Within a few years of opening, the park added electric boats to cruise the canals and provide guests with an even more sedate way to soak up the ambience. The strolling Southern Belles outfitted in antebellum dresses first appeared near the entrance gate in the winter of 1940 to distract guests from the sight of some freeze-damaged vegetation. They proved to be so popular they remained as a permanent fixture throughout the park. In 1943 when some visiting World War II servicemen expected to see a show, the Pope children were enlisted to perform a waterskiing exhibition on adjacent Lake Florence. This was to be the birth of the famous Cypress Gardens water-ski show. Who among us hasn’t seen the vintage photos of the multi-level pyramid of skiers with the American flag fluttering at the apex? Celebrities and Hollywood movie producers discovered Cypress Gardens in the decades of the 1940s through the 1960s. Several movies were filmed in the park’s lush tropical waterways. Additional attractions and displays,

like an ice-skating show and elaborate model train setups, were added over the years. Cypress Gardens was a theme park in that it had themed areas. But, perhaps its distinguishing characteristic was not what it was, but rather what it wasn’t. Cypress Gardens was not a ride park. There were no roller coasters or other thrill-based attractions that were to become the trademark of the newer parks that began to dot the central Florida landscape in the 1970s. That fact may have led to the park’s downfall. At the beginning of the new millennium, 89% of the park’s guests were senior citizens. In the words of the Winter Haven Area Chamber of Commerce executive director, “There was no reason for a child over 8 to go there.” The park just didn’t have much to offer young families. Competition from the newer parks was quite intense. The post 9/11 tourism downturn didn’t help matters either. On peak days, park attendance would barely reach 3000 guests, which pales in comparison to the tens of thousands visiting the surrounding parks each day. When debt mounted to $6 million, the owners decided to throw in the towel. With only 3 days notice, Florida’s first commercial tourist theme park closed its gates on April 13, 2003, after almost seven decades of operation. While developers licked their lips over this prime piece of real estate, a grassroots organization called Friends of Cypress Gardens quickly sprang up. With members in 117 Florida cities, all 50 states, and 15 countries, the group lobbied hard for a savior. In stepped Kent Buescher, owner of a Valdosta, Georgia, amusem*nt park. He was intent upon resurrecting this Florida tourist icon.1

Introduction LEARNING OBJECTIVE

1 Describe the nature of the decision-making process and explain each of its seven steps.

Any person or organization faced with a decision has a rather straightforward task at hand. The decision maker must select a course of action (the decision) from a set of potential alternatives. Some decisions are critical and can have a major impact on personal and organizational lives. Other decisions are more routine but still require that we select an appropriate course of action. In “Facing the Challenge,” Kent Buescher was destined to face many decisions and challenges as he sought to restore Cypress Gardens to its past glory. This

chapter introduces concepts and models that focus on the demands of managerial decision making. Before examining specific tools and techniques for decision making, we review the conditions under which a decision situation might arise. Then we present a structured, multistep process for making quality decisions.

Sources of Organizational and Entrepreneurial Decisions Decision making is the process through which managers and leaders identify and resolve problems and capitalize on opportunities. Good decision

Chapter 6 Managerial Decision Making

making is important at all levels in the organization. It begins with recognition or awareness of problems and opportunities and concludes with an assessment of the results of actions taken to solve those problems. A problem occurs when some aspect of organizational performance is less than desirable. This definition is purposely broad so that it covers any aspect of organizational performance, such as overall bottom–line profits, market share, output productivity, quality of output, or worker satisfaction and harmony, to name just a few of the countless possibilities. When such unsatisfactory results have occurred, the successful manager will both recognize the problem and find a solution for it.2 Numerous examples can be cited where organizations and individuals have made a decision in response to some problem. In 2005 the Ford Motor Company recalled nearly 800,000 pickup trucks and sport utility vehicles because the cruise control switch could short circuit and cause a fire under the hood.3 In the same year, the Florida Turnpike Enterprise made the decision to install protective barriers along sections of Florida’s turnpike where out-ofcontrol motorists have either crashed into oncoming traffic or plunged into ponds and canals.4 Again in 2005, many restaurants made the decision to relocate the carbon dioxide source for their carbonated beverages to the exterior of the restaurant in the wake of two McDonald’s workers being asphyxiated from carbon dioxide stored in a confined, interior space.5 In the wake of mad cow disease scares, the menus in European Hard Rock Cafes had to be altered to focus less on beef.6 In a similar vein, in the wake of the 2004 Southeast Asia tsunami, top hotels in several Asian capitals removed many fish items from their menus to ease diners’ concerns that fish might be feasting on human corpses.7 In the case of Cypress Gardens, the problems facing the previous owners were lack of attendance and mounting losses. The decision made in response to those problems was sudden and drastic. The park abruptly ceased operation, and the assets were put up for sale. Managers do not always make decisions in response to problem situations. Often decisions are made because an opportunity arises. An opportunity is any situation that has the potential to provide additional beneficial outcomes. When an opportunity presents itself, success will be achieved by those who recognize the potential benefits and then embark upon a course of action to achieve them. For example, consider PepsiCo’s decision to add a freshness date on its beverage containers.8 This decision was precipitated by a perceived opportunity to capture additional market share by offering something that Pepsi’s competitors were not offering. Not to be outdone, Coca-Cola soon followed with freshness dates on its own products. Eventually, this service was to become standard practice in the beverage industry. The next salvo in the cola wars was the introduction of flavors, and soon lemon- , cherry- ,

vanilla- , and, most recently, lime-flavored colas were lining up for shelf space.9 Low calorie has also been a battleground, with catchy names like Pepsi One and co*ke Zero.10 147 Much like the freshness-dating situation in soft drinks, the battery industry provides an example of companies following the lead of their competitors to cash in on an opportunity. Duracell first introduced the concept of a battery tester contained in its packaging. However, the Energizer Bunny topped that by introducing batteries with the test mechanism designed as an integral part of the battery. One needed only to squeeze the buttons on the battery and its LCD display would indicate the strength of its charge. Duracell soon followed suit with a version of that innovation. The list of company decisions precipitated by opportunity can go on and on. Apple Computer’s digital music player, the iPod, has prompted many companies to enter the iPod aftermarket, with an assortment of gadgets, accessories, and add-ons for this popular MP3 player.11 The post-9/11 era presented many opportunities that companies seized on. When the U.S. Postal Service had an episode of anthrax-tainted letters, the Bayer Corporation more than tripled its production of the anthrax antibiotic Cipro.12 In early 2002, heavyweights Boeing, Northrup Grumman, TRW, Raytheon, and eventual winner Lockheed Martin all began preparing bids, seeking to win a federal airport security contract for a system to screen passengers and baggage in the post9/11 era.13 In the “At the Forefront” box, we can see how several south Florida entrepreneurs seized upon an opportunity in this strife-torn world with their focus on converting stock automobiles into armored cars.14 It is hard to top the serendipitous opportunity that presented itself to Chris Mike, director of Marketing and Advertising for Nike Golf, during the 2005 Masters Golf Tournament. The “Leaders in Action” box describes how Mike seized a golden opportunity when a Tiger Woods chip shot miraculously found the bottom of the cup on the 16th hole at the Augusta National Golf Course on the final day of the tournament.15 KEY TERMS Recognizing the importance of Decision making finding new opportunities, the The process through which 3M Corporation spends nearly managers identify and twice the industry average on resolve problems and research and development. In capitalize on opportunities. fact, researchers spend about Problem 15% of their time brainstormA situation in which some asing and working on projects of pect of organizational perfortheir own choosing. This inimance is less than desirable. tiative is in support of the Opportunity company’s objective to mainA situation that has the tain an innovative spirit, and potential to provide additional its goal to generate 30% of beneficial outcomes. annual revenue from products

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At the Forefront

148

Danger Drives Demand for Armored-Car Makers ersonal security and safety has become a major concern in many areas of our strife-ridden world. In war-torn regions of the Middle East and Latin America, kidnappings and assaults on occupants of motor vehicles are increasing at an alarming rate. No one is immune from this extreme form of road rage. Politicians, government employees, military personnel, business leaders, celebrities, and common citizens have all been targets of such violence. Urban terror of this type has presented a golden opportunity for Juan Mundo, who with his father Jorge, owns CSI Armoring in Miami–Dade County. This company is in the business of retrofitting stock vehicles to make them almost invincible to violent attacks. The 20-year-old company traditionally depended on private businessmen throughout south Florida as its client base. Now the Mundos cater almost exclusively to contractors who export the vehicles to Iraq and to customers in Latin America. Demand is so great that the Mundos are searching for a larger warehouse to store the truckloads of sport utility vehicles that are brought in each week for bulletproofing.

At the CSI Armoring plant, more than 50 workers gut brand-new Chevy Trail Blazers in preparation for their future “war-zone” homes. Sheets of Kevlar are inserted in doors, floors, and body panels to bulletproof the auto bodies. Sheets of bulletproof glass that can block bullets from an AK-47 assault rifle are also installed. Most conversions include flat-proof tires and safes in the rear compartment. Occasionally, vehicles are outfitted with canisters that spray Mace. Additional accessories that can be added include a device that creates a smoke curtain, an armored grill to protect the radiator, and electrified door handles. What was once a James Bond fantasy has become a new-millennium reality. Although his vehicle conversions cost upwards of $130,000, Mundo rationalizes that “you can’t really put a price on safety. We’re living in real troubled times.” Other south Florida entrepreneurs who have cashed in on this opportunity include Martin Cardenal, who co-owns Square One Armoring Service of Miami. Square One is among the few vendors in the United States that has secured vehiclearmoring contracts with the U.S.

that are less than 4 years old.16 When Kent Buescher looked at the vacant property that was once Cypress Gardens, he viewed it as a marvelous opportunity to resurrect the once-proud tourist Mecca and turn it back into a profitable business venture.

Steps in the DecisionMaking Process An effective decision-making process generally includes the seven steps shown in Figure 6.1. Although the figure

government. Cardenal’s company was recently awarded a $2.2 million government contract to equip vehicles shipped to the Middle East and ships an average of 200 vehicles a year for various government agencies. On an even larger scale, Labock Technologies in suburban Miami secured $60 million in orders in 2004. The company specializes in products for the military in Iraq and corporate security in Latin America. Although some would argue that these companies are profiting from war and chaos, it cannot be denied that they are making sound business decisions in response to an opportunity that has presented itself. According to one company official from Labock Technologies, “[We] provide a vital service that saves lives. We have pictures and proof that the grim situation out there could be worse without these services.”

Sources: I Rodriguez, “Danger Drives Up Demand: South Florida Armored Car Suppliers Grow to Meet Increased Need for Security,” South Florida Sun-Sentinel, 13 March 2005, 1B; I. Rodriguez, “Danger Drives Demand for Armored-Car Makers,” Orlando Sentinel, 26 March 2005, C1ff.

shows the steps proceeding in a logical, sequential order, managerial decision making often unfolds in a quite disorderly and complex manner. Keep in mind that managers are influenced at each step in the decision-making process by their individual personalities, attitudes, and behaviors (as we will discuss in Chapter 13), ethics and values (as discussed in Chapter 3), and culture, as we discuss later in this chapter. Before we begin to examine these steps in greater detail, think about how you make decisions. How skilled a decision maker are you? Take a few minutes to complete the decision-making process questionnaire (DMPQ) in the “Now Apply It” box. The DMPQ evaluates your current level of decision-making ability.17 As we progress through this chapter, you will learn more about sharpening these skills, which are an important part of most managerial experiences. Now let’s

Chapter 6 Managerial Decision Making

Figure 6.1

Seven Steps in the Decision-Making Process 149 Identifying opportunities and diagnosing problems

Identifying objectives

Generating alternatives

Evaluating alternatives

Reaching decisions

Choosing implementation strategies

Monitoring and evaluating

examine in more detail each of the seven steps in the managerial decision-making process.

IDENTIFYING OPPORTUNITIES AND DIAGNOSING PROBLEMS Decision makers must know where action is required. Consequently, the first step in the decision-making process is the clear identification of opportunities or the diagnosis of problems that require a decision. Managers regularly review data related to their areas of responsibility, including both outside information and reports and information from within the organization. Discrepancies between actual and desired conditions alert a manager to a potential opportunity or problem. Identifying opportu-

nities and problems is not always easy, considering human behavior in organizations. Sometimes, the origins of a problem may be deeply rooted in an individual’s past experience, the complex structure of the organization, or some combination of individual and organizational factors. Therefore, a manager must pay particular attention to ensure that problems and opportunities are assessed as accurately as possible. Other times the problem may be so obvious that it is easily recognized, even by the casual observer. An assessment of opportunities and problems will be only as accurate as the information on which it is based. Therefore, managers put a premium on obtaining accurate, reliable information. Poor-quality or inaccurate information can waste time and lead a manager to overlook the underlying causes of a situation.18 This basic principle

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Leaders in Action 150

Nike Executive Seizes the Moment pril 10, 2005, was a little different from most Sunday afternoon TV sports-viewing days. On this day, the final round of the Masters Golf Tournament was being played, so both avid and casual golf fans were likely to be tuned in. In fact, even many nongolf fans were watching the annual drama unfold. Chris Mike was comfortably positioned in front of his television in the basem*nt of his Portland, Oregon, home, doing what 20 million plus other Americans were doing. They were all about to witness one of the most replayed moments in televised golf history. Tiger Woods was clinging to a one-stroke lead when his tee shot at the par-3 16th hole sailed long. From 40 yards off the green, Woods played a delicate chip that rolled up the slope, across a ridge, and then made what appeared to be a 90-degree turn to the right, trickling toward the vicinity of the hole. The ball then wobbled back to the left and stopped at the edge, hanging there for 2 full seconds before finally toppling into the cup. Woods had somehow conjured up a miracle birdie, a feat that was crucial to his achieving a tie with Chris DiMarco, and eventual victory in a playoff. At the sight of this “miracle,” Chris Mike jumped from his chair and screamed so loudly that his two young children left the room shaking their heads.

Much of Mike’s jubilation sprang not from his being a golf fan but from his being a golf executive. You see, Mike is the director of marketing and advertising for Nike Golf, whose products are endorsed and used by Tiger Woods. And, during that 2-second “eternity” that Tiger’s golf ball hung on the lip of the cup, the Nike “swoosh” logo was plainly visible for all the world to see. Mike quickly got on his phone, called a colleague, and proclaimed, “I think we have our next One Ball commercial.” The ball that Woods used was a model called One Platinum, a new model that Woods began using in January after switching over from another Nike model. This new model had been targeted to hit the market in May 2005, and Mike was determined to seize this marketing opportunity and cash in on this stroke of good fortune. Mike estimated that 30-second commercials during the Masters telecast could cost as much as $250,000 apiece. The Nike logo was showcased on Woods’ ball for 2 full seconds. A glimpse of the Nike swoosh amounted to $16,666 of advertising each time it was shown that Sunday. Furthermore, every TV station that replayed the moment during its sports coverage prominently featured the Nike logo. By the 60th replay on highlight shows and sportscasts that evening, Nike had received the equivalent of $1 million in

is well understood by U.S. business leaders, who spend millions of dollars each year on market research to identify trends in consumer preferences and buying decisions. For example, it was Mattel’s monitoring the trends and shifting tastes of young girls that prompted the company to update its aging Barbie doll. The company reacted by introducing an array of new Barbies, including a softbody version with glow-in-the-dark hair and pajamas— the perfect combination for little girls to bring to bed. Mattel’s plan called for establishing Barbie as a ubiquitous “lifestyle brand,” with a product for a girl’s every fashion need.19 Despite all efforts to thoroughly monitor the relevant information, crucial information is some-

free publicity. There would be countless more of these replays in the wake of this exciting and dramatic event. By Monday night, Mike offered that “the value of that shot far exceeds any mathematical evaluation of purchased media time.” Many experts in the sports-marketing industry concluded that Woods’s $20 million annual endorsem*nt fee from Nike will rate as a bargain by the end of the summer. Nike’s 9% share of the golf ball market seemed certain to rise. In the words of Marc Ganis, executive in a Chicagobased sports-marketing firm, “Nike could not have written a better script; (1) you had brand awareness, (2) you’ll have people who want to be like Tiger, and (3) people will recognize that they have to have that ball because it’s pretty cool.” Mike’s advertising campaign was under way, and he was certain that a lot of those $54a-dozen One Platinum golf balls will be flying off the shelves.

Sources: D. Haugh, “Product Placement: Nike Execs Hope to Get Plenty of Mileage Out of Tiger Woods’ Amazing Shot at the Masters,” Orlando Sentinel, 13 April 2005, A1ff.; “Nike to Launch Ad Campaign on Woods’ Shot,” Forbes.com, 13 April 2005; T. Spousta, “Woods’ Chip Lodged in Masters Lore,” USAToday.com, 12 April 2005.

times overlooked. In a classic blunder several years ago, the Coca-Cola Company developed the infamous “New co*ke” after exhaustive taste tests were conducted. However, the company failed to assess one crucial factor: brand loyalty. The unveiling of the New co*ke was one of the most spectacular marketing flops of all time.20 Even when high-quality information is collected, it may be misinterpreted. Sometimes, misinterpretations accumulate over time as information is consistently misunderstood or problematic events are unrecognized.21 Many major disasters or accidents turn out to have had long incubation periods in which warning signs were misunderstood or overlooked. Consider the following revelations

Chapter 6 Managerial Decision Making

tential park visitors when he perceived the situation as a golden opportunity to have a profitable business venture. Even though managers will improve their chances of making good decisions by insisting on high-quality information and interpreting it carefully, there are no guarantees that solutions will always be clear cut.

IDENTIFYING OBJECTIVES

Managers are influenced at each step in the decision-making process by their individual personalities, attitudes, and behaviors as well as their ethics, values, and cultures.

regarding some news-headline-grabbing events. Months before ValuJet Flight 592 crashed into the Florida Everglades, killing all 110 people on board, the Federal Aviation Administration (FAA) had the safety data it later used to ground the airline. Unfortunately, this information was stored in warehouses out of sight of the FAA’s key decision makers. In Saudi Arabia, U.S. authorities wanted to widen the security zone that surrounded the complex that housed U.S. troops, but the Saudis denied the request. It wasn’t until 4 days after a terrorist bomb killed 19 Americans that Defense Secretary William Perry learned about the denial.22 And none of us is likely to soon forget how the unrecognized hazards of insulating foam on external fuel tanks led to the space shuttle Columbia disaster, in which all crew members perished.23 To complicate matters further, even when managers have accurate information, it can be subject to different interpretations. Consider for the moment the Cypress Gardens situation described in the opening “Facing the Challenge.” Previous owners perceived profitability problems, resulting in the decision to close the park. The potential new owner, Kent Buescher, was looking at the same piece of real estate and the same tourist pool of po-

Objectives reflect the results the organization wants to attain. Both the quantity and quality of the desired results should be specified because these aspects of the objectives will ultimately guide the decision maker in selecting the appropriate course of action. As you will recall from Chapters 4 and 5, objectives are often referred to as targets, standards, and ends. They may be measured along a variety of dimensions. For example, profit or cost objectives are measured in monetary units, productivity objectives may be measured in units of output per labor hour, and quality objectives may be measured in defects per million units produced. Objectives can be expressed for long spans of time (years or decades) or for short spans of time (hours, days, or months). Long-range objectives usually direct much of the strategic decision making of the organization, whereas short-range objectives usually guide operational decision making. Regardless of the time frame, the objectives guide the ensuing decision-making process.

GENERATING ALTERNATIVES Once an opportunity has been identified or a problem diagnosed correctly, a manager develops various ways to solve the problem and achieve objectives. This step involves the generation of alternatives, which are strategies that might be implemented in the decision-making situation. Creativity and imagination are often required in this step. In generating alternatives, the manager must keep in mind the goals and objectives that he or she is trying to achieve. Ideally, several different alternatives will emerge. In this way, the manager increases the likelihood KEY TERMS that many good alternative Objective courses of action will be The desired result to be considered and evaluated. In attained when making the never-ending burger wars, decisions. Burger King routinely considers many alternative additions to its menu to combat rival McDonald’s menu changes. In an effort to provide more

Alternative A strategy that might be implemented in a decisionmaking situation.

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Now Apply It 152

Assessing Your Decision-Making Skills This decision-making process questionnaire (DMPQ) evaluates your current decision-making skills. These behaviors are part of most managerial experiences, but you will find that the questions are applicable to your own experience even if you are not yet a manager. If you do not have experience in a management-level position, consider a group you have worked with either in the classroom or in an organization such as a fraternity, sorority, club, church, or service group. Use the following scale to rate the frequency with which you perform the behaviors described in each statement. Place the appropriate number (1–7) in the blank preceding the statement. Rarely: 1

Irregularly: 2

____ 1. ____ 2.

I review data about the performance of my work and/or my group’s work. I seek outside information, such as articles in business magazines and newspapers, to help me evaluate my performance. When examining data, I allow for sufficient time to identify problems. Based on the data, I identify problem areas needing action. To generate alternative solutions, I review problems from different perspectives. I list many possible ways of reaching a solution for an identified problem. I research methods that have been used to solve similar problems. When generating alternative courses of action, I seek the opinions of others. I explicitly state the criteria I will use for judging alternative courses of action. I list both positive and negative aspects of alternative decisions. I consider how possible decisions could affect others. I estimate the probabilities of the possible outcomes of each alternative. I study information about problems that require my decisions. I determine if I need additional data in light of my objectives and the urgency of the situation. To reach a decision, I rely on my judgment and experience as well as on the available data. I support my choices with facts. Before finally accepting a decision, I evaluate possible ways to implement it. I choose the simplest and least costly methods of putting my decisions into effect. I select resources and establish time frames as part of my implementation strategy. I choose implementation strategies that help achieve my objectives.

____ 3. ____ 4. ____ 5. ____ 6. ____ 7. ____ 8. ____ 9. ____ 10. ____ 11. ____ 12. ____ 13. ____ 14. ____ 15. ____ 16. ____ 17. ____ 18. ____ 19. ____ 20.

Occasionally: 3

Usually: 4

Frequently: 5

Almost Always: 6

Consistently/Always: 7

Enter your score for each category in the following table and sum the five category scores to obtain your total score. Enter that total score in the space indicated. Scores can range from a low of 4 to a high of 28 in each skill category. Total scores can range from a low of 20 to a high of 140. The higher the score in a particular category, the more refined your skill in that aspect of the decision-making process. Skill Area Diagnosing the problem Generating alternatives Evaluating alternatives Reaching decisions Choosing implementation strategies Total score

Statements 1, 2, 3, 4 5, 6, 7, 8 9, 10, 11, 12 13, 14, 15, 16 17, 18, 19, 20

Score ____________ ____________ ____________ ____________ ____________ ____________

Source: P. Fandt, Management Skills: Practice and Experiences (St. Paul: West, 1994).

Chapter 6 Managerial Decision Making

choices, Burger King has evaluated such additions as a veggie burger, eggwich, Chicken Whopper, King Supreme, onion rings with zesty sauce, and an oldfashioned, ice cream–based milk shake.24 Many nutritionists cringed when the company recently decided to offer its Enormous Omelet Sandwich—a two-egg, sausage, cheese, and bacon concoction stuffed between two halves of a bun.25 As decadent as this 730-calorie, 47–fat gram sandwich may sound, it barely holds a candle to Hardee’s new Monster Thickburger. This sandwich includes a slab of Angus beef with four strips of bacon, three slices of cheese, and mayonnaise on a buttered, sesame-seed bun, and weighs in at 1420 calories and 107 grams of fat.26 These decisions certainly buck the trend toward lower-calorie fare at fast-food restaurants. Managers may rely on their training, personal experience, education, and knowledge of the situation to generate alternatives. With prior experience in the amusem*nt park industry, Buescher had a clear idea of several alternatives that might help turn around the fortunes of Cypress Gardens. Collectively, these decision choices would all focus on the concept of making the park more attractive to both families and individuals of all ages. Viewing the problem from varying perspectives is often helpful in generating good alternatives. This is usually best accomplished when input is solicited from other people such as peers, employees, supervisors, and groups within the organization. For example, consumer product companies such as Procter & Gamble often use customer focus groups to supply information that can be used in this stage of decision making. The alternatives can be standard and obvious as well as innovative and unique. Standard solutions often include options that the organization has used in the past. Innovative alternatives may be developed using such approaches as brainstorming, nominal group technique, and the Delphi technique. These methodologies, which encourage consideration of multiple alternatives, are discussed in more detail later in the chapter as techniques for enhancing the quality of participative decision making.

EVALUATING ALTERNATIVES The fourth step in the decision-making process involves determining the value or adequacy of the alternatives generated. Which solution is the best? Fundamental to this step is the ability to assess the value or relative advantages and disadvantages of each alternative under consideration. Predetermined decision criteria, such as the quality desired, anticipated costs, benefits, uncertainties,

and risks of each alternative, may be used in the evaluation process. The result should be a ranking of the alternatives. For example, the manager might ask, “Will this alternative help achieve our objectives? What is the anticipated cost of this alternative? What are the uncertainties and risks associated with this alternative?” Later in this chapter, we examine some of the tools used by managers to evaluate strategic alternatives.

REACHING DECISIONS Decision making is commonly associated with making a final choice. Reaching the decision is really only one step in the process, however. Although choosing an alternative would seem to be a straightforward proposition (that is, simply consider all the alternatives and select the one that best solves the problem), in reality, the choice is rarely clear-cut. Because the best decisions are often based on careful judgments, making a good decision involves carefully examining all the facts, determining whether sufficient information is available, and finally selecting the best alternative.27 In a classic example of cautious restraint, when Lou Gerstner took over as CEO of IBM Corporation, Wall Street expected him to take quick and bold action because IBM was losing its strong hold in the computer industry. When he took no action that Wall Street could see in his first year, he came under fire for being indecisive. But Gerstner was doing his homework, reviewing every IBM planning document that had been written since the late 1970s. Eventually, Gerstner decided to remove many ingrained operating procedures as he began reshaping IBM’s organizational culture. Six billion dollars in expenses were cut, and stock prices doubled as IBM had its first profitable year since 1990.28

CHOOSING IMPLEMENTATION STRATEGIES When decisions involve taking action or making changes, choosing ways to put these actions or changes into effect becomes an essential managerial task. The step that is the bridge between reaching a decision and evaluating the results is the implementation phase of the decision-making process. The keys to effective implementation are (1) sensitivity to those who will be affected by the decision and (2) proper planning and consideration of the resources necessary to carry out the decision. As will be seen in the closing “Meeting the Challenge,” Buescher had a detailed plan for the implementation of his Cypress Gardens

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restoration decisions. New rides and attractions were secured, delivered, and installed with a schedule that had a “soft” opening planned within a year and a half of the park closing. This was quite an aggressive schedule, given the need to restore overgrown garden areas, install new attractions and venues, and repair the damage caused by the three major 2004 hurricanes that hit the park. Those who will be affected by the decision must understand the choice and why it was made; that is, the decision must be accepted and supported by the people who are responsible for its implementation. These needs can be met by involving employees in the early stages of the decision process so that they will be motivated and committed to its successful implementation. This is advice that a top-level MCI executive would have been wise to heed a few years ago when he decided to relocate MCI’s 4000-employee systems division from Washington, D.C., to Colorado Springs. This decision was made with the thought that the spectacular setting in this new location would inspire workers. Instead, numerous executives and engineers, as well as hundreds of the division’s minority population, refused to relocate or left MCI shortly after relocating. These workers had been accustomed to living in larger, ethnically diverse urban areas and found Colorado Springs to be too isolated and politically conservative, with little diversity and fewer cultural activities.29 According to recent research, senior executives frequently complain that middle and operating managers fail to take actions necessary to implement decisions. Implementation problems often occur as a result of poor understanding and lack of commitment to decisions on the part of middle management.30 Poor understanding and lack of commitment tend to be less prevalent at upper levels of management. This is certainly evident in the case of a recent major automobile recall by the Saturn Motor Company. Executives at Saturn operated swiftly and decisively when it was learned that there was a small chance of engine fires due to an alternator wiring problem. Although only 34 fires had been reported, company officials initiated a media blitz of information detailing the recall of over 380,000 automobiles to make the necessary repairs.31 The planning process is a key to effective implementation. Without proper planning, the decision may not be accepted by others in the organization, cost overruns may occur, needed resources may not be available, and the objectives may not be accomplished on schedule. To plan properly for implementation, managers need to perform the following activities: • List the resources and activities required to implement each activity or task. • Estimate the time needed for each activity or task.

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Planning is key to effective implementation. Factors involved in the planning process include: listing resources and activities required to implement the task; estimating necessary time for each task; drawing up a chronological schedule of necessary activities; assigning responsibility for activities; and determining how the situation will look when the plan is fully operational.

•

Draw up a chronological schedule of the activities and tasks that must be carried out to make the decision fully operational. • Assign responsibility for each activity or task to specific individuals. • Determine how things will look when the decision is fully operational. Figure 6.2 displays a summary overview of the critical aspects of successful decision implementation.

MONITORING AND EVALUATING FEEDBACK No decision-making process is complete until the impact of the decision has been evaluated. Managers must observe the impact of the decision as objectively as possible and take further corrective action if it becomes necessary. Quantifiable objectives can be established even before the solution to the problem is put into effect. For example, when 3M began a 5-year program dubbed “Challenge ’95” to increase quality control and reduce manufacturing costs by 35%, the company constantly monitored its efforts to determine whether it was making progress toward those goals. Monitoring the decision is useful whether the feedback is positive or negative. Positive feedback indicates that the decision is working and that it should be continued and perhaps applied elsewhere in the organization. Negative feedback indicates either that the implementation requires more time, resources, effort, or planning than originally thought or that the decision was a poor one and needs to be reexamined.

Chapter 6 Managerial Decision Making

Figure 6.2

Keys to Effective Implementation of Decisions 155 Sensitivity to Those Affected by the Decision • Affected employees must be involved in the decision-making process. • Affected employees must be made aware of why the decision was made. • Affected employees must be made aware of the importance that the decision is accepted and supported.

EFFECTIVE IMPLEMENTATION Proper Planning • Identify required resources and tasks. • Estimate task-time requirements. • Develop time schedule for implementation of tasks. • Assign individual task responsibilities. • Project the consequences of the decision.

The importance of assessing the success or failure of a decision cannot be overstated. Evaluation of past decisions as well as other information should drive future decision making as part of an ongoing decision-making feedback loop. Thus far, we have explored how managers in organizations make decisions by examining the seven steps in the decision-making process. The process starts when the organization recognizes a problem or becomes aware that an opportunity exists. It concludes with an assessment of the results of its decision actions. As we have stressed, the ability to make effective decisions is a distinguishing characteristic of most successful managers.32 However, there are philosophical differences in how one approaches the decision-making process. In that context, we now examine two commonly used models of decision making.

in scope, assumptions, and applicability, they are similar in that each focuses on the complexity of decision-making processes. In this section, we examine two contrasting decisionmaking models: the rational–economic model and the behavioral model. Our goal is to demonstrate the variations in how decision making is perceived and interpreted.33 Figure 6.3 displays a summary comparison of many of the key aspects of each of these models. The discussions that follow elaborate on the points in this figure.

Many models of the decision-making process can be found in the management literature. Although these models vary

2 Describe the rational–economic model of decision making.

RATIONAL–ECONOMIC DECISION MODEL The rational–economic decision model is prescriptive rather than descriptive; that is, it focuses on how decisions should be made, not on how they actually are made. The model makes the following important KEY TERMS assumptions about the deciRational–economic sion maker and the decisiondecision model making process: A model that focuses on how • The decision maker is asdecisions should be made. sumed to have “perfect”

Models of Decision-Making

LEARNING OBJECTIVE

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Figure 6.3

Two Contrasting Decision Models

156 RATIONAL–ECONOMIC MODEL

BEHAVIORAL MODEL

Prescriptive model (suggests how decisions should be made)

Descriptive model (suggests how decisions are actually made)

Basic Premise

Decision making will be rational, systematic, and logical.

Accompanying Assumptions • Complete and accurate information is available. • Agreed-on objectives and list of alternative courses of action. • Decision makers work for the organization’s best interests. • No ethical dilemmas arise in the decision-making process.

(that is, completely accurate) information and to have all the information that is relevant to the decision situation.

•

The model assumes that the decision maker operates to accomplish objectives that are known and agreed on and has an extensive list of alternatives from which to choose. • The model assumes that the decision maker will be rational, systematic, and logical in assessing each alternative and its associated probabilities. • The model assumes that the decision maker will work in the best interests of the organization. • The model assumes that ethical dilemmas do not arise in the decision-making process. As these assumptions suggest, the rational–economic decision model does not address the influences that affect the decision environment or describe how managers actually make decisions; instead, it provides guidelines to help the organization or group reach an ideal outcome. As a consequence, in practice, the model may not always be a

Human limitations make rational decision making difficult to achieve.

Accompanying Assumptions • Bounded rationality affects decisionmaking process. • Experience-based intuition will affect the decision-making process. • Decision makers will accept a satisfactory (satisficing) decision. • Escalation of commitment may occur.

realistic depiction of managerial behavior. For example, the model portrays decision making as a straightforward process. In reality, there are several reasons why making a decision is not likely to be that simple. First, people rarely have access to complete and perfect information. Second, even if information about all possible alternatives were available, individuals are limited in their ability to comprehend and process vast amounts of information. Third, decision makers seldom have adequate knowledge about the future consequences of alternatives. Fourth, in most decision-making situations, personal factors (such as fatigue, emotions, attitudes, motives, or behaviors) are likely to intervene to prevent a manager from always acting in a completely rational manner. Finally, an individual’s culture and ethical values may influence the decision process. From a global perspective, it is especially important to be sensitive to how culture influences decision making. Individuals from different backgrounds and cultures have different experiences, values, and behaviors, which in turn influence the way they process information and make decisions. It is particularly important for managers

Chapter 6 Managerial Decision Making

to recognize and appreciate this as modern organizations become increasingly global in their operations. We will discover in Chapter 16 the full extent to which organizations, large and small, are forming global alliances through e-commerce and Internet linkages. For example, Japanese managers follow a unique consensual decisionmaking process in which subordinates are involved in considering the future direction of their companies. Individuals and groups who have ideas for improvement or change discuss them extensively with a large number of peers and managers. During this lengthy information communication process, some agreements are hammered out. At this point, a formal document is drafted and circulated for the signature or personalized stamp of every manager who is considered relevant to the decision. Only after all the relevant managers have put their seals on the proposal is the idea or suggestion implemented.34 Managerial decision making is also influenced by the individual’s ethics and values. As we discussed in Chapter 3, managers have power by virtue of their positions to make decisions that affect people’s lives and well-being; consequently, the potential for ethical dilemmas is always present.35 In an ethical dilemma, managers must decide whether or not to do something that will benefit themselves or the organization but may be considered unethical and perhaps illegal. Ethical dilemmas are going to occur more and more frequently in the future as a result of the dramatic changes the business environment is undergoing. For example, managers may have to answer questions such as the following: What do companies owe employees who are let go after 30 years of service? Is it right to cancel a contract with a loyal distributor when a cheaper supplier becomes available? Is it proper to develop condominiums on land that is an unofficial wildlife refuge? The following questions may help you when you face a situation that has ethical implications:36 • Have you accurately assessed the problem? • Do you have all the necessary information? • Where are your loyalties? • Have you generated a list of possible alternatives and considered how each will affect the other parties involved? • Have you tested each alternative by asking whether it is legal, fair, and just to all parties involved? • Would your decision change if you were to disclose it to your family, your boss, or society as a whole? • Does your decision have any symbolic potential? Could it be misunderstood? Managers should encourage ethical decision making throughout the organization by providing subordinates with clear guidelines for making decisions and establishing rules for enforcing the guidelines. Both the guidelines and

the rules should be communicated to subordinates on a regular basis. 157

BEHAVIORAL DECISION MODEL Unlike the rational–economic model, LEARNING the behavioral decision model OBJECTIVE acknowledges human limitations that make rational decisions difficult to achieve. The behavioral decision model is descriptive and provides a framework for understanding the Discuss the process that managers actually use when behavioral decision selecting from among alternatives. model and its The behavioral decision model suggests related concepts of that a person’s cognitive ability to process bounded rationality, information is limited. In other words, a intuition, human being can handle only so much satisficing, and information before overload occurs. Even if escalation of complete information were available to commitment. decision makers, these cognitive limitations would impede them from making completely rational decisions. Applying this assumption to managerial decision making, the model suggests that managers usually attempt to behave rationally within their limited perception of a situation. But most organizational situations are so complex that managers are forced to view problems within sharply restricted bounds. They frequently try to compensate for their limited ability to cope with the information demands of complex problems by developing simple models. Thus, managers’ behaviors can be considered ra- KEY TERMS tional, but only in terms of Ethical dilemma their simplified view of the A situation in which a person problem. must decide whether or not The behavioral decision to do something that, model introduces several conalthough benefiting oneself cepts that are important to unor the organization, may be derstanding how we make considered unethical and decisions. These concepts perhaps illegal. include bounded rationality, intuition, satisficing, and Behavioral decision model escalation of commitment. A descriptive framework for understanding that a person’s cognitive ability to process Bounded Rationality information is limited. The notion of bounded ratio-

nality recognizes that people cannot know everything; they are limited by such organizational constraints as time, information, resources, and their own mental capacities.37

Bounded rationality Recognizes that people are limited by such organizational constraints as time, information, resources, and their own mental capacities.

