Bateman and Snell 2013-Management 3rd Ed.

MANAGEMENT

BATEMAN | SNELL

HOW DO YOU FIND A JOB OR CAREER FOR WHICH

YOU’RE PASSIONATE? CH 1

Social Entrepreneurs do well by doing good.

What’s your plan?

Do social networking sites like Facebook, LinkedIn, and Twitter change how managers communicate? CH 6 & 13

CH 3 & 4

www.mhhe.com/BatemanM3e

WHY ARE SO MANY WORKERS UNDER THE AGE OF 25 DISSATISFIED WITH THEIR JOBS?

ISBN 978-0-07-802952-3 MHID 0-07-802952-X

CH 11

90000

EAN 9

780078 029523 www.mhhe.com

is Motivation.

is Momentum.

is Moving Forward.

is McGraw-Hill.

MD DALIM #1203425 7/22/12 CYAN MAG YELO BLACK

BATEMAN | SNELL

ARE YOU CONNECTED?

MANAGEMENT

STUDENTS... Want to get better grades?

(Who doesn’t?)

Ready to do online interactive assignments that help you apply what you’ve learned? (You need to know how to use this stuff in the real world…) Need new ways to study before the big test?

(A little peace of mind is a good thing…)

With McGraw-Hill's Connect Plus Management, ®

STUDENTS GET: Interactive, engaging content.

Immediate feedback on how you’re doing. (No more wishing you could call your instructor at 1 a.m.) Quick access to lectures, practice materials, eBook, and more. (All the material you need to be successful is right at your fingertips.) LearnSmart – intelligent flash cards that adapt to your specific needs and provide you with 24 x 7 personalized study

MD DALIM #1203425B 7/22/12 CYAN MAG YELO BLACK BACKUP

Interactive Applications – chapter assignments that help you APPLY what you’ve learned in the course.

STUDENTS... Want to get better grades?

(Who doesn’t?)

Ready to do online interactive assignments that help you apply what you’ve learned? (You need to know how to use this stuff in the real world…) Need new ways to study before the big test?

(A little peace of mind is a good thing…)

With McGraw-Hill's Connect Plus Management, ®

STUDENTS GET: Interactive, engaging content.

MD DALIM #1203425B 7/22/12 CYAN MAG YELO BLACK BACKUP

Interactive Applications – chapter assignments that help you APPLY what you’ve learned in the course.

Confirming pages

Less managing. More teaching. Greater learning.

INSTRUCTORS... Would you like your students to show up for class more prepared?

(Let’s face it, class

is much more fun if everyone is engaged and prepared…)

Want ready-made application-level interactive assignments, student progress reporting, and auto-assignment grading? (Less time grading means more time teaching…) Want an instant view of student or class performance relative to learning objectives? (No more wondering if students understand…) Need to collect data and generate reports required for administration or accreditation? (Say goodbye to manually tracking student learning outcomes…) Want to record and post your lectures for students to view online?

With McGraw-Hill's Connect Plus Management, ®

INSTRUCTORS GET: s Interactive Applications – book-speciﬁc interactive assignments that require students to APPLY what they’ve learned. s Simple assignment management, allowing you to spend more time teaching. s Auto-graded assignments, quizzes, and tests. s Detailed Visual Reporting where student and section results can be viewed and analyzed. s Sophisticated online testing capability. s A ﬁltering and reporting function that allows you to easily assign and report on materials that are correlated to accreditation standards, learning outcomes, and Bloom’s taxonomy. s An easy-to-use lecture capture tool.

bat2952X_fm_i-xvi.indd i

31/07/12 10:14 PM

Confirming pages

Want an online, searchable version of your textbook? Wish your textbook could be available online while you’re doing your assignments? Connect® Plus Management eBook If you choose to use Connect® Plus Management, you have an affordable and searchable online version of your book integrated with your other online tools.

Connect® Plus Management eBook offers features like: s Topic search s Direct links from assignments s Adjustable text size s Jump to page number s Print by section

Want to get more value from your textbook purchase? Think learning organizational behavior should be a bit more interesting? Check out the STUDENT RESOURCES section under the Connect® Library tab. Here you’ll find a wealth of resources designed to help you achieve your goals in the course. You’ll find things like quizzes, PowerPoints, and Internet activities to help you study. Every student has different needs, so explore the STUDENT RESOURCES to find the materials best suited to you.

bat2952X_fm_i-xvi.indd ii

31/07/12 10:14 PM

Confirming pages

management Thomas S. Bateman McIntire School of Commerce, University of Virginia

Scott A. Snell Darden Graduate School of Business, University of Virginia

bat2952X_fm_i-xvi.indd iii

31/07/12 10:14 PM

Confirming pages

management SENIOR VICE PRESIDENT, PRODUCTS & MARKETS

KURT L. STRAND

VICE PRESIDENT, GENERAL MANAGER, PRODUCTS & MARKETS VICE PRESIDENT, CONTENT PRODUCTION & TECHNOLOGY SERVICES MANAGING DIRECTOR

PAUL DUCHAM

EXECUTIVE BRAND MANAGER

MICHAEL ABLASSMEIR

EXECUTIVE DIRECTOR OF DEVELOPMENT

ANN TORBERT

DEVELOPMENT EDITOR II

LAURA GRIFFIN

EDITORIAL COORDINATOR

CLAIRE WOOD

MARKETING MANAGER

ELIZABETH TREPKOWSKI

MARKETING SPECIALIST CONTENT PROJECT MANAGER BUYER II

LIZ STEINER PAT FREDERICKSON

DEBRA R SYLVESTER

INTERIOR DESIGNER COVER DESIGNER

MATT DIAMOND KAY LIEBERHERR

SENIOR CONTENT LICENSING SPECIALIST PHOTO RESEARCHER

COMPOSITOR

JEREMY CHESHARECK

ALLISON GRIMES

MEDIA PROJECT MANAGER TYPEFACE

BRENT GORDON

KIMBERLY MERIWETHER DAVID

RON NELMS

10/12 MINION PRO REGULAR LASERWORDS PRIVATE LIMITED

PRINTER

QUAD/GRAPHICS

MANAGEMENT, THIRD EDITION Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Previous editions © 2011 and 2009. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 QPD/QPD 1 0 9 8 7 6 5 4 3 2 ISBN 978-0-07-802952-3 (student edition) MHID 0-07-802952-X (student edition) ISBN 978-0-07-765027-8 (instructor’s edition) MHID 0-07-765027-1 (instructor’s edition) All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Control Number: 2012942131 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

bat2952X_fm_i-xvi.indd iv

31/07/12 10:14 PM

Confirming pages

brief

contents part one INTRODUCTION 2 chapter 1 chapter 2 chapter 3

Managing Effectively in a Changing World 2 The Evolution of Management 24 The Organizational Environment and Culture 40

part two PLANNING 66 chapter 4 chapter 5 chapter 6

Ethics and Corporate Responsibility 66 Strategic Planning and Decision Making 90 Entrepreneurship 120

part three ORGANIZING chapter 7 chapter 8 chapter 9

148

Organizing for Action 148 Managing Human Resources 176 Managing Diversity and Inclusion 202

part four LEADING chapter 10 chapter 11 chapter 12 chapter 13

228

Leadership 228 Motivating People 254 Teamwork 278 Communicating 300

part five CONTROLLING 324 chapter 14 Managerial Control 324 chapter 15 Innovating and Changing 350

bat2952X_fm_i-xvi.indd v

31/07/12 10:14 PM

Confirming pages

contents part one CHAPTER 1

INTRODUCTION 2

MANAGING EFFECTIVELY IN A CHANGING WORLD 2

THE FOUR FUNCTIONS OF MANAGEMENT 4 1.1|Planning Helps You Deliver Value 5 1.2|Organizing Resources Achieves Goals 6 1.3|Leading Mobilizes Your People 7 1.4|Controlling Means Learning and Changing 8 1.5|Managing Requires All Four Functions 9 FOUR DIFFERENT LEVELS OF MANAGERS 9 2.1|Top Managers Strategize and Lead 9 2.2|Middle Managers Bring Strategies to Life 11 2.3|Frontline Managers are the Vital Link to Employees 12 2.4|Team Leaders Facilitate Team Effectiveness 12 2.5|Three Roles That All Managers Perform 13 MANAGERS NEED THREE BROAD SKILLS 14 3.1|Technical Skills 14 3.2|Conceptual Decision Skills 14 3.3|Interpersonal and Communication Skills 14 MAJOR CHALLENGES FACING MANAGERS 15 4.1|Business Operates on a Global Scale 16

4.2|Technology is Continuously Advancing 17 4.3|Knowledge is a Critical Resource 18 4.4|Collaboration Boosts Performance 18 4.5|Diversity Needs to be Leveraged 19 SOURCES OF COMPETITIVE ADVANTAGE 20 5.1|Innovation Keeps You Ahead of Competitors 20 5.2|Quality Must Continuously Improve 20 5.3|Services Must Meet Customers’ Changing Needs 21 5.4|Do It Better and Faster 22 5.5|Low Costs Help Increase Your Sales 22 5.6|The Best Managers Deliver All Five Advantages 23 INDRA NOOYI OF PEPSICO PUSHES FOR SUSTAINABLE, “HEALTHIER” GROWTH 10 TAKE CHARGE OF YOUR CAREER // FIND YOUR PASSION! 15

CHAPTER 2

THE EVOLUTION OF MANAGEMENT 24

bat2952X_fm_i-xvi.indd vi

31/07/12 10:14 PM

Confirming pages

3.4|Systems Theory 36 MODERN CONTRIBUTORS 37 AN EYE ON THE FUTURE 39 TAKE CHARGE OF YOUR CAREER // USING HISTORY TO YOUR ADVANTAGE! 34 THE GREENEST COMPANIES WORLDWIDE 38

CHAPTER 3

THE ORGANIZATIONAL ENVIRONMENT AND CULTURE 40

THE MACROENVIRONMENT 42 1.1|Laws and Regulations Protect and Restrain Organizations 42 1.2|The Economy Affects Managers and Organizations 43 1.3|Technology is Changing Every Business Function 45 1.4|Demographics Describe Your Employees and Customers 45 1.5|Social Values Shape Attitudes Toward Your Company and Its Products 47 THE COMPETITIVE ENVIRONMENT 48 2.1|Rivals Can be Domestic or Global 48 2.2|New Entrants Increase When Barriers to Entry are Low 49 2.3|Buyers Determine Your Success 50 2.4|Products Can be Substitutes or Complements of Yours 51 2.5|Suppliers Provide Your Resources 52 KEEP UP WITH CHANGES IN THE ENVIRONMENT 52 3.1|Environmental Scanning Keeps You Aware 53 3.2|Scenario Development Helps You Analyze the Environment 53 3.3|Forecasting Predicts Your Future Environment 54 3.4|Benchmarking Helps You Become Best in Class 54 RESPONDING TO THE ENVIRONMENT 54 4.1|Adapt to the External Environment 54 4.2|Influence Your Environment 56 4.3|Change the Boundaries of the Environment 58

4.4|Three Criteria Help You Choose the Best Approach 59 CULTURE AND THE INTERNAL ENVIRONMENT OF ORGANIZATIONS 59 5.1|What is an Organization Culture? 59 5.2|Companies Give Many Clues About Their Culture 61 5.3|Four Different Types of Organizational Cultures 62 5.4|Cultures Can be Leveraged to Meet Challenges in the External Environment 64 TOMS SHOES MAKES IMPACT WITH ITS “ONEFOR-ONE” MODEL 46 TAKE CHARGE OF YOUR CAREER // FIGURE OUT THE ORGANIZATIONAL CULTURE, AND FAST! 62

part two CHAPTER 4

PLANNING 66

ETHICS AND CORPORATE RESPONSIBILITY 66

CONTENTS

bat2952X_fm_i-xvi.indd vii

vii

31/07/12 10:14 PM

Confirming pages

2.3|The Ethical Climate Influences Employees 76 2.4|Danger Signs 77 MANAGERS SHAPE BEHAVIOR 78 3.1|Ethical Leadership 78 3.2|Ethics Codes 79 3.3|Ethics Programs 79 YOU CAN LEARN TO MAKE ETHICAL DECISIONS 80 4.1|The Ethical Decision-Making Process 81 4.2|Outcomes of Unethical Decisions 81 4.3|Ethics Requires Courage 82 CORPORATE SOCIAL RESPONSIBILITY 83 5.1|Four Levels of Corporate Social Responsibility 83 5.2|Do Businesses Really Have a Social Responsibility? 84 5.3|You can Do Good and Do Well 85 THE NATURAL ENVIRONMENT 86 6.1|Economic Activity has Environmental Consequences 86 6.2|Development can be Sustainable 87 6.3|Some Organizations Set Environmental Agendas 88 TAKE CHARGE OF YOUR CAREER // WHY SETTLE? FIND A GREAT PLACE TO WORK! 77 A NEW MEANING FOR “GREENHOUSES” 88

CHAPTER 5

STRATEGIC PLANNINGAND DECISION MAKING 90

THE PLANNING PROCESS 92 Step 1: Analyze the Situation 92 Step 2: Generate Alternative Goals and Plans 93 Step 3: Evaluate Goals and Plans 94 Step 4: Select Goals and Plans 94 Step 5: Implement the Goals and Plans 95 Step 6: Monitor and Control Performance 96 LEVELS OF PLANNING 96 2.1|Strategic Planning Sets a Long-Term Direction 96 2.2|Tactical and Operational Planning Support the Strategy 97 2.3|All Levels of Planning Should be Aligned 98 STRATEGIC PLANNING PROCESS 98 First, Establish a Mission, Vision, and Goals 99 Second, Analyze External Opportunities and Threats 100

viii

Third, Analyze Internal Strengths and Weaknesses 101 Fourth, Conduct a SWOT Analysis and Formulate Strategy 103 BUSINESS STRATEGY 106 FIFTH, IMPLEMENT THE STRATEGY 109 Finally, Control your Progress 109 MANAGERIAL DECISION MAKING 110 Formal Decision Making has Six Stages 111 6.1|Identifying and Diagnosing the Problem 112 6.2|Generating Alternative Solutions 112 6.3|Evaluating Alternatives 112 6.4|Making the Choice 114 6.5|Implementing the Decision 115 6.6|Evaluating the Decision 115 HUMAN NATURE ERECTS BARRIERS TO GOOD DECISIONS 116 7.1|Psychological Biases 116 7.2|Time Pressures 117 7.3|Social Realities 117 GROUPS MAKE MANY DECISIONS 117 8.1|Groups can Help 117 8.2|Groups can Hurt 118 8.3|Groups must be Well Led 119

CONTENTS

bat2952X_fm_i-xvi.indd viii

31/07/12 10:15 PM

Confirming pages

TAKE CHARGE OF YOUR CAREER // BABY BOOMERS LAUNCH ALTERNATIVE CAREERS 113 ZERO MOTORCYCLES LEADS THE PACK 106

CHAPTER 6

ENTREPRENEURSHIP 120

ENTREPRENEURSHIP 124 1.1|Why become an Entrepreneur? 125 1.2|What Does It Take to Succeed? 126 WHAT BUSINESS SHOULD YOU START? 127 2.1|The Idea 127 2.2|The Opportunity 128 2.3|Franchises 130 2.4|The Next Frontiers 131 2.5|The Internet 131 2.6|Side Streets 132 WHAT DOES IT TAKE, PERSONALLY? 132 3.1|Making Good Choices 133 3.2|Failure Happens, But You Can Improve The Odds of Success 134 3.3|The Role of the Economic Environment 135 3.4|Business Incubators 135 COMMON MANAGEMENT CHALLENGES 136 4.1|You Might not Enjoy It 136 4.2|Survival is Difficult 136 4.3|Growth Creates New Challenges 137 4.4|It’s Hard to Delegate 137 4.5|Misuse of Funds 138 4.6|Poor Controls 138 4.7|Mortality 138 4.8|Going Public 138 PLANNING AND RESOURCES HELP YOU SUCCEED 139 5.1|Planning 139 5.2|Nonfinancial Resources 141 CORPORATE ENTREPRENEURSHIP 142 6.1|Build Support for Your Ideas 143 6.2|Build Intrapreneurship in Your Organization 143 6.3|Managing Intrapreneurship is Risky 144 6.4|An Entrepreneurial Orientation Encourages New Ideas 144 TAKE CHARGE OF YOUR CAREER // WHY WAIT? START A BUSINESS WHILE STILL IN COLLEGE 128 INTRAPRENEURSHIP AT IKEA 144

part three CHAPTER 7

ORGANIZING 148

ORGANIZING FOR ACTION 148

FUNDAMENTALS OF ORGANIZING 151 1.1|Differentiation Creates Specialized Jobs 152 1.2|Integration Coordinates Employees’ Efforts 152 THE VERTICAL STRUCTURE 153 2.1|Authority is Granted Formally and Informally 153 2.2|Span of Control Determines a Manager’s Authority 154

CONTENTS

bat2952X_fm_i-xvi.indd ix

31/07/12 10:15 PM

Rev.Confirming pages

CHAPTER 8 MANAGING HUMAN RESOURCES 176 STRATEGIC HUMAN RESOURCES MANAGEMENT 178 1.1|HR planning Involves Three Stages 180 STAFFING THE ORGANIZATION 183 2.1|Recruitment Helps Find Job Candidates 183 SELECTION CHOOSES APPLICANTS TO HIRE 185 3.1|Selection Methods 185 3.2|Both Reliability and Validity are Important 187 3.3|Sometimes Employees Must Be Let Go 188 3.4|Legal Issues and Equal Employment Opportunity 189 TRAINING AND DEVELOPMENT 191 4.1|Training Programs Include Four Phases 191 4.2|Training Options Achieve Many Objectives 192

2.3|Delegation is How Managers Use Others’ Talents 155 2.4|Decentralization Spreads Decision-Making Power 156 THE HORIZONTAL STRUCTURE 157 3.1|Functional Organizations Foster Efficient Experts 158 3.2|Divisional Organizations Develop a Customer Focus 159 3.3|Matrix Organizations Try to Be the Best of Both Worlds 160 3.4|Network Organizations are Built on Collaboration 163 ORGANIZATIONAL INTEGRATION 164 4.1|Standardization Coordinates Work Through Rules and Routines 165 4.2|Plans Set a Common Direction 165 4.3|Mutual Adjustment Allows Flexible Coordination 166 4.4|Coordination Requires Communication 166 ORGANIZATIONAL AGILITY 167 5.1|Strategies Promote Organizational Agility 167 5.2|Agile Organizations Focus on Customers 170 5.3|Technology Can Support Agility 172 TAKE CHARGE OF YOUR CAREER // BE A SPECIALIST FIRST, THEN A GENERALIST 161 KIVA’S NETWORK REACHES ACROSS THE GLOBE 162

PERFORMANCE APPRAISAL 192 5.1|What do You Appraise? 192 5.2|Who Should do the Appraisal? 194 5.3|How do you Give Employees Feedback? 195 DESIGNING REWARD SYSTEMS 196 6.1|Pay Decisions Consider the Company, Position, and Individual 196 6.2|Incentive Pay Encourages Employees to do Their Best 197 6.3|Executive Pay has Generated Controversy 197 6.4|Employees Get Benefits, Too 198 6.5|Pay and Benefits Must Meet Legal Requirements 199 6.6|Employers Must Protect Health and Safety 199 LABOR RELATIONS 200 7.1|What Labor Laws Exist? 200 7.2|How do Employees Form Unions? 200 7.3|How is Collective Bargaining Conducted? 201 7.4|What does the Future Hold? 201 TAKE CHARGE OF YOUR CAREER // TIPS FOR PROVIDING CONSTRUCTIVE FEEDBACK 195 HIRING COLLEGE HUNKS TO HAUL JUNK 180

CHAPTER 9

MANAGING DIVERSITY AND INCLUSION 202

DIVERSITY IS DYNAMIC AND EVOLVING 205 1.1|Diversity Shaped America’s Past 205 1.2|Diversity is Growing in Today’s Workforce 206 1.3|Tomorrow’s Workers will be More Varied than Ever 211 WELL-MANAGED DIVERSITY AND INCLUSION: A COMPETITIVE ADVANTAGE 213 A DIVERSE AND INCLUSIVE WORKFORCE: CHALLENGING TO MANAGE 213 MULTICULTURAL ORGANIZATIONS 215 HOW ORGANIZATIONS CAN CULTIVATE A DIVERSE WORKFORCE 216 5.1|Start by Securing Top Managers’ Commitment 216 5.2|Conduct an Organizational Assessment 217 5.3|Attract a Diverse Group of Qualified Employees 217

x CONTENTS

bat2952X_fm_i-xvi.indd x

8/10/12 7:57 PM

Confirming pages

4.2|Certain Behaviors May Make Leaders Effective 237 4.3|The Best Way to Lead Depends on the Situation 240 CONTEMPORARY PERSPECTIVES ON LEADERSHIP 245 5.1|Charismatic Leaders Inspire Their Followers 245 5.2|Transformational Leaders Revitalize Organizations 247 5.3|Authentic Leadership Adds An Ethical Dimension 249 YOU CAN LEAD 249 6.1|Today’s Organizations Offer Many Opportunities to Lead 249 6.2|Good Leaders Need Courage 251 MAJORA CARTER LEADS THE FIGHT FOR ENVIRONMENTAL JUSTICE 246 TAKE CHARGE OF YOUR CAREER // DEVELOP YOUR LEADERSHIP SKILLS 252

CHAPTER 11

MOTIVATING PEOPLE 254

SETTING GOALS 256 1.1|Well-Crafted Goals are Highly Motivating 257 1.2|Stretch Goals Help Employees Reach New Heights 258 1.3|Goal Setting Must Be Paired with Other Management Tools 259 1.4|Set Your Own Goals, Too 260 5.4|Train Employees to Understand and Work with Diversity 217 5.5|Retain Talented Employees 218

REINFORCING PERFORMANCE 260 2.1|Behavior has Consequences 261 2.2|Be Careful What you Reinforce 262

MANAGING ACROSS BORDERS 221 6.1|Global Managers Need Cross-Cultural Skills 222 6.2|National Cultures Shape Values and Business Practices 223 6.3|International Management Introduces Complex Ethical Challenges 226 TAKE CHARGE OF YOUR CAREER // FIND A MENTOR (BEFORE THEY ALL RETIRE) 219 MOVE OVER EXPATRIATES: HERE COMES A NEW BREED OF INTERNATIONAL MANAGERS 220

part four CHAPTER 10

LEADING 228

LEADERSHIP 228

VISION 231 LEADING AND MANAGING 233 2.1|Comparing Leaders and Managers 233 2.2|Good Leaders Need Good Followers 234 POWER AND LEADERSHIP 234 TRADITIONAL APPROACHES TO UNDERSTANDING LEADERSHIP 236 4.1|Certain Traits May Set Leaders Apart 236

CONTENTS

bat2952X_fm_i-xvi.indd xi

31/07/12 10:17 PM

Confirming pages

6.3|Procedures—Not Just Outcomes—Should Be Fair 276 JOB SATISFACTION 276 7.1|Companies are Improving the Quality of Work Life 277 7.2|Psychological Contracts are Understandings of Giveand-Take 277 TAKE CHARGE OF YOUR CAREER // WILL YOU BE MOTIVATED IN THE NEW JOB? 270 STONYFIELD FARM MOTIVATES THROUGH ITS MISSION 258

CHAPTER 12 TEAMWORK 278 THE CONTRIBUTIONS OF TEAMS 280 THE NEW TEAM ENVIRONMENT 280 2.1|Organizations Have Different Types of Teams 282 2.2|Self-Managed Teams Empower Employees 284 HOW GROUPS BECOME REAL TEAMS 285 3.1|Group Activities Shift as the Group Matures 285 3.2|Over Time, Groups Enter Critical Periods 285 3.3|Some Groups Develop into Teams 285 WHY DO GROUPS SOMETIMES FAIL? 287 BUILDING EFFECTIVE TEAMS 287 5.1|Effective Teams Focus on Performance 288 5.2|Managers Motivate Effective Teamwork 289 5.3|Effective Teams Have Skilled Members 290 5.4|Norms Shape Team Behavior 291 5.5|Team Members Must Fill Important Roles 291

2.3|Should You Punish Mistakes? 262 2.4|Feedback is Essential Reinforcement 263 PERFORMANCE-RELATED BELIEFS 264 3.1|If You Try Hard, Will You Succeed? 264 3.2|If You Succeed, Will You Be Rewarded? 264 3.3|All Three Beliefs Must Be High 264 3.4|Expectancy Theory Identifies Leverage Points 265 UNDERSTANDING PEOPLE’S NEEDS 266 4.1|Maslow Arranged Needs in a Hierarchy 266 4.2|Alderfer Identified Three Work-Related Needs 267 4.3|McClelland Said Managers Seek Achievement, Affiliation, and Power 268 4.4|Do Need Theories Apply Internationally? 269 DESIGNING JOBS THAT MOTIVATE 269 5.1|Managers Can Make Work More Varied and Interesting 270 5.2|Herzberg Proposed Two Important Job-Related Factors 271 5.3|Hackman and Oldham: Meaning, Responsibility, and Feedback Provide Motivation 272 5.4|To Motivate, Empowerment Must Be Done Right 273 ACHIEVING FAIRNESS 274 6.1|People Assess Equity by Making Comparisons 275 6.2|People Who Feel Inequitably Treated Try to Even the Balance 275 xii

CONTENTS

bat2952X_fm_i-xvi.indd xii

31/07/12 10:18 PM

Confirming pages

5.6|Cohesiveness Affects Team Performance 292 5.7|Managers can Build Cohesiveness and HighPerformance Norms 294 MANAGING LATERAL RELATIONSHIPS 295 6.1|Some Team Members should Manage Outward 295 6.2|Some Relationships Help Teams Coordinate with Others in the Organization 295 CONFLICT HAPPENS 296 7.1|Conflicts Arise Both within and among Teams 296 7.2|Conflict Management Techniques 296 7.3|Mediating Can Help Resolve a Conflict 298 7.4|Conflict Isn’t Always Face-To-Face 298 TEAMS MAKE SOCIAL IMPACT BY DESIGN 282 TAKE CHARGE OF YOUR CAREER // PLAYING DEVIL’S ADVOCATE CAN HELP YOUR TEAM MAKE BETTER DECISIONS 293

ORGANIZATIONAL COMMUNICATION 317 5.1|Downward Communication Directs, Motivates, Coaches, and Informs 317 5.2|Upward Communication is Invaluable to Management 319 5.3|Horizontal Communication Fosters Collaboration 320 INFORMAL COMMUNICATION NEEDS ATTENTION 321 6.1|Managing Informal Communication 322 BOUNDARYLESS ORGANIZATIONS HAVE NO BARRIERS TO INFORMATION FLOW 322 TWITTER AS A LIFELINE DURING DISASTERS 308

CHAPTER 13

COMMUNICATING 300

INTERPERSONAL COMMUNICATION 302 1.1|One-Way Communication is Common 302 1.2|Communication Should Flow in Two Directions 302 WATCH OUT FOR COMMUNICATION PITFALLS 303 2.1|Everyone Uses Perceptual and Filtering Processes 304 2.2|Mistaken Perceptions Cause Misunderstandings 304 COMMUNICATIONS FLOW THROUGH DIFFERENT CHANNELS 306 3.1|Electronic Media Offer Flexible, Efficient Channels 306 3.2|Managing the Electronic Load 310 3.3|The Virtual Office 310 3.4|Use “Richer” Media for Complex or Critical Messages 311 IMPROVING COMMUNICATION SKILLS 311 4.1|Senders Can Improve Their Presentations, Writing, Word Choice, and Body Language 312 4.2|Nonverbal Signals Convey Meaning, Too 314 4.3|Receivers Can Improve Their Listening, Reading, and Observational Skills 315

TAKE CHARGE OF YOUR CAREER // TIPS FOR MAKING FORMAL PRESENTATIONS MORE POWERFUL! 313

part five CHAPTER 14

CONTROLLING 324 MANAGERIAL CONTROL 324

SPINNING OUT OF CONTROL? 326 BUREAUCRATIC CONTROL SYSTEMS 328 2.1|Control Systems have Four Steps 328 2.2|Bureaucratic Control Occurs Before, During, and After Operations 331 2.3|Management Audits Control Various Systems 333 BUDGETARY CONTROLS 334 3.1|Fundamental Budgetary Considerations 334 3.2|Types of Budgets 335 3.3|Activity-Based Costing 336 FINANCIAL CONTROLS 337 4.1|Balance Sheet 337 4.2|Profit and Loss Statement 339 4.3|Financial Ratios 339

CONTENTS

bat2952X_fm_i-xvi.indd xiii

xiii

31/07/12 10:19 PM

Rev.Confirming pages

4.4|Bureaucratic Control has a Downside 340 MORE EFFECTIVE CONTROL SYSTEMS 341 5.1|Establish Valid Performance Standards 342 5.2|Provide Adequate Information 343 5.3|Ensure Acceptability to Employees 344 5.4|Maintain Open Communication 344 5.5|Use Multiple Approaches 345 THE OTHER CONTROLS: MARKETS AND CLANS 345 6.1|Market Controls Let Supply and Demand Determine Prices and Profits 345 6.2|Clan Control Relies on Empowerment and Culture 347 TAKE CHARGE OF YOUR CAREER // LEARN HOW TO CONTROL WITHOUT BEING TOO CONTROLLING! 327 TERRACYCLE’S COST CONTROL FORMULA IS GARBAGE 336

CHAPTER 15

INNOVATING AND CHANGING 350

DECIDING TO ADOPT NEW TECHNOLOGY 352 1.1|Measuring Current Technologies 353 1.2|Assessing External Technological Trends 354 1.3|Engaging in Disruptive Innovation 354 BASE TECHNOLOGY DECISIONS ON RELEVANT CRITERIA 355 2.1|Anticipated Market Receptiveness 355 2.2|Technological Feasibility 355 2.3|Economic Viability 356 2.4|Anticipated Capability Development 357 2.5|Organizational Suitability 357 KNOW WHERE TO GET NEW TECHNOLOGIES 357 ORGANIZING FOR INNOVATION 359

4.1|Who is Responsible for New Technology Innovations? 360 4.2|To Innovate, Unleash Creativity 360 4.3|Don’t let Bureaucracy Squelch Innovation 361 4.4|Development Projects can Drive Innovation 361 4.5|Job Design and Human Resources Make Innovation Possible 362 BECOMING WORLD-CLASS 362 5.1|Build Organizations for Sustainable, Long-Term Greatness 363 5.2|Replace the “Tyranny of the or” with the “Genius of the and” 363 5.3|Organization Development Systematically Shapes Success 364 5.4|Certain Management Practices Make Organizations Great 365 MANAGING CHANGE 365 6.1|Motivate People to Change 366 6.2|A Three-Stage Model Suggests Ways to Manage Resistance 368 6.3|Specific Approaches Can Encourage Cooperation 370 6.4|Managers Have to Harmonize Multiple Changes 371 6.5|Managers Must Lead Change 372 SHAPING THE FUTURE 374 7.1|Think about the Future 374 7.2|Create the Future 374 7.3|Shape Your Own Future 376 7.4|Learn and Lead the Way to Your Goals 377 COMPUSA ORDERS UP A CUSTOMER-FOCUSED FUTURE 364 TAKE CHARGE OF YOUR CAREER // THE “NEW” JOB SECURITY: CONTINUALLY ADD VALUE AT WORK 376

NOTES 380 CREDITS 419 INDEX 421

xiv

CONTENTS

bat2952X_fm_i-xvi.indd xiv

8/10/12 12:38 AM

Confirming pages

chapter changes CHAPTER 1

CHAPTER 4

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features.

• Tightened two sections to enhance flow of chapter.

• Expanded coverage on topics to emphasize “management” instead of “business.” • New Green feature, “Indra Nooyi of PepsiCo Pushes for Sustainable, ‘Healthier’ Growth.” • Over 30 new examples, including: Jeff Bezos and Kindle Fire of Amazon, Tony Hsieh of Zappos, Ursula Burns of Xerox, Wim Elfrink of Cisco, eBay, Target, Facebook, Twitter, LinkedIn, and Netflix. • 15 current events, including the death of Steve Jobs of Apple, Zappo’s “fun” culture, Deepwater Horizon oil rig explosion in the Gulf, and the growth of the BRIC economies. • 4 new exhibits.

CHAPTER 2 • New Chapter and Learning Objectives. • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features.

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • New applied examples. • Addition of over 10 current events and companies including: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and deceptive lending practices that contributed to the housing crisis.

CHAPTER 5 • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • Quotations from Peter Drucker, Herb Kelleher, and Warren Bennis. • Updated Green feature, “Zero Motorcycles Leads the Pack.” • 201 current events that include topics such as the European debt crisis, J.P. Morgan Chase, Citigroup, Wells Fargo’s crossselling strategies, IDEO, and W.L. Gore. • 4 new/updated figures.

• New Green feature, “The Greenest Companies Worldwide.” • 25 new examples, including: Sun Tsu, Frank Gilbreth’s motion studies, Michael Porter, Gary Hamel, Peter Drucker, Bob Waterman, Theory X as related to self-fulfilling prophecy, Newsweek’s rankings of greenest companies, and IBM.

CHAPTER 3 • 5 updated or new vocabulary terms. • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • New Green feature, “Toms Shoes Makes Impact with its ‘One-for-One’ Model.”

CHAPTER 6 • New examples of diverse entrepreneurs (female, college-age, immigrant, and international). • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • New Green feature, “Intrapreneurship at IKEA.” • Over 30 new companies, current events, and issues, including Oprah Winfrey of Harpo Productions, Martha Stewart of Omnimedia, Vera Wang, Zac Workman of ZW Enterprises, and crowdfunding or raising capital from social networking sites.

• 351 organizations or topics, including: Dunkin’ Donuts, Foreign Corrupt Practices Act, Royal Dutch Shell, Toms Shoes, Perfetti Van Melle (Italy), and Tata (India).

CHAPTER 7

• New current events include: Johnson & Johnson bribery scandal in Europe; protests in Greece and the “Arab spring”; supportive workplace policies for working parents; Zynga’s Farmville and CityVille social games; and NikeiD customizable shoes.

• Converted parts of flowing text into numbered sections to enhance student learning.

• 4 new exhibits.

• Trimmed chapter length.

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • Updated Green feature, “Kiva’s Network Reaches across the Globe.”

CHAPTER CHANGES

bat2952X_fm_i-xvi.indd xv

31/07/12 10:20 PM

Confirming pages

• Coverage on 201 current events, including: Electronic Arts, Lean Six Sigma, Jeff Harvey of Burgerville (“2010 Restaurant Business’s Entrepreneur of the Year”), McNeil Consumer Healthcare & Tylenol, and Bombardier Aerospace’s modular (virtual) worldwide network.

and the Baojun 630 automobile, and Bancorp’s use of 20-something employees (“Dynamic Dozen”) to understand young customers and other employees.

CHAPTER 12 CHAPTER 8 • Tightened flow of chapter by updating various parts of the text and reducing several sections. • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • Updated Green feature, “Hiring College Hunks to Haul Junk.” • Approximately 30 current events/issues/companies such as: Fortune’s 2011 list of the “50 Most Powerful Women in Business,” Mercy Health System, SAS, global skills shortages, and Betty Dukes and the class action lawsuit against Walmart.

CHAPTER 9 • Updated several parts of the chapter and reduced overall length. • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • New Green feature, “Move Over Expatriates: Here Comes a New Breed of International Managers.” • Highlights on over 30 companies that either emphasize diversity or were founded by an immigrant entrepreneur. • 6 new or redesigned exhibits.

• Trimmed chapter length. • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • New Green feature, “Teams Make Social Impact by Design.” • 20 new current companies, people, issues, and events such as: Google’s Nooglers and “tech talks,” Saatchi & Saatchi, Continuum, the Rockefeller Foundation, Coanchor cohesiveness at the Today show, and Mary Parker Follett.

CHAPTER 13 • New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features. • Updated Green feature, “Twitter as a Lifeline during Disasters.” • The addition of 7 current events on companies and people including: Thierry Breton (CEO of tech firm Atos) and his “zero e-mail” policy, IBM’s BluePages internal social network, Twitter standout stories from 2011 (Alabama tornadoes, Arab Spring protests, the Occupy Wall Street movement, and the Japanese earthquake, tsunami, and nuclear plant explosions), and Julian Assange of WikiLeaks. • 4 new and/or modified exhibits.

CHAPTER 14 • Decreased chapter length.

CHAPTER 10 • Decreased chapter length.

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features.

• Updated Green feature, “Majora Carter Leads the Fight for Environmental Justice.”

• Updated Green feature, “TerraCycle’s Cost-Control Formula Is Garbage.”

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features.

• Over 20 new current events/issues/companies/people, including: Greece economic crisis, Bill Lumbergh (actor Gary Cole) and Peter Gibbons (actor Ron Livingston) of the movie Office Space, Donnelly Custom Manufacturing, FastDel, and Agilent Technologies.

• New current events/issues/companies/people including: N.R. Murthy’s vision at Infosys, Ricardo Semler’s participative management approach at Semco (Brazil), Mark Hurd of Hewlett Packard, Ren Zhengfei of Huawei (China), and Darwin E. Smith of Kimberly Clark in addition to 11 others.

• 4 new or redesigned exhibits.

CHAPTER 15

CHAPTER 11

• Updated several parts of the chapter and reduced overall length.

• Tightened flow of chapter by updating various parts of the text and reducing several sections.

• New “Study Tip,” “Traditional thinking/The best managers today,” and “Take Charge of Your Career” features.

• Updated Green feature, “CompUSA Orders Up a CustomerFocused Future.”

• Updated Green feature, “Stonyfield Farm Motivates through Its Mission.”

• 15 current events or companies added, including: Blockbuster, British Petroleum, industry-changing innovations like cloud computing, electric/hybrid automobiles, and renewable energy, and Google’s Polyglot translation program for e-meetings.

• New current events such as: Zappos’ plans to build “tech hub” in downtown Las Vegas, GM’s joint venture in China

xvi

CHAPTER CHANGES

bat2952X_fm_i-xvi.indd xvi

31/07/12 10:20 PM

Confirming pages

management

bat2952X_ch01_001-023.indd 1

18/07/12 9:25 PM

Confirming pages

PART 1

bat2952X_ch01_001-023.indd 2

Introduction

18/07/12 9:15 PM

Confirming pages

one

part one

chapter

managing effectively in a changing world

lmost everyone has worked

Effective managers do all of these organize,

lead,

No one knows this better than Howard

for a good supervisor, played

things—plan,

and

Schultz, the current CEO of Starbucks.

for a good coach, or taken

control—to help employees reach their

Having joined the company in 1982,

a class with a good professor. What

potential so organizations can succeed

Schultz worked his way up the ranks to

made these managers so effective?

and thrive in the highly competitive and

Was it because they always had a plan

changing global marketplace.

continued on p. 4

and set goals to guide their people

Starbucks is an example of a suc-

toward accomplishing what needed to

cessful global company. In 1971 it began

get done? Maybe it had something to

as a single store that sold coffee, tea, and

do with being organized and on top of

spices in Seattle’s Pike Place Market.

things. Or maybe these managers were

Since that time, the company has expe-

effective because of the way they moti-

rienced dramatic growth in every sense

vated, inspired, and led their employ-

of the word. In 2010 Starbucks reported

ees, players, or students. Of course they

$10.7 billion in revenue from its 17,000

were probably good at keeping things

stores in over 50 countries.1 However,

under control and making changes

the company’s 40-year journey has not

when needed.

always been smooth and predictable.

CHAPTER 1

bat2952X_ch01_001-023.indd 3

LEARNING OBJECTIVES After studying Chapter 1, you should be able to LO1 Describe the four functions of management. LO2 Understand what managers at different organizational levels do. LO3 Define the skills needed to be an effective manager. LO4 Summarize the major challenges facing managers today. LO5 Recognize how successful managers achieve competitive advantage.

Managing Effectively in a Changing World

18/07/12 9:16 PM

Confirming pages

continued from p. 3

become chief executive officer. In 2000 he stepped down from the post to oversee the company’s international expansion. In 2008 Schultz decided to return to his previous role as chief executive officer because he felt that several changes and improvements were needed to get the company to the next level.2 Two years after his return, Starbucks’ market value quadrupled while revenue and profits reached record levels.3 As the top manager of Starbucks, Schultz does a lot of plan-

In business, there is no replacement for effective management. A company may fly high for a while, but it cannot maintain that success for long without good management. The goal of this book is to help you learn what it takes to become an effective and successful manager. It is organized into five major sections: introduction, planning, organizing, leading, and controlling. Also, several themes that can help managers differentiate themselves in today’s workplace will be emphasized throughout the book: globalization; green and sustainability initiatives; entrepreneurship; e-management, social media, and mobile computing; changing demographics and diversity management; and study tips and career suggestions for your personal development.

ning regarding how fast the company should grow in the future: “I’ve learned that growth and success can cover up a lot of mistakes. So now, we seek disciplined, profitable growth for the right reasons.” In terms of organizing the human resources and talent needed to support that growth, Schultz comments, “Our biggest growth constraint is attracting world-class people who have values that are aligned with our culture.” Leading comes naturally to Schultz, as reflected by his approach to motivating employees: “It’s vital to give people hope, to provide aspirations and a vision for the future.” And like any good manager, he is also concerned about controlling key parts of the business: “We took $700 million of costs out of operations in the last two years—and we’re still looking for more.”4 ■

st ud y tip 1 Study more efficiently You’re busy with work, school, family, and a social life and probably don’t have four or five hours to spend studying in one sitting. Try chunking your study time into separate 30to 45-minute minisessions. This will help you focus better while reading a chapter, reviewing vocabulary, studying action review cards, or preparing for a quiz or exam. This will work only if you turn off your e-devices; so no texting, updating Facebook, surfing the web, playing online games, or chatting.

LO1 Describe the four functions of management

THE FOUR FUNCTIONS OF MANAGEMENT Management is the process of working with people and resources to accomplish organizational goals. Good managers do those things both effectively and efficiently: • To be effective is to achieve organizational goals. • To be efficient is to achieve goals with minimal waste of resources—that is, to make the best possible use of money, time, materials, and people. Starbucks’ CEO Howard Schultz hosts a “cupping workshop” during which members of the media can learn about various blends and roasts of coffee.

PART 1

bat2952X_ch01_001-023.indd 4

Unfortunately far too many managers fail on both criteria, or focus on one at the expense of another. The best managers maintain a clear focus on both effectiveness and efficiency.

Introduction

18/07/12 9:16 PM

Confirming pages

management the process of working with people and resources to accomplish organizational goals

Although business is changing rapidly, there are still plenty of timeless principles that make managers great and companies thrive. While fresh thinking and new approaches are required now more than ever, much of what we already know about successful management practices (Chapter 2 discusses historical but still-pertinent contributions) remains relevant, useful, and adaptable to the current highly competitive global marketplace. Great managers and executives like Howard Schultz of Starbucks not only adapt to changing conditions but also apply—passionately, rigorously, consistently, and with discipline—the fundamental management principles of planning, organizing, leading, and controlling. These four core functions remain as relevant as ever, and they still provide the fundamentals that are needed to manage effectively in all types of organizations, including private, public, nonprofit, and entrepreneurial (from microbusinesses to global firms). As any exceptional manager, coach, or professor would say, excellence always starts with the fundamentals.

1.1|Planning Helps You Deliver Value

Planning is specifying the goals to be achieved and deciding in advance the appropriate actions needed to achieve those goals. As Exhibit 1.1 illustrates, planning activities include analyzing current situations, anticipating the future, determining objectives, deciding on what types of activities the company will engage, choosing corporate and business strategies, and determining the resources needed to achieve the organization’s goals. Plans set the stage for action. For example, Amazon did a lot of planning when developing its new Kindle Fire touch tablet. Priced at $199 (approximately $300 less than the iPad 2), the Kindle Fire may be the next big thing in the starter tablet computer market. Jeff Bezos, CEO of Amazon, explains that the Android-based device has a new kind of browser (called Silk) that performs some functions locally while delegating other tasks to Amazon’s cloud data center.5 This enhancement will dovetail with the company’s cloud offerings that include more than 100,000 movies and TV shows, 17,000 songs, 1 million e-books, and hundreds of online newspapers and magazines. Amazon claims that the Silk browser is faster than those in competing tablet browsers.6 The planners at Amazon decided to keep the Kindle Fire a bit smaller than the iPad 2, and it has no camera function; however, the lower price will likely attract many potential customers.

planning the management function of systematically making decisions about the goals and activities that an individual, a group, a work unit, or the overall organization will pursue

Value is a complex concept.7 Fundamentally, it describes the monetary amount associated with how well a job, task, good, or service meets users’ needs. Those users might be business owners, customers, employees, governments, and even nations. When Steve Jobs, founder and CEO of Apple, died on October 5, 2011, many people around the world experienced a sense of loss both for him as a person and for the value that his transformational Apple products provided. The better you meet users’ needs (in terms of quality, speed, efficiency, and so on), the more

E X H I B I T 1 . 1 Examples of planning activities

Analyze current situation. Determine resources to achieve goals.

Anticipate the future.

Planning Activities Choose a business strategy.

Determine objectives. Decide on what actions to engage in.

In today’s highly competitive business environment, the planning function can also be described as delivering strategic value. CHAPTER 1

bat2952X_ch01_001-023.indd 5

Managing Effectively in a Changing World

18/07/12 9:17 PM

Confirming pages

value you deliver. That value is “strategic” when it contributes to meeting the organization’s goals. On a personal level, you should periodically ask yourself and your boss, “How can I add value?” Answering that question will enhance your contributions, job performance, and career. Traditionally, planning was a top-down approach in which top executives established business plans and told others to implement them. For the best companies, delivering strategic value is a continual process in which people throughout the organization use their knowledge and that of their external customers, suppliers, and other stakeholders to identify opportunities to create, seize, strengthen, and sustain competitive advantage. (Chapter 3 discusses the external competitive environment of business and how managers can influence it.) This dynamic process swirls around the objective of creating more and more value for the customer. For example, Amazon is trying to create more value for its customers by offering a cutting-edge tablet computer that is designed to be faster and less expensive than those offered by the competition.

TRADITIONAL THINKING Planning is a top-down approach where top executives establish business plans and tell others to implement them.

adaptive, particularly in response to competitive threats and customer needs. Tony Hsieh, CEO of Zappos, has built a dynamic and successful online shoe and retail business by changing the rules of how to organize and treat its diverse employees and customers. After he founded the business in 2000, Hsieh’s entrepreneurial approach was rewarded when Amazon purchased Zappos in 2009 for $1.2 billion.8

Innovation distinguishes between a leader and a follower. —Steve Jobs Effectively creating value requires fully considering a new and changing set of factors, including the government, the natural environment, global forces, and the dynamic economy in which ideas are king and entrepreneurs are both formidable competitors and potential collaborators. You will learn about these and related topics in Chapter 4 (ethics and corporate responsibility), Chapter 5 (strategic planning and decision making), and Chapter 6 (entrepreneurship).

1.2|Organizing Resources Achieves Goals

Organizing is assembling and coordinating the human, financial, physical, informational, and other resources needed to achieve goals. Organizing activities include attracting people to the organization, specifying job responsibilities, grouping jobs into work units, marshaling and allocating resources, and creating conditions so that people and things work together to achieve maximum success. The organizing function’s goal is to build a dynamic organization. Traditionally, organizing involved creating an organization chart by identifying business functions, establishing reporting relationships, and having a personnel department that administered plans, programs, and paperwork. Now and in the future, effective managers will be using new forms of organizing and viewing their people as their most valuable resources. They will build organizations that are flexible and 6

PART 1

bat2952X_ch01_001-023.indd 6

A major goal of Zappos is to treat its employees and customers with integrity, honesty, and commitment.9 Hsieh encourages employees to develop themselves by checking out books stored at the company, post questions to the “Ask Anything” newsletter, make suggestions to improve how things get done, and contribute to making Zappos a positive and fun place to work. Employees have been known to volunteer to shave their heads (in a mullet style or in the shape of a “No. 1”), act in zany ways during job interviews, wear fun wigs, and blow horns and ring cowbells to entertain tour groups who visit the company.10 Employees aren’t the only stakeholders who benefit from Hsieh’s flexible and adaptive approach to organizing. Customers who call the online retailer often feel spoiled by the treatment they receive. Surprisingly, customer service employees at Zappos aren’t told how long they can spend on the phone with customers. In a time when many call-in customer service operations are tightly controlled or outsourced, Hsieh encourages his employees to give customers a “wow” experience such as staying on the phone with a customer for as long as it takes to connect with them and make them happy (the longest recorded phone call lasted six hours), giving customers free shipping both ways, sending flowers and surprise coupons, writing thank-you notes, or even helping a customer find a pizza place that delivers all night.11 Progressive employee and customer-oriented practices such as those at Zappos help organizations organize and effectively

Introduction

18/07/12 9:17 PM

Confirming pages

THE BEST MANAGERS TODAY Deliver strategic value that draws on the collective knowledge and ideas of a wide variety of people both inside and outside the organization.

deploy the highly dedicated, diverse, and talented human resources needed to achieve success. You will learn more about these topics in Chapter 7 (organizing for action), Chapter 8 (human resources management), and Chapter 9 (managing diversity and inclusion).

1.3|Leading Mobilizes Your People

Leading is stimulating people to be high performers. It includes motivating and communicating with employees, individually and in groups. Leaders maintain close day today contact with people, guiding and inspiring them toward achieving team and organizational goals. Leading takes place in teams, departments, and divisions, as well as at the tops of large organizations. In earlier textbooks, the leading function described how managers motivate workers to come to work and execute top management’s plans by doing their jobs. Today and in the future, managers must be good at mobilizing and inspiring people to engage fully in their work and contribute their ideas—to use

their knowledge and experience in ways never needed or dreamed of in the past.

organizing the management function of assembling and coordinating human, financial, physical, informational, and other resources needed to achieve goals

Ursula M. Burns, chair and CEO of Xerox since 2009, inspired her employees to change their thinkleading the anagement ing about the future direction of function that involves the $21.6 billion company and the manager’s efforts to mobilized them to apply their talstimulate high performance by employees ents and energies in new ways.12 The company’s recent acquisition of Affiliated Computer Systems for $6.4 billion means that Burns is asking employees to help transform the copier manufacturer into a “formidable” services company that offers business and IT outsourcing.13 If Burns can continue to motivate Xerox employees to embrace the new direction of the firm, this new service side of the business may grow to as much as two-thirds of Xerox’s revenues by 2015.14

LISTEN & LEARN ONLINE

Young Managers

Speak Out!

“

We’re all very different; we all have very different needs. Some things that work for one person, don’t necessarily work for someone else. Be able to adapt to the different styles, because most people are not going to change. Know how to best work with them so that they can be the most productive.

”

—Sheryl Freeman, Program Manager

Online retail giant Zappos’ zanny culture and work environment make it a great place to work.

CHAPTER 1

bat2952X_ch01_001-023.indd 7

Managing Effectively in a Changing World

18/07/12 9:17 PM

Confirming pages

Like Ursula Burns, today’s managers must rely on a very different kind of leadership (Chapter 10) that empowers and motivates people (Chapter 11). Far more than in the past, great work must be done via great teamwork (Chapter 12), both within work groups and across group boundaries. Underlying these processes will be effective interpersonal and organizational communication (Chapter 13).

1.4|Controlling Means Learning and Changing Planning, organizing, and leading do not guarantee success. The fourth function, controlling, is about monitoring performance and making necessary changes in a timely manner. By controlling, managers make sure the organization’s resources are being used as planned and the organization is meeting its goals for quality and safety. Control must include monitoring. If you have any doubts that this function is important, consider some control breakdowns that caused catastrophic problems for workers, the environment, and local economies. Consider the explosion of Transocean Ltd.’s Deepwater Horizon oil rig in the Gulf of Mexico on April 20, 2010, which killed 11 workers. Some argue that this worst offshore oil spill in U.S. history could have been prevented if tighter controls were in place. One recent report suggested that the rig’s crew failed to react to multiple warning signs: “. . . the crew deviated from standard well-control and well-abandonment protocols by testing for pressure during the removal of the drilling mud, instead of prior to it, an operation that resulted in the drilling pipe being present in the blowout preventer at the time of the blowout, keeping it from closing properly to contain the outburst.”15 This was not the only oil well to go out of control in the Gulf of Mexico. According to an interview with William Reilly, former head of the U.S. Environmental Protection Agency, there have been “79 losses of well control” during the 2000–2009 period.16 He suggests that greater controls need to be put in place by both the U.S. government and the oil companies.17

Pelicans affected by an oil spill.

More recently, salmonella found in Cargill Inc. ground turkey products is thought to have sickened approximately 100 people in over 30 states.20 When managers implement their plans, they often find that things are not working out as planned. The controlling function makes sure that goals are met. It asks and answers the question, “Are our actual outcomes consistent with our goals?” It then makes adjustments as needed. Elon Musk, chief executive officer of the premium electric car firm Tesla Motors, has applied this function to make needed changes at that firm. Like many start-ups, Tesla has hit a few potholes along the way. Conflicts with the firm’s founder and technical problems during development pushed back the launch of the company’s first car by more than a year, causing cash flow problems. Musk was forced to close one office and lay off nearly 25 percent of the company’s workforce. But Musk also raised $55 million of capital from investors, and since production started in 2008, there are now 1,650 Roadsters being driven in 31 countries.21

Other lapses in control can hurt customers. A 2008–2009 outbreak of salmonella infections— Successful organizations, large and which can cause fever, diarrhea, small, pay close attention to the constomach cramps, and even death— trolling function. But today and for the Ursula M. Burns, Chair and CEO of Xerox. was traced to peanut butter future, the key managerial challenges products produced by two Peanut Corp. are far more dynamic than in the past; of America processing plants in Georgia and Texas.18 Processthey involve continually learning and changing. Controls must ing the peanuts generally kills salmonella and other germs, so still be in place, as described in Chapter 14. But new technolothe likely culprit was contamination of jars or equipment. The gies and other innovations (Chapter 15) make it possible to outbreak caused 714 illnesses and nine deaths across 46 states.19 achieve controls in more effective ways, to help all people 8

PART 1

bat2952X_ch01_001-023.indd 8

Introduction

18/07/12 9:17 PM

Confirming pages

controlling the management function of

Elon Musk, Chairman, CEO, and Product Architect of Tesla Motors, speaks during a panel discussion at a Future in Review (FiRe) conference.

throughout a company and across company boundaries change in ways that forge a successful future. Exhibit 1.2 provides brief definitions of the four functions of management and the respective chapters in which these functions are covered in greater detail.

1.5|Managing Requires All Four Functions As a manager in the ever-changing global economy, your typical day will not be neatly divided into the four functions. You will be doing many things more or less simultaneously.22 Your days will be busy and fragmented, with interruptions, meetings, and firefighting. If you work with heavy digital users who constantly send texts and e-mails, then your workdays will require even more stop-and-go moments.23 There will be plenty of activities that you wish you could be doing but can’t seem to get to. These activities will include all four management functions. Some managers are particularly interested in, devoted to, or skilled in one or two of the four functions. Try to devote

monitoring performance enough time and energy to develand making needed oping your abilities with all four changes functions. You can be a skilled planner and controller, but if you top-level managers organize your people improperly senior executives or fail to inspire them to perform responsible for the overall management at high levels, you will not be realand effectiveness of the izing your potential as a manager. organization Likewise, it does no good to be the kind of manager who loves to organize and lead but doesn’t really understand where to go or how to determine whether you are on the right track. Good managers don’t neglect any of the four management functions. You should periodically ask yourself whether you are devoting adequate attention to all of them.

The four management functions apply to your career and other areas of your life, as well. You must find ways to create value; organize for your own personal effectiveness; mobilize your own talents and skills as well as those of others; monitor your performance; and constantly learn, develop, and change for the future. As you proceed through this book and this course, we encourage you to engage in the material and apply the ideas to your other courses (e.g., improve your teamwork skills), your part-time and full-time jobs (e.g., learn how to motivate coworkers and “wow” your customers), and use the ideas for your own personal development by becoming an effective manager.

LO2 Understand what managers at different organizational levels do

FOUR DIFFERENT LEVELS OF MANAGERS

Function

Brief Definition

See Chapters

Organizations—particularly large organizations—have many levels. In this section, you will learn about the types of managers found at four different organizational levels:

Planning

Systematically making decisions about which goals and activities to pursue.

4, 5, and 6

• Top-level manager.

Organizing

Assembling and coordinating resources needed to achieve goals.

7, 8, and 9

• Team leader.

Leading

Stimulating high performance by employees.

10, 11, 12, and 13

2.1|Top Managers Strategize and Lead

Controlling

Monitoring performance and making needed changes.

14 and 15

E X H I B I T 1 . 2 The Four Functions of Management

• Middle-level manager. • Frontline manager.

Top-level managers are the organization’s senior executives and are responsible for its overall management. Top-level managers, often referred to as strategic managers, focus on the survival, growth, and overall effectiveness of the organization. CHAPTER 1

bat2952X_ch01_001-023.indd 9

Managing Effectively in a Changing World

18/07/12 9:17 PM

Confirming pages

In a recent nationwide survey, employees had mixed reviews of their manager’s leadership skills. As a result, a manager who excels in leadership is especially valuable.24 Percentage of employees who say . . . They relate positively to their boss.

77%

Their boss is competent.

50%

Their boss rewards them for accomplishments.

30%

Their boss is a good role model and mentor.

29%

They feel motivated by their boss.

22%

Indra Nooyi of PepsiCo Pushes for Sustainable, “Healthier” Growth

t a typical college, you wouldn’t have to look far before seeing someone with a bag of Doritos and a can of Pepsi. These two products, along with Classic Lay’s, Cheetos, Fritos, and Mountain Dew, are some of the best sellers from PepsiCo. While these products are still very important to the financial success of the company, Indra Nooyi, the Indian-born CEO, is encouraging the company to follow a dual-growth strategy: one focusing on

10 PART 1

bat2952X_ch01_001-023.indd 10

60 Percent

maintaining the success of its salty snacks and sweet drinks, and the other focusing on a multifaceted sustainability initiative called “Performance with Purpose.” Nooyi believes a major driver for the next level of PepsiCo’s success will come from “delivering sustainable growth by investing in a healthier future for people and our planet.” At first this may seem like a major change in direction for a company that has made billions of dollars from selling sweet drinks and snack foods, but Nooyi doesn’t see it that way. Perhaps concerned about the growing societal concerns about unhealthful foods and drinks that are seen as contributing to the childhood and adult obesity problem in the United States and elsewhere, she believes strongly that “ethics and growth are not just linked, but inseparable.”

100

PepsiCo, in partnership with Waste Management, has rolled out hundreds of Dream Machine kiosks around the United States to recycle cans and bottles. In return it will provide for career training, education, and job creation for returning U.S. veterans with disabilities.

Introduction

18/07/12 9:17 PM

Confirming pages

middle-level managers Top managers are concerned not only with the organization as a whole but also with the interaction between the organization and its external environment. This interaction often requires managers to work extensively with outside individuals and organizations. The chief executive officer (CEO) is one type of top-level manager found in large corporations. This individual is the primary strategic manager of the firm and has authority over everyone else. Others include the chief operating officer (COO), company presidents, vice presidents, and members of the top management team. As companies have increasingly leveraged technology and knowledge management to help them achieve and maintain a competitive advantage, they created the position of chief information officer (CIO). A relatively new top manager position, chief ethics officer, has emerged in recent years. Kathleen Edmond holds that position for Best Buy. Her role is to “develop, market and support programs and strategies designed to support the enterprise’s business initiatives and promote honest and ethical business conduct in its daily operations.”25 Traditionally, the role of top-level managers has been to set overall direction by formulating strategy and controlling resources. But now more top managers are called on to be not only strategic architects but also true organizational leaders. Like Indra Nooyi of PepsiCo, leaders must create and articulate a broader corporate purpose with which people can identify— and one to which people will enthusiastically commit.

2.2|Middle Managers Bring Strategies to Life

As the name implies, middle-level managers are located in the organization’s hierarchy below top-level management and above the frontline managers and team leaders. Sometimes called tactical managers, they are responsible for translating the general goals and plans developed by strategic managers into more specific objectives and activities. Traditionally the role of the middle manager is to be an administrative controller who bridges the gap between higher and lower levels. Today middle-level managers break corporate objectives down into business unit targets; put together separate business unit plans from the units below them for higherlevel corporate review; and serve as nerve centers of internal communication, interpreting and broadcasting top management’s priorities downward and channeling and translating information from the front lines upward. As a stereotype, the term middle manager connotes mediocre, unimaginative people defending the status quo. Companies have been known to cut them by the thousands, and television often portrays them as incompetent (such as Michael Scott of NBC’s The Office).26 But middle managers are closer than top

Two major components of PepsiCo’s sustainability strategy include

increasing beverage container recycling to 50 percent by 2018.

1. Human sustainability: The company is encouraging people to live balanced and healthy lives through nonprofit initiatives and by expanding its product and drink lines to include more healthful choices. For example, Baked Lays have zero trans fats, and Propel Zero is water enhanced with vitamins and antioxidants.

Even for a CEO, change is not easy. Some Wall Street analysts and critics feel Nooyi should focus less on health and wellness, and more on PepsiCo’s “sugary and

2. Environmental sustainability: PepsiCo sells millions of products worldwide in packages, containers, or bottles. To reduce the impact on natural resources, the company is reducing water usage, increasing recycling levels, and minimizing its carbon footprint. In 2010 PepsiCo launched a recycling partnership with Waste Management, Greenopolis, and Keep America Beautiful with the goal of

salty product portfolio.” However, with total soft drink consumption in the United States dropping by 16 percent over the past decade, there’s certainly room for both “fun for you” and “good for you” products and beverages at this forward-looking company.

would fit their particular organizational cultures and industries?

DISCUSSION QUESTIONS • Indra Nooyi, as CEO of PepsiCo, faces some unique challenges as she advocates a dual-focus strategy for her company. Describe your reaction to her dual-focus strategy and whether you think it will help PepsiCo succeed in the future.

SOURCES: See PepsiCo’s 2010 Annual Report at http://www.pepsico.com; “Bottoms Up!” Newsweek, October 10 and 17, 2011 (double issue), p. 29; A. Rappeport, “Pepsi Chief Faces Challenge of Putting Fizz Back into Brand,” Financial Times, March 21, 2011, p. 19; A. Bary, “Sweet or Salty, PepsiCo Tastes Success,” Barron’s 91, no. 32 (August 8, 2011), pp. 15–17; V. Bauerlein, “CEO Indra Nooyi Stands by Strategy to Promote ‘Good for You’ Foods,” The Wall Street Journal, June 28, 2011, p. B1.

• To what degree do you think a “Performance with Purpose” strategy would be applicable to other organizations (using examples)? How could leaders of other organizations modify the strategy so it

CHAPTER 1

bat2952X_ch01_001-023.indd 11

managers located in the middle layers of the organizational hierarchy, reporting to top-level executives

Managing Effectively in a Changing World

18/07/12 9:17 PM

Confirming pages

managers to day-to-day operations, customers, frontline managers, team leaders, and employees, so they know the problems. They also have many creative ideas—often better than their bosses’. Good middle managers provide the operating skills and practical problem solving that keep the company working.27

Actor Steve Carell plays Michael Scott, the likeable, but often incompetent manager on NBC’s The Office.

2.3|Frontline Managers are the Vital Link to Employees

2.4|Team Leaders Facilitate Team Effectiveness

A relatively new type of manager, known as a team leader, engages in a variety of behaviors to achieve team effectiveness.30 The use of teams (discussed in Chapter 12) has increased as organizations shift from hierarchical to flatter structures that require lower-level employees to make more decisions.31 While both team leaders and frontline managers tend to be younger managers with entrepreneurial skills, frontline managers have direct managerial control over their nonmanagerial employees. This means that frontline managers may be responsible for hiring, training, scheduling, compensating, appraising, and if necessary, firing employees in order to achieve their goals and create new growth objectives for the business. In comparison, team leaders are more like project facilitators or coaches. Their responsibilities include organizing the team and establishing its purpose, finding resources to help the team get its job done, removing organizational impediments that block the team’s progress, and developing team members’ skills and abilities.32 In addition, a good team leader creates and supports a positive social climate for the team, challenges the team, provides feedback to team members, and encourages the team to be self-sufficient.33 Beyond their internally focused responsibilities, team leaders also need to represent the team’s interests with other teams, departments, and groups within and outside of the organization. In this sense, the team leader serves as the spokesperson and champion for the team when dealing with external stakeholders.

Frontline managers, or operational managers, are lowerlevel managers who execute the operations of the organization. These managers often have titles such as supervisor or sales manager. They are directly involved with nonmanagement employees, implementing the specific plans developed with middle managers. This role is critical because operational managers are the link between management and nonmanagement personnel. Your first management position probably will fit into this category. Traditionally, frontline managers were directed and controlled from above to make sure that they successfully implemented operations to support the company strategy. But in leading companies, their role has expanded. Operational execution remains vital, but in leading companies, frontline managers are increasingly called on to be innovative and entrepreneurial, managing for growth and new business development. Managers on the front line—usually newer, younger managers—are crucial to creating and sustaining quality, innovation, and other drivers of financial performance.28 In outstanding organizations, talented frontline managers are not only allowed to initiate new activities but are expected to do so by their top and middle-level managers. And they receive the freedom, incentives, and support to do so.29 12 PART 1

bat2952X_ch01_001-023.indd 12

Introduction

18/07/12 9:17 PM

Confirming pages

frontline managers Team leaders are expected to help their teams achieve important projects and assignments. In some ways, a team leader’s job can be more challenging than frontline and other types of managers’ jobs because team leaders often lack direct control (e.g., hiring and firing) over team members. Without this direct control, team leaders need to be creative in how they inspire, motivate, and guide their teams to achieve success. Exhibit 1.3 elaborates on the changing roles and activities of managers at different levels within the organization. You will learn about each of these aspects of management throughout the course.

2.5|Three Roles That All Managers Perform

2. Informational roles: • Monitor—Seeking information to develop a thorough understanding of the organization and its environment. • Disseminator—Sharing information between different people like employees and managers; sometimes interpreting and integrating diverse perspectives.

lower-level managers who supervise the operational activities of the organization

team leaders employees who are responsible for facilitating successful team performance

• Spokesperson—Communicating on behalf of the organization about plans, policies, actions, and results. 3. Decisional roles:

The trend today is toward less hierarchy and more teamwork. In small firms—and in large companies that have adapted to these highly competitive times—managers have strategic, tactical, operational responsibilities and team responsibilities. They are complete businesspeople; they have knowledge of all business functions, are accountable for results, and focus on serving customers both inside and outside their firms. All of this requires the ability to think strategically, translate strategies into specific objectives, coordinate resources, and do real work with lower-level people.

• Entrepreneur—Searching for new business opportunities and initiating new projects to create change. • Disturbance handler—Taking corrective action during crises or other conflicts. • Resource allocator—Providing funding and other resources to units or people; includes making major organizational decisions. • Negotiator—Engaging in negotiations with parties inside and outside the organization.

Even though this study was done decades ago and focused on top executives, it remains highly descriptive of what all types of managers do today. As you review the list, you might ask yourself, “Which of these activities do I enjoy most (and least)? Where do

Today’s best managers can do it all; they are adaptive and agile, and are “working leaders.”34 They focus on relationships with other people and on achieving results. They don’t just make deciE X H I B I T 1 . 3 Transformation of Management Roles and Activities sions, give orders, wait for others to produce, and then evaluate results. Team Frontline Middle-Level They get their hands dirty, do hard Leaders Managers Managers work themselves, solve problems, and create value. Changing Roles From operational From operational From What does all of this mean in practice? How do managers spend their time—what do they actually do? A classic study of top executives found that they spend their time engaging in 10 key activities, falling into three broad categories or roles: 35 1. Interpersonal roles: • Leader—Staffing, training, and motivating people to achieve organizational goals. • Liaison—Maintaining a network of outside contacts and alliances that provide information and favors. • Figurehead—Performing symbolic duties on behalf of the organization, like greeting important visitors and attending social events.

Key Activities

From resource allocators to institutional leaders.

implementer to facilitator of team effectiveness.

implementers to aggressive entrepreneurs.

administrative controllers to supportive controllers.

Structuring teams and defining their purpose.

Attracting and developing resources.

Linking dispersed knowledge and skills across units.

Establishing high performance standards.

Finding resources and removing obstacles so teams can accomplish their goals.

Creating and pursuing new growth opportunities for the business.

Managing the tension between short-term purpose and longterm ambition.

Institutionalizing a set of norms to support cooperation and trust.

Developing team members’ skills so teams can be self-managing.

Managing continuous improvement within the unit.

Developing individuals and supporting their activities.

Creating an overarching corporate purpose and ambition.

Sources: Adapted from F. P. Morgeson, D. S. DeRue, and E. P. Karam, “Leadership in Teams: A Functional Approach to Understanding Leadership Structures and Processes,” Journal of Management 36, no. 1 (January 2010), pp. 5–39; J. R. Hackman and R. Wageman, “A Theory of Team Coaching,” Academy of Management Review 30, no. 2 (April 2005), pp. 269–87; and C. Bartlett and S. Goshal, “The Myth of the Generic Manager: New Personal Competencies for New Management Roles,” California Management Review 40, no. 1 (Fall 1997), pp. 92–116.

CHAPTER 1

bat2952X_ch01_001-023.indd 13

Top-Level Managers

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

technical skills the ability to perform a specialized task involving a particular method or process

conceptual and decision skills skills pertaining to the ability to identify and resolve problems for the benefit of the organization and its members

interpersonal and communication skills people skills; the ability to lead, motivate, and communicate effectively with others

I excel (and not excel)? Which would I like to improve?” Whatever your answers, you will be learning more about these activities throughout this course.

LO3 Define the skills needed to be an effective manager

MANAGERS NEED THREE BROAD SKILLS Performing management functions and roles, pursuing effectiveness and efficiency, and competitive advantage (discussed later in this chapter) are the cornerstones of a manager’s job. However, understanding this fact does not ensure success. Managers need a variety of skills to do these things well. Skills are specific abilities that result from knowledge, information, aptitude, and practice. Although managers need many individual skills, which you will learn about throughout this text, three general categories are crucial: 36 • Technical skills. • Conceptual and decision skills. • Interpersonal and communication skills.

First-time managers tend to underestimate the challenges of the many technical, human, and conceptual skills required.37 However, with training, experience, and practice, managers can learn to apply each of these skills to increase their effectiveness and performance.

3.1|Technical Skills

A technical skill is the ability to perform a specialized task that involves a certain method or process. Most people develop a set of technical skills to complete the activities that are part of their daily work lives. The technical skills you learn in school will give you the opportunity to get an entry-level position or change careers; they will also help you as a manager. For example, your accounting and finance courses will develop the technical skills you need to understand and manage an organization’s financial resources. Lower-level managers who possess technical skills earn more credibility from their subordinates than comparable managers without technical know-how.38 Thus newer employees may want to become proficient in their technical area (e.g., human resources management or marketing) before accepting a position as team leader or frontline manager. 14 PART 1

bat2952X_ch01_001-023.indd 14

3.2|Conceptual Decision Skills

Conceptual and decision skills involve the ability to identify and resolve problems for the benefit of the organization and everyone concerned. Managers use these skills when they consider the overall objectives and strategy of the firm, the interactions among different parts of the organization, and the role of the business in its external environment. Managers (like Indra Nooyi of PepsiCo) are increasingly required to think out of their comfort zones to make “new connections between social and environmental challenges on the one hand and firm growth and innovation on the other, and to plan far beyond the quarter and into the future.”39 As you acquire greater responsibility, you will be asked often to exercise your conceptual and decision skills. You will confront issues that involve all aspects of the organization and must consider a larger and more interrelated set of decision factors. Much of this text is devoted to enhancing your conceptual and decision skills, but experience also plays an important part in their development.

3.3|Interpersonal and Communication Skills

Interpersonal and communication skills influence the manager’s ability to work well with people. These skills are often called people skills or soft skills. Managers spend the great majority of their time interacting with people,40 and they must develop their abilities to build trust, relate to, and communicate effectively with those around them. Your people skills often make a difference in the level of success you achieve. Management professor Michael Morris explains, “At a certain level in business, you’re living and dying on your social abilities. . . . gets you in the door, but social intelligence gets you to the top.”41 Supporting this view, a survey of senior executives and managers found that more than 6 out of 10 said they base hiring and promotion decisions on a candidate’s “likeability.” Roughly equal numbers (62 versus 63 percent) said they base these decisions on skills, presumably referring to technical skills.42

E X H I B I T 1 . 4 Importance of Skills at Different Managerial Levels

Technical Skills

Conceptual/ Decision Skills

Interpersonal/ Communication Skills

Top manager

Low

High

Middle manager

Medium

High

Frontline manager

High

Medium

High

Team leader

High

Medium

High

Source: Adapted from R. Katz, “Skills of an Effective Administrator,” Harvard Business Review 52, no. 5 (September–October 1974), pp. 90–102.

Introduction

18/07/12 9:18 PM

Confirming pages

emotional intelligence the skills Professor Morris emphasizes that it is vital for future managers to realize the importance of these skills in getting a job, keeping it, and performing well, especially in this era when so many managers supervise independent-minded knowledge workers. He explains, “You have to get high performance out of people in your organization who you don’t have any authority over. You need to read other people, know their motivators, know how you affect them.”43 As Exhibit 1.4 illustrates, the importance of these skills vary by managerial level. Technical skills are most important early in your career when you are a team leader and frontline manager. Conceptual and decision skills become more important than technical skills as you rise higher in the company and occupy positions in the middle and top manager ranks. But interpersonal and communication skills are important throughout your career, at every level of management. Good, successful managers often demonstrate a set of interpersonal skills known collectively as emotional intelligence44 (or EQ). EQ combines three skill sets: • Understanding yourself—including your strengths and limitations as a manager. • Managing yourself—dealing with emotions, making good decisions, seeking feedback, and exercising self-control.

• Working effectively with others mlistening, showing empathy, motivating, and leading.

of understanding yourself, managing yourself, and dealing effectively with others

The basic idea is that before you can be an effective manager of other people, you need to be able to manage your own emotions and reactions to others. Maybe you already have a high EQ, but if you feel that you could use some improvement in this area, observe how others connect with the people around them, handle stressful situations, and exercise self-control. This can help you build your own EQ so that you can be a more effective manager.

LO4 Summarize the major challenges facing managers today

MAJOR CHALLENGES FACING MANAGERS When the economy is soaring, business seems easy. Starting up an Internet company looked easy in the 1990s, and ventures related to the real estate boom looked like a sure thing

TAKE CHARGE OF YOUR CAREER // Find your passion!

any people go through life tolerating (or worse, hating) their jobs and careers. Given the amount of time people spend working each day, this can feel like a life sentence. Whether you are just starting out or are thinking about switching careers, take the time to discover what you are passionate about. It takes a lot of research, but with persistence and focus, you can find your passion in life and get paid to follow it. A good starting point is to purchase a copy of What Color Is Your Parachute? by Richard Bolles. It’s filled with exercises and suggestions designed to help readers understand their career and job preferences. The book will not tell you exactly what job or career is a perfect fit, but it will help you understand your preferences regarding the types of skills you want to use in the ideal job, with what types of people you want to work, and so on. Furthermore, visit your school’s career services office. Ask a career counselor if

CHAPTER 1

bat2952X_ch01_001-023.indd 15

(attorney, editor, chef), and your personal style preferences (you are probably comfortable both leading by example and taking charge). After reading the test results, make an appointment with the career counselor to ask for advice about any internships and full-time jobs that would fit well with your results and interests. Parents, mentors, motivational speakers, and others often tell students to find their passions. But finding your passion is not easy. Do not get discouraged if your first couple of jobs or internships teach you what you do not want to do for the rest of your life. That is good information, too. It takes a lot of persistence to find the “right” internship or job that begins to feel like it is something you could do (and enjoy) for the rest of your career. If you keep asking yourself, “What am I really passionate about?” and pursue jobs and careers that fit better and better with that ideal, you will eventually find your passion.

you could complete some career and occupational interest inventories. Most schools have several available (for free) online for students, including the Campbell Interest and Skill Survey, the Strong Interest Inventory, and Holland’s Occupational Themes (this last one is also available for a fee through the U.S. Department of Labor O*Net Interest Profiler— http://www.onetcenter.org/IP.html). How do these online inventories work? You answer several questions about yourself, such as whether you like talking to people at a party or working with numbers. After you submit your answers, you receive immediately an interpretive report that describes your preferences in terms of themes, skills, interests, personal style, and occupational preferences. For example, the report from the Strong Interest Inventory gives your highest-rated themes (investigative, social, artistic), your top interest areas (writing and mass communication, law, performing arts), your top occupations

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

during the early 2000s. Eventually investors grew wary of dotcom start-ups, and the demand for new homes cooled as the United States experienced a major economic recession. At such times, it becomes evident that management is a challenge that requires constantly adapting to new circumstances. What defines the competitive landscape of today’s businesses? You will be reading about many relevant issues in the coming chapters, but we begin here by highlighting five key elements that make the current business landscape different from those of the past: 1. Globalization. 2. Technological change. 3. The importance of knowledge and ideas. 4. Collaboration across organizational boundaries. 5. Increasingly diverse labor force.

4.1|Business Operates on a Global Scale Far more than in the past, today’s enterprises are global, with offices and production facilities all over the world. Corporations such as Coca-Cola and Unilever transcend national borders. A key reason for this change is the strong demand coming from consumers and businesses overseas. Companies that want to grow often need to tap international markets where incomes are rising and demand is increasing. GE, which became a massive and profitable corporation by selling appliances, lightbulbs, and machinery to U.S. customers, recently announced that it expected its foreign sales to equal its sales within the United States. GE’s biggest foreign customers are in Europe, but sales volume in China and India is rising fast.45 Globalization also means that a company’s talent can come from anywhere. As with its sales, half of GE’s employees work outside the United States.46 Cisco, a San Jose, California– based leader in equipment for computer networking, considers staffing its ever-expanding operations in India to be an essential tactic for staying competitive. Wim Elfrink, the company’s chief globalization officer, recently returned from a four and a half year assignment in Bangalore, India. His job was to create and staff a second headquarters in Bangalore so Cisco could “establish key resources closer to the world’s fastest growing markets.”47 He accomplished his goal. As of June 2011, the Indian-based operation had approximately 7,500 employees, and over 20 percent of Cisco’s global leadership was based there.48 Many of these senior executives are from the United States and are helping Cisco take advantage of the fast-growing Indian Internet market.49 Elfrink also reports that Cisco has transformed its focus for the Bangalore operation from cost savings and outsourcing to quality and innovation. Its talent has earned 420 patents and leads worldwide initiatives for creating new markets for the company’s products and services.50 Another factor that is making globalization both more possible and more prevalent is the Internet. In 2011 it was estimated that 16 PART 1

bat2952X_ch01_001-023.indd 16

Anand Mahindra of Mahindra Group and Wim Elfrink of Cisco announce at a press conference in Mumbai that their firms will form a global strategic alliance to provide a range of IT-linked services.

an astounding 5 billion devices and 1 billion mobile workers worldwide were connected to the Internet.51 Many of these new users are from the emerging BRIC economies: Brazil, Russia, India, and China.52 Global companies like Dell Computer and Johnson & Johnson are taking advantage of this trend in that a growing percentage of their international sales are to customers in the BRIC countries.53 As people in developing nations turn to the power of the web, they develop content in their own languages and create their own means of access, like Baidu, the search engine market leader in China.54 The Internet is a powerful force for connecting people without regard to time and space. The Internet enables people to connect and work from anywhere in the world on a 24/7 basis. Laura Asiala, a manager for Dow Corning, based in Midland, Michigan, supervises employees in Tokyo, Seoul, Hong Kong, Shanghai, and Brussels. To keep in touch with them, she starts working at 5:00 a.m. some days and ends as late as midnight. She takes a break from 3:30 to 9:30 each day, and technology lets her communicate from home.55 The global reach of the Internet pushed Mitch Free to expand his business, MFG.com, into China. MFG.com runs a website where manufacturers that need parts post their specifications online, and suppliers bid to provide those parts. The suppliers pay an annual fee for the right to submit bids. Free, who grew up in a small town in Georgia and had barely traveled outside the United States, had never planned to be an international manager, but Chinese suppliers soon began submitting requests to participate. At the same time, manufacturers were pressing MFG.com to include Asian suppliers, which often could offer the best prices. So Free traveled to Shanghai, China, to meet some of the interested suppliers. He learned about the business culture, such as the importance of cultivating business relationships and networks. After a difficult search, he made a key hiring decision: general manager James Jin, who speaks fluent English, studied global management, and has experience in manufacturing both in the

Introduction

18/07/12 9:18 PM

Confirming pages

social capital United States and in China. The effort was well rewarded. Jin has helped Free navigate the fast-growing business landscape of his native China. Sales in China accounted for more than 10 percent of MFG.com’s total annual sales and are growing faster than the company’s overall sales.56

Smaller firms are also engaged in globalization. Many small companies export their goods. Many domestic firms assemble their products in other countries, using facilities such as Mexico’s maquiladora plants. And companies are under pressure to improve their products in the face of intense competition from foreign manufacturers. Firms today must ask themselves, “How can we be the best in the world?” For students, it’s not too early to think about the personal ramifications. In the words of chief executive officer Jim Goodnight of SAS, the largest privately held software company in the world, “The best thing business schools can do to prepare their students is to encourage them to look beyond their own backyards. Globalization has opened the world for many opportunities, and schools should encourage their students to take advantage of them.”57

4.2|Technology is Continuously Advancing The Internet’s impact on globalization is only one of the ways that technology is vitally important in the ever-changing business world. Technology both complicates things and creates new opportunities. The challenges come from the rapid rate at which communication, transportation, information, and other technologies change.58 Until recently, for example, desktop computers were a reliable source of income, not only for computer makers but also for the companies that make keyboards and a whole host of accessories like wrist rests and computer desks. But after just a couple of decades of widespread PC use, customers switched to laptops, tablets, and even smartphones for their computing needs, requiring different accessories and using them in different ways.59 Any company that still makes desktops has to rethink its customers’ wants and needs, not to mention the possibility that these customers may be doing their work at the airport or a local coffee shop rather than in an office. Later chapters will discuss technology further, but here we highlight the rise of the Internet and its effects. Why is the Internet so important to business?60 • It enables managers to be mobile and connected 24/7. • It fulfills many business functions. It is a virtual marketplace, a means to sell goods and services, a distribution channel, an information service, and more.