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Bounded rationality is a useful concept because it explains why different individuals with exactly the same information may make different decisions. Bounded rationality affects several key aspects of the decision-making process. First, decision makers do not search out all possible alternatives and then select the best. Rather, they identify and evaluate alternatives only until an acceptable solution is found. Having found a satisfactory alternative, the decision maker stops searching for additional solutions. Other and potentially better alternatives may exist, but they will not be identified or considered because the first workable solution has been accepted. Therefore, only a fraction of the available alternatives may be considered due to the decision maker’s information-processing limitations.

Intuition Intuition has been described as everything from an unconscious analysis based on past experience to a paranormal ability called a “sixth sense.”38 Several theories have attempted to explain intuition, but none has been proved. We do know that intuition is based on the individual’s years of practice and experience. For example, a decision maker who detects similarities between the current situation and one encountered previously will select or modify actions that proved effective in that situation in the past.39 Managers use intuition to obtain a quick understanding of a situation and to identify solutions without going through extensive analysis. With four decades of experience in the theme park industry, Robert G. Gault, Jr., president and chief operating officer of Universal Orlando, relies heavily on intuition as he interacts with workers and surveys guests’ opinions while walking around Universal Studios’ two Orlando theme KEY TERMS parks.40 Buescher also relied on intuition a good bit as he Intuition made the various decisions to An unconscious analysis transform Cypress Gardens based on past experience. into a more family-friendly Satisficing attraction. With his years of The search for and experience at the Valdosta, acceptance of something Georgia, amusem*nt park, that is satisfactory rather Buescher had a pretty keen than perfect or optimal. sense of what it would take to Escalation of commitment turn this situation around. The tendency to increase Some experts on corporate commitment to a previously decision making feel that it selected course of action would be a good thing if there beyond the level that would was more behavior like this. be expected if the manager They feel that many U.S. followed an effective corporations place too much decision-making process. emphasis on decision analysis

and suggest that managers should trust their feelings and experience more often.41

Satisficing Satisficing means searching for and accepting something that is satisfactory rather than insisting on the perfect or optimal. Satisficers do not try to find optimal solutions to problems but search until they find an acceptable or satisfactory solution and then adopt it. In short, managers tend to satisfice rather than optimize in considering and selecting alternatives. Some satisficing behavior is unavoidable because managers do not have access to all possible contingencies in making decisions. When Hewlett-Packard decided it was going to enter the home personal-computer business, it established a goal of simply becoming one of the top three competitors in this market. This could be viewed as a satisficing decision because Hewlett-Packard management had identified a level of performance that would be satisfactory but certainly not perfect.42

Escalation of Commitment When managers face evidence that an initial decision is not working, they frequently react by committing more resources, even when feedback indicates the action is wrong.43 This escalation of commitment phenomenon is the tendency to commit more to a previously selected course of action than would be expected if the manager followed an effective decision-making process.44 One reason for escalation of commitment is that individuals feel responsible for negative consequences and try to justify their previous decisions. Managers may also stay with a course of action simply because they believe consistency is a desirable behavior. In addition, managers may worry that if they change course, others may regard the original decision as a mistake or a failure. For example, when Denver’s new state-of-the-art international airport opened in 1995, it was supposed to have an equally stateof-the-art, computer-controlled luggage-handling system, complete with laser scanners reading barcodes on luggage tags, thousands of telecars carrying luggage around 21 miles of track, and photocells tracking the moving telecars. What Denver International got was a system that misdirected luggage, periodically jammed, and all too often crushed the luggage of irate passengers. Although many carriers soon abandoned the system in favor of the more conventional luggage-handling methods, United Airlines, Denver’s largest carrier and longtime proponent of the system, remained committed to the system and continued to invest heavily to get it operable. Finally, after 10 years of futility and millions of wasted dollars, United threw in the towel and shut down the system in 2005.45

Chapter 6 Managerial Decision Making

FOSTERING QUALITY IN THE DECISION-MAKING PROCESS How can managers tell whether they have made the best possible decision? One way is to wait until the results are in, but that can take a long time. In the meantime, managers can focus on the decision-making process. Although nothing can guarantee a perfect decision, using vigilance can make a good decision more likely. Vigilance means being concerned for and attentive to the correct decision-making procedures. Vigilant decision makers use the following procedures:46 • Survey the full range of objectives to be fulfilled and identify the values and qualities implicated by the choices. • Thoroughly canvass a wide range of alternative courses of action. This is the idea-gathering process, which should be separate from idea evaluation. • Carefully weigh whatever they know about the costs and risks of both the negative and positive consequences that could flow from each alternative. • Intensively search for new high-quality information relevant to further evaluation of the alternatives. • Assimilate and take into account any new advice or information to which they are exposed, even when the information or advice does not support the course of action initially preferred. • Reexamine all the possible consequences of all known alternatives before making a final choice, including those originally regarded as unacceptable. • Make detailed provisions for implementing or executing the chosen course of action and give special attention to contingency plans that might be required if various known risks materialize. Vigilance will not guarantee perfect decisions every time, but this approach can help managers be confident that they have followed procedures that will yield the best possible decision under the circ*mstances. Spending more time at this stage can save time later in the decision process.

Group Considerations in Decision Making So far in this chapter, we have been examining how managers make decisions individually. In practice,

managers often work with their employees and peers in the company and may need to solicit input from them. Decision making is frequently entrusted to a group—a board, standing committee, ad hoc committee, or task force—and as such, is referred to as participative decision making. Participative decision making is becoming more common as organizations push decision making to lower organizational levels in conjunction with their increased focus on improving customer service through quality management.47 Accordingly, this section examines some of the issues related to using groups to make decisions.

PARTICIPATIVE DECISION MAKING Participative decision making is not a single technique that can be applied to all situations. As we will see, managers can use a variety of techniques to involve the members of the organization in decision making. The appropriate level of subordinate participation in decision making depends on the manager, the employees, the organization, and the nature of the decision itself.

LEARNING OBJECTIVE

4 Describe the participative approach to decision making.

Participative Models Vroom and Yetton laid the groundwork for participative decision making with their pioneer work in the development of a model to help managers determine when group decision making is appropriate.48 According to this participative model, the effectiveness of a group decision is governed by both its quality and its acceptance (the degree to which group members are committed to the decision they have made). This model has seen a few updates over the years by Vroom and Jago to reflect the decision-making environment of managers more adequately.49 The most recent version of this model employs five possible levels of subordinate participation in decision making, yielding the five decision styles described in Table 6.1. We see here that the five styles can be arranged along a continuum. The decision methods become progressively more participative as one moves from a highly autocratic style in which the leader makes the KEY TERMS decision alone, to a highly participative style in which the Vigilance leader permits the group to The concern for and attention make the decision.50 to the process of making a According to Vroom and decision that occurs when the Jago, the degree of subordidecision maker considers nate participation depends on seven critical procedures.

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Table 6.1

Vroom–Jago Decision-Making Styles

160 Decide style

Leader makes the decision alone and announces or sells it to the group. Leader uses his/her own expertise and may collect information from the group to help solve the problem.

Consult individually style

Leader presents the problem to group members individually, gets their ideas and suggestions individually, and then makes the decision.

Consult group style

Leader presents the problem to group members in a meeting, gets their suggestions, and then makes the decision.

Facilitate style

Leader presents the problem to the group in a meeting and acts as a facilitator by defining the problem to be solved and the constraints within which the decision must be made. Leader seeks concurrence from group members on a decision.

Delegate Style

Leader permits the group to make the decision within prescribed limits. Group undertakes the identification and diagnosis of the problem and the development of alternative solutions and makes the decision on the selection of alternative(s).

Source: Adapted and reprinted from Leadership and Decision-Making, by Victor H. Vroom and Philip W. Yetton, by permission of the University of Pittsburgh Press © 1973 by University of Pittsburgh Press.

seven situational contingencies. They provide the following list of diagnostic questions to help managers select the appropriate level of participation. 1. 2. 3. 4.

Decision significance How significant is this decision for the project or the organization? Importance of commitment How important is subordinate commitment for enacting the decision? Leader expertise What is the level of the leader’s expertise in relation to the problem? Likelihood of commitment Would subordinates have high or low commitment if the leader were to make the decision alone? Team support What is the level of subordinate support for the team’s or organization’s goals associated with this decision? Team expertise What is the level of knowledge and expertise on the part of team members in relation to the problem at hand? Team competence How skilled and committed to working together as a team are the subordinates?

Figure 6.4 shows how these questions can be used in a matrix format to arrive at the appropriate decision style. The leader enters the left side of the matrix at Problem Statement and examines the seven situational contingency questions in sequence from left to right. Each question calls for a response of either high (H) or low (L), and each response to a question moves the user one column to the right to answer the next situational contingency question. Following these sequential questions

eventually leads the user to a choice of a decision-making participation style in the last column. To illustrate the use of this model, assume that the leader entered the matrix at the left with a problem statement and answered H to the decision significance question. Suppose the response to the second question, importance of commitment, was also H. The leader would then proceed to the leader expertise question. Let’s assume that the response here was also H. The leader then proceeds to the likelihood of commitment question. We’ll assume that the response to this question was L. Let’s also assume that a response of L was given to the next question, goal alignment. If you have been following the responses on the matrix, you will now encounter dashes the rest of the way to the right. This means that the subsequent questions do not need to be addressed. We proceed directly to the decision-making style in the last column, in this case the Consult group style. Regardless of what type of participative decisionmaking model is used, generally speaking, a participative decision style is desirable when subordinates have useful information and share the organization’s goals, when subordinates’ commitment to the decision is essential, when timeliness is not crucial, and when conflict is unlikely. At the same time, group decision making is more complex than decision making by individuals, but good communication and conflict-management skills can overcome this difficulty.51 It is important to note that inappropriate use of either group or individual decision making can be costly. Ineffective use of groups wastes organizational resources because

Chapter 6 Managerial Decision Making

Vroom and Jago Decision Model

Figure 6.4

Likelihood of Commitment

Goal Alignment

Group Expertise

Team Competence

Leader Expertise

Importance of Commitment

Decision Significance

161

–

Instructions: The matrix operates like a funnel. You start at the left with a specific decision problem in mind. The column headings denote situational factors which may or may not be present in that problem. You progress by selecting High and Low (H or L) for each relevant situational factor. Proceed down from the funnel, judging only those situational factors for which a judgment is called for, until you reach the recommended process.

Decide

Facilitate

H H

–

– H

Consult (Group)

Facilitate

H H

H P R O B L E M

L H

–

Consult (Individually)

L H

Facilitate

H H

S T A T E M E N T

–

Decide

Facilitate

Consult (Group)

H H

L L

– L

–

Decide

Delegate

–

– L

Facilitate

–

Decide

–

Consult (Individually)

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162

the participants’ time could have been spent on other tasks; it can also lead to boredom and reduce motivation when participants feel that their time has been wasted. Making decisions individually that would have been better made by groups can lead to poor coordination among organization members, less commitment to quality, and little emphasis on creativity, as well as poor decisions.52

Group Size In deciding whether a participative model of decision making is appropriate, a manager must also consider the size of the group. In general, as group size increases, the following changes in the decision-making process are likely to be observed:53 • The demands on the leader’s time and attention are greater, and the leader is more psychologically distant from the other members. This becomes much more of a problem in self-managed teams, in which several individuals can take on leadership roles. LEARNING OBJECTIVE • The group’s tolerance of direction from the leader is greater, and the team’s decision making becomes more centralized. Discuss the • The atmosphere is less friendly, advantages and actions are less personal, more disadvantages of subgroups form, and in general, participative members are less satisfied. decision making. • Rules and procedures become more formalized.

Table 6.2

Advantages and Disadvantages of Group Decision Making

Advantages

Disadvantages

• Experience and expertise of several individuals available

• Greater time requirement

• More information, data, and facts accumulated

• Compromise

• Problems viewed from several perspectives

• Minority domination

• Concern for individual rather than group goals • Social pressure to conform

• Higher member satisfaction • Greater acceptance and commitment to decisions

• Groupthink

Participative decision making offers potential advantages, but it is not without its disadvantages. Let’s now briefly examine these aspects of participative decision making.

ADVANTAGES AND DISADVANTAGES OF PARTICIPATIVE DECISION MAKING Committees, task forces, and ad hoc groups are frequently assigned to identify and recommend decision alternatives or, in some cases, to actually make important decisions. In essence, a group is a tool that can focus the experience and expertise of several people on a particular problem or situation. Thus, a group offers the advantage of greater total knowledge. Groups accumulate more information, knowledge, and facts than individuals and often consider more alternatives. Each person in the group is able to draw on his or her unique education, experience, insights, and other resources and contribute those to the group. The varied backgrounds, training levels, and expertise of group members also help overcome tunnel vision by enabling the group to view the problem in more than one way. Participation in group decision making usually leads to higher member satisfaction. People tend to accept a decision more readily and to be better satisfied with it when they have participated in making that decision. In addition, people will better understand and be more committed to a decision in which they have had a say than to a decision made for them. As a result, such a decision is more likely to be implemented successfully. A summary of the advantages of group decision making appears in Table 6.2. Although groups have many potential benefits, we all know that they can also be frustrating. In fact, the traditional interacting group is prone to a variety of difficulties. One obvious disadvantage of group decision making is the time required to make a decision (see Table 6.2). The time needed for group discussion and the associated compromising and selecting of a decision alternative can be considerable. Time costs money, so a waste of time becomes a disadvantage if a decision made by a group could have been made just as effectively by an individual working alone. Consequently, group decisions should be avoided when speed and efficiency are the primary considerations. A second disadvantage is that the group discussion may be dominated by an individual or subgroup. Effectiveness can be reduced if one individual, such as the group leader, dominates the discussion by talking too

Chapter 6 Managerial Decision Making

much or being closed to other points of view. Some group leaders try to control the group and provide the major input. Such dominance can stifle other group members’ willingness to participate and could cause decision alternatives to be ignored or overlooked. All group members need to be encouraged and permitted to contribute. Another disadvantage of group decision making is that members may be less concerned with the group’s goals than with their own personal goals. They may become so sidetracked in trying to win an argument that they forget about group performance. On the other hand, a group may try too hard to compromise and consequently may not make optimal decisions. Sometimes this stems from the desire to maintain friendships and avoid disagreements. Often groups exert tremendous social pressure on individuals to conform to established or expected patterns of behavior. When they are dealing with important and controversial issues, interacting groups may be prone to a phenomenon called groupthink.54 Groupthink is an agreement-at-any-cost mentality that results in ineffective group decision making. It occurs when groups are highly cohesive, have highly directive leaders, are insulated so that they have no clear ways to get objective information, and—because they lack outside information—have little hope that a better solution might be found than the one proposed by the leader or other influential group members.55 These conditions foster the illusion that the group is invulnerable, right, and more moral than outsiders. They also encourage the development of self-appointed “mind guards” who bring pressure on dissenters. In such situations, decisions— often important decisions—are made without consideration of alternative frames or alternative options. It is difficult to imagine conditions more conducive to poor decision making and wrong decisions. Research indicates that groupthink may also result when group members have preconceived ideas about how a problem should be solved.56 Under these conditions, the team may not examine a full range of decision alternatives, or it may discount or avoid information that threatens its preconceived choice. Irving Janis, who coined the term groupthink, focused his research on high-level governmental policy groups faced with difficult problems in complex and dynamic environments. The groupthink phenomenon has been used to explain numerous group decisions that have resulted in serious fiascoes. Classic examples of such decisions include the Bay of Pigs invasion, the Watergate cover-up, and NASA’s decision to launch the ill-fated, space shuttle Challenger.57 Of course, group decision making is common in all types of organizations, so it is possible that groupthink exists in private-sector organizations as well as

Table 6.3

Characteristics of Groupthink and the Types of Defective Decisions That May Result

Characteristics of Groupthink

Types of Defective Decisions

• Illusion of invulnerability

• Incomplete survey of alternatives

• Collective rationalization

• Incomplete survey of goals

• Belief in the morality of group decisions

• Failure to examine risks of preferred decisions

• Self-censorship

• Poor information search

• Illusion of unanimity in decision making

• Failure to reappraise alternatives

• Pressure on members who express arguments

• Failure to develop contingency plans

in those in the public sector. Table 6.3 summarizes the characteristics of groupthink and the types of defective decision making that will likely result. Groupthink is common in tightly knit groups that believe in what they are doing, such as citizen groups who censor book acquisitions for the local library, environmental groups who will save us from ourselves at any price, business leaders who presume that they control other people’s economic destinies, or government functionaries who think they know better than the voters what is in the national interest. None of the decisions made by these groups is necessarily wrong, but that is not the point. Rather, it is the sinLEARNING gle-mindedness of the decision process, the OBJECTIVE narrow framing, and limited deliberation that are of concern.58

TECHNIQUES FOR ENHANCING THE QUALITY OF PARTICIPATIVE DECISION MAKING Managers can use several structured techniques to foster quality in group decision making.59 Here, we briefly explore brainstorming, the nominal group technique, the Delphi technique, devil’s advocacy approach, and dialectical inquiry.

List the various techniques used to improve participative decision making.

KEY TERMS Groupthink An agreement-at-any-cost mentality that results in ineffective group decision making.

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Brainstorming is a technique that encourages group members to generate as many novel ideas as possible on a 164 given topic without evaluating them. As a group process, brainstorming can enhance creativity by overcoming pressures for conformity that can retard the development of creative decision making. Brainstorming primarily focuses on generating ideas rather than on choosing an alternative. The members of the group, usually 5 to 12 people, are encouraged to generate ideas during a specific time period while withholding criticism and focusing on nonevaluative presentation.60 In this way, individuals who may be concerned about being ridiculed or criticized feel more free to offer truly novel ideas. The following rules should guide the brainstorming process:61 • Freewheeling is encouraged. Group members are free to offer any suggestions to the facilitator, who lists ideas as people speak. • Group members will not criticize ideas as they are being generated. Consider any and all ideas. No idea can be rejected initially. • Quantity is encouraged. Write down all the ideas. • The wilder the ideas are, the better. • Piggyback on or combine previously stated ideas. • No ideas are evaluated until after all alternatives are generated. Brainstorming enhances KEY TERMS creativity and reduces the tendency of groups to satisfice in Brainstorming considering alternatives. One A technique used to enhance advocate of brainstorming is creativity that encourages Bill Gates, CEO of Microsoft. group members to generate He often joins programmers as many novel ideas as in the brainstorming sessions possible on a given topic that give birth to new prodwithout evaluating them. ucts. According to Gates, it is Nominal group technique very important to him and to (NGT) those who work with him at A structured process Microsoft to encourage credesigned to stimulate ative group decision making.62 creative group decision making where agreement is Nominal Group lacking or where the Technique members have incomplete The nominal group techknowledge concerning the nique (NGT) is a structured nature of the problem. process designed to stimulate Delphi technique An approach that uses experts to make predictions and forecasts about future events without meeting face to face.

creative group decision making in which agreement is lacking or the members have incomplete knowledge of the nature of the problem.63 It is a

Brainstorming

Managers can use several techniques, such as brainstorming, to foster quality in group decision making.

means of enhancing creativity and decision making that integrates both individual work and group interaction with certain basic guidelines. NGT was developed to foster individual as well as group creativity and to further overcome the tendency of group members to criticize ideas when they are offered. NGT is used in situations in which group members must pool their judgments to solve the problem and determine a satisfactory course of action. First, individual members independently list their ideas on the specific problem. Next, each member presents his or her ideas one at a time, without discussion. As with brainstorming, members are asked to generate ideas without direct comment, but the idea-generation phase of NGT is more confined than it is with brainstorming because group members present ideas in a round-robin manner rather than through freewheeling. Members’ ideas are recorded so that everyone can see them. After all members’ ideas are presented, the group discusses the ideas to clarify and evaluate them. Finally, members vote on the ideas independently, using a rank-ordering, or rating, procedure. The final outcome is determined by the pooled individual votes and is thus mathematically derived. NGT may be most effective when decisions are complex or when the group is experiencing blockages or problems, such as a few dominating members. NGT is generally effective in generating large numbers of creative alternatives while maintaining group satisfaction.64

Delphi Technique The Delphi technique was originally developed by Rand Corporation to enable groups to consult experts and use

Chapter 6 Managerial Decision Making

their predictions and forecasts about future events.65 Using survey instruments or questionnaires, a group leader solicits and collects written expert opinions on a topic. The leader collates and summarizes the information before distributing it to the participants. This process continues until the experts’ predictions are systematically refined through feedback and a consensus emerges. Like NGT, the Delphi technique can be used to define problems and to consider and select alternatives. The Delphi technique is also best used under special circ*mstances. The primary difference between NGT and the Delphi technique is that with the Delphi technique participants do not meet face to face. A significant advantage of the Delphi technique is that it completely avoids group-interaction effects. Even NGT is not completely immune to the social facilitating pressure that results from having an important person in the same room. With Delphi, participant experts can be thousands of miles apart.

forces the group to confront the implications of their assumptions in the decision process.68 The Bausch and Lomb Company successfully uses this technique by estab165 lishing “tiger teams” composed of scientists from different disciplines. Team members are LEARNING OBJECTIVE encouraged to bring up divergent ideas and offer different points of view. Xerox uses round-table discussions composed of various functional experts to encourage divergent and innovative decision making. Discuss the basic Now that we have examined the deciclassifications for sion making process from both an individmanagerial ual and a group perspective, let’s turn our decisions. attention to a mechanism for classifying decision situations.

Classifying Decision Situations

Devil’s Advocacy Approach The last two techniques to enhance group decision making, devil’s advocacy approach and dialectical inquiry, were developed to deal with complex, strategic decisions. Both techniques encourage intense, heated debate among group members. One study found that disagreement in structured settings like meetings can lead to better decision making.66 Disagreement is particularly useful for organizations operating in uncertain environments. The devil’s advocacy approach appoints an individual or subgroup to critique a proposed course of action. One or more individuals are assigned the role of devil’s advocate to make sure that the negative aspects of any attractive decision alternatives are considered.67 The usefulness of the devil’s advocacy technique was demonstrated several years ago by Irving Janis in his discussion of famous fiascoes attributed to groupthink. Janis recommends that everyone in the group assume the role of devil’s advocate and question the assumptions underlying the popular choice. An individual or subgroup can be formally designated as the devil’s advocate to present critiques of the proposed decision. Because groups often exhibit a desire to agree, using this technique avoids the problem of having this tendency interfere with the decision-making process. Potential pitfalls are identified and considered before the decision is final.

Dialectical Inquiry With dialectical inquiry, a decision situation is approached from two opposite points, and advocates of the conflicting views conduct a debate, presenting arguments in support of their positions. Each decision possibility is developed, and assumptions are identified. The technique

On a very basic level, Herbert Simon, a management scholar and prolific researcher in the area of decision making, proposed that decisions can be classified as either programmed or nonprogrammed.69 When the decision situation is one that has occurred in the past and the response is routine, the decision is referred to as a programmed decision. Identifying alternative courses of action in such situations is usually routine because the alternatives are quite familiar to the decision maker. As an example of a programmed de- KEY TERMS cision, consider the customer Devil’s advocacy approach assistance operator for the An approach in which an Mills-Pride Company, a manindividual or subgroup is ufacturer of kits of unassemappointed to critique a probled furniture and cabinetry. If posed course of action and a customer discovers that a identify problems to consider component or hardware item before the decision is final. is missing from her kit, she can Dialectical inquiry call an 800 number for assisA method that approaches a tance. The operator routinely decision from two opposite obtains the missing part numpoints and structures a ber from the customer and debate between conflicting then authorizes immediate views. UPS shipping of that part. Programmed decision When a decision is made A decision made in response in response to a situation that to a situation that is routine or is unique, unstructured, or recurring. poorly defined, it is called a

Part 2 Planning Challenges in the 21st Century

nonprogrammed decision. These decisions often require considerable creativity, cleverness, and innovation to elicit a list of reasonable alternative courses of action. 166 When an investment group took control of the Schwinn Bicycle Company and tried to reverse the slide that Schwinn had been in for years, many nonprogrammed decisions were made as they restructured the company, shifted to a customer focus, and developed some hot new models. These decisions helped Schwinn roll back to its former prominence in the industry.70 Whether programmed or nonprogrammed, organizational decisions can be further described as either longrange strategic decisions or short-range operational decisions. As the names suggest, long-range strategic decisions are those that are made infrequently and commit resources for long time spans into the future. On the other hand, short-range operational decisions are those that are made on a recurring basis and deal with the dayto-day or week-to-week operation of the organization. The changing nature of today’s business environment presents an interesting dilemma for decision makers. On one hand, the rapidly changing, global business environment creates a need for more nonprogrammed decisions than ever before. With LEARNING quality and continuous improvement as OBJECTIVE major strategic initiatives, organizations are constantly being challenged to find creative and innovative solutions to unique new problems and opportunities. On the Describe the other hand, the changing composition of nature of strategic the workforce suggests that more prodecision making as grammed decisions might be beneficial. well as the Today’s workforce continues to become strategic decisionmore diverse in racial, ethnic, and gender making matrix composition. Workers with diverse backapproach for grounds and cultural values often have strategy selection. different perceptions of appropriate organizational goals and objectives and therefore respond differently to the same decision situation. KEY TERMS In such circ*mstances, the more programmed the deciNonprogrammed decision sion responses can be, the A decision made in response more likely that workers will to a situation that is unique, make consistent, high-quality unstructured, or poorly decisions. defined. Regardless of the type of decision situation, managers Strategic decision-making have at their disposal certain matrix tools and techniques to achieve A two-dimensional grid used excellence in the decisionto select the best strategic making process. Let’s look at a alternative in light of multiple few of the more popular tools organizational objectives.

used in making long-range strategic decisions within an organization.

Strategic DecisionMaking Tools Strategic decision making occurs at the highest levels in organizations. As we saw in Chapter 5, this type of decision making involves the selection of a strategy that will define the long-term direction of the firm. Two important areas for strategic decision making are in strategy selection and evaluation of portfolios.

STRATEGY SELECTION: THE STRATEGIC DECISION-MAKING MATRIX Many times, organizations find that there is not one clear-cut, obvious strategy that should be pursued. Instead, several potentially attractive alternatives may exist. The task for management is to select the strategy that will best facilitate the achievement of the multiple objectives of the organization. A tool that can be helpful in such cases is the strategic decision-making matrix.71 When management faces several strategic alternatives and multiple objectives, it is helpful to organize these factors into a two-dimensional decision-making matrix.72 To illustrate, let’s consider the case of an organization that has established a goal of strong growth and has implemented that goal by specifying three objectives: increased profit, increased market share, and increased production output. Suppose management has determined that three alternative growth strategies are reasonable options for the organization—product development, horizontal integration, and a joint venture. To form the strategic decisionmaking matrix, the alternative strategies are listed along the side of the matrix, and the objectives are listed along the top, as in Table 6.4.73 Because the objectives of the organization won’t always be equally important, different weights can be assigned to them. Management usually assigns the weights based on its subjective assessment of the importance of each objective. The weights are shown directly below the objectives in Table 6.4. In this example, increased profit is the most important objective; therefore, it has received the highest weight. Note that the sum of the weights must equal 1.0.

Chapter 6 Managerial Decision Making

Table 6.4

Strategic Decision-Making Matrix 167 Objectives Increased Profit

Increased Market Share

Increased Production Output

Alternative Strategies/Weight

0.5

0.3

0.2

Product development

0.5(2) 1 0.3(2) 1 0.2(3) 5 2.2

Horizontal integration

0.5(4) 1 0.3(2) 1 0.2(2) 5 3.0

Joint venture

0.5(5) 1 0.3(3) 1 0.2(3) 5 4.0

To use the matrix, management must first rate each alternative strategy on its potential to contribute to the achievement of each objective. A 1-to-5 rating scale is used, with 1 indicating little or no potential for achieving an objective and 5 indicating maximum potential. Once an alternative strategy has been rated for each objective, the strategy’s total weighted score can be computed by multiplying its rating for each objective by the corresponding weight of the objective and then summing across all objectives, as shown in the last column in Table 6.4. The decision maker can then select the strategy with the highest weighted score. In this example, the joint venture strategy is the most desirable alternative because it will allow the organization to achieve the best combination of profitability, market share, and production output.

EVALUATION OF PORTFOLIOS Whenever an organization becomes involved in several businesses and industries or with several products and services, it becomes necessary to make decisions about the role each business line will play in the organization and the manner in which resources will be allocated among the business lines. Although this discussion of the portfolio approach focuses on the evaluation of multiple business lines, these approaches can also be used at the product or service level. This is done by replacing business lines on the matrix with products or services. The most popular technique for assessing the balance of the mix of business lines in an organization is portfolio matrix analysis. A business portfolio matrix is a twodimensional grid that compares the strategic positions of each of the organization’s businesses. A portfolio matrix can be constructed using any reasonable pair of indicators of a firm’s strategic position.

Total Weighted Score

As we will see, usually one dimension of the matrix relates to the attractiveness of the industry environment and the other to the strength of a business within its industry.74 The two most frequently used LEARNING portfolio matrices are the growth-share maOBJECTIVE trix and the industry attractiveness/ business strength matrix.

The Growth-Share Matrix

Identify the The earliest business portfolio differences approach to be widely used for corbetween the porate strategy formulation is the growthgrowth-share share matrix. This technique was developed matrix and the by the Boston Consulting Group (BCG), a industry leading management consulting firm. Figure attractiveness/ 6.5 illustrates a BCG matrix.75 business strength The BCG matrix is constructed using matrix approaches market-growth rate and relative market share for evaluating as the indicators of the firm’s strategic posibusiness portfolios. tion. Each indicator is divided into two levels (high and low) so that the matrix contains four cells. The rows of the matrix show the market-growth rate, and the columns show the KEY TERMS relative market share. MarketBusiness portfolio matrix growth rate is the percentage at A two-dimensional grid that which the market in which the compares the strategic business operates is growing positions of each of the annually. In the BCG matrix, organization’s businesses. 10% is generally considered the BCG matrix dividing line between a low rate A business portfolio matrix and a high rate of market that uses market growth rate growth. Relative market share is and relative market share as computed by dividing the firm’s the indicators of the firm’s market share by the market strategic position. share of its largest competitor.

Part 2 Planning Challenges in the 21st Century

The BCG Growth-Share Matrix

Figure 6.5 168

Relative Market Share High 10

Low 1

20% Star

Question mark

High

Market Growth Rate

10% Cash cow

Low

For example, a relative market share of 0.4 means that the sales volume of the business is only 40% of the largest competitor’s sales volume. In the BCG matrix, a relative market share of 1.0 is usually set as the dividing line between high- and low-relative market shares. To use the BCG matrix, each of the organization’s businesses is plotted in the matrix according to its marketgrowth rate and relative market share. Figure 6.5 illustrates a BCG matrix for an organization with six businesses. Each circle represents a business unit. The size of a circle reflects the proportion of corporate revenue generated by that KEY TERMS business, and the pie slice indicates the proportion of corpoStar rate profits generated by that A business that falls into the business.76 Note that each cell high market-growth/high in the BCG matrix has a demarket-share cell of a BCG scriptive label; these labels matrix. reflect the roles that the busiCash cow nesses in the cells play in the A business that falls into the overall strategy of the firm. low market-growth/high market-share cell of a BCG Stars Businesses that fall matrix. into the high market-growth/ Dog A business that falls into the low market-growth/low market-share cell of a BCG matrix.

high market-share cell are referred to as stars. These businesses offer attractive profit and growth opportunities. However, they also require a

great deal of money to keep up with the market’s rate of growth. Consequently, in the short term they are often cash-using rather than cash-generating units, but usually this situation reverses in time. BCG analysis advocates retaining stars in the corporate portfolio. Cash Cows Businesses that fall into the low marketgrowth/high market-share cell are referred to as cash cows. These businesses generate substantial cash surpluses over what they need for reinvestment and growth. Cash cows are generally yesterday’s stars whose industries have matured. Although not attractive from a growth standpoint, they are quite valuable because the cash surpluses they generate can be used to pay bills, cover dividends, provide funds for investment, or support struggling businesses, such as the question marks described in a following section. BCG analysis also views cash cows favorably and advocates keeping them in the corporate portfolio. Dogs Businesses that fall into the low marketgrowth/low market-share cell are known as dogs. These businesses typically generate low profits, and in some cases they may even lose money. They also frequently consume more management time than they are worth. Unless there is some compelling reason to hold onto a dog, such as an expected turnaround in market-growth rate, BCG analysis suggests that such businesses be removed from the portfolio.