• It speeds up globalization. Managers can see what competitors, suppliers, and customers are doing on the other side of the world.

• It provides access to information, allows better-informed decisions, and improves efficiency of decision making. • It facilitates design of new products and services, from smartphones to online banking services.

While these advantages create business opportunities, they also create threats as competitors capitalize on new developments. At the beginning, Internet companies dazzled people with financial returns that seemed limitless. Today investors and entrepreneurs have learned that not every business idea will fly, but many profitable online businesses have become a part of our day-to-day lives. Just a few years ago, it was novel to go online to order plane tickets, read the news, or share photos. Some online success stories, such as eBay, Amazon, Monster, and Google, are purely Internet businesses. Other companies, including Target, Barnes & Noble, and Office Depot, have incorporated online channels into an existing business strategy. The Internet’s impact is felt not only at the level of businesses as a whole but also by individual employees and their managers. Just as globalization has stretched out the workdays of some people, high-tech gadgets have made it possible to stay connected to work anytime and anywhere. Wi-Fi hotspots make connections available in stores, restaurants, hotels, airports, and libraries. Software lets users download and read files and e-mail over their phones and PDAs. Social media and networking are also challenging the way businesses operate and managers connect. Facebook, the largest online social network, has over 845 million users that swap about 250 million photos a day.61 Facebook is not just an American phenomenon; about 70 percent of its users are located outside the United States. Other popular social networking sites, like MySpace, Twitter, and LinkedIn, also connect people with one another.

DID YOU KNOW? Information overload can have negative effects on employees by making them feel anxious and powerless, reducing their creativity, and making them less productive.63

Finding the time to build and maintain meaningful connections to a large and diverse network of contacts, clients, and other key stakeholders is a major challenge for managers today. While it can be time-consuming, connecting with people has never been easier because of online social networking sites that allow you to develop your social capital. The goodwill stemming from your social relationships is more important than ever and aids your career success, compensation, employment, team effectiveness, successful entrepreneurship, and relationships with suppliers and other outsiders.62 Students should take time to build a large and diverse network while in school. This network may prove valuable in the future.

CHAPTER 1

bat2952X_ch01_001-023.indd 17

goodwill stemming from your social relationships

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

The stress comes when employees or their supervisors don’t set limits on being connected. Real estate broker Ted Helgans calls his BlackBerry a “traveling office” and a valuable tool for getting and sharing information. Helgans emphasizes that users can and should decide when to turn off the devices.64 Jean Chatzky, an editor for Money magazine, realized that the device had become more of a distraction than a help, and began reminding herself that the messages were not emergencies.65 Thus using technology effectively is more than a matter of learning new skills; it also involves making judgments about when and where to apply the technology for maximum benefit.66

4.3|Knowledge is a Critical Resource Companies and managers need new, innovative ideas. Because companies in advanced economies have become so efficient at producing physical goods, most workers have been freed up to provide services like training, entertainment, research, and advertising. Efficient factories with fewer workers produce the cereals and cell phones the market demands; meanwhile, more and more workers create software and invent new products. These workers, whose primary contributions are ideas and problemsolving expertise, are often referred to as knowledge workers. Managing these workers poses some particular challenges, which we will examine throughout this book. For example, determining whether they are doing a good job can be difficult because the manager cannot simply count or measure a knowledge worker’s output. Also, these workers often are most motivated to do their best when the work is interesting, not because of a carrot or stick dangled by the manager.67 Because the success of modern businesses so often depends on the knowledge used for innovation and the delivery of services, organizations need to manage that knowledge. Knowledge management is the set of practices aimed at discovering and harnessing an organization’s intellectual resources—fully utilizing the intellects of the organization’s people. Knowledge management is about finding, unlocking, sharing, and capitalizing on the most precious resources of an organization: people’s expertise, skills, wisdom, and relationships. Typically knowledge management relies on software that lets employees contribute what they know and share that knowledge readily with one another. As a result, knowledge management 18 PART 1

bat2952X_ch01_001-023.indd 18

may be the responsibility of an organization’s information technology (IT) department, perhaps under the leadership of a chief information officer or chief knowledge officer. In hospitals, important knowledge includes patients’ histories, doctors’ orders, billing information, dietary requirements, prescriptions administered, and much more. With lives at stake, many hospitals have embraced knowledge management. At Virginia Commonwealth University (VCU) Health System, a single information system lets doctors write prescriptions, look up patient information and lab results, and consult with one another. Billing also is automated as part of VCU’s knowledge management system, making the process more efficient and connecting with patient data so that it can remind the physician of all the conditions being treated— and billed for.68 Hospitals may also give patients access to the knowledge management system so they can schedule appointments, request prescription refills, and send questions to their doctors.

4.4|Collaboration Boosts Performance One of the most important processes of knowledge management is to ensure that people in different parts of the organization collaborate effectively. This requires communication among departments, divisions, or other subunits of the organization. As illustrated in Exhibit 1.5, BP tries to create “T-shaped” managers who break out of the traditional corporate hierarchy to share knowledge freely across the organization (the horizontal part of the “T”) while remaining fiercely committed to the performance of their individual business units (the vertical part of the “T”). This emphasis on dual responsibilities for performance and knowledge sharing also occurs at pharmaceutical giant GlaxoSmithKline, the large German industrial company Siemens, and the London-based steelmaker Ispat International.69 Toyota keeps its product development process efficient by bringing together design engineers and manufacturing employees from the beginning. Often manufacturing employees can see ways to simplify a design so that it is easier to make without defects or unnecessary costs. Toyota expects its employees to listen to input from all areas of the organization, making this type of collaboration a natural part of the organization’s culture. The collaboration is supported with product development software including an online database that provides a central, easily

Introduction

18/07/12 9:18 PM

Confirming pages

knowledge management accessible source of information about designs and processes. Along with this information, employees use the software to share their knowledge—best practices they have developed for design and manufacturing.70 At Toyota, knowledge management supports collaboration and vice versa. Collaboration also occurs beyond the boundaries of the organization itself. Companies today must motivate and capitalize on the ideas of people outside the organization. AT&T, in an effort to connect with more small business owners (a key source of potential customers) over the Internet, is collaborating with an outside firm to develop over 100 how-to articles.71 Topics include everything from writing a business plan to setting up a wireless network. AT&T is putting content like this on the web to attract these new customers when they use search engines and social media.72 Customers, too, can be collaborators. Creating outstanding products and services can start with involving customers in company decisions. Procter & Gamble has been getting customers to think creatively and talk with one another online to come up with new product and service ideas.73 Tapping into the popularity of social networking websites like Facebook and Twitter, P&G set up two websites aimed at bringing its customers together. One site, the People’s Choice Community, provides content about the winners of the People’s Choice Awards, along with opportunities to join a “community” of people who want to share messages about those celebrities. The other site, called Capessa, is a discussion group for women where they can trade thoughts about health and other concerns. Although both sites offer advertising opportunities, P&G intends to use them primarily as a way to learn more about consumers’ attitudes.74

4.5|Diversity Needs to be Leveraged

practices aimed at

other stakeholders will differ from discovering and harnessing you in race, ethnicity, age, gender, an organization’s physical characteristics, or sexual intellectual resources orientation. To be an effective manager, you’ll need to understand, relate to, and work productively with these individuals. How diverse are we becoming at work? The following trends in the U.S. labor force are expected from 2008 through 2018:75 • The labor force will continue to grow more diverse. • Fast growth of “older workers” will occur to the point that approximately 1 out of 4 workers will be 55 and older. • Hispanics will grow to about 18 percent and Asians to about 6 percent of the labor force. • A higher percentage of women than men will join the labor force. • White (non-Hispanic) workers’ participation in the labor force will drop from 68 to 64 percent.

The increase in gender, racial, age, and ethnic diversity in the workplace will accentuate the many differences in employees’ values, attitudes toward work, and norms of behavior. In addition to leveraging the strengths of diverse employees, effective managers need to find ways to connect with diverse customers, suppliers, and government officials, both in the United States and internationally. As will be discussed in greater detail in later chapters, managers need to be acutely aware of these differences and be prepared to prevent (or deal with) miscommunication, insensitivity, and hostility on the part of an employee, customer, or other stakeholder who doesn’t embrace the benefits of diversity management.

Fortunately, effective managers and organizations are taking steps to address these concerns and leverage the diversity of their resources and talent in new ways. IBM’s board The labor force is becoming more and more diverse. This means of directors and its Worldwide Executive Council (WEC) are that it is likely that your coworkers, customers, suppliers, and 57 percent and 40 percent (respectively) female and multicultural (not U.S.-born). The WEC is responE X H I B I T 1 . 5 The T-shaped manager at BP sible for overseeing the company’s worldwide diversity initiatives, including recruiting, retaining, and T-shaped managers increase organizational effectiveness by promoting talent, and linking diversity initiatives to sharing knowledge with others across the organization... the global marketplace.76 Accounting, taxation and consulting firm Deloitte LLP has undertaken several steps to break the “glass ceiling” and retain more of its talented female employees. The firm decreased the amount of travel for employees to allow them to have better work/life balance, provided enhanced career opportunities for women, and made diversity management a key priority for the entire organization. By making a concerted effort to retain and value female employees, Deloitte is managing its talent in a more effective and efficient manner. The ....while simultaneously focusing on achieving company now has more than 1,000 female partners, strong performance in their own business units. principals, and directors.77 By retaining valuable human resources, Deloitte avoids having to spend Source: Adapted from M. Hansen and B. von Oetinger, “Introducing T-Shaped Managers: time and money on recruiting, selecting, orienting, Knowledge Management’s Next Generation,” Harvard Business Review, March 2001, pp. 106–16. and training new employees who may or may not fit CHAPTER 1

bat2952X_ch01_001-023.indd 19

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

the organizational culture or be able to do the job as well as a current employee. Globalization, technological change, the monumental importance of new ideas, collaboration across disappearing boundaries, diversity—what are the effects of this tidal wave of new forces? The remainder of this chapter and the following chapters will answer this question with business and management principles, real-world examples, and insights from successful managers and leaders.

LO5 Recognize advantage

how

successful

managers

achieve

competitive

SOURCES OF COMPETITIVE ADVANTAGE Why do some companies lose their dominant positions while others manage to stay on top?78 Blockbuster was a successful video rental chain until Netflix, cable companies, and online enterprises changed the delivery and pricing of videos and entertainment content. Then there’s Eastman Kodak. For over 100 years, this company dominated the camera and film markets until being upended by the invention of digital photography, file sharing, and the like. On the other hand, how does a company like Apple continually excite customers with its “iGadget” offerings?79 How does the Chinese electric car manufacturer BYD compete effectively in this emerging segment of the automobile industry? How does the Indian technology company Infosys compete effectively against its American rivals, Accenture and McKinsey?80 These successful companies have strong managers who know they are in a competitive struggle to survive and win. To do this, you have to gain advantage over your competitors and earn a profit. You gain competitive advantage by being better than your competitors at doing valuable things for your customers. But what does this mean, specifically? To succeed, managers must deliver the fundamental success drivers: innovation, quality, service, speed, and cost competitiveness.

5.1|Innovation Keeps You Ahead of Competitors

If the Kindle Fire’s Internet browser is as fast as predicted81 and the new tablet’s relatively low price of $19982 proves attractive to consumers, will the Kindle Fire become the number one tablet computer? One thing is fairly certain: we can count on Apple to counter with its own innovations when it releases its next generation iPad. Innovation is the introduction of new goods and services. Your firm must adapt to changes in consumer demand and to new competitors. Products don’t sell forever; in fact, they don’t 20 PART 1

bat2952X_ch01_001-023.indd 20

An important source of competitive advantage for Apple is how it excites customers with new product offerings.

sell for nearly as long as they used to because so many competitors are introducing so many new products all the time. Likewise, you have to be ready with new ways to communicate with customers and deliver products to them, as when the Internet forced traditional merchants to learn new ways of reaching customers directly. Globalization and technological advances have accelerated the pace of change and thus the need for innovation. Sometimes the most important innovation isn’t the product itself but the way it is delivered. Borrowing an idea that has proved popular in Europe, Opaque–Dining in the Dark has collaborated with the Braille Institute of America to present dining events at the Hyatt West Hollywood in total darkness. Diners select gourmet meals from a menu in a lighted lounge and then are led into a dark banquet room by blind or visually impaired waiters. The attraction is that diners experience the meal in a completely new way because they are forced to concentrate on their senses of taste, smell, and touch.83 Innovation is today’s holy grail.84 And like the other sources of competitive advantage, innovation comes from people, it must be a strategic goal, and it must be managed properly. Later chapters will show you how great companies innovate.

5.2|Quality Must Continuously Improve When Spectrum Health, a hospital chain based in Grand Rapids, Michigan, asked patients how well they were served, the hospital learned that it had a problem. Patients rated staff low on helpfulness and said they didn’t get good information about the procedures they received in the hospital, or the way they were supposed to take care of themselves after being released to return home. Spectrum responded to the survey results by setting up an advisory council of patients and family members, making visiting hours more flexible, getting patient input on who was allowed

Introduction

18/07/12 9:18 PM

Confirming pages

to hear medical information and make decisions about treatment, and calling discharged patients at home to make sure they understood the directions they had received. Within two years of conducting the survey and beginning to make these changes, satisfaction scores of Spectrum patients improved dramatically.85 Spectrum Health’s efforts reflect a commitment to quality. In general, quality is the excellence of your product or service. The importance of quality and the standards for acceptable quality have increased dramatically. Customers now demand high-quality goods and services, and often they will accept nothing less. Historically, quality pertained primarily to the physical goods that customers bought, and it referred to attractiveness, lack of defects, reliability, and long-term dependability. The traditional approach to quality was to check work after it was completed and then eliminate defects. But then W. Edwards Deming, J. M. Juran, and other quality gurus convinced managers to take a more complete approach to achieving total quality. This includes several objectives: • Preventing defects before they occur. • Achieving zero defects in manufacturing. • Designing products for quality.

The goal is to plan carefully, prevent from the beginning all quality-related problems, and live a philosophy of continuous improvement in the way the company operates. Deming and his ideas were actually rebuffed by U.S. managers; only when he found an audience in Japan, and Japan started grabbing big chunks of market share from the United States in vehicles, computer chips, and TVs, did U.S. managers start internalizing and practicing his quality philosophy.86

innovation the introduction of new goods and services

of product performance, customer service, reliability (avoidance of quality the excellence failure or breakdowns), conforof your products (goods or mance to standards, durability, and services) aesthetics. At the beginning of this service the speed and section, we mentioned how hosdependability with which an pitals are using patient surveys to organization delivers what measure quality. However, a recent customers want study conducted by the University of Pennsylvania School of Medicine determined that a patient’s risk of dying was not significantly less at hospitals that scored well on Medicare’s quality measures.89 Certainly, if you enter a hospital, you hope to come out alive! Only when you move beyond broad, generic concepts like “quality” and identify specific quality requirements can you identify problems, target needs, set performance standards more precisely, and deliver world-class value.

5.3|Services Must Meet Customers’ Changing Needs As we noted in the discussion of quality, important quality measures often pertain to the level of service customers receive. This dimension of quality is particularly important because the service sector now dominates the U.S. economy. Services include intangible products like insurance, hotel accommodations, medical care, and haircuts. Between now and 2018, the Bureau of Labor Statistics forecasts that Americans will spend a higher percentage of their personal income on services than tangible goods.90 The total number of jobs in service companies—not including retailing, wholesaling, and government workers—is nearly five times the number in manufacturing companies. And that pattern is expected to intensify. Between now and 2018, the fastest-growing job categories will be almost entirely services and retailing jobs, and the jobs expected to see the greatest declines are almost all in manufacturing.91

Although these principles were originally applied to manufacturing tangible goods, the experiences of Spectrum Health remind us that service quality is vital as well. QualPeople enter the Dans le Noir (In the Black) restaurant ity is also enhanced when companies In a competitive context, service in Paris, where they will enjoy a dining experience customize goods and services to indimeans giving customers what they in complete darkness as if they were blind. Blind vidual consumers’ wishes. Choices want or need, when and where they waiters serve as guides. The concept is an innovative at Starbucks give consumers literally want it. So service is focused on conapproach to fine dining, and restaurants such as this are spreading around the globe. thousands of variations on the drinks tinually meeting the changing needs of they can order, whether it’s half-caff customers to establish mutually benefior full caffeine, skim milk or soy milk, or shots of espresso and cial long-term relationships. Service is also an important offering any of a variety of flavored syrups. Car buyers can go online to for many companies that sell tangible goods. Software compachoose from hundreds of features to “build their own” Mini nies, in addition to providing the actual programs, may help Cooper, down to the color of the light for the speedometer. And their customers identify requirements, set up computer systems, for a premium price, candy lovers can select M&M’s candies and perform maintenance. bearing the message of their own creation.87 Stores offer a shopping environment and customer service along with the goods on their shelves. To improve service for a wider Providing world-class quality requires a thorough understandcustomer base, Best Buy adjusted its store environment so it ing of what quality really is.88 Quality can be measured in terms CHAPTER 1

bat2952X_ch01_001-023.indd 21

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

speed fast and timely execution, response, and delivery of results cost competitiveness

would be more inviting to female shoppers.

The chain’s loud music and emphasis on high-tech features had been aimed at young men, but the store found that women influence 9 out of 10 consumer electronics purchases. Best Buy lowered the volume, dimmed the lighting, and trained staff to discuss what customers want the technology to do for them, rather than merely pointing out bells and whistles. The chain is also trying to hire more female salespeople.92

keeping costs low to achieve profits and to be able to offer prices that are attractive to consumers

An important dimension of service quality is making it easy and enjoyable for customers to experience a service or to buy and use products. For example, Apple made it easy and enjoyable for online customers to sample their favorite music and then download it from the iTunes store. Amazon allows customers to look at a free sample of a book to help them decide whether they want to read and purchase the entire book. These innovations in service are changing the way companies do business.

5.4|Do It Better and Faster Google’s culture, based on rapid innovation, is constantly trying to make improvements in its product. Sheryl Sandberg, a Google vice president, once made a mistake because she was

essential just for keeping up with the competition. A recent study found that the top assembly plant in the United States was Ford’s Atlanta facility, where employees needed just 15.4 hours to assemble a vehicle. Compare that with the 1980s, when GM employees needed 40 hours to assemble a vehicle.94 Another important measure of speed in the auto industry is the time a company takes to go from product concept to availability of a vehicle in the showroom. During the 1980s, that time was about 30 or 40 months. Today Toyota has cut the process to an average of 24 months; it needed just 22 months to launch its Tundra pickup.95 Speed isn’t everything—you can’t get sloppy in your quest to be first. But other things being equal, faster companies are more likely to be the winners, slow ones the losers.

5.5|Low Costs Help Increase Your Sales Walmart keeps driving hard to find new ways to cut billions of dollars from its already very low distribution costs. It leads the industry in efficient distribution, but competitors are copying Walmart’s methods, so the efficiency no longer gives it as much of an advantage. To stay on top of the game, Walmart has urged its suppliers to use radio frequency ID (RFID) tags on products for instantaneous identification and better inventory tracking.96 Walmart also has sought to keep costs down by scheduling store employees more efficiently. It introduced a computerized system that schedules employees based on

BE EVERYWHERE, DO EVERYTHING, AND NEVER FAIL TO ASTONISH THE CUSTOMER. —Macy’s motto moving too fast to plan carefully. Although the mistake cost the company a few million dollars, Google cofounder Larry Page responded to her explanation and apology by saying he was actually glad she had made the mistake. It showed that Sandberg appreciated the company’s values. Page told her, “I want to run a company where we are moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risks.”93

each store’s sales, transactions, units sold, and customer traffic. It compares seven weeks’ worth of data in those areas with the prior year’s performance and uses the results to determine how many employees will be needed during which hours. The system is intended to schedule just enough workers, with full staffing only at the busiest times and days of the week, so it requires more flexibility from Walmart’s employees.97

While it’s unlikely that Google actually favors mistakes over money-making ideas, Page’s statement expressed an appreciation that in the modern business environment, speed—rapid execution, response, and delivery of results—often separates the winners from the losers. How fast can you develop and get a new product to market? How quickly can you respond to customer requests? You are far better off if you are faster than the competition—and if you can respond quickly to your competitors’ actions.

Walmart’s efforts are aimed at cost competitiveness, which means keeping costs low enough so the company can realize profits and price its products (goods or services) at levels that are attractive to consumers. Toyota’s efforts to trim product development processes are also partly aimed at cost competitiveness. Making the processes more efficient through collaboration between design and manufacturing employees eliminates wasteful steps and procedures. Needless to say, if you can offer a desirable product at a lower price, it is more likely to sell.

Speed is no longer just a goal of some companies; it is a strategic imperative. Speed combined with quality is a measure that a company is operating efficiently. In the auto industry, getting faster is

Managing your costs and keeping them down require being efficient: accomplishing your goals by using your resources wisely and minimizing waste. Little things can save big money, but

22 PART 1

bat2952X_ch01_001-023.indd 22

Introduction

18/07/12 9:18 PM

Confirming pages

Walmart controls costs by continuously improving the efficiency and speed of its inventory management system. One of its distribution centers is pictured above.

cost cuts involve trade-offs. That explains some of the growth in the market for private jets. Flying on a private jet is more expensive than buying a ticket on a commercial airline. But for a highly paid, frequently traveling business executive, the time spent hanging around an airport can become more costly than the cost of a jet. If the company can arrange to participate in a service such as NetJets, where the company buys only shares in a jet with the rights to use it, this can trim the price and make the arrangement even more beneficial.98 One reason every company must worry about cost is that consumers can easily compare prices on the Internet from thousands of competitors. DealTime, Shopzilla, and PriceGrabber are only a few of the search tools that can generate lists of prices at which a product is available from various suppliers. Consumers looking to buy popular items, such as cameras, printers, and plane fares, can go online to research the best models and the best deals. If you can’t cut costs and offer attractive prices, you can’t compete.

5.6|The Best Managers Deliver All Five Advantages Don’t assume that you can settle for delivering just one of the five competitive advantages: low cost alone or quality alone, for example. The best managers and companies deliver them all. Virginia Mason Medical Center, like many hospitals, felt challenged in delivering low costs along with high quality and superior services. Virginia Mason has a reputation for highquality care, but it was losing money treating certain patients. Complicated, high-tech procedures generate higher fees, but they aren’t necessarily what a patient needs the most. Some patients may benefit more from a simple doctor visit, but that’s not as profitable. So Virginia Mason collaborated with Aetna, an insurer that pays for 10 percent of the medical center’s business, and with local employers that provide coverage for

their employees through Aetna. Together the companies renegotiated the standard procedures physicians would follow and the rates Aetna would pay so that some of the most expensive conditions could be treated in ways that were ultimately more economical to insure but paid for at higher rates that would be profitable for Virginia Mason. The facility presented the plan to its department heads, helping them pay attention to how their decisions affect the cost of care. Virginia Mason has also improved quality through measures that enhance speed—in this case, cutting waiting times for patients, such as a reduction in the four-hour wait for chemotherapy to 90 minutes.99 Trade-offs may occur among the five sources of competitive advantage, but this doesn’t need to be a zero-sum game where one has to suffer at the expense of another. Columbia Hotel Management is in the business of managing hotel properties around the country. Some of these hotels include Best Western (Georgia), Holiday Inn (Illinois), Ramada Plaza (Texas), and the Quality Inn (Mississippi).100 Milan Yager, the director of human resources for the company, focused on cost savings when he decided to outsource some of the more routine human resources tasks such as payroll and benefits management.101 Turning over those responsibilities to a vendor that specializes in performing them efficiently freed Yager to engage in higher-level HR strategies and projects that can help his organization provide outstanding services for the hotel properties it manages. Making decisions about outsourcing and cost savings are just some important ways to help your organization achieve competitive advantage. As you read this chapter, you learned about several of the challenges facing managers today and what functions and activities managers engage in at different levels of the organization. The next chapter (Chapter 2) looks back to help provide a lens for understanding how we got to where we are today. It provides a brief look at the evolution of management thought and practice. ■ CHAPTER 1

bat2952X_ch01_001-023.indd 23

Managing Effectively in a Changing World

18/07/12 9:18 PM

Confirming pages

24 PART 1

bat2952X_ch02_024-039.indd 24

Introduction

16/07/12 8:40 PM

Confirming pages

chapter

two

the evolution of management hat is a chapter about

did not like seeing that processes at

LEARNING OBJECTIVES

history doing in a manage-

his company were disorganized and

ment textbook? It provides

workers were slacking off. His ideas

After studying Chapter 2, you should be able to

context for understanding how manage-

inspired the likes of Henry Ford, who

rial approaches have evolved over time.

perfected the assembly line and

Today’s taken-for-granted management

changed history. Lillian Gilbreth main-

practices—efficiency, division of labor,

tained quite a balancing act between

pay for performance, cooperative work

her successful career, husband, and

environments,

treatment

12 children while still finding time to

of employees, decentralized decision

design kitchens and appliances as a

making, empowerment, autonomy, and

consultant for General Electric. Henri

teamwork—originated from earlier con-

Fayol saved a large mining and steel

tributions to management thought.

company that was on the brink of bank-

equitable

Many of the historical contributors

ruptcy and turned it into a profitable,

discussed in this chapter were color-

well-managed organization. He saved

ful, interesting people. Frederick Taylor

over 10,000 employees’ jobs. ■

LO1 Describe the origins of management practice and its early concepts and influences. LO2 Summarize the five classical approaches to management. LO3 Discuss the four contemporary approaches to management. LO4 Identify modern contributors who have shaped management thought and practices.

CHAPTER 2

bat2952X_ch02_024-039.indd 25

The Evolution of Management

16/07/12 8:41 PM

Confirming pages

The management profession as we know it today is relatively new. This chapter explores the roots and influences of modern management theory. Understanding the origins of management thought will help you grasp the underlying contexts of the ideas and concepts presented in the chapters ahead. Although this chapter is titled “The Evolution of Management” it might be more appropriately called “The Revolutions of Management” because it documents the wide swings in management approaches over the last 100 years. Parts of each of these approaches have survived and found their way into modern perspectives on management. Thus the legacy of past efforts, breakthroughs, and failures has become our guide to current and future management practice. The remainder of this chapter discusses the classical and contemporary approaches to management, as well as modern contributions from current and well-known management thought leaders.

LO1 Describe the origins of management practice and its early concepts and influences

ORIGINS OF MANAGEMENT For several thousand years, managers have wrestled with some of the same issues and problems that confront executives today. As far back as 5000 BC, the Sumerians practiced the management function of controlling (discussed in Chapter 1) by keeping records of tax receipts, real estate holdings, and lists of farm animals.1 Here are some other examples of the early application and use of management functions:2 • Around 4000 BC, the Egyptians used planning, organizing, leading, and controlling to build their great pyramids; one pyramid took over 100,000 laborers 20 years to complete. • As early as 1100 BC, the Chinese applied the managerial concepts of delegation, cooperation, efficiency, organization, and control. • In 500 BC, Sun Tzu discussed the importance of planning and leading in his book The Art of War. • Around 400–350 BC, the Greeks recognized management as a separate art and advocated a scientific approach to work.

LISTEN & LEARN ONLINE

Young Managers

Speak Out!

“

Time management is key. Often when we’re talking about the cost of an item, it isn’t as important as the time it may take up. Time has become the new currency.

”

— Martha Zehnder Keller, Associate Director of Convention Services

Over 2,500 years ago, Chinese general, Sun Tzu, wrote that planning and leading are critical elements of a successful military strategy.

26 PART 1

bat2952X_ch02_024-039.indd 26

Introduction

16/07/12 8:41 PM

Confirming pages

economies of scale reductions in the average cost of a unit of production as the total volume produces increases

• Around AD 1436, the Venetians standardized production through the use of an assembly line, building warehouses and using an inventory system to monitor the contents.

Toward the end of the industrial revolution, management emerged as a formal discipline. The first university programs to offer management and business education, the Wharton School at the University of Pennsylvania and the Amos Tuck School at Dartmouth, were founded in the late 19th century. By 1914, 25 business schools existed.7

• In 1776 Adam Smith discussed control and the principle of specialization with regard to manufacturing workers.

However, throughout history most managers operated by a trial-and-error basis. The industrial revolution in the 18th and 19th centuries changed that. Fueled by major advances in manufacturing and transportation technologies like the steam engine, cotton gin, and railway networks, and the availability of large numbers of low-skilled laborers,3 businesses and factories grew in size and became more complex to operate. Managers who could make minor improvements in management tactics produced impressive increases in production quantity and quality.4

THE EVOLUTION OF MANAGEMENT Exhibit2.1 provides a timeline depicting the evolution of management thought through the decades. This historical perspective is divided into two major sections: classical approaches and contemporary approaches. Many of these approaches overlapped as they developed, and they often had a significant impact on one another. Some approaches were a direct reaction to the perceived deficiencies of previous approaches. Others developed as the needs and issues confronting managers changed over the years. All the approaches attempted to explain the real issues facing managers and provide them with tools to solve future problems.

The emergence of economies of scale— reductions in the average cost of a unit of production as the total volume produced increases—drove managers to strive for further growth. The opportunities for mass production created by the industrial revolution spawned intense and systematic thought about management problems and issues—particularly efficiency, production processes, and cost savings.5 In the 1890s the newly formed General Electric Company was able to mass-produce several new products (many invented or refined by Thomas A. Edison), including incandescent lightbulbs, electric fans, and phonographs.6

Exhibit2.1 will reinforce your understanding of the key relationships among the approaches and place each perspective in its historical context.

E X H I B I T 2 . 1 The evolution of management thought

Classical Approaches 1890

1900

1910

1920

1930

Administrative management

Systematic management

Scientific management

Bureaucracy

Human relations

Contemporary Approaches 1940

1950

Sociotechnical systems

1960

1970

Systems theory

1980

2000

2010

2020

Modern contributions to current and future revolutions

Quantitative management

Organizational behavior

CHAPTER 2

bat2952X_ch02_024-039.indd 27

1990

The Evolution of Management

16/07/12 8:41 PM

Confirming pages

An Early Labor Contract

LO2 Summarize the five classical approaches to management

CLASSICAL APPROACHES The classical period extended from the mid-19th century through the early 1950s. The major approaches that emerged during this period were systematic management, scientific management, bureaucracy, administrative management, and human relations.

2.1|Systematic Management During the 19th century, growth in U.S. business centered on manufacturing.8 Early writers such as Adam Smith believed the management of these firms was chaotic, and their ideas helped to systematize it. Most organizational tasks were subdivided and performed by specialized labor. However, poor coordination caused frequent problems and breakdowns of the manufacturing process. The systematic management approach attempted to build specific procedures and processes into operations to ensure coordination of effort. Systematic management emphasized economical operations, adequate staffing, maintenance of inventories to meet consumer demand, and organizational control. These goals were achieved through

The following rules, taken from the records of Cocheco Company, were typical of labor contract provisions in the 1850s. 1. The hours of work shall be from sunrise to sunset, from the 21st of March to the 20th of September inclusively; and from sunrise until eight o’clock, P.M., during the remainder of the year. One hour shall be allowed for dinner, and half an hour for breakfast during the first mentioned six months; and one hour for dinner during the other half of the year; on Saturdays, the mill shall be stopped one hour before sunset, for the purpose of cleaning the machinery. 2. Every hand coming to work a quarter of an hour after the mill has been started shall be docked a quarter of a day; and every hand absenting him or herself, without absolute necessity, shall be docked in a sum double the amount of the wages such hand shall have earned during the time of such absence. No more than one hand is allowed to leave any one of the rooms at the same time—a quarter of a day shall be deducted for every breach of this rule. 3. No smoking or spiritous liquors shall be allowed in the factory under any pretense whatsoever. It is also forbidden to carry into the factory, nuts, fruits, etc., books, or papers during the hours of work. Source: W. Sullivan, “The Industrial Revolution and the Factory Operative in Pennsylvania,” The Pennsylvania Magazine of History and Biography 78 (1954), pp. 478–79.

• Careful definition of duties and responsibilities. • Standardized techniques for performing these duties. • Specific means of gathering, handling, transmitting, and analyzing information. • Cost accounting, wage, and production control systems to facilitate internal coordination and communications.

Systematic management emphasized internal operations because managers were concerned primarily with meeting the explosive growth in demand brought about by the industrial revolution. In addition, managers were free to focus on internal issues of efficiency, in part because the government did not constrain business practices significantly. Finally, labor was poorly organized. As a result, many managers were oriented more toward things than toward people. Systematic management did not address all the issues 19thcentury managers faced, but it tried to raise managers’ awareness about the most pressing concerns of their job.

2.2|Scientific Management

The fifteen millionth Ford Model T rolls off the assembly line in 1927. Henry Ford revolutionized automobile manufacturing by applying the principles of scientific management.

28 PART 1

bat2952X_ch02_024-039.indd 28

Systematic management failed to lead to widespread production efficiency. This shortcoming became apparent to a young engineer named Frederick Taylor, who was hired by Midvale Steel Company in 1878. Taylor discovered that production and pay were poor, inefficiency and waste were prevalent, and most companies had tremendous unused potential. He concluded that management decisions were unsystematic and that no research to determine the best means of production existed.

Introduction

16/07/12 8:41 PM

Confirming pages

systematic management In response, Taylor introduced a second approach to management, known as scientiﬁc management.9 This approach advocated the application of scientific methods to analyze work and to determine how to complete production tasks efficiently. For example, U.S. Steel’s contract with the United Steel Workers of America specified that sand shovelers should move 12.5 shovelfuls per minute; shovelfuls should average 15 pounds of river sand composed of 5.5 percent moisture.10

a classical management approach that attempted to build into operations the specific procedures and processes that would ensure coordination of effort to achieve established goals and plans

Taylor identified management:

a classical management approach that applied scientific methods to analyze and determine the “one best way” to complete production tasks

four

principles

scientific management

scientific

1. Management should develop a precise, scientific approach for each element of one’s work to replace general guidelines. 2. Management should scientifically select, train, teach, and develop each worker so that the right person has the right job.

Frederick Taylor was an early expert in management efficiency.

3. Management should cooperate with workers to ensure that jobs match plans and principles. 4. Management should ensure an appropriate division of work and responsibility between managers and workers.

To implement this approach, Taylor used techniques such as time-and-motion studies. With this technique, a task was divided into its basic movements, and different motions were timed to determine the most efficient way to complete the task.

who were struggling with meeting their output goals. He is also known for creating the Gantt chart, which helps employees and managers plan projects by task and time to complete those tasks. An interesting aspect of the chart is that it illustrates how some tasks need to be done during the same time period. Today Gantt charts (available through Microsoft Project and other project software) are used in several fields for a wide variety of projects.13 Exhibit2.2 illustrates how students can use a Gantt chart to complete a semester-long team research project.

After the “one best way” to perform the job was identified, Taylor stressed the importance of hiring and training the proper worker to do that job. Taylor advocated the standardization of tools, the use of instruction cards to help workers, and breaks to eliminate fatigue. Another key element of Taylor’s approach was the use of the differential piecerate system. Taylor assumed workers were motivated by receiving money. Therefore, he implemented a pay system in which workers were paid additional wages when they exceeded a standard level of output for each job. Taylor concluded that both workers and management would benefit from such an approach. Henry L. Gantt worked with and became a protégé of Frederick Taylor’s.11 Like Taylor, he believed in scientific management and the need for management and labor to cooperate. He expanded on the piecerate system by suggesting that frontline supervisors should receive a bonus for each of their workers who completed their assigned daily tasks.12 Gantt believed that this would motivate supervisors to provide extra attention and training to those workers

DID YOU KNOW? Frederick Taylor started as a common laborer at Midvale Steel company in Philadelphia. Within six years, he rose through the ranks (clerk, machinist, supervisor, and master mechanic) to become the chief engineer of the plant. His experiences at Midvale Steel informed many of his ideas about scientific management. Source: D.A. Wren, The History of Management Thought (Upper Saddle River, NJ: Wiley, 2005), pp. 122–124.

Frank B. and Lillian M. Gilbreth formed a productive husband and wife team. Frank was a strong believer in Taylor’s philosophies. While working as a supervisor of bricklayers, Frank Gilbreth developed a system to lower costs and increase worker productivity by showing how employees could work smarter, not harder.14 His analysis showed how the number of motions for the average bricklayer could be reduced from 18 to 4, allowing worker productivity to increase from 1,000 to 2,700 bricks laid each day.15 This success inspired Gilbreth to use a motion picture camera (with a clock in the foreground) to capture the precise movements of workers as they accomplished tasks. These “motion studies” were used to identify and remove wasteful movements so workers could be more efficient and productive. Lillian Gilbreth was also an influential contributor to management thought and practice. Known as the “mother of modern management,” she earned a PhD in psychology and later taught at Purdue University as a professor of management and the first female professor in the engineering school.16 While supportive of her husband’s work, Lillian Gilbreth eventually focused less on the technical CHAPTER 2

bat2952X_ch02_024-039.indd 29

The Evolution of Management

16/07/12 8:41 PM

Confirming pages

E X H I B I T 2 . 2 Using a Gantt Chart for a Team Research Project at School Step

Task

Assigned to

Accomplish Task Aug

Review assignment.

All team members

Meet as group to discuss and identify areas for clarification.

All team members

Identify team leader.

All team members

Meet with professor to clarify objectives of assignment.

Team leader

Meet as group to divide responsibilities.

Team leader and members

Sept

Oct

Nov

-----8/28 -----9/5 -------9/8 ----9/12 -------9/18

Write sections 1–3.

Member B

---------------10/31

Write sections 4–6.

Member C

---------------10/31

Write introduction and conclusion and type bibliography.

Member D

---------------10/31

Edit entire paper.

Team leader

Prepare PPT slides for presentation.

Member E

Practice/rehearse presentation.

Team leader and members

Submit completed paper and deliver presentation.

Team leader and members

and more on the human side of management. She was interested in how job satisfaction motivated employees, how motion studies could be used to help disabled individuals perform jobs, and how fatigue and stress affected workers’ well-being and productivity.17 Amazingly, Lillian Gilbreth achieved many of these accomplishments while raising 12 children and running a consulting business. Perhaps it would be more appropriate to refer to her as the “first superwoman” who balanced a successful career and family life.18 Scientific management principles were widely embraced. One of the most famous examples of the application of scientific

Dec

-------11/15 -------11/20 --------11/22 --12/1

management is the factory Henry Ford built to produce the Model-T.19 The legacy of Taylor’s scientific management approach is broad and pervasive. Most important, productivity and efficiency in manufacturing improved dramatically. The concepts of scientific methods and research were introduced to manufacturing. Scientific Management and the Model-T At the turn of the century, automobiles were a luxury that only the wealthy could afford. They were assembled by craftspeople who put an entire car together at one spot on the factory floor. These workers were not specialized, and Henry Ford believed they wasted time and energy bringing the needed parts to the car. Ford took a revolutionary approach to automobile manufacturing by using scientific management principles. After much study, machines and workers in Ford’s new factory were placed in sequence so that an automobile could be assembled without interruption along a moving production line. Mechanical energy and a conveyor belt were used to take the work to the workers. The manufacture of parts likewise was revolutionized. For example, formerly it had taken one worker 20 minutes to assemble a flywheel magneto. By splitting the job into 29 different operations, putting the product on a mechanical conveyor, and changing the height of the conveyor, Ford cut production time to 5 minutes.

Frank B. and Lillian M. Gilbreth pose with their eleven children. Their family grew to twelve children and inspired the book and movie Cheaper by the Dozen.

30 PART 1

bat2952X_ch02_024-039.indd 30

By 1914 chassis assembly time had been trimmed from almost 13 hours to 1½ hours. The new methods of production required complete standardization, new machines, and an adaptable labor force. Costs dropped significantly, the Model-T became the first car accessible to the majority of Americans, and Ford dominated the industry for many years. Source: H. Kroos and C. Gilbert, The Principles of Scientific Management (New York: Harper & Row, 1911).

Introduction

16/07/12 8:41 PM

Confirming pages

bureaucracy a The piecerate system gained wide acceptance because it more closely aligned effort and reward. Taylor also emphasized the need for cooperation between management and workers. And the concept of a management specialist gained prominence. Despite these gains, not everyone was convinced that scientific management was the best solution to all business problems. First, critics claimed that Taylor ignored many job-related social and psychological factors by emphasizing only money as a worker incentive. Second, production tasks were reduced to a set of routine, machinelike procedures that led to boredom, apathy, and quality control problems. Third, unions strongly opposed scientific management techniques because they believed management might abuse their power to set the standards and the piecerates, thus exploiting workers and diminishing their importance. Finally, although scientific management resulted in intense scrutiny of the internal efficiency of organizations, it did not help managers deal with broader external issues such as competitors and government regulations, especially at the senior management level.

2.3|Bureaucracy Max Weber, a German sociologist, lawyer, and social historian, showed how management itself could be more efficient and consistent in his book The Theory of Social and Economic Organizations.20 The ideal model for management, according to Weber, is the bureaucracy approach.

classical management approach emphasizing a structured, formal network of relationships among specialized positions in the organization

According to Weber, bureaucracies are especially important because they allow large organizations to perform the many routine activities necessary for their survival. Also, bureaucratic positions foster specialized skills, eliminating many subjective judgments by managers. In addition, if the rules and controls are established properly, bureaucracies should be unbiased in their treatment of people, both customers and employees. Many organizations today are bureaucratic. Bureaucracy can be efficient and productive. However, bureaucracy is not the appropriate model for every organization. Organizations or departments that need rapid decision making and flexibility may suffer under a bureaucratic approach. Some people may not perform their best with excessive bureaucratic rules and procedures.

Other shortcomings stem from a faulty execution of bureaucratic principles rather than from the approach itself. Too much authority may be vested in too few people; the procedures may become the ends rather than the means; or managers may ignore appropriate rules and regulations. Finally, one advantage of a bureaucracy—its permanence—can also be a problem. Once a bureaucracy is established, dismantling it is very difficult.

Weber believed bureaucratic structures can eliminate the variability that results when managers in the same organization have different skills, experiences, and goals. As illustrated in Exhibit2.3, Weber advocated that the jobs themselves be standardized so that personnel changes would not disrupt the organization. He emphasized a structured, formal network of relationships among specialized positions in an organization. Rules and regulations standardize behavior, and authority resides in positions rather than in individuals. As a result, the organization need not rely on a particular individual, but will realize efficiency and success by following the rules in a routine and unbiased manner.

st ud y tip 2 Planning5Better Grades During the first week of the semester, review the syllabi from your classes and record the due dates of exams, quizzes, and assignments in a planner/calendar. These are readily available in electronic or paper formats. Next make a Gantt chart (see Exhibit 2.2) for assignments that require multiple steps over several weeks or months. Using a planner/calendar and Gantt charts will help you be better organized and earn higher grades!

German Sociologist Max Weber believed that a bureaucracy approach would make management more efficient and consistent.

CHAPTER 2

bat2952X_ch02_024-039.indd 31

The Evolution of Management

16/07/12 8:41 PM

Confirming pages

E X H I B I T 2 . 3 Characteristics of an Effective Bureaucracy 1. Division of labor

Tasks, assignments, and authority are clearly specified.

2. Authority

A chain of command or hierarchy is well established.

3. Qualifications

Employees are selected and promoted based on their qualifications.

4. Ownership

Managers, not owners, should run the organization.

5. Rules and controls

Impersonal rules should be applied consistently and fairly.

Source: Adapted from M. Weber, The Theory of Social and Economic Organization, trans. T. Parsons and A. Henderson (New York: Free Press, 1947), pp. 324–341.

2.4|Administrative Management

The administrative management approach emphasized the perspective of senior managers within the organization, and argued that management was a profession and could be taught. An explicit and broad framework for administrative management emerged in 1916, when Henri Fayol, a French mining engineer and executive, published a book summarizing his management experiences. Fayol identified five functions and 14 principles of management. The five functions, which are very similar to the four functions discussed in Chapter 1, are planning, organizing, commanding, coordinating, and controlling. Exhibit2.4 lists and defines the 14 principles. Although some critics claim Fayol treated the principles as universal truths for management, he actually wanted them applied flexibly.21

Mary Parker Follett was an influential writer, speaker, and management consultant.

E X H I B I T 2 . 4 Fayol’s 14 Principles of Management 1. Division of work—divide work into specialized tasks and assign responsibilities to specific individuals. 2. Authority—delegate authority along with responsibility.

A host of other executives contributed to the administrative management literature. These writers discussed a broad spectrum of management topics, including the social responsibilities of management, the philosophy of management, clarification of business terms and concepts, and organizational principles. Chester Barnard’s and Mary Parker Follett’s contributions have become classic works in this area.22

3. Discipline—make expectations clear and punish violations.

Barnard, former president of New Jersey Bell Telephone Company, published his landmark book The Functions of the Executive in 1938. He outlined the role of the senior executive: formulating the purpose of the organization, hiring key individuals, and maintaining organizational communications.23 Mary Parker Follett’s 1942 book Dynamic Administration extended Barnard’s work by emphasizing the continually changing situations that managers face.24 Two of her key contributions— the notion that managers desire flexibility and the differences between motivating groups and individuals—laid the groundwork for the modern contingency approach discussed later in the chapter.

7. Remuneration—systematically reward efforts that support the organization’s direction.

All the writings in the administrative management area emphasize management as a profession along with fields such as law and medicine. In addition, these authors offered many 32 PART 1

bat2952X_ch02_024-039.indd 32

4. Unity of command—each employee should be assigned to only one supervisor. 5. Unity of direction—employees’ efforts should be focused on achieving organizational objectives. 6. Subordination of individual interest to the general interest— the general interest must predominate.

8. Centralization—determine the relative importance of superior and subordinate roles. 9. Scalar chain—keep communications within the chain of command. 10. Order—order jobs and material so they support the organization’s direction. 11. Equity—fair discipline and order enhance employee commitment. 12. Stability and tenure of personnel—promote employee loyalty and longevity. 13. Initiative—encourage employees to act on their own in support of the organization’s direction. 14. Esprit de corps—promote a unity of interests between employees and management.

Introduction

16/07/12 8:42 PM

Confirming pages

administrative management a recommendations based on their personal experiences, which often included managing large corporations. Although these perspectives and recommendations were considered sound, critics noted that they might not work in all settings. Different types of personnel, industry conditions, and technologies may affect the appropriateness of these principles.

classical management approach that attempted to identify major principles and functions that managers could use to achieve superior organizational performance

2.5|Human Relations

A fourth approach to management, human relations, developed during the 1930s. This approach aimed at understanding how psychological and social processes interact with the work situation to influence performance. Human relations was the first major approach to emphasize informal work relationships and worker satisfaction. This approach owes much to other major schools of thought. For example, many of the ideas of the Gilbreths (scientific management) and Barnard and Follett (administrative management) influenced the development of human relations from 1930 to 1955. In fact, human relations emerged from a research project that began as a scientific management study. Western Electric Company, a manufacturer of communications equipment, hired a team of Harvard researchers led by Elton Mayo and Fritz Roethlisberger. They were to investigate the influence of physical working conditions on workers’ productivity and efficiency in one of the company’s factories outside Chicago. This research project, known as the Hawthorne Studies, provided some of the most interesting and controversial results in the history of management.25 The Hawthorne Studies were a series of experiments conducted from 1924 to 1932. During the first stage of the project (the Illumination Experiments), various working conditions, particularly the lighting in the factory, were altered to determine the effects of those changes on productivity. The researchers found no systematic relationship between the factory lighting and production levels. In some cases, productivity continued to increase even when the illumination was reduced to the level of moonlight. The researchers concluded that the workers performed and reacted differently because the researchers were observing them. This reaction is known as the Hawthorne Effect. This conclusion led the researchers to believe productivity may be affected more by psychological and social factors than by physical or objective influences. With this thought in mind, they initiated the other four stages of the project. During these stages, the researchers performed various work group experiments and had extensive interviews with employees. Mayo and his team eventually concluded that productivity and employee behavior were influenced by the informal work group. Human relations proponents argued that managers should stress primarily employee welfare, motivation, and

human relations

hawthorne effect

a classical management approach that attempted to understand and explain how human psychological and social processes interact with the formal aspects of the work situation to influence performance.

people’s reactions to being observed or studied resulting in superficial rather than meaningful changes in behavior

communication. They believed social needs had precedence over economic needs. Therefore, management must gain the cooperation of the group and promote job satisfaction and group norms consistent with the goals of the organization. Another noted contributor to the field of human relations was Abraham Maslow.26 In 1943 Maslow suggested that humans have five levels of needs. The most basic needs are the physical needs for food, water, and shelter; the most advanced need

A Human Relations Pioneer In 1837 William Procter, a ruined English retailer, and James Gamble, son of a Methodist minister, formed a partnership in Cincinnati to make soap and candles. Both were known for their integrity, and soon their business was thriving. By 1883 the business had grown substantially. When William Cooper Procter, grandson of the founder, left Princeton University to work for the firm, he wanted to learn the business from the ground up. He started working on the factory floor. “He did every menial job from shoveling rosin and soap to pouring fatty mixtures into crutchers. He brought his lunch in a paper bag . . . and sat on the floor [with the other workers] and ate with them, learning their feelings about work.” By 1884 Cooper Procter believed, from his own experience, that increasing workers’ psychological commitment to the company would lead to higher productivity. His passion to increase employee commitment to the firm led him to propose a scandalous plan: share profits with workers to increase their sense of responsibility and job satisfaction. The surprise was audible on the first “Dividend Day,” when workers held checks equivalent to seven weeks’ pay. Still, the plan was not complete. Workers saw the profit sharing as extra pay rather than as an incentive to improve. In addition, Cooper Procter recognized that a fundamental issue for the workers, some of whom continued to be his good friends, was the insecurity of old age. Public incorporation in 1890 gave Procter a new idea. After trying several versions, by 1903 he had discovered a way to meet all his goals for labor: a stock purchase plan. For every dollar a worker invested in P&G stock, the company would contribute four dollars’ worth of stock. Finally, Cooper Procter had resolved some key issues for labor that paid off in worker loyalty, improved productivity, and an increasing corporate reputation for caring and integrity. He went on to become CEO of the firm, and P&G today remains one of the most admired corporations in the United States. Sources: O. Schisgall, Eyes on Tomorrow (Chicago: J. G. Ferguson, 1981): T. Welsh, “Best and Worst Corporate Reputations,” Fortune, February 7, 1994, pp. 58–66.

CHAPTER 2

bat2952X_ch02_024-039.indd 33

The Evolution of Management

16/07/12 8:42 PM

Confirming pages

Employees working at a Western Electric plant circa 1930.

is for self-actualization, or personal fulfillment. Maslow argued that people try to satisfy their lower-level needs and then progress upward to the higher-level needs. Managers can facilitate this process and achieve organizational goals by removing

obstacles and encouraging behaviors that satisfy people’s needs and organizational goals simultaneously. Although the human relations approach generated research into leadership, job attitudes, and group dynamics, it drew heavy

TAKE CHARGE OF YOUR CAREER // Using history to your advantage!

any senior executives and entrepreneurs have not only read many of the famous books and writings (discussed later in this chapter) by modern writers like Peter Drucker, Michael Porter, and Stephen Covey, but also know the classic works of Frederick Taylor, Elton Mayo, and Abraham Maslow. By familiarizing yourself with these influential works, you will be able to discuss them with senior managers, who will probably be impressed to discover that you have taken the time to learn “where we have come from.” You might take this approach a step further by learning everything you can about the

34 PART 1

bat2952X_ch02_024-039.indd 34

history of the industry in which your organization competes. This may give you insights into your firm’s growth and position relative to its competitors. Next you could dig into the history of the company and learn about the key people and founders who shaped its culture and direction. This will help you learn about the firm’s values and how things really work inside its walls. Last, try to learn about the history of your supervisor and coworkers since they joined the organization. This information will give you insight and could prove helpful in many ways during your tenure at the organization. For example, maybe you find out that your supervisor was instrumental is stopping some unethical practices in the department a few years ago. This should tell you that she or he takes these issues very

seriously, and thus you and your coworkers should do the same. History is a source of information, and information is powerful when it is turned into actionable knowledge that can help you develop an excellent reputation and successful career within an organization.

Introduction

16/07/12 8:42 PM

Confirming pages

sociotechnical systems theory an criticism.27 Critics believed that one result of human relations— a belief that a happy worker was a productive worker—was too simplistic. While scientific management overemphasized the economic and formal aspects of the workplace, human relations ignored the more rational side of the worker and the important characteristics of the formal organization. However, human relations was a significant step in the development of management thought because it prompted managers and researchers to consider the psychological and social factors that influence performance.

LO3 Discuss the four contemporary approaches to management

General Motors and Toyota set up in Fremont, California, Ford and Mazda in Flat Rock, Michigan, and Chrysler and Mitsubishi in Bloomington, Illinois.31 Both sides wanted to learn from the other, with American managers being especially interested in understanding how the Japanese integrated the different management and technical subsystems to achieve high performance. At that time, managers at these Japanese companies were applying sociotechnical systems to achieve competitive advantage.32

approach to job design that attempts to redesign tasks to optimize operation of a new technology while preserving employees’ interpersonal relationships and other human aspects of the work

quantitative management a contemporary management approach that emphasizes the application of quantitative analysis to managerial decisions and problems

CONTEMPORARY APPROACHES

3.2|Quantitative Management

The contemporary approaches to management include sociotechnical systems theory, quantitative management, organizational behavior, and systems theory. The contemporary approaches have developed at various times since World War II, and they continue to represent the cornerstones of modern management thought.

Although Taylor introduced the use of science as a management tool early in the 20th century, most organizations did not adopt the use of quantitative techniques for management problems until the 1940s and 1950s.33 During World War II, military planners began to apply mathematical techniques to defense and logistic problems. After the war, private corporations began assembling teams of quantitative experts to tackle many of the complex issues confronting large organizations. This approach, referred to as quantitative management, emphasizes the application of quantitative analysis to management decisions and problems.

3.1|Sociotechnical Systems Theory Drawing on several classical approaches, sociotechnical systems theory suggests that organizations are effective when their employees (the social system) have the right tools, training, and knowledge (the technical system) to make products and services that are valued by customers.28 Developed in the early 1950s by researchers from the London-based Tavistock Institute of Human Relations, sociotechnical systems theory explained how important it was to understand how coal miners’ social behaviors interacted with the technical production system of their organizations. The researchers found that when there was a good fit between these two important internal dimensions and the demands of customers external to the organization, the organizations could reach higher levels of effectiveness.29 While research on sociotechnical systems theory was a precursor to the total quality management (TQM) movement (discussed in other chapters), it also promoted the use of teamwork and semiautonomous work groups as important factors for creating efficient production systems. The researchers believed that workers should be given the freedom to correct problems at early stages of the production process rather than after products were made, when errors would create waste.30 Sociotechnical systems theory was put into action back in the late 1980s and 1990s when each of the large U.S. automakers—General Motors, Ford, and Chrysler—created cooperative ventures with the major Japanese automakers.

Quantitative management helps a manager make a decision by developing formal mathematical models of the problem. Computers facilitated the development of specific quantitative methods. These include such techniques as statistical decision theory, linear programming, queuing theory, simulation, forecasting, inventory modeling, network modeling, and breakeven analysis. Organizations apply these techniques in many areas, including production, quality control, marketing, human resources, finance, distribution, planning, and research and development. Despite the promise quantitative management holds, managers do not rely on these methods as the primary approach to decision making. Typically they use these techniques as a supplement or tool in the decision process. Many managers will use results that are consistent with their experience, intuition, and judgment, but they often reject results that contradict their beliefs. Also, managers may use the process to compare alternatives and eliminate weaker options. Several explanations account for the limited use of quantitative management. Many managers have not been trained in using these techniques. Also, many aspects of a management decision cannot be expressed through mathematical symbols and formulas. Finally, many of the decisions managers face are nonroutine and unpredictable. CHAPTER 2

bat2952X_ch02_024-039.indd 35

The Evolution of Management

16/07/12 8:42 PM

Confirming pages

organizational behavior a contemporary management approach that studies and identifies management activities that promote employee effectiveness by examining the complex and dynamic nature of individual, group, and organizational processes

systems theory a theory stating that an organization is a managed system that changes inputs into outputs

inputs goods and services organizations take in and use to create products or services outputs the products and services organizations create

3.3|Organizational Behavior During the 1950s, a transition took place in the human relations approach. Scholars began to recognize that worker productivity and organizational success are based on more than the satisfaction of economic or social needs. The revised perspective, known as organizational behavior, studies and identifies management activities that promote employee effectiveness through an understanding of the complex nature of individual, group, and organizational processes. Organizational behavior draws from a variety of disciplines, including psychology and sociology, to explain the behavior of people on the job.

During the 1960s, organizational behaviorists heavily influenced the field of management. Douglas McGregor’s Theory X and Theory Y marked the transition from human relations.34 According to McGregor, Theory X managers assume workers are lazy and irresponsible and require constant supervision and external motivation to achieve organizational goals. Theory Y managers assume employees want to work and can direct and control themselves. An important implication for managers who subscribe to Theory X is known as a self-fulfilling prophecy. This occurs when a manager treats employees as lazy, unmotivated, and in need of tight supervision; then the employees eventually fulfill the manager’s expectations by acting that way. This cycle can have several negative implications for managers, employees, and organizations. McGregor advocated a Theory Y perspective, suggesting that managers who encourage participation and allow opportunities for individual challenge and initiative would achieve superior performance. Other major organizational behaviorists include Chris Argyris, who recommended greater autonomy and better jobs for workers,35 and Rensis Likert, who stressed the value of participative management.36 Through the years, organizational behavior has consistently emphasized development of the organization’s human resources to achieve individual and organizational goals. Like other approaches, it has been criticized for its limited perspective,

36 PART 1

bat2952X_ch02_024-039.indd 36

although more recent contributions have a broader and more situational viewpoint. In the past few years, many of the primary issues addressed by organizational behavior have experienced a rebirth with a greater interest in leadership, employee involvement, and self-management.

3.4|Systems Theory The classical approaches as a whole were criticized because they (1) ignored the relationship between the organization and its external environment and (2) usually stressed one aspect of the organization or its employees at the expense of other considerations. In response to these criticisms, management scholars during the 1950s stepped back from the details of the organization to attempt to understand it as a whole system. These efforts were based on a general scientific approach called systems theory.37 Organizations are open systems, dependent on inputs from the outside world, such as raw materials, human resources, and capital. They transform these inputs into outputs that (ideally) meet the market’s needs for goods and services. The environment reacts to the outputs through a feedback loop; this feedback provides input for the next cycle of the system. The process repeats itself for the life of the system, and is illustrated in Exhibit2.5. Systems theory also emphasizes that an organization is one system in a series of subsystems. For instance, Southwest Airlines is a subsystem of the airline industry, and the flight crews are a subsystem of Southwest. Systems theory points out that each subsystem is a component of the whole and is interdependent with other subsystems. Building on systems theory ideas, the contingency perspective refutes universal principles of management by stating that a variety of factors, both internal and external to the firm, may affect the organization’s performance.38 Therefore, there is no “one best way” to manage and organize because circumstances vary. Situational characteristics are called contingencies. Understanding contingencies helps a manager know which sets of circumstances dictate which management actions. You will learn

E X H I B I T 2 . 5 Open-system perspective of an organization EXTERNAL ENVIRONMENT Raw materials Human resources Energy Financial resources Information Equipment

Inputs

Organization Transformation process

Outputs

Goods Services

Introduction

16/07/12 8:42 PM

Confirming pages

contingency perspective an recommendations for the major contingencies throughout this text. The contingencies include

approach to the study of management proposing that the managerial strategies, structures, and processes that result in high performance depend on the characteristics, or important contingencies, or the situation in which they are applied

With an eye to these contingencies, a manager may categorize the situation and then choose the proper competitive strategy, organization structure, or management process for the circumstances.

he is widely viewed as having mastered “all of the critical aspects of leadership: people, process, strategy and structure.”43 Welch has written several books about this management philosophies and successes. Other exceptional leaders who have left their mark on management practice include Herb Kelleher, cofounder of Southwest Airlines, Sam Walton, founder of Walmart, and Lou Gerstner, former CEO of IBM.

Researchers continue to identify key contingency variables and their effects on management issues. As you read the topics covered in each chapter, you will notice similarities and differences among management situations and the appropriate responses. This perspective should represent a cornerstone of your own approach to management. Many of the things you will learn about throughout this course apply a contingency perspective.

Michael Porter, Professor at Harvard University, is a well-known and influential expert on competitive strategy. He has published over 125 research articles and 18 books on the subject and related areas, including Competitive Strategy: Creating and Sustaining Superior Performance. Two of his influential research articles are titled “What Is Strategy?” and “The Five Competitive Forces That Shape Strategy” (discussed in Chapter 3).44

1. Circumstances in the organization’s external environment. 2. The internal strengths and weaknesses of the organization. 3. The values, goals, skills, and attitudes of managers and workers in the organization. 4. The types of tasks, resources, and technologies the organization uses.

contingencies factors that determine the appropriateness of managerial actions

LO4 Identify modern contributors who have shaped management thought and practices

MODERN CONTRIBUTORS In addition to the historical figures that we discussed earlier in this chapter, several individuals from more recent times have influenced (through their leadership, interviews, presentations, or writing) the way management is practiced in today’s organizations. In 2001 Jim Collins authored an influential book titled Good to Great in which he and his research team analyzed 1,435 companies to understand why some companies reach high levels of sustained performance while other companies fail to reach greatness.39 He discovered that great companies are managed by “level 5 leaders” who often display humility while simultaneously inspiring those in the organization to apply self-discipline and self-responsibility while pursuing high standards. These leaders often leave enduring legacies without drawing a lot of attention to themselves.40 Several CEOs have left an impact on modern management thought. Ex-CEO Jack Welch transformed General Electric from a $13 billion company into a $500 billion company over a 20-year period.41 Though sometimes criticized for his controversial practices (e.g., selling off underperforming divisions and forced rankings of employees by performance),42

CHAPTER 2

bat2952X_ch02_024-039.indd 37

The Evolution of Management

16/07/12 8:42 PM

Confirming pages

Gary Hamel, professor, consultant, and management educator, was recently ranked as the “world’s most influential business thinker” by The Wall Street Journal. As a member of the London Business School faculty since 1983, Hamel has published numerous influential articles, including “The Core Competence of the Corporation” (with C.K. Prahalad) and “The Why, What, and How of Management Innovation.” His most recent book, The Future of Management, was selected by Amazon.com as the best business book of 2007.45

TRADITIONAL THINKING Leaders adapt to change by relying on one or two favorite managerial approaches.

Peter Drucker was a respected management guru who, through his writings and consulting, made several lasting contributions to the practice of management. One of his major contributions was the need for organizations to set clear objectives and establish the means of evaluating progress toward those objectives.46 He was the first person to discuss “management by objective” (MBO), by which a manager should be self-driven to accomplish key goals that link to organizational success (as opposed to being controlled by a supervisor).47 Drucker also championed several ideas that continue to be influential to this day, including decentralization, employees as assets (not liabilities), corporation as a human community, and the importance of knowledge workers in the new information economy.”48 In addition to these modern contributors, several more individuals have made a lasting impact on current thought and practices. Peter Senge of MIT Sloan School of Management has made several significant contributions to the areas of organizational learning and change. In addition to founding the “Society of Organizational Learning,” Senge wrote The Fifth Dimension: The Art

The Greenest Companies Worldwide

hile some critics still see the green movement as a fad or temporary trend, many global companies are taking real steps to become greener. Managers and leaders of these organizations see many benefits to pursuing sustainability

38 PART 1

bat2952X_ch02_024-039.indd 38

and Practice of The Learning Organization, which has sold over 1 million copies worldwide (2006)(MIT Sloan bio);49 Christopher A. Bartlett of Harvard University has focused on the “strategic and organizational challenges confronting managers in multinational corporations.”50 With coauthor Sumatra Ghoshal, he wrote the influential Managing Across Borders: The Transnational Solution (1998), named by the Financial Times as one of the 50 most influential business books of the 20th century.51 In his 1990 best-selling book, the Seven Habits of Highly Effective People: Powerful Lessons in Personal Change, Stephen Covey discussed how a leader’s success hinges on balancing between personal and professional effectiveness.52 In 1982 Thomas J. Peters and Robert H. Waterman wrote the best-selling book In Search of Excellence, which urged U.S. firms to fight their competition by refocusing their business strategies on several drivers of success: people, customers, values, culture, action, and an entrePeter Drucker was an influential contributor of modern management ideas and practices. preneurial spirit.53

initiatives, including a reduction in operating costs, the creation of more efficient products, and the resulting generation of goodwill from customers who are concerned about the environment. Since 2009, Newsweek magazine has compiled an annual ranking of the greenest U.S. and global companies. An expert advisory panel and two environmental research firms analyze data from each company such as its environmental footprint (greenhouse gas emissions and water use),

IBM Corporate Headquarters, Armonk, NY.

Introduction

16/07/12 8:42 PM

Confirming pages

THE BEST MANAGERS TODAY Embrace change by drawing on classic, contemporary, and modern managerial approaches to guide their decisions and actions.

technologies change how we work, produce goods, and deliver services. Change continually creates both new opportunities and new demands for lowering costs and for achieving greater innovation, quality, and speed. Management knowledge and practices evolve accordingly. The essential facts about change are these: First, change is happening more rapidly and dramatically than at any other time in history. Second, if you don’t anticipate change and adapt to it, you and your firm will not thrive in a competitive business

MANAGEMENT MEANS, IN THE LAST ANALYSIS, THE SUBSTITUTION OF THOUGHT FOR BRAWN AND MUSCLE, OF KNOWLEDGE FOR FOLKLORE AND TRADITION, AND OF COOPERATION FOR FORCE. —Peter Drucker

AN EYE ON THE FUTURE All of these historical perspectives have left legacies that affect contemporary management thought and practice. Their undercurrents continue to flow, even as the context and the specifics change. Times do pass, and things do change. This may sound obvious, but it isn’t to those managers who sit by idly while their firms fail to adapt to changing times. Business becomes global. New

management efforts (environmental policies and initiatives), and disclosure (company reporting of environmentally related activities). What were the top 25 greenest companies in 2011? IBM was ranked second among all companies in the world and was the only U.S. firm to make the top 10. Over the past 20 years, IBM has saved more than 5.4 billion kilowatt-hours of electricity, reducing energy costs by approximately $400 million. The only other U.S. firms that made the

world. The theme of change—what is happening now, what lies ahead, how it affects management, and how you can deal with it—permeates this entire book. What are the implications of these changes for you and your career? How can you best be ready to meet the challenges? You must ask questions about the future, anticipate changes, know your responsibilities, and be prepared to meet them head-on. We hope you study the remaining chapters with these goals in mind. ■

top 25 were Hewlett-Packard, Sprint Nextel, and Baxter. European firms dominated the list. Nine European firms made the top 25, including Munich Re (Germany), BT Group (Great Britain), and Philips (Netherlands). Green companies did not come from only the United States and Europe; the remainder of the list consisted of organizations from Australia, Brazil, India, Canada, and Japan. Based on the investments that these organizations are making, there is little doubt that “going green” and managing for

sustainability are becoming part of the current and future fabric of managerial thought and practice.

Sources: “America’s Top 25,” Newsweek 158, no. 17 (October 24, 2011), pp. 50–56; I. Yarett, “The World’s Greenest Companies,” The Daily Beast, October 16, 2011, http://www.thedailybeast.com.

CHAPTER 2

bat2952X_ch02_024-039.indd 39

The Evolution of Management

16/07/12 8:43 PM

Confirming pages

40 PART 1

bat2952X_ch03_040-065.indd 40

Introduction

16/07/12 8:44 PM

Confirming pages

chapter

three

the organizational environment and culture ob Stiller, founder and former

interest in organic foods, GMCR also

LEARNING OBJECTIVES

chairman of Green Mountain

began offering organically grown cof-

Coffee Roasters (GMCR), brought

fees that were produced through fair

After studying Chapter 3, you should be able to

his company a long way since its begin-

trade practices—ensuring that farm-

nings in a small Vermont café nearly

ers receive a fair price for their crops.1

30 years ago. He expanded his busi-

The company also makes the best-sell-

ness by surveying the competition and

ing single-cup coffee machine in the

choosing avenues that looked most

United States. In 2011 GMCR entered

promising. With the retail coffee market

a partnership with its rival Starbucks

crowded by Starbucks, Seattle’s Best

to begin selling their coffee in Keurig

Coffee, Dunkin’ Donuts Coffee, Caribou

K-Cup single-portion packs in grocery

Coffee, and others, Stiller chose to focus

stores.2 This partnership is expected

on the quality of his coffee—offering

to pay off for both firms given the

more than 100 gourmet varieties—and

size of the $2 billion U.S. single-cup

to sell through retail stores, wholesale

coffee market and the fact that in 2010

outlets, direct-mail catalogs, and on the

GMCR sold approximately 3 billion

web. Recognizing consumers’ growing

single-portion packs.3 ■

CHAPTER 3

bat2952X_ch03_040-065.indd 41

LO1 Describe the five elements of an organization’s macroenvironment. LO2 Explain the five components of an organization’s competitive environment. LO3 Understand how managers stay on top of changes in the external environment. LO4 Summarize how managers respond to changes in the external environment. LO5 Discuss how organizational cultures can be leveraged to overcome challenges in the external environment.

The Organizational Environment and Culture

16/07/12 8:45 PM

Confirming pages

Executives such as Stiller must keep a sharp watch on their external environment, or developments outside their organizations. As we suggested in the first two chapters, organizations are open systems—that is, they are affected by and in turn affect their external environments. They use inputs like goods and services from their environment to create goods and services that are outputs to their environment. When we use the term external environment here, we mean more than an organization’s customers, competitive partnerships, or supplier relationships: the external environment includes all relevant forces outside the organization’s boundaries. Many external factors are uncontrollable. Managers and their organizations are often battered by recession, government interference, and competitors’ actions. But their lack of control does not mean that managers can ignore such forces, use them as excuses for poor performance, and try to just get by. Managers must stay abreast of external developments and react effectively. In addition, as we will discuss later in this chapter, sometimes managers can influence components of the external environment. This chapter discusses the major components of an organization’s macroenvironment and competitive environment. It covers several methods that managers use to gather information to better understand uncertainties in their firm’s external environment. Next the chapter discusses how leaders respond to and attempt to manage this uncertainty in their environment. It also examines the internal environment, or culture, of the organization and how a culture can help the organization respond to its environment. Later chapters elaborate on many of the basic environmental forces introduced here. For example, technology will be discussed again in Chapters 5 and 15. Other chapters focus on ethics, social responsibility, and the natural environment. And Chapter 15 reiterates the theme that recurs throughout this text: organizations must change continually because environments change continually.

LO1 Describe the five elements of an organization’s macroenvironment

THE MACROENVIRONMENT All organizations operate in a macroenvironment, which includes the general elements in the external environment that 42 PART 1

bat2952X_ch03_040-065.indd 42

potentially can influence strategic decisions. As Exhibit 3.1 illustrates, the five components of an organization’s macroenvironment include laws and regulations, the economy, technology, demographics, and social values.

1.1|Laws and Regulations Protect and Restrain Organizations U.S. government policies impose strategic constraints on organizations but may also provide opportunities. For example, the Library of Congress’s Copyright Royalty Board alarmed Internet radio companies when it changed its regulations setting the royalty payments these companies owe recording companies and artists. Webcasters had been paying

st ud y tip 3 Outline chapters and make vocabulary flashcards At first it may sound like a waste of time, but making an outline of a chapter as you read it will help you later when it’s time to study for an exam. A brief one- to two-page outline (for example, write the headings and key points from LO 1, 1.1, 1.2, and so on) in your notebook or computer gives you a “road map” for the whole chapter. The road map allows you to quickly see (and remember) how the different sections of the chapter connect and where the key concepts and vocabulary fit. Even though you can find an outline already done for you either online or in the back of this book, doing it yourself will help you understand better the material and thus increase your chances of getting higher grades on exams. In your outlines, be sure to include the vocabulary terms (but don’t write out the definitions—this will make the outline too long). On index cards, write the name of a vocabulary term on one side and the full definition on the other. Keep them with you and practice them while eating lunch, walking for exercise, and so forth. Being organized and disciplined will pay off!

Introduction

16/07/12 8:45 PM

Confirming pages

open systems a percentage of their earnings, and because companies like AccuRadio are relatively young and have only begun turning a profit, that arrangement limited costs. The regulations took effect in 2011 and impose a flat fee (e.g., $.0017) each time a song is played, which could possibly raise AccuRadio’s annual royalty cost from less than $50,000 to about $600,000 a year—far more than its profits and nearly equal to its entire revenue. Even big webcasters like RealNetworks and AOL Radio said the fees would force them to substantially cut back their offerings. Still, some companies would benefit. Broadcast radio stations pay royalties only to the composers of the songs they play, so they would have an advantage relative to fast-growing but smaller online radio stations. And recording companies would receive more revenue from the new arrangement.4 The government can affect business opportunities through tax laws, economic policies, labor laws, and international trade rulings. In some countries, for example, bribes and kickbacks are common and expected ways of doing business. However, the Foreign Corrupt Practices Act prohibits Americans from bribing foreign officials.5 In 2011 Johnson & Johnson, in response to claims that it bribed doctors in three European countries, agreed to pay $80 million to settle the allegations.6 But laws can also assist organizations. Because U.S. federal and state governments protect property rights, including copyrights, trademarks, and patents, it is economically more attractive to start businesses in the United States than in countries where laws and law enforcement offer less protection. Regulators are specific government organizations in a firm’s more immediate task environment. Here are some example of regulatory agencies: • Equal Employment Opportunity Commission (EEOC).

of the writing of this book, the proposed amendment has not been passed and is being opposed by several pro-business groups.

organizations that are affected by, and that affect, their environment

external environment all relevant forces outside a

Often the corporate community firm’s boundaries, such as sees government as an adversary. competitors, customers, However, many organizations the government, and the realize that government can be a economy source of competitive advantage macroenvironment for an individual company or an the general environment; entire industry. Public policy may includes governments, prevent or limit new foreign or economic conditions, and domestic competitors from enterother fundamental factors ing an industry. Government that generally affect all may subsidize failing companies organizations or provide tax breaks to some. Federal patents protect innovative products or production technologies. Legislation may be passed to support industry prices, thereby guaranteeing profits or survival. The government may even intervene to ensure the survival of certain key industries or companies, as it has done to help auto companies, airlines, and agricultural businesses.

1.2|The Economy Affects Managers and Organizations Although most Americans think in terms of the U.S. economy, the economic environment for organizations is much larger—created by complex interconnections among the economies of different countries. Several recent events in the world have had far-reaching influence: the post-tsunami nuclear meltdown in Japan, the European financial crisis and social unrest, and antigovernment protests throughout

• Occupational Safety and Health Administration (OSHA). • Interstate Commerce Commission (ICC).

E X H I B I T 3 . 1 Environments

• Federal Aviation Administration (FAA). • Food and Drug Administration (FDA).

Microenvironment

• National Labor Relations Board (NLRB).

Laws and regulations

• Office of Federal Contract Compliance Programs (OFCCP).

Economy

Competitive environment

Technology

Rivals

Demographics

New entrants

• Environmental Protection Agency (EPA).

These agencies have the power to investigate company practices and take legal action to ensure compliance with laws. For example, the U.S. National Labor Relations Board (which regulates union activities) has proposed the Employee Free Choice Act that would make sweeping changes to labor law, effectively making it easier for employees to form unions.7 As

Social values

Buyers

Culture Values

Substitutes and complements Suppliers

CHAPTER 3

bat2952X_ch03_040-065.indd 43

Internal environment

The Organizational Environment and Culture

16/07/12 8:45 PM

Confirming pages

several nations, including the “Arab spring” movement in Egypt, Tunisia, and Libya. The economic environment dramatically affects managers’ ability to function effectively and influences their strategic choices. Interest and inflation rates affect the availability and cost of capital, growth opportunities, prices, costs, and consumer demand for products. Unemployment rates affect labor availability and the wages the firm must pay, as well as product demand. Steeply rising energy and health care costs have limited companies’ ability to hire and have raised the cost of doing business. Changes in the value of the dollar on world exchanges may make American products cheaper or more expensive than their foreign competitors. For example, economic forces have caused the fortunes of corn-based ethanol producers to swing wildly. For a time, soaring gasoline prices intensified the demand for alternative fuel sources for automobiles. That fact, coupled with a belief that ethanol fuel would reduce emissions of greenhouse gases, inspired the U.S. government to mandate the use of ethanol. Farmers responded by planting more corn, and energy companies built ethanol refineries. But soon other forces pummeled the ethanol producers. First, flooding in the Midwest led to forecasts of high corn prices, and many ethanol producers tried to protect themselves by signing contracts for a generous $7 or more per bushel. Then fields dried

LISTEN & LEARN ONLINE

Young Managers

Speak Out!

“

I definitely think that learning about the external business environment, especially in my industry, is huge because it ultimately helps you identify the right customers and how you reach out to them.

”

— J John Maggio III, Sales Manager

Egyptian protesters shout slogans against the military rulers of the country during a protest after the weekly Friday prayer in Cairo’s landmark Tahrir Square. A year after Egypt overthrew Hosni Mubarak, the tumultous state of the once growing economy of the Arab world’s most populous nation poses a significant challenge to its transition to democracy.

and prospects for a good harvest improved, so corn prices started falling, leaving producers with contracts for overpriced corn. More recently, the economy swung downward. A “bubble” of inflated real estate prices burst, contributing to problems for mortgage lenders that quickly spread to the entire financial industry. As credit dried up, the overall pace of business slowed dramatically, and oil prices fell, erasing some of ethanol’s competitive advantage in the marketplace for fuel. But prices for corn also fell, keeping production costs down. Ethanol producers are hopeful that in the long run, drivers will need to rely more and more on alternative fuels. Meanwhile, ethanol companies need steady and farsighted management to guide them through the ups and downs of commodity prices and demand.8

An important economic influence is the stock market. When investors bid up stock prices, they are paying more to own 44 PART 1

bat2952X_ch03_040-065.indd 44

Introduction

16/07/12 8:45 PM

Confirming pages

demographics shares in companies, so the companies have more capital to support their strategies. Observers of the stock market watch trends in major indexes such as the Dow Jones Industrial Average, Standard & Poor’s 500, and NASDAQ Composite, which combine many companies’ performance into a single measurement. In recent years, the indexes had risen to great heights, but then they dropped rapidly. The falling prices reflected an economy in which demand for homes and cars had shriveled, credit was difficult to obtain, exports tumbled, and unemployment rates soared.9 Governments launched a variety of stimulus efforts to help companies get financing and to encourage consumers to start spending again. Stock markets have always rebounded eventually, even after a steep decline such as this one, as investors see hope for renewed business growth.

statistical characteristics of a group or population such as age, gender, and education level

fatigue, requiring vacations or weekends off, or demanding wage increases. New methods, such as drilling horizontal wells to reach new oil and natural gas deposits in the Utica Shale (a deep rock formation), are helping Chesapeake Energy Corporation produce 3.45 billion cubic feet of natural gas per day.11 In this case, technological and economic forces overlap: the rising price of oil has made it worthwhile for companies to develop and try new technology.12 In addition, new technologies provide more efficient ways to manage and communicate. Advanced information technology and telecommunication systems make information available when and where it’s needed around the clock. Productivity software monitors employee performance and detects deficiencies. Telecommunications allow conferences to take place without requiring people to travel to the same location. As we will discuss in Chapter 5, strategies developed around cutting-edge technological advances can create a competitive advantage.