Chapter 6 Managerial Decision Making

Question Marks Businesses that fall into the high market-growth/low market-share cell are referred to as question marks. The rapid market growth makes these businesses look attractive from an industry standpoint. Unfortunately, their low market share makes their profit potential uncertain. Question mark businesses are often called cash hogs because they require large infusions of resources to keep up with the rapid growth and product development of the market. BCG analysis suggests that the organization must consider very carefully whether continued funding for a question mark is worthwhile. Management must consider the question mark’s potential to gain market share and move into the star category. The BCG business portfolio matrix makes valuable contributions in the area of strategic decision making. This method of analysis can be used in both for-profit and not-for-profit organizations and in manufacturing and service organizations. It enables a corporation to highlight the flow of cash resources among the units in its portfolio, and it provides a sound rationalization for resource allocation, investment, expansion, and contraction decisions. It also enables management to assess the balance among the units within its portfolio. A balanced portfolio should contain units in several cells. The status of individual business units can shift over time. For example, question marks can move into the star category, and stars will eventually evolve into cash cows. For these reasons, it is important to have question marks “waiting in the wings” to replace stars and stars waiting to replace any cash cows that might slip into the dog category. Darden Restaurants (parent company to Red Lobster and Olive Garden restaurants) is a classic example of a service organization that tries to balance its portfolio to ensure its long-term success. In addition to the seafood and Italian segments of casual dining, Darden has ventured into the Caribbean and barbeque segments with its Bahama Breeze restaurants and Smokey Bones BBQ Sports Bars. In early 2005, Darden began testing still another concept restaurant with its unveiling of a few Seasons 52 restaurants. This concept offers a casually sophisticated grill and wine bar, which features a lowcalorie, seasonally changing menu. Each restaurant chain is in a different stage of development and occupies a different position on the BCG matrix. With 679 restaurants in mid-2005, Red Lobster is a mature chain in a mature segment of the restaurant industry. Although Red Lobster still has opportunities for expansion, its growth rate has subsided since the early 1980s when units were popping up everywhere. When Olive Garden was started in 1982, the intention was to build this chain into a leader in its segment by penetrating the domestic market. Olive Garden, with its 556 restaurants, has already achieved this leadership position and is moving beyond the middle-

growth stage, and it will continue to enjoy significant growth for several years to come. Expansion plans for Olive Garden will increase its footprint to over 700 restaurants in the next several years.77 Placing these restaurant chains on a BCG matrix, we find that Red Lobster is a cash cow and Olive Garden is a star that is rapidly approaching the cash cow category. In the early 1990s, Darden moved into the Chinese segment with its China Coast restaurants. As the China Coast venture was beginning its growth, it fell into the question mark category. With only 51 restaurants and a short track record, its future was uncertain. The questions about China Coast were certainly answered when Darden abruptly closed all China Coast restaurants in August 1995. Darden replaced China Coast in its portfolio with the Bahama Breeze restaurants. This segment has been setting and resetting records for Darden at each of its restaurants since opening. With 32 restaurants thus far, it is quickly moving from the question mark category toward the star category. Smokey Bones BBQ Sports Bar has seen a growth rate that has exceeded Bahama Breeze. Although once a question mark, Smokey Bones, with its 101 restaurants, is quickly gravitating to star status.78 Darden’s newest concept restaurant, Seasons 52, currently falls into the question mark category with only 3 prototype outlets being tested thus far.79 The BCG matrix will continue to be an important tool for Darden as long as it continues to experiment with new dining concepts. The BCG business portfolio matrix approach is not without its shortcomings. Some critics have argued that the four-cell classification scheme is overly simplistic. Others contend that accurately measuring market share and growth rate can be difficult. Furthermore, when the analysis is based on just these two factors, other important variables may be overlooked.80 In an attempt to overcome some of the limitations of the BCG approach, more refined models have been proposed. One of the early refinements of the BCG approach is the General Electric model, which attempts to overcome some of the BCG shortcomings.

The Industry Attractiveness/Business Strength Matrix General Electric (GE) developed a nine-cell business portfolio matrix that overcomes some of the limitations of the BCG matrix. The GE matrix uses several factors (listed in Table 6.5) to assess industry attractiveness and business strength.81 The GE approach

KEY TERMS Question mark A business that falls into the high market-growth/low market-share cell of a BCG matrix. GE matrix A business portfolio matrix that uses industry attractiveness and business strength as the indicators of the firm’s strategic position.

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Table 6.5

Factors Contributing to Industry Attractiveness and Business Strength

170 Industry Attractiveness Market Forces Size (dollars, units, or both) Size of key segments Growth rate per year: Total Segments Diversity of market Sensitivity to price, service, features, and external factors Cyclicality Seasonality Bargaining power of upstream suppliers Bargaining power of downstream suppliers Competition Types of competitors Degree of concentration Changes in type and mix Entries and exits Changes in share Substitution by new technology Degrees and types of integration Financial and Economic Factors Contribution margins Leveraging factors, such as economies of scale and experience Barriers to entry or exit (both financial and nonfinancial) Capacity utilization Technological Factors Maturity and volatility Complexity Differentiation Patents and copyrights Manufacturing process technology required Sociopolitical Factors in Your Environment Social attitudes and trends Laws and government agency regulations Influence with pressure groups and government representatives Human factors, such as unionization and community acceptance

Business Strength

Your share (in equivalent terms) Your share of key segments Your annual growth rate: Total Segments Diversity of your participation Your influence on the market Lags or leads in your sales Bargaining power of your suppliers Bargaining power of your customers

Where you fit, how you compare in terms of products, marketing capability, service, production strength, financial strength, and management Segments you have entered or left Your relative share change Your vulnerability to new technology Your own level of integration

Your margins Your scale and experience Barriers to your entry or exit (both financial and nonfinancial) Your capacity utilization

Your ability to cope with change Depths of your skills Types of your technological skills Your patent protection Your manufacturing technology

Your company’s responsiveness and flexibility Your company’s ability to cope Your company’s aggressiveness Your company’s relationships

Source: Abell, Derek; Hammond, John S.; Strategic Market Planning: Problems and Analytical Approaches, 1st Edition, © 1979, p. 214. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.

Chapter 6 Managerial Decision Making

also allows for three levels of industry attractiveness and business strength, resulting in its nine-cell structure. To use the GE matrix, each of the organization’s businesses is rated as to industry attractiveness and business strength. To measure the attractiveness of an industry, the decision maker first selects from Table 6.5 those factors that are likely to contribute to the attractiveness of the industry in question. Each factor is assigned a weight based on its perceived importance. These weights must sum to 1.0. The industry is then assigned a rating for each of these factors using some uniform scale (for example, a 1-to-5 rating scale). Finally, a weighted score is obtained by multiplying weights by factor scores and then adding to obtain a total weighted value. To arrive at a measure of business strength, each business is rated using the same procedure as for industry attractiveness. Table 6.6 illustrates these calculations for a hypothetical business in a corporation’s portfolio.

The total weighted scores for industry attractiveness and business strength are used to locate the business on the nine-cell matrix. Figure 6.6 illustrates a GE business portfolio matrix that contains eight businesses, with each circle reflecting one business.82 The area of a circle is proportional to the size of the entire industry, and the pie slice within the circle represents the business’s share of that market. The GE matrix provides the decision maker with rationalization for resource allocation, investment, expansion, and contraction decisions within different cells, in much the same way as the BCG matrix. Businesses that fall into the three green cells at the upper left of the GE matrix are given top investment priority. These are the combinations of industry attractiveness and business strength that are most favorable. The strategic prescription for businesses located in these three cells is to invest and grow. Businesses positioned in the three gold

Text not available due to copyright restriction

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The GE Industry Attractiveness/Business Strength Matrix

Figure 6.6 172

Business Strength Strong

Average

Weak

Long-Term Industry Attractiveness

High

Medium

Low

cells are next in priority. These businesses deserve selective reinvestment to maintain and protect their industry positions. Finally, businesses positioned in the three orange cells at the lower right of the matrix are serious candidates for divestiture due to their low overall strength.83 Although similar to the BCG approach, the GE matrix offers several improvements. For one thing, it allows for intermediate rankings between high and low and between weak and strong, yielding nine rather than four cells. A second improvement is that it incorporates a much wider variety of strategically relevant variables. Whereas the BCG matrix considers only two factors (industry growth rate and relative market share), the GE matrix takes many factors into consideration (see again Table 6.5) to determine industry attractiveness and business strength. Finally, and perhaps most important, the GE approach emphasizes allocating corporate resources to businesses with the greatest chance of achieving competitive advantage and superior performance.84 Despite these improvements, the GE matrix does have its critics. Like the BCG matrix, it prescribes only a general strategic posture and provides no real guidance on the specifics of the business strategy. Another criticism of the GE approach (and the BCG approach, for that matter) is

that they are static. They portray businesses as they are at one point in time and do not take into account that businesses evolve over time. Consequently, these approaches do not detect businesses that are about to become winners because their industries are entering the takeoff stage or businesses that are about to become losers as their industries enter the decline stage.85 This was certainly the case as Darden was expanding the China Coast restaurant chain. The BCG matrix was not capable of helping management foresee this chain’s sudden demise.

Ethical and Social Implications in Decision Making The treatment of decision making presented thus far may leave the impression that all managers need to do is plug in the numbers to generate the best choice of an alternative. However, managers must also be careful to consider more than just the numbers. Often they will

Chapter 6 Managerial Decision Making

have to look beyond the numbers and consider the ethical and social implications of their decisions. Many examples can be cited for decisions that went beyond bottom-line profitability and included a component of ethical behavior and social responsibility. At considerable expense the Walt Disney Company has been refurbishing many of its resort swimming pools into “zero-entry” pools. Also called “zero-grade” or “zero-barrier” pools, these pools lack a traditional elevated ledge, instead offering a gradual “shorelike” entrance and exit. Handicapped bathers can simply roll into the pool in special waterresistant wheelchairs.86 Burger King made the decision to double the number of welfare recipients hired.87 In response to tragic incidents of children dying after becoming trapped in car trunks, General Motors announced its decision to equip its family cars with an infrared-sensing device that automatically unlocks the trunk if anyone is trapped inside.88 Partly due to the rising number of fatal handgun incidents (and partly due to corresponding liability issues), the Colt Manufacturing Company has decided to remove itself from the consumer handgun business.89 In an effort to help the homeless break out of the endless cycle of poverty, the Orlando/Orange County Expressway Authority made hiring the homeless a condition for contractors bidding on a highway project.90 And how about Bob Thompson? When he sold his roadbuilding firm, one of the conditions of the sale was that his employees would not lose their jobs. Then, as a reward for their loyalty and hard work, he decided to split $128 million from the sale among his 550 flabbergasted workers. More than 80 of them became instant millionaires!91

Information Technology and Decision-Making Tools Early in this chapter, we were introduced to a seven-step decision-making process and focused on how timely and accurate information is extremely beneficial in the first step (problem identification) and the last step (monitoring and evaluating). The tools and techniques introduced in this chapter are quantitative models that enable us to assess the promise of various alternative courses of action. Consequently, these tools and techniques have their biggest impact on the midsection of the decision-making process in which alternatives are evaluated and decisions reached. When we use quantitative models of this type, the old axiom rings true: garbage in, garbage out. Regardless of how sophisticated these analytical tools are, their output

(decision recommendations) will be worthless if the information being processed is suspect. Once again, the huge advances in information-gathering, -processing, and -dissemination technology serve to make this aspect of the decision-making process more reliable. The confidence that we can place in our decisions will only increase as the technological advances in information handling continue.

Implications for Leaders Decision making has always been one of the primary activities of business leaders. As the global business economy continues to expand and change dramatically, the level of managerial decision making can only be expected to increase in the future. If leaders are to make high-quality decisions, they will have to become thoroughly familiar with the structure of decision making while equipping themselves with the tools and techniques that can aid in the decision-making process. To be effective decision makers, tomorrow’s leaders should • Be able to recognize quickly problems and opportunities that call for a decision. • Be able to recognize the different time frames and scopes of strategic decisions versus operational decisions. • Be equipped with all the tools and techniques that can aid in making strategic decisions. • Be familiar with the framework for operational decision making as well as the structural components for displaying operational decisions. • Be able to recognize the different decision-making environments in which their operational decisions will be made. • Have an awareness and understanding of the various quantitative tools that can aid in making operational decisions. This chapter has presented a structured methodology that can aid in making both strategic and operational decisions. Various analytical tools, techniques, and decisionmaking aids are available, suggesting that we need only “plug in the numbers” to select the best alternative. However, we saw several times in our discussions that decision making cannot always go entirely by the numbers. Many times, experience, good judgment, and even intuition are valuable commodities when making decisions about future courses of action, especially because we can never be entirely certain about what the future holds in store.

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174

Meeting The Challenge Hello Cypress Gardens Adventure Park he historic grounds that encompassed Cypress Gardens were spared from the developers’ bulldozers when Kent Buescher, owner of a Valdosta, Georgia, amusem*nt park, stepped in and offered to purchase this Florida landmark. The deal was closed in February 2004. Buescher’s experiences in the amusem*nt park industry convinced him that these grounds had potential, but something had to be done to make the attraction more family friendly. Buescher’s solution involved keeping a lot of the old but introducing much more that was new. The famed botanical gardens, topiaries, water-ski show, and Southern Belles would remain as park fixtures. These were to be complimented with a wide array of rides, new attractions and shows, shopping areas, and dining facilities. Buescher pledged to invest $36 million in the first 18 months of restoration. He had an aggressive schedule that called for reopening the park by late 2004, a daunting task given that the gardens had suffered almost a year of neglect and the new attractions would require a major construction effort. Unanticipated events occurred that might have challenged the resolve of even the strongest of entrepreneurs. Six months after restoration had begun, the park found itself in the crosshairs of three major hurricanes in 6 weeks. After the first and most devastating hurricane, Buescher commented that “we had spent so much time restoring and rejuvenating the park that it was heartbreaking to see six months of hard work disappear over night.” These catastrophes would set back the opening by several months and raise the price of the first wave of investments to $50 million. But Buescher was undeterred, and work proceeded at a fever pitch. By late November 2004, the park was able to have the first of several “preview days” to work out the “bugs” prior to its December 9, 2004, grand reopening as Cypress Gardens Adventure Park. Workers

toiled around the clock at a frenzied pace making some major “final touches” with things like paving, painting, construction, and landscaping. When the park finally had its official opening, park visitors were thrilled with what they found. When you go through the following scorecard, you will understand why the park was renamed Cypress Gardens Adventure Park: •

38 rides: 11 are coasters/thrill rides, 16 are family rides, 2 are water rides, and 9 are children’s rides

•

9 shows, including comedy, song and dance, magic, ice skating, waterskiing, and more more than 50 all-star concerts and special events yearly

•

A bustling village where shopping takes an entertaining old-fashioned twist and dining options range from quick bites and confections to elegant dining

•

A water park containing slides and attractions for everyone from tiny tots to bold thrill seekers, a 20,000–square foot wave pool, a 1000-foot meandering river pool, and a full range of dining facilities

•

A teen-oriented arcade, complete with interactive games and a disc jockey Early indications are that this has been a successful transformation. In the first few months of operation, annual pass sales were brisk, and daily attendance was averaging four to five times what the park averaged prior to Buescher’s transformation decisions. These early successes prompted park officials to raise their first-year attendance projections to more than 1.2 million guests. Many longtime Cypress Park visitors have been effusive in their praise of the transformation, but perhaps the highest compliment was paid by Dick Pope, Jr., son of the original founder and one of the original water-skiers. In his words, “It’s just beautiful. It’s going in the right direction.”

SUMMARY 1. Decision making is the process through which managers and leaders identify and resolve problems or capitalize on opportunities. The decision-making process includes seven steps: (a) identifying and diagnosing the problem, (b) identifying objectives, (c) generating alternatives, (d) evaluating alternatives, (e) reaching decisions, (f) choosing implementation strategies, and (g) monitoring and evaluating.

2. The rational–economic decision model assumes that the decision maker has completely accurate information and an extensive list of alternatives from which to choose. It also assumes that he or she will be rational and systematic in assessing each alternative and will work in the best interests of the organization.

Chapter 6 Managerial Decision Making

3. The behavioral decision model acknowledges human limitations to decision making and addresses the issues of bounded rationality, intuition, satisficing, and escalation of commitment. Bounded rationality recognizes that people cannot know everything and are limited by such organizational constraints as time, information, resources, and their own mental capacities. Intuition has been described as everything from an unconscious analysis based on past experience to a paranormal ability called a “sixth sense.” Satisficing means searching for and accepting something that is satisfactory rather than optimal. Escalation of commitment is the tendency to commit more resources to a previously selected course of action than would be expected if the manager followed an effective decision-making process.

7. On a basic level, decisions can be classified as either programmed or nonprogrammed. Programmed decisions are routine responses to decision situations that may have occurred in the past or with which the decision maker is familiar. Nonprogrammed decisions are responses to situations that are unique, unstructured, or poorly defined.

8. Strategic decision making occurs from a broad perspective and is performed at the highest levels within organizations. It involves the selection of a corporate-level strategy and the choice of competitive strategies to be pursued by the various business units of the organization. Strategic decision making is most often nonroutine by nature. Selection of a business strategy can be facilitated by means of the strategic decision-making matrix approach. This tool allows the decision maker to evaluate a variety of potential strategies in conjunction with several objectives. Objectives are ranked by their importance, and strategies are rated by their likelihood of achieving those objectives. This method ultimately allows for the ranking of alternative strategies.

4. The increased involvement of groups and teams in management actions requires that leaders understand group considerations in decision making. The participative model of group decision making provides guidelines for the appropriate level of subordinate participation in decision making.

5. A leader must consider both the advantages and dis-

9. Two popular matrix approaches for evaluating a busi-

advantages of participative decision making. The advantages include greater experience and expertise, more information, higher satisfaction, and greater acceptance of and commitment to the decisions. The disadvantages are that group decisions take more time, one member or subgroup may dominate, individual goals may supplant group goals, social pressure to conform may be brought to bear on members, and groupthink may develop.

ness portfolio are the BCG growth-share matrix and the GE industry attractiveness/business strength matrix. Although both have two dimensions, they measure different factors and include a different number of levels for each factor. The two factors in the BCG matrix are market-growth rate and relative market share. With two levels for each factor, a four-cell matrix results. The GE matrix uses industry attractiveness and business strength as its factors. Three levels for each factor are defined, resulting in a nine-cell matrix. In both approaches, an organization’s business units are placed in the appropriate cell; then prescriptions for strategic decision making are made relative to the cell occupied by the business unit.

6. Leaders can use several structured techniques to aid in participative decision making. These include brainstorming, the nominal group technique, the Delphi technique, devil’s advocacy approach, and dialectical inquiry.

REVIEW QUESTIONS 1.

Describe the nature of the decision-making process and list each of its seven steps. 2. (LEARNING OBJECTIVE 2) Describe the rational–economic model for decision making. 3. (LEARNING OBJECTIVE 3) Describe the behavioral model for decision making and indicate how it differs from the rational–economic model. 4. (LEARNING OBJECTIVE 4) Describe the participative decision-making approach. (LEARNING OBJECTIVE 1)

Describe the advantages and disadvantages of participative decision making when compared to individual decision making. 6. (LEARNING OBJECTIVE 6) Discuss the concepts of brainstorming, nominal group technique, Delphi technique, devil’s advocacy approach, and dialectical inquiry as devices that can enhance quality in participative decision making. (LEARNING OBJECTIVE 5)

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7. 176

Identify and describe the two basic classifications for managerial decisions. 8. (LEARNING OBJECTIVE 8) Describe the strategic decision-making matrix technique for selecting from among strategy alternatives. (LEARNING OBJECTIVE 7)

Describe the structure, purpose, and approach of the four-cell BCG matrix and the nine-cell GE matrix. (LEARNING OBJECTIVE 9)

DISCUSSION QUESTIONS Improving Critical Thinking 1. Recall a situation in which you made a decision for which the outcome was satisfactory but not optimal. Describe the reasons you accepted this satisficing decision rather than pushing on to make an optimal decision.

2. Discuss the pros and cons associated with the two business portfolio matrix techniques described in this chapter. Which, if either, do you find more appealing? Why?

Enhancing Communication Skills 3. What types of ethical dilemmas do you think future managers will face? How can you prepare yourself to handle ethical dilemmas? To develop your written communication skills, find some recent examples in business publications and/or the news media and write a short paper on this subject.

4. Consider an important decision that you recently made, such as choosing a major or buying a car. How much vigilance did you exercise to ensure

making a quality decision? To practice your oral communication skills, be prepared to present your decision process to the class or a small group as directed by your instructor.

Building Teamwork 5. Interview one of your college professors. Ask the professor to describe a decision that was made regarding one of the policies on the course syllabus and to explain the process that led to that decision. Analyze the professor’s decision with regard to the two models of decision making described in the chapter. Form small groups and share the results of your interview with the team. Did the team members find any issues in common among all the professors interviewed?

6. Reflect on recent decisions made by groups with which you were involved in various college courses. Try to recall an experience that showed signs of groupthink. Be prepared to report this experience to the class and describe what might have been done to prevent this phenomenon.

THINKING CRITICALLY: DEBATE THE ISSUE Who Should Make the Decision? Form teams as directed by your instructor. Half of the teams should take the position that group decision making leads to high-quality decisions and high organizational performance. The other teams should take the

position that group decision making impedes organizational performance and that decisions should not be made by groups. Research the topic using current business publications to provide support for your team’s position. Your instructor will select two teams to present your arguments in a debate format.

Chapter 6 Managerial Decision Making

EXPERIENTIAL EXERCISE 177

6.1

Brainstorming: Creative Group Decision Making

Step 1. Form small groups as directed by your instructor. Each group will have an opportunity to develop some creative solutions to problems that typically arise on a college campus. Before beginning the exercise, review the rules for brainstorming discussed in the chapter.

Step 6. Discuss as a class what happened in your group. How did your ideas emerge? Did you experience frustrations? What did you find most difficult about trying to use the brainstorming process?

6.2

Examining Decision-Making Ethics

Step 2. From a current campus newspaper, select a problem or issue that needs to be solved on your campus. Possible issues might include student apathy about elections, the need for recycling programs, or the lack of funding for student programs.

Examine recent issues of business periodicals, news magazines, and newspapers. Identify a significant decision made by a major company that has some ethical implications associated with it. Then write a short (one- to twopage) report that addresses the following questions:

Step 3. You have 10 minutes after the words “begin brainstorming” to generate ideas. Have one person write down all the alternatives. Remember, do not evaluate ideas.

1. In the decision you identified, did the manager or

Step 4. You have 10 to 15 minutes to discuss and evaluate the ideas that were generated in Step 3. Step 5. You have 5 minutes to decide on the final solution that you will present to the class.

managers appear to use good decision-making skills?

2. Did they follow the decision-making steps? 3. Was the decision made by a group or an individual? 4. What are the ethical implications of this decision, and who is likely to be impacted?

ETHICS: TAKE A STAND Many of the plastic toys that babies and toddlers love to gnaw on are made with chemicals (phthalates) that are used to soften the plastic. Teething rings, squeeze toys, bathtub toys, and many other playthings have concentrations of the chemical exceeding 50%. Recent studies have suggested that phthalates may be linked to liver and kidney damage if ingested. Although no government edict has been issued banning the use of these chemicals in children’s toys, the Consumer Products Safety Council has recommended that manufacturers stop using them until more research is done. Several manufacturers have discontinued using these chemicals in teething rings, but they continue to be used in a variety of infants’ and children’s toys. Their use will probably continue until

scientists can find a biodegradable, nonpetroleum replacement for phthalates.92 For Discussion

1. What stand do you feel the U.S. government should take on this issue?

2. What role should the U.S. Food and Drug Administration play in this issue, given that studies have not yet shown conclusively that ingesting phthalates can lead to liver and kidney damage?

3. What do you feel the toy manufacturers should do while they wait for the discovery of a safer softening agent?

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CASE 178

Beacon Cleaners Richard Beacon has been in the dry cleaning business for over two decades, having established his first Beacon Cleaners store in a moderately sized, university town in 1984. His first outlet was in the downtown area, but over the years he has expanded into different sectors of the city. Beacon’s cleaning business has been successful over the years, and he recently decided it was time to slow down and enjoy the fruits of his labor. To help him accomplish this lifelong goal, Beacon hired Andrew Spilling, a business school graduate, to take over the management of his enterprise. Beacon explained to Spilling that his expansions over the years were pretty much determined in a “seat-of-the-pants” manner, but his underlying instincts led him toward expanding into each sector of the city. In his mind’s eye, he had divided the town into four quadrants plus a central business district. He now had what he considered blanket coverage of the city. Starting with his first store in the central business district, Beacon gradually expanded into the northwest, northeast, southwest, and southeast quadrants of the city. After Spilling grew comfortable with his role as Beacon Cleaners’ manager, he decided to put his college training to work. He began to formally analyze this business and the dry cleaning industry as a whole in this college town. Spilling spent several weeks gathering demographic, financial, and demand data. He arranged his findings into the following table to help him organize his thoughts:

Number of households Number of competitors Annual number of Beacon transactions Annual number of competitor transactions Average profit per transaction ($)

Sector of City Northeast Southwest

Central

Northwest

Southeast

5000 1 6000

20,000 4 20,000

15,000 2 12,000

15,000 3 11,000

10,000 2 13,000

4000

76,000

40,000

35,000

23,000

Spilling’s demographic studies revealed that the central business district didn’t have a large number of permanent-resident households, but did have a significant number of professionals coming into this business district to work each day. Both the northwest and southwest sectors of town were fully built up, and there wasn’t likely to be much population growth in these areas. The northwest sector was heavily populated with established, dual-income families, while the southwest sector was dominated by empty nesters and retired couples. A midsized university was located in the northeast sector of town, and its demographics were changing. Although public records showed that this sector contained 15,000 households, that number is a bit misleading. Only 10,000 of these “residence units” had families living in them. The remaining 5000 properties were inhabited by college students. Furthermore, that ratio was destined to change as more families moved away from the congestion, noise, and traffic so common to many college campuses. The southeast sector of town was the hot growth area. It was only after the recent construction of two new major roads that development started in earnest in the southeast. Currently, homes have been built upon fewer than half of the available home sites in the southeast sector.

Chapter 6 Managerial Decision Making

As Spilling digested all this information, it became clearer to him that demand for the dry cleaning services and average size and profit of a dry cleaning transaction had a lot to do with the socioeconomic status of the population in a particular sector of the city. Spilling also realized that this information could be useful to plan a strategy for future expansion or contraction in the various sectors of town. For Discussion

1. Describe how BCG analysis could be used to classify each of the Beacon Cleaners dry cleaning establishments.

2. Develop a BCG matrix and determine what you feel to be the proper position of each Beacon establishment on the matrix.

3. Based on your analysis, what recommendations would you make to Spilling?

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VIDEO CASE 180

Next Door Food Store—Decision Making Next Door Food Store (NDFS) is a chain of over 30 small convenience stores and gas stations located throughout Michigan and Northern Indiana. Similar to other convenience stores, the overall purpose of NDFS is to provide gasoline and convenience products 24 hours a day to people who are in a hurry. Because many people are in a hurry and willing to pay more for convenience, the convenience store industry is very competitive. Leaders at NDFS corporate headquarters and their stores continually are challenged to respond to routine problems and emerging industry trends. Two of their most fundamental decisions are (1) how to manage their channels of distribution and (2) what and how many products should be stocked in each store. NDFS’s main objectives are to maintain a variety of products, manage their cost of distribution, keep inventory levels low, and use just-in-time (JIT) inventory. Their major constraints include a lower volume than supermarkets, less shelf and storage space than supermarkets, a limited number of stores, and difficulty in serving their geographically dispersed stores from a central warehouse because they currently do not have a trucking system to ship goods. In regard to their first fundamental decision, NDFS had to decide whether to manage their channels of distribution by building and operating their own warehouse or hiring wholesale distributors (such as Fabiano Foods) to stock each store on a JIT basis. Hiring Fabiano Foods appeared preferable over the advantages (and disadvantages) associated with a new warehouse. Since making the decision, NDFS has found Fabiano Foods to be a valuable business partner in providing important marketing, inventory, and product-mix information. This is especially important because product demand varies for NDFS’s geographically dispersed stores. Another ongoing challenge is deciding which products to sell in the stores. There are literally hundreds of products to choose from, and some suppliers are very aggressive. On one occasion, NDFS accepted a cash payment from Coca-Cola in exchange for a commitment to discontinue selling Pepsi products and sell only Coca-Cola soft-drink products. This decision resulted in NDFS losing several loyal Pepsi drinkers as customers. However, the NDFS leaders took only a few weeks to respond to customer complaints and cancel their agreement with Coca-Cola. Another aspect of determining what products to stock is identifying emerging market trends and deciding whether such trends represent profitable opportunities or just a passing fad. An example of such an emerging trend is bottled waters, teas, and sport drinks for the health conscious. Early on, the NDFS leaders identified the potential of this emerging trend through articles they read and seeing how much cooler space convenience stores in other states had allocated to these products. The decision to dedicate a generous amount of cooler space to bottled waters, teas, and sport drinks was risky at the time and was questioned by many local people. Nevertheless, the decision has proven to be very profitable. James Salisbury, vice president of NDFS Operations, asserts that after they added bottled waters, teas, and sports drinks to their product mix, they have never looked back. He also notes they need to consider where this trend might go and whether they want to stay ahead of their competition in this trend. Next Door Food Stores is constantly looking for new ideas so that they will continue to lead the convenience store industry. They frame their decisions in terms of their overall mission: to operate the best and most profitable convenience stores in Michigan and Indiana with the best trained people providing the best customer service through high-quality products, a clean environment, and well-stocked stores. The decisions made regarding distribution channels, product mix, and other critical areas play an important role in determining the company’s present and future success.

Chapter 6 Managerial Decision Making

For Discussion

1. What are Next Door Food Store’s mission and objectives? Do you believe that the company’s mission and objectives help guide its decision-making process? Explain your answer.

2. Select one decision made by NDFS. Briefly explain how they applied (or did not apply) each of the seven steps in the decision-making process in making this decision. Do any steps appear to be particularly critical in the convenience store industry?

3. Do you think they’ve “never looked back” or reevaluated their decision regarding allocating generous cooler space to bottled waters, teas, and sport drinks? Explain your answer.

4. Are the leaders of NDFS affected by bounded rationality? If so, provide an example from the case that illustrates this concept.

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part 3

Organizing Challenges in the 21st Century

Chapter 7 Organizing for Effectiveness and Efficiency Chapter 8 Organizational Design Chapter 9 Strategic Human Resource Management Chapter 10 Organizational Culture and Change

Chapter

Organizing for Effectiveness and Efficiency

CHAPTER OVERVIEW The previous chapters discussed the establishment of vision and mission of an organization or reaffirming or adjusting the vision and mission, as is the most likely case in existing organizations. Then goals and operational plans were discussed, and we have learned about decision making and ethical and socially responsible behavior so that, as managers, we can make better decisions concerning all of these issues. In other words, we have learned about establishing an overall strategy for an organization. Now we learn about organizing the many tasks that need to be done to achieve the strategy and, consequently, the mission and vision. This chapter begins by discussing the necessity to understand the tasks and jobs that

need to be done to work toward the goals and overall strategy. It also discusses relationships that need to be established and tools that can be used to organize the jobs into an overall organizational structure that will help the organization operate effectively and efficiently. Constructing the overall organizational structure and design will be discussed in the next chapter. The remaining chapters in this book discuss the other managerial functions that must be performed to plan, organize, and carry out the operations successfully. Take another look at Figures 1.1 and 1.5 to refresh your memory about how everything must be focused on achieving the mission and vision of an organization.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Explain why organizing is an important managerial function, describe the process of organizing, and outline the primary stages of the process. 2. Discuss the concept of job design and identify the core job dimensions that define a job. 3. Explain how and why the perspectives on job design have evolved. 4. Describe the job-design approaches that came from the classical management, behavioral management, and employee/work team–centered perspectives. 5. Understand both the vertical and horizontal associations that exist between individuals and work groups within the organization. 6. Define delegation and discuss why it is important for managers to delegate. 7. Explain why managers often fail to delegate and suggest methods for improving delegation skills.

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Facing The Challenge

186

Procter and Gamble Stumbles t is almost unimaginable that Procter and Gamble (P&G), the company that introduced Tide in 1946 and disposable diapers (Pampers) in 1961, as well as a vast variety of consumer products, would be in financial difficulty. By 2000 revenues were not increasing but costs were, driving down profit margins. In turn, the price of the stock fell 43% in a year. It is not that P&G under CEO Dirk Jager was not trying. In fact, when Jager became CEO, he began immediately to try to change the organization’s culture, which was very resistant to new ideas and change. Rather, the culture was rule bound, and everyone stayed in his or her own department and job. There was little cooperation and communication from person to person, job to job, and department to department. Jager used a very aggressive approach to try to get the people to change and to try to get new products developed because new products and/or new uses for existing products were necessary in the very slow-growing markets of household products.

Instead of changing to keep up with the industry, P&G stagnated. Although the company was in no danger of failing soon, the long term looked much less bright. Over the previous 15 years, only one product, the Swiffer dust mop, was financially successful. The company had to get more profitable. After only 17 months as CEO, the Board of Directors replaced Jager. In the summer of 2000, the board selected A. G. Lafley, a 23-year P&G veteran to be its new CEO. Lafley’s main job was not to necessarily change the company but to get profits back to reasonable levels.

Sources: S. Ellison, “P&G Chief’s Turnaround Recipe: Find Out What Women Want,” Wall Street Journal (Eastern Edition), 1 June 2005, A1; “It Was a No-Brainer,” Fortune, 21 February 2005, 97–102; P. Sellers, “P&G: Teaching an Old Dog New Tricks,” Fortune, 31 May 2004, 166–180; R. Berner, “P&G New and Improved,” BusinessWeek, 7 July 2003, 52–60.

Introduction LEARNING OBJECTIVE

1 Explain why organizing is an important managerial function, describe the process of organizing, and outline the primary stages of the process.

You may have heard the saying, “form follows function.” In organizing terms, the form of the organizational structure should be designed so that it can help an organization achieve its function. Procter and Gamble’s organizational structure did not seem to be appropriate for achieving profitability any more (“Facing the Challenge”). The organizational structure, with its rigid rules and tightly defined jobs and organizational units, interfered with rather than assisted designing, making, and marketing products that customers wanted. As you read this chapter, think about what Procter and Gamble could do to return to success.

What Is Organizing? Organizing refers to the process of determining the tasks to be done, who will do them, and how those tasks will be managed and coordinated. It is an interactive and ongoing process that occurs throughout the life of the organization. As an organization develops and matures, so must its organizational system. Many times companies must adapt their organizational systems to cope with changes that occur in their competitive environment. As you read in “Facing the Challenge,” CEO Dirk Jager of Procter and Gamble attempted this, but it was not done successfully. The process of organizing can be divided into two primary stages (Figure 7.1). In the first stage, the foundation of the organizational system is developed. Work activities are determined and assigned to specific job positions, and working relationships between individuals and work

Chapter 7 Organizing for Effectiveness and Efficiency

The Process of Organizing

Figure 7.1

187 Organizational Mission Developing the foundation • Determining tasks and defining jobs • Defining work relationships

Control and feedback Developing organizational design • Grouping organizational members • Developing an integrating system • Determining the locus of decision making

Goals and Objectives

groups are defined. This chapter focuses specifically on these aspects of the organizing process. The second stage of the organizing process involves developing an organizational design that supports the strategic and operational plans of the organization. This requires grouping organizational members into work units, developing integrating mechanisms to coordinate the efforts of diverse work groups, and determining the extent to which decision making in the organization is centralized or decentralized. These aspects of organizing will be addressed in Chapter 8.

Job Design As we noted, the first stage of the organizing process involves outlining the tasks and activities to be completed and assigning them to individuals and groups within the organization. Before managers can design specific jobs, they need to identify the work that must be done to achieve the organization’s strategic and operational goals. Consider, for example, an organization that manufactures and distributes small appliances. To fulfill its mission and achieve its goals, the organization must com-

plete a number of tasks and activities. Raw LEARNING materials must be acquired and inventoried; OBJECTIVE people must be hired, trained, and compensated; the plant must be managed and maintained; and the product must be delivered to customers. These are just a few of the activiDiscuss the ties that must occur. concept of job Once the tasks and activities that must design and identify be completed have been identified, jobs the core job must be designed and assigned to employees dimensions that within the organization. Job design refers to define a job. the set of tasks and activities that are grouped together to constitute a particular job position. The importance of effective job design should not be underestimated because the overall productivity of the organiza- KEY TERMS tion will be affected by the way Organizing jobs are structured. Managers The process of determining commonly blame an emthe tasks to be done, who will ployee’s poor performance on do them, and how those his or her lackluster efforts, but tasks will be managed and in many cases the real problem coordinated. is poor job design. Job design The design of a job can The set of tasks and activities be assessed, to a degree, by that are grouped together to reviewing the associated job define a particular job. description. A job description

Part 3 Organizing Challenges in the 21st Century

Table 7.1

Job Description of a Director of Internet Communications

188 • Develop and implement communication projects, content

through completion. • Develop editorial and graphical guidelines for communication projects. • Monitor compliance with adherence to communication guidelines. • Ensure that all communications are consistent in message and tone. • Direct technical staff in other departments. • Monitor developments in technology/communication media. • Perform related duties as assigned. details the responsibilities and tasks associated with a given position1 (more on this in Chapter 9). Table 7.1 provides a position description for a director of Internet communications. This job description is intended to provide the jobholder, as well as other organizational members, with an understanding of the responsibilities associated with the job of the director of Internet communications. Although job descriptions are commonly used to describe how jobs are designed, some relevant job characteristics may not be evident from a job description. Before we go on to discuss the various job perspectives that have evolved over the years, it is important to examine the fundamental characteristics that can be used to describe most jobs.

KEY TERMS Job description Details of the responsibilities and tasks associated with a given position. Skill variety The degree to which a job challenges the jobholder to use various skills and abilities. Task identity The degree to which a job includes the completion of an identifiable piece of work. Task significance The degree to which a job contributes to the overall efforts of the organization. Autonomy The degree to which a job includes freedom, independence, and decision-making authority.

CORE JOB DIMENSIONS A set of core job dimensions can be used to characterize any job: (1) skill variety, (2) task identity, (3) task significance, (4) autonomy, and (5) feedback.2 Each of these core job dimensions can significantly affect the performance and satisfaction of the individual who occupies the job. As Table 7.2 illustrates, these dimensions affect the degree to which employees find their work meaningful, feel responsibility for the outcomes of their job, and understand the results of their work activities. More specifically, skill variety, task identity, and task signifi-

cance can affect the degree to which employees find their work meaningful; autonomy can affect the extent to which employees feel responsible for the outcomes of their jobs; and feedback can affect the degree to which employees understand the results of their work activities.3 Let’s explore these core job dimensions and relationships in more detail.

Skill Variety Skill variety refers to the degree to which a job challenges the jobholder to use his or her skills and abilities. When a variety of skills are necessary to complete a task and those skills are perceived to be of value to the organization, employees find their work to be more meaningful. Consider, for example, how a production manager and a mailroom clerk might feel about the meaningfulness of their work. The production manager’s job requires the use of a relatively diverse and highly valued set of skills and abilities. That manager may therefore perceive the job to be quite meaningful. The job of the mailroom clerk, in contrast, is narrower in terms of skill variety and usually of less perceived value to the organization than the production manager’s job. As a result, the mailroom clerk may feel that the job is less meaningful.

Task Identity Task identity refers to the degree to which the job requires the completion of an identifiable piece of work—a tangible outcome that can be attributed to the employee’s efforts. For example, individuals who design computers will likely find their jobs to have higher task identity and to be more meaningful than employees who simply slide a chip into place on the circuit board of the computer and thus have low task identity.

Task Significance Task significance relates to the degree to which the job contributes to the overall efforts of the organization or to the world at large. Where task significance is high, the work probably will be perceived as more meaningful. For example, civil engineers who design an entire highway system will likely find their jobs to be more meaningful than assembly-line workers who are responsible for producing a component that goes into other products. This is particularly true when the employees don’t know what the end product is, what it does, or who uses it.

Autonomy Autonomy reflects the degree to which jobholders have freedom, independence, and decision-making authority in their jobs. When employees are highly autonomous in their work roles, their success depends on their own capabilities and their desire to complete the task. There-

Chapter 7 Organizing for Effectiveness and Efficiency

fore, they tend to feel greater responsibility for the success or failure of their efforts and, in general, greater job satisfaction.4 When there is low autonomy, employees tend to feel less accountable for the outcomes of their work. Consider, for example, organizational trainers who teach a seminar that prepares participants to pass a national certification exam. These trainers may have little latitude in selecting the material to be covered in the course and often must employ a course design that is prescribed by the testing agency. They have little autonomy in conducting their jobs. In contrast, consider trainers who teach a management development seminar that is intended to help participants learn more about their own management style. These trainers are free to determine both the material to be covered and the methods by which it should be delivered. They are likely to feel more personal responsibility for their work than the trainers who deliver a prepackaged training seminar. Recently, The Limited used highly creative approaches to learning to revitalize the company’s training function. Training programs took a game-show approach wherein employees played Let’s Make a Deal to learn more about

Table 7.2

The Core Dimensions of a Job 189

Core Job Dimension • Skill variety • Task identity • Task significance • Autonomy • Feedback

Effect of Dimension

⎤

⎥→ ⎦

→ →

Meaningfulness of the work Responsibility for outcomes of the work Knowledge of results of the work activities

Source: California Management Review Volume/Edition 5th by Hackman, Oldhan, Janson C. Pardy. Copyright 1975 by California Management Review. Reproduced with permission of California Management Review in the format Textbook via Copyright Clearance Center.

The Limited’s products, participated in a session inspired by Jeopardy! to demonstrate their knowledge of critical financial metrics, and competed with one another in Lingo Bingo, which helps them develop a mastery of retail buzzwords. Members of the training group designed a successful program, largely because they were given the autonomy to be creative and they felt responsible for their work.5

Feedback

When employees have less autonomy, as might be indicated by the obligation to record the times they arrive and leave work, they tend to feel less accountable for the outcomes of their work.

Feedback refers to the extent to which jobholders have information about the results of their efforts. When feedback is frequent and constructive, employees develop a better understanding of the relationship between their efforts and the outcomes of their work. When feedback is insufficient, employees have little understanding of the value of their efforts.6 Some organizations even provide customer feedback to their employees. Such feedback encourages employees to be more customer oriented in their work. Solectron, the world’s largest contract equipment manufacturer, attributes much of its success to its system of providing comprehensive customer satisfaction feedback to its employees on a weekly basis.7 Because the core dimensions of job design affect the extent to which jobholders find their work meaningful, feel responsibility for their efforts, and understand the relationship between their activities and the results of those activities, they have a significant effect on the commitment and attitudes of the jobholders. 8 Motivation, quality of work performance, job satisfaction, absenteeism, and turnover will all be a function of the core job dimensions to some degree. Consequently, managers should consider the effect of various job designs KEY TERMS on each core dimension as they assign tasks and work acFeedback tivities to individuals within Information about the results the organization. of efforts in a job.

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Now Apply It 190

Job Design Focus on the job that you currently hold or one that you have held recently. Analyze the design of that job. Part A: Using the scales below, rate the job that you are assessing in terms of its skill variety, task identity, task significance, autonomy, and feedback. If your responses fall toward the left side of the scales, what is your feeling about the job? If your responses tend to fall toward the right side, what are your feelings about the job? Find someone who has rated his or her job on the end of the scales opposite of yours. Compare your feelings about your respective jobs. Part B: Based on your responses to Part A, how might you redesign your job to improve each of the five core job dimensions? Would your suggested changes help make you more effective and more efficient in your job?

High

Low Skill variety

High

Low Task identity

High

Low Task significance

High

Low Autonomy

High

Low Feedback

The increasing diversity of the workforce has made the assessment of job design more complicated. Individuals from diverse cultural backgrounds may view certain job characteristics differLEARNING ently. For example, whereas many people OBJECTIVE from the United States may perceive a job with low autonomy negatively, people from other cultures may perceive low autonomy favorably. In any case, managers Explain how and must be aware of how an individual emwhy the ployee might view a job.9 perspectives on job How does your job stack up with redesign have gard to these job characteristics? The “Now evolved. Apply It” box provides an opportunity for you to assess a past or present position that

you have held in an organization (such as a business, church, social club, or student organization) in terms of skill variety, task identity, task significance, autonomy, and feedback. At this point, you are prepared to complete the assessment aspect (Part A) of the exercise. After reading the next section, you’ll be prepared to suggest ways in which the job could be redesigned to improve it (Part B).

THE EVOLUTION OF JOB-DESIGN PERSPECTIVES As management theory has evolved, so have many of the perspectives of job design. As we discussed in Chapter 2, classical management theory and scientific

Chapter 7 Organizing for Effectiveness and Efficiency

management theory supported the concepts of division of labor and specialization. These early theories of management gave rise to perspectives of job design in which jobs were highly structured. The movement toward the human relations school of thought introduced other job-design variables, most of which dealt with human behavior.10 As a result, more behavioral approaches to job design gained acceptance. Today, we consider issues of job design in the organizations of the 21st century. Clearly, in industrial economies, machinery, metal, and muscle define how work is done. But in postindustrial societies, the raw material is information, and the production worker is the knowledge worker. Thus, in many ways, contemporary management thought has focused on a different type of work. Let’s examine how each of these approaches has affected the concept of job-design, as well as the core job dimensions.

Perspectives from Classical Management Recall from Chapter 2 that classical management theorists emphasized the benefits of division of work and specialization. Productivity and efficiency were the driving forces for job design. Repetition, skill simplification, and time-and-motion efficiency were the primary focus of job-design efforts. The result was highly specialized jobs that were routine, repetitive, and highly efficient. In a classic book, Wealth of Nations,11 Adam Smith explained how specialization can lead to high quality and efficiency. At the time, one pin-maker performing all the tasks necessary to make a pin could make only ten pins per day. The total productivity of ten pin-makers making pins in this fashion would be 100 pins per day. But if the ten pin-makers organized the activities of the group so that one pin-maker drew the wire, another straightened it, a third cut it, and a fourth sharpened it to a point, while others were performing the operations necessary to complete the head of the pin and prepare the final product, the group could produce 48,000 pins per day—an average of 4800 pins per pin-maker per day. Obviously, the productivity of the group improved dramatically when jobs were redesigned to be highly specialized. The benefits of specialization are easy to identify (Table 7.3). Specialized tasks can lead to high quality and efficiency because work activities are broken down into routine, repetitive actions. Furthermore, such actions can be mastered readily by individual workers and require less training than more complex tasks. Additionally, when tasks are highly specialized, workers may be selected based on specific characteristics that make them uniquely qualified to perform the task effectively and efficiently. Specialization may also have disadvantages. Often, the skill variety, task identity, and task significance associated with such tasks are low. Jobholders typically have

Table 7.3

Potential Advantages and Disadvantages of Job Specialization

Potential Advantages

Potential Disadvantages

Task or job is easier to learn.

Task or job may be dull to some.

Can perform very well—high quality.

Productivity may decrease if employee sees job as dull and has negative reaction.

Greater efficiency—can do job faster.

Productivity may decrease if employee has negative perspective that contributes to absence.

191

Can select employee based on specific qualifications.

less autonomy and may receive little feedLEARNING back or feedback that is inconsequential. To OBJECTIVE the extent that these conditions exist, some jobholders may find little challenge in their work and may lose interest in their jobs. It is easy to see that the assembly-line Describe the jobmanufacturing design is founded on the condesign approaches cept of highly routine and specialized tasks. that came from the Consider, for example, the traditional autoclassical mobile manufacturing plant. As the chassis of management, the car flows through the assembly line, behavioral workers perform a series of highly specialized management, and tasks that contribute in some way to the proemployee/work duction of the final product. While any given team–centered worker may do little more than attach a speperspectives. cific component or insert and tighten several screws, the result of the combined efforts of all the participants in the assembly process is a complete and fully functioning vehicle. Today, robotics technology has replaced many specialized jobs, particularly in the manufacturing environment. Now consider how the idea of specialization permeates almost all organizations. Almost everyone’s major, specialization, or concentration, including advanced degrees in education, is based on specialization, at least to some degree. The marketing major focuses on marketing, the accounting major on accounting, and so on. Within each major or discipline there is further specialization; in accounting, one may specialize in tax or auditing. Within an organization, one’s job may focus on accounts receivable, accounts payable, tax, or auditing. In human resources, one’s job may focus on payroll, benefits, recruiting, or training. This specialization tends to be true

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192

for not only lower-level employees but also most managers. Specialization helps us focus on a particular job or task in order to improve our skills and perform better and more efficiently. Of course, specialization may lead to the disadvantages mentioned in Table 7.3.

Perspectives from Behavioral Management Approaches The theorists who were part of the human relations and other behavioral movements in management believed that highly specialized jobs could be redesigned in ways that would improve both productivity and employee satisfaction. Their emphasis moved from division of labor and specialization toward job designs that had greater breadth, depth, and challenge. From that came job enlargement, job enrichment, and job rotation. Job Enlargement To understand job-enlargement programs, one must understand the concept of job scope. Job scope refers to the number of different activities that a specific job requires and the frequency with which each activity is performed. Jobs that involve many different activities have broader scope than jobs that are limited to a few activities. Jobs with broad scope typically rate more favorably in terms of skill variety, task identity, and task significance than do jobs with a narrower scope. Consider, for example, how the job scope of an office manager and a data-entry clerk might differ. The office manager’s job will involve a relatively broad set of tasks and thus will have relatively wide scope. In any given day, the office manager may prepare a letter, complete and sign time cards, make travel arrangements, schedule appointments, order supplies, and interview, hire, or fire office staff. The data-entry clerk’s job, in contrast, is much narrower in that it involves only entering data into a database file. Job enlargement broadens the scope of a specific job. KEY TERMS The intent of job enlargement is to increase the horizontal Job scope tasks and responsibilities assoThe number of different ciated with a given job and activities required in a job provide greater challenge for and the frequency with which the employee. For example, a each activity is performed. data-entry clerk’s job could be Job enlargement enlarged by assigning addiAdding more of similar tasks tional job responsibilities such to a job. as answering the phones, proJob depth cessing payroll forms, and Adding tasks to a job that providing copying services. require a wider range of The data-entry clerk would skills, usually including be responsible for a greater autonomy. variety of tasks.

Job enlargement has typically been considered as a means of making jobs more interesting that hopefully leads to better productivity. However, sometimes reducing job scope has a positive impact on productivity and job satisfaction. Consider, for example, the situation at United Parcel Service (UPS). UPS was experiencing high turnover among its drivers. Management was very concerned about this issue because the drivers are critical employees for the company. Not only did it take several months to train every new driver on a particular route, but also, over time, these drivers tended to develop strong relationships with the customers on their route. So, when UPS lost a driver, it incurred significant training costs and put customer satisfaction at risk. As the company explored the cause of the driver turnover, it discovered that it was the front end of the work— loading the packages on to the truck—that was causing the turnover. Management restructured the job to provide loaders for the drivers, reducing their job scope. This action improved job satisfaction greatly and reduced turnover among drivers. The relatively simple change in the job design had big benefits for UPS and its customers.12 Job Enrichment Central to the concept of job enrichment is the notion of job depth, which refers to the degree of control that individuals have over the jobs they perform. Job depth is high when the planning, doing, and controlling aspects of the job are the responsibility of the jobholder. When one or more of these aspects is the responsibility of some other organizational member, job depth is lower. Jobs that have high job depth typically rate more favorably on the core job dimensions of skill variety, task identity, and autonomy than jobs with low job depth. Just as specialization has led to jobs with a narrow job scope, highly specialized jobs often lack depth. In such cases, the planning, doing, and controlling aspects of a job may be separate. For example, consider a computer services center within an organization and how the tasks might be divided to provide high or low job depth. Assume that this computer services center has three employees. If all three employees are responsible for receiving work orders, clarifying instructions with the originator of the work, setting priorities for scheduling the work orders they receive, providing the technical services required by the work order, and confirming the acceptability of the work with the originator, their jobs are of significant depth as they plan, do, and control their work. In contrast, if the tasks of the computer services center were divided among the three employees such that one person received work orders, clarified instructions, and scheduled the work, while another performed the services required, and yet another followed

Chapter 7 Organizing for Effectiveness and Efficiency

up with the originator of the work to ensure that the services were performed satisfactorily, the tasks performed would be more highly specialized, and the three members of the group would have lower job depth. By vertically loading the job, closing the gap between planning, doing, and controlling, job enrichment gives the jobholder greater discretion in setting schedules and planning work activities, determining appropriate methods for completing the task, and monitoring the quality of the output from the work process.13 For many, job enrichment can be an effective means of motivating employees and improving job satisfaction.14

that have looked to lateral job moves as a method of motivating employees whose career progression has been stymied by the restructuring efforts of the organization. Sony and Canon even attribute much of the success at product innovation to the job rotation of their engineers.18 Ultimately, employees often find that lateral career moves enhance their long-term job satisfaction and career advancement.19 Job enlargement, job enrichment, and job rotation are methods of redesigning specialized jobs. Such efforts often have a positive effect on overcoming the disadvantages that might be associated with highly specialized jobs.

Job Rotation Job rotation involves shifting individuals from one position to another to gain a more wellrounded experience. Employees rotate through a number of job positions that are at approximately the same level and have similar skill requirements. Job rotation is a type of cross-training in that employees learn to complete several tasks, or jobs, not just one. Although job rotation has proven particularly beneficial in manufacturing settings,15 it can also be used effectively in service organizations. For example, an individual who works in a bank might rotate between being a teller, a customer-service representative, a loan processor, a proof operator, and a safe deposit box attendant. At a higher organizational level, a financial manager who works for a multinational firm might rotate among positions at various foreign subsidiaries to gain international business experience. Job rotation offers several advantages. Organizations that use job rotation typically have more flexibility in developing work schedules, making work assignments, and filling vacancies within the company quickly. In addition, some employees are more challenged and less bored with their jobs and usually have a better understanding of the organization as a whole. At the level of the individual employee, job rotation has been found to have a positive effect on both promotion rates and salary growth.16 In fact, in many companies, job rotation is considered essential for grooming managers for executive-level positions because it provides the breadth of experience necessary for top-level management roles.17 A new form of job rotation emerged in response to the downsizing activities of the 1990s. As organizations reduced their workforces, their employees had far fewer internal career opportunities available. With fewer promotions available, some companies tried to motivate employees by shifting them sideways instead of up. American Greetings, for example, found lateral moves to be very effective in rejuvenating employees who had become bored in their present positions. Nabisco Foods, Corning, Inc., and Eastman Kodak are other companies

Employee-Centered and Team-Centered Perspectives In recent years, both management theorists and practitioners have been rethinking the traditional approaches to job design.20 Efforts to develop more innovative and effective approaches to job design have been inspired by increasing competitive pressures in many industries. From airlines to banks to manufacturing companies, organizations have had to rethink job design to ensure high product and service quality at the lowest possible cost. Approaches that incorporate elements of participatory decision making that include employees more directly have been used to supplement the job-design methods discussed above. The most popular are employee-centered work redesign and self-managed teams. Employee-Centered Work Redesign Employee -centered work redesign is an innovative approach to job design that presents a practical solution to one of the most significant challenges of job design—bridging the gap between the individual and the organization. This method of job design links the mission of the organization with the needs of the individual by allowing employees to design their work roles to benefit the organization as well as themselves. The unique aspect of this jobdesign approach is that employees are accountable for justifying how their job will support the mission of the organization as well as improving their productivity and job satisfaction.21

KEY TERMS Job enrichment Adding tasks to a job that require a wider range of skills. Job rotation Assigning individuals to a variety of job positions, usually positions at a similar level. Cross-training Teaching a variety of skills to a jobholder, usually skills that can be used in other, similar jobs. Employee-centered work redesign An approach whereby employees design their work roles to benefit the organization and satisfy their individual goals.

193

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A number of benefits are associated with employeecentered work redesign. Because jobs are designed by the jobholder, this approach tends to favorably affect the core job dimensions that are most relevant to the individual employee. Studies suggest that tangible improvements in both productivity and job satisfaction result from employee-centered work redesign efforts. Furthermore, this approach fosters an organizational climate that supports cooperative efforts between individuals and work groups. Finally, employee-centered work redesign can be consistent with the quality improvement efforts of many companies. If employees of an organization are in a position to know where quality improvements can be achieved, their jobs can be designed so that quality problems can be identified and resolved more quickly.22 Today, many companies are looking to workredesign programs to address a critical work problem that can result in significant losses in productivity— stress.23 Based on a survey by International Survey Research in Chicago, about 40% of U.S. workers say workloads are excessive, and about the same percentage indicate that they are bothered by too much pressure on the job. A few companies, such as Bank of America, used innovative ways to redesign jobs to reduce stress and provide a better work/life balance. Bank of America’s efforts began with 1100 employees at two customer-service call centers. The employees were asked to report on those aspects of their work that were frustrating and an impediment to balancing work and family life. A large number of suggestions poured in through focus groups and an 800-number hotline. When all was finished, 60% of the employees at the two call centers had offered suggestions on how to change their work. Bank of America moved quickly to implement many of the changes. Not only were the employees delighted, but the customers benefited as well. The proportion of customers reporting satisfaction with the service they received rose from 80 to 85% at one call center and from 79 to 82% at the other. Bank of America’s experience in this case clearly demonstrates that employees and customers can both benefit from employee-centered work redesign, which ultimately benefits the business as a whole.24

KEY TERMS Self-managed team (SMT) A group of employees who design their jobs and work responsibilities to achieve the self-determined goals and objectives of the team.

Self-Managed Teams All the approaches to job design discussed so far have focused on designing the jobs of individual organizational members. The self-managed team (SMT) approach to job design shifts the focus from the individual to a work

group. Instead of managers dictating a set of narrowly defined tasks to each employee, responsibility for a substantial portion of the organization’s activities is assigned to a team of individuals who must determine the best way to fulfill those responsibilities. Today, SMTs exist in organizations of all sizes and types and in and across departments within those organizations.25 When SMTs exist across departments and include representatives from the different functional areas of the organization (for example, engineering, marketing, finance), they are considered cross-functional teams.26 The distinguishing feature of the SMT approach to job design is that the group is largely independent. The team must justify its choice of work methods only in terms of strong productivity and contribution to the overall effort of the organization. As with employee-centered work redesign programs, jobs that are designed by SMTs tend to reflect the core job dimensions that are most relevant to the individual employees of the work group. Although research has suggested that SMTs can achieve higher productivity and deliver better-quality products and services with lower relative costs,27 a number of situational factors appear to influence the effectiveness of such groups. These factors include the personalities of the group members as well as the nature of the job responsibilities.28 The SMT approach has been credited with improving overall organizational effectiveness in ways such as avoiding redundant efforts, increasing cooperation between organizational members, spawning new ideas, generating solutions to problems, maintaining motivation, improving product quality, and increasing profits.29 Examples include the classic teamwork success at NUMMI (New United Motors Manufacturing, Inc.), the joint venture between General Motors and Toyota, and the more recent examples of success at 3M and BP.30 Other companies have used the SMT approach to develop new products and processes. For example, companies as diverse as Chrysler, Medtronic, IBM, and Eli Lilly have used SMTs to create new processes so that they could develop new and better products.31 As businesses have become more international in nature, the need to develop global work teams has increased. Yet, many challenges exist in developing highly effective work teams that cross national borders. Cultural and communication differences among team members, as well as the barriers that arise from timeand-distance differences, all complicate the development of effective global teams. Nevertheless, some organizations, such as Digital Equipment, and 3Com, have developed innovative ways to make global teams work effectively.32 In recent years, improvements in technology have enabled many global teams to overcome the barriers of time and distance. In fact, through the use of

Chapter 7 Organizing for Effectiveness and Efficiency

Cultural and communication differences among team members, as well as the barriers that arise from time-and-distance differences, complicate the development of effective global teams.

advanced information technology, so-called virtual teams have emerged.33 These teams can work together from all over the world as long as they share a common purpose and a means of communicating. The existence of virtual teams will likely change the way many people work in the years to come. Now that we have concluded our discussion of job design, take a moment to go back to Part B of “Now Apply It.” How might you redesign the position you evaluated to improve productivity, job satisfaction, quality? Thus far, we have explored how managers determine the work to be done and assign that work to individual employees or work groups. Equally important, however, is the process of defining the working relationships, both vertical and horizontal, that exist within the organization. The next section examines how working relationships can be established to ensure that the organization fulfills its mission and achieves its goals.

Organizational Relationships Now let’s discuss how to arrange the jobs and tasks in a coordinated way so that they can work together to achieve the organization’s mission. The plan, or guide, for

this arrangement is called an organizational structure, or organizational chart. It is usually pictured as the arrangement of parts (jobs, departments, divisions) of 195 the organization showing the relationships among the parts as they are focused on the organization’s mission, as represented by the top-level manager, or chief executive officer (CEO). (See Figure 7.2 for examples of organizational structure.) Designing the overall structure will be discussed in the next chapter. However, first we need to discuss important concepts and tools that are needed to establish the relationships between the parts of the organization as the overall structure is designed. The working relationships that exist within an 5 organization will affect how its activities are accomplished and coordinated. Consequently, it is essential to understand both the vertical and horizontal associations that exist between individuals and work groups within the organization. Organizational relationships are defined by (1) chain of command, (2) LEARNING OBJECTIVE span of control, (3) line and staff responsibilities, and (4) authority and responsibility.

CHAIN OF COMMAND

Understand both

The vertical relationships that exist within an the vertical and organization are defined by its chain of comhorizontal mand. The chain of command delineates the associations that line of authority and responsibility that flows exist between individuals and throughout the organization and identifies work groups within the supervisor and subordinate relationships the organization. (who reports to whom) that govern decision making. This is also called the hierarchy of authority. Ideally, each employee should report to and be accountable to only one supervisor. This is called unity KEY TERMS of command. As you recall from ChapOrganizational structure ter 2, the concept of a wellThe plan representing the defined chain of command relationships between jobs was originally advanced by the and departments in an classical management theoorganization. rists. In its purest form, the Organizational chart concept is consistent with the The chart, or “picture” of the bureaucratic organizational organizational structure. system. Although contempoChain of command rary managers still embrace The line of authority and the idea of a chain of comresponsibility that flows mand, the flexibility of the throughout the organization. organization to respond to Unity of command change quickly and proactively An employee in the may be severely limited when organization is accountable to decision making is rigidly tied one and only one supervisor. to the official hierarchy. For

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Figure 7.2

Alternative Ways to Structure an Organization

196 CEO

CEO

that reason, organizations may need to find ways to be flexible in their chain of command and yet find ways to hold people and departments accountable for results.

SPAN OF CONTROL A second important aspect of working relationships is span of control, also known as span of management, which refers to the number of employees who report to a single manager.34 At one time it was thought that there was a universally appropriate span of control (for example, six employees should report to each manager), but managers now recognize that span of control will vary in accordance with a number of variables.35 Organizational characteristics such as task complexity, the volatility of the competitive environment, and the capabilities of both the employees and the manager will influence the appropriate span of control. As an example of how cerKEY TERMS tain conditions might affect span of control, consider the Span of control job characteristic of task comThe number of employees plexity. Normally, when tasks reporting to a particular are very complex, span of manager.

control should be relatively narrow. This allows the manager to spend more time with each subordinate to help him or her deal with the complexity of the job. In contrast, where jobs are highly standardized and routine (low complexity), a manager will not need to spend as much time supporting individual subordinates, and the span of control may be larger.36 Span of control is a critical organizational variable for a number of reasons. It defines the layers of management that exist within the company. An organization that maintains a relatively narrow span of control will have more hierarchical levels (tall) than an organization with the same number of employees but a wider span of control (flat) (Figure 7.2). Is it better to have narrower or broader spans and more or fewer levels in the hierarchy? That depends on the situation.37 Managers who have fewer subordinates to supervise might be less likely to be overcommitted and overburdened. Free from the burden of excessive numbers of subordinates, such managers may have more time to analyze situations, make effective decisions, and execute the actions associated with their decisions. Consequently, they may be more effective than managers with more subordinates reporting to them.38

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At the Forefront No Organizational Chart at Semco, Inc. ow would you like to work for Semco, Inc.? There is no organizational chart. People decide when they will come to work, on what products to work, which meetings to attend—if any—and which manager they want to work with. There is no permanent CEO. Rather, the position is rotated among about six senior managers every 6 months. Everyone has access to the financial statements, and union leaders hold workshops to help people understand them. There are hammocks in the offices for naps. Your reaction to this situation probably falls into one of four categories. One is that you are convinced that this situation would result in total chaos. Another is that you would like to work in this company because it

sounds like a lot of fun. A third response might be that “there has to be something more going on here.” A fourth reaction might be that it is obvious to you what the “something more” is. In the early 1980s, Ricardo Semler took over the family business from his father. The business made industrial machinery in Sao Paulo, Brazil, but was not doing particularly well. Semler fired most of the managers and implemented the strategies mentioned above. Since Semler took over, the company’s revenues have grown over 900%. When Semler changed the business from one with traditional organizational characteristics, many of the people were fired, or they left on their own because they did not like the

Managers with wider spans of control have greater demands in terms of direct supervision. They may feel hassled, frustrated, and incapable of coping effectively with the nonsupervisory demands of their job.39 Yet wide spans of control suggest a need for greater self-direction and initiative on the part of individual employees and may result in more effective employee development.40 Clearly, advantages and disadvantages are associated with both tall and flat structures. Therefore, organizations must choose a span of control that supports their particular strategic and operational goals.41

LINE AND STAFF RESPONSIBILITIES Line and staff positions or departments exist within virtually all organizations, but the individuals who occupy these positions play very different roles. Line departments are directly involved in delivering the product or service of the organization. They have formal authority for decisions affecting the core production efforts of the organization. Staff departments, in contrast, are not part of the product or service delivery–system chain of command but rather provide support to line departments. Line personnel or

turmoil that they saw in the “new” company. The only people who remained were passionate about the new kind of company. When new people are hired, they go through unlimited numbers of interviews conducted sometimes by over a dozen people at one time. New hires must fit “the Semco way.” All employees sign a contract for a specific level of output or productivity, and they are held accountable for it. If they do not meet their contract, they are fired or they leave voluntarily. What do you think is included in “the Semco way”?

Sources: S. Shinn, “The Maverick CEO,” BizEd (January/February 2004): 16–21; G. Colvin, “The Anti-Control Freak,” Fortune, 26 November 2001, 60.

work groups may call upon staff personnel to provide expert advice or perform specific support services. Staff personnel do not have authority or responsibility for decisions that relate to the core delivery system of the organization. Distinctions between line and staff have sometimes caused conflicts. Some think that staff departments are not as important as line or that they are just cost, or “overhead”; that is, they do not contribute to profits. However, the differences in the way employees contribute is far less important than the commonality in- KEY TERMS herent in working to achieve Line department the same organizational goals. An organizational unit that is Fortunately, the distinction directly involved in delivering between line and staff has the products and services of become less important. the organization. In addition, line and staff personnel now frequently coexist within work teams that collectively pursue a specific set of tasks. A company called AES has done everything it can to eliminate the staff function at the corporate level by moving

Staff department An organizational unit that is not directly involved in delivering the products and services of the organization but provides support for line personnel.

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all staff personnel onto the teams around which the organization is structured. The finance, marketing, and environmental compliance departments have all been eliminated and their staff personnel reassigned to teams that are responsible for delivering core products and services. AES believes this system enables all team members to understand all aspects of the business.42

LEARNING OBJECTIVE

The Process of Delegation

AUTHORITY AND RESPONSIBILITY

Various people in organizations need to make decisions about what is to be done, who is to do it, when it is to be done, and the like. The formal right inherent in an organizational position to make decisions—instruct or ask subordinates to do certain things and expect that they will—is called authority. When it is based on a position KEY TERMS in the organization, it is called formal authority.43 When an Authority ability to influence people is The formal right inherent in based on personal attributes, an organizational position to such as knowledge or make decisions. charisma, it is called informal Formal authority authority. (See position power Authority inherent in an and personal power in the organizational position. leadership chapter.) With authority comes Informal authority responsibility to use the auAbility to influence others that thority properly. Responis based on personal sibility is the obligation to characteristics or skills. perform the duties that were Responsibility assigned with the authority. The obligation to perform the Although the words responsiduties assigned. bility and accountability are Accountability used by some as two different Responsibility to the things, they are essentially the supervisor for results of same. To be accountable to a decisions made and actions supervisor means that a subtaken with delegated ordinate is responsible to the authority. supervisor for results of decisions made and actions taken Delegation by the subordinate.44 The process of transferring Managers at all the authority for a specific 6 levels in organizations activity or task to another probably cannot make all the member of the organization decisions that need to be and empowering that made in the parts of the orgaindividual to accomplish the nizations that they supervise. task effectively. Define delegation and discuss why it is important for managers to delegate.

Therefore, they must delegate some of the authority to subordinates. Delegation refers to the process of transferring the authority for a specific task or set of tasks to another member of the organization and empowering that individual to accomplish the task effectively. Normally, authority is delegated by a manager to one or more of his or her subordinates.

Delegating authority well is an important, often complex task.45 It is much more than just turning authority over to someone else. The person to whom authority is delegated must be capable and willing to use it well. The person with the authority is accountable to his or her supervisor. However, the manager who delegated the authority is still accountable for the results of his or her department, and now it includes the decisions of subordinates to whom authority was delegated.46 Delegating authority well includes important steps. They are (1) decide which goals or tasks to delegate, (2) make assignments, (3) grant authority, (4) hold responsible/accountable, and (5) monitor. All are essential to the success of the delegation process (Table 7.4). Decide Which Goals or Tasks to Delegate Deciding which goals or tasks to delegate can be complex. A manager might assign goals or tasks for many reasons including • Goals or tasks for which a subordinate has a special skill or interest. • A very capable subordinate. • Goals or tasks for which the manager might not have expertise and/or interest. Some might suggest that a manager should delegate tasks that he or she does not like. However, this is probably not a good guide to delegation. Joseph Liemandt of Trilogy Development Group believes that a manager should not keep tasks just because he or she likes them or delegate tasks just because he or she does not like them.47 In any case, delegation of authority will be more successful if the subordinate to whom goals or tasks are assigned understands the mission of the department and, ideally, the mission of the organization and is capable of making good decisions. Of course, the manager can teach and train the subordinate in these areas. Make Assignments The manager must be clear in what is being transferred to the subordinate.48 The subordinate must understand the mission, goals, and tasks for which he or she will now be responsible. If there are limits to what is an acceptable outcome or an acceptable

Chapter 7 Organizing for Effectiveness and Efficiency

decision, the manager must establish those limits. This Delegating Authority can be done with the use of policies, which were disTable 7.4 cussed in Chapter 4. The manager and subordinate must agree on the results that are expected and what monitor- 1. Decide which goals/tasks to delegate. ing or feedback might be helpful to make the outcomes • Teach the department or organization mission. successful. Finally, the manager must give the subordi• Find a capable person. nate information that is useful for the subordinate to • Teach/train the person. make good decisions. 2. Make assignments.