The stock market may also affect the behavior of individual managers. In publicly held companies, managers throughout the organization may feel required to meet Wall Street’s earnings expectations. It is likely that you, too, at some point in your career will be asked to improve budget or sales numbers because your company does not want to disappoint “the Street.” Such external pressures usually have a positive effect—they help make many firms more efficient and profitable. But failure to meet those expectations can cause a company’s stock price to drop, making it more difficult for the firm to raise additional capital for investment. The compensation of managers may also be affected, particularly if they have been issued stock options. These pressures sometimes lead managers to focus on short-term results at the expense of the long-term success of their DID YOU KNOW? organizations, or even worse, to engage in unethical or unlawful behavior that misleads Researchers found that investors.10 teens studying at their computers are also doing something else 65 1.3|Technology is percent of the time, and 26 percent of teens use Changing Every several media at once. Business Function According to a study of Today a company cannot succeed without multitasking and brain incorporating into its strategy the astonishactivity, we use different ing technologies that exist and are under parts of the brain when we development. As technology evolves, new multitask while learning. industries, markets, and competitive niches Multitaskers used the develop. Advances in technology also permit part of the brain involved companies to enter markets that would othin repetitive skills, while erwise be unavailable to them, such as when those engaged only in Apple’s iPhone technology spurred exponenlearning used the area tial growth among application developers. associated with memory.13 New technologies also provide new producWill this influence future tion techniques. In automobile and other types managers’ ability to think of capital-intensive manufacturing, sophistideeply about problems? cated robots perform jobs without suffering

1.4|Demographics Describe Your Employees and Customers

Demographics are statistical characteristics of a group or population. An organization’s customers, a university’s faculty and staff, or a nation’s current labor force can all be described statistically in terms of their members’ ages, genders, education levels, incomes, occupations, and so forth. Managers must consider workforce demographics in formulating their human resources strategies. Population growth influences the size and composition of the labor force. In the decade from 2008 to 2018, the U.S. civilian labor force is expected to grow at a rate of 8.2 percent, reaching nearly 167 million in 2018.14 This growth is slower than during the previous decade, partly because young workers—those between the ages of 16 and 24—are declining in numbers. The fastest-growing age group will be workers who are 55 and older, who are expected to represent one out of four workers in the labor force in 2018. What does this mean for employers? They will need to find ways to retain and fully use the talents of their experienced workers while competing for relatively scarce entry-level workers. Perhaps their older employees will be willing to work past the traditional retirement age of 65, at least on a part-time basis; research suggests that

CHAPTER 3

bat2952X_ch03_040-065.indd 45

The Organizational Environment and Culture

16/07/12 8:46 PM

Confirming pages

a lack of pensions and adequate savings will make retirement unaffordable for many of today’s baby boomers.15 Eventually, however, declining participation in work by older people will force managers to find replacements for these highly experienced workers. The education and skill levels of the workforce are another demographic factor managers must consider. The share of the U.S. labor force with at least some college education has been increasing steadily over the past several decades, from less than one-fourth of the workforce in 1970 to close to 70 percent today.16 Even so, many companies invest heavily in training their entry-level workers and send them through their own corporate universities, common at hundreds of large organizations like Apple, Boeing, Motorola, and General Electric. Also, as college has become a more popular option, employers are having difficulty recruiting employees for jobs that require knowledge of a skilled trade, such as machinists and toolmakers, especially in areas where the cost of living is so high that most residents are professionals.17 However, as education levels improve around the globe, more organizations may send technical tasks to lower-priced but highly trained workers overseas. For example, some U.S. hospitals, to avoid paying higher wages to U.S.-based radiologists, outsource radiology services (called “teleradiology”) to Indian specialists who analyze patients’ images and provide written reports of the results—all via telecommunications technology.18

Toms Shoes Makes Impact with Its “One-for-One” Model

y now many people have heard of Blake Mycoskie, the 34-year-old “social entrepreneur” and founder of Toms Shoes (short for Tomorrow’s Shoes). Before becoming famous, Mycoskie started several entrepreneurial ventures. As a business school student at Southern Methodist University in Dallas, he started a door-to-door laundry service for students. Later he created an outdoor media company that was purchased by Clear Channel. In 2002 he teamed up with his

46 PART 1

bat2952X_ch03_040-065.indd 46

Another factor that significantly influences the U.S. population and labor force is immigration. Immigrants accounted for approximately 40 percent of recent U.S. population growth.19 Immigrants are frequently of working age, but some have different educational and occupational backgrounds from the rest of the labor force. The demographic importance of immigration intersects with legal issues governing who is permitted to work in the United States. For example, the federal government recently cracked down not only on undocumented workers but also on the managers who hired them. It established a new program by which businesses are required to check prospective hires’ legal status by submitting their names to a database called “E-Verify.”20 Some companies have asked the U.S. government to admit more foreign workers with technical expertise that may be hard to find in the United States. Immigration is one reason why the labor force in the future will be more ethnically diverse than it is today. The biggest percentage of employment increases will be by Asian Americans and Hispanic populations, followed by African Americans. In the last quarter of the 20th century, women joined the U.S. labor force in record numbers. Throughout the 1970s and 1980s, they became much more likely to take paying jobs. In the 1970s only about one-third of women were in the labor force, but 60 percent had jobs in 1999. Since then, women’s

sister to compete in the CBS reality show The Amazing Race, which brought him to Argentina where he witnessed large-scale poverty. While traveling back to Argentina in 2006, Mycoskie met an American woman who was coordinating a shoe drive to deliver donated shoes to poor Argentinean children. Barefoot children are exposed to dangerous hookworm, tetanus, and other soil-based ailments. Mycoskie noticed that children who received donated shoes often got the wrong size. He had a “lightbulb” moment and came up with the idea of creating a sustainable, for-profit business that could fund donations of new shoes for poor children. Known as the “one-for-one” sustainability model, for every pair of shoes that the company sells, it donates a pair of shoes to a poor child somewhere in the world.

Wearing their new (free) shoes, Argentinean children laugh along with social entrepreneur Blake Mycoskie, founder of Toms Shoes.

Modeled after a popular Argentinean shoe known as an alpargata, Toms Shoes

Introduction

16/07/12 8:46 PM

Confirming pages

labor force participation rate has stayed near that level, declining slightly.21

increasing a source of competitive advantage: an experienced workforce.

A more diverse workforce has many advantages, but managers have to ensure they provide equality for women and minorities with respect to employment, advancement opportunities, and compensation. They must recruit, retain, train, motivate, and effectively utilize people of diverse demographic backgrounds who have the skills to achieve the company’s mission.

A prominent issue today pertains to natural resources: drilling for oil in formerly protected areas in the United States. Firms in the oil industry like ExxonMobil, Royal Dutch Shell, British Petroleum, ConocoPhillips, and Chevron face considerable public opinion both in favor of preserving the natural environment and against U.S. dependence on other countries for fuel. Protection of the natural environment will factor into social concerns and many types of management decisions.

1.5|Social Values Shape Attitudes Toward Your Company and Its Products Societal trends regarding how people think and behave have major implications for management of the labor force, corporate social actions, and strategic decisions about products and markets. For example, during the 1980s and 1990s women in the workforce often chose to delay having children as they focused on their careers, but today more women are having children and then returning to the workforce. As a result, at companies like Bank of America and PricewaterhouseCoopers, parents who work just 20 hours per week receive full benefits.22 General Mills has introduced more supportive policies, including family leave, flexible working hours, less travel, and child care assistance.23 Firms provide these benefits as a way of

are available in many colors and styles for men, women, and children online and through retail outlets like Whole Foods and Nordstrom. The company is in the process of expanding its product offerings and now also donates eyeglasses. Toms Shoes was not the first company to use the “one-for-one” sustainability model, but its success is inspiring many other entrepreneurs to create their own socially conscious ventures that make profit while helping others. In 2011 Mycoskie wrote a book titled Start Something That Matters, in which he offers six suggestions that others can follow to develop a sustainable venture that is meaningful. His six suggestions are to find your story, face your fears, be resourceful without resources, keep it simple, build

How companies respond to these and other social issues may affect their reputation in the marketplace, which in turn may help or hinder their competitiveness. The public health issue of childhood obesity has given video games a bad name among those who advocate for children to get off the couch and move. But two games have generated favorable publicity: Konami’s Dance Dance Revolution (DDR), where players compete with dance moves, and Nintendo’s Wii Sports, where players swing a remote control containing motion sensors to move a virtual tennis racket, golf club, bowling ball, baseball bat, or boxing gloves. These games have also been praised as an alternative to games with violent themes. Dean Bender, the public relations agent for DDR, said of his client, “With all the bad PR about violence, we became the white knights.”24 And Wii Sports players have reported breaking into a sweat and even straining muscles.25

trust, and realize that giving is good business. The Toms Shoes socially conscious and sustainable business model is having impact. In 2011 the company reported

that with the help of charities and other groups, it gave away more than 1 million shoes to children around the world! Blake Mycoskie is proving that a company can do well by doing good.

DISCUSSION QUESTIONS

SOURCES: B. Mycoskie, Start Something That Matters (New York: Spiegel & Grau, 2011); P. D. Broughton, “Doing Good by Shoeing Well,” The Wall Street Journal (online), September 10, 2011, http://www.wsj.com; J. Schectman, “Good Business,” Newsweek 156, no. 15 (October 11, 2010), p. 8; “In Toms’ Shoes: Start-Ups Copy ‘One-for-One’ Model,” The Wall Street Journal (online), September 29, 2010, http://www.wsj.com; J. Shambora, “Blake Mycoskie, Founder of TOMS Shoes,” Fortune 161, no. 4 (March 22, 2010), p. 72.

• Some critics believe that sustainable and socially oriented business models like the one at Toms Shoes are a passing fad. To what degree do you agree or disagree with this claim? Can you think of some other examples of organizations that are doing well by doing good? • What are some areas in which you have thought about making a difference? Do you envision yourself ever starting a venture that matters to you and others?

CHAPTER 3

bat2952X_ch03_040-065.indd 47

The Organizational Environment and Culture

16/07/12 8:46 PM

Confirming pages

TRADITIONAL THINKING Twenty-somethings interested in a business career will join companies and work their way up the ranks. In exchange for performing well, companies will reward employees with pay raises, benefits, and job security. Source: Adapted from M. J. Cetron and O. Davies, “Trends Shaping Tomorrow’s World: Forces in the Natural and Institutional Environments,” The Futurist 44, no. 4 (July/August 2010), pp. 38–53.

and try to win market share at the others’ expense, all must react to and anticipate their competitors’ actions.

LO2 Explain the five components of an organization’s competitive environment

THE COMPETITIVE ENVIRONMENT All managers are affected by the components of the macroenvironment we just discussed. As Exhibit 3.2 illustrates, each organization also functions in a closer, more immediate competitive environment, consisting of rivalry among existing competitors and the threat of new entrants, the threat of substitute and complementary products, and the bargaining power of suppliers and buyers. This model was originally developed by Michael Porter, a Harvard professor and a noted authority on strategic management.26 According to Porter, successful managers do more than simply react to the environment; they act in ways that actually shape or change the organization’s environment. Porter’s model is an excellent method for analyzing the competitive environment and adapting to or influencing the nature of the competition.

2.1|Rivals Can be Domestic or Global Among the various components of the competitive environment, competitors within the industry must first deal with one another. When organizations compete for the same customers

48 PART 1

bat2952X_ch03_040-065.indd 48

Identify the Competition The first question to consider is this: Who is the competition? Sometimes the answer is obvious. The major competitors in the market for video game consoles are Sony (whose brand is the PlayStation), Microsoft (Xbox 360), and Nintendo (maker of the Wii). But if organizations focus exclusively on traditional rivalries, they miss the emerging ones. Back in the 1990s, many of the large music companies were so busy competing against one another for sales and market share that they underestimated E X H I B I T 3 . 2 Porter’s five forces: The organization’s competitive environment Threat of new entrants

Bargaining power of suppliers

Rivalry among existing competitors

Bargaining power of buyers

Threat of substitute products or services

Source: M. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review (online), www.hbr.org (January 2008), pp. 78–93.

Introduction

16/07/12 8:46 PM

Confirming pages

competitive environment the immediate environment

THE BEST MANAGERS TODAY Are increasingly starting their own entrepreneurial ventures, often before turning 30 years old. Millennials’ command of technology and social networking will create many opportunities for new businesses.

The growth in competition from surrounding a firm; includes other countries has been espesuppliers, customers, rivals, cially significant with worldwide and the like reduction in international trade barriers. For example, the North American Free Trade Agreement (NAFTA) sharply reduced tariffs on trade between the United States, Canada, and Mexico. Managers today confront a particular challenge from low-cost producers abroad.

Analyze How They Compete

the long-term impact of new technologies like MP3 files and music swapping services like Napster. Then the launch of iTunes by Apple that allowed customers to purchase (for about $.99) single songs represented another competitive blow to the traditional music industry. In-store sales of CDs have never recovered. As a first step in understanding their competitive environment, organizations must identify their competitors. Competitors may include many types of companies: • Small domestic firms, especially upon their entry into tiny, premium markets. • Strong regional competitors. • Big new domestic companies exploring new markets. • Global firms, especially those that try to solidify their position in small niches (a traditional Japanese tactic) or can draw on an inexpensive labor force on a large scale (as in India and China). • Newer ventures launched by all types of entrepreneurs.

Once competitors have been identified, the next step is to analyze how they compete. Competitors use tactics such as price reductions, new product introductions, and advertising campaigns to gain advantage over their rivals. Consider the market for video game consoles. When Sony launched its PS3, it couldn’t charge a high enough price to cover its costs. It originally set the price at $599, still far above its competitors. The Xbox 360, which had been on the market for a year, was a less advanced but comparable product selling for $399. But in the initial competition with PS3, Nintendo took a surprising lead by choosing an entirely different strategy for its Wii. The company offered something new and easy to use—its remote control motion sensors instead of buttons and knobs. A Wii console was priced at just $249. While the PS3 and Wii both flew off store shelves in the early weeks of the products’ launch, PS3 sales over the next few years continually fell below expectations, while the Wii became the top-selling game console in the United States. In fact, the PS3 fell to fourth place in game console units sold, behind the older PS2, which became Sony’s lowerpriced—and therefore more popular—alternative.27

Competition is most intense when there are many direct competitors (including global contenders), industry growth is slow, and the product or service cannot be differentiated. New, high-growth industries offer enormous opportunities for profits. When an industry matures and growth slows, profits drop. Then intense competition causes an industry shakeout: weaker companies are eliminated, and the strong companies survive.28 We will discuss competitors and strategy further in Chapter 5.

2.2|New Entrants Increase When Barriers to Entry are Low New entrants into an industry compete with established companies. A relatively new global industry, online social games, is expected to be worth over $4 billion by 2014.29 As of 2011, Facebook controlled about one-third of the market thanks in part to Zynga’s popular FarmVille and CityVille.30 A new entrant to social gaming, Google+, is expected to ramp up its offerings over the next few years. If many factors prevent new companies from entering an industry, the threat to established firms is less serious. If there

CHAPTER 3

bat2952X_ch03_040-065.indd 49

The Organizational Environment and Culture

16/07/12 8:46 PM

Confirming pages

barriers to entry

final consumer a

conditions that prevent new companies from entering an industry

customer who purchases products in their finished form

intermediate consumer a customer who purchases raw materials or wholesale products before selling them to final customers

are few such barriers to entry, the threat of new entrants is greater. Several major barriers to entry are common: • Government policy—When a firm’s patent for a drug expires, other companies can enter the market. The patents recently expired on several drugs made by Pfizer, including antidepressant Zoloft and allergy medicine Zyrtec. At the same time, several research projects to introduce new, patented medicines failed, so Pfizer had to lay off employees and close some facilities to cut costs.31

are a ﬁnal consumer when you buy a buy a book from Amazon or new home speakers from Bose. Intermediate consumers buy raw materials or wholesale products and then sell to final consumers, as when Sony buys components from IBM and ATI Technologies and uses them to make PS3 consoles. Types of intermediate customers include retailers, who buy from wholesalers and manufacturers’ representatives and then sell to consumers, and industrial buyers, who buy raw materials (such as chemicals) to be converted into final products. Intermediate customers make more purchases than individual final consumers do.

Customers do much more than simply purchasing goods and services. They can demand lower prices, higher quality, unique product specifications, or better service. They also can play

Your most unhappy customers are your greatest source of learning. — Bill Gates • Capital requirements—Getting started in some industries, such as building aircraft or operating a railroad, may cost so much that companies won’t even try to raise such large amounts of money. This helps explain why Boeing and Airbus have no direct competitors in manufacturing large, long-haul aircraft.32 • Brand identification—When customers are loyal to a familiar brand, new entrants have to spend heavily. Imagine, for example, the costs involved in trying to launch a new chain of fast-food restaurants to compete against Taco Bell or Wendy’s. Similarly, Google’s recent entry into the market for business software, with a package called Google Apps for Business, surprised many people because Microsoft has dominated that segment for many years.33 • Cost disadvantages—Established companies may be able to keep their costs lower because they are larger, have more favorable locations, and have existing assets and so forth. • Distribution channels—Existing competitors may have such tight distribution channels that new entrants struggle to get their goods or services to customers. For example, established food products have supermarket shelf space. New entrants must displace existing products with promotions, price breaks, intensive selling, and other tactics.

2.3|Buyers Determine Your Success Buyers (customers) purchase the goods or services an organization offers. Without them, a company won’t survive. You 50 PART 1

bat2952X_ch03_040-065.indd 50

competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Often today’s customers want to be actively involved with their products, as when Nike launched its “NikeiD” program that lets customers customize their shoes by choosing the color of the swoosh, stitching, tread, and upper material.34 Social networking and media sites have further empowered customers. They provide an easy source of information—both about product features and pricing. In addition, today’s social media users informally create and share messages about a product, which provide flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. For example, from 2010 to 2011 sales of Mentos mints increased 6 percent to a total of $72.8 million.35 But the company, Perfetti Van Melle, spent almost nothing on advertising because it uses social media to market its mints. In addition to using Facebook and Twitter, the company also markets itself in YouTube videos showing two guys (the Eepybird group) dropping Mentos into Diet Coke bottles. The photo at the top of the next page shows its Coke Zero-powered bicycle. The Eepybird group has over 21 million Facebook fans.36 However, viral videos can also work against companies. Out of frustration over a customer service dispute with United Airlines, musician Dave Carroll wrote a song titled “United Breaks Guitars” and posted it on YouTube.37 As of October 2011 that video had received approximately 11 million hits. Today’s companies may find it difficult to identify, much less respond to, these unofficial messages.

Introduction

16/07/12 8:46 PM

Confirming pages

As we discussed in Chapter 1, customer service means giving customers what they want or need in the way they want it. This usually depends on the speed and dependability with which an organization can deliver its products. Actions and attitudes that provide excellent customer service include the following:

suffer growth and earnings problems unless they improve quality or launch aggressive marketing campaigns. Nintendo’s success with the Wii game console partly results from offering games such as Wii Sports that entice people who want to interact with the game, as well as by allowing them to create avatars to represent themselves in the various games.

• Speed of filling and delivering normal orders. • Willingness to meet emergency needs. • Merchandise delivered in good condition. • Readiness to take back defective goods and resupply quickly. • Availability of installation and repair services and parts. • Service charges (i.e., whether services are free or priced separately).38

An organization is at a disadvantage if it depends too heavily on powerful customers—those who make large purchases or can easily find alternative places to buy. If you are a firm’s largest customer and can buy from others, you have power over that firm and probably can negotiate with it successfully. Your firm’s biggest customers, especially if they can buy from other sources, will have the greatest negotiating power over you.

2.4|Products Can be Substitutes or Complements of Yours Besides products that directly compete, other products can affect a company’s performance by being substitutes for or complements of the company’s offerings. A substitute is a potential threat; customers use it as an alternative, buying less of one kind of product but more of another. For example, substitutes for coffee could be tea, energy drinks, cola, or water. A complement is a potential opportunity because customers buy more of a given product if they also demand more of the complementary product. Examples include ink cartridges as a complement for printers; when people buy more printers, they buy more ink cartridges.

Substitutes Technological advances and economic efficiencies are among the ways that firms can develop substitutes for existing products. Internet offerings such as YouTube and MySpace have attracted video game players away from their TV sets to interact with one another online. This example shows that substitute products or services can limit another industry’s revenue potential. Companies in those industries are likely to

In addition to current substitutes, companies need to think about potential substitutes that may be viable in the future. For example, possible alternatives to fossil fuels include nuclear fusion, solar power, and wind energy. The advantages promised by each of these technologies are many: inexhaustible fuel supplies, inexpensive electricity, zero emissions, universal public acceptance, and so on. Yet each of these faces economic and technical hurdles.

Complements Besides identifying and planning for substitutes, companies must consider complements for their products. When the Wii became popular, some programmers saw an opportunity to offer a niche service: tweaking the software to offer customized avatars. Wii players can use Nintendo’s software to select from a range of facial characteristics, height, and other features, but some users want a more customized look or perhaps a character modeled after a famous figure. An entrepreneur in Tokyo created Mii Station, which uses a customer-supplied photo to create a Mii lookalike for a $5 fee. A web developer in Boston started Mii Plaza, a website where users can tap a database of more than 8,000 characters to collect and share Miis. Nintendo could have viewed these efforts as copyright infringement, but the company’s initial response has been to treat Mii-related businesses as harmless.39

Hawken King’s iPhone application, Facemakr, allows users to create avatars.

CHAPTER 3

bat2952X_ch03_040-065.indd 51

The Organizational Environment and Culture

16/07/12 8:46 PM

Confirming pages

switching costs fixed costs buyers face when they change suppliers

supply chain management the managing of the network of facilities and people that obtain materials from outside the organization, transform them into products, and distribute them to customers

2.5|Suppliers Provide Your Resources

Recall from our earlier mention of open systems that organizations must acquire resources (inputs) from their environment and convert those resources into products or services (outputs) to sell. Suppliers provide the resources needed for production, and those resources may come in several forms: • People—supplied by trade schools and universities. • Raw materials—from producers, wholesalers, and distributors. • Information—supplied by researchers and consulting firms. • Financial capital—from banks and other sources.

But suppliers are important to an organization for reasons beyond the resources they provide. Suppliers can raise their prices or provide poor-quality goods and services. Labor unions can go on strike or demand higher wages. Workers may produce defective work. Powerful suppliers, then, can reduce an organization’s profits, particularly if the organization cannot pass on price increases to its customers. In some industries, suppliers include labor unions. Although unionization in the United States has dropped below 10 percent of the private labor force, unions remain powerful in industries such as steel, autos, education, and transportation. Labor unions represent and protect the interests of their members in matters such as hiring, wages, working conditions, job security, and due-process appeals. Historically the relationship between management and labor unions has been adversarial, but today both sides realize that to improve productivity and competitiveness, management and labor must work together in collaborative relationships. Troubled labor relations can create higher costs, reduce productivity, and eventually lead to layoffs.40 Organizations are at a disadvantage if they become overly dependent on any powerful supplier. A supplier is powerful if the buyer has few other sources of supply or if the supplier has many other buyers. One of the problems plaguing the launch of the PS3 was a shortage of parts, and during the weeks leading up to the console’s first Christmas, it was often out of stock in U.S. stores. Sony depended on Panasonic to provide disk drives and on IBM and ATI Technologies to deliver core processors and graphics chips.41 For such a sophisticated product, the company couldn’t go elsewhere for these components. Switching costs are fixed costs buyers face if they change suppliers. For example, once a buyer learns how to operate a supplier’s equipment, such as computer software, the buyer faces both economic and psychological costs in changing to a new supplier. 52 PART 1

bat2952X_ch03_040-065.indd 52

In recent years many companies have improved their competitiveness and profitability through supply chain management, the management of the entire network of facilities and people that obtain raw materials from outside the organization, transform them into products, and distribute them to customers.42 Increased global competition has required managers to pay close attention to their costs; they can no longer afford to hold large inventories, waiting for orders to come in. Also, once orders do come in, some products sitting in inventory might be out of date. With the emergence of the Internet, customers look for products built to their specific needs and preferences—and they want them delivered quickly at the lowest available price. This requires the supply chain to be not only efficient but also flexible, so that the organization’s output can quickly respond to changes in demand. Today the goal of effective supply chain management is to have the right product in the right quantity available at the right place at the right cost. Boeing, the aircraft and defense systems company, forges partnerships with its suppliers to share knowledge that will help them learn how to operate more efficiently. Rick Behrens is senior manager of supplier development, charged with building close supplier relationships and helping them understand Boeing’s commitment to “lean” operations, aimed at eliminating waste. He educates some suppliers in the basics of how to run lean operations; for others, he sends a team to the organization to help them streamline certain activities. Behrens helps suppliers develop their abilities so they can move from simply selling parts to providing complete subassemblies. In Behrens’s words, “We need suppliers that can grow with us.”43 In sum, choosing the right supplier is an important strategic decision. Suppliers can affect manufacturing time, product quality, costs, and inventory levels. The relationship between suppliers and the organization is changing in many companies. The close supplier relationship has become a new model for many organizations that are using a just-in-time manufacturing approach. And in some companies, innovative managers are forming strategic partnerships with their key suppliers in developing new products or new production techniques.

LO3 Understand how managers stay on top of changes in the external environment

KEEP UP WITH CHANGES IN THE ENVIRONMENT If managers do not understand how the environment affects their organization or cannot identify opportunities and threats that are likely to be important, their ability to make

Introduction

16/07/12 8:47 PM

Confirming pages

environmental uncertainty lack of decisions and execute plans will be severely limited. For example, if little is known about customer likes and dislikes, organizations will have difficulty designing new products, scheduling production, or developing marketing plans. In short, timely and accurate environmental information is critical for running a business. But information about the environment is not always readily available. For example, even economists have difficulty predicting whether an upturn or a downturn in the economy is likely. Moreover, managers find it difficult to forecast how well their own products will sell, let alone how a competitor might respond. In other words, managers often operate under conditions of uncertainty. Environmental uncertainty means that managers do not have enough information about the environment to understand or predict the future. Uncertainty arises from two related factors: • Complexity—the number of issues to which a manager must attend, and the degree to which they are interconnected. Industries (e.g., the automotive industry) with many different firms that compete in vastly different ways tend to be more complex—and uncertain—than industries (e.g., airplane manufacturers) with only a few key competitors. • Dynamism—the degree of discontinuous change that occurs within the industry. High-growth industries (e.g., smartphones) with products and technologies that change rapidly are more uncertain than stable industries (e.g., utilities) where change is less dramatic and more predictable.44

As environmental uncertainty increases, managers need methods for collecting, sorting through, and interpreting information about the environment. We discuss some of these approaches in this section of the chapter. (In Chapter 5 we will also discuss how managers make decisions under conditions of uncertainty.) By analyzing forces in both the macroenvironment and the competitive environment, managers can identify opportunities and threats that might affect the organization.

3.1|Environmental Scanning Keeps You Aware The first step in coping with uncertainty in the environment is to pin down what might be important. Frequently organizations and individuals act out of ignorance, only to regret those actions in the future. IBM, for example, had the opportunity to purchase the technology behind xerography but turned it down. Xerox saw the potential and took the lead in photocopying. Later, Xerox researchers developed the technology for the original computer mouse but failed to see its potential and missed an important opportunity. To understand and predict changes, opportunities, and threats, organizations such as Verizon, Marriott, and Kelly Services spend a good deal of time and money monitoring events in the environment. Environmental scanning includes searching for information that is unavailable to most people and sorting

through that information to interpret what is important. Managers can ask questions such as these: • Who are our current competitors? • Are there few or many entry barriers to our industry? • What substitutes exist for our product or service? • Is the company too dependent on powerful suppliers? • Is the company too dependent on powerful customers?45

environmental scanning searching for and sorting through information about the environment

competitive intelligence information that helps managers determine how to compete better

Answers to these questions help managers develop competitive intelligence, the information necessary to decide how best to manage in the competitive environment they have identified. Porter’s competitive analysis, discussed earlier, can guide environmental scanning and help managers evaluate the competitive potential of different environments. Exhibit 3.3 describes two extreme environments: an attractive environment, which gives a firm a competitive advantage, and an unattractive environment, which puts a firm at a competitive disadvantage.46

3.2|Scenario Development Helps You Analyze the Environment As managers try to determine the effect of environmental forces on their organizations, they often develop different outcomes that are uncertain in the future—alternative combinations of different factors that form a total picture of the environment and the firm. For example, before Apple launched the

E X H I B I T 3 . 3 Attractive and Unattractive Environments Environmental Factor

Attractive

Unattractive

Competitors

Few; high industry growth; unequal size differentiated.

Many; low industry growth; equal size; commodity.

Threat of entry

Low threat; many barriers.

High threat; few entry barriers.

Substitutes

Few.

Many.

Suppliers

Many; low bargaining power.

Few; high bargaining power.

Customers

Many; low bargaining power.

Few; high bargaining power.

Sources: Adapted from S. Ghoshal, “Building Effective Intelligence Systems for Competitive Advantage,” Sloan Management Review 28, no. 1 (Fall 1986), pp. 49–58; and K. D. Cory, “Can Competitive Intelligence Lead to a Sustainable Competitive Advantage?” Competitive Intelligence Review 7, no. 3 (Fall 1996), pp. 45–55.

CHAPTER 3

bat2952X_ch03_040-065.indd 53

information needed to understand or predict the future

The Organizational Environment and Culture

16/07/12 8:47 PM

Confirming pages

scenario a narrative

forecasting method

that describes a particular set of future conditions

for predicting how variables will change the future

benchmarking the process of comparing an organization’s practices and technologies with those of other companies

• Collect data carefully. Forecasts are no better than the data used to construct them. • Use simple forecasts (rather than complicated ones) where possible.

iPhone 4, company planners developed several “best guesses” about the level of sales the new product would attract. Orders on the first day surpassed 1 million, a company record for iPhone sales. Frequently organizations develop a best-case scenario (the occurrence of events that are favorable to the firm), a worst-case scenario (the occurrence of unfavorable events), and some middle-ground alternatives. The value of scenarios is that they help managers develop contingency plans for what they might do given different outcomes.47 For example, as a manager, you will quite likely be involved in budgeting for your area. You will almost certainly be asked to list initiatives you would eliminate in case of an economic downturn and new investments you would make if your firm does better than expected. Effective managers regard the scenarios they develop as living documents, not merely prepared once and put aside. They constantly update the scenarios to take into account relevant new factors that emerge, such as significant changes in the economy or actions by competitors. Also, managers try to identify strategies that are the most robust across all of the different scenarios.

Whereas environmental scanning identifies important factors and scenario development develops alternative pictures of the future, forecasting predicts exactly how some variable or variables will change in the future. For example, in making capital investments, firms may forecast interest rates. In deciding to expand or downsize a business, firms may forecast the demand for goods and services or forecast the supply and demand of labor. Publications such as Businessweek’s Business Outlook provide forecasts to businesses both large and small. The accuracy of forecasts varies from application to application. Because they extrapolate from the past to project the future, forecasts tend to be most accurate when the future ends up looking a lot like the past. Of course we don’t need sophisticated forecasts in those instances. Forecasts are most useful when the future will look radically different from the past. Unfortunately that is when forecasts tend to be less accurate. The more things change, the less confidence we have in our forecasts. Here is some practical advice for using forecasts: forecasts,

and

consider

averaging

their

• Remember that accuracy decreases as you go further into the future. 54 PART 1

bat2952X_ch03_040-065.indd 54

3.4|Benchmarking Helps You Become Best in Class Besides trying to predict changes in the environment, firms can intensively study the best practices of various firms to understand their sources of competitive advantage. Benchmarking means identifying the best-in-class performance by a company in a given area—say, product development or customer service—and then comparing your processes with theirs. A benchmarking team collects information about its own company’s operations and those of the other firm in order to determine gaps. These gaps serve as a point of entry to learn the underlying causes of performance differences. Ultimately, the team maps out a set of best practices that lead to world-class performance. We will discuss benchmarking further in Chapter 5.

LO4 Summarize how managers respond to changes in the external environment

3.3|Forecasting Predicts Your Future Environment

• Use multiple predictions.

• Keep in mind that important events often are surprises that depart from predictions.48

RESPONDING TO THE ENVIRONMENT For managers and organizations, responding effectively to their environments is almost always essential. Clothing retailers who pay no attention to changes in the public’s style preferences, and manufacturers who fail to ensure they have steady sources of supply, are soon out of business. To respond to their environment, managers and companies have a number of options, which can be grouped into three categories: 1. Adapting to the environment. 2. Influencing the environment. 3. Selecting a new environment.

4.1|Adapt to the External Environment To cope with environmental uncertainty, organizations frequently adjust their structures and work processes. Exhibit 3.4 shows four different approaches that organizations can take in adapting to environmental uncertainty, depending on whether it arises from complexity, dynamism, or both.

Introduction

16/07/12 8:47 PM

Confirming pages

When uncertainty arises from environmental complexity, organizations tend to adapt by decentralizing decision making. For example, if a company faces a growing number of competitors in various markets, if different customers want different things, if product features keep increasing, and if production facilities are being built in different regions of the world, executives probably cannot keep abreast of all activities and understand all the operational details of a business. In these cases, the top management team is likely to give lower-level managers authority to make decisions that benefit the firm. The term empowerment is used frequently today to talk about this type of decentralized authority. To compete in volatile environments, organizations rely on knowledgeable and skilled workers. One way to develop such workers is to sponsor training programs. Alliances among employers, community colleges, universities, and nonprofit training programs are producing workers with much-needed skills in many industries. One program in New York, Per Scholas, trains computer repair technicians in one of the country’s poorest areas—the Bronx. Funded by grants from private foundations and the New York City Council, the program gained momentum through its collaboration with Time Warner Cable and other companies looking for skilled employees. To date, Per Scholas has trained over 3,000 low-income adults to obtain jobs in the technology field. Per Scholas boasts a job placement rate of 80 percent of its graduates, who earn about $12 per hour in the first year and $15 per hour in two years—often double what they would have earned without the training. One graduate, Cristina Rodriguez, works at Time Warner Cable as a broadband specialist. Her new skills have empowered her to become a high-performing employee. “What feels great is when I resolve someone’s issue,” she says. Rodriguez, fluent in both English and Spanish, is able to solve customers’ problems in both languages. Training programs such as Per Scholas have grown more sophisticated in the last few years because of their close association with the companies that hire their graduates. These relationships give the programs insight into how the employers operate and what they need. Connie Ciliberti, vice president of human resources for Time

Warner Cable, confirms the importance of this collaboration. “Per Scholas has spent time learning our business, understanding our measures of success,” she says.49

empowerment the process of sharing power with employees to enhance their confidence in their ability to perform their jobs and contribute to the organization buffering creating supplies of excess resources in case of unpredictable needs

In response to uncertainty arising from a dynamic environment, organizations tend to establish more flexible structures. Today the term bureaucracy generally has a bad connotation. While bureaucratic organizations may be efficient and controlled if the environment is stable, they tend to react slowly to changes in products, technologies, customers, or competitors. Because bureaucratic organizations tend to be formal and stable, they often cannot adjust to change or exceptional circumstances that “don’t fit the rules.” In these cases, more organic structures give organizations the flexibility to adapt. Organic structures are less formal than bureaucratic organizations; decisions are made through interaction and mutual adjustment among individuals rather than from a set of predefined rules.

Adapting at the Boundaries

Because they are open systems, organizations are exposed to uncertainties from both their inputs and outputs. In response, they can create buffers on both the input and output boundaries with the environment. Buffering creates supplies of excess resources to meet unpredictable needs. On the input side, organizations establish

Stable

Dynamic

Complex

Decentralized Bureaucratic (standardized skills)

Decentralized Organic (mutual adjustment)

Simple

E X H I B I T 3 . 4 Four structural approaches for managing uncertainty

Centralized Bureaucratic (standardized work processes)

Centralized Organic (direct supervision) Per Scholas hosted hands-on workshops to help 1,500 senior citizens in New York City learn how technology can improve the quality of their lives.

CHAPTER 3

bat2952X_ch03_040-065.indd 55

The Organizational Environment and Culture

16/07/12 8:47 PM

Confirming pages

smoothing leveling

flexible processes

normal fluctuations at the boundaries of the environment

methods for adapting the technical core to changes in the environment

independent strategies strategies

cooperative strategies

that an organization acting on its own uses to change some aspect of its current environment

strategies used by two or more organizations working together to manage the external environment

relationships with employment agencies to hire part-time and temporary help during rush periods when labor demand is difficult to predict. In the U.S. labor force, these workers, known as contingent workers, include 2.5 million on-call workers, 1.2 million temporary-help agency workers, and more than 800,000 workers provided by contract firms, suggesting widespread use of this approach to buffering labor input uncertainties.50 On the output side of the system, most organizations use some type of ending inventories, keeping merchandise on hand in case a rush of customers decides to buy their products. Auto dealers are a common example of this practice; other companies that use buffer inventories include fast-food restaurants, bookstores, and even real estate agencies.51 In addition to buffering, organizations may try smoothing or leveling normal fluctuations at the boundaries of the environment. For example, during winter months in the north, when automobile sales drop off, dealers commonly cut the price of their in-stock vehicles to increase demand. At the end of each clothing season, retailers discount their merchandise to clear it out and make room for incoming inventories. These are examples of smoothing environmental cycles to level off fluctuations in demand.

Adapting at the Core While buffering and smoothing manage uncertainties at the boundaries of the organization, firms also can establish ﬂexible processes that allow for adaptation in their technical core. For example, firms increasingly try to customize their goods and services to meet customers’ varied and changing demands. Health care companies like Blue Cross and Blue Shield and Aetna offer a variety of coverage options to customers. Even in manufacturing, where it is difficult to change basic core processes, firms are creating flexible factories. Instead of mass-producing large quantities of a “one-size-fits-all” product, organizations can use mass customization to produce customized products at an equally low cost. Whereas Henry Ford used to claim that “you could have a Model T in any color you wanted, as long as it was black,” auto companies now offer a wide array of colors and trim lines, with different options and accessories. Customers who purchase a Mini Cooper can choose the engine, exterior colors, and interior design features that suit their style.52 The process of mass customization involves the use of a network of independent operating units in which each performs a specific process or task such as making a dashboard assembly on an automobile. When an order comes in, different modules join forces to deliver the product or service as specified by the customer.53 56 PART 1

bat2952X_ch03_040-065.indd 56

4.2|Influence Your Environment In addition to adapting or reacting to the environment, managers and organizations can develop proactive responses aimed at changing the environment. Two general types of proactive responses are independent action and cooperative action.

Independent Action A company uses independent strategies when it acts on its own to change some aspect of its current environment. As illustrated in Exhibit 3.5, several independent strategies are possible:54 • Competitive aggression—exploiting a distinctive competence or improving internal efficiency for competitive advantage (e.g., aggressive pricing and comparative advertising). Southwest Airlines cuts fares when it enters a new market, and Sony positioned itself as the gaming industry’s technological leader with the launch of the PS3. • Competitive pacification—independent action to improve relations with competitors (e.g., helping competitors find raw materials). Kellogg Company promotes the cereal industry as a whole, as well as advertising its various brands.

E X H I B I T 3 . 5 Ways that managers can influence their environment

Competitive aggression

Political action

Competitive pacification

Legal action

Public relations

Voluntary action

Introduction

16/07/12 8:47 PM

Confirming pages

Top four industry/labor sectors for PAC spending

Labor union PACs

DID YOU KNOW? Companies or organizations within an industry sometimes form political action committees (PACs) to raise money to help elect lawmakers with favorable points of view. During the most recent presidential election year, the biggest spenders were labor unions; the most PAC spending by businesses came from companies in finance, insurance, and real estate.55

$66.1 million

Finance, insurance, and real estate PACs

$62.6 million

Health care PACs

$48.6 million

Energy and natural resources PACs

$25.9 million

Total spending (in millions)

• Public relations—establishing and maintaining favorable images in the minds of those making up the environment (e.g., sponsoring sporting events). The oil and natural gas industry advertises its role in national independence. • Voluntary action—voluntary commitment to various interest groups, causes, and social problems (e.g., donating supplies to tsunami victims). Converse, Apple, Gap, Dell, Nike, Shazam, and other companies have signed on to Product Red, a program in which they market special Red-themed products and donate a percentage of the profits to the Global Fund, a project to help end AIDS in Africa.

• Contracts—negotiating an agreement between the organization and another group to exchange goods, services, information, patents, and so on. Suppliers and customers, or managers and labor unions, may sign formal agreements about the terms and conditions of their future relationships.

• Legal action—engaging the company in a private legal battle (e.g., lawsuits against illegal music copying). Viacom sued Google for allowing users to post copyrighted video clips on the Google-owned YouTube website. • Political action—efforts to influence elected representatives to create a more favorable business environment or limit competition (e.g., issue advertising or lobbying at state and national levels). In a recent year, pharmaceutical companies spent $1.1 billion to lobby members of Congress; insurers, the second biggest spenders on lobbying, paid out almost $900 million.56

Each of these examples shows how organizations—on their own—can have an impact on the environment.

Cooperative Action In some situations, two or more organizations work together using cooperative strategies to influence the environment.57 Several types of cooperative strategies are common:58

Celebrities Bono and Oprah have supported organizations that participate in the Product Red Program to help end AIDS in Africa through the Global Fund. What other opportunities do companies have to participate in voluntary actions to change their environment?

CHAPTER 3

bat2952X_ch03_040-065.indd 57

The Organizational Environment and Culture

16/07/12 8:47 PM

Confirming pages

strategic maneuvering an organization’s conscious efforts to change the boundaries of its task environment

domain selection entering a new market or industry with existing expertise

diversification a firm’s investment in a different product, business, or geographic area

These contracts are explicit attempts to make their future relationship predictable. • Cooptation—absorbing new elements into the organization’s leadership structure to avert threats to its stability or existence. Many universities invite wealthy alumni to join their boards of directors. • Coalition—groups that act jointly with respect to a set of political initiatives for some period. Local businesses may band together to curb the rise of employee health care costs, and organizations in some industries have formed industry associations and special interest groups. Life Is Good, a New England–based T-shirt company, used the latest economic downturn to strengthen cooperative action with the retailers that stock its products. Employees at Life Is Good began calling retailers to ask how they could help them through the slow times. Based on the feedback, the firm identified a need to establish online networks that retailers—the company’s customers—could use for sharing ideas.59

At the organizational level, firms establish strategic alliances, partnerships, joint ventures, and mergers with competitors to deal with environmental uncertainties. Cooperative strategies such as these make most sense when two conditions exist: 1. Taking joint action will reduce the organizations’ costs and risks. 2. Cooperation will increase their power (their ability to successfully accomplish the changes they desire).

4.3|Change the Boundaries of the Environment Besides changing themselves (environmental adaptation) or their environment, organizations can redefine or change which environment they are in. We refer to this last category as strategic maneuvering. By making a conscious effort to change the boundaries of its competitive environment, a firm can maneuver around potential threats and capitalize on opportunities.60 Managers can use several strategic maneuvers, including domain selection, diversification, merger and acquisition, and divestiture.61 Domain selection is the entrance by a company into another suitable market or industry. For instance, the market may have limited competition or regulation, ample suppliers and customers, or high growth. An example is Nintendo’s decision to create products such as the Wii that appeal to customer segments

58 PART 1

bat2952X_ch03_040-065.indd 58

merger one or more

acquisition one firm

companies combining with another

buying another

that have not been enthusiastic to purchase video games, such as people intimidated by complicated game controllers and parents concerned about the violent content and sedentary play involved in video games. By avoiding head-on competition to be the product with the best graphics or most advanced play, Nintendo was able to enjoy immediate profits from its new console. Thus Nintendo has used an existing expertise to broaden the goods and services it offers. Diversiﬁcation occurs when a firm invests in different types of businesses or products or when it expands geographically to reduce its dependence on a single market or technology. Apple’s launch of the iPod is a good example of effective diversification. While Apple struggled in the highly competitive computer industry, where its Macintosh had only a 3 percent market share, the iPod has gobbled up three-quarters of the market for portable digital music players and for online music sales. More recently, Apple’s launch of the iPhone and iPad generated considerable buzz. The company’s name change from “Apple Computer” to simply “Apple” makes sense in light of these diversification moves.62 A merger or acquisition takes place when two or more firms combine, or one firm buys another, to form a single company. Mergers and acquisitions can offer greater efficiency from combined operations or can give companies relatively quick access to new markets or industries. Swedish automaker Volvo was recently acquired by Geely Holding Group in China.63 Li Zhejiang, the CEO of Geely, has announced plans to build several manufacturing plants in China to serve its growing demand for cars. Divestiture occurs when a company sells one or more businesses. At Ford Motor Company, recent operating losses and the costs of restructuring its workforce have brought about a cash shortage. To raise cash and focus on meeting changing consumer tastes in the U.S. automotive market, Ford recently dismantled its Premier Automotive Group by selling Aston Martin to a British-led group of investors, Land Rover and Jaguar to Tata of India, and Volvo to Geely of China.64 Organizations engage in strategic maneuvering when they move into different environments. Some companies, called prospectors, are more likely than others to engage in strategic maneuvering.65 Aggressive companies like Amazon, Google, and Apple continuously change the boundaries of their competitive environments by seeking new products and markets, diversifying, and merging or acquiring new enterprises.

Introduction

16/07/12 8:47 PM

Confirming pages

divestiture a firm selling one or more businesses

prospectors

defenders companies

companies that continuously change the boundaries for their task environments by seeking new products and markets, diversifying and merging, or acquiring new enterprises

that stay within a stable product domain as a strategic maneuver

In these and other ways, corporations put their competitors on the defensive and force them to react. Defenders, in contrast, stay within a more limited, stable product domain.

4.4|Three Criteria Help You Choose the Best Approach Three general considerations help guide management’s response to the environment: 1. Managers need to change what can be changed. Environmental responses are most useful when aimed at elements of the environment that cause the company problems, provide opportunities, and allow the company to change successfully. Thus Nintendo recognized that its game console would have difficulty competing on superior graphics, so it addressed underserved segments of the market, where customers and favorable publicity made the Wii successful. 2. Managers should use the appropriate response. If a company wants to better manage its competitive environment, competitive aggression and pacification are viable. Political action influences the legal environment, and contracting helps manage customers and suppliers.

No business likes bad press, but if it occurs, managers must choose a response. They can ignore the negative publicity or address it in such a way that the incident is viewed as neutral, or even positive. When Washington, DC, restaurateur Mark Sakuta discovered criticisms of his restaurant on the website for the Washington Post, he was at first puzzled. About 10 negative reviews appeared simultaneously, accusing the restaurant of using cookbook recipes instead of its own original concoctions, claiming that the floor was unstable, and more. A month later, another harsh review criticized the gratuity policy for large groups. Sakuta knew that the first group of accusations was simply untrue. He suspected they were written by disgruntled former employees. So he called customer service at the website and asked to have the postings removed. The site manager agreed. But Sakuta did not ask to have the comment about the tipping policy removed because it was accurate. Instead he decided to adjust the policy. He reasoned that if customers were uncomfortable with it, they might choose to dine elsewhere. Now Sakuta keeps closer tabs on food-related websites and blogs, looking for any comments about his business.66 3. Managers should choose responses that offer the most benefit at the lowest cost. Return-on-investment calculations should

internal environment all

organization culture the set of

relevant forces inside a firm’s boundaries, such as its managers, employees, resources, and organization culture

assumptions that members of an organization share to create internal cohesion and adapt to the external environment

incorporate short-term financial considerations and long-term impact.

Proactive managers who consider these factors carefully will guide their organizations to competitive advantage more effectively. In addition, effective managers also look to their internal environment for ways to respond to changes that are occurring outside their organization. This leads to a discussion of how an organization’s culture can be used to address those changes in the external environment.

LO5 Discuss how organizational cultures can be leveraged to overcome challenges in the external environment

CULTURE AND THE INTERNAL ENVIRONMENT OF ORGANIZATIONS An organization’s internal environment refers to all relevant forces inside a firm’s boundaries, such as its managers, employees, resources, and organizational culture. As we have discussed, an organization’s managers serve a critical role in scanning and responding to threats and opportunities in the external environment. Financial, physical, and human resources also play a key role when it comes to achieving competitive advantage. One of the most important factors that influence an organization’s response to its external environment is its culture.

5.1|What is an Organization Culture?

Organization culture is the set of assumptions about the organization and its goals and practices that members of the company share.67 It is a system of shared values about what is important and beliefs about how the world works. It provides a framework that organizes and directs people’s behavior on the job.68 The culture of an organization may be difficult for an observer to define easily, yet like an individual’s personality, an astute observer can decipher the clues of the culture

CHAPTER 3

bat2952X_ch03_040-065.indd 59

The Organizational Environment and Culture

16/07/12 8:47 PM

Confirming pages

visible artifacts the components of an organization that can be seen and heard, such as office layout, dress, orientation, stories, and written material

values the underlying qualities and desirable behaviors that are important to the organization

unconscious assumptions the strongly held and taken-forgranted beliefs that guide behavior in the firm

over time. As illustrated in Exhibit 3.6, there are three layers of organization culture.69 The first level is like the exposed part of an iceberg and consists of visible artifacts, which are the components of an organization that can be seen and heard such as office layout, dress, orientation, stories, and written material (e.g., annual reports and strategic plans). Though seemingly easy to interpret, these clues to understanding the culture often take time to figure out. The second level of culture refers to its values, which are the underlying qualities and desirable behaviors that are important to the organization. Values are akin to that part of the iceberg that is just below the surface of the water. They can’t be directly observed, but rather values need to be inferred from the behavior of managers. For example, acting on the value of wanting to become a “green” automobile company, the top management team may decide to build a line of fuel-efficient electric automobiles. The third and deepest level of an organization’s culture refers to unconscious assumptions, which are strongly held and taken-forgranted beliefs that guide behavior in the firm. In the case of the automobile executives, they’ll be willing to “go green” only to the extent that this new sustainability initiative is profitable. Cultures can be strong or weak; strong cultures can greatly influence the way people think and behave. A strong culture is one

E X H I B I T 3 . 6 The three levels of organizational culture

Level 1:Visible Artifacts Office layout, dress code, written documents.

Level 2:Values “We need to become a ‘green’ company.”

Level 3:Unconscious Assumptions “But we have to be profitable.”

Source: Adapted from E. H. Schein, “Coming to a New Awareness of Organizational Culture,” Sloan Management Review 25, no. 2 (Winter 1984), pp. 3–16.

60 PART 1

bat2952X_ch03_040-065.indd 60

in which everyone understands and believes in the firm’s goals, priorities, and practices. A strong culture can be a real advantage to the organization if the behaviors it encourages and facilitates are appropriate. The Walt Disney Company’s culture encourages extraordinary devotion to customer service; the culture at Apple encourages innovation, and the culture at Walmart stresses low cost and frugality. Employees in these companies don’t need rule books to dictate how they act because these behaviors are conveyed as “the way we do things around here,” rooted in their companies’ cultures. In contrast, a strong culture that encourages inappropriate behaviors can severely hinder an organization’s ability to deal effectively with its external environment—particularly if the environment is undergoing change, as is almost always the case today. A culture that was suitable and even advantageous in a prior era may become counterproductive in a new environment. For instance, a small start-up may have an informal culture that becomes less suitable when the company grows, faces more competition, and requires decision making by a wide range of specialized employees spread out over many locations. In its relatively short life as a company, Google quickly became a role model for its brainy culture of innovation. Software writers and engineers were attracted to Google not just for its famous perks, such as free meals and laundry facilities, but also for a climate in which they were encouraged to let their imaginations roam free, dreaming up ideas that could be crazy but just might be the next big thing on the Internet. During a long-running business boom, that culture served Google well. The best engineers were thrilled to work for a company that let them spend one-fifth of their time on new projects of their own choosing. But when the economy slowed and the stock market nosedived, Google’s managers had to cope with a new reality in which money was tight. Google could no longer afford its free-spending culture. Managers had to figure out how to maintain the best of the culture while innovating at a more prudent pace. Google’s modified culture now values setting priorities. New ideas are still welcome if they are focused on core businesses of search, advertising, and web-based software applications. Managers are reassigning employees away from teams working on unrelated projects and using them to staff teams working on profitable ideas in the core areas. Employees who have an idea that can improve the computer user’s experience are asked to consider also what impact that idea might have on Google’s bottom line. Similarly, hiring has slowed because managers must not only justify the talent of a candidate but also target hiring to particular business needs. The challenge will be to keep employees as excited about targeted innovation as they have been about freewheeling innovation.70

In contrast, at a company with a weak culture, different people hold different values, there is confusion about corporate goals, and it is not clear from one day to the next what principles

Introduction

16/07/12 8:47 PM

Confirming pages

should guide decisions. Some managers may pay lip service to some aspects of the culture (“we would never cheat a customer”) but behave very differently (“don’t tell him about the flaw”). As you can guess, such a culture fosters confusion, conflict, and poor performance. Most managers would agree that they want to create a strong culture that encourages and supports goals and useful behaviors that will make the company more effective. In other words, they want to create a culture that is appropriately aligned with the organization’s competitive environment.71

5.2|Companies Give Many Clues About Their Culture Let’s say you want to understand a company’s culture. Perhaps you are thinking about working there and you want a good “fit,” or perhaps you are working there right now and want to deepen your understanding of the organization and determine whether its culture matches the challenges it faces. How would you go about making the diagnosis? As the “Take Charge of Your Career” feature discusses, a variety of things will give you useful clues about culture: • Corporate mission statements and official goals are a starting point because they will tell you the firm’s desired public image. Most companies have a mission statement—even the CIA (you can find it at http://www.cia.gov). Your school has one, and you can probably find it online. But are these statements a true expression of culture? A study of hospital employees and their managers found that managers rated their mission statement more positively than nonmanagers (even though employees had participated in developing it), and 3 out of 10 employees were not even aware that the hospital had a mission statement (even though the hospital had processes for communicating about it).72 So even after reading statements of mission and

goals, you still need to figure out whether the statements truly reflect how the firm conducts business. • Business practices can be observed. How a company responds to problems, makes strategic decisions, and treats employees and customers tells a lot about what top management really values. When an unknown person(s) laced some Extra Strength Tylenol capsules with cyanide in the Chicago area back in the early 1980s, Jim Burke and the other leaders of Johnson & Johnson reacted to the crisis by recalling all related products throughout the United States. This decisive move, though not good for short-term profitability, was respected throughout the company and business community. • Symbols, rites, and ceremonies give further clues about culture. For instance, status symbols can give you a feel for how rigid the hierarchy is and for the nature of relationships between lower and higher levels. Who is hired and fired—and why—and the activities that are rewarded indicate the firm’s real values. • The stories people tell carry a lot of information about the company’s culture. Every company has its myths, legends, and true stories about important past decisions and actions that convey the company’s main values. The stories often feature the company’s heroes: people once or still active who possessed the qualities and characteristics that the culture especially values and who act as models for others about how to behave. Sam Walton, founder of Walmart, was a biggerthan-life presence for his employees. Well into his senior years, Walton would drive an old red pickup truck from store to store, where he’d meet and joke with employees and even lead them in a company cheer.

A strong culture combines these measures in a consistent way. The Ritz-Carlton hotel chain gives each employee a laminated CHAPTER 3

bat2952X_ch03_040-065.indd 61

The Organizational Environment and Culture

17/08/12 9:55 PM

Confirming pages

card listing its 12 service values. Each day it carries out a type of ceremony: a 15-minute meeting during which employees from every department resolve problems and discuss areas of potential improvement. At these meetings, the focus is on the day’s “wow story,” which details an extraordinary way that a Ritz-Carlton employee lived up to one of the service values. For example, a family arrived at the Bali Ritz-Carlton with special eggs and milk because of their son’s allergies, but the food had spoiled. The manager and dining staff couldn’t find replacements in town, so the executive chef called his mother-in-law in Singapore and asked her to buy the necessary products and fly with them to Bali.73

5.3|Four Different Types of Organizational Cultures In general, cultures can be categorized according to whether they emphasize flexibility versus control and whether their focus is internal or external to the organization. Keep in mind that organizations can have characteristics of more than one

culture. In order to understand their culture, managers should discuss this issue with other managers to compare notes on how the culture is evolving and its strengths and weaknesses relative to the demands of the external environment. By juxtaposing these two dimensions, we can describe four types of organizational cultures, depicted in Exhibit 3.7: • Group culture. The New Belgium Brewery in Fort Collins, Colorada, is an example of a group culture that is internally oriented and flexible. It tends to be based on the values and norms associated with the firm. The employees (i.e., organizational members) comply with organizational directives that flow from trust, tradition, and long-term commitment. Their culture emphasizes member development and values participation in decision making. The strategic orientation associated with this cultural type is one of implementation through consensus building. Its leaders tend to act as mentors and facilitators. • Hierarchical culture. The U.S. armed forces are based on a hierarchical culture that is internally oriented by more focus on control and stability. It has the values and norms

TAKE CHARGE OF YOUR CAREER // Figure out the organizational culture, and fast!

tarting a new job or career is never easy. If you moved as a child, it may bring up memories of being the new kid in town. Here’s an idea. During the first few days, weeks, and months on the new job, try to “hit the ground listening.” There’s an old saying that suggests that because we’ve been given two ears and one mouth, we should probably try to listen twice as much as we talk. That makes a lot of sense, especially when trying to figure out the ins and outs of an organization you recently joined. Think of yourself as a private investigator or cultural anthropologist whose job is to figure out answers to questions like these: 1. The who’s: Who on staff is respected the most? Who seems to have the most influence? Whom do people go to with problems? Whom do I need to impress? 2. The what’s: What skills, abilities, and knowledge does this organization value?

62 PART 1

bat2952X_ch03_040-065.indd 62

What kind of attitudes do successful people display here? 3. The why’s: Why is this organization successful? Why does it hire people like me? Why do people get fired from here? Why is there talk about changing the culture to better align with the external environment? 4. The how’s: How good is the fit between the organizational culture and my values? How can I make a positive impact on this organization? The questions are probably not the hardest part to figure out. Getting accurate answers to the questions is more challenging. How can you go about collecting information so that you can arrive at the answers? First, find (or download) and read everything you can about the organization. Start with its website, but don’t stop there. Use your school’s library databases and Internet search engines to unearth articles, news releases, complaints, and other tidbits about your organization. Getting facts and opinions from diverse sources will give you a more complete picture of the organization than just relying on internal documents.

Second, start talking to people. When you start getting to know your supervisor, coworkers, customers, or suppliers, ask them for their opinions about some of the questions listed here. You might be surprised at what people are willing to tell you. Being new has advantages—most folks like imparting their wisdom to someone who’s willing to listen to them. Last, observe people’s behaviors and listen to what they say (and how they say it). If you’re a good observer of people, you’ll be able to piece together the puzzle that makes up an organization’s culture. If you find you often miss what people say or struggle with interpreting nonverbal cues, it may take you longer to arrive at the same point of understanding. That’s okay. Everyone moves at his or her own pace. The important point is to make a direct and conscious effort to decipher your organization’s culture so you can decide whether it’s a good fit for you in the long term. If not, there are a virtually unlimited number of different organizations in the world. By finding one that fits well with your preferences, personality, values, and passion, you will feel at home while at work.

Introduction

16/07/12 8:47 PM

Confirming pages

E X H I B I T 3 . 7 Competing-values model of culture Flexible Processes Type: Group Dominant attribute: Cohesiveness, participation, teamwork, sense of family Leadership style: Mentor, facilitator, parent figure Bonding: Loyalty, tradition, interpersonal cohesion Strategic emphasis: Toward developing human resources, commitment, and morale

Type: Adhocracy Dominant attribute: Entrepreneurship, creativity, adaptability, dynamism Leadership style: Innovator, entrepreneur, risk taker Bonding: Flexibility, risk, entrepreneur Strategic emphasis: Toward innovation, growth, new resources

Internal maintenance

External positioning Type: Hierarchy Dominant attribute: Order, rules and regulations, uniformity, efficiency Leadership style: Coordinator, organizer, administrator Bonding: Rules, policies and procedures, clear expectations Strategic emphasis: Toward stability, predictability, smooth

Type: Rational Dominant attribute: Goal achievement, environment exchange, competitiveness Leadership style: Productionand achievement-oriented, decisive Bonding: Goal orientation, production, competition Strategic emphasis: Toward competitive advantage and market superiority

Control-Oriented Processes Source: K. S. Cameron and R. E. Quinn, Diagnosing and Changing Organizational Culture (Englewood Cliffs, NJ: Addison-Wesley, 1988). Used by permission of the author.

associated with a bureaucracy. It values stability and assumes that individuals will comply with organizational mandates when roles are stated formally and enforced through rules and procedures. • Rational culture. Oil and natural gas companies tend to have rational cultures that are externally oriented and focused on control. This type of culture’s primary objectives are productivity, planning, and efficiency. Organizational members are motivated by the belief that performance that leads to the desired organizational objectives will be rewarded. • Adhocracy. Apple is an example of an adhocracy that is externally oriented and flexible. This culture type emphasizes change in which growth, resource acquisition, and innovation are stressed. Organizational members are motivated by the importance or ideological appeal of the task. Leaders tend to be entrepreneurial and risk takers. Other members tend to have these characteristics as well.74

Legendary Walmart founder Sam Walton would drive his pickup truck to stores, often delighting employees by leading them in the Walmart cheer.

This type of diagnosis is important when two companies are considering combining operations, as in a merger, acquisition, or joint venture, because as we noted, cultural differences can sink these arrangements. In some cases, organizations investigating CHAPTER 3

bat2952X_ch03_040-065.indd 63

The Organizational Environment and Culture

16/07/12 8:47 PM

Confirming pages

BE THE CHANGE YOU WANT TO SEE IN THE WORLD. — Mahatma Gandhi

this type of change can benefit from setting up a “clean team” of third-party experts who investigate the details of each company’s culture. For example, they might conduct employee focus groups, look for systems that empower employees to make independent decisions, and note how management talks about the company’s founder, customers, and employees. In this way, the clean team can identify for the organizations’ leaders the types of issues they will have to resolve and the values they must choose among as they try to establish a combined culture.75 What type of company culture is important to you in your career?

Teamwork ⇐ or ⇒ efficiency? Creativity ⇐ or ⇒ competitiveness?

5.4|Cultures Can be Leveraged to Meet Challenges in the External Environment We mentioned earlier in this chapter that one important way organizations have of responding to the external environment is to adapt to it by changing the organization itself. One of the most important tools managers have for implementing internal changes lies in their management of their organization’s culture. For example, a strong focus on customer service will be difficult to establish in a culture that has always focused on its own internal processes and goals. Simple directives alone are often ineffective; the underlying values of the organization also have to be shifted in the desired direction. Most companies today know that making moves necessary to remain competitive is so essential that they require deep-rooted cultural changes. When that kind of change occurs, organization members may begin to internalize the new values and display the appropriate behaviors. Effective managers can take several approaches to managing culture: • Craft an inspirational vision of “what can be” for the organizational culture. • “Walk the talk” and show members of the culture that you are serious about and committed to long-term change. • Celebrate and reward members who behave in ways that exemplify the desired culture.

First, effective managers should espouse ideals and visions for the company that will inspire organization members. That vision should be articulated over and over until it becomes a tangible presence throughout the organization. For example,

64 PART 1

bat2952X_ch03_040-065.indd 64

Coca-Cola’s vision statement provides a clear idea of what the company stands for: Our vision serves as the framework for our roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. • People: Be a great place to work where people are inspired to be the best they can be. • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs. • Partners: Nurture a winning network of customers and suppliers; together we create mutual, enduring value. • Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities. • Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities. • Productivity: Be a highly effective, lean, and fast-moving organization.76

Second, executives need to “walk the talk” of the new organizational direction by communicating regularly, being visible and active throughout the company, and setting examples. The CEO not only should talk about the vision but also should embody it day in and day out. This makes the CEO’s pronouncements credible, creates a personal example others can emulate, and builds trust that the organization’s progress toward the vision will continue over the long run. Important here are the moments of truth requiring hard choices. Imagine top management trumpeting a culture that emphasizes quality and then discovering that a part used in a batch of assembled products is defective. Whether to replace the part at great expense in the interest of quality or to ship the defective part to save time and money is a decision that will reinforce or destroy a quality-oriented culture. To reinforce the organization’s culture, the CEO and other executives should routinely celebrate and reward those who exemplify the new values. Another key to managing culture involves hiring, socializing newcomers, and promoting employees on the basis of the new corporate values. In this way, the new culture will begin to permeate the organization. While this may seem a time-consuming approach to building a new culture, effective managers recognize that replacing a long-term culture of traditional values with one that embodies the competitive values needed in the future can take years. But the rewards of that effort will be an organization much more effective and responsive to its environmental challenges and opportunities. ■

Introduction

16/07/12 8:47 PM

Confirming pages

effective management starts now! M Management was revised from the ground up to be uniquely student-focused.

• Chapter Videos: Clips for Part 1 feature FedEx, AFLAC, and Pike Place Fish Market.

Build your skills. Practice and apply your knowledge by going online (link below). Here you will find PPT ®presentations, review cards, and practice quizzes to review and apply chapter concepts.

• Interactive Applications with activities and chapterrelated assignments help you apply what you’ve just covered.

Connect ® Management is also available for M Management. Additional resources include:

• Chapter Quizzes: Questions testing your overall comprehension of chapter topics.

www.mhhe.com/BatemanM3e

• Young Managers Speak Out Videos: Full-length videos include a program manager, an associate director of convention services, and a sales manager.

bat2952X_ch03_040-065.indd 65

16/07/12 8:47 PM

Confirming pages

66 PART 2

bat2952X_ch04_066-089.indd 66

Planning

17/07/12 8:07 PM

Confirming pages

four

part two

chapter

ethics and corporate responsibility almart, the world’s largest

Just as ambitious is Walmart’s plan

retailer, has gone green.

to develop a sustainability index for

For the past five years

many of its products. In 2009 Walmart

the company has been developing and

asked its 100,000 global suppliers to

implementing a sustainability strategy

complete a survey about the sus-

that includes using renewable energy,

tainability of their products. These

reducing its waste, and selling products

and other data will be used to label

that sustain people and the environ-

Walmart’s products with an index

ment. The company is making significant

number that informs customers how

progress: stores and distribution centers

much environmental and social impact

have been made more efficient with LED

occurred during production. Given the

lighting systems and hydrogen fuel cell–

broad scope of the initiative, the com-

powered forklifts; and millions of tons of

pany is combining efforts with over 70

greenhouse gas emissions have been

organizations, including government

cut by helping suppliers in China and

and nongovernmental organizations,

elsewhere be more energy-efficient. By

universities, retailers, and food service

2015 Walmart plans to reduce sodium

firms. The sustainability index initiative

by 25 percent and added sugars by

is taking longer than expected to roll

10 percent, and remove trans fats from

out, but Walmart hopes to begin pilot

thousands of products sold in its stores.1

testing it in 2012.2 ■

CHAPTER 4

bat2952X_ch04_066-089.indd 67

LEARNING OBJECTIVES After studying Chapter 4, you should be able to LO1 Describe how different ethical perspectives guide managerial decision making. LO2 Identify the ethics-related issues and laws facing managers. LO3 Explain how managers influence their ethics environment. LO4 Outline the process for making ethical decisions. LO5 Summarize the important issues surrounding corporate social responsibility. LO6 Discuss the growing importance of managing the natural environment.

Ethics and Corporate Responsibility

17/07/12 8:07 PM

Confirming pages

This chapter addresses the values and manner of doing business adopted by managers as they carry out their organizational and business strategies. In particular, we will explore ways of applying ethics, the moral principles and standards that guide the behavior of an individual or group. We do so based on the premise that employees, their organizations, and their communities thrive over the long term when managers apply ethical standards that direct them to act with integrity. In addition, we consider the idea that organizations have a responsibility to meet social obligations beyond earning profits within legal and ethical constraints. Professor Edward Freeman, an early champion of stakeholder theory3 (discussed later in the chapter), and business and academic thought leaders from the Business Roundtable Institute for Corporate Ethics at the University of Virginia believe that managers benefit their organizations not only by growing profits, but also by behaving ethically when dealing with individuals and groups (known as stakeholders) that interact with their organizations.4 As you study this chapter, consider what kind of manager you want to be. What reputation do you hope to have? How would you like others to describe your behavior as a manager?

LISTEN & LEARN ONLINE

Young Managers

Speak Out!

“

Having integrity on the job is doing everything right. Whether it’s telling someone to do something or having every record you keep in paperwork. Everything needs to be correct, and if it’s not and somebody catches it—there goes any promotion you can get.

”

— Joe Kubinski, Operations Manager

It’s a Big Issue It seems ethics-related scandals are becoming a part of everyday life. While business leaders and managers commit many of these unethical acts, bad behavior can occur anywhere at anytime. Recent examples of business-related scandals include the conviction of Raj Rajaratnam, founder of the hedge fund Galleon Group, for securities fraud and conspiracy.5 He is currently serving an 11-year jail term. Also arrested and convicted for his role in hedge fund insider trading is Robert Moffat, a former senior vice president of IBM.6 Reports suggest that he shared confidential information about IBM, Lenovo, and Advanced Micro Devices Inc. with Danielle Chiesi, an analyst, who in turn shared it with Rajaratnam and others.7 In an unrelated scandal, Bernie Madoff was convicted of running a $50 billion Ponzi scheme in which he deceived his investors into thinking that they were earning legitimate returns on their investments; in reality, Madoff was taking investor’s money to pay “returns” to other investors. After pleading guilty to 11 felony charges, Madoff is currently serving a 150-year prison term.8 What other news disturbs you about managers’ behavior? Tainted products in the food supply . . . damage to the environment . . . hacking private cell phone messages . . . Internet scams . . . employees pressured to meet lofty sales or production targets by any means? The list goes on, and the public becomes cynical. In a survey by public relations firm Edelman, the percentage of Americans who trust business dropped from 59 percent in 2008 to 46 percent in 2011. They’re even suspicious of their own company’s management; only 31 percent said they trust their own CEO.9 Try to imagine the challenge of leading employees who don’t trust you. Unethical behavior can happen anywhere, not just in business. It occurs when police officers “take care of parking tickets” so friends and family members do not have to pay fines.10 While this may seem relatively minor at first glance, many citizens feel this is an unfair practice and an abuse of power.

68 PART 2

bat2952X_ch04_066-089.indd 68

Planning

17/07/12 8:07 PM

Confirming pages

ethics the moral Recently prosecutors have brought criminal charges related to “ticket fixing” against 13 members of the Patrolmen’s Benevolent Association, a powerful police union in New York City.11

scheme could end up costing the Railroad Retirement Board pension fund over $1 billion.14

principles and standards that guide the behavior of an individual or group

In matters of style, swim with the current. In matters of principle, stand like a rock. — Thomas Jefferson In another union-related case, prosecutors are alleging hundreds of workers of the Long Island Rail Road union have filed fraudulent claims stating that they suffer from disabling injuries.12 The prosecutors allege that some of the workers have received “tens of thousands of dollars in annual pensions” while engaging in nonwork activities (playing golf, shoveling snow, bike riding) that suggest the “disabilities were either fabricated or exaggerated.”13 So far, 11 individuals have been charged in the case, including a former union president. The fraudulent

Bernie Madoff is arrested and convicted for engaging in a $50 billion Ponzi scheme.

Sports have seen their share of unethical behavior. The aftershocks following the child sexual abuse trial of Jerry Sandusky, the former defensive coordinator of the Penn State University football team, have rocked the university and its community. For years, eyewitness information was known by some people at the university but not properly conveyed to the police. After the allegations were finally made public, Sandusky was found guilty of 45 felony counts of sexual abuse against 10 boys over a 15-year period.15 He is currently awaiting sentencing. Tim Curley, the athletic director, and Gary Schultz, the now-retired vice president of finance and business, were charged with perjury and for failing to report what they knew about the alleged crimes.16 Acting to “restore trust in the university,” the school’s board of trustees dismissed the popular, longtime head coach Joe Paterno and the university’s president, Graham Spanier.17 The former

Found guilty of 45 counts of sexual abuse against minors, Jerry Sandusky (left), former defensive coordinator of Penn State University’s football team, poses with former Head Coach Joe Paterno.

CHAPTER 4

bat2952X_ch04_066-089.indd 69

Ethics and Corporate Responsibility

17/07/12 8:07 PM

Confirming pages

head coach (who died in early 2012) and ex-university president were not charged in the case. The fallout from this tragic set of events will undoubtedly be felt for many years at Penn State University and throughout the university’s community. The list of bad behavior goes on, whether it is allegations about the role that 38 principals and 178 teachers played in tampering with elementary and middle school students’ scores on standardized tests in Atlanta18 or slugger Manny Ramirez deciding to retire from baseball after receiving a 100-game suspension for testing positive for a performance-enhancing drug.19 Still, simply talking about recent examples of lax ethics does not get at the heart of the problem. Simply saying “I would never do anything like that” or “I would have reported it if it were me” is too easy. The fact is that temptations and levels of silence exist in all organizations. In a survey called the Spherion Workplace Snapshot, more than one-third of U.S. adults said they had observed unethical conduct at work. About one out of five reported seeing abuse or intimidation of employees; lying to employees, customers, vendors, or the public; or situations in which employees placed their own interests ahead of their company’s interests.20 The motivations are not always as obvious as greed. Another survey, conducted by the American Management Association and the Human Resource Institute, found that the top justification given for unethical behavior was “pressure to meet unrealistic goals and deadlines.”21 Many of the decisions you will face

as a manager will pose ethical dilemmas, and the right thing to do is not always clear.

It’s a Personal Issue “Answer true or false: ‘I am an ethical manager.’ If you answered ‘true,’ here’s an uncomfortable fact: You’re probably not.”22 These sentences are the first in a Harvard Business Review article called “How (Un)Ethical Are You?” The point is that most of us think we are good decision makers, ethical, and unbiased. But the fact is, most people have unconscious biases that favor themselves and their own group. For example, managers often hire people who are like them, think they are immune to conflicts of interest, take more credit than they deserve, and blame others when they deserve some blame themselves. Knowing that you have biases may help you try to overcome them, but usually that’s not enough. Consider the basic ethical issue of telling a lie. Many people lie—some more than others, and in part depending on the situation, usually presuming that they will benefit from the lie. At a basic level, we all can make ethical arguments against lying and in favor of honesty. Yet it is useful to think thoroughly about the real consequences of lying.23 Exhibit 4.1 summarizes the possible outcomes of telling the truth or lying in different situations. People often lie or commit other ethical transgressions somewhat mindlessly, without realizing the full array of negative personal consequences.

E X H I B I T 4 . 1 Lying vs. Telling the Truth Reasons Why People Lie

Results of Lying

Results of Telling the Truth

Conflicting expectations

• • • • •

Easier to lie than to address the underlying conflict. Offers quick relief of the issue. Leaves the underlying problem unresolved. May have no meaningful consequences, good or bad. Liar must rationalize the action in order to preserve positive self-concept.

• • • •

Negotiating

• • • •

Short-term gain. Economically positive. Harms long-term relationship. Must rationalize to oneself.

• Supports high-quality long-term relationship. • Develops reputation of integrity. • Models behavior to others.

Keeping a confidence (that may require at least a lie of omission)

• Protects whatever good reason there is for the confidence. • Maintains a long-term relationship with the party for whom confidence is kept. • May project deceitfulness to the deceived party.

• Violates a trust to the confiding party. • Makes one appear deceitful to all parties in the long run. • Creates the impression of honesty beyond utility.

Reporting your own performance within an organization

• Might advance oneself or one’s cause. • Develops dishonest reputation over time. • Must continue the sequence of lies to appear consistent.

• Creates reputation of integrity. • May not always be positive.

Emotionally more difficult than lying. May correct underlying problem. May provoke further conflict. Sometimes difficult to have an impact on an impermeable structure. • Develops one’s reputation as an “honest” person.

Source: S. L. Grover, “The Truth, the Whole Truth, and Nothing but the Truth: The Causes and Management of Workplace Lying,” Academy of Management Executive 19 (May 2005), pp. 148–57, table 1, p. 155.

70 PART 2

bat2952X_ch04_066-089.indd 70

Planning

17/07/12 8:07 PM

Confirming pages

Ethics issues are not easy, and they are not faced only by top corporate executives and CEOs. You will face them; no doubt, you already have. You’ve got your own examples, but consider this one: more and more people at work use computers with Internet access. If the employer pays for the computer and the time you spend sitting in front of it, is it ethical for you to use the computer to do tasks unrelated to your work? Would you bend the rules for certain activities or certain amounts of time? Maybe you think it’s OK to do a little online shopping during your lunch hour or to check scores during the World Series or March Madness. But what if you stream video of the games for your own and your coworkers’ enjoyment or take a two-hour lunch to locate the best deal on a flat-panel TV? Besides lost productivity, employers are most concerned about computer users introducing viruses, leaking confidential information, and creating a hostile work environment by downloading inappropriate web content. Sometimes employees write blogs or post comments online about their company and its products. Obviously companies do not want their employees to say bad things about them as in the case of 13 flight attendants fired from Virgin Atlantic after they posted rude comments about passengers and mocked the airline’s plane safety.24 Also, some companies are concerned about employees who are overly enthusiastic. When employees plug their companies and products on comments pages, this practice is considered spamming at best and deceptive if the employees don’t disclose their relationship with their company. Another practice considered deceptive is when companies create fictional blogs as a marketing tactic without disclosing their sponsorship. And in a practice

st ud y tip 4 Remembering vocabulary during exams Did you ever forget the definition of a vocabulary term during an exam? You are not alone. The next time you study vocabulary, come up with an applied example for each term. For example, Toms Shoes follows the stakeholder theory of corporate social responsibility to meet social goals (help poor children) and economic goals (make a profit). You can apply the vocabulary terms to any organization: a current/past employer, a student club, a sports team, or a local restaurant. Creating applied examples will help you learn the vocabulary better; which may help you earn an A on the next exam.

known as Astroturfing—because the “grassroots” interest it builds is fake—businesses pay bloggers to write positive comments about them. A Florida company known as PayPerPost will match advertisers with bloggers but now requires bloggers to disclose the relationship. Companies such as Coca-Cola, UPS, and IBM have established guidelines directing employees to identify themselves accurately in online communications so that they can participate in online conversations about their companies without being accused of deception.25

business ethics the moral principles and standards that guide behavior in the world of business

moral philosophy principles, rules, and values people use in deciding what is right or wrong

Are these examples too small to worry about? What do you do that has potential ethical ramifications? This chapter will help you think through decisions with ethical ramifications.

LO1 Describe how different ethical perspectives guide managerial decision making

FIVE PERSPECTIVES SHAPE YOUR ETHICS The aim of ethics is to identify both the rules that should govern people’s behavior and the “goods” that are worth seeking. Ethical decisions are guided by the underlying values of the individual. Values are principles of conduct such as caring, being honest, keeping promises, pursuing excellence, showing loyalty, being fair, acting with integrity, respecting others, and being a responsible citizen.26 Most people would agree that all of these values are admirable guidelines for behavior. However, ethics becomes a more complicated issue when a situation dictates that one value overrules others. An ethical issue is a situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as morally right or wrong.27 Ethical issues arise in every facet of life; we concern ourselves here with business ethics in particular. Business ethics comprises the moral principles and standards that guide behavior in the world of business.28 Moral philosophy refers to the principles, rules, and values people use in deciding what is right or wrong. This seems to be a simple definition but often becomes terribly complex and difficult when facing real choices. How do you decide what is right and wrong? Do you know what criteria you apply and how you apply them? CHAPTER 4

bat2952X_ch04_066-089.indd 71

ethical issue a situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as morally right or wrong

Ethics and Corporate Responsibility

17/07/12 8:07 PM

Confirming pages

Ethics scholars point to various major ethical systems as guides.29 We will consider five of these: 1. Universalism. 2. Egoism. 3. Utilitarianism. 4. Relativism. 5. Virtue ethics.

These major ethical systems underlie personal moral choices and ethical decisions in business.

1.1|Universalism

According to universalism, all people should uphold certain values, such as honesty and other values that society needs to function. Universal values are principles so fundamental to human existence that they are important in all societies— for example, rules against murder, deceit, torture, and oppression. Some efforts have been made to establish global, universal ethical principles for business. The Caux Roundtable, a group of international executives based in Caux, Switzerland, worked with business leaders from Japan, Europe, and the United States to create the Caux Principles for Business.30 Two basic ethical ideals underpin the Caux Principles: kyosei and human dignity. Kyosei means living and working together for the common good, allowing cooperation and mutual prosperity to coexist with healthy and fair competition. Human dignity concerns the value of each person as an end, not a means to the fulfillment of others’ purposes. Research conducted by the Institute for Global Ethics identified five core ethical values that are found in all human cultures, including truthfulness, responsibility, fairness, respectfulness, and compassion.31 Universal principles can be powerful and useful, but what people say, hope, or think they would do is often different from what they really do, faced with conflicting demands in real situations. Before we describe other ethical systems, consider the following example, and think about how you or others would resolve it. Suppose that Sam Colt, a sales representative, is preparing a sales presentation on behalf of his firm, Midwest Hardware, which manufactures nuts and bolts. Colt hopes to obtain a large sale from a construction firm that is building a bridge across the Missouri River near St. Louis. The bolts manufactured by Midwest 72 PART 2

bat2952X_ch04_066-089.indd 72

Hardware have a 3 percent defect rate, which, although acceptable in the industry, makes them unsuitable for use in certain types of projects, such as those that might be subject to sudden, severe stress. The new bridge will be located near the New Madrid Fault line, the source of a major earthquake in 1811. The epicenter of that earthquake, which caused extensive damage and altered the flow of the Missouri, is about 190 miles from the new bridge site. Bridge construction in the area is not regulated by earthquake codes. If Colt wins the sale, he will earn a commission of $25,000 on top of his regular salary. But if he tells the contractors about the defect rate, Midwest may lose the sale to a competitor whose bolts are slightly more reliable. Thus Colt’s ethical issue is whether to point out to the bridge contractor that in the event of an earthquake, some Midwest bolts could fail.33

1.2|Egoism DID YOU KNOW? According to the findings of a recent survey done by the Ethics Resource Center, unethical behavior at the workplace has decreased slightly during the recent recession. Overall misconduct has decreased, pressure to take shortcuts is down, and ethical cultures are becoming stronger. However, American workers still observe the following bad behaviors: company resource abuse (23 percent), abusive behavior (22 percent), lying to employees (19 percent), e-mail or Internet abuse (18 percent), and conflicts of interest (18 percent).32 The studies’ authors speculate that this might be a temporary “ethics bubble” brought on by hard economic times and the tight job market. Managers need to keep reinforcing the importance of ethical behavior to prepare for when good times return.