Grant Authority Managers must give their em• Agree on mission, goals, tasks. ployees the authority to accomplish their work success• Establish limits (policy). fully.49 The subordinate must have the formal right to • Agree on results. make decisions and to commit resources. Without suffi• Establish monitors and feedback. cient authority, it is unlikely that employees will com• Give information. plete delegated tasks successfully. As we mentioned in Chapter 4, a policy is a tool that can be used to set the 3. Grant authority to act. limits or guidelines for what authority is to be • Transfer right to decide. delegated. This is what Jeffrey Immelt, CEO of General • Transfer right to commit resources. Electric, calls “manage by setting boundaries with • Make it public. freedom in the middle.”50 • Do not interfere. Granting authority in a “public” way can help make the authority more clear and more “authentic.” For exam- 4. Hold responsible/accountable. ple, putting it in writing offers a chance to clear up mis• Check progress. understandings, and it is a more formal way to state the • Treat problems and challenges as teaching/learning opportunities. authority. Another form of making it public means that the manager should inform other people or departments affected by a person’s authority so they know that the 5. Monitor. • Teach. authority is legitimate. • Reward. Consider a simple example: A restaurant manager • Communicate. has to leave early one evening and says to one of the wait• Give information. ers, “Make sure that all the employees complete their • Give resources. closing duties.” Assuming that the statement is made only • Remove roadblocks. to the waiter and not to the other employees and that the waiter has not previously been designated as a head waiter, the manager has put the waiter in a difficult position. The other employees are unlikely to feel compelled to cooperate with the waiter because they do not know standby passengers to register at the gate. In both cases, that the waiter is now to have this authority. the employees have the knowledge to do their jobs better Finally, managers must not interfere. Yes, managers and create greater customer satisfaction, but they do not should monitor and give feedback, as agreed in step 2. have the authority to act on that knowledge. As informaBeyond that, if a manager interferes, either the results will tion becomes increasingly available to frontline workers, not be good and/or the subordinate will not learn to use organizations must consider how to provide the authorauthority well or will not be interested in doing so. ity for those workers to act appropriately in light of that In today’s age of greater access to information, information.51 employees may feel frustrated by the fact that they know about a problem but do not have the authority to address Hold Responsible/Accountable Managers must it. Consider, for example, the warehouse worker who can hold their employees accountable for completing the tasks see that an order will be late but has no authority to for which they assume responsibility and are given the necexpedite it. Or the airline reservationists who know that essary authority. When there is accountability for performany seats are available on certain flights but cannot mance, employees understand that they must justify their book a standby passenger on those flights because they decisions and actions with regard to the tasks for which do not have the authority to override the policy requiring they have assumed responsibility.

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It is important for managers to be sure that subordinates are doing the “right things.” These are the things that help achieve goals and, ultimately, the mission of the organization. Enterprise Rent-A-Car used a reward system that paid people a bonus based on the amount of profits that they help generate. To increase their bonus, some branch managers started focusing on short-term profits, which sometimes interfered with long-term profits. Consequently, Enterprise now bases bonuses on customer satisfaction plus profits in order to hold people accountable for long-term profits.52 Delegating decision-making authority without the associated accountability will compromise the overall benefits of the delegation process. Christopher Galvin, former CEO of Motorola, said, “Sometimes delegation does work and sometimes it does not.” While he believes strongly in the power of delegation, he also knows that when it does not work, managers must learn to delegate better.53 If you are the manager, how do you hold some responsible? If the person made a decision that resulted in a positive outcome, reward that. That might be a simple acknowledgment or some other appropriate reward. However, look for signs that the person is aware of why and how the decision led to good results. If that is not the case, then the person has not necessarily made a good decision. Now, what if the person made a decision that resulted in negative outcomes or created other problems? Turn this into a teaching/learning opportunity. If you are the manager, refer to the goals and assignments that were established in steps 1 and 2. Then help the subordinate learn how and why the results were not positive. If done well, the subordinate will learn how to make better decisions and use authority well. CEO Steven Reinemund of PepsiCo holds senior managers accountable for teaching their subordinates to delegate well. In turn, the next level of manager must mentor and teach their subordinates.54 Monitor Just as the overall management process and each managerial function must have feedback mechanisms built in to evaluate and control operations (see the discussion related to the overall framework shown in Figure 1.5), so too must the delegation process. The monitors and feedback mechanisms that were established in step 2 mean that not only the subordinate will be watching for how decisions are progressing but also the supervisor. The feedback probably will include things that the supervisor and subordinate will watch together, including meetings and discussions, as seem appropriate. Both the supervisor and subordinate should view and ensure that feedback and monitoring are constructive. Of course, if the subordinate cannot, or will not learn to

Part 3 Organizing Challenges in the 21st Century

Delegation of authority and decision making to employees also involves accountability of performance to managers.

correct mistakes and problems, then the authority must be taken back and/or the subordinate replaced.

The Benefits of Delegation Delegation offers a number of advantages. When done properly, delegation can lead to a more involved and committed workforce, sometimes referred to as an empowered workforce.55 Empowerment can lead to heightened productivity and quality, reduced costs, more innovation, improved customer service, and greater commitment from employees.56 The end result can be a more effective organization.57 Delegating decisions and activities to individuals lower in the organizational hierarchy can lead to better decision making. Those who are closest to the actual problem to be solved or the customer to be served may be in the best position to make the most effective decisions. In addition, response time may be improved because information and decisions need not be passed up and down the hierarchy. This is particularly critical in organizations where delays in decision making can make the difference between success and failure. Delegation is also beneficial from an employee development perspective.58 By delegating tasks and decision-making responsibility to their employees, managers provide an opportunity for the development of analytical and problem-solving skills. The employees are forced to accept responsibility, exercise judgment, and be accountable for their actions. The development of such skills will benefit the organization in the long term.59

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Was Tyco International Too Flexible? yco International (Tyco) was one of the companies that was almost destroyed by a notorious CEO who was at the forefront of using unethical and illegal practices that artificially inflated profitability while enriching himself and some of the other top managers. Dennis Kozlowski is well known for paying himself a very high salary, living in a an expensive apartment in New York City that was paid for by the company, and purchasing lavish furnishing for the apartment with company money. Kozlowski faced legal problems because of use of illegal accounting practices and because he was charged with simply looting company funds. Under Kozlowski, top-level managers earned large bonuses that were based almost entirely on revenues. Problems related to this included managers who would simply buy other companies to get the revenues and/or not watch costs in generating the high revenues. There was no concern about whether the companies fit together in any way that could take advantage of core competencies.

Division managers were totally free to manage their companies. With emphasis on revenues without any on costs, profitability suffered. If the illegal activities had not shaken Tyco, the profitability problems were ready to cause trouble. It was up to Edward Breen, newly hired CEO in mid-2002, to clean up the mess and try to restore Tyco to a grand company. He replaced the entire Board of Directors, fired 290 of the top 300 managers, and began to streamline and coordinate many parts of the company in order to cut costs that were way too high. We focus on restoring efficiency by cutting costs here. All divisions of Tyco purchased almost all of what they needed on an individual basis; nothing was coordinated to be managed by headquarters. Phone services, office supplies, raw materials, and even computers (PCs) were purchased by various people and units throughout the organization. There was no attempt to take advantage of buying in quantity.

Finally, through proper delegation, managers magnify their accomplishments. By delegating tasks that their employees have the ability to complete, managers can use their time to accomplish more complicated, difficult, or important tasks. This can lead to a more creative and productive work group as a whole.60 Many organizations have benefited from empowering employees through proper delegation. Starbucks, Xerox, the American Society for Quality Control, and FedEx are a few examples of organizations that have claimed significant success from employee empowerment.61 Managers should be cautioned, however, 7 about the potentially negative perceptions that ineffective delegation can create. Delegation must never be used to avoid work responsibilities that should legitimately be assumed by the manager. Delegation is not a way to “pass the buck” but rather a method for enhancing the overall productivity of the work group. If

Breen formalized the purchasing operation and centralized it at headquarters. A few examples of the results: Purchasing PCs at headquarters reduced the cost of computers alone by $11 million a year. Reducing the number of packaging suppliers used by Tyco from 300 to 25 saved $40 million per year. These examples show the results of Mr. Breen establishing policies, procedures, and rules that restricted the jobs of many Tyco managers. The result is better coordination of costs that resulted in supplies and services that were at least as good as before but now at a much lower cost. Now Breen is working on applying the same analysis to see where benefits can be achieved by combining and coordinating other parts of the organization. Managers probably had too much flexibility previously, or at least it was not managed well. Sources: “Best Managers: Edward Breen,” BusinessWeek, 10 January 2005, 63; S. Tully, “Mr. Cleanup,” Fortune, 15 November 2004, 151–163

employees perceive the delegation as a way to reduce the manager’s responsibilities and increase their own, their respect for the manager will deteriorate. This may be particularly problematic in diverse work groups in which perceptions of delegation may vary. In such situations, it may be appropriate for managers to explain to their employees how delegation benefits the entire work group. Effective delegation is a vital skill for successful managers. Yet it is a skill that many managers lack. Why? There are a number of reasons why managers fail to delegate.62

LEARNING OBJECTIVE

7 Explain why managers often fail to delegate and suggest methods for improving delegation skills.

Reasons for Failing to Delegate Delegation requires planning—and planning takes time. How often have you heard someone say, “By the time I get

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done explaining this task to someone, I could have done it myself”? This is a common excuse for maintaining authority for tasks rather than delegating them.63 In some cases, such a decision may make sense. However, when tasks are recurring and would warrant the time to train someone who could assume authority and responsibility for the work, such a decision would not be appropriate. “Experiential Exercise 7.1” at the end of this chapter provides a tool for managers to use in determining whether a task is appropriate for delegation. Another reason for failure to delegate is that managers may simply lack confidence in the abilities of their subordinates. Such a situation fosters the attitude “If you want it done well, do it yourself.” This problem is particularly difficult to overcome when the manager feels pressure for high-level performance in a relatively short time frame. The manager simply refuses to delegate, preferring to retain authority for tasks to ensure that they are completed properly. As a further complication, managers experience dual accountability. Managers are accountable for their own actions and the actions of their subordinates. If a subordinate fails to perform a certain task or performs it poorly, it is the manager who is ultimately responsible for the subordinate’s failure. Therefore, when the stakes are high, managers may prefer to perform certain tasks themselves.64 Finally, managers may refrain from delegating because they are insecure about their value to the organization. Such managers may refuse to share the information necessary to complete a given task or set of tasks because they fear they will be considered expendable.

Learning to Delegate Effectively Despite the perceived disadvantages of delegation, the reality is that managers can improve the performance of their work groups and their organizations by delegating well to their employees. So how do managers learn to delegate effectively? They apply the basic principles of delegation. Principle 1: Match the Employee to the Task Managers should carefully consider the employees to whom they delegate. The individual selected should possess the skills and capabilities needed to complete the task and, when possible, should stand to benefit from the experience. Furthermore, managers should delegate duties that challenge employees somewhat but which they can complete successfully. There is no substitute for success when it comes to getting an employee to assume responsibility for more challenging assignments in the future.

Implicit in this principle is an acceptance of an incremental learning philosophy. This philosophy suggests that as employees prove their ability to perform effectively in a given job, they should be given tasks that are more complex and challenging. In addition to employee development benefits, such a strategy will be beneficial for the overall performance of the work group.65 Principle 2: Be Organized and Communicate Clearly Most cases of failed delegation can be attributed to either poor organization or poor communication. When managers or employees do not clearly understand what is expected, the delegation process is sure to fail. Both the manager and the employee must have a clear understanding of what needs to be done, what deadlines exist, and what special skills will be required.66 Delegation is a consultative process whereby managers and employees gain a clear understanding of the scope of their responsibilities and how their efforts relate to the overall efforts of the group or organization.67 Furthermore, managers must be capable of communicating their instructions effectively if their subordinates are to perform up to their expectations.68 Principle 3: Transfer Authority and Accountability with the Task The delegation process is doomed to failure if the individual to whom the task is delegated is not given the authority to succeed at accomplishing the task and is not held accountable for the results. The manager must expect employees to carry the ball and let them do so.69 This means providing employees with the necessary resources and power to succeed, giving them timely feedback on their progress, and holding them fully accountable for the results of their efforts. Principle 4: Choose the Level of Delegation Carefully Delegation does not mean that the manager can walk away from the task or the person to whom the task is delegated. The manager may maintain some control of both the process and the results of the delegated activities. Depending on the confidence that the manager has in the subordinate and the importance of the task, the manager can choose to delegate at several levels (Figure 7.3).70 Many good managers find it difficult to delegate. Yet few managers have been successful in the long term without learning to delegate effectively.71 As a future manager, you must develop effective delegation skills.

Chapter 7 Organizing for Effectiveness and Efficiency

Figure 7.3

Degree of Delegation

Managers can delegate in degrees. Consider the following alternative levels of delegation. High

• Investigate and take action

• Investigate and recommend a course of action Medium

• Investigate and identify alternatives

Low

• Investigate and report back

Source: Adapted from M. E. Haynes, “Delegation: There’s More to It Than Letting Someone Else Do It!” 9–15. Reprinted, by permission of publisher, from Supervisory Management, January 1980. © 1980, American Management Association, New York. All rights reserved.

Implications for Leaders In this chapter, we have learned how jobs are designed and organizational relationships are determined. Effective managers must demonstrate competence by designing jobs and working relationships in such a way that achieves the goals of the organization. As a future manager, you should keep the following organizing tips in mind: • Identify the tasks and activities that must be completed for the goals of the organization to be achieved. • Design jobs so that jobholders will find their jobs interesting and challenging. • Understand the potential advantages and disadvantages of specialization, job enlargement, job enrichment, and job rotation.

•

Understand the importance of chain of command and span of control.

•

All successful managers delegate authority. Learn how to delegate well and hold people accountable.

This chapter focused on the first stage of the organizing process. The next chapter addresses the concept of organizational design, building the entire organization structure. The design of an organization defines the way that organizational members are configured or grouped together; the types of mechanisms used to integrate and coordinate the flow of information, resources, or tasks between organizational members; and the degree of centralization or decentralization of decision making within the organization. An understanding of these organizing concepts, along with those discussed in this chapter, are essential for understanding the managerial function of organizing.

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Meeting The Challenge New and Improved Procter and Gamble very Sunday evening, A. G. Lafley, CEO of Procter and Gamble (P&G), meets with the manager of human resources to review the performance of the top 200 managers. The focus is on how well the managers are delivering what customers want. Lafley made important decisions to stop P&G’s slide. To regain efficiency, he cut the workforce and eliminated some unprofitable products. He directed that pricing be studied and changed where necessary to fit the competitive situation. He replaced over half of the 30 top managers. He set out to slowly change the parts of the P&G culture that resisted change and did not allow people and departments to communicate and cooperate with each other. Lafley intended to focus the managers on making and selling products that customers wanted and that were related to the core competencies of P&G. The tight rules and jobs made inflexible by the organizational culture subsided as Lafley began to hold managers accountable for keeping products in line with consumer preferences and essentially made the managers’ jobs much more flexible so that they could cooperate to be focused on the wants of customers and on taking advantage of the company’s core competencies. The main changes that made jobs more flexible, enhanced cooperation, and held managers accountable are the following: • A quarterly meeting of the top-level people from the 15 biggest brands was initiated so that ideas can be shared across products and divisions. • Internal trade shows were started so that managers could learn from each other across the corporation. • The five division managers were moved from the corporate headquarters’ 11th floor to the floors on which their managers were located.

•

The walls were removed between the senior managers, including Lafley’s whose desk is next to the managers with whom he interacts most. • The table in the conference room where the top 12 managers meet every Monday morning is now round rather than square. • Lafley started conducting “innovation reviews” in which he evaluates how well managers share ideas. • Managers who do not share ideas are not promoted. One example of many successful products that were developed with the much more flexible jobs in P&G is Mr. Clean Auto Dry, a product that attaches to the end of a garden hose to wash a car and help it to dry without water spots. It came about after cooperation among people from R&D in the home-care division, the Pur water-purification unit, and the Cascade dishwasher detergent department. Since Lafley became CEO, the stock price of P&G has more than doubled. Almost all the major brands have increased market share. Core volume, revenue from products that were part of P&G’s existing business, is up about 12% per year. Although work is still to be done, as there always is, the more flexible organization structure, culture, and jobs helped P&G get back to understanding what its customers want and help the company to deliver in a way that takes advantage of core competencies and results in profits.

SUMMARY 1. For an organization to fulfill its mission and achieve its goals, the employees of the organization must complete many tasks and activities. These varied tasks and activities must be organized and coordinated to ensure the effectiveness and efficiency of the organization. First, the work that needs to be done must be clarified and assigned to specific jobholders. Then the work relationships necessary to support the organization’s product and service delivery system must be established. After

that, work groups must be assigned, the integrating system to coordinate the work of those groups must be established, and the locus of decision making in the organization must be decided.

2. Job design refers to the way tasks and activities are grouped to constitute a particular job. Core job dimensions that can be used to describe a job include (a) skill variety, (b) task identity, (c) task significance, (d) autonomy, and (e) feedback. The first three dimensions determine the meaningfulness of jobs;

Chapter 7 Organizing for Effectiveness and Efficiency

the fourth dimension, autonomy, determines the degree to which individuals feel responsible for their work; and feedback relates to the extent to which jobholders understand the outcomes of their jobs.

3. Classical management theory and scientific management support the concepts of division of labor and specialization. These early theories of management gave rise to designing jobs that are highly structured. The human relations and behavioral approaches to management suggest designing jobs that include job enlargement, job enrichment, job rotation, and job design that might include participation from employees.

4. Classical management perspectives of job design focus on efficiency. Specialization and division of labor are key features. Behavioral approaches to job design focus on the human aspect of work and seek to enhance the motivation, satisfaction, and productivity by using job enlargement, job enrichment, and job rotation. Other approaches include jobs that are designed by employees, including self-managed teams.

5. Organizational work relationships are defined by the organization structure. Components of the organization structure are (a) chain of command, (b) span of control, (c) line versus staff responsibilities, and (d) authority and responsibility. Chain of command defines the vertical relationships that exist within the organization. Span of control

refers to the number of subordinates who report to any supervisor. Line departments are those that have direct responsibility for the delivery of the organization’s product or service, whereas staff personnel provide an advisory or support function to the line personnel. All managers need authority to make decisions and must be held accountable for the decisions.

6. Delegation of authority involves the assignment of deciding which goals and tasks to delegate, making the assignments, granting of the authority necessary to complete the task, holding people accountable for authority, and monitoring the entire process. Successful managers must be able to delegate effectively because delegation makes better decisions possible, provides development opportunities for employees, and magnifies the accomplishments of the manager.

7. Managers often fail to delegate because of a failure to plan, a lack of confidence in their subordinates, hesitancy to assume dual accountability for their own actions and the actions of those to whom they delegate, or insecurity about their own value to the organization. Effective delegation requires matching the employee to the task, clearly communicating task responsibilities, giving authority to and requiring accountability from the person to whom the task is delegated, and choosing the appropriate level of delegation.

REVIEW QUESTIONS 1.

Why is organizing an important managerial function? Describe the process of organizing. What does each stage in the process entail? 2. (LEARNING OBJECTIVE 2) Define job design. What are the core job dimensions that define a specific job? 3. (LEARNING OBJECTIVE 3) How and why have jobdesign perspectives evolved over the last century? 4. (LEARNING OBJECTIVE 4) Explain the potential advantages and disadvantages of (LEARNING OBJECTIVE 1)

specialization, job enlargement, job enrichment, job rotation, employee-centered design, and self-managed teams. 5. (LEARNING OBJECTIVE 5) Discuss the following concepts: (a) chain of command, (b) span of control, (c) line versus staff departments, and (d) authority and responsibility. 6. (LEARNING OBJECTIVE 6) What is delegation and why is it important to delegate? 7. (LEARNING OBJECTIVE 7) Why might managers find it difficult to delegate? How might they improve their delegation skills?

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DISCUSSION QUESTIONS 206

Improving Critical Thinking 1. Consider an organization that you have either worked for or have been affiliated with in some way. How might you redesign the jobs that must be done in that organization to achieve (a) increased effectiveness—better products and services; (b) increased efficiency; and (c) improved employee satisfaction? Are these objectives mutually exclusive? Could you design the jobs so that all of these objectives could be achieved?

2. The concept of self-managed teams has gained popularity in recent years. Consider moving toward that type of job design in a job you have held or hold currently. What would be the advantages and disadvantages of this approach?

Enhancing Communication Skills 3. Certain advantages and disadvantages are associated with having a fairly strict chain of command. What are they? Can you identify certain business conditions and/or organizations in which a more strict chain of command would be appropriate? What conditions and/or organizations would benefit from the use of a more flexible chain of command? Present your conclusions to the class orally.

4. Consider the job design of the following grocery store positions: (a) cashier, (b) produce manager,

and (c) general manager. How would these jobs differ with regard to the core job dimensions discussed in this chapter? How would these jobs rate in terms of meaningfulness, the responsibility the jobholder feels for outcomes, and the jobholder’s understanding of the results of work activities? To practice writing, develop a written summary of your response.

Building Teamwork 5. The competitive pressures of today’s business climate (such as stronger global competition, advancing technology, greater demands from consumers) have forced many organizations to reconsider how they might operate more effectively and more efficiently. Form a team with four or five fellow students. As a group, identify and research at least three organizations that have responded to such pressures by reassessing and adjusting their organizational system. Have their efforts been effective?

6. Your boss is a terrible delegator. She rarely delegates tasks, preferring to retain the authority for the efforts of your entire work unit rather than take a risk by assigning the task to a member of the group. Even when she does delegate a meaningful task, she rarely gives the authority necessary to complete the task successfully. Form a team of four to five fellow students and discuss ways to encourage your boss to delegate more.

THINKING CRITICALLY: DEBATE THE ISSUE No Organizational Chart? Review the situation at Semco, Inc., as described in the “At the Forefront” box. The owner, Ricardo Semler, built a company that appears to not have the characteristics that most organizations have, such as an organizational chart, a chain of command, and formal job assignments. Form teams of four to five students. Half the teams should prepare to argue that it is impossible to manage

a company without the formal characteristics of an organization. The other half of the teams should prepare to argue that it is possible to manage well without the formal characteristics. Both groups of teams certainly must provide support and explanation for their arguments. The teams that argue that the formal characteristics are not needed must explain why Semco’s approach works so well. Your instructor will select two teams to present their arguments to the class in a debate format.

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EXPERIENTIAL EXERCISE 207

7.1

Delegating Authority

Using either your present job or a past job as an example, think about a task that you would like to delegate. Answer the following questions about the task and the existing situation. Based on your answers, decide whether the task should have been delegated.

needs, or is motivated to do work outside the customary job?

6. Measure of cost If the person makes an error, specifically what would be the dollar costs? The human costs?

7. Check of performance Is it possible for me to oversee or measure the employee’s performance on the task without interfering with the work?

1. Precise task Can I specify in writing the precise task I’m going to delegate? In other words, can I specify what it is, how much of it needs to be done, and within what time frame?

2. Benefits Can I specify in writing why delegating this particular task to this particular individual is good for him or her, good for the organization, and good for me?

8. Correction of mistakes If problems arise, can we correct mistakes quickly without great cost or difficulty?

9. Clearance Do I need to check with my boss to delegate this task?

10. Rewards What are the rewards, both formal and informal, that I can give this person if the delegated task is done well? Do I need to tell the person what these rewards are?

3. Measure of results Can I specify in writing how I will know (a) whether the task has been done and (b) how well it has been done?

11. Next tasks If the person masters the task that has been delegated, what are the specific subsequent tasks that should be delegated to him or her?

4. Competence Is the person to whom I intend to delegate this task (a) competent to do it or (b) in need of step-by-step instructions or supervision?

12. Authority and responsibility Can I clearly delegate the authority for this task and hold the person accountable?

5. Motivation Is there any evidence in my past relationship with this person that he or she wants,

ETHICS: TAKE A STAND You have read about A. G. Lafley, CEO of Procter and Gamble (“Meeting the Challenge” box), redesigning offices at his company so that they are now open areas. He himself sits at a desk in an open area. The only enclosed room at company headquarters is the conference room. At Semco, Inc. (“At the Forefront” box), not only do managers not have enclosed offices, but they also do not even have an office. Rather, “hoteling” is used. If managers want to work at a workstation, they must schedule it. Consider what would happen at a company that had open workstations rather than enclosed offices when a

negative performance review had to be conducted or a reprimand of an employee was necessary. For Discussion

1. What are the ethical issues involved in conducting a reprimand in an area that is not private?

2. Should the employee’s right to privacy take precedence over an office design?

3. If you were a manager conducting a reprimand of an employee, what would you do if there were no enclosed spaces available, and why?

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CASE 208

Designing Jobs and Delegating Authority Jim Star is a manager at the local 16-screen movie theater. He supervises five people who are in charge of ticket sales, concessions, projectionists, custodial, and grounds and building maintenance. Each of these managers supervises several other people. Sarah and Jamie are two of the people whom Jim supervises. Sarah tends to be energetic, likes to get her work done quickly, and looks around for something to do, if it can be done ahead of time. She asks questions when she does not understand something. Jamie tends to be less energetic and does not take much initiative. He does a good job, however, when he has specific and clear directions. For Discussion

1. Outline how you would design the job for Sarah and for Jamie. Would you design them the same or differently? Why?

2. How would you delegate authority to each of these two people? Would you delegate the same amount of authority to each?

3. Develop an argument in which you explain how and why Sarah would be more productive (get more done) than Jamie. Explain your conclusion.

4. Now develop an argument in which you explain how and why Jamie would be more productive. Explain your conclusion.

VIDEO CASE

Machado and Silvetti Associates, Inc.—Team Structure Machado and Silvetti Associates is a highly successful Boston-based firm of about 50 people specializing in architectural and urban design. The firm’s projects include the Utah Museum of Fine Arts; buildings for Harvard, Princeton, Rice, Notre Dame, and other universities; a New York City park; a development master plan for the five-block Con Edison site in Manhattan; and the Allston Branch of the Boston Public Library that has been highly praised by community leaders and architectural critics. The firm has received numerous prestigious awards for their designs in the United States and around the world. To date, their largest project is the master plan to renovate and expand the J. Paul Getty Villa and Museum in Malibu, California, over an 11-year time period. Although the firm was incorporated in 1985, the principals (Rodolfo Machado and Jorge Silvetti) have worked together since 1974. At Machado and Silvetti Associates, two vice presidents report to the principals and nine associates report to the vice presidents. Typically, various teams work on six or seven long-term projects simultaneously. The principals provide the teams with their vision of the design projects. Then team members work through the details of their respective design projects. One team has been working on a large dormitory for a Boston university for about 3 years. Sixteen team members worked together during the design phase of this project. Now in the construction phase,

Chapter 7 Organizing for Effectiveness and Efficiency

about six team members concentrate on various aspects of the dormitory. The team’s project manager is an associate, Mike Yusem. This structure is typical of Machado and Silvetti Associates’ projects. The principals created the team structure because they believe that several people can come up with better ideas than a single person. The firm also employs young and inexperienced team members. The team structure allows them to contribute to the team discussions and gain the confidence that comes from experience. At the beginning of the dormitory project, team members got together to talk, sketch, and work through ideas. During the construction phase, they meet weekly or more often if necessary. Although each team member has a role in the project, the roles overlap and require careful coordination among team members. The senior designer’s primary responsibilities on the dormitory project involve the building’s interiors such as walls and doors. These responsibilities overlap with the designers who coordinate the dormitory’s mechanical systems, shafts, and stairs, and the like. It’s critical for these team members to talk. Then they involve the project manager and architect to discuss and resolve potential problems. As project manager, Mike’s main functions are to encourage the team to produce and be the liaison between the client and his bosses who aren’t available every day. He makes sure the client’s needs are met and the project is following the principals’ original design. His secondary goals include keeping a young team focused, motivated, and producing. The project manager serves as coach, liaison, and “camp counselor.” To keep the process moving on such a large project, Mike knows he needs to delegate effectively. However, he finds it difficult to delegate to team members partly because of their youth and inexperience. He also considers them as his friends, and they all have a lot of fun. At times, he has to separate himself so that he can delegate to them, possibly overload them, and trust them to do the tasks well. Sometimes his team members might look at him angrily, but his job is to delegate and make sure that the job gets done. Like a camp counselor, Mike works with his team, empowers them, and keeps everything moving toward completion. Although he delegates tasks, he still shares the work and responsibility. David, the project architect, praises Mike’s skills as project manager because Mike takes the time to ask the right questions of the right people Their design-team structure is based on the experience of their principals who have spent most of their lives as architecture professors in a college environment. The principals created the design-team structure as an experiment. Because it has worked, they’ve kept it. The team-oriented structure has stabilized the small firm and is crucial to their success. At Machado and Silvetti Associates, everyone is involved, contributing, doing his/her own thing, and coordinating with each other. For Discussion

1. Explain how the structure that Machado and Silvetti adopted illustrates the stages associated with the process of organizing.

2. Provide examples of the core job dimensions that appear to be part of Mike’s job as project manager.

3. Explain the vertical and horizontal associations that appear to exist at Machado and Silvetti Associates.

4. Why does Mike appear to have difficulties delegating to team members? Suggest how he could improve his delegation skills.

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Chapter

Organizational Design

CHAPTER OVERVIEW Developing an organizational design that supports the strategic and operational goals of an organization can be a challenging managerial task. This is particularly true today as many organizations struggle to find that delicate balance between organizational responsiveness and operational efficiency. Achieving success depends, to a large degree, on the ability of managers to develop an effective organizational design and one that has the right degree of flexibility for the situation.

We discussed the basic components of organization design in the previous chapter. Here, we discuss “putting all of this together” into an overall organization design that will be effective and efficient. That is, we discuss arranging the jobs and tasks into departments or divisions in an appropriate overall organizational structure, coordinating the departments or divisions so that they work together appropriately, and deciding at what level in the organization major decisions should be made.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. Explain why organizational design is important for organizational success. 2. Identify the three major components of organizational design. 3. Discuss the four types of organizational structure and the strategic conditions under which each might be appropriate. 4. Describe the factors that affect an organization’s need for coordination and explain how integrating mechanisms can be used to coordinate organizational activities. 5. Explain the concept of locus of decision making and when centralized or decentralized decision making might be appropriate.

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Facing The Challenge IBM: Big Blue Has the Blues asically since its beginning, IBM was nearly synonymous with computing in organizations. Its blue mainframe computers, combined with the software that they used, set the standard in the industry, earning IBM the nickname “Big Blue.” The computers and software were so entrenched in businesses that when IBM decided to enter the personalcomputer (PC) market, it instantly helped set the standard for PCs also, preventing Apple Computer Company and others from capturing large shares of the PC market. All of that was before Gateway, Dell, and Intel. Gateway and Dell built very efficient businesses that served primarily as assemblers of components, including important processing chips from Intel, to make PCs with the latest features that customers wanted. Dell continued to do this so well that it pushed aside Gateway and others, including Hewlett-Packard (HP) and Compaq, which became part of HP. At the same time,

Introduction Sam Palmisano faced serious challenges when he became CEO of IBM in 2002. The industry consisting of mainframe computers and, later, personal computers had changed dramatically. Mr. Palmisano decided that it was time to change the overall strategy of the company, and to support that change in strategy, a new organization design was necessary. Both of these major changes are complex and risky. However, once there was a change in strategy, the old organizaLEARNING tion structure would not work anymore. OBJECTIVE Organizational design is an 1 important aspect of management. The way in which an organization is designed will determine how effectively and Explain why efficiently its activities are carried out. organizational Palmisano made bold changes for IBM. design is important Hopefully, its new strategy is in line with for organizational the external environment, and its organisuccess. zational design changes will help achieve the new strategy.

PC makers continued to supply sophisticated servers that, combined with powerful PCs, took over many of the functions that mainframes perform. By the early 2000s, IBM’s revenues and profits were showing the effects of the changes in the computing industry and the competition from PCs. The demand for mainframe computers was decreasing and profits from PCs were gone.

Sources: S. Hamm, “Two Pillars of IBM’s Growth Look Shaky,” BusinessWeek 1 August 2005, 35–36; C. Forelle, “IBM’s Earnings Hint at Recovery,” Wall Street Journal, 19 July 2005, A3, A10; S. Hamm, “Beyond Blue,” BusinessWeek, 18 April 2005, 68–76; P. Hemp, “Leading Change When Business Is Good,” Harvard Business Review (December 2004): 60–71; D. Kirkpatrick, “Sam Palmisano,” Fortune, 9 August 2004, 96; D. Kirkpatrick, “Inside Sam’s $100 Billion Growth Machine,” Fortune, 14 June 2004, 80–90; D. Kirkpatrick and S. Palmisano, “IBM Has a Vision Too,” Fortune, 25 November 2002, 158–162.

Organizational Design Organizational design is a plan for arranging and coordinating the activities of an organization for the purpose of fulfilling its mission and achieving its goals. More specifically, design defines (1) the configuration of organizational members, (2) the types of mechanisms used to integrate and coordinate the flow of information, resources, and tasks between organizational members, and (3) the locus of decision making—the level of the organizational hierarchy at which most decision making occurs. The ultimate success of an organization depends, at least in part, on the ability of its managers to develop an organizational design that supports its strategic and operational goals. Design provides a mechanism for coping with the complexity that results from managing multiple tasks, functions, products, markets, or technologies. Although organizational design issues are important to all organizations, the more complex an organization’s operations, the more sophisticated its design must be. For example, a small organization that produces a single product

Chapter 8 Organizational Design

At the Forefront Meg Whitman: Running Tomorrow’s Company ome say that Meg Whitman, CEO of eBay, is running the type of company that will be more common in the future, a company with minimum actual employees and maximum profitability. In 2005 eBay had over 125 million registered users. They do all of the selecting of products, pricing, buying, selling, and shipping. None of them is an employee. Over 430,000 people earn most or all of their income selling products on eBay. If eBay employeed these 430,000, it would be the second largest employer on Fortune’s 500 list. Only Wal-Mart would have more employees. However, none of these peo-

ple is an employee of eBay. Yet eBay has grown faster in its first 8 years, measured by revenues, than any other company and has been very profitable. How do you manage 125 million people who are not employees? Whitman does it very well. She talks to buyers and sellers at eBay’s annual conference. She listens in on calls with buyers and sellers. She has established strong credibility not only with eBay users but also with employees and investors. When she says that she is going to do something, she does it. Whitman has been very successful in managing a profitable,

with a small workforce will likely find it easier to organize and coordinate its organizational members than will a multinational organization with multiple product lines, operating facilities spread across the globe, and a highly diverse workforce. Furthermore, growth-oriented organizations will find that effective design is a key to managing the complexity that results from developing new products, entering new geographic markets, or pursuing new customer groups. In sum, all organizations—small, large, and growing— must maintain an organizational design that is appropriate for the level of complexity they face. No universal design is appropriate for all organizations. Organizational design must be consistent with a fairly broad range of variables that are largely a function of the organization’s strategy, size, level of development, product diversity, geographic coverage, customer base, and information-processing needs.1 Consequently, just as strategy varies among organizations, so will organizational design. The 1990s and early 2000s have been characterized by a need for corporate redesign as organizations struggled to find an alignment between their strategy and structure. The highly volatile and competitive

global company consisting mostly of people and other businesses, most of whom are not employees. She has done it so well that Fortune consistently selects her to be on its “The 50 Most Powerful Women in Business” list, being number 1 on the list in 2004. Similarly, she repeatedly appears on BusinessWeek’s “The Best Managers” list.

Sources: “eBay: Back on Track,” BusinessWeek, 1 August 2005, 40; “The Best Managers: Repeat Performers,” BusinessWeek, 10 January 2005, 68; P. Sellers, “50 Most Powerful Women: eBay’s Secret,” Fortune, 18 October 2004, 160–178.

business environment forced many companies to reconsider their strategic focus and, consequently, the way in which their organizations were designed.2 This has also been true for nonprofit organizations.3 Pressures for efficiency led some companies into reengineering efforts. Yet efficiency alone was not enough. Simultaneously, competitive pressures to have the highest-quality products and services forced companies to look at designs that fostered employee creativity and commitment.4 Still other competitive pressures made it necessary for some organizations to change their entire focus. Companies such as Motorola, General Electric, Proctor and Gamble, and Semco have responded to these challenges effectively, reformulating their strategies in light of the competitive challenges they face and redesigning their organi- KEY TERMS zations to support those Organizational design strategies. IBM (“Meeting the The way in which the activiChallenge”) is a good examties of an organization are ple of an organization that arranged and coordinated so changed its organizational that its mission can be structure to be in line with its achieved. change in focus.5

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Components of Organizational Design

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As noted earlier and illustrated in Figure 8.1, an organization’s overall design is defined by three primary components: (1) organizational structure, (2) integrating mechanisms, and (3) locus of decision making. As a sysLEARNING tem, these components enable the memOBJECTIVE bers of the organization to fulfill their mission and work toward the achievement of their goals. Each component will vary with the overall strategy of the Identify the three organization.

major components of organizational design.

ORGANIZATIONAL STRUCTURE

As discussed in Chapter 7, organizational structure refers to the primary reporting LEARNING relationships that exist within an organizaOBJECTIVE tion. The chain of command and hierarchy of responsibility, authority, and accountability are established through organizational structure. These relationships are Discuss the four often illustrated in an organizational chart. types of The structuring process involves creatorganizational ing departments by grouping tasks on the structure and the basis of some common characteristic such strategic conditions as function, product, or geographic market. under which each If, for example, work units are created by might be grouping all production tasks together, all appropriate. marketing tasks together, and all finance tasks together, then the units are organized by function. In contrast, if work units are formed by KEY TERMS grouping together all tasks related to serving a specific Organizational structure region of the U.S. market A phrase referring to the (such as Northeast, Southeast, primary reporting Central, or West), then the gerelationships that exist ographic market served is the within an organization. basis for departmentalization. Functional structure An organization’s strategy A structure in which tasks and has significant implications jobs are grouped according to for its structure.6 For example, the function they perform an organization with signifiwithin the organization. cant product diversity will

likely find a structure departmentalized by product to be most suitable for managing its broad range of products. If, in contrast, a firm has a relatively narrow product line but serves many geographic markets that are quite different from each other, it might find a geographically based structure to be most appropriate. In general, four types of organizational struc3 ture are predominant in organizations today. Three of these—the functional, divisional, and matrix structures—are traditional organizational forms that have been used by U.S. corporations for decades. The fourth, the network structure, has emerged more recently as an approach to meeting the challenges of today’s business environment. In the next several sections, we describe each structural alternative, suggest some strategic conditions for which each might be appropriate, and outline some of the major advantages and disadvantages associated with each structure.

Functional Structure: Specialization and Efficiency The functional structure groups organizational members according to the particular function that they perform within the organization and the set of resources that they draw on to perform their tasks. It is based on discipline-specific specialization. Therefore, the departments have names such as Marketing, Production, Finance, Human Resources, and Information Technology (Figure 8.2). Because functional structures are based on specialization, they can help focus on a particular job or task in order to perform effectively and efficiently. Because of this, the functional structure is the most commonly used organizational form. Table 8.1 outlines the major potential advantages and disadvantages associated with the functional structure. On the positive side, functional structures support task specialization and may help employees develop better job-related skills. In addition, work groups may be more cohesive because employees work with individuals with similar skills and interests and the group’s leader has a common functional orientation with the group members. Finally, this structure supports tight, centralized control and tends to contribute to operational efficiency. But this structure has potential disadvantages as well. Most of these disadvantages stem from the problems associated with coordinating diverse work groups. Work groups organized along functional lines can often be insulated from the activities of other departments and may not truly understand the priorities and initiatives of other work groups. Another potential disadvantage of the functional structure is that it leads to the development of specialized managers rather than generalists who may be more appropriate for top-level management positions.

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Figure 8.1

Dimensions of Organizational Design 215

Organizational Design

Organizational Structure

Integrating Mechanisms

Locus of Decision Making

Figure 8.2

Functional Structure

CEO

Marketing

Table 8.1

Production

Sales

Human Resources

Finance

Potential Advantages and Disadvantages of Organizational Structures

Types of Structure Potential Advantages

Potential Disadvantages

Functional

Facilitates specialization. Cohesive work groups. Operational efficiency.

Focuses on departmental rather than organizational issues. Difficult to develop generalists needed for top-level management. Only top-level management held accountable for profitability.

Divisional

Focuses on specific product, geographic markets, or customers. Adapts to specific growth strategies.

Duplicates resources across divisions. Coordination among divisions difficult.

Matrix

Focuses on simultaneous goals. Develops managerial skills in several dimensions.

Complex and difficulties with implementation. “Two bosses.” Difficult to plan and coordinate.

Network

Maximizes effectiveness of core unit. Fragmentation; difficult to control systems. Can do more with fewer resources. Success depends on success in locating resources. Flexibility. Difficult to develop employee loyalty.

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Divisional Structures: Providing Focus A second common form of organizational structure is normally referred to as the divisional structure. Although it incorporates three different types of departmentalization—product, geographic, and customer—it is seen primarily at top levels or divisional levels in an organization. For convenience, it is called divisional structure. A divisional structure is designed so that members of the organization are grouped on the basis of common products or services, geographic markets, or customers served. The primary advantage of a divisional structure is that it focuses the company’s attention on the aspects of its operations that are of greatest importance from a strategic perspective. For example, if the groups of customers that an organization serves are quite different from each other and if each group is large enough to allow reasonable efficiency, then an organizational structure focused on each customer group can be very effective. A primary potential disadvantage of a divisional-type structure is that resources and efforts may be duplicated across divisions; each division may have its own production department, marketing department, and so on (see Table 8.1). However, if each division is large enough to allow reasonable efficiency, then this potential disadvantage can be reduced.

KEY TERMS Divisional structure A structure in which members of the organization are grouped on the basis of common products, geographic markets, or customers served. Product divisional structure A structure in which the activities of the organization are grouped according to specific products or product lines. Geographic divisional structure A structure in which the activities of the organization are grouped according to the geographic markets served.

Product Divisions In a product divisional structure, product managers assume responsibility for the production and distribution of a specific product or product line to all the geographic and customer markets served by the organization. These managers coordinate all functional tasks (finance, marketing, production, and so on) related to their product line. Product divisional structures can be based on services as well as products. Product divisional structures are considered most appropriate for organizations with relatively diverse product lines that require specialized efforts to achieve high product

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Finally, profit centers usually do not exist in a functionally structured organization. Therefore, only top-level corporate executives can be held clearly accountable for bottom-line profitability.

An organization that has significant product diversity will likely use a management structure that is departmentalized by product.

quality, however that is defined by the markets. When products are targeted to different and distinct groups, require varied technologies for production, or are delivered through diverse distribution systems, a product-based structure may be suitable. For example, consider IBM’s move to create operating divisions based on the firm’s distinct product lines. Recognizing the importance of a product orientation to IBM’s overall success, top-level management believed that a product divisional structure would provide the product focus necessary to regain the competitive edge.7 Procter and Gamble is one of the bestknown and largest companies that uses product structure.8 Look at Figure 8.3 to see Clariant’s use of a product structure. Actually, this figure shows the use of a product structure for the main line divisions and a functionalbased structure for the staff departments. Many large organizations not only have diverse product lines but also operate several diverse and distinct businesses. In such cases, the product divisional structure actually takes the form of an SBU (strategic business unit) divisional structure in which each business unit is maintained as a separate and autonomous operating division. PepsiCo provides an excellent example of a company organized around its primary businesses—Pepsi Cola Company (soft drinks), Frito-Lay Company (snack foods), and others.9 Geographic Divisions The geographic divisional structure groups the activities of the organization along geographic lines. Each geographic division is responsible for distributing products or services within a specific

Chapter 8 Organizational Design

Figure 8.3

Product Divisional Structure: Clariant 217 Chief Executive Officer

Human Resources

Finance/CFO

Group Communications

Services*

Group Legal

Technology**

Corporate Development

Textile, Leather & Paper Chemicals

Pigments & Additives

Functional Chemicals

Life Science Chemicals

Masterbatches

Textile

Coating Industries

Detergents

Pharmaceutical Fine Chemicals

Europe North

Paper

Plastic Industries

Performance Chemicals

Specialty Fine Chemicals

Europe West

Leather

Printing Industries

Process Chemicals

Specialized Industries

*Services Production Services, Supply Chain Management, Sourcing, ESHA, IT, International Coordination **Technology Intellectual Property, Innovation & Knowledge Management, New Business Development Source: http://www.clariant.com. August 19, 2005.

Europe South Special Markets

Asia Pacific

Latin America

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Figure 8.4 218

Text not available due to copyright restrictions Eastern Canada Division

geographic region. Canadian National Railway Company, for example, organizes its operations into five geographic divisions that cover the regions it serves. The geographic divisional structure, which was precipitated by the merger of Canadian National with Illinois Central, focuses managers on serving the needs of the particular geographic market they serve.10 Figure 8.4 illustrates the structure of Canadian National Railway Company. A geographic divisional structure is appropriate for organizations of varying strategic conditions. In general, this structure is most appropriate for organizations with limited product lines that either have wide geographic coverage or desire to grow through geographic expansion. This structure permits organizations to concentrate their efforts and allocate their resources toward penetrating multiple regional markets with products and services that are, when necessary, adapted to meet local needs and preferences.11 Organizations pursuing international strategies often choose a geographically based structure.12 Entering those markets effectively often requires a strong understanding of local market conditions and customer preferences. A geographic divisional structure provides a mechanism for learning more about local markets and making the necessary adaptations to the company’s products and services. Because Kellogg’s, a major ready-to-eat cereal company, markets its products in more than 160 countries around the world, it uses a geKEY TERMS ographical structure with six main geographic regions—the United States, Europe, Latin Customer divisional America, Canada, Australia, structure and Asia.13 Kellogg enjoys a An organizational structure strong international presence focused on customer groups.

that justifies separate divisions based on geographic area, but organizations that are just venturing into the international marketplace often begin by adding an international division to support their international sales efforts. For example, Houghton Mifflin, a publisher of educational materials, added an international division in an effort to stimulate sales of its products overseas.14 Customer Divisions A customer divisional structure groups tasks in a way that will help meet the demands of different customer groups. Each customerbased unit focuses on meeting the needs of a specific group of the organization’s customers. This type of structure is appropriate when groups of customers want different things and when each group is large enough so that a department or division focused on them can be efficient as well as effective. With the intense competitive environment in most industries and the emphasis on meeting the needs of the customer first and foremost, this structure is highly appropriate for organizations that must adapt their products and services for different customer groups. It may also be suitable for organizations that wish to grow by targeting new and distinct customer groups. Resources can be allocated to support the customer groups with the greatest growth potential. Cisco Systems moved from a product divisional structure to a structure that is focused on its primary customer segments. General Electric also switched to a structure in mid-2005 that is focused on what it calls industry groups.15 Amazon.com added a division that is focused on helping other retailers to sell on the Internet.16 Although Microsoft is organized into five semiautonomous product divisions, those divisions focus on very different customer segments.17

Chapter 8 Organizational Design

Figure 8.5

Matrix Structure 219 Chief Executive Officer

Production Manager

Marketing Manager

Finance Manager

Human Resources Manager

Project A Manager

Project B Manager

Project C Manager

Matrix Structure: A Dual Focus The organizational structures discussed so far have grouped activities along a specific, single dimension of the organization’s operations (function, product, geographic region, or customer base). In some cases, there is a need to focus on two or more dimensions at the same time. For example, assume that a company has a functional structure but it also needs to be sure that each product or product group meets certain requirements. Similarly, an organization might have a product-based structure, but it also must tune into requirements of the different geographic markets. The matrix structure was developed to deal with these situations.18 It defines work groups on the basis of two dimensions simultaneously (such as product/function, product/geographic region, and so on). A matrix structure begins with a basic form of structure, usually functional, and then has a second type of structure superimposed upon it. A common form of matrix structure is a functional structure with a product, geographic, or customer structure laid over. The managers of the superimposed structure normally are called project managers, especially if the matrix structure is intended to be temporary. When the matrix is intended to

be permanent, the project managers may be product managers or geographical managers (Figure 8.5). The potential advantage of a matrix structure is to provide a way to focus on two important dimensions at the same time. It can also provide flexibility when the second focus is needed for only a short time. For example, if a project is to last for a certain time only, the organization does not have to build an organizational unit for the project. Instead, a project manager can be designated, and that manager can “borrow” or coordinate resources across the original organization in order to accomplish the project. When the project is finished, the resources can be used by their original organizational unit. The matrix structure also has a number of disadvantages (see Table 8.1). Most notable is the complexity inherent in a dual chain of command. Managing within this structure requires extraordinary planning and coordination between KEY TERMS work groups.19 Matrix structure A number of companies A technique that arranges have found the matrix structure work groups on two to be effective. For example, dimensions simultaneously. Texas Instruments credited a

Part 3 Organizing Challenges in the 21st Century

Figure 8.6

Network Structure (Building Contractor)

220 ELECTRICAL COMPANY/ ELECTRICIAN

CARPENTRY COMPANY/ CARPENTER

GENERAL CONTRACTOR PLUMBING COMPANY/ PLUMBER

MASONRY COMPANY/ BRICKLAYER

EXCAVATING COMPANY

functional/product matrix with its ability to bring products to market more quickly.20 Unisys adopted a matrix structure in an attempt to bring a stronger customer focus to the company. However, before Digital Equipment Company (DEC) was acquired by other companies, it reported a very different experience with the functional/product matrix structure. DEC found that the matrix structure led to “people spending endless hours in meetings trying to build consensus between the two factions in the matrix: the functional bosses and the team bosses.”21 The delays associated with the structure left DEC behind in the fastpaced technology race in the computer industry. DEC’s experience provides an important reminder that although the matrix structure can be effective, the benefits of the design will come only with successful implementation.

Network Structures: Flexibility For decades, organizations aspired to be large. Growth was considered to be synonymous with success, and the “bigger-is-better” syndrome govthe strategic decision makKEY TERMS erned ing of most companies. But today, an alternative view has Network structure emerged. Organizations are findAn organization that has a ing that being lean and flexible is core coordinating with often preferable to being big. other organizations or This may be particularly true for organizational units.

companies that operate within rapidly changing industries or face intense global competition.22 In response to these changes, a number of successful organizations have moved toward a form of organizational structure called the network structure. The network structure is built around alliances between organizations within the network. Each member of the network performs some portion of the activities necessary to deliver the products and services of the network as a whole.23 At the core of each network is an organization that performs some key functions for the network and coordinates the activities of other network members. For example, the central organization may coordinate the production, marketing, financing, and distribution activities necessary to market a particular product without owning a single manufacturing plant, creating a single line of advertising copy, or even taking possession of the product. The central organization simply coordinates the activities of others so that the product reaches the ultimate consumer in an effective and efficient way.24 Essentially, a network structure results in outsourcing various parts or operations of the organization. This is becoming increasingly popular, especially because many managers and other strategy experts suggest that a company should focus on its distinctive competencies (Chapter 4) and outsource the other things.25 Figure 8.6 illustrates the network organizational structure in a very simple form.

Chapter 8 Organizational Design

Leaders in Action 221

Will Your Next TV Be a Dell? hen Michael Dell was 16, he bought a BMW with money earned from his paper route. He occasionally visited the courthouse to get names of new home buyers and newly married couples. Then he solicited them as customers for his paper route. By the mid-1980s, he understood that personal computers (PCs) were all made the same way, simply assembled from components that were readily available. So he started assembling PCs and declared that he was competing against IBM. As the saying goes, the rest is history. Dell has built one of the most effective and efficient organization

structures that ever existed. Even though Dell now produces servers, printers, and related products in addition to PCs, they all are produced in essentially the same way, assembled from readily available components. That is why Dell establishes alliances and partnerships with major component makers, such as Intel and Microsoft, and shippers such as FedEx and UPS. Now Dell is planning to make televisions and is becoming a major competitor in the printer business, which was once dominated by Hewlett-Packard. And what about competing against IBM? IBM sold its PC division to a Chinese company,

Ikea, an international Scandinavian-style furniture company, is an example of a company that uses elements of a network structure. The company develops its own strategy and mission and controls all aspects of its operations. It controls design of the furniture, design of manufacturing techniques that result in quality furniture while keeping costs down, and all aspects of marketing. However, Ikea does not manufacture any of its furniture and does not actually perform some other operations. It outsources those operations.26 Similarly, Michael Dell, founder and CEO of Dell Computers, has created an innovative network structure that is considered by many to be the standard in not only the PC computer industry but also in many other industries. Dell does not make any of the parts of the PC. Rather, Dell has very strong alliances with suppliers of various components and with companies that deliver the PCs to the customers. Dell assembles the PCs and coordinates everything related to design, marketing, assembly-production, and the like.27 (See the “Leaders in Action” box.) On the other hand, IDEO is an organization to which other companies outsource. IDEO is a design company that helps Intel, Nestle, Lufthansa, Samsung, and others with design of products and related marketing tools.28 As discussed in the “Meeting the Challenge” box,

and Michael Dell is chairman of the “most admired company” in 2005.

Sources: A. Serwer, “The Education of Michael Dell,” Fortune, 7 March 2005, 72–82; A. Park, “Thinking Out of the Box,” Newsweek, 22 November 2004, 22; J. Baattelle and M. Dell, “Features/Titans of Tech,” Business 2.0 5, no. 4 (May 2004): 99; G. McWilliams, “Dells’ Founder to Step Down as CEO; President Rollins to Take That Post, while Mr. Dell Will Remain as Chairman,” Wall Street Journal, 5 March 2004, A10; G. McWilliams and P. Tam, “Dell Price Cuts Put a Squeeze on Rival H-P,” Wall Street Journal, 21 August 2003, B1; S. Pritchard, “Inside Dell’s Lean Machine,” Works Management 55, no. 12 (December 2002): 14–16.

IBM is moving to become a company that also provides services for many others. As globalization continues, companies that operate in many countries are using various forms of network structure. This allows the companies to work with partners in a local country.29 The partner in that country, if chosen carefully, can help with adapting to the local conditions much more successfully and quickly. Three primary types of network structures are found in organizations today—internal, stable, and dynamic networks.30 These structures vary in the extent to which the central organization relies on outsourcing. An internal network exists in organizations that choose to avoid outsourcing but wish to develop internal entrepreneurial ventures that are driven by market forces and thus are competitive with alternative sources of supply. These internal units operate independently and negotiate with the central unit like any outside vendor. Each KEY TERMS unit functions as a profit center that specializes in a particular Internal network aspect of the organization’s A network structure that product delivery system. relies on internally developed The component business units to provide services to a of General Motors (GM) is an core organizational unit.

Part 3 Organizing Challenges in the 21st Century

example of an internal network structure. GM’s component business maintains independent divisions that specialize in the production of some aspect of the 222 automotive system. These divisions are encouraged to conduct business on the open market, yet they cooperate with the central unit of GM’s component business whenever appropriate. The net result is greater effectiveness for the corporation as a whole.31 Organizations that maintain a stable network rely to some degree on outsourcing to add flexibility to their product delivery system. The central organization contracts with outside vendors to provide certain products and services that are LEARNING essential to its product delivery system. OBJECTIVE Although these vendors are independent of the central organization, they typically are highly committed to the core firm. BMW is an example of a company Describe the that has adopted a stable network strucfactors that affect ture. Somewhere between 55 and 75% of an organization’s BMW’s production comes from outsourcneed for ing. Although BMW does not own its vencoordination and dor firms outright, it does maintain stable explain how relationships with them and may even integrating make a financial investment in these mechanisms can organizations where appropriate.32 Dell be used to has a longstanding alliance with Intel for coordinate processors.33 organizational A dynamic network differs from inactivities. ternal and stable networks in that organizations with this structure make extensive use of outsourcing to support their operations. Partnerships with vendors are less frequent, and less KEY TERMS emphasis is placed on finding organizations to service the Stable network central organization only. A network structure that Typically, the central organicontinually uses a set of zation focuses on some core alliance partners. skill and contracts for most Dynamic network other functions. For example, A network structure that Ikea focuses on its retailing makes extensive use of strength, and although it cooutsourcing through alliances ordinates everything else, it with outside organizations. also outsources many of the other operations.34 Reebok Coordinating focuses on its design strengths Keeping organization units and oursources the rest.35 that interact with or influence A number of potential adeach other in contact with vantages and disadvantages are each to share information and associated with the network other things in a way that structure (see Table 8.1). The enhances accomplishment effectiveness and efficiency of of tasks.

the core unit can be maximized by the use of a network structure, particularly if the network is characterized by enduring, mutually beneficial business relationships.36 The organization can do more with less because it is using others’ resources. Flexibility is an inherent benefit of this organizational form because the core unit can change vendors quickly should product and/or component changes be necessary. Many international firms have found that the network structure provides them with the speed and flexibility necessary to compete effectively in highly competitive global markets. In fact, some multinationals have abandoned the matrix structure in favor of the more adaptable network form.37 The primary potential disadvantage of a network structure is that, because operations are fragmented, it may be difficult to develop a control system that effectively monitors all aspects of the product delivery system.38 However, advanced information technology can be utilized to better monitor the activities of networked companies. In fact, specialized systems have been developed that address the unique needs of the network organization. Companies such as Dell, Benetton, and Nike are utilizing such systems to effectively coordinate the activities of their diverse networks. As business-to-business e-commerce solutions continue to evolve, more organizations may find the network structure feasible and appealing.39 We have examined the four basic types of structures that are commonly used in organizations. These structures define how the employees of the organization are grouped and specify reporting relationships within the organizational hierarchy. The “Now Apply It” box gives you an opportunity to assess the organizational structure of an organization with which you are familiar. Take some time to work through the exercise before moving on to learn about the second component of organizational design—integrating mechanisms.

MANAGING COMPLEXITY THROUGH INTEGRATION Integrating the activities of an organization involves controlling and coordinating the flow of information, resources, and tasks among organizational members and work groups. Whereas structure serves to segregate organizational members into different work units, the goal of the integration component of organizational design is to coordinate the work of these distinct groups. An organization’s many and diverse work groups are linked together through integrating mechanisms. As we will soon learn, integrating mechanisms include such things as management information systems, liaison personnel, and cross-functional work teams.

Chapter 8 Organizational Design

Now Apply It 223

Analyzing Organizational Structure Identify a student organization in which you are involved. Draw an organizational chart showing how the organization is departmentalized. Now answer the following questions about its structure: 1. Is the structure consistent with the strategy of the organization?

Do the work units, or student officers, have titles that represent primary functions, services, or customers? Would another organizational structure make more sense than the existing one? If so, why?

The complexity of an organization’s operations will affect its need for integration. For example, a purely domestic firm with a narrow product line and a single manufacturing facility will find the integration of its work groups to be more manageable than will a multinational corporation with broad product lines and manufacturing facilities spread across the globe. Normally, the more complex an organization’s operations, the more sophisticated its coordinating mechanisms must be. In general, an organization’s integration needs will vary with the level of interdependence that exists among work groups.40 In organizations where work groups must closely coordinate their activities to achieve organizational goals, integration needs will be high. In contrast, where work groups exist relatively independently and without significant interaction, integration needs are low. Before we discuss specific integrating mechanisms that might be used to coordinate the activities of an organization, let’s examine the various levels of interdependence that may exist in an organization and how that interdependence affects its integration needs.

Interdependence and Integration Needs Central to the discussion of integration is the concept of interdependence. Interdependence refers to the degree to which work groups are interrelated and the extent to which they depend on one another to complete their work. The level of interdependence between work groups will affect the need for integrating mechanisms.41 Figure 8.7 illustrates the three primary levels of work group interdependence, and the following discussion describes each in greater detail. Pooled Interdependence Pooled interdependence occurs when organizational units have a common source of resources but have no interrelationship with

Where is the locus of decision making in this organization? Does it seem appropriate? Explain why or why not.

one another as a particular task is performed. Consider, for example, a local bank with branch offices spread around the city. Although all branches must coordinate their efforts with the central office, they have limited interaction with one another. They have little need to cooperate and coordinate with one another to achieve their goals. Managers work independently to achieve the goals of their own work groups, which in turn contribute to the overall performance of the organization. Sequential Interdependence Sequential interdependence exists when work groups must coordinate the flow of information, resources, or tasks from one unit KEY TERMS to another. Sequential interdependence is associated with a Interdependence typical manufacturing assemThe degree to which work bly line. The output of one groups are interrelated. unit becomes the input for anPooled interdependence other unit. Organizations with When organizational units sequentially interdependent have a common resource but units have greater coordinano interrelationship with one tion needs than organizations another. with units that have pooled Sequential interdependence interdependence. When organizational units must coordinate the flow of Reciprocal Interdepeninformation, resources, and dence Reciprocal interdetasks from one unit to pendence represents the greatanother. est level of interrelatedness between work groups, in that work is passed back and forth between work units. The final product requires the input of a number of different departments at varying times

Reciprocal interdependence Occurs when information, resources, and tasks must be passed back and forth between work groups.

Part 3 Organizing Challenges in the 21st Century

Levels of Work Group Interdependence

Figure 8.7 224

Sequential

Pooled A

A F

B Reciprocal

Headquarters E

C D

Integrating mechanism A method for managing the flow of information, resources, and tasks within the organization.

Integrating Mechanisms At the foundation of an organization’s ability to coordinate the activities of its subunits is its information-processing

capacity. Effective coordination depends on the flow of information between the individual units of the organization so that work can be scheduled, resources shared and transferred, and conflicting objectives resolved. Toward this end, organizations develop integrating mechanisms that enhance their information-processing capacity and support their need for coordination. Integrating mechanisms are methods for managing the flow of information, resources, and tasks throughout the organization.

during the production process. Consider a university system in which students’ registration materials must be shuffled from one administrative unit to another and back. These work groups are interrelated, and the effective functioning of the system requires a high level of integration among the groups. The higher the level of interdependence of an organization’s work groups, the greater its needs for coordination. The sophistication of an integrating system should be in alignment with its specific coordination needs. For example, an organization with pooled interdependence between its work groups may be able to function effectively with a few relatively simple integrating mechanisms. In contrast, an organization with reciprocal interdependence between work groups will require more sophisticated integrating mechanisms. Integrating mechanisms are not without costs. As we will discuss, many of the tools for coordinating the activities of the organization have human or financial costs that are tangible and measurable. Therefore, organizations must carefully evaluate their coordination needs so that they can develop integrating mechanisms that are cost effective and in KEY TERMS line with those needs.

A university student services office may control and coordinate the flow of student information for task purposes such as course registration, parking permits, and grading records.

Chapter 8 Organizational Design

Many different mechanisms can be used to process information and coordinate the activities of interdependent work units. Some of these mechanisms are characteristic of general management systems. Others are developed specifically to increase the coordination potential of the organization. Still others are designed to reduce the organization’s need for coordination. Figure 8.8 illustrates the three major categories of integrating mechanisms, each of which is discussed next.42 General Management Systems Some coordination of work units may be achieved through the development of general management systems such as the managerial hierarchy, basic rules and procedures, and plans and goals. Such mechanisms form the foundation of an organization’s integration system. As we have discussed, an organization’s managerial hierarchy is established by its organizational structure. Recall that organizational structure defines work groups on the basis of some type of familiarity (that is, function, product, geographic, market, or customer). By grouping organizational members in this fashion, coordination within the groups is enhanced. Consider the structures of Procter and Gamble and PepsiCo for example. These companies have designed their structures in such a way that separate business units focus on different products or serve different customer segments. Thus, they have grouped employees based on their need to coordinate with one another.43 Similarly, organizations develop plans, goals, policies, rules, and procedures that govern the behavior of their members. All of these serve as a means of integrating the operations of an organization. Plans that require implementation by multiple work groups provide

Figure 8.8

a foundation for action by those units. A well-developed business plan details the activities of specific departments within an organization, thereby providing guidance about how those activities are to be coordinated. Similarly, certain behaviors are implied by specific achievement-based goals. The plans that result from such programs provide a foundation for integrating and coordinating the activities of diverse groups toward common quality-oriented goals. Organizations that make extensive use of rules and procedures often are thought to be bureaucratic, highly formalized, and closely governed. In contrast, organizations that use fewer rules and procedures are considered to be more flexible, less formal, and participatory in nature. Yet too few rules can result in significant problems, particularly when coordination between organizational members is required. Most universities make extensive use of rules and procedures to coordinate the activities of their colleges and departments. Student records must be processed according to specific guidelines; overrides into classes must be handled systematically; and parking tickets and overdue library books must be dealt with before the registration process can be completed. These rules and procedures are mechanisms ensuring that the activities of the various units of the university are well coordinated. Increasing Coordination Potential Although general management systems can be very good coordination tools, they may not provide all the coordination that is needed. Information systems and lateral relationships are two of the most common mechanisms for increasing coordination potential both vertically and horizontally within the organization.

Integrating Mechanisms

General Management Systems

Methods of Increasing Coordination Potential

Integrating Mechanisms

Methods of Reducing the Need for Coordination

Source: Adapted by permission, J. R. Galbraith, “Organizational Design: An Information Processing View,” Interfaces 4 (May 1974): 3. Copyright 1974, The Institute of Management Sciences and the Operations Research Society of America (currently INFORMS), 2 Charles Street, Suite 300, Providence, RI 02904 USA.

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Information systems facilitate the flow of information up and down the traditional chain of command and across organizational units. The computerized transfer of 226 important information and data provides a powerful tool for coordinating diverse departments or operating units. Additionally, information technology can provide control mechanisms ensuring that coordination problems are identified and resolved in a timely fashion. In fact, some have argued that information technology has advanced organizational coordination to the same magnitude that mass-production technologies advanced manufacturing in the Industrial Revolution.44 Many multinational corporations have developed sophisticated management information systems to support their global operations. With the advent of more sophisticated and affordable computer technology, decisionmaking data can be transmitted almost simultaneously from division to division around the globe. Computer and telecommunication networks provide the infrastructure for coordinating operations on a worldwide scale. E-mail, teleconferencing, and high-speed data systems are a few of the mechanisms used by multinational organizations. WalMart is known for having one of the best, if not the best, information system in the world.45 The second important method for increasing coordination potential is to establish lateral relationships. Such relationships exist across horizontal work units and serve as mechanisms for exchanging decision making information. In general, lateral relationships can be thought of as boundary-spanning roles. The primary purpose of the boundary-spanning function is to develop an understanding of the activities of units outside the boundaries of one’s own work group. Such knowledge helps employees and work groups understand how their actions and performance affect others within the organization as well as the organization as a whole. The effectiveness of the networks that exist between people within different units of the organization will often determine the success of the individual units and the organization as a whole.46 When two or more work units have a recurring need to communicate with each other, it may be beneficial to establish a liaison position to KEY TERMS support their communication needs. People who occupy such positions retain their asBoundary-spanning role sociation with their primary A lateral relationship that unit, but they also assume helps integrate and responsibility for interacting coordinate the activities of with other work groups. For the organization (liaisons, example, the marketing decommittees, task forces, partment of an organization integrating positions, and might identify an individual cross-functional work teams).

to act as a formal liaison with the company’s engineering department. Although this individual remains in his marketing role, he or she also serves as the primary contact point for the interaction between the marketing department and the engineering department. When the effective management of multiple interdependent units is critical to the success of the organization, it may be appropriate to establish a committee (a permanent group) or a task force (a temporary group) to facilitate communication between the groups. The committee or task force would be made up of representatives from each of the work groups involved. As was the case with the formal liaison position, the committee or task force assignment is only a part of each representative’s job; the representatives’ primary job responsibilities remain with the units they represent. Multinational corporations, for example, often use committees composed of corporate executives and representatives from both domestic and foreign subsidiaries. These committees assume responsibility for both assimilating and disseminating critical information needed by the operating units of the organizations.47 When an organization has very high integration needs, it may be appropriate to establish cross-functional work teams. Cross-functional work teams represent a more aggressive approach to integration in that members from various functional groups are permanently assigned to a team that is given responsibility for completing a particular set of tasks (see the discussions of selfmanaged teams in Chapter 7). Toyota, for example, uses a cross-functional team approach to support its vehicle development process. These teams enable the company to achieve cross-functional integration while still capturing functional expertise from the team members. The crossfunctional team provides a balanced approach that overcomes many of the disadvantages associated with a pure functional structure (chimney extreme) or a formalized committee structure (committee extreme). Table 8.2 illustrates Toyota’s balanced approach to integration and coordination.48 Today, information technology has enabled the development of a new kind of cross-functional team— the virtual team. A group of technologies including desktop video conferencing, collaborative software, and Internet/Intranet systems is converging to support a revolution in the work environment. This new work environment will be unrestrained by geography, time, and organizational boundaries; it will be a virtual workplace that will permit organizations to achieve unprecedented levels of flexibility and collaboration. Virtual teams may be geographically dispersed coworkers within the same organization, or they may exist across organizations as in a network organizational structure. What virtual teams

Chapter 8 Organizational Design

Table 8.2

How Toyota Avoids Extremes

Chimney Extreme

Toyota Balance

Committee Extreme

Succinct written reports for most communication.

Reliance on meetings to accomplish tasks.

Meetings for intensive problem solving.

Predominantly oral communication.

Direct Supervision Close supervision of engineers by managers.

Technically astute functional supervisors who mentor, train, and develop their engineers.

Little supervision of engineers.

Large barriers between functions.

Strong functions that are evaluated based on overall system performance.