According to egoism, individual self-interest is the actual motive of all conscious action. “Doing the right thing,” the focus of moral philosophy, is defined by egoism as “do the act that promotes the greatest good for oneself.” If everyone follows this system, according to its proponents, the well-being of society as a whole should increase. This notion is similar to Adam Smith’s concept of the invisible hand in business. Smith argued that if every organization follows its own economic self-interest, the total wealth of society will be maximized. An example of egoism is how individual self-interest may have contributed to the subprime mortgage crisis. According to Adam Smith, individual financial and mortgage professionals should have acted in their own best interest, and ultimately the invisible hand of the mortgage and financial markets would be the best control mechanism to ensure the greater good. If that were the case, why did the housing market reach an unsustainable level that could not be maintained? Did opportunism and the deceptive use of information play a role? Stated differently, did unethical managerial behavior contribute to the subprime mortgage crisis? Some financial and mortgage experts encouraged prospective home buyers to purchase homes that they could not afford by applying for adjustable-rate mortgages (ARMs). ARMs allow home buyers to pay a low introductory monthly payment for a few years; after this period expires, the monthly payment increases significantly.34 The experts convinced many home buyers to assume this risk by pointing out that as long as the value of their homes continued to rise, their

Planning

17/07/12 8:07 PM

Confirming pages

funds rate from 6.5 percent in May 2000 to 1.75 percent in December 2001. In 2004 the Fed lowered the rate to 1.0 percent.37 The period from 2001 to 2004 became known as the “credit boom” when mortgages, bank loans, and credit cards were easily obtained at low interest rates. 38 The goal of these rate cuts was to spur the economy and job creation while also encouraging people to buy homes. An outcome of this low interest rate policy was that home ownership was made available to those whose income level or credit history placed them into a higherrisk category of borrower.

wealth would increase. Home owners were also told they could manage their risk by selling their homes anytime they wanted for a profit. How did these financial and mortgage professionals benefit? They received commissions and other fees from the loans they sold. Higher compensation became a driving force for these managers to continue pushing high-risk loans. Others in the financial industry also profited, including banks, mortgage firms, and investment companies.35 In 2007–2008 the housing bubble burst as the economy went into a recession and home owners began to struggle to pay their “adjusted” mortgage payments. The large number of foreclosures and defaults contributed to a historic shake-up of the financial industry, including the collapse of Lehman Brothers, huge losses at Morgan Stanley, Citigroup, and Merrill Lynch, and unprecedented governmental intervention to help firms like JP Morgan to purchase Bear Stearns.36 The fallout of the subprime mortgage and ensuing financial crises will be felt for many years to come. It is useful to ask yourself the following questions: To what degree did egoism motivate individuals in the mortgage and financial markets to make and sell loans that became toxic assets? Is there an alternative explanation for what caused the subprime mortgage crisis?

universalism the ethical system stating that all people should uphold certain values that society needs to function caux principles for business ethical principles established by international executives based in Caux, Switzerland, in collaboration with business leaders from Japan, Europe, and the United States

egoism an ethical principle holding that individual self-interest is the actual motive of all conscious action

utilitarianism an While some subprime loans were ethical system stating that properly documented and exethe greatest good for the cuted, many of these “mortgage greatest number should be loans were created without any or the overriding concern of 39 little supervision.” This allowed decision makers opportunistic financial and mortgage experts to convince borrowers to assume subprime mortgages that had “teaser” introductory interest rates for a couple of years before automatically adjusting upward. Adding to the rapid growth of the subprime market were the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), two government-sponsored entities that bought many of these high-risk loans from banks and then packaged and sold them (as a way to diversity the risk of the loans) to U.S. and foreign investors. These two companies ran afoul of U.S. regulators. In 2003 Freddie Mac admitted that it “underreported earnings

1.3|Utilitarianism

Unlike egoism, utilitarianism directly seeks the greatest good for the greatest number of people. Refer back to the subprime mortgage crisis that was just discussed. It may be possible that certain utilitarian policies and practices that were implemented after 9/11/2001 and the dot-com meltdown inadvertently contributed to the subprime mortgage crisis. In an effort to do the greatest good for the greatest number of people, the Federal Reserve slashed the federal

The Securities and Exchange Commission has charged six former executives (including the former CEOs pictured above) of Fannie Mae and Freddie Mac for allegedly committing securities fraud.

CHAPTER 4

bat2952X_ch04_066-089.indd 73

Ethics and Corporate Responsibility

17/07/12 8:07 PM

Confirming pages

relativism a philosophy that bases ethical behavior on the opinions and behaviors of relevant other people

virtue ethics a perspective that what is moral comes from what a mature person with “good” moral character would deem right

by over $5 billion,” and in 2004 Fannie Mae was under investigation for allegedly committing several widespread accounting errors.40 Several former executives from these firms are facing one or more civil charges ranging from manipulating earnings to fraud.41

In 2006 the housing market began to weaken as housing prices started to decline and inflation started to increase. Contributclassification of people ing to the decline was the Federal based on their level of Reserve’s decision to raise interest moral judgment rates in order to decrease inflation. This move led banks to tighten credit and require borrowers to make larger down payments on homes, while many subprime mortgage owners saw their adjustable-rate mortgages increase to unexpectedly high levels. The net effect was that many home owners could not make their mortgage payments and began to default on their loans.42 kohlberg’s model of cognitive moral development

Students may want to ask themselves whether decisions made at the Federal Reserve, Fannie Mae and Freddie Mac, and other institutions achieved utilitarian outcomes: Did these decisions result in the greatest good for the greatest number of home owners? Were the decisions completely rational, or did subjectivity lead to a suboptimal set of consequences? Was it egoism on the part of individuals or utilitarianism on the part of institutions that ultimately caused the subprime mortgage meltdown?

1.4|Relativism

1.5|Virtue Ethics The moral philosophies just described apply different types of rules and reasoning. Virtue ethics is a perspective that goes beyond the conventional rules of society by suggesting that what is moral must also come from what a mature person with good “moral character” would deem right. Society’s rules provide a moral minimum; moral individuals can transcend rules by applying their personal virtues such as faith, honesty, and integrity. Yet individuals differ in their moral development. As illustrated in Exhibit 4.2, Kohlberg’s model of cognitive moral development classifies people into categories based on their level of moral judgment.45 People in the

It may seem that an individual makes ethical choices by applying personal perspectives. But this view is not necessarily true. Relativism defines ethical behavior based on the E X H I B I T 4 . 2 Kohlberg’s Stages of Moral Development opinions and behaviors of relevant other people. Relativism acknowledges the existence of different ethical viewpoints. For example, norms, or standards of expected and acceptable behavior, vary from one culture to another. A recent study found that the perceived effectiveness of whistleblowing—telling others, inside and outside the organization, about wrongdoing— differs across cultures.43 While U.S. managers believe that whistleblower hotlines are effective at reducing unethical behaviors, managers in the Far East and Central Europe do not believe they are effective. For example, Chinese employees are less likely to report that their superiors have engaged in fraud or corruption. The Chinese government considers this a major problem. It is believed that guanxi, a Chinese term for personal relationships, prevents many Chinese employees from acting in an independent manner when it comes to blowing the whistle on unethical managers.44 Relativism defines ethical behavior according to how others behave. 74 PART 2

bat2952X_ch04_066-089.indd 74

Preconventional stage

• Make decisions based on immediate selfinterest. • Example: You take a flash drive home from work because you need one and do not want to pay for it.

Conventional stage

• Make decisions that conform to expectations of groups and institutions like family, peers, and society. • Example: You think about taking the flash drive home, but decide against it because it would not look right.

Principled stage

• Make decisions based on self-chosen ethical principles. • Example: You do not consider taking the flash drive from work because you believe that would be wrong.

Source: Adapted from L. Kohlberg, “Moral Stages and Moralization: The CognitiveDevelopment Approach,” in T. Lickona (ed.], Moral Development and Behavior Theory, Research, and Social Issues (New York: Holt, Rinehart & Winston, 1976], pp. 31–53.

Planning

17/07/12 8:08 PM

Confirming pages

preconventional stage make decisions based on concrete rewards and punishments and immediate self-interest. People in the conventional stage conform to the expectations of ethical behavior held by groups or institutions such as society, family, or peers. People in the principled stage see beyond authority, laws, and norms and follow their self-chosen ethical principles.46 Some people forever reside in the preconventional stage, some move into the conventional stage, and some develop even further into the principled stage. Over time, and through education and experience, people may change their values and ethical behavior. Returning to the bolts-in-the-bridge example, egoism would result in keeping quiet about the bolts’ defect rate. Utilitarianism would dictate a more thorough cost–benefit analysis and possibly the conclusion that the probability of a bridge collapse is so low compared to the utility of jobs, economic growth, and company growth that the defect rate is not worth mentioning. The relativist perspective might prompt the salesperson to look at company policy and general industry practice, and to seek opinions from colleagues and perhaps trade journals and ethics codes. Whatever is then perceived to be a consensus or normal practice would dictate action. Finally, virtue ethics, applied by people in the principled stage of moral development, would likely lead to full disclosure about the product and risks, and perhaps suggestions for alternatives that would reduce the risk.47

didn’t keep promises, 24 percent said their supervisor had invaded their privacy, and 23 percent said their supervisor covered up his or her own mistakes by blaming someone else.50

2.1|Ethical Dilemmas DID YOU KNOW? In a recent survey ranking 178 nations from most to least honest, the United States came in 22nd (tied with Belgium). The U.S. rating of 7.1 on a 10-point scale placed it among only 22 countries that scored at least a 7.0. The top ratings went to Denmark, Singapore, and New Zealand, each with 9.3. The bottomranked nations, including Somalia, Myanmar, and Afghanistan, tend to be among the poorest. Sadly, the combination of corruption and poverty in these nations can literally amount to a death sentence for many of their citizens.48

LO2 Identify the ethics-related issues and laws facing managers

BUSINESS ETHICS MATTER Insider trading, illegal campaign contributions, bribery and kickbacks, famous court cases, and other scandals have created a perception that business leaders use illegal means to gain competitive advantage, increase profits, or improve their personal positions. Neither young managers nor consumers believe top executives are doing a good job of establishing high ethical standards.49 Some even joke that business ethics has become a contradiction in terms. Too often, these opinions are borne out by actual workplace experiences. In a recent survey of 700 employees holding a variety of jobs, 39 percent said their supervisor sometimes

Most business leaders believe they uphold ethical standards in business practices.51 But many managers and their organizations must deal frequently with ethical dilemmas, and the issues are becoming increasingly complex. Here are just a few of the dilemmas challenging managers and employees today:52 • Brands—In-your-face marketing campaigns have sparked antibrand attitudes among people who see tactics as manipulative and deceptive. • CEO pay—Nearly three-fourths of Americans say executives’ pay packages are excessive. • Commercialism in schools—Parent groups in hundreds of communities have battled advertising in the public schools. • Religion at work—Many people seek spiritual renewal in the workplace, in part reflecting a broader religious awakening in America, while others argue that this trend violates religious freedom and the separation of church and boardroom. • Sweatshops—At many colleges, students have formed antisweatshop groups, which picket clothing manufacturers, toymakers, and retailers.

• Wages—More than half of workers feel they are underpaid, especially because wages since 1992 have not grown as fast as productivity levels. On Valentine’s Day in 2007, a bad winter storm led to the cancellation or delay of several airline flights throughout the country. While most of the airlines did the best they could to get through this difficult situation, JetBlue made the headlines when 21 of its aircraft were delayed on the runway at Kennedy Airport in New York for up to 11 hours. Passengers were forced to stay in the stranded planes, and some bloggers went so far as to call it a “hostage situation.” As snack supplies withered and rest room facilities turned unpleasant, many passengers felt trapped and angry with JetBlue. After passengers were eventually allowed to deplane, many found themselves stuck in the airport for long hours waiting for the weather to clear and flights to resume.53 In the wake of this fiasco, JetBlue compensated passengers and then introduced a Passengers’ Bill of Rights to guard against this type of poor treatment of passengers from happening again.54 Inspired by this initiative, the governments of the United States, European Union, Canada, and Australia are taking this issue seriously by considering or adopting laws to protect airline passenger rights.55 CHAPTER 4

bat2952X_ch04_066-089.indd 75

Ethics and Corporate Responsibility

17/07/12 8:08 PM

Confirming pages

JetBlue aircraft at JFK airport in New York a few days after Valentine’s Day in 2007 where bad weather and delays led the airline to keep passengers on board some planes for up to 11 hours.

2.2|Ethics and the Law Responding to a series of corporate scandals—particularly the high-profile cases of Enron and WorldCom—Congress passed the Sarbanes-Oxley Act in 2002 to improve and maintain investor confidence. The law requires companies to do the following: • Have more independent board directors, not just company insiders. • Adhere strictly to accounting rules. • Have senior managers personally sign off on financial results.

Violations could result in heavy fines and criminal prosecution. One of the biggest impacts of the law is the requirement for companies and their auditors to provide reports to financial statement users about the effectiveness of internal controls over the financial reporting process. Companies that make the effort to meet or exceed these requirements can reduce their risks by lowering the likelihood of misdeeds and the consequences if an employee does break the law. Responding to a directive in the Sarbanes-Oxley Act, the U.S. Sentencing Commission modified the sentencing guidelines to say that organizations convicted of federal criminal laws may receive more lenient sentences if they are shown to have established an effective compliance and ethics program. To meet the requirements of these guidelines, organizations should establish written standards of ethical conduct and controls for enforcing them, assign responsibility to top managers to ensure that the program is working as intended, exclude anyone who violates the standards from holding management positions, provide training in ethics to all employees, monitor compliance, give employees incentives for complying and consequences for violating the standards, and respond with consequences and additional preventive measures if criminal conduct comes to light.56 Some executives say Sarbanes-Oxley distracts from their real work and makes them more risk averse. Some complain about the time and money needed to comply with the internal control reporting—reportedly spending millions of dollars for technology upgrades. Others point out that unethical behavior has negative consequences, especially when it includes illegal actions that later come to light. For example, companies that set up a 76 PART 2

bat2952X_ch04_066-089.indd 76

hot-line with which employees can report illegal or unethical conduct can find out when employees are engaged in fraud. Not only can fraud hurt customers, but it can also hurt the company itself when employees find ways to defraud or steal from the company. The Association of Certified Fraud Examiners found that U.S. companies lose about 5–6 percent of their annual sales to fraud, but the losses are less than half that at organizations with a mechanism for reporting misconduct.57 Regardless of managers’ attitudes toward Sarbanes-Oxley, it creates legal requirements intended to improve ethical behavior.

2.3|The Ethical Climate Influences Employees Ethics are not shaped only by laws and by individual development and virtue. They also may be influenced by the company’s work environment. The ethical climate of an organization refers to the processes by which decisions are evaluated and made on the basis of right and wrong.58 For example, General Electric’s top executives have demonstrated a commitment to promoting high levels of integrity without sacrificing the company’s well-known commitment to business results. The measures taken by GE to maintain a positive ethical climate include establishing global standards for behavior to prevent ethical problems such as conflicts of interest and money laundering. Managers at all levels are rewarded for their performance in meeting both integrity and business standards, and when violations occur, even managers who were otherwise successful are disciplined, sending a powerful message that ethical behavior is truly valued at GE.59 When people make decisions that are judged by ethical criteria, certain questions always seem to get asked: Why did she do it? Good motives or bad ones? So often, responsibility for unethical acts is placed squarely on the individual who commits them. But the work environment has a profound influence, as well. When employees feel pressured to meet unreasonable goals or deadlines, they may act unethically; but managers are in part responsible for setting the right standards, selecting employees with the ability to meet standards, and providing employees with the resources required for success. Managers also need to keep the lines of communication open so that employees will discuss problems in meeting goals, rather than resorting to unethical and possibly illegal behavior. Unethical corporate behavior may be the responsibility of an unethical individual, but it often also reveals a company culture that is ethically lax.60 Maintaining a positive ethical climate is always challenging, but it is especially complex for organizations with international activities. Different cultures and countries may have different standards of behavior, and managers have to decide when relativism is appropriate, rather than adherence to firm standards. Electronics giant Siemens Corporation of Germany recently agreed to pay $1.6 billion to the U.S. and German governments for bribing officials in several countries— Bangladesh, Argentina, Nigeria, Israel, and China—to win business contracts. Given that the bribery permeated several parts of the company, the permissive ethical climate of the firm undoubtedly influenced its managers to engage in this behavior. Siemens

Planning

17/07/12 8:08 PM

Confirming pages

sarbanes-oxley act

2.4|Danger Signs In organizations, maintaining consistent ethical behavior by all employees is an ongoing challenge. What are some danger signs that an organization may be allowing or even encouraging unethical behavior? Many factors, including the following, create a climate conducive to unethical behavior:

an act that established strict accounting and reporting rules to make senior managers more accountable and to improve and maintain investor confidence

ethical climate in an organization, the processes by which decisions are evaluated and made on the basis of right and wrong

• Excessive emphasis on shortterm revenues over longer-term considerations.

has a long history of engaging in such practices. Prior to 1999, bribery was not illegal in Germany, and as a result, many firms used it as a competitive advantage to land contracts from foreign officials. After the law was changed, Siemens continued to engage in bribery but became more secretive in how it was used; Swiss bank accounts were used to make payments, and consultants were hired to handle bribery payments. After investigators from several countries—Italy, Germany, Switzerland, and the United States—discovered the bribery, Siemens agreed to pay the huge fine, and several of its executives were sent to jail.61

• Failure to establish a written code of ethics. • Desire for simple, “quick fix” solutions to ethical problems. • Unwillingness to take an ethical stand that may impose financial costs. • Consideration of ethics solely as a legal issue or a public relations tool. • Lack of clear procedures for handling ethical problems. • Responsiveness to the demands of shareholders at the expense of other constituencies.62

It takes many good deeds to build a good reputation, and only one bad one to lose it. —Benjamin Franklin

TAKE CHARGE OF YOUR CAREER // Why settle? Find a great place to work!

he weak job market for college graduates is not going to last forever. Over the next 5 to 10 years, the retirement of millions of baby boomers will create a wide variety of job opportunities. It is a good time to start looking for a great place to work. There are many lists available to help you find good companies, but one of the most famous lists is the “Fortune’s 100 Best Companies to Work for.” It is coauthored by Robert Levering and Milton Moskowitz of the Great Place to Work Institute. Which companies made the list in 2011? In first place was SAS, an information technology

SAS employees staying fit at the firm’s Recreation and Fitness Center in Cary, NC.

and software company, that spoils its employees with lavish benefits. Next was the Boston Consulting Group, which avoided layoffs during the recent recession while providing its employees with extensive training and

development opportunities. In third place was Wegman’s Food Market, known for taking good care of its employees. Two high-tech firms, Google and NetApp, rounded off the top five best companies to work for thanks to their excellent pay, perquisites, and organizational cultures. Want to learn more about great places to work? Try “Fortune’s Best Small and Medium Companies to work for,” “Fortune’s Best Companies to work for: Minorities,” and “Fortune’s Best Companies to work for: Women.” SOURCE: http://www.greatplacetowork.com http:// www.moneycnn.com/magazines/fortune/2011 L. Petrecca, “Tech Companies Top List of ’Great Workplaces,’” USA Today, October 31, 2011, p. 7B.

CHAPTER 4

bat2952X_ch04_066-089.indd 77

Ethics and Corporate Responsibility

17/07/12 8:08 PM

Confirming pages

ethical leader one who is both a moral person and a moral manager influencing others to behave ethically

To understand your organization’s ethics climate, think about issues from the employees’ perspective. What do people think is required to succeed? Do they think that ethical people “finish last” and that the “bad guys win”? Or vice versa, that the company rewards ethical behavior and won’t tolerate unethical behavior?63 Lynn Brewer, who brought to light the financial misdeeds of Enron, also heard Enron’s management advocate values such as respect and integrity, but she later determined that these messages were just “window-dressing” and that people would undermine one another as they looked out for their self-interests. She eventually concluded that “no one cared” about unethical and illegal behavior in support of the company’s stock price.64

Do you see danger signs in the judgment of AutoAdmit’s founders? The small company operates a message board website targeting college and law school students. Some students have complained that participants on the site’s law school message board have posted false and insulting messages about them that have humiliated them and may have interfered with their ability to find summer internships. Many employers use Internet searches as part of their background checks, and sites such as AutoAdmit might surface in search results. AutoAdmit founder Jarret Cohen told the Washington Post that he is reluctant to interfere with postings: “I want [the message board] to be a place where people can express themselves freely.” He and his partner, Anthony Ciolli, define the matter in terms of free speech, insisting that “one finds overall a much deeper and much more mature level of insight in a community where the ugliest depths of human opinion are confronted, rather than ignored.” Ciolli claims that only Cohen has the authority to remove offensive postings, and Cohen refuses to “selectively remove” comments. The site also does not keep information that would identify participants, using only screen names, because “people would not have as much fun” if employers could identify them. Ciolli and Cohen have so far avoided any accusation that their message boards are violating the law; AutoAdmit isn’t liable for the content of messages written by visitors to the site.65 But what do you think about the organization’s ethical climate? Should it uphold values other than freedom of expression? What recourse do people have when anonymous posters can say anything they like?

LO3 Explain how managers influence their ethics environment

MANAGERS SHAPE BEHAVIOR People often give in to what they perceive to be the pressures or preferences of powerful others. In the workplace, that means managers influence their employees for good or for ill. As we’ll see in the discussions of leadership and motivation 78 PART 2

bat2952X_ch04_066-089.indd 78

later in the text, managers formally and informally shape employees’ behavior with money, approval, good job assignments, a positive work environment, and in many other ways. That means managers are a powerful force for creating an ethical culture. To create a culture that encourages ethical behavior, managers must be more than ethical people. They also should lead others to behave ethically.66 Sharon Allen, chair of the board of the accounting and taxation firm Deloitte LLP, is convinced that being ethical can give organizations a competitive advantage. She believes that “the shared language of ethical values that enables people to conduct business with each other, where a deal can be sealed with a handshake and your word is your bond,” is essential. Ethical leadership is also important when it comes to retaining employees. According to Deloitte LLP’s 2010 Ethics & Workplace Survey, about onethird of Americans plan to look for a new job when the economy improves. Respondents blamed the loss of trust in their employer and lack of transparent communication from their organization’s leaders as the primary reasons for wanting to quit. Given that turnover can be costly and good replacements hard to find, Allen recommends that leaders work hard to rebuild an ethical climate characterized by trust and open communication.67

3.1|Ethical Leadership It’s been said that your reputation is your most precious asset. Here’s a suggestion: set a goal for yourself to be seen by others as both a “moral person” and also as a “moral manager,” someone who influences others to behave ethically. When you are both personally moral and a moral manager, you will truly be an ethical leader.68 You can have strong personal character, but if you pay more attention to other things, and ethics is “managed” by “benign neglect,” you won’t have a reputation as an ethical leader. IBM uses a guideline for business conduct that asks employees to determine whether under the full glare of examination by associates, friends, and family, they would remain comfortable with their decisions. One suggestion is to imagine how you would feel if you saw your decision and its consequences on the front page of the newspaper.69 This “light of day” or “sunshine” ethical framework can be powerful. Such fear of exposure compels people more strongly in some cultures than in others. In Asia, anxiety about losing face often makes executives resign immediately if they are caught in ethical transgressions or if their companies are embarrassed by revelations in the press. By contrast, in the United States, exposed executives might respond with indignation, intransigence, pleading the Fifth Amendment, stonewalling, an everyoneelse-does-it self-defense, or by not admitting wrongdoing and giving no sign that resignation ever crossed their minds. Partly because of legal tradition, the attitude often is never explain, never apologize, don’t admit the mistake, and do not resign, even if the entire world knows exactly what happened.70

Planning

17/07/12 8:08 PM

Confirming pages

compliance-based ethics programs company mechanisms

3.2|Ethics Codes The Sarbanes-Oxley Act, described earlier, requires that public companies periodically disclose whether they have adopted a code of ethics for senior financial officers—and if not, why not. Often the statements are just for show, but when implemented well they can change a company’s ethical climate for the better and truly encourage ethical behavior. Executives say they pay most attention to their company’s code of ethics when they feel that stakeholders (customers, investors, lenders, and suppliers) try to influence them to do so, and their reasons for paying attention to the code are that doing so will help create a strong ethical culture and promote a positive image.71 Ethics codes must be carefully written and tailored to individual companies’ philosophies. For example, Coca-Cola’s 44-page code of business conduct covers a variety of topics, from when written approval is necessary to how to prevent conflict of interest.72 Aetna Life & Casualty believes that tending to the broader needs of society is essential to fulfilling its economic role. Most ethics codes address subjects such as employee conduct, community and environment, share-holders, customers, suppliers and contractors, political activity, and technology. Often the codes are drawn up by the organizations’ legal departments and begin with research into other companies’ codes. The Ethics Resource Center in Arlington, Virginia, assists companies interested in establishing a corporate code of ethics.73 To make an ethics code effective, apply the following principles: • Involve those who have to live with the code in writing it. • Focus on real-life situations that employees can relate to. • Keep it short and simple, so it is easy to understand and remember. • Write about values and shared beliefs that are important and that people can really believe in. • Set the tone at the top, having executives talk about and live up to the statement.74

When reality differs from the typically designed by statement—as when a motto says corporate counsel to people are our most precious prevent, detect, and asset or a product is the finest in punish legal violations the world, but in fact people are treated poorly or product quality is weak—the statement becomes a joke to employees rather than a guiding light.

3.3|Ethics Programs Corporate ethics programs commonly include formal ethics codes articulating the company’s expectations regarding ethics; ethics committees that develop policies, evaluate actions, and investigate violations; ethics communication systems giving employees a means of reporting problems or getting guidance; ethics officers or ombudspersons who investigate allegations and provide education; ethics training programs; and disciplinary processes for addressing unethical behavior.76 Ethics programs can range from compliance-based to integritybased.77 Compliance-based ethics programs are designed by corporate counsel to prevent, detect, and punish legal violations. Compliance-based programs increase surveillance and controls on people and impose punishments on wrongdoers. Program elements include establishing and communicating legal standards and procedures, assigning high-level managers to oversee compliance, auditing and monitoring compliance, reporting criminal misconduct, punishing wrongdoers, and taking steps to prevent offenses in the future. Yahoo! is struggling with an ethical dilemma as it makes decisions about how to operate in China. The Chinese government arrested Wang Xiaoning for “inciting subversion” in his prodemocracy e-journal and sentenced him to 10 years in prison. According to the case filed against Yahoo! in the United States, the Chinese subsidiary of Yahoo! claimed that Wang provided the information that enabled officials to track him down. How can an Internet company that values free expression justify support for

Percentage of organizations that . . . Measure ethical conduct as part of performance appraisals

DID YOU KNOW? Although many companies have a code of ethics, far fewer have a comprehensive ethics program that includes training, channels for reporting violations, evaluation of ethical conduct, and discipline for violations.75

43%

Have a comprehensive ethics and compliance program

23%

Have no ethics and compliance program

7% 0

CHAPTER 4

bat2952X_ch04_066-089.indd 79

20 30 Percent

Ethics and Corporate Responsibility

17/07/12 8:08 PM

Confirming pages

integrity-based ethics programs company mechanisms designed to instill in people a personal responsibility for ethical behavior

a repressive government? Yahoo!’s Jim Cullinan points out that the company has to obey the laws of the countries where it operates but adds that the company has been trying to develop operating principles that will help its people make ethical decisions in countries where governments have different values.78 Integrity-based ethics programs go beyond the mere avoidance of illegality; they are concerned with the law but also with instilling in people a personal responsibility for ethical behavior. With such a program, companies and people govern themselves through a set of guiding principles that they embrace.

For example, the Americans with Disabilities Act (ADA) requires companies to change the physical work environment so it will allow people with disabilities to function on the job. Mere compliance would involve making the changes necessary to avoid legal problems. Integrity-based programs would go further by training people to understand and perhaps change attitudes toward people with disabilities and sending clear signals that people with disabilities also have valued abilities. This effort goes far beyond taking action to stay out of trouble with the law. When top management has a personal commitment to responsible ethical behavior, programs tend to be better integrated into operations, thinking, and behavior. For example, at a meeting of about 25 middle managers at a major financial services firm, every one of them told the company’s general counsel that they had never seen or heard of the company’s ethics policy document.79 The policies existed but were not a part of the everyday thinking of managers. In contrast, a health care products company bases one-third of managers’ annual pay raises on how well they carry out the company’s ethical ideals. Their ethical behavior is assessed by superiors, peers, and subordinates—making ethics a thoroughly integrated aspect of the way the company and its people do business.

Acting with integrity is important not only to managers in organizations but also to MBA students. On June 3, 2009, over 400 graduating students of the Harvard Business School’s MBA program took an oath stating that as future managers they would “act with the utmost integrity” and avoid “decisions and behavior that advance my own narrow ambitions, but harm the enterprise and the societies it serves.” Created by then-MBA student Max Anderson with encouragement from a few faculty members, the oath is meant to signal that graduating MBA students are committed to applying ethics and integrity in all of their future managerial and leadership endeavors.80

LO4 Outline the process for making ethical decisions

YOU CAN LEARN TO MAKE ETHICAL DECISIONS We’ve said it’s not easy to make ethical decisions. Such decisions are complex. For starters, you may face pressures that are difficult to resist. Also, it’s not always clear that a problem has ethical dimensions; they don’t hold up signs that say, “Hey, I’m an ethical issue, so think about me in moral terms!”81 Making ethical decisions takes three things: 1. Moral awareness—realizing the issue has ethical implications. 2. Moral judgment —knowing what actions are morally defensible. 3. Moral character—the strength and persistence to act in accordance with your ethics despite the challenges.82

Moral awareness begins with considering whether a decision has ramifications that disadvantage employees, the environment, or other stakeholders. Then the challenge is to apply moral judgment. The philosopher John Rawls created a thought experiment based on the “veil of ignorance.”83 Imagine you are making a decision about a policy that will benefit or disadvantage some groups more than others. For example, a policy might provide extra vacation time for all employees but eliminate flex time, which allows parents of young children to balance their work and family responsibilities. Or you’re a university president considering raising tuition or cutting financial support for study abroad.

Max Anderson, right, with Harvard classmates, signed the MBA Oath that states as future managers, they will “act with the utmost integrity.”

80 PART 2

bat2952X_ch04_066-089.indd 80

Now pretend that you belong to one of the affected groups, but you don’t know which one—for instance, those who can afford to study abroad or those who can’t, or a young parent or a young single person. You won’t find out until after the decision is made. How would you decide? Would you be willing to risk being in the disadvantaged group? Would your decision be different if you were in a group other than your own? Rawls maintained that only a person ignorant of his or her own identity can make a truly ethical decision. A decision maker can tactically apply the veil of ignorance to help minimize personal bias.

Planning

17/07/12 8:08 PM

Confirming pages

4.1|The Ethical DecisionMaking Process

E X H I B I T 4 . 3 A process for ethical decision making

Determine the economic outcomes.

Understand all the moral standards.

To resolve ethical problems, you can use the process illustrated in Propose a Define the Consider convincing complete Exhibit 4.3. Understand the varithe legal moral moral ous moral standards (universalism, Recognize all requirements. solution. problem. relativism, etc.), as described earmoral impacts: lier in the chapter. Begin to follow –Benefits to some. Evaluate the a formal decision-making process. –Harms to others. ethical duties. As we will discuss in more detail in –Rights exercised. –Rights denied. Chapter 5, you identify and diagnose your problem, generate alternative solutions, and evaluate each Source: L. T. Hosmer, The Ethics of Management, 4th ed. (New York: McGraw-Hill/Irwin, 2003), p. 32. © 2003 alternative. Your evaluation should The McGraw-Hill Companies. recognize the impacts of your alternatives: which people do they benoptions, including costs and potential profits. Exhibit 4.4 shows efit and harm, which are able to exercise their rights, and some of the costs associated with unethical behavior.86 Some are whose rights are denied? You now know the full scope of the obvious: fines and penalties. Others, like administrative costs moral problem. and corrective actions, are less obvious. Ultimately the effects on As you define the problem, it’s easy to find excuses for unethicustomers, employees, and government reactions can be huge. cal behavior. People can rationalize unethical behavior by denyBeing fully aware of the potential costs can help prevent people ing responsibility (“What can I do? They’re twisting my arm”), from straying into unethical terrain. denying injury (“No one was badly hurt; it could have been Evaluating your ethical duties requires looking for actions that worse”), denying the victim (“They deserved it”), social weightmeet the following criteria: ing (“Those people are worse than we are”), and appealing to higher loyalties (“It was for a higher purpose,” or “I’m too loyal • You would be proud to see the action widely reported in newspapers. to my boss to report it”).84 Only days after the U.S. government had posted $85 billion to keep insurance giant American Inter• It would build a sense of community among those involved. national Group from collapsing, AIG sent executives on a luxuri• It would generate the greatest social good. ous retreat. When asked to justify this, executives initially replied with excuses: the $440,000 spent was E X H I B I T 4 . 4 The business costs of ethical failures far, far less than the amount of the government bailout, and the execuLevel 3 Costs tives who participated in the retreat did not work in the AIG division where the company’s financial probCustomer defections Level 2 Costs lems had originated. Eventually they Loss of reputation had to concede that these responses Employee cynicism Administrative and audit did not really address the question of Lost employee morale Legal and investigative whether the retreat was an ethical use Level 1 Costs Employee turnover Remedial education of company money at a time when Government cynicism Corrective actions Government fines the company—along with many of Government regulation Government oversight the taxpayers whose money was bailand penalties ing out AIG—was undergoing an economic crisis.85

4.2|Outcomes of Unethical Decisions You must also consider legal requirements to ensure full compliance, and the economic outcomes of your

More damaging costs, get less executive attention.

Less damaging costs, get more executive attention.

Source: T. Thomas, J. Schermerhorn Jr., and J. Dienhart, “Strategic Leadership of Ethical Behavior in Business,” Academy of Management Executive (May 2004), p. 58.

CHAPTER 4

bat2952X_ch04_066-089.indd 81

Ethics and Corporate Responsibility

17/07/12 8:08 PM

Confirming pages

• You would be willing to see others take the same action when you might be the victim. • It doesn’t harm the “least among us.” • It doesn’t interfere with the right of all others to develop their skills to the fullest.87

As you can see, making ethical decisions is complex, but considering all these factors will help you develop the most convincing moral solution.

4.3|Ethics Requires Courage Behaving ethically requires not just moral awareness and moral judgment but also moral character, including the courage to take actions consistent with your ethical decisions. Think about how hard it can be to do the right thing.88 As you’re growing up, you have plenty of peer pressure to conform to others’ behavior, and it’s not cool to be a snitch. On the job, how hard would it be to walk away from lots of money in order to “stick to your ethics”? To tell colleagues or your boss that you believe they’ve crossed an ethical line? To disobey a boss’s order? To go over your boss’s head to someone in senior management with your suspicions about accounting practices? To go outside the company to alert others if someone is being hurt and management refuses to correct the problem? PepsiCo managers faced a difficult choice when an executive secretary from Coca-Cola Company’s headquarters contacted them to offer confidential documents and product samples for a price. Rather than seek an unethical (and illegal) advantage, Pepsi’s managers notified Coca-Cola. There, management fired the secretary and contacted the FBI. Eventually the secretary and two acquaintances were convicted of conspiring to steal trade secrets.89 PepsiCo still doesn’t have the secret recipe for Coke, but it did maintain its reputation as a competitor with integrity. Choosing integrity over short-term business gain took courage. Behaving ethically in a strong ethical climate is complicated enough, but even more courage 82 PART 2

bat2952X_ch04_066-089.indd 82

is necessary when you decide that the only ethical course of action is whistleblowing. The road for whistleblowers is rocky. Many, perhaps most, whistleblowers suffer consequences such as being ostracized, treated rudely, or given undesirable assignments. While the Sarbanes-Oxley Act includes provisions for the protection of whistleblowers that report fraudulent activities, employees are susceptible to retaliation because employees have a “very high burden of proof in order to win their case.”90 To address this weakness, a new and broader whistleblower rule was issued as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The new rule compensates whistleblowers at least $100,000 if their reports of corporate wrongdoing result in penalties exceeding $1 million.91 “It also broadens the range of potential whistleblowers to include more than just employees.”92

Signed into law on July 21, 2010, one of the aims of the Dodd-Frank Wall Street Reform and Consumer Protection Act is to increase the amount of regulation over financial institutions that operate in the United States.

Incentives and protections aside, people decide whether to blow the whistle based on their perceptions of the wrongful act, their emotions (anger, resentment, fear), and a (usually informal) cost–benefit analysis.93 Courage plays a role in the moral awareness involved in identifying an act as unethical, the moral judgment to fully consider the repercussions, and the moral character to take the ethical action. From an organization’s point of view, whistleblowing is either an asset or a threat, depending on the situation and management’s perspective. But whistleblowing is a far different and more troubling matter when employees take their complaints to government agencies, report them to the media, or post them on blogs. When problems are resolved in public, the whistleblower is more often seen as acting against the company’s interests. For this reason, and in response to the new whistleblowing rule from the Dodd-Frank Act and the revised sentencing guidelines under the Sarbanes-Oxley Act described earlier, some organizations set up channels for employees to report ethics problems so the organization can respond without the matter becoming a scandal. Ideally, the reporting method should keep the whistleblower’s identity secret, management should investigate

Planning

17/07/12 8:09 PM

Confirming pages

corporate social responsibility

economic responsibilities to

legal responsibilities to

ethical responsibilities

obligation toward society assumed by business

produce goods and services that society wants at a price that perpetuates the business and satisfies its obligations to investors

obey local, state, federal, and relevant international laws

meeting other social expectations, not written as law

ACCORDING TO A STUDY BY THE ASSOCIATION OF CERTIFIED FRAUD EXAMINERS, COMPANIES THAT UNCOVERED FRAUD MOST OFTEN LEARNED ABOUT IT FROM A COWORKER’S TIP, RATHER THAN FROM A FORMAL AUDIT.94 and respond quickly, and there should be no retaliation against whistleblowers who use proper channels. At Marvin Windows and Doors, which has thousands of employees working in a dozen facilities in the United States and Honduras, workers can go online to submit anonymous tips and suggestions in English or Spanish. The company’s general counsel says the system not only provides an early warning in case of problems as diverse as theft and safety concerns, but also maintains an overall culture of valuing ethics.95 Besides online reporting systems, such as e-mail and webbased tools, companies can use drop boxes and telephone hotlines. Often these channels of communication are administered by third-party organizations, whose employees protect whistleblowers’ identity and have procedures to follow if the complaint involves higher-level executives who might be part of the usual group charged with responding to reports.96 Under the recently passed Dodd-Frank Act, reporting systems should be expanded to give access to customers, suppliers, shareholders, associates of employees, and others who could potentially report fraudulent acts and violations of the law.97

LO5 Summarize the important issues surrounding corporate social responsibility

CORPORATE SOCIAL RESPONSIBILITY Should business be responsible for social concerns beyond its own economic well-being? Do social concerns affect a corporation’s financial performance? The extent of business’s responsibility for noneconomic concerns has been hotly debated for years. In the 1960s and 1970s, the political and social environment became more important to U.S. corporations as society focused on issues like equal opportunity, pollution control,

energy and natural resource conservation, and consumer and worker protection.98 Public debate addressed these issues and the ways business should respond. This controversy focused on the concept of corporate social responsibility— the obligation toward society assumed by business. A socially responsible business maximizes its positive effects on society and minimizes its negative effects.99

5.1|Four Levels of Corporate Social Responsibility

Social responsibilities can be categorized more specifically,100 as shown in Exhibit 4.5. The economic responsibilities of business are to produce goods and services that society wants at a price that perpetuates the business and satisfies its obligations to investors. For Smithfield Foods, the largest pork producer in the United States, this means selling bacon, ham, and other products to customers at prices that maximize Smithfield’s profits and keep the company growing over the long term. Economic responsibility may also extend to offering certain products to needy consumers at a reduced price. Legal responsibilities are to obey local, state, federal, and relevant international laws. Laws affecting Smithfield cover a wide range of requirements, from filing tax returns to meeting worker safety standards. Ethical responsibilities include meeting other societal expectations, not written as law. Smithfield took on this level of responsibility when it responded to requests by major customers, including McDonald’s and Walmart, that it discontinue the practice of using gestation crates to house its sows. The customers were reacting to pressure from animal rights advocates who consider it cruel for sows to live in the twofoot by seven-foot crates during their entire gestation period, which means they cannot walk, turn around, or stretch their legs for months at a time. The practice had been to move the sows to a farrowing crate to give birth and then return them to the gestation crate soon after, when they became pregnant again. Smithfield plans to exchange the crates for “group housing,” which allows the animals to socialize, even though group housing costs CHAPTER 4

bat2952X_ch04_066-089.indd 83

Ethics and Corporate Responsibility

17/07/12 8:09 PM

Confirming pages

philanthropic responsibilities additional behaviors and activities that society finds desirable and that the values of the business support

more.101 Smithfield is not legally required to make the change (except in two states), and the arrangement may not maximize profits, but the company’s actions help it maintain good customer relationships and a positive public image.

transcendent education an education with five higher goals that balance selfinterest with responsibility to others

Finally, philanthropic responsibilities are additional behaviors and activities that society finds desirable and that the values of the business support. Examples include supporting community projects and making charitable contributions. Philanthropic activities can be more than mere altruism; managed properly, “strategic philanthropy” can become not an oxymoron but a way to build goodwill in a variety of stakeholders and even add to shareholder wealth.102

shareholder model theory of corporate social responsibility that holds that managers are agents of shareholders whose primary objective is to maximize profits

stakeholder model

teaches students to leave a legacy that extends beyond the bottom line—a transcendent education.103 A transcendent education has five higher goals that balance self-interest with responsibility to others: 1. Empathy—feeling your decisions as potential victims might feel them, to gain wisdom. 2. Generativity—learning how to give as well as take, to others in the present as well as to future generations. 3. Mutuality—viewing success not merely as personal gain, but a common victory. 4. Civil aspiration—thinking not just in terms of “don’ts” (lie, cheat, steal, kill), but also in terms of positive contributions. 5. Intolerance of ineffective humanity—speaking out against unethical actions.