Weak functional expertise.

Project leader as system designer, with limitations on authority.

System design dispersed among team members.

Rotation on intervals that are longer than the typical product cycle, and only to positions that complement the engineers’ expertise.

Rotation at rapid and broad intervals.

Standard milestones—project leader decides timing, functions fill in details.

Lengthy, detailed, rigid development schedules.

Standard forms and procedures that are simple, devised by the people who use them, and updated as needed.

Making up procedures on each project.

Standards that are maintained by the people doing the work and that keep pace with current company capabilities.

No design standards.

Mutual Adjustment Little face-to-face contact.

Predominantly written communication.

Integrative Leadership No system design leader.

Standard Skills No rotation of engineers.

Standard Work Processes New development process with every vehicle. Complex forms and bureaucratic procedures.

Design Standards Obsolete, rigid design standards.

Source: Reprinted by permission of Harvard Business Review. From “Another Look at How Toyota Integrates Product Development,” by D. Sobek II, J. Liker, and A. Ward (July/August 1998). Copyright © 1998 by the Harvard Business School Publishing Corporation, all rights reserved.

have in common is that they are in separate physical locations, yet they are brought together by advanced telecommunications and information technologies to achieve a specific task.49 Many organizations such as Microsoft, Intel, and Xerox are using virtual teams. British Petroleum (BP) has developed a virtual team network that has made it possible to flatten and decentralize its organizational design. By capitalizing on advances in information systems and digital communications, BP virtual team members can share knowledge and information with each other without concern for boundaries created by most organizational structures.50

Although integrating mechanisms designed to increase coordination potential can be quite costly, they may be warranted when strategic effectiveness requires close coordination and cooperation between organizational subunits. Most organizations today acknowledge that facilitating communication, integration, and coordination among work groups is critical to organizational success.51 Reducing the Need for Coordination The third method of integration is to reduce or eliminate the need for coordination between work groups. In essence,

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228

the organization creates “slack resources” that reduce the interdependence of the work groups and, as a result, the need for integrating mechanisms. For example, an organization might establish longer lead times for sequentially interdependent work to be completed or maintain larger inventories of work in progress. Both measures would reduce the need for tight coordination between units. Although this is an effective way to reduce the need for coordination, it is not necessarily the most efficient. Creating slack resources in this way is inconsistent with the need for improved productivity and efficiency. As a result, such a practice may lead to suboptimal organizational performance. Another way that organizations can reduce the need for coordination is to create work units that have only pooled interdependence. By doing so, they minimize the need for integration. One benefit of cross-functional work teams is that work groups are relatively independent, thereby reducing the need for integration between diverse functional units. However, forming cross-functional teams simply to reduce integration needs may not be appropriate if it results in redundant resource utilization. In general, independent units should be formed only when there are other strategic reasons to do so. LEARNING OBJECTIVE

Matching Integrating Mechanisms with Coordination Needs

It is important for an organization to develop an integration system that satisfies its coordination needs while minimizing Explain the concept the financial and managerial resources of locus of decision required to maintain the system. Without making and when providing coordination that is necessary centralized or between work units in an organization, decentralized the organization might not be able to decision making achieve its mission. On the other hand, might be coordination could be “overdone” to the appropriate. point of interfering with the organization’s operations, or it could simply cost more than the KEY TERMS benefits it provides. Like everything else in the organiLocus of decision making zation, this must be managed The level of the organization well. at which decisions are made. Centralized decision making Authority is at the top of the organization. Decentralized decision making Authority is at the lower levels of the organization.

LOCUS OF DECISION MAKING The third component of organizational design involves the locus of

decision making within the organization. Locus of decision making refers to the level in the organization at which the authority resides for making major decisions. If the primary decision-making authority rests with corporate headquarters or the top levels of management of an operating facility, its organizational structure is said to be centralized. An organization that maintains its locus of decision making at lower levels, such as at the department or employee level, is decentralized.52 It is helpful to think of centralized and decentralized decision making as two ends of a continuum. The locus of decision making in most organizations is mixed, with decisions in some areas being relatively centralized and decisions in other areas being relatively decentralized.

Centralized and Decentralized Decision Making Traditionally, centralized decision making has been associated with tight control at the top of the organization or organizational department. That is appropriate in some circ*mstances. However, if the top-level managers do not have all the appropriate information, it can hinder good decision making, and it can take a long time if the request for the decision has to go all the way up and down the chain of command. On the other hand, it is frequently argued that the people who are closest to the situation, usually referring to people at lower levels in the organization, could make better and faster decisions. The argument is that decision making should be decentralized. However, these people must have appropriate information and must be capable of making good decisions. Also, coordination between units may be hindered by decentralized decision making. Furthermore, the growing diversity of the workforce has increased the variability in decision-making styles.53 There are examples of organizations that have used both forms of decision making at different times in their history. Apple Computer, for example, has changed between a decentralized and centralized approach several times over the last three decades, depending on the organizational and competitive pressures at the time.54 As discussed in the “Leaders In Action” box in Chapter 7, Edward Breen, the CEO brought to Tyco International in mid-2002, centralized purchasing from a very decentralized approach earlier and saved considerable amounts of money.55 John Brown, CEO of Stryker Corporation, believes that the locus of decision making should be flexible according to the circ*mstances. He has achieved remarkable success at Stryker, an orthopedic implant and medical equipment company, by both decentralizing decision making with some managers and retaining decision-making authority centrally when it comes to

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other managers. Brown drives decision making down to managers who are performing well and hitting targets. Those who are faltering, however, hear from Brown a lot more often.56 Although it is probably too simplistic, historically, the “popular” belief was that the decision to be centralized or decentralized involved a trade-off between control (characterized by centralized systems) and flexibility and responsiveness (characterized by decentralized systems). Today, however, we are learning how to manage ever-increasing complex situations, and advanced information technology can be used to resolve such trade-offs, allowing organizations to retain reasonable central control while decentralizing the decisions that are most critical to meeting the needs of customers57 and providing instant information to improve the quality of centralized decisions.58 Many factors influence the degree of centralization or decentralization, but there are three main ones. They are the degree of stability in the external environment of the organization, the type of interdependence between work units, and the overall culture of the organization.

The Impact of Environmental Stability The external environment for any organization can be characterized along a continuum ranging from stable to turbulent. In general, stable environments experience relatively little change, or the change is of low impact to the organization. This condition is associated with product life cycles being long and enduring, marketing strategies remaining relatively constant, and economic and political factors having little influence on the strategic or operational aspects of the firm. Competitive pressures are manageable, and changes in buyers’ needs are minimal. Under these circ*mstances, most things are predictable. Although few industries would fit this description, some organizations do operate in relatively stable environments. For example, manufacturers of staple items such as detergents, cleaning supplies, and paper products enjoy relatively stable environmental conditions.59 Turbulent environments, in contrast, are characterized by rapid and significant change. An organization that faces turbulent environmental conditions must cope with shorter decision windows, changing buyer patterns, fragmented markets, greater risk of resource and product obsolescence, and a general lack of longterm control. Such conditions tend to be less predictable and intensify the pressure for organizations to respond effectively to change. For example, most computer-related companies (like Cisco, Unisys, Microsoft, and Dell) and other electronic product compa-

nies (such as Motorola and Samsung) face a relatively turbulent environment in which technological change creates competitive pressures for all industry players.60 In addition, these industries tend to be crossing into each other. The key to success in such an environment lies in developing an organizational design that allows managers to identify and respond quickly to the opportunities and threats facing the organization. In general, it is believed that organizations that operate in stable, predictable external environments find more centralization to be advantageous. This approach can be effective and efficient because things change slowly and they are predictable. In contrast, it is generally believed that organizations that operate in volatile and frequently changing environments need to be more decentralized because it allows the organization to respond to environmental change more proactively. However, for this to be successful, the people at various levels in the organization who make the decisions must be capable of doing so, must have the information, and must be coordinated well with the other parts of the organization that are impacted or must be involved in some way.61 Refer to the discussion about delegating authority well in the previous chapter.

The Impact of Interdependence As discussed earlier in this chapter, the type of interdependence between tasks or work units influences the type of coordination that is appropriate. When work groups are highly interdependent, such as with reciprocal interdependence, they either must be coordinated very well with some mechanism, or they could be coordinated with centralized decision making. A sequential interdependence can also be managed well with centralized decision making and authority because the work units must be kept in exact alignment with each other. On the other hand, pooled interdependence could be conducive to a decentralized approach as long as the work units are coordinated with an overall goal or mission.

The Impact of Organizational Culture As discussed in Chapter 10, organizational culture refers to the dominant values or philosophy of an organization. In some organizations, the underlying philosophy, or belief, is that authority for decision making should be mostly kept toward the top. In others, the philosophy is to push it to the

KEY TERMS Stable environment An external environment that contains little change. Turbulent environment An external environment that includes rapid and significant change.

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lowest possible level. With each philosophy and approach to centralization/decentralization, sometimes it works well; sometimes it does not. However, either approach could be made to work reasonably well as long as it is acknowledged that tasks are adapted to the approach, and people are selected for and trained/educated to work with that approach. Certainly, people who work for Semco, Inc. (“At the Forefront” box in Chapter 7), where there is no formal organizational chart and people have great autonomy for making decisions, must be interested in and capable of making many important decisions. They must also deal with being held accountable for their decisions. On the other hand, an organization that is more centralized overall must be sure that appropriate decisions can be made in a timely manner. Related to organizational culture that influences the relative degree of centralization is selecting and developing people who fit with the situation. When there is a higher degree of decentralization, capable people must be in place, either by proper selection and hiring or by training and development. Capable people must be combined with good delegation of authority, appropriate information, and rewards, all of which must support, coordinate, and control the decentralized decision making.

Implications for Leaders Managers must be aware of the importance of organizational design to the long-term performance of the organization. The increasing availability and sophistication of technology will change the way organizations are designed and coordinated. The ever-increasing demands for quality will create additional pressures for achieving maximum efficiency and effectiveness in every aspect of an organization’s operations. As more and more industries globalize, organizations will be faced with the challenge of coordinating their efforts across different nations and among diverse people. Effective leadership demands that one possess the competence to design organizations so that they are prepared to cope with and capitalize on a changing

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Multinational corporations have developed sophisticated management information systems to support global operations. Teleconferencing is a useful tool for a virtual, cross-functional team.

business environment. In preparing to meet such challenges, managers must • Remember that organizational design provides an important mechanism for achieving the strategic and operational goals of the organization. • Understand the makeup of the forms of organizational structure and under what conditions it would be appropriate to use each. • Understand the potential advantages and disadvantages of the functional, division, matrix, and network structures. • Look for ways to increase the integration potential of the organization or to reduce the need for integration. • Understand the circ*mstances in which centralized or decentralized decision making would work well and how to use each approach. Now we have learned how to design an overall organizational structure that will help us achieve the organization’s overall strategy and mission. In the next chapter, we discuss finding and managing the right people to fit into the organization. Then, in the remaining chapters, we discuss the other basic components of overall management.

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Meeting The Challenge

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IBM: Changing Strategy and Structure n mid-2005, Sam Palmisano, CEO of IBM, announced a major global reorganization of the company. This change was needed to support the change in overall mission and strategy. Although the company will definitely stay in the mainframe computer business, it will no longer be an IT (information technology) company. Rather, it now is a BPO (business process outsourcing) company. IBM wants other organizations to outsource major processes such as accounting, customer service, finance, research and development (R&D), supply chain management, inventory control, and human resource management to it. IBM wants to be the member of a network structure that provides services to the hub of the network structure. IBM’s focus now is mainly to provide services for other companies. Its new organizational structure is centered on grouping services into divisions with similar services or divisions targeted for specific industry customers. One division provides accounting services, another customer services and telemarketing, and so on. Another division is being developed to manage databases of patient information for health care organizations.

IBM will stay in the mainframe business. The hopes are that its new mainframe, named Danu, will reestablish it as the center of computing for large organizations. At the same time, IBM is doing R&D work for Honeywell International and Boeing; customer service for Nextel; human resources management for Proctor and Gamble; financial, customer support, telemarketing, and credit report work for Dun and Bradstreet; and others. The areas of supply-chain management, processing of insurance claims, and after-sales service are being developed. It seems to be working as a headline in the Wall Street Journal announced in mid-2005: “IBM’s Earnings Hint at Recovery.”

Sources: S. Hamm, “Two Pillars of IBM’s Growth Look Shaky,” BusinessWeek, 1 August 2005, 35–36; C. Forelle, “IBM’s Earnings Hint at Recovery,” Wall Street Journal, 19 July 2005, A3, A10; S. Hamm, “Beyond Blue,” BusinessWeek, 18 April 2005, 68–76; P. Hemp, “Leading Change When Business Is Good,” Harvard Business Review (December 2004): 60–71; D. Kirkpatrick, “Sam Palmisano,” Fortune, 9 August 2004, 96; D. Kirkpatrick, “Inside Sam’s $100 Billion Growth Machine,” Fortune, 14 June 2004, 80–90; D. Kirkpatrick and S. Palmisano, “IBM Has a Vision Too,” Fortune, 25 November 2002, 158–162.

SUMMARY 1. An organization’s design serves as a mechanism for managing its tasks, functions, products, markets, and technologies effectively.

2. Organizational design determines the configuration of organizational members (structure); the flow of information, resources, and tasks throughout the organizational system (integration); and the centralization or decentralization of decisionmaking authority (locus of decision making).

3. Organizations structure their activities by grouping certain tasks and responsibilities into work units. The four primary forms of structure are functional, divisional, matrix, and network. Certain strategic conditions imply certain organizational structures. In general, an organization should employ a structure that is most conducive to achieving its mission.

4. An organization’s need for coordination will be determined, to a large degree, by the level of interdependence among its subunits. Integrating mechanisms help coordinate the flow of information, resources, and tasks between work groups. Integrating mechanisms include general management systems (managerial hierarchy, rules and procedures, plans and goals), methods for increasing coordination potential (information systems and lateral relationships), and methods for reducing the need for coordination (creation of slack resources and independent work units).

5. Locus of decision making refers to the extent to which an organization centralizes or decentralizes decision-making authority.

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REVIEW QUESTIONS 232

What is organizational design? Why is it important for an organization to develop an effective design? 2. (LEARNING OBJECTIVE 2) What are the three primary components of organizational design? 3. (LEARNING OBJECTIVE 3) Identify and describe each of the four types of organizational structure discussed in the chapter. (LEARNING OBJECTIVE 1)

How does interdependence affect the need for coordination and integration? Outline the three major categories of integrating mechanisms. 5. (LEARNING OBJECTIVE 5) Explain the concept of locus of decision making. Under what circ*mstances would centralized decision making be appropriate? Under what circ*mstances would decentralized decision making be appropriate? (LEARNING OBJECTIVE 4)

DISCUSSION QUESTIONS Improving Critical Thinking 1. How might the organizational design of a research and development firm in the pharmaceutical industry differ from the organizational design of a consumer food products manufacturer?

2. Consider the organization you currently work for or one that you worked for in the past. Would you characterize that organization as having a centralized or decentralized locus of decision making? What are the advantages and disadvantages associated with the locus of decision making in that organization? If you had the power to change the locus of decision making, how would you change it, and why?

Enhancing Communication Skills 3. Suppose the dean of the College of Business hired you to coordinate the efforts of five different student organizations, each of which was affiliated with a different functional department within the college. What integrating mechanisms might you use to

coordinate the activities of the groups? To practice your oral communication skills, make a brief presentation of your ideas to the class.

4. Identify a company that has a functional organization design at the top and one that has a product structure. Write an analytical report in which you explain why the structure is appropriate or not appropriate for each organization.

Building Teamwork 5. Think of a business that might be started on your campus to serve the needs of students. With a team of students, discuss how that business might be developed using a dynamic network system.

6. With a group of fellow students, identify an organization that could benefit from switching to being more of a network structure. Identify what the distinctive competency is or competencies are and which operations or functions could be outsourced. Develop a plan for managing the interactions between the center of the network structure and the other organizations that would support the center.

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THINKING CRITICALLY: DEBATE THE ISSUE 233

The Hollow Organization Rapid changes in global markets, advances in information technology, and increased competition have led many organizations to adopt innovative structures. Virtual organizations allow employees to work together remotely without having to come together in a central location. Taking this concept one step further, the hollow-organization model outsources many core functions that have traditionally been performed in organizational departments. For example, Amazon.com is a bookstore without the books, the physical store, or the means to deliver the products.

There is no need to pay for inventory, retail space, or staff salaries because orders are taken over the Internet, fulfilled, and shipped by suppliers who contract with Amazon.com. Form teams of four to five students. Half the teams should prepare to argue the benefits of adopting the hollow-organization structure and outsourcing many traditional functions. The other half should prepare to argue the benefits of maintaining a more traditional organizational structure where departments are maintained and employees work and communicate face to face. Your instructor will select two teams to present their arguments to the class in a debate format.

EXPERIENTIAL EXERCISE 8.1

Organizational Characteristics Questionnaire

This brief assessment instrument measures the degree to which five characteristics are present in a particular organization’s structure. It can be used to examine any real organization. Instructions: Identify a specific organization and then respond to the following ten questions. Give your best overall judgment about how well each statement actually describes conditions in the organization that you have in mind. Because the purpose of the exercise is simply to describe an existing organization’s conditions and characteristics, there are no right or wrong answers.

1. Work roles in this organization are highly specialized; each person has clear-cut authority and responsibility.

2. The hierarchy in this organization is formal to the point of being rigid and inflexible.

3. In this organization people are selected and promoted on the basis of their demonstrated technical competence.

4. People in this organization often seem so concerned with conforming to rules and procedures that it interferes with their mental health.

5. Everyone in this organization expects to be subject to the same set of rules and controls; there are no favorites.

6. People in this organization are often so wrapped up in their own narrow specialties that they can’t see

that we all have common interests; this causes unnecessary conflicts.

7. The offices and positions in this organization are arranged in a clear and logical hierarchy.

8. Overall, this organization is a political bureaucracy with a “managerial elite” who got where they are through political savvy.

9. Managers in this organization see themselves as being on a clear “career ladder” and expect to make regular progress in their career paths.

10. Many of the rules in this organization either have become ends in themselves, with no logical function, or have come to specify the minimum tolerable performance levels. Scoring: To score your answers, use the following key. Add up the points for all ten questions to get your score. A high score indicates a “good” bureaucracy, and the lower the score, the less the organization is a good bureaucracy; it either lacks the right bureaucratic characteristics or goes far overboard on some. A score between 25 and 35 is about average; scores above 35 are suggestive of a “good” bureaucratic structure. Scores from 18 to 24 are a cause for concern, and scores below 18 indicate serious problems: either overbureaucratic rigidity or underbureaucratic chaos. Response Question Not Numbers Completely Mostly Partly Slightly at All 1, 3, 5, 7, 9

5 points

4 points 3 points 2 points 1 point

2, 4, 6, 8, 10

1 point

2 points 3 points 4 points 5 points

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ETHICS: TAKE A STAND 234 Many U.S. companies outsource various parts of their operations, from a call center dealing with customer service, to managing human resource records, to production of products. Even though IBM (see “Meeting the Challenge” box) is one of the companies that wants to perform various services for other organizations, most of the outsourcing goes to companies in countries other than the United States. (Actually, some of the divisions that IBM would use to perform the outsourced work are located in other countries.) Competitive conditions, usually related to effects of globalization, have made outsourcing attractive to various companies. Although there are benefits related to outsourcing, some believe that outsourcing takes jobs away from people of the existing organizations. This is

especially a concern for some when the jobs essentially are transferred to another country. For Discussion

1. Is it ethical for a company in one country to outsource work to a company in another country?

2. If a company outsources work to another company and no longer needs some employees, does the company have any obligations to the people it no longer needs?

3. Develop an argument explaining why and how outsourcing from one country to another might be beneficial for consumers.

Chapter 8 Organizational Design

CASE

Carolina Carpets Jay McBride was smiling. Reading letters from satisfied customers always put him in a good mood. His smile faded, though, as he put the letter down and returned to the task at hand. His young company was facing its biggest challenge in its 8-year history. Markets were changing, competition was becoming more intense, and the need for developing strategic alliances was becoming more apparent every day. Jay had grown Carolina Carpets from a part-time hobby conducted out of his garage to a multimillion-dollar textile company. He employed over 100 people in three plants across North and South Carolina. The structure of Carolina Carpets was organized around the functional model with Jay serving as CEO and president. He had four vice presidents responsible for finance, human resources, manufacturing, and marketing. While this structure had been successful and efficient during the company’s early years of operation, changes in market were pressing it to the limit. Carolina Carpets started out making carpets for a typical house, but as it expanded, its customer base included more and more businesses, or commercial customers. The businesses tended to need a heavier grade of carpet, different color choices, and much larger amounts of a particular carpet. In addition, business clients used ordering systems that were different from the carpet stores that sold to households and wanted different payment schedules and terms. These differing demands from the commercial customers were complicating operations, especially in marketing and finance, for Carolina Carpets. For Discussion

1. Do you think the functional structure was appropriate for Carolina Carpets in the early days? Why or why not?

2. If you were a consultant working for Carolina Carpets, would you suggest that a different organizational structure is necessary? If so, what organizational structure would you recommend that Jay adopt? Why?

3. Is there any structure that you would not recommend for Carolina Carpets? Why?

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VIDEO CASE 236

Lonely Planet—Global Guide Little did Tony and Maureen Wheeler realize that an extended trip from London through Asia and on to Australia would lead to the formation of one of the world’s leading publishers of guides for independent travelers. Their first guidebook, Across Asia, written at a kitchen table in the early 1970s, became an immediate hit. Other journeys and books followed, and by 1977 Lonely Planet (http://www.lonelyplanet.com) guides helped travelers navigate most of the world, from Southeast Asia, Nepal, and the Himalayas to Africa, Europe, Australia, and New Zealand. Today the company’s 250 professional authors live in many countries worldwide, writing lively books about their countries from an insider’s perspective. They are not employees but rather freelancers who work on a contract basis to research, write, and revise company publications. The 400 staff members are located in Lonely Planet’s Melbourne, Australia, headquarters as well as offices in Oakland, London, and Paris. Lonely Planet’s mission focuses on encouraging international travel as a unique experience, one that promotes understanding, tolerance, and mutual respect for other cultures. Its guides are known for high-quality, accurate, insightful, and straightforward travel information. Rather than spoon-feed readers, they provide information—maps, photos, facts, and historical and cultural background—to help travelers appreciate and understand the country and its people. In addition to standard tourist sights, authors seek out lesser known attractions that highlight the uniqueness of the locale. Two-year revision cycles keep the most popular guides current and accurate. Because the travel market encompasses many different ages and types of travelers, Lonely Planet books target different groups. “Travel is not one-size-fits-all,” says President Todd Sotkiewicz. “We’ve worked hard to focus on the individual traveler . . . whether you’re a midlife traveler or a college student or a free spirit.” The company now publishes more than 600 books in multiple languages—regular and “on-a-shoestring” guides; phrasebooks and guides for specialized topics such as world food, hiking, and photography; traveler’s journals; travel literature and reference books; and pictorial books. Other products include travel videos, puzzles, and calendars. Lonely Planet Six Degrees television series air in more than 50 countries on the Discovery Channel. The interactive website offers other travel-related services, such as the Thorn Tree online discussion boards, travel videos and podcasts, newsletters, the Lonely Planet Phonecard, Lonely Planet Images, and travel reservation and insurance programs provided through carefully selected partners. So how does a company whose business is bringing the world to its customers structure its own operations to meet its strategic goals? Like many global corporations with offices on several continents, Lonely Planet faces challenges such as time zone changes and cultural differences. The company uses both consolidated and regionalized structures. The publishing, information technology (IT), and distribution functions are global in nature and operate as such. For areas with specific issues—for example, different languages, types of retailers, images suited to target audiences—the company adopts more customized regional marketing strategies. From an editorial perspective, a consolidated global structure works well. “The people that are involved in the editorial aspect of producing guides to the Americas are all very familiar with the markets,” says Managing Editor David Zingarelli. Because his commissioning editors are each responsible for a specific region of the Americas, they develop in-depth expertise. “It enables us to really be in touch with what’s happening in each of these regions and what’s hot, what’s promising, what our competitors are doing.” Having offices in different countries worldwide is an advantage for Lonely Planet. Multiple time zones enable the company to provide round-the-clock global support for all IT systems. As Darren Burn, technical service manager, explains, “As we’re going home, Australia’s coming in. As Australia’s going home, London’s coming in. London’s going home, we’re coming in.” For example, authors who are on

Chapter 8 Organizational Design

the road can get answers from staff members during their work day, regardless of where they happen to be traveling. When the U.S. website design team reaches the end of their day, they can hand off a project to their colleagues in Melbourne. Working on projects with offices in another country expands idea generation and provides different perspectives. One totally centralized department, both in terms of function and location, is distribution. “Since our printers are in Asia, it only became logical to consolidate in Singapore,” says Scot Stampfli, distribution manager. “This provides greater control, reduces redundancy on a worldwide basis, and saved us quite a bit of money, as well as streamlining the whole supply chain.” Lonely Planet is “ a very flat organization . . . a very lean organization,” says Vice President Robin Goldberg, who oversees marketing and business development. “When you’re lean, you need to allow everyone to grow to their greatest potential, to make decisions, to make them fast. If we had too much hierarchy, it would slow us down dramatically.” Lonely Planet also ties job responsibilities closely to the overall company objectives, so that employees see clearly how their role fits into the big picture. The company emphasizes action and listens to employees’ opinions. “They feel they can drive a decision and make a program a reality,” Goldberg says. “Once you get too hierarchical, you lose some of that incredible sort of nimbleness and that feeling of involvement.” For Discussion

1. Describe Lonely Planet’s organizational structure. Which of the four work unit structures does Lonely Planet use, and why?

2. How does Lonely Planet use integration to meet the challenges of operating on three continents with a diverse workforce? What level and type of interdependence does the company exhibit?

3. Is the locus of decision making centralized or decentralized at Lonely Planet, and what role does the type of environment play?

4. How well does Lonely Planet’s organizational design support the company’s mission, products, operations, and markets? Give specific examples from the video and the case.

Sources: Adapted from Lonely Planet video, Lonely Planet corporate website, http://www.lonelyplanet.com (3 November 2005); and Judith Rosen, “Lonely Planet Nothing but Blue Skies,” Publishers Weekly, 16 August 2004, 35–36.

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Chapter

Strategic Human Resource Management

CHAPTER OVERVIEW “The one priority above all others in running a company today is to acquire as many of the best people as possible. And the biggest constraint on the success of the organization is the ability to get and to hang on to enough of the right people,” so says Jim Collins, a highly respected management consultant and author.1 If an organization does not have people with the knowledge, skills, abilities, and attitudes that are needed to achieve its overall strategy, it won’t be successful. It won’t be able to satisfy its customers. Coordinating and managing all the things that are necessary to find the right people and guide them toward achieving the overall strategy is called strategic human resource management (SHRM). SHRM involves many other parts of overall management such as motivation, leadership, and communication, which are discussed in other chapters of this book. Although all managers need to understand the relatedness of these things to be successful managers, in this

chapter we focus on the things that are normally managed or coordinated by managers who are specialists in human resource issues. We explore the major SHRM activities that help the organization attract, retain, and develop the quality and quantity of employees needed to meet organizational goals. The strategy of the organization both influences human resources and is influenced by human resources, as we discuss in this chapter.2 Specifically, we examine the planning process involved in creating an effective internal organizational environment. Specialists in the discipline of SHRM might coordinate and actually carry out many of the related details in forecasting, recruiting, selecting, and training, but every manager in an organization is directly or indirectly involved in all aspects of SHRM. Therefore, managers should be aware that their behavior and attitudes can and probably will influence many aspects of guiding people in their pursuit of the organization’s overall strategy and goals.

LEARN I NG OBJ ECTIVES When you have finished studying this chapter, you should be able to 1. 2. 3. 4. 5. 6. 7. 8.

Identify the components of the strategic human resource management planning process. Define job analysis and explain its importance. Summarize the different recruiting techniques used by organizations. Clarify the major employee selection methods. Discuss the different types of employee training. Examine the role of performance appraisals in the organization. Explain how compensation and benefits are used in organizations. Describe the key factors of the legal environment in which human resource management functions. 9. Understand the importance of labor–management relations.

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240

Facing The Challenge JetBlue n the short span of 6 years, JetBlue founder and CEO David Neeleman built a remarkably innovative company that has changed the rules of competition in its industry. JetBlue has gone from scratch to nearly $1 billion in annual revenue since 1999 and has forced its entrenched rivals to change tactics and strategies. It ranks among the industry’s best operating margins, the highest percentage of seats filled, one of the top ratings for on-time arrivals, and makes a profit. The real secret weapon of JetBlue is the employees, all of whom are called “crew members” (JetBlue lingo for employees), to emphasize the company-wide sense of teamwork. If you treat people well, the company’s philosophy goes, they’ll treat the customer well. “There is no ‘they’ in the organization. Instead, it’s ‘we’ and ‘us.’” The culture is based on “we succeed together or we fail together.” JetBlue’s crew members aren’t unionized. While insisting that they are not against unions, the leadership team makes it clear that they would prefer to avoid them. They believe if management and crew members trust one another and if people feel they’re compensated fairly (in 2004 there was a 17% profit sharing), there’s no need for a third party. The work of JetBlue crew members transcends job titles. For example, all crew members help clean a plane when it lands. Employees traveling on their day off are expected to pitch in too, including the senior managers and the CEO. Like other practices at JetBlue, this involvement serves symbolic purposes as well as saving money. JetBlue makes a very strong effort to find the right people and is highly selective. It looks for crew members who like people, not just certain people. In 2004 over 100,000 people applied for jobs, and JetBlue hired 1700. The attention to employees is not to make them feel good or to keep them from unionizing. Ultimately, it’s about building a system that consistently delivers a better experience to passengers, which is critical to

Introduction To achieve the strategy of an organization, a certain set of actions, behaviors, and attitudes from the employees is necessary. To ensure the right behaviors and attitudes, an organization must have the “right” people

JetBlue’s survival. Despite evidence that the cost of a ticket is what matters most to airline passengers, JetBlue believes that it can compete on more than price. In some markets, its passengers are willing to pay fares that average $20 more than on competitors. The company believes that good service, delivered by passionate employees, will give JetBlue a lasting edge. But as JetBlue grows, it relies more and more on employees who weren’t there in the beginning, when the entire staff could fit in one room. That’s why preserving the culture increasingly requires conscious effort, starting with orientation and emphasized in all training programs and strategic decisions. On the first day of orientation, the CEO is the teacher. He explains the JetBlue brand, teaches how the company makes money, how each employee contributes to the bottom line, and how the numbers affect their profit sharing. He wants the group to know how important he considers them and their training. Much about JetBlue is considered distinctive, from the enthusiasm of its employees to its relentless customer focus to its hip, slightly countercultural image. It depends on flexibility, speed, and a sense of intimacy with employees and customers alike. Over the next 7 years, JetBlue expects to quadruple its workforce, growing from 6000 to 25,000 employees. Can it maintain the unique, passionate workforce as it evolves from a nimble startup into the bureaucracy that’s required to manage a vastly more complex operation? This is the challenge JetBlue now faces.

Sources: J. Wyndbrandt, Flying High: How JetBlue Founder and CEO David Neeleman Beats the Competition . . . Even in the World’s Most Turbulent Industry (New York: Wiley, 2004); B. Peterson, Blue Streak (San Francisco Portfolio, 2004); C. Salter, “And Now the Hard Part,” Fast Company (May 2004): 66–73.

who are guided by proper human resource policies and operations.3 If this is done well, an organization will have people with the right skills and motivation to make the organization successful. The customers of the organization will be satisfied, and the organization will have a combination of people with the right skills and motivation and practices that would be impossible to imitate by another organization. The organization would have a sustainable competitive advantage.4

Chapter 9 Strategic Human Resource Management

Figure 9.1

Strategic Human Resource Management Planning Process 241 Organizational Strategy

Analysis

Forecasting

Recruiting

Selecting

Strategic Human Resource Management Tying all of this together and focusing it on the overall strategy of an organization is called strategic human resource management (SHRM). This is all based on strategic planning and, as you recall from Chapter 1, the overall goals of the organization. Of course, main elements of these things are discussed in other chapters of this book. Here, we focus on the concepts and tools that are needed to guide the overall human resources planning process (Figure 9.1). To begin with, we need to have some way to determine who the “right people” are, so we need to understand what knowledge, skills, and abilities are needed in each job through the process of job analysis.

ANALYSIS Job analysis refers to studying a job in order to understand what knowledge, skills, abilities, and attitudes are needed as a foundation for the behaviors that would help the jobholder perform that job successfully. To understand what behaviors are really required by the job, rather than what one might assume to be required, one must be very objective and careful when analyzing jobs. A salesperson’s job in a retail store might require sincerely listening to customers and being able to interact with them well, especially if the company’s strategy includes developing loyal long-term customers. A factory job might require skills needed to successfully engage in groups and group decision making, in addition to being able to operate certain equipment. A person’s attitude and other personality characteristics may become a more important component of a job. The reason for this

Training

Appraising

Rewarding

is that a person can be more successful if he LEARNING or she fits into the culture of the organizaOBJECTIVE tion, into the “way things are done.” If a person really does not like working in groups or with very flexible work rules, then a culture that thrives on group work and flexible rules Identify the might not work well for the person. 5 components of the From the job analysis, a job description strategic human is established. The job description lists the resource tasks, behaviors, responsibilities, and other management information that help explain the job. planning process. Related to this is the job specification that lists the specific knowledge, skills, abilities, and other employee characteristics that are needed to perform the job successfully. LEARNING OBJECTIVE Taken together, job descriptions and job specifications provide managers with a foundation for forecasting the supply of and demand for labor within the organization and for developing programs to meet the Define job analysis organization’s human resource requirements. and explain its These activities are usually coordinated by or importance. actually done by the human resource manager. Job descriptions and job specifications also help the organization comply with equal employment KEY TERMS opportunity laws by ensuring that SHRM decisions are based Strategic human resource on job-related information. management (SHRM) Managing in such a way as to coordinate all human FORECASTING resource components and focus them on achieving An important aspect of SHRM organizational goals and planning is forecasting the overall strategy. demand for and supply of hu-

man resources for both shortterm and long-term planning. Both types of forecasts require looking into the future. A significant demographic shift will

Job analysis Studying a job to understand what knowledge, skills, abilities, and attitudes are required for successful performance.