5.2|Do Businesses Really Have a Social Responsibility?

Two basic and contrasting views describe principles that should guide managerial responsibility. The first, known as the shareholder model, holds that managers act as agents for Robert Giacalone, who teaches shareholders and, as such, are obligated to maximize the presbusiness ethics at Temple Univerent value of the firm. This tenet of capitalism is widely associsity, believes that a 21st-century ated with the early writings of Adam Smith in The Wealth of education must help students think Nations, and more recently with Milton Friedman, the Nobel beyond self-interest and profitPrize–winning economist of the University of Chicago. With ability. A real education, he says, his now-famous dictum “The social responsibility of business is to increase profits,” Friedman contended that organiE X H I B I T 4 . 5 Pyramid of global corporate social responsibility and performance zations may help improve the quality of life as long as such actions are directed at increasDo what is desired Be a good ing profits.

theory of corporate social responsibility that suggests that managers are obliged to look beyond profitability to help their organizations succeed by interacting with groups that have a stake in the organization

global corporate citizen.

Be ethical.

Obey the law. Be profitable.

by global stakeholders.

Philanthropic Responsibility

Ethical Responsibility

Do what is expected by global stakeholders.

Legal Responsibility

Do what is required by global stakeholders.

Economic Responsibility

Do what is required by global capitalism.

Source: A. Carroll, “Managing Ethically with Global Stakeholders: A Present and Future Challenge,” Academy of Management Executive (May 2004), pp. 116, 114–20.

84 PART 2

bat2952X_ch04_066-089.indd 84

Some considered Friedman to be “the enemy of business ethics,” but his position was ethical: he believed it is unethical for unelected business leaders to decide what is best for society, and unethical for them to spend shareholders’ money on projects unconnected to key business interests.104 In addition, the context of Friedman’s famous statement includes the qualifier that business should increase its profits while conforming to society’s laws and ethical customs. The alternative view of corporate social responsibility, called the stakeholder model, assumes that managers are obliged to

Planning

17/07/12 8:09 PM

Confirming pages

look beyond profitability to help their organizations succeed by interacting with groups that have a stake in the organization.105 A firm’s stakeholders include shareholders, employees, customers, suppliers, competitors, society, and the government.106 As members of society, organizations should actively and responsibly participate in the community and in the larger environment. From this perspective, many people criticized insurance companies after Hurricanes Katrina and Rita devastated homes and businesses along the Gulf Coast. From a social responsibility perspective, it was wrong for companies to watch out for their bottom line and avoid paying claims where they could make a case that the damage wasn’t covered; the insurers should have been more concerned about their devastated customers. Or consider how companies have responded to public criticism that products manufactured in low-wage countries are produced in “sweatshops,” where employees work in conditions widely viewed as unacceptable in developed nations such as the United States. Do U.S. companies have a social responsibility to insist on better working conditions? Walmart and other companies that buy products made in China have written codes of conduct and conducted onsite audits. Unfortunately some enterprising Chinese consultants have set up services that help factories hide violations instead of correcting them. Still, as demand for Chinese-made products and pressure from multinational corporations have both intensified, observers say pay and working conditions in China have generally improved.107

5.3|You Can Do Good and Do Well Profit maximization and corporate social responsibility used to be regarded as leading to opposing policies. But in today’s business climate, which emphasizes both doing good and doing well, the two views can converge.108 The Coca-Cola Company has set up about 70 charitable projects to provide clean water in 40 countries. These projects are helping some of the 1.2 billion people without access to safe drinking water. The company is building structures to “harvest” rainwater in India, expanding the municipal water supply in Mali, and delivering water purification systems and storage urns to Kenya. These projects are aimed at burnishing the company’s image and targeting complaints that the company is using too much of the world’s water supply to manufacture its beverages. From a practical perspective, Coca-Cola’s strategic planners have identified water shortages as a strategic risk; from a values perspective, water conservation remains a key long-term priority.109 Earlier attention to corporate social responsibility focused on alleged wrongdoing and how to control it. More recently, attention has also been centered on the possible competitive advantage of socially responsible actions. DuPont has been incorporating care for the environment into its business in two ways it hopes will put it ahead of the competition. First, the company has been reducing its pollution, including a 72 percent cut in greenhouse gas emissions since 1990. It hopes these efforts will give it an advantage in a future where the government regulates emissions, requiring competitors to play catch-up. Second, DuPont has been developing products that are sustainable, meaning they

The Green Movement. David Best, president of Prism Software, unloads a truck full of old computer equipment during an e-cycling event near the Mall of America in Bloomington, MN. Thousands of people lined up for blocks with carloads and truckloads of old consumer appliances needing to be recycled. The event is designed to help Minnesotans clean house and protect the environment against hazardous waste such as old monitors and televisions.

don’t use up the earth’s resources. Examples include corn-based fabrics and new applications of its Tyvek material to make buildings more energy-efficient. DuPont expects these innovations to give the company profitable access to the growing market for environmentally friendly products.110 The real relationship between corporate social performance and corporate financial performance is highly complex; socially responsible organizations do not necessarily become more or less successful in financial terms.111 Some advantages are clear, however. For example, socially responsible actions can have long-term benefits. Companies can avoid unnecessary and costly regulation if they are socially responsible. Honesty and fairness may pay great dividends to the conscience, to the personal reputation, and to the public image of the company as well as in the market response.112 In addition, society’s problems can offer business opportunities, and profits can be made from systematic and vigorous efforts to solve these problems. Firms can perform a cost–benefit analysis to identify actions that will maximize profits while satisfying the demand for corporate social responsibility from multiple stakeholders.113 In other words, managers can treat corporate social responsibility as they would treat all investment decisions. This has been the case as firms attempt to reconcile their business practices with their effect on the natural environment. For a clearer link between social and business goals, companies can benefit from integrating social responsibility with corporate strategy—and society can benefit as well. Applying the principles of strategic planning (described in Chapter 5), organizations can identify the specific areas in which they can capitalize on their CHAPTER 4

bat2952X_ch04_066-089.indd 85

Ethics and Corporate Responsibility

17/07/12 8:09 PM

Confirming pages

strengths to neutralize threats and benefit from opportunities that result from serving the society of which they are a part.114 For example, suppose a company is interested in exercising social responsibility for the environment by reducing its carbon emissions. The extent to which this choice is strategic varies from one company to another. Reducing carbon emissions would be a good deed for Bank of America but not directly related to its strategy, except to the extent it might (or might not) lower its operating costs. For UPS, reducing carbon emissions would directly affect its day-to-day activities but still might not give the company a competitive advantage. For Toyota, reducing carbon emissions—say, by leading in the development and marketing of

TRADITIONAL THINKING Businesses see environmental issues as a no-win situation: either you help the environment and hurt your business, or vice versa.

THE ESSENTIAL TEST THAT SHOULD GUIDE CORPORATE SOCIAL RESPONSIBILITY IS NOT WHETHER A CAUSE IS WORTHY BUT WHETHER IT PRESENTS AN OPPORTUNITY TO CREATE SHARED VALUE—THAT IS, A MEANINGFUL BENEFIT FOR SOCIETY THAT IS ALSO VALUABLE TO THE BUSINESS. —Michael E. Porter and Mark R. Kramer115 hybrid technology as well as by operating more efficiently—can be a significant part of its competitive advantage.

LO6 Discuss the growing importance of managing the natural environment

THE NATURAL ENVIRONMENT Most large corporations developed in an era of abundant raw materials, cheap energy, and unconstrained waste disposal.116 But many of the technologies developed during that era are contributing to the destruction of ecosystems. Industrial-age systems follow a linear flow of extract, produce, sell, use, and discard—what some call a “take-make-waste” approach.117 But perhaps no time in history has offered greater possibilities for a change in business thinking than the 21st century. Business used to look at environmental issues as a no-win situation: either you help the environment and hurt your business, or else you help your business at a cost to the environment. But now a shift is taking place as companies deliberately

86 PART 2

bat2952X_ch04_066-089.indd 86

incorporate environmental values into competitive strategies and into the design and manufacturing of products.118 Why? In addition to philosophical reasons, companies “go green” to satisfy consumer demand, react to a competitor’s actions, meet requests from customers or suppliers, comply with guidelines, and create a competitive advantage. General Electric CEO Jeff Immelt used to view environmental rules as a burden and a cost. Now he sees environmentally friendly technologies as one of the global economy’s most significant business opportunities. Under a business initiative called Ecomagination, GE is looking for business opportunities from solving environmental problems. Recently General Electric announced an ”Ecomagination Challenge” in China in which it (along with seven other firms) will provide $100 million to support innovations in gas power, including natural gas and biogas.119

6.1|Economic Activity has Environmental Consequences We live in a risk society. That is, the creation and distribution of wealth generate by-products that can cause injury, loss, or danger to people and the environment. The fundamental sources of risk in modern society are the excessive production of hazards and ecologically unsustainable consumption of natural resources.120 Risk has proliferated through

Planning

17/07/12 8:09 PM

Confirming pages

ecocentric management its

THE BEST MANAGERS TODAY Incorporate environmental values into the design and manufacture of their products; this helps achieve competitive advantage, build brand value, and reduce costs. Source: C. Holliday, “Sustainable Growth, the DuPont Way,” Harvard Business Review, September 2001, pp. 129–34.

of life worldwide for all organizational stakeholders.125 Sustainable growth is economic growth and development that meet the organization’s present needs without harming the ability of future generations to meet their needs.126 Sustainability is fully compatible with the natural ecosystems that generate and preserve life. Some believe that the concept of sustainable growth can be applied in several ways:

population explosion, industrial pollution, and environmental degradation.121 Industrial pollution risks include air pollution, global warming, ozone depletion, acid rain, toxic waste sites, nuclear hazards, obsolete weapons arsenals, industrial accidents, and hazardous products. More than 30,000 uncontrolled toxic waste sites have been documented in the United States alone, and the number is increasing by perhaps 2,500 per year. The situation is far worse in other parts of the world. The pattern, for toxic waste and many other risks, is one of accumulating risks and inadequate remedies. The institutions that create environmental and technological risk (corporations and government agencies) also are responsible for controlling and managing those risks.122 Lockheed Martin Corporation had to contain the spread of a chemical used in industrial degreasers when it leaked from a broken sump pump at an old facility in Florida. Even though Lockheed had sold the facility to another company, it had owned the property when the contamination was first discovered, so it was responsible. Lockheed’s efforts included sealing off an old contaminated well at a cattle operation and providing a new well with clean water for the cattle.123 Sometimes the risks can be overwhelming. Regulators at the Environmental Protection Agency (EPA) determined that Asarco’s metal-processing facility in Globeville, Colorado, had been polluting the community with lead and arsenic. The EPA declared 4.5 square miles a Superfund site, meaning it was a priority for a major cleanup, and Asarco was supposed to pay for the effort. Asarco, which faced more than $1 billion in cleanup costs for Globeville and more than 90 other contaminated sites in the United States, instead filed for bankruptcy and planned to shut down and sell the Globeville facility.124

6.2|Development can be Sustainable

Ecocentric management has as its goal the creation of sustainable economic development and improvement of quality

sustainable growth economic growth and development that meet present needs without harming the needs of future generations

• As a framework for organizations to use in communicating to all stakeholders. • As a planning and strategy guide. • As a tool for evaluating and improving the ability to compete.127

The principle can begin at the highest organizational levels and be made explicit in performance appraisals and reward systems. With two-thirds of the world’s population expected to experience water scarcity by 2025 and shortages forecast for 36 U.S. states by 2013, businesses are becoming concerned about this essential natural resource. If you haven’t experienced a water shortage, water usage might not seem to be an obvious area of concern, but it should be. For example, Levi Strauss & Company determined that making a pair of jeans requires about 500 gallons of water for growing, dying, and processing cotton. Brewer SABMiller is a leader in making water conservation part of its strategy. Using an online computer application, the company submitted the GPS coordinates of factory and farm locations and learned where its operations are located in areas of water scarcity. About 30 SABMiller sites were in vulnerable areas. Executives decided to target one of those areas and develop a process they could apply elsewhere. They selected South Africa, whose breweries produce about one-sixth of the company’s beer. Not only is South Africa facing water shortages, but its government has yet to provide access to safe drinking water for 5 million of its people. To get hard information about its water consumption, the company measured water usage at each stage of its processes, from growing crops to rinsing out used bottles before recycling. SABMiller hired a consulting firm for this task. The most water was used in growing barley, maize (corn), and hops. Together with the water used in factories, 20 gallons of water are needed to produce each pint of beer. Based on the data, SABMiller’s initial efforts are focusing on identifying and using more efficient irrigation technology, preventing waste from runoff and evaporation.128

CHAPTER 4

bat2952X_ch04_066-089.indd 87

goal is the creation of sustainable economic development and improvement of quality of life worldwide for all organizational stakeholders

Ethics and Corporate Responsibility

17/07/12 8:09 PM

Confirming pages

life cycle analysis (lca) a process of analyzing all inputs and outputs, through the entire “cradle-to-grave” life of a product, to determine total environmental impact

Increasingly, firms are paying attention to the total environmental impact throughout the life cycle of their products.129 Life cycle analysis (LCA) is a process of analyzing all inputs and outputs, through the entire “cradle-to-grave” life of a product, to determine the total environmental impact of its production and use. LCA quantifies the total use of resources and the releases into the air, water, and land.

LCA considers the extraction of raw materials, product packaging, transportation, and disposal. Consider packaging alone. Goods make the journey from manufacturer to wholesaler to retailer to customer; then they are recycled back to the manufacturer. They may be packaged and repackaged several times, from bulk transport, to large crates, to cardboard boxes, to individual consumer sizes. Repackaging not only creates waste but also costs time. The design of initial packaging in sizes and formats adaptable to the final customer can minimize the need for repackaging, cut waste, and realize financial benefits. Profitability need not suffer and may be increased by ecocentric philosophies and practices. Some, but not all, research has shown a positive relationship between corporate environmental performance and profitability.130 Of course, whether the relationship is positive, negative, or neutral depends on the strategies chosen and the effectiveness of implementation. And managers of profitable companies may feel more comfortable

A New Meaning for “Greenhouses”

ince early Roman days, people have used greenhouses to grow plants— particularly to enjoy fruits and vegetables out of season. But not until the 1990s did greenhouses begin to gain popularity in the United States. The timing couldn’t be better. The amount of farmable land per capita in the world continues to shrink, and over the next 50 years world population is expected to increase by 3 billion. At the same time, economists estimate, the demand for farm products will double.

88 PART 2

bat2952X_ch04_066-089.indd 88

turning their attention to the environment than are managers of companies in financial difficulty.

6.3|Some Organizations Set Environmental Agendas In the past, most companies were oblivious to their negative environmental impact. More recently, many began striving for low impact. Now some strive for positive impact, eager to sell solutions to the world’s problems. IBM has three decades of experience in lowering its environmental impact through efforts such as reducing waste in packaging and measuring carbon emissions. It has begun to use that experience as a strength—a basis for expertise it can sell to other organizations, along with its computing power and other consulting services. Thus one application might be to help clients measure and forecast the carbon emissions of their entire supply chain. By running calculations on its supercomputers, IBM consultants could help the clients find ways to lower their energy use.131 You don’t have to be a manufacturer or a utility to jump on the green bandwagon. Web search giant Google is applying a threepronged strategy aimed at reducing its “carbon footprint,”—that is, its output of carbon dioxide and other greenhouse gases. At Google, most greenhouse gas emissions are related to electricity consumption by its buildings and computers. So Google is first seeking ways to make buildings and computers more energyefficient, such as by using high-efficiency lighting and installing power management software in its computers. Second, the company is developing ways to get more of its power from renewable sources, such as the solar power system at its facility

As more regions suffer from drought from climate change and as power shortfalls increase, the notion of using glass houses to grow fruits and vegetables has become increasingly attractive. A leader in greenhouse-grown produce, Houweling Nurseries was founded in 1974 by Cornelius Houweling, a Dutch immigrant to the United States and professional horticulturist. Today the business includes farms in British Columbia and Oxnard, California. In 2009 the company expanded its Oxnard site with a $53 million, 40-acre greenhouse facility that uses sustainable practices to grow tomatoes year-round. Located in the center of California’s $36 billion farming economy, the greenhouses

stand as a triumph of 21st-century agricultural science. They are believed to be the world’s first energy-neutral greenhouses. In fact, nothing goes to waste at Houweling Nurseries. Solar panels generate most of the electricity needed to power the greenhouse pumps and climate controls. Energy screens reduce heat loss. Should the temperature drop during the night, the greenhouses are heated with waste heat collected from refrigeration exhaust. The 2.1 megawatts of electricity generated by the greenhouses could power 1,500 homes. Fully enclosed, the greenhouses are nearly dust-free. Crops grow herbicide-free and nearly pesticide-free, using only about half the fertilizer of conventional crops.

Planning

17/07/12 8:09 PM

Confirming pages

in Mountain View, California. Finally, recognizing that its other efforts cannot yet eliminate Google’s release of greenhouse gases, the company is purchasing “offsets”—funding projects that reduce greenhouse gas emissions elsewhere.132 Webs of companies with a common ecological vision can combine their efforts into high-leverage, impactful action.133 In Kalundborg, Denmark, such a collaborative alliance exists among an electric power generating plant, an oil refiner, a biotech production plant, a plasterboard factory, cement producers, heating utilities, a sulfuric acid producer,

Colonies of bumblebees reside on-site and pollinate the crops. Houweling greenhouses use about 20 percent as much water as a field farm and only about a third as much as an ordinary greenhouse. Rainwater and irrigation runoff are captured in a pond, filtered, and recirculated as needed. Watered individually through a complex computerized piping system, greenhouse-tended tomato plants live far longer than field crops. The plants grow to the ceiling; workers stand on ladders to harvest the fruit. High-tech growing facilities like Houweling Nurseries yield as much as 20 times more tomatoes per acre than does a conventional farm. An estimated 5 million cartons of tomatoes are produced annually.

and local agriculture and horticulture. Chemicals, energy (for heating and cooling), water, and organic materials flow among companies. Resources are conserved, “waste” materials generate revenues, and water, air, and ground pollution all are reduced. Companies not only have the ability to solve environmental problems; they are coming to see and acquire the motivation as well. Some now believe that solving environmental problems is one of the biggest opportunities in the history of commerce.134 ■

In addition, at the Oxnard facility alone, Houweling has generated more than 450 full-time, year-round jobs in an industry

that, like many in recessionary times, has been hard-hit by unemployment.

DISCUSSION QUESTIONS

SOURCES: Company website, http://www. houwelings.com, Oppenheimer company website, “Casey Houweling: Growing with Oppenheimer,” http://www.oppyproduce.com; T. Burfield, “Opening of Houweling Nurseries Greenhouse Draws VIPs,” The Packer, May 15, 2009, http://www. thepacker.com; S. Hoops, “Environmentally Friendly Greenhouses in Camarillo Impresses Experts,” Ventura County Star, May 15, 2009, http://www. venturacountystar.com; J. Hirsch, “Greener Greenhouses Produce 21st Century Crops,” Los Angeles Times, May 14, 2009, http://www.newsday.com; D. Babcock, “Grown under Glass: The Future of Greenhouse-Grown Products,” Produce Merchandising, March 2009, http://producemerchandising.com.

• How does Houweling Nurseries serve as a forward-looking example for other agricultural businesses? • Emerging environmental issues have created significant challenges for farming. Although costly, what could the construction of more greenhouses like the Houwelings mean for today’s farmers? For the agricultural industry as a whole?

CHAPTER 4

bat2952X_ch04_066-089.indd 89

Ethics and Corporate Responsibility

17/07/12 8:09 PM

Confirming pages

90 PART 2

bat2952X_ch05_090-119.indd 90

Planning

18/07/12 7:19 PM

Confirming pages

chapter

five

strategic planning and decision making enior executives at Royal Dutch

The Chinese want to learn Shell’s tech-

LEARNING OBJECTIVES

Shell (the world’s second largest

niques and methods for tapping “uncon-

oil company) have decided that

ventional gas and oil resources, such as

After studying Chapter 5, you will be able to

China is their number one strategic busi-

shale gas, that require new technologies

ness priority. In 2010 China passed the

to extract.” Similarly, Shell wants more

United States to become the top energy—

than just access to the Chinese natural

consuming country in the world, and over

gas and oil markets: senior executives

the next 20 years China is expected to

hope that the Changbei joint venture

“account for almost half of the world’s

will help them “gain influence over the

growth in oil consumption.” To gain

flow of all global resources destined for

access to this massive market, Shell is

China, from the Middle East to Australia.”

partnering with PetroChina, China’s larg-

However, every strategic plan has risks.

est oil company, in a $1.3 billion joint ven-

Shell’s foray into China may one day

ture at the Changbei gas field. The gas

backfire if PetroChina, after learning

field, managed by Shell, produces over

many of Shell’s extraction techniques and

3 billion cubic meters of gas annually.

methods, decides that it does not need a

LO7 Give examples of some individual barriers that affect rational decision making.

What does PetroChina gain? Knowledge.

“partner” as much as it once thought.1 ■

LO8 Summarize principles for group decision making.

CHAPTER 5

bat2952X_ch05_090-119.indd 91

LO1 Summarize the basic steps in any planning process. LO2 Discuss how strategic planning should be integrated with tactical and operational planning. LO3 Describe the strategic management process and the importance of SWOT analysis in strategy formulation. LO4 Analyze how companies can achieve competitive advantage through business strategy. LO5 Identify the keys to effective strategy implementation. LO6 Explain how to make effective decisions as a manager.

Strategic Planning and Decision Making

18/07/12 7:19 PM

Confirming pages

This chapter examines the most important concepts and processes involved in planning and strategic management. By learning these concepts and reviewing the steps outlined, you will be on your way to understanding the current approaches to strategically managing today’s organizations. Also, whether or not managers are directly involved in strategic planning for their firms, they make key decisions that contribute to the successful implementation of that strategy. The chapter explores the types of decisions managers face, the ways they are made, and the ways they should be made.

LO1 Summarize the basic steps in any planning process

THE PLANNING PROCESS Planning is the conscious, systematic process of making decisions about goals and activities that an individual, group, work unit, or organization will pursue in the future. Planning is not an informal or haphazard response to a crisis; it is a purposeful effort that is directed and controlled by managers and often draws on the knowledge and experience of employees at all levels. Exhibit5.1 shows the steps in this process. Notice that planning moves in a cycle. The outcomes of plans are evaluated and, if necessary, revised. Planning gives individuals and work units a clear map to follow in their future activities yet is flexible enough to allow for unique circumstances and changing conditions. We now describe the basic planning process in more detail. Later in this chapter, we will discuss how managerial decisions and plans fit into the larger purposes of the organization—its ultimate strategy, mission, vision, and goals.

Step 1: Analyze the Situation View of a Shell gas station in Chongqing, China. In an effort to expand its oil network in the country, Royal Dutch Shell is planning on building approximately 100 gas stations in Shaanxi province with its Chinese partners.

Planning begins with a situational analysis. Within their time and resource constraints, planners should gather, interpret, and summarize all information relevant to the planning issue in question. They study past events, examine current conditions,

Manage your destiny, or someone else will. — Jack Welch, former CEO,General Electric It’s almost impossible to imagine Royal Dutch Shell—or any organization—meeting significant challenges without developing a plan beforehand. Planning is a formal expression of managerial intent. It describes what managers decide to do and how they will do it. It provides the framework, focus, and direction required for a meaningful effort. Without planning, any improvements in an organization’s innovation, speed, quality, service, and cost will be accidental, if they occur at all. 92 PART 2

bat2952X_ch05_090-119.indd 92

and try to forecast future trends. The analysis focuses on the internal forces at work in the organization or work unit and, consistent with the open-systems approach (see Chapter 3), examines influences from the external environment. The outcome of this step is the identification and diagnosis of planning assumptions, issues, and problems. A thorough situational analysis will provide information about the planning decisions you need to make. For example, if you

Planning

18/07/12 7:19 PM

Confirming pages

situational analysis a process E X H I B I T 5 . 1 Formal planning steps Step 1: Situational analysis

Step 2: Alternative goals and plans

easy to remember with the acronym SMART: • Specific—When goals are precise, employees know what they need to do to accomplish them. • Measurable—As much as possible, the goal should quantify the desired results, so that there is no doubt whether it has been achieved.

planners use, within time and resource constraints, to gather, interpret, and summarize all information relevant to the planning issue under consideration

goal a target or end that management desires to reach

Step 3: Goal and plan evaluation

• Attainable (but challenging)—Employees need to recognize that they can attain their goals, so they won’t become discouraged. However, they also should feel challenged to work hard and be creative.

Step 4: Goal and plan selection

• Relevant—Each goal should contribute to the organization’s overall mission (discussed later in this chapter) and be consistent with its values, including ethical standards. • Time-bound—Effective goals specify a target date for completion.

Step 5: Implementation

LISTEN & LEARN ONLINE Step 6: Monitor and control

Young Managers

Speak Out! are a manager in a magazine company considering the launch of a sports publication for the teen market, your analysis will include such factors as the number of teens who subscribe to magazines, the appeal of the teen market to advertisers, your firm’s ability to serve this market effectively, current economic conditions, the level of teen interest in sports, and any sports magazines already serving this market and their current sales. Such an analysis will help you decide whether to proceed with the next step in your magazine launch.

“

I think it’s very important at the beginning of every day to have a plan to manage the various issues that may arise. It’s essential to be proactive in addressing and meeting the needs of our customer.

”

— Jeremy Partacz, Customer Experience Manager

Step 2: Generate Alternative Goals and Plans Based on the findings from situational analysis, the planning process should generate alternative goals that may be pursued and alternative plans for achieving those goals. This step should stress creativity and encourage managers and employees to think broadly. Once a range of alternatives has been developed, their merits and feasibility will be evaluated. Continuing with our magazine publishing example, the alternatives you might want to consider could include whether the magazine should be targeted at young men, young women, or both groups, and whether it should be sold mainly online, through subscriptions, or on newsstands. Goals are the targets or ends the manager wants to reach. To be effective, goals should have certain qualities, which are CHAPTER 5

bat2952X_ch05_090-119.indd 93

Strategic Planning and Decision Making

18/07/12 7:19 PM

Confirming pages

General Electric’s goal of being first or second in all its markets is a well-known example of a goal that is specific, measurable, and challenging. SMART goals such as these not only point employees in the direction they should be going but also foster acceptance by those who are charged with achieving them. In other words, they both direct and motivate employees. Plans are the actions or means the manager intends to use to achieve goals. At a minimum, planning should outline alternative actions that may lead to the attainment of each goal, the resources required to reach the goal, and the obstacles that may develop. IBM has goals to increase its profits, and the fastestgrowing area of growth is in software. To meet profit goals, the software unit acquires existing software companies that have high-potential products but lack the means to promote them aggressively enough. IBM’s software group plans how its gigantic sales force will sell the new products. Those plans include training the salespeople in what the new software does and how it can help IBM’s clients. To improve the effectiveness of the sales force, the software group planned a selling system for categorizing and keeping track of each salesperson’s leads.2 In this chapter we will talk about various types of plans: • Single-use plans are designed to achieve a set of goals that are not likely to be repeated in the future. For example, city planners might prepare for an upcoming bicentennial celebration by putting in place a plan for parades, festivities, speeches, and food tents. • Standing plans focus on ongoing activities designed to achieve an enduring set of goals. Many companies have standing plans

for recruiting minority group members and women. Standing plans may become more permanent policies and rules for running the organization. • Contingency plans specify actions to take when a company’s initial plans have not worked well or events in the external environment require a sudden change. Disasters and unexpected events, including the BP oil spill in the Gulf of Mexico and the European debt crisis, have reminded many businesses how important contingency planning can be. But contingency plans are important for more common situations as well. For example, many businesses are affected by snowstorms, increases in gasoline prices, computer breakdowns, or changes in customer tastes.

Step 3: Evaluate Goals and Plans Next managers evaluate the advantages, disadvantages, and potential effects of each alternative goal and plan. They must prioritize the goals and even eliminate some of them. Also, managers consider how well alternative plans meet highpriority goals, considering the cost of each initiative and the likely investment return. In our magazine publishing example, your evaluation might determine that newsstand sales alone wouldn’t be profitable enough to justify the launch. Perhaps you could improve profits with an online edition supplemented by Podcasts.

Step 4: Select Goals and Plans Once managers have assessed the goals and plans, they select the most appropriate and feasible alternative. The evaluation process identifies the priorities and trade-offs among the goals

Are small companies prepared for a disaster ?3

Companies that report having a disaster preparedness plan 58%

94 PART 2

bat2952X_ch05_090-119.indd 94

No disaster preparedness plan 42%

Planning

18/07/12 7:19 PM

Confirming pages

plans the actions and plans. For example, if your plan is to launch a number of new publications and you’re trying to choose among them, you might weigh the different up-front investment each requires, the size of each market, and which one fits best with your existing product line or company image. Experienced judgment plays an important role in this process. As you will discover later in the chapter, however, relying on judgment alone may not be the best way to proceed. Typically a formal planning process leads to a written set of goals and plans that are appropriate and feasible for a particular set of circumstances. In some organizations, the alternative generation, evaluation, and selection steps generate planning scenarios. A different contingency plan is attached to each scenario. The manager pursues the goals and implements the plans associated with the most likely scenario. However, the manager should also be prepared to switch to another set of plans if the situation changes and another scenario becomes

or means managers intend to use to achieve organizational goals

Business’s managers were doing— move beyond their fear of change to find new opportunities in challengscenario a narrative ing times. Hull counseled the owner that describes a particular of a real estate investment company set of future conditions to set aside his fears about the real estate downturn, reevaluate his data on the prospects for converting a warehouse into a restaurant, and go ahead with plans for what was in fact a wellresearched, practical idea.4

Step 5: Implement the Goals and Plans Once managers have selected the goals and plans, they must implement them. Proper implementation is key to achieving goals. Managers and employees must understand the plan,

Plans are only good intentions unless they immediately degenerate into hard work. —Peter Drucker relevant. This approach helps the firm anticipate and manage crises and allows greater flexibility and responsiveness. Looking back to the chapter opening example, Shell managers undoubtedly developed several contingency plans for each scenario related to gaining access to Chinese oil and natural gas markets. A pioneer of scenario planning, Shell needed to have alternative plans ready in case PetroChina refused to work as its partner. If a company hasn’t already considered possible scenarios, managers must be prepared to restart the planning process when an unexpected change brings disappointing results. This flexible approach to planning can help a company survive and even thrive in a turbulent environment. For example, when the economy recently took a downturn, major clients stopped calling on Cor Business, a management coaching firm, for help in developing their managers. Jeffrey Hull and the other partners of Cor Business realized their firm’s survival required a new plan for bringing in business. The partners brainstormed ideas for a new business plan. Looking over the prior year’s results, they noticed that most of Cor Business’s growth that year had come from small businesses, even though the partners had been directing most of their energy toward large companies like MasterCard and AT&T. As a matter of fact, as the economy had slowed, more and more nervous small business owners had been looking for help from their firm. Hull and the other partners drew up a new plan in which they would focus on serving small clients, helping them do what Cor

have the resources to implement it, and be motivated to do so. Including employees in the previous steps of the planning process paves the way for the implementation phase. Employees usually are better informed, more committed, and more highly motivated when a goal or plan is one that they helped develop. Finally, linking the plan to other systems in the organization, particularly the budget and reward systems, helps ensure its successful implementation. If the manager does not have or cannot find the financial resources to execute the plan, the plan is probably doomed. Similarly, linking goal achievement to the organization’s reward system, such as bonuses or promotions, encourages employees to achieve goals and to implement plans properly. Wells Fargo’s top management saw the importance of linking its employees’ pay to a new strategy. Chairman of the Board Dick Kovacevich saw that one of the nation’s largest banks could stay competitive by excelling at “cross-selling,” that is, encouraging the bank’s existing customers to use more of its financial services. Bank customers typically go to different institutions for different services, but Wells Fargo beat the odds by getting employees at all levels to focus on customer needs rather than product lines. Tellers and branch managers receive training aimed at this goal, and pay systems reward employees for cross-selling. As a result, Wells Fargo customers use an average of 5.7 of the bank’s products, roughly double the average for the industry. Selling to existing customers is much more profitable than winning new ones, so this strategy might seem obvious. Perhaps it is, but Wells Fargo board member Robert Joss CHAPTER 5

bat2952X_ch05_090-119.indd 95

Strategic Planning and Decision Making

18/07/12 7:19 PM

Confirming pages

strategic planning

strategic goals

a set of procedures for making decisions about the organization’s long-term goals and strategies

major targets or end results relating to the organization’s long-term survival, value, and growth

strategy a pattern of actions and resource allocations designed to achieve the organization’s goals

says, “It’s simple in concept but very hard in execution,” adding that this successful implementation reflects Kovacevich’s “great capacity to motivate people.”5 As other consumer banks like J.P. Morgan Chase and Citigroup lose revenue from new rules that restrict debit card and overdraft fees, they will likely follow Wells Fargo’s lead by implementing their own cross-selling strategies.6

2.1|Strategic Planning Sets a Long-Term Direction

Strategic planning involves making decisions about the organization’s long-term goals and strategies. Strategic plans have a strong external orientation and cover major portions of the organization. Senior executives are responsible for the development and execution of the strategic plan, although they usually do not formulate or implement the entire plan personally. Strategic goals are major targets or end results that relate to the long-term survival, value, and growth of the organization. Strategic managers— top-level managers—usually establish goals aimed at effectiveness (providing appropriate outputs) and efficiency (a high ratio of outputs to inputs). Typical strategic goals include growing, increasing market share, improving profitability, boosting return on investment, fostering quantity and quality of outputs, increasing productivity, improving customer service, and contributing to society.

Step 6: Monitor and Control Performance

Although it is sometimes ignored, the sixth step in the formal planning process— monitoring and controlling— is essential. Without it, you would never know whether your plan is succeeding. As we mentioned earlier, planning works in a cycle. Managers must continually monitor the actual performance of Wells Fargo rolled out a plan that links employee pay to the practice of cross-selling; encouraging the bank’s existing customers to use more their work units against the of its financial services. Selling to existing customers is more profitable unit’s goals and plans. They than winning new ones. also need to develop control systems to measure that performance and allow them to take A strategy is a pattern of actions and resource allocations corrective action when plans are implemented improperly designed to achieve the organization’s goals. An effective strategy or the situation changes. In our magazine publishing example, newsstand and subscription sales reports let you know how well your new magazine launch is going. If subscription sales are below expectations, you may need to revise your marketing plan. We will discuss control systems in greater detail later.

st ud y tip 5

LO2

Use a study strategy for exams

Discuss how strategic planning should be integrated with tactical and operational planning

LEVELS OF PLANNING Planning is used by managers at all four levels described in Chapter 1: top-level (strategic managers), middle-level (tactical managers), frontline (operational managers), and team leaders. However, the scope and activities of the planning process tend to differ at each level. 96 PART 2

bat2952X_ch05_090-119.indd 96

Have you ever had to take two or three exams on the same day or within a day of each other? A good study strategy will help in these situations. Here is a sample strategy you might consider trying. One week before the next exam, make it a point to have finished reading and outlining the chapters, making vocabulary flashcards, reviewing the online materials, and completing anything else you will need to know for the upcoming exams. This should leave you plenty of time to review the study materials and those of your other courses before the exams hit.

Planning

18/07/12 7:19 PM

Confirming pages

tactical planning provides a basis for answering five broad questions about how the organization will meet its objectives: 1. Where will we be active? 2. How will we get there (e.g., by increasing sales or acquiring another company)? 3. How will we win in the marketplace (e.g., by keeping prices low or offering the best service)? 4. How fast will we move, and in what sequence will we make changes? 5. How will we obtain financial returns (low costs or premium prices)?7

Later in this chapter we discuss how managers try to craft a strategy by matching the organization’s skills and resources to the opportunities found in the external environment.

2.2|Tactical and Operational Planning Support the Strategy The organization’s strategic goals and plans serve as the foundation for planning by middle-level and frontline managers. Exhibit 5.2 shows that as goals and plans move from the

a set of procedures for translating broad strategic goals and plans into specific goals and plans that are relevant to a particular portion of the organization, such as a functional area like marketing

The formal planning model is hierarchical, with top-level strategies flowing down through the levels of the organization into more specific goals and plans and an ever-more-limited timetable. But in today’s complex organizations, planning is often more dynamic and flexible. Managers throughout an organization may be involved in developing the strategic plan and contributing critical elements. Also, in practice, lower-level managers may make decisions that shape strategy, whether or not top executives realize it.

operational planning the process of identifying the specific procedures and processes required at lower levels of the organization

When Intel senior adviser Andy Grove suggested that the company exit the computer memory business, Intel was directing about one-third of its research dollars to memory-related projects. Yet on a practical level, the company had already been exiting the business; only 4 percent of its total sales were for computer memory products. Why was this occurring, if

Think small and act small, and we’ll get bigger. Think big and act big, and we’ll get smaller. —Herb Kelleher, Southwest Airlines strategic level to the tactical level and then to the operational level, they become more specific and involve shorter time periods. A strategic plan typically has a time horizon of three to seven years, but sometimes it spans decades, as with the successful plan to land a probe on Titan, Saturn’s moon. Tactical plans may have a time horizon of a year or two, and operational plans may cover several months. Tactical planning translates broad strategic goals and plans into specific goals and plans relevant to a particular portion of the organization, often a functional area such as marketing or human resources. Tactical plans focus on the major actions a unit must take to fulfill its part of the strategic plan. Suppose a strategy calls for the rollout of a new product line. The tactical plan for the manufacturing unit might involve the design, testing, and installation of the equipment needed to produce the new line. Operational planning identifies the specific procedures and processes required at lower levels of the organization. Frontline managers usually focus on routine tasks such as production runs, delivery schedules, and human resource requirements.

it wasn’t a defined strategy? Finance executives had directed manufacturing managers to set up factories in a way that would generate the biggest margins (revenues minus costs) per square inch of microchips produced. As computer memory became a money-losing commodity, manufacturing made fewer of those products. So when Intel announced it would get out of the

E X H I B I T 5 . 2 Hierarchy of goals and plans

Managerial Level

Level of Detail

Time Horizon

Top

Low

Long (3–7 years)

Middle

Medium

Medium (1–2 years)

Frontline

High

Short (

Bateman and Snell 2013-Management 3rd Ed. - PDFCOFFEE.COM (2025)