Part 3 Organizing Challenges in the 21st Century

occur in the coming years; the labor force will be older, with more minorities. By 2015 nearly one in five U.S. workers will be age 55 or older. The largest generation of 242 American workers—76 million “baby boomers”—will soon retire.6 Demand forecasting involves determining the number of employees that the organization will need at some point in the future as well as the knowledge, skills, and abilities that these employees must possess. The organization’s external and internal environments are the major determinants of the demand for human resources. For example, JetBlue is forecasting a growth from 6000 to 25,000 employees in the next few years.7 Rapid technological change and the emergence of the global economy have created the necessity for profound change and the demand for LEARNING a product or service, therefore requiring OBJECTIVE changes in a company’s strategy and operations. As Hewlett-Packard moved into the digital entertainment market, an entirely new and different market for the Summarize the company, it needed to identify the implidifferent recruiting cations on the workforce. For example, techniques used by the right designers, marketing people, organizations. and product specialists had to be identified, hired, and trained.8 Companies are increasing sales over the Internet. One KEY TERMS reason for this is that the companies are developing the Job description systems to do this. Another Details of the responsibilities reason is that more and more and tasks required by a job. customers are becoming comfortable with buying products Job specification over the Internet. Ultimately, A list of the knowledge, skills, this affects the need for emabilities, and other employee ployees with special skills.9 In characteristics needed to addition, demand is based on perform the job. the organization’s strategic Demand forecasting goals and internal changes in Determining the number of the workforce, such as retireemployees that the organizaments, resignations, termination will need in the future as tions, and leaves of absence. well as the knowledge, skills, Supply forecasting inand abilities these employees volves determining what humust possess. man resources will be availSupply forecasting able both inside and outside Determining what human the organization. Internal resources will be available practices that affect promoboth inside and outside the tions, transfers, training, and organization. pay incentives are designed to Recruitment meet demand with existing Finding and attracting employees. To meet human requalified job candidates. source demand, most orga-

nizations must rely to some extent on bringing in employees from the outside. Human resource professionals use labor-market analysis to forecast external labor supply. Together, internal and external supply forecasts allow the organization to estimate the number of people who will enter and leave various organizational jobs, as well as the effects of SHRM programs on employee skills and productivity. After estimating the demand and supply of human resources, the human resource manager must reconcile the two forecasts. If a shortage is forecast, emphasis must be put on employee hiring, promotions, transfers, and training. If an excess is predicted, workforce reduction must be implemented. Although workforce reduction is a very serious issue, it tends to be one time or short term. Plus, if downsizing is done properly, it must include using the SHRM concepts and tools to identify those jobs that are no longer needed and the “right” people and jobs to remove from the organization. In the longer run, though, even those companies that downsize certainly have to continue to manage the remaining employees and probably have to add and replace people. Therefore, we turn our attention to recruitment.

RECRUITING Recruitment is the process of finding and attracting job candidates who are qualified to fill job vacancies. The qualifications are listed and explained in the job descriptions and job specifications, as we discussed earlier. Recruitment can occur in a variety of settings, both inside and outside the organization. Both approaches have certain advantages and disadvantages. These are summarized in Table 9.1 and discussed in more detail below. Internal recruitment involves identifying internal candidates and encouraging them to apply for and be willing to accept organizational jobs that are vacant. Methods of internal recruitment include job banks, employee referral systems, job postings, and advertisem*nts in company newsletters. Every organization represents an internal labor market to some degree. Many employees, both entry level and upper level, aspire to move up the ranks through promotion. Promotion from within conveys a positive message that there are ways to move up within the organization. It becomes more feasible when companies invest in training and development activities. At higher levels, transfers can be an important development tool for acquiring additional job knowledge, as well as a means for upward mobility. Both promotion and transfer policies can create a favorable climate for attracting qualified employees and retaining valued ones.

Chapter 9 Strategic Human Resource Management

Table 9.1

Internal versus External Recruitment 243

Internal Recruitment

External Recruitment

Advantages • Motivator for good performance • Causes succession of promotions • Better assessment of abilities • Increased commitment, morale • Lower cost for some jobs • Have to hire only at entry level

Disadvantages • Strong personnel development, training needed • Possible morale problems of those not promoted • Political infighting for promotions • Inbreeding

• New ideas, insights • Possibly cheaper than training a professional • No group of political supporters in the organization already

• Selected person may not fit job or organization • Possible morale problems for internal candidates not promoted • Long adjustment time may be needed

UPS is one organization that maintains a policy to promote from within rather than recruiting from the outside. The company has a strong belief that employment longevity enables them to get experience across many different parts of the business. Such experiences

Recruitment is the process of finding and attracting job candidates who are qualified to fill job vacancies. Recruitment can occur both within and outside an organization.

and training delivers continuity. Most members of the company’s executive team came up through the ranks, and they expect others to do the same.10 External recruitment involves advertising for and soliciting applicants from outside the company. If internal sources do not produce an acceptable candidate or if it is decided that the best candidate would come from the outside, a wide variety of external sources are available.11 These sources differ in terms of ease of use, cost, and the quality of applicants obtained. External sources include walk-ins, public employment agencies, temporary-help agencies, labor unions, educational institutions, referrals from current and past employees, recruiting employees from competitors, newspaper and trade publications, and a growing use of the Internet. The source used will depend on the job skills required and the current availability of those skills in the labor market. For example, organizations frequently use external placement firms and private employment agencies to find applicants for upper-level managerial positions, but they look to educational institutions for candidates for entrylevel managerial positions. As technology develops, human resource managers are increasingly using computerized databases as well as the Internet. The Internet and employee referrals accounted for more than 61% of external hires in 2004 among companies surveyed by CareerXroads, a recruiting technology consultancy in Kendall Park, New Jersey. That figure has jumped in each of the past 3 years.12 The Container Store makes recruiting part of every employee’s job, and all employees carry recruiting cards. Nearly a third of the company’s employees come from referrals.13 Employee referrals account for more than 40% at Cognizant Technology Solutions in Teaneck, New Jersey. These are primarily software engineers and MBA graduates with 6 to 8 years’ work experience. Employees

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244

are rewarded with cash or reimbursem*nt for external training.14 The search for high-tech workers has become increasingly difficult and controversial with the explosive growth of positions in technology. Many U.S. companies have developed a strategy of recruiting skilled workers from other countries, claiming that the labor pool of workers in the United States is not adequate. Opposing this strategy, many employee organizations claim that increasing the number of temporary visas issued to workers from other countries is a form of digital-age discrimination. They argue that the high-tech industries can pay lower salaries to temporary workers from other countries than they can to older and more experienced U.S. workers.15 A great company can’t be built without great people, and that requires attention and commitment to the recruiting process.16 According to a foremost authority on hiring, the best way to select people who will thrive in the company is to identify the personal characteristics of people who are already thriving and hire people just like them. To do this, it is necessary to understand star performers, identify their target behaviors and attitudes, and then use methods to LEARNING OBJECTIVE find people with those attributes.17

SELECTING

Selection is the process of evaluating and choosing the best-qualified candidate from the pool of applicants available for the position. It entails the exchange of accurate information between employand job candidates to optiKEY TERMS ers mize the person–job match. Although organizations usuSelection ally make these decisions, The process of evaluating and applicants also self-select into choosing the best-qualified organizations that meet their candidate from the pool of requirements or choose to not applicants available for the join or to leave organizations position. that they think don’t meet their Validity needs. An employment tool must At the heart of the selecshow that it predicts actual tion process is the prediction job performance. of whether or not a particular Application form applicant is capable of perA form used to gather inforforming the job tasks associmation about a job applicant. ated with the position for Résumé which he or she is being conInformation prepared by a job sidered. A wrong decision in applicant usually stating caeither choosing a candidate reer goal, qualifications, and who is not suited for the posisome related information. tion or not choosing a candiClarify the major employee selection methods.

date who would be very successful is costly. A “wrong candidate” is not productive and might have to be replaced. A “missed opportunity,” not selecting a candidate who would have been very good, is a costly missed opportunity. Also, if a person is not selected for “nonvalid” reasons, illegal discrimination might be an issue. This could cause negative consequences in how the organization operates and could lead to a lawsuit. To select the right person for a job, any method used to make an employment decision—for example, original selection, promotion, demotion, or selection for personal development—must demonstrate validity. That means the method must accurately measure or predict what it is intended to measure or predict. A strong relationship must exist between the selection method and some criterion. For example, if scores on a test are used to select a person for a job, then those scores must be associated with or predict performance on the job. An interview must be conducted in such a way that the person selected for the job as a result of the interview must be able to perform better than the person not selected. The same is true for all other employment or selection methods. Now let’s turn our attention to the more commonly used selection methods. Usually, some combination of the following methods is used. In any case, the methods must be used in such a way so that they are valid.

SELECTION METHODS The application form and a résumé are usually the first sources of information about a potential employee. Both usually record the applicant’s desired position and job-related qualifications and experience such as the applicant’s educational background, previous job experience, and other information that may be useful in assessing the individual’s ability to perform a job. Both the application form and résumé tend to serve as prescreening devices to help determine whether an applicant meets the minimum requirements of a position and allow preliminary comparisons with the credentials of other candidates. Employers sometimes conduct background checks to evaluate the accuracy of information on the application form and résumé. Occasionally other things such as credit history and criminal record might be checked. Similarly, employers might contact references listed in a résumé, usually to check the accuracy of past employment or to ask for an appraisal of a candidate’s past performance. According to a Society for Human Resource Management survey, 69% of companies do some kind of a background check. This probably is wise because about 30% of applications contain misstatements of fact,

Chapter 9 Strategic Human Resource Management

usually claiming longer employment in previous jobs than was the case. Background checks are costly especially in higherlevel jobs. People who make employment decisions must therefore judge the extent of the background check. At the minimum, a manager would contact references listed on a résumé.

Tests Any instrument, device, or information used to make an employment decision is considered an employment test by the EEOC’s Uniform Guidelines on Employee Selection. An employment-testing measure is a means of assessing a job applicant’s knowledge, skills, and abilities, for example, through written responses (such as a math test), simulated exercises, performance tests (such as a word-processing test), or verbal responses (such as a test of language skills). Regardless of what test is used, it should help select the best candidate for the position; that is, the test should predict the success of the candidate.18 We discuss three categories of tests—written tests, performance tests, and personality (or personal characteristics) tests (Table 9.2). Although the personality test can be a written test, personality and personal characteristics can also be assessed through interviews and observations. We discuss the assessment of personality separately because it is being used with increased frequency and it may be controversial. Written tests usually are those that test knowledge, ability, skill, intelligence, or interest. They usually are called paper-and-pencil tests, although that title is outdated because many are now computerized. However, the tests still are designed to test one’s knowledge about math, knowledge about a certain job or task, intelligence level, interest in certain types of careers, or other factors. If these tests are valid, the results of them predict job performance. A simple example of this type of test is the driver’s license examination. It is presumed that the higher one’s scores, the better driver that he or she is. Hopefully, the driver’s exam is valid! Performance tests require the job candidate to actually perform in the job usually some small part of the job or for a short time. Because performance tests are based directly on job analysis, they should accurately predict job performance. Performance tests consist of actual job behaviors. There are two common types of performance tests—work samples and assessment centers. Work samples are more appropriate for jobs that might be more routine or more specific. For example, to see whether a person can install a computer, have the person actually perform the task. To judge whether a person might write creative and hopefully effective, advertisem*nts, have the person prepare a portfolio (a collection or

Table 9.2

Categories of Tests 245

Test Category

What It Measures

Example

Written

Knowledge

Driver’s license exam

Performance

Ability, skills for a specific job

Assessment center, work sample

Personality

Characteristics, personality

Locus of control measure

sample) of his or her work. If work samples are designed or selected well, then a person’s performance in the work sample should accurately predict the person’s performance on the job. In fact, work samples do show high validity scores, especially when compared to written aptitude, personality, or intelligence tests.19 Assessment centers are usually more appropriate to judge a candidate’s predicted performance in a more complex job. For example, a candidate’s readiness to be selected for a managerial position or to be promoted can be assessed by judging performance on a simulation of a group of tasks that a manager might actually do. The candidate typically is presented with a fairly large number and varying types of tasks to do. The tasks might include meetings to attend, speeches to make, decisions to make, among other tasks. This is sometimes called an “in-basket,” referring to the tasks awaiting a manager. The intent of the assessment center is to judge how a candidate would behave and perform in the selected tasks to predict performance as a manager. At the same time, the assessment center probably includes more tasks than can reasonably be done. This is usually included to see how the candidate selects which tasks to KEY TERMS do and which to ignore. Employment test In a typical assessment Any instrument or device used center, a team of managers, to assess the qualifications of psychologists, and others a job applicant. trained in judging perforWork sample mance observe the candidate’s A small part of an actual job performance and rate it. Ascompleted by an applicant to sessment centers usually last predict performance on the several days, so they can be job. costly. However, assessment centers, like work samples, Assessment center show good results in predictA type of simulation of a more ing performance in managerial complex or higher-level manjobs, so they may be worth it, agerial job used to predict a especially for higher-level jobs. job applicant’s performance.

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246

Personality tests are discussed here because increasing numbers and types of organizations are using some form of personality assessment to judge whether a person “fits,” whether the organization hires the “right” people.20 Studies indicate it is beneficial to hire people who already have characteristics and attitudes that are in line with the core values of the organization and with its culture. Teaching a person the details of a job is easier than teaching him or her to change deeply held attitudes or change personality characteristics.21 Personality tests include any method used to assess personal attributes or characteristics. It might be a written test that measures locus of control or self-esteem, an indepth evaluation by a trained psychologist, or an assessment by an interviewer or a group of current employees. Physical exams are required by many organizations. The physical exam is intended to ensure that a person is physically able to carry out certain job requirements. It also can be used to enroll employees in fringe benefits such as health, life, and disability insurance. Drug tests are also used by some organizations, both for hiring and for continued employment. These tests tend to be very controversial. Occasionally, physical exams can be controversial also, depending upon how the information is used. The main thing to keep in mind with both physical exams and drug tests is that they must be important to the job.

Interviews Interviews are relatively formal, in-depth conversations conducted for the purpose of assessing a candidate’s knowledge, skills, and abilities, as well as providing information to the candidate about the organization and potential jobs. They are used for more than 90% of all people hired for industrial positions. Interviews permit a two-way exchange of information. Most interview questions are straightforward inquiries about the candidate’s experience or education. At Microsoft, however, prospective employees are asked questions that reveal the candidate’s capabilities of (1) grasping new KEY TERMS knowledge extremely quickly and generating acute questions Personality test on the spot, (2) possessing Assessment of personality such familiarity with programcharacteristics of a job ming structures that a quick applicant. glance is sufficient for him or Interview her to understand a long printRelatively formal, in-depth out of code, and (3) having conversations used to assess photographic recall of code a candidate’s readiness for a that he or she has written. In job, and to provide informaother words, Microsoft is testtion to the candidate. ing how the applicant thinks.

Related closely to the Microsoft example, many organizations use interviews to assess the job candidate’s personal characteristics and attitudes to see whether the candidate will fit into the company culture. Carrying the interview a bit further, some organizations ask potential hires to make a presentation to current employees that solves an organizational challenge so that they can assess whether the candidate will function as part of a team.22 Interviews, overall, tend to have low validity. One reason for this is that although many people conduct interviews, many are not trained in how to do them well. Another reason is that interviews tend to be fairly informal, and no two are alike. This raises serious problems. In a typical interview, the interviewer draws a conclusion about the candidate within the first 2 minutes. The rest of the interview is spent looking for reasons to support the quick decision. Therefore, people who conduct interviews must take steps to increase their effectiveness. Typically, a structured interview format works best. This includes the interviewer asking the same questions, in the same order, and having the same type of information about each candidate in order to be more objective. It is usually important for the interviewer to probe for more information and to follow up, based on what the candidate said, but this must be done carefully. If not done carefully, the interview could stray far from jobrelated issues. Also, the interviewer could easily be influenced by his or her biases, stereotypes, and previous information that the interviewer has about the candidate. Interviewers can be effective by following these guidelines: • Base the interview questions on a complete and current job analysis. • Ask precise, specific questions that are job related. • Avoid biases and making snap judgments, stereotyping, or looking for only negative or only positive information. • Be careful about having a perception or stereotype of what the “good” candidate is. • Be careful about making up your mind about the applicant in the first several minutes, as is usually the case. • Avoid questions that can lead to discrimination (Table 9.3). • Keep written records of the interview. Because there is questionable validity for interviews, they should never be the sole basis for selecting a candidate. Instead, they should be used along with other selection devices to provide additional information on candidates’ strengths and weaknesses.

Chapter 9 Strategic Human Resource Management

An interview can also include a realistic job preview. That is, the interviewer can explain to the job applicant what the job really requires rather than give just the positive points of a job or company and avoid the negative. For example, a candidate interviewing for a sales position might accompany a sales representative during a sales call in the field; a warehouse manager might observe warehouse operations; a training specialist might observe a training program and interact with participants. These experiences are important because they provide a sense of realism and greater accuracy of the job and the company than without a job preview.

TRAINING Employees must know what to do in their jobs in order to perform well. Some or most of what they need to know may have been learned in some form of education or training before they got to the job. They might have a high school education, a college degree, a license, or experience in a similar job in the same or another organization. Or the job might require tasks that are quite new to them. In the latter case, training is obviously required. However, even with previous learning, a person will need to learn other duties as circ*mstances change in the industry. Also, new learning will probably be needed in order to move to a new job in the current organization or to move to a different organization. Some training will be necessary in almost every case. Training is a planned effort to assist employees in learning job-related behaviors that will improve their performance. It is vital to the success of the organizations. This is evidenced by the fact that organizations spend $100 billion every year on formal training. The figure is much higher when all types of training are included. Rapidly changing technology requires that employees possess the knowledge, skills, and abilities needed to cope with new processes and production techniques.23 Changes in management philosophy create a need for new approaches, skills, and knowledge.24 An organization’s training needs can be identified through three types of needs assessment: organizational, task, and individual.25 Organizational assessment determines where in the organization the training is needed; task assessment is what is to be trained; and individual assessment determines who needs to be trained based on actual versus desired skills.26

Types of Training Once the training needs of the organization have been assessed, training must be designed and developed. The first step in the training process is to get

Table 9.3

Interview Questions That Can Lead to Discrimination 247

Don’t Ask

Ask This Instead

Are you married? Do you have children? Do you have child-care arrangements? What is your spouse’s name?

Do you have any responsibilities that might conflict with job attendance or your availability for shift work?

What is your race?

No acceptable question.

What is your religion? Which church do you attend? What are your religious holidays?

Are you available for weekend work?

Are you male or female?

No acceptable question.

How old are you? What is your birth date?

If hired, can you prove that you are at least 18?

Have you ever been arrested?

Have you ever been convicted of a crime?

Are you a U.S. citizen? Where were you born?

Can you show proof that you are eligible to work in the United States?

Are you disabled? In your condition, do you think you can do the job?

Are you able to perform the essential functions of this job with or without reasonable accommodation?

new employees off to a good start. This is generally accomplished through orientation. Orientation is the formal process of familiarizing new employees with the organization, their job, and their work LEARNING unit. Orientation procedures vary widely OBJECTIVE from organization to organization. Generally, their purpose is to enable new employees to fit in so that they become productive members of the organization. A newcomer may Discuss the need several hours, several weeks, or several different types months of work with other employees to beof employee come completely familiar with the organizatraining. tion. In recent years, many organizations have realized that the socialization process begins

in orientation and can make a significant difference to new employees. For example, at JetBlue, orientation is given a very high priority. Therefore, the senior leadership 248 team and CEO participate in every new-hire orientation program.27 Technical training programs are designed to provide employees with specialized skills and knowledge in the methods, processes, and techniques associated with their jobs or trade. With advances in training technology, many organizations are using computer-assisted instruction and interactive video training. On-the-job training is conducted while employees perform job-related tasks. This type of training is the most direct approach and offers employers the quickest return in terms of improved performance.28 Management development programs are designed to improve the technical, interpersonal, and conceptual skills of supervisors, managers, and executives. On-thejob training for managers might include rotating through a variety of positions, regular coaching and mentoring by a supervisor, committee assignments to involve individuals in decision-making activities, and staff meetings to help managers become acquainted with the thinking of other managers and with activities outside their immediate area. Most of LEARNING these on-the-job training methods are OBJECTIVE used to help managers broaden their organizational knowledge and experience. Some popular off-the-job training techniques include classroom training, simulations, roleplaying, and case discussion Examine the role of performance groups.

appraisals in the organization.

Part 3 Organizing Challenges in the 21st Century

Organizations spend over $100 billion every year for formal training that assists employees in learning job-related behaviors that improve their performance.

performers. Managers can use performance appraisal information in four ways: 1.

APPRAISING Judging, or appraising, the performance of everyone in an organization is necessary so that the effort of everyone can be focused on achieving the mission of the organization. Performance appraisal is a systematic process of evaluating each employee’s job-related achievements, strengths, and weaknesses, as well as determining ways to improve performance.29 Performance appraisals are valuable aids in making many SHRM decisions; they are essential for distinguishing between good and poor

KEY TERMS Training A planned effort to assist employees in learning jobrelated behaviors that will improve their performance. Orientation The process of familiarizing new employees with the organization, their job, and their work unit. Performance appraisal Any method used to assess a person’s performance on the job.

Motivation Organizations try to motivate employees by rewarding them for good performance. This can be done by basing rewards, both financial (pay, bonuses) and nonfinancial (recognition, “pat on the back”), on good performance. Therefore, it is important to evaluate performance so that those rewards can be provided fairly and serve as a motivator for future performance. Merit pay plans, for example, are designed to compensate people according to their job performance. Personnel movement Performance appraisal information helps managers develop an inventory of people appropriate for personnel movement. In other words, performance appraisals can be used to determine who should receive a promotion, transfer, or demotion, and who should be dismissed. Training By identifying areas of poor performance, performance appraisals help the manager suggest training or other programs to improve certain skills or behaviors. Feedback for improvement and personal development Performance appraisals provide a mechanism for

Chapter 9 Strategic Human Resource Management

giving employees feedback about their work performance. If employees are able to do their jobs better in the future, they need to know how well they have done them in the past so that they can adjust their work patterns as necessary for better performance or to get ready for a promotion.

Appraisal Methods Effective performance appraisals usually consider various dimensions of a job. A variety of methods is available, but the most widely used approaches evaluate either behaviors or performance results.30 Behavior-oriented approaches focus on assessing employee behavior based on the idea that certain behaviors will lead to successful performance on the job. Two commonly used methods are graphic rating scales and behavioral-anchored rating scales. Graphic rating scales assess employees on a series of performance dimensions, such as initiative, tardiness, and accuracy of work, using a 5- or 7-point scale. For example, a typical rating scale ranges from 1 to 5, with 1 representing poor performance and 5 representing outstanding performance. The rater evaluates the employee on each performance dimension by checking the appropriate place on the scale. Performance dimensions on a graphic rating scale tend to be fairly general and, as a result, the scales are relatively flexible and can be used to evaluate individuals in a number of different jobs. Because the graphic rating scale is general, considerable interpretation is needed to apply it to specific jobs. As a result, the scale sometimes produces inconsistent and inaccurate ratings of employees. In general, the more clearly and specifically the scales and performance dimensions are defined, the more effective is the evaluation. To define various aspects of an employee’s job more clearly, some organizations use behavioral-anchored rating scales (BARSs). BARSs are similar to graphic rating scales, but they use more detailed examples of job behaviors to represent different levels of performance. The BARS approach relies on job-analysis information to describe a range of desirable and undesirable behaviors for each performance dimension. Each of these behavioral descriptors is used as an anchor to distinguish between high, moderate, and low performance. Using BARS reduces subjective interpretation of performance because they are based on clearly stated job-related activities. They are costly to construct, however, and both subordinates and supervisors require training in their use.31 Results-oriented methods of performance appraisal are an alternative to the behavior-based ones. Resultsbased methods require the establishment of goals,

targets, or results expected, and then a person’s performance is judged against these. Some organizations use 360-degree feedback for performance appraisal. The approach includes feedback about performance from four sources: the supervisor, the subordinates, coworkers, and self-appraisal. Feedback from all these sources can give a more complete picture. However, this approach requires trust and communication skills. People need to understand how to give constructive feedback (see Chapter 11), and they must be comfortable with appraising their supervisor.32

Problems with Performance Appraisal Although we would like to believe that every manager carefully assesses each employee’s performance, most people who have given or received a performance appraisal are aware of the subjective nature of the process. This subjectivity can lead to the following common problems.33 Halo Effect The halo effect occurs when a manager rates an employee high or low on all items because of one characteristic. For example, a worker who has few absences might receive high ratings in all other areas of work, including quantity and quality of output. The manager may not really think about the employee’s other characteristics separately. An employee may perform at the same level across all dimensions, but most people do some things better than others. Thus, the ratings KEY TERMS should differ from one dimen360-degree feedback sion to another. Feedback from the supervisor, subordinates, coworkers, Rater Patterns Managers and self-appraisal. may develop rating patterns. For example, some managers Halo effect have a problem with central Rating an employee high or tendency. Central tendency low on all items because of occurs when the rater judges one characteristic. all employees as average, Central tendency even though their performance Judging all employees as varies. average, even though their Another common rater performance varies. pattern is the leniency–severity Leniency error error. A leniency error occurs Evaluating someone in a when the rater evaluates some group higher than the person in a group higher than they should be rated or when the should be or when the rater is rater is unjustifiably easy in unjustifiably easy in evaluating evaluating performance. performance. In contrast, a severity error occurs when a Severity error rater tends to be unjustifiably Being unjustifiably harsh in harsh in evaluating employee evaluating employee performance. performance.

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A contrast error is the tendency to rate employees relative to each other rather than to performance standards. If almost everyone in a group is doing a mediocre job, then a person performing somewhat better may be rated as excellent because of the contrast effect. But, in a higher-performing group, the same person might have received only an average rating. Although it may be appropriate to compare people at times, performance appraisal ratings should evaluate performance against job requirements rather than against other employees. If a manager bases an evaluation on the employee’s most recent performance, it is considered a recency error. This is typically a problem when the evaluations are not frequent enough for the rater to recall performances over a long period of time. One way to help remedy this is to make weekly or biweekly notations on performance for all employees. When it is time for the performance review, information on the employee can be assembled with accurate documentation. Eliminating the problems associated with performance appraisal is never simple. However, making raters aware of the potential problems through training programs is beneficial in overcoming the errors and the problems that result.34

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REWARDING Organizations must reward employees for doing a good job and for helping achieve the goals and mission of the organization. Frequently, when the word reward is used, we think of money. Certainly money is important, but there are very important Explain how nonmonetary rewards also.35 Many of these compensation and nonmonetary rewards will be discussed in benefits are used other chapters. For example, rewards in organizations. like recognition, encouragement from the manager, coaching and mentoring from the manager, and KEY TERMS supportive types of communication will be discussed in the Contrast error chapters on motivation, leaderThe tendency to rate employship, and communication. Noees relative to each other tice that many of these types of rather than to performance rewards are part of the manstandards. ager being a good leader. BeRecency error cause these topics will be disEvaluation on the employee’s cussed elsewhere, we turn our most recent performance attention to the direct and inrather than all of it. direct aspects of compensation. The overriding goal is to design Compensation and implement equitable and Direct and indirect payments effective reward systems. to employees. LEARNING OBJECTIVE

Compensation Compensation consists of monetary payments and rewards that go to employees. This includes the direct financial payments such as wages, salaries, incentives, bonuses, and commissions. In addition, all indirect payments in the form of benefits such as insurance and vacation are forms of compensation. Compensation rates are determined by an assessment of how valuable the job itself is to an organization, by economic forces in the labor market, by wages that competitors pay, by the level of education and specialized training needed, and in unionized firms, by negotiation. To attract, retain, and motivate employees, organizations develop incentives programs. These incentives are designed to encourage employees to produce results beyond expected performance norms.36 Traditionally, incentives were directly tied to performance such as profitsharing plans and some form of stock options. More recently, many organizations are tailoring incentive programs to increase loyalty, decease turnover, and provide good work–life balance.37 Read how David Brandon, CEO

Chapter 9 Strategic Human Resource Management

Leaders in Action 251

PeopleFirst at Domino’s ith turnover at 158%, Domino’s CEO, David Brandon, realized the company was recruiting, hiring, and training 180,000 people a year. That was in 1999 when Brandon first took the leadership position. He vowed to make major changes and started by renaming the Human Resources department “PeopleFirst.” Brandon attacked turnover by focusing on store managers—hiring more selectively, coaching them on how to create better workplaces, providing access to financial data, and motivating them with the promise of stock options and promotions. To

select better managers, Domino’s implemented a new computer-testing process. Employees seeking a promotion to management are required to take a 30-minute online evaluation of their financial skills and management style. Candidates then receive training in specific performance areas. Technology systems were updated to provide managers with performance statistics and financial data tracking. Brandon also introduced a program that grants stock options to about 15% of store managers, based on criteria such as sales growth and customer service. This is in addition to profit-linked bonuses that Domino’s

of Dominos, took an aggressive approach to turnover in the “Leaders in Action” box. Table 9.4 shows a sample of some creative incentive programs. Further discussion on the topics of incentives and motivation is in Chapter 14.

Benefits Benefits are considered indirect compensation; that is, they are payments beyond wages or salaries that are given to employees as a reward for organizational membership. Benefits can be categorized into several types: required and voluntary security, retirement, time off, insurance and financial, and social and recreational. Examples of the benefits an organization can provide are listed in Table 9.5.38 Organizations commonly provide health, dental, disability, and life insurance coverage for employees and sometimes for their families. The costs of these plans may be paid entirely by the company or shared with the employee. Also, employees usually receive some pay for time that they don’t work, such as vacations, sick days, and holidays. Retirement programs are also a common benefit. Some organizations provide benefits such as counseling, wellness programs, credit unions, legal advice, tuition reimbursem*nt for educational expenses, on-site child care, or emergency child-care arrangements. For example, M/C/C, an advertising agency in Dallas, Texas, built a Child Development Center that allows all employees to bring their children to work. The CEO contends that the center built loyalty, increased employee retention, and helped recruit new employees.39

already had, which traditionally average about 30% of managers’ compensation. Today, store managers’ base salaries start at about $32,000. Brandon’s strategy seems to be working. By 2005 the company’s overall turnover had declined to 107%.

Sources: E. White, “To Keep Employees, Domino’s Decides It’s Not All about Pay,” Wall Street Journal, 17 February 2005, A1; “CEO Interview: David Brandon—Domino’s Pizza Inc.,” Wall Street Journal, 11 April 2005, 1.

A benefits package can represent a significant cost to an organization. However, it can be a key factor in attracting and retaining employees. Most organizations attempt to develop a compensation system that carefully considers issues of equity or fairness. Compensation is often the prime reason that an individual works. However, compensation usually has several meanings to employees. It has economic meaning because it allows people to obtain the necessities and luxuries that they need and want; it is symbolic because it is a means of “keeping score” and a measure of achievement; and an increase in compensation indicates growth because it reflects how well employees’ performance and capabilities have grown. In practice, developing an equitable, or fair, compensation system is challenging, primarily because most organizations have very complex compensation systems. Equity theory, discussed in KEY TERMS Chapter 14, is the basis for Benefits designing fair-pay plans. ComIndirect compensation given pensation designers are conto employees as a reward for cerned with three sources of organizational membership. fairness expectations: external External fairness fairness, internal fairness, and Pay in one organization is fair employee fairness.40 relative to the pay for the External fairness refers to same job in other expectations that the pay for a organizations. job in one organization is fair

Part 3 Organizing Challenges in the 21st Century

Table 9.4

Creative Incentives Programs

252 SAS Institute Incorporated, Cary, North Carolina • Provides performances of live music to keep its employees relaxed and healthy. Each day over lunchtime in the cafeteria of the company’s headquarters, a pianist serenades employees with jazz standards, show tunes, and classical pieces. “The music doesn’t cost a lot but adds a great deal to the company’s culture,” says Jeff Chambers, vice president of human resources. • Operates several day-care centers and a summer camp for its employees’ children at its 900-acre headquarters. Camp Awesome Adventure, for ages 9 to 14, features swimming, basketball, soccer, and nature hikes, among other activities. Baystate Health System, Springfield, Massachusetts • Sponsors 90-minute lunches, four times a year, during which employees with musical talent perform for their coworkers. The cost of that particular event is a few dollars per person for the food. Among the benefits is the opportunity for employees to network and get acquainted with peers, according to Anne-Marie Szmyt, director of work–life strategies. Network Appliance Incorporated, Sunnyvale, California • Installed a putting green and a beach volleyball court at headquarters for the company’s employees to celebrate, relax, and exercise. Orvis Company, Manchester, Vermont • Offers employees free fishing classes and equipment that they can use during their breaks. The company, which specializes in fly fishing equipment, has a lake on its 377-acre property stocked with bass. “It helps align the associate with what we do and why we do it,” says Mary Cheddie, vice president of human resources at Orvis. MBNA Corporation, Wilmington, Delaware • Provides newlyweds with limousine service on their wedding day, an extra week’s vacation, and $500. Making employees “happier people” should also make them friendlier to customers, says spokesman Jim Donahue. DDB Worldwide Communications Group • Sponsors yoga classes in its conference rooms and on-site bicycles. In the firm’s Paris office, it has a café serving wine and beer from the afternoon on, and the London office has a pub. In the U.S. office, beer is available to celebrate or to ease tensions during a hard project. Ken Kaess, DDB chief executive officer and president, considers these socializing opportunities a good way for employees to get to know each other. “Our whole business is based on people being able to work together.” Burton Snowboards, Burlington, Vermont • Allows employees to bring their dogs to work, which a quarter of the company’s 230 headquarters employees do everyday. “The humor and the morale boost that it brings far outweighs any lost productivity,” according to Kathi Sporzynski, Burton’s manager of benefits and compensation. Source: Wall Street Journal Eastern Edition (Only Staff-produced materials may be used) by Jennifer Saranow. Copyright 2005 by Dow Jones & Co., Inc. Reproduced with permission of Dow Jones & Co., Inc. in the format Textbook via Copyright Clearance Center.

KEY TERMS Internal fairness Pay for the job within the organization is fair relative to the pay of higher- and lowerlevel jobs in the same organization. Employee fairness Expectations that individuals on a given job are paid fairly relative to coworkers on the same job.

relative to the pay for the same job in other organizations. Wage surveys are used to compare the organization’s pay rates with other organizations in the industry to ensure that the pay remains competitive. Internal fairness refers to expectations that the pay for the job the individual is performing within the organization is fair relative to the pay of higher- and lower-level jobs in

the same organization. Job-evaluation procedures use job specifications to determine the relative worth of jobs in the organization. Employee fairness refers to expectations that individuals on a given job are paid fairly relative to coworkers on the same job. Differences in pay among coworkers are acceptable if the variations are based on differences in performance or seniority. Because compensation can be so complex, many organizations have compensation specialists in the human resource department who develop, administer, and oversee the compensation system. They ensure that the organization provides compensation that is both competitive and equitable.

Chapter 9 Strategic Human Resource Management

Table 9.5

Examples of Benefits 253

Required Security

Voluntary Security

Worker’s compensation

Social and Recreational

Retirement

Time-off

Insurance

Financial

Severance pay

Social Security

Vacation

Medical

Credit union

Recreational facilities

Unemployment compensation

Supplemental unemployment

Pension fund

Companypaid travel

Accident

House or car loans

Company publications

Old age, survivors’, and disability insurance

Leave of absence

Early retirement

Holidays Sick pay

Group rates Disability

Legal services

Professional memberships

State disability insurance

Preretirement counseling

Military reserve pay

Life

Purchase discounts

Counseling

Medicare benefits

Disability retirement benefits

Socialservice sabbatical

Auto

Stock plans

